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. Certain prior period amounts have been adjusted to conform to current year presentation.

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 (AAR) and annual reports submitted to the Surface Transportation Board (STB), are available on the Company's Web site at www.bnsf.com/investors.

Executive Summary

Fiscal Year 2008 - Financial Overview
• The Company achieved earnings of $6.08 per share compared with 2007 earnings of $5.10 per share.

• Freight revenues increased 14 percent to $17.5 billion, which included revenue increases in each of the Company's four business groups.

• The 14-percent increase in freight revenue includes 10-percent and 6-percent increases attributable to fuel surcharges and prices, respectively, partially offset by a decrease due to lower unit volumes.

• Operating expenses of $14.1 billion for 2008 increased 15 percent compared with 2007, primarily driven by a $1.3 billion, or 39 percent, increase in fuel expenses principally as a result of higher fuel prices.

• Operating income of $3.9 billion for 2008 increased 12 percent or $426 million from 2007.

• Each year capital expenditures are a significant use of cash for BNSF. In 2008, BNSF decreased its cash capital expenditures to $2.18 billion from $2.25 billion in the prior year. BNSF's capital commitments, which include both cash spent for capital and locomotive leases, increased approximately $260 million to $2.85 billion in 2008 due to the following: (i) the acquisition of additional new locomotives, which will enable the Company to take advantage of the significant fuel efficiency, other environmental benefits and the Economic Stimulus Act of 2008, and (ii) capital expenditures associated with significant flooding costs in the Midwest.

Capital Commitment Outlook for 2009
• The Company's planned capital commitment program for 2009 is approximately $2.7 billion, or about $150 million lower than 2008.

• BNSF expects to spend $1.9 billion to refresh track, signal systems, structures and freight cars and to upgrade technologies.

• The Company anticipates acquiring approximately 350 locomotives at a cost of about $675 million.

• Because of the significant volume declines associated with the economy, the expansion portion of the 2009 capital program is minimal and consists of ongoing work on projects already started.

Results of Operations

Revenue Table
The following table presents BNSF's revenue information by business group for
the years ended December 31, 2008, 2007 and 2006.

Year ended                   Revenues (in millions)         Cars / Units (in thousands)        Average Revenue Per Car / Unit
December 31,                 2008       2007       2006       2008         2007      2006          2008           2007       2006

Consumer products        $  6,064   $  5,664   $  5,613      4,818        5,149     5,520    $    1,259     $    1,100    $ 1,017
Industrial products         4,028      3,684      3,589      1,598        1,664     1,686         2,521          2,214      2,129
Coal                        3,970      3,279      2,916      2,516        2,472     2,458         1,578          1,326      1,186
Agricultural products       3,441      2,722      2,427      1,062        1,033       973         3,240          2,635      2,494
Total freight revenues     17,503     15,349     14,545      9,994       10,318    10,637    $    1,751     $    1,488    $ 1,367
Other revenues                515        453        440
    Total operating
revenues                 $ 18,018   $ 15,802   $ 14,985

Expense Table
The following table presents BNSF's expense information for the years ended
December 31, 2008, 2007 and 2006 (in millions):

Year ended December 31,              2008       2007       2006

Fuel                             $  4,640   $  3,327   $  2,856
Compensation and benefits           3,884      3,773      3,816
Purchased services                  2,136      2,023      1,906
Depreciation and amortization       1,397      1,293      1,176
Equipment rents                       901        942        930
Materials and other                 1,148        958        780
Total operating expenses         $ 14,106   $ 12,316   $ 11,464
Interest expense                 $    533   $    511   $    485
Other expense, net               $     11   $     18   $     40
Income tax expense               $  1,253   $  1,128   $  1,107

Year Ended December 31, 2008, Compared with Year Ended December 31, 2007 BNSF recorded net income for 2008 of $2,115 million, or $6.08 per share. In comparison, net income for 2007 was $1,829 million, or $5.10 per share.

Revenues
Freight
Freight revenues of $17,503 million for 2008 were $2,154 million, or 14 percent higher than 2007. Freight revenues reflected a 3-percent decrease in unit volumes. Freight revenues included an increase of approximately $1,460 million in fuel surcharges compared with the same 2007 period. Growth in prices and fuel surcharges drove average revenue per car/unit up 18 percent in 2008 to $1,751 from $1,488 in 2007.

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 $6,064 million for [[Image Removed: pie chart 1]] 2008 were $400 million, or 7 percent greater than 2007. Revenue gains were driven by higher revenue per unit due to increased fuel
surcharges and improved yields along with slightly higher domestic traffic, partially offset by lower international and automotive volumes caused by economic softness.

Industrial Products revenues increased $344 [[Image Removed: pie chart 2]] million, or 9 percent, to $4,028 million for 2008. The 14-percent increase in average revenue per car was mainly the result of higher fuel surcharges and improved yields. Units decreased 4 percent primarily due to a decline in building products resulting from weakness in the housing market, partially offset by increased
construction product volumes.

Coal
BNSF Railway 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 of $3,970 million for 2008 rose $691 million, or 21 percent, versus a year ago, due to improved yields, contractual economic escalators, increased fuel surcharges and higher unit volumes. Despite the flooding impact in the Powder River Basin and Midwest during May and June, 2008 was a record year for coal as volumes grew 2 percent. This was driven by continued strong demand for Powder River Basin coal, leading to organic growth of existing customers and new eastern U.S. conversions of power plants to burn Powder River Basin coal.

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

Other Revenues
Other revenues increased $62 million, or 14 percent, to $515 million for 2008 compared to 2007. This increase was primarily due to an increase of $40 million, or 21 percent, to $230 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 2008 were $14,106 million, an increase of $1,790 million, or 15 percent over 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 $4,640 million for 2008 were $1,313 million, or 39 percent higher than 2007. The increase in fuel expense was primarily due to an increase in the average all-in cost per gallon of locomotive diesel fuel, partially offset by a decline in consumption related to improved fuel efficiency and lower volumes. The average all-in cost per gallon of locomotive diesel fuel increased by 94 cents to $3.16, or $1,330 million, which is comprised of an increase in the average purchase price of 91 cents, or $1,294 million, and a decrease in the hedge benefit of 3 cents, or $36 million (2008 loss of $5 million less 2007 benefit of $31 million). Locomotive fuel consumption in 2008 decreased 27 million gallons to 1,415 million gallons when compared with consumption in 2007, resulting in a $60 million decrease in fuel expense. The remainder of the increase was primarily due to higher non-locomotive fuel prices.

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.

Purchased Services
Purchased services expense includes the following: ramping (lifting of containers onto and off of rail 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 services expenses of $2,136 million for 2008 were $113 million, or 6 percent higher than 2007. Approximately 30 percent of the increase was due to purchased transportation costs for BNSF Logistics, which increased about $30 million to $185 million for 2008. An increase of approximately $30 million in freight car and locomotive contract maintenance expense as well as an increase of approximately $15 million in haulage payments for transportation over other railroads also contributed to the increase.

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 $1,397 million for 2008 were $104 million, or 8 percent higher than 2007. This increase was due to capital expenditures and updated depreciation studies (see discussion under the heading "Critical Accounting Estimates; Depreciation").

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 for 2008 of $901 million were $41 million, or 4 percent lower than 2007, due to lower volumes and improved car velocity.

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, impairments of long-lived assets, 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 $1,148 million for 2008, which consisted of approximately $340 million of materials expense with the remainder consisting of numerous other items, were $190 million, or 20 percent higher than 2007. The increase was primarily due to (i) $125 million in higher environmental costs;
(ii) a reduction in gains on land sales of about $20 million; (iii) higher derailment costs of about $20 million; and (iv) about $20 million higher property and other miscellaneous taxes.

Interest Expense
Interest expense of $533 million for 2008 was $22 million, or 4 percent higher than 2007. This increase was primarily the result of a higher average debt balance, partially offset by the interest associated with a favorable tax settlement.

Income Taxes
The effective rate in 2008 was 37.2 percent compared with 38.2 percent for the prior year. The decrease in the effective tax rate primarily reflects a favorable tax settlement.

Year Ended December 31, 2007, Compared with Year Ended December 31, 2006 BNSF recorded net income for 2007 of $1,829 million, or $5.10 per share. In comparison, net income for 2006 was $1,889 million, or $5.11 per share.

Revenues
Freight
Freight revenues of $15,349 million for 2007 were $804 million, or 6 percent higher than 2006. Freight revenues reflected a 3-percent decrease in unit volumes. Freight revenues included an increase of approximately $150 million in fuel surcharges compared with the same 2006 period. Growth in prices and fuel surcharges drove average revenue per car/unit up 9 percent in 2007 to $1,488 from $1,367 in 2006.
Consumer Products
Consumer Products revenues of $5,664 million for 2007 were $51 million, or 1 percent higher than 2006. Higher revenue per unit due to improved [[Image Removed: pie chart 4]] yields and fuel surcharges was partially offset by lower volumes related to economic softness as well as reduced trans-pacific service of a large international customer.

Industrial Products
Industrial Products revenues increased $95 million, or 3 percent, to $3,684 million for 2007, while unit volumes declined 1 percent. The 4-percent increase in average revenue per car was mainly the result of price increases. Units [[Image Removed: pie chart 5]] decreased 1 percent primarily due to a decline in building products as a result of weakness in the housing market, partially offset by
increased petroleum products and chemicals and plastics volumes.

Coal
Coal revenues of $3,279 million for 2007 increased $363 million, or 12 percent, versus a year ago due to improved yields, contractual inflation escalators, increased tons per unit and fuel surcharges. Coal unit volumes increased 1 percent despite mine production and weather-related issues.

Agricultural Products
Agricultural Products revenues of $2,722 million for 2007 were $295 million, or 12 percent higher than revenues for 2006. This increase was [[Image Removed: pie chart 6]] primarily due to strong volume growth, favorable mix of business and price increases with the strongest revenue growth in wheat, soybeans, bulk foods, ethanol and fertilizer.

Other Revenues
Other revenues increased $13 million, or 3 percent, to $453 million for 2007 compared to 2006. This increase was primarily due to volume growth of BNSF Logistics, an indirect, wholly-owned non-rail subsidiary that specializes in providing third-party logistics and transportation services.

Expenses
Total operating expenses for 2007 were $12,316 million, an increase of $852 million, or 7 percent over 2006.

Fuel
Fuel expenses of $3,327 million for 2007 were $471 million, or 16 percent higher than 2006. The increase in fuel expense was primarily due to an increase in the average all-in cost per gallon of locomotive diesel fuel, partially offset by a decline in consumption related to improved fuel efficiency. The average all-in cost per gallon of locomotive diesel fuel increased by 37 cents to $2.22, or $538 million, which is comprised of an increase in the average purchase price of 16 cents, or $228 million, and a decrease in the hedge benefit of 21 cents, or $310 million (2007 benefit of $31 million less 2006 benefit of $341 million). Locomotive fuel consumption in 2007 decreased 36 million gallons to 1,442 million gallons when compared with consumption in the same 2006 period, resulting in a $75 million decrease in fuel expense. The remainder of the increase was primarily due to higher non-locomotive fuel prices.

Purchased Services
Purchased services expenses of $2,023 million for 2007 were $117 million, or 6 percent higher than 2006. Beyond general inflation, the largest drivers of this increase were (i) $25 million in haulage payments for transportation over other railroads, principally due to a new southeast intermodal agreement; (ii) $20 million in purchased transportation costs for BNSF Logistics; (iii) $10 million in locomotive maintenance costs; and (iv) $10 million in ramping costs (lifting of containers onto and off of cars).

Depreciation and Amortization
Depreciation and amortization expenses of $1,293 million for 2007 were $117 million, or 10 percent higher than 2006. This increase was primarily due to continuing capital expenditures as well as updated depreciation rates for locomotives (see discussion under the heading "Critical Accounting Estimates; Depreciation").

Equipment Rents
Equipment rents expenses for 2007 of $942 million were $12 million, or 1 percent higher than 2006, on a 3-percent decline in unit volumes. The variance represents an increase in locomotive lease expense, partially offset by a decrease in freight car equipment expense due to the impact of the Company's privatization efforts, lower volumes and velocity improvements for freight car equipment.

Materials and Other
Materials and other expenses of $958 million for 2007, which consisted of approximately $320 million of materials expense with the remainder consisting of numerous other items, were $178 million, or 23 percent higher than 2006. The increase was primarily due to increases of approximately (i) $65 million and $16 million first quarter environmental and technology charge, respectively; (ii) $40 million in environmental remediation developments; (iii) $18 million due largely to rising costs for materials for locomotives, freight cars and track structure; and (iv) about $20 million in crew transportation costs principally due to increased fuel and insurance-related costs as well as increased usage due to adverse weather. In addition, a $22 million gain from a line sale to the State of New Mexico was recorded in 2006 (see discussion under the heading "Other Matters; New Mexico Department of Transportation").

Interest Expense
Interest expense of $511 million for 2007 was $26 million, or 5 percent higher than 2006. This increase was primarily the result of a higher average debt balance, partially offset by lower average rates.

Income Taxes
The effective rate in 2007 was 38.2 percent compared with 36.9 percent for the prior year. The increase in the effective tax rate primarily reflects income tax adjustments that favorably impacted income tax expense in 2006 as compared with 2007.

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

2008
Net cash provided by operating activities was $3,977 million during 2008 compared with $3,492 million during 2007. The increase was primarily the result of an increase in earnings before depreciation and amortization expense.

2007
Net cash provided by operating activities was $3,492 million during 2007 compared with $3,189 million during 2006. The increase was primarily the result of an increase in earnings before depreciation and amortization expense, higher environmental accruals in 2007 and higher contributions to the pension plan in 2006.

Investing Activities

2008
Net cash used for investing activities was $3,073 million during 2008 compared with $2,415 million during 2007. The increase in cash used for investing activities primarily reflects an increase in equipment acquired in 2008 that was not sold and leased back in the same year as it was acquired, as was the case in the prior year. This was partially offset by a decrease in cash capital expenditures. Investing activities for the year included $2,175 million of capital expenditures, which were $73 million lower than 2007.

A breakdown of cash capital expenditures during 2008, 2007 and 2006 is set forth in the following table (in millions):

Year ended December 31,                          2008      2007      2006

Engineering:
Rail                                          $   429   $   376   $   304
Ties                                              358       316       311
Surfacing                                         230       235       214
Othera                                            544       432       397
Total engineering                               1,561     1,359     1,226
Mechanical                                        168       141       152
Other                                             133       105       121
Total replacement capital                       1,862     1,605     1,499
Information services                               83        75        65
New locomotive and freight car acquisitions         8         -         -
Terminal and line expansion                       222       568       450
Total                                         $ 2,175   $ 2,248   $ 2,014

a Other primarily includes signals, bridges, structures and other right of way improvements.

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

Financing Activities

2008
Net cash used for financing activities during 2008 was $601 million, primarily related to common stock repurchases of $1,147 million, including $60 million to satisfy tax withholding obligations for stock option exercises, and dividend payments of $471 million, which were partially offset by net debt borrowings of $772 million, excess tax benefits from equity compensation plans of $96 million, proceeds from stock options exercised of $91 million and proceeds from a facility financing obligation of $68 million.

Aggregate debt to mature in 2009, excluding commercial paper, is $456 million. BNSF's ratio of net debt to total capitalization was 44.5 percent at December 31, 2008, compared with 41.2 percent at December 31, 2007. The Company's adjusted net debt to total capitalization was 54.7 percent at December 31, 2008, compared with 53.4 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 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:

December 31,                                                               2008                 2007

Net debt to total capitalizationa                                          44.5 %               41.2 %
Adjustment for long-term operating leases and other debt
equivalentsb                                                                9.7                 12.6
Adjustment for unfunded pension and retiree health and
welfare liability                                                           1.5                  0.7
Adjustment for junior subordinated notesc                                  (1.0 )               (1.1 )
Adjusted net debt to total capitalization                                  54.7 %               53.4 %