The following discussion and analysis should be read in conjunction with the Consolidated Financial Statements and Notes and the Selected Financial Data.

OVERVIEW

Reflecting the substantially weaker economy, NS' first quarter 2009 net income was down 39% compared with the same period last year, as a 20% decline in volumes coupled with lower fuel surcharge revenue more than offset the effects of expense reductions and net rate/mix increases and led to a 34% decrease in income from railway operations. Operating expenses declined 19% compared with the same period last year. The railway operating ratio (a measure of the amount of operating revenues consumed by operating expenses) rose to 80.3% compared with 76.9% for the first quarter of 2008.

Cash provided by operating activities for the first quarter was $354 million and, along with proceeds from borrowings, provided for capital expenditures, debt maturities, and dividends. At March 31, 2009, cash and short-term investment balances totaled $884 million.

SUMMARIZED RESULTS OF OPERATIONS

First-quarter 2009 net income was $177 million, down $114 million, or 39%, compared with the same period last year. The reduction primarily resulted from a $195 million decrease in income from railway operations that reflected a $557 million, or 22%, decline in railway operating revenues, partially offset by a $362 million, or 19%, decrease in railway operating expenses.

Oil prices affect NS' results of operations in a variety of ways and can have an overall favorable or unfavorable impact in any particular quarter. In addition to the impact of oil prices on general economic conditions, traffic volume, and supplier costs, oil prices directly affect NS' revenues through market-based fuel surcharges and contract escalators (see "Railway Operating Revenues") and also affect fuel costs (see "Railway Operating Expenses"). For the first quarter 2009, excluding the impact of decreased consumption, the decline in fuel surcharge revenue was greater than the decline in fuel expense. Future changes in oil prices may cause volatility in operating results that could be material to a particular quarter.

DETAILED RESULTS OF OPERATIONS

Railway Operating Revenues

First-quarter 2009 railway operating revenues were $1.9 billion, down $557 million, or 22%, compared with the first quarter of 2008. As shown in the following table, the decreases were the result of lower traffic volume and lower average revenue per unit, including fuel surcharges that were down $226 million (and which amounted to $94 million).

                                              First Quarter
                                              2009 vs. 2008
                                           Increase (Decrease)
                                             ($ in millions)

                   Traffic volume (units)   $          (509)
                   Revenue per unit/mix                 (48)
                      Total                 $          (557)

Many of Norfolk Southern's negotiated fuel surcharges for coal and general merchandise traffic are based on the monthly average price of West Texas Intermediate Crude Oil (WTI Average Price). These surcharges are reset the first day of each calendar month based on the WTI Average Price for the second preceding calendar month. This two-month lag in computing WTI Average Price coupled with the change in fuel prices increased fuel surcharge revenue by approximately $10 million for the quarter.

Revenues, units and average revenue per unit for NS' market groups were as follows:

                                                     First Quarter
                                    Revenues             Units         Revenue per Unit
                                  2009     2008     2009      2008       2009      2008
                                ($ in millions)     (in thousands)       ($ per unit)

   Coal                         $     602 $   662     380.8     427.0 $    1,581 $  1,551
   General merchandise:
     Agr./consumer prod./govt.        278     299     130.4     152.1      2,129    1,968
     Metals/construction              183     305     120.9     186.5      1,514    1,636
     Chemicals                        236     305      80.3     102.2      2,941    2,986
     Paper/clay/forest                166     215      74.6     100.2      2,222    2,139
     Automotive                       112     228      61.8     119.6      1,817    1,908
   General merchandise                975   1,352     468.0     660.6      2,083    2,047

   Intermodal                         366     486     606.8     740.4        604      656

      Total                     $   1,943 $ 2,500   1,455.6   1,828.0 $    1,335 $  1,367

Coal

Coal revenues decreased $60 million, or 9%, in the first quarter compared with the same period last year. The decrease reflected an 11% decline in carloads offset in part by a 2% increase in average revenue per unit, despite the impact of lower fuel surcharges. Tonnage handled was below first quarter 2008, reflecting decreases in the utility, export, and domestic metallurgical coal markets. Coal tonnage by market was as follows:

                      Total Coal, Coke, and Iron Ore Tonnage

                                               First Quarter
                                             2009         2008
                                            (Tons in thousands)

                 Utility                      33,371       35,604
                 Export                        4,381        5,773
                 Domestic metallurgical        2,610        3,517
                 Industrial                    1,849        1,909
                    Total                     42,211       46,803

Utility coal tonnage decreased 6% in the first quarter as a result of lower demand for electricity induced by the downturn in the U.S. economy, natural gas competition, and plant maintenance outages. Export coal tonnage decreased 24% in the first quarter, reflecting the decline in global steel production as a result of the downturn in the global economy. Domestic metallurgical coal, coke, and iron ore tonnage was down 26% in the first quarter, as domestic steel production declined due to a drop in steel demand. Other coal tonnage (principally steam coal shipped to industrial plants) decreased 3% in the first quarter compared to 2008 principally due to reduced production at NS-served plants.

NS is currently involved in litigation with Virginia Electric and Power Company/Old Dominion Electric Cooperative (Virginia Power) regarding rate adjustment provisions in a transportation contract between them. In 2007, the Virginia Supreme Court issued a decision that remanded the case to the trial court on the grounds that neither of its prior decisions constituted a final order. In April 2008, the trial court entered a final order granting NS monetary damages, including interest, and prescribing the methodology for determining future rates. Virginia Power filed a notice of appeal, and oral argument was held before the Virginia Supreme Court in April 2009. Future developments and the ultimate resolution of this matter could result in NS recognizing additional revenues related to this dispute, which could have a favorable impact on results of operations in a particular year or quarter.

Coal revenues for the remainder of the year are expected to be down compared to last year due to continued weak volumes and lower fuel surcharge revenue.

General Merchandise

General merchandise revenues decreased $377 million, or 28%, in the first quarter compared with the same period last year, reflecting a 29% decline in traffic volume. Average revenue per unit increased 2% despite the impact of lower fuel surcharges.

Agriculture, consumer products, and government volume decreased 14% for the first quarter, reflecting declines in fertilizer, corn, and soybeans shipments principally due to processing and production cutbacks. Metals and construction volume declined 35%, reflecting reduced shipments of coil, iron, steel, and scrap metals and reduced demand for construction materials due to the weak housing and automotive sectors. Chemicals traffic volume decreased 21% for the first quarter, reflecting continued weakness in industrial intermediates shipments (linked to housing construction declines), as well as petroleum-based and miscellaneous chemical products shipments. Paper, clay, and forest products volume was down 26% for the first quarter, reflecting reduced U.S. paper production and lower volumes related to the slowdown in the housing market. Automotive volumes decreased 48%, a result of reduced North American sales and production. Automotive manufacturers, especially the domestic producers, continued to experience significant sales declines during the quarter. North American automotive production decreased by 49% as manufacturers cut production to be more in line with consumer demand. During the first quarter, Ford, General Motors, and Chrysler combined operated 15 of 25 assembly plants served by NS. General Motors operates three of these plants and has announced plans to temporarily idle them during the second and third quarters of 2009 for periods of up to nine weeks. NS continues to monitor the state of the automotive industry and collectability of associated receivables.

General merchandise revenues for the remainder of the year are expected to be lower than 2008, reflecting lower volumes and fuel surcharge revenue.

Intermodal

Intermodal revenues decreased $120 million, or 25%, in the first quarter compared with the same period last year, reflecting an 18% decline in traffic volume and an 8% decrease in average revenue per unit, including the impact of lower fuel surcharges. Domestic volume (which includes truckload and intermodal marketing companies' [IMC] volumes) increased 2%, reflecting the relative fuel efficiency of intermodal versus over-the-road transportation and service improvements in the face of a weak economy. International traffic volume declined 32%, primarily driven by the weak global economy. The Premium business, which includes parcel and less-than-truckload (LTL) carriers, decreased 19% due to poor economic conditions and less empty repositions. Triple Crown Services Company, a service with rail-to-highway trailers, experienced a 15% drop in volume primarily driven by reduced auto parts shipments and the weak economy.

Intermodal revenues for the remainder of the year are expected to continue to be lower than those of last year reflecting lower volumes and fuel surcharge revenue.

Railway Operating Expenses

Railway operating expenses were $1.6 billion in the first quarter of 2009, down $362 million, or 19%, compared with the same period last year.

Compensation and benefits expenses decreased $66 million, or 9%, in the first quarter of 2009, compared with the same period last year. The decrease was primarily the result of lower stock-based and incentive compensation (down $56 million) and volume-related payroll (down $47 million). These decreases were partially offset by increased wage rates (up $13 million), pension expenses (up $10 million), and medical benefits for active and retired employees (up $10 million).

Purchased services and rents includes the costs of services purchased from outside contractors, including the net costs of operating joint (or leased) facilities with other railroads and the net cost of equipment rentals. This category of expenses decreased $20 million, or 5%, in the first quarter, compared with the same period last year, reflecting lower volume-related intermodal and automotive operational costs and equipment rents that were offset in part by increased roadway maintenance costs and professional and legal services costs.

Fuel expense, which includes the cost of locomotive fuel as well as other fuel used in railway operations, decreased $245 million, or 61%, for the first quarter, compared with the same period last year. The decline consisted of $175 million based on price and $70 million based on consumption, which reflected a 50% drop in the price per gallon of locomotive fuel and 19% lower consumption.

Depreciation expense increased $9 million, or 5%, in the first quarter, reflecting an increased capital base.

Materials and other expenses (including the estimates of costs related to personal injury, property damage, and environmental matters) decreased $40 million, or 17%, in the first quarter, compared with the same period last year. The decline reflected the absence of the 2008 Avondale Mills settlement related to Graniteville (see additional discussion below) as well as lower costs associated with derailments, personal injury claims development, and freight car material costs which were offset in part by higher environmental claims development. The following table shows the components of materials and other expenses:

                                                 First Quarter
                                               2009      2008
                                                ($ in millions)

                  Materials                   $    89   $   101
                  Casualties and other claims      36        65
                  Other                            75        74

                                              $   200   $   240

In April 2008, NS settled the lawsuit brought by Avondale Mills for claims associated with the January 6, 2005, derailment in Graniteville, SC. A portion of the settlement was not reimbursed by insurance and was included in first quarter 2008 expenses. The total liability related to the derailment represents NS' best estimate based on current facts and circumstances. The estimate includes amounts related to business property damage and other economic losses, personal injury and individual property damage claims, as well as third-party response costs. NS' commercial insurance policies are expected to cover substantially all expenses related to this derailment above the unreimbursed portion and NS' self-insured retention, including NS' response costs and legal fees. The Consolidated Balance Sheets reflect current and long-term receivables for estimated recoveries from NS' insurance carriers. NS is engaged in arbitration with one of its insurance carriers that failed to respond to an insurance claim submitted by NS. NS believes these expenses are covered by the insurance policy and that recovery of the contested amount is probable, in that NS expects the arbitrator will determine the settlement amounts to be reasonable and that the insurer's refusal to consent to and to fund the settlement was a breach of contract. Accordingly, NS has recorded the full recovery attributable to such carrier ($100 million). In October 2008, another of NS' insurance carriers provided the preliminary findings of its review of NS' reimbursement request and reported that it may dispute a portion of that request. NS has initiated arbitration against the carrier and believes that all expenses contained in the reimbursement request are covered by the insurance policy and that recovery is probable.

Other Income - Net

Other income - net was $17 million, up $10 million from the first quarter of last year, reflecting higher net returns from corporate-owned life insurance (up $8 million) and increased coal royalties (up $6 million).

Provision for Income Taxes

The effective income tax rate for the first quarter was 37.5% in 2009, compared with 38.9% for the same period last year. The decrease for the quarter was largely due to the favorable resolution of certain prior year tax positions.

NS' consolidated income tax returns for 2006 and 2007 are being audited by the Internal Revenue Service and these audits are expected to be completed by year end.

FINANCIAL CONDITION AND LIQUIDITY

Cash provided by operating activities, NS' principal source of liquidity, was $354 million in the first three months of 2009 compared with $604 million in the first three months of 2008, reflecting lower income from railway operations. NS had working capital of $176 million at March 31, 2009, compared with a working capital deficit of $106 million at December 31, 2008; the change was largely the result of an increase in cash and cash equivalents and reduced accounts payable. NS' cash and cash equivalents balances totaled $884 million at March 31, 2009. NS expects that cash on hand combined with cash flows from operations will be sufficient to meet its ongoing obligations. There have been no material changes to the contractual obligation amounts or information relating to NS' future obligations related to uncertain tax positions contained in NS' Form 10-K for the year ended December 31, 2008.

Cash used for investing activities was $244 million in the first quarter of 2009, compared with $247 million in the same period last year, reflecting lower investment sales and other transactions offset by a reduction in property additions.

Cash provided by financing activities was $156 million in the first quarter of 2009 compared with a use of $199 million in the first quarter of 2008. The change reflected the absence of share repurchase activity during the quarter and lower debt repayments that were offset in part by fewer exercises of employee stock options and by increased dividend payments. Due to current economic and market conditions, the amount of future share repurchases is uncertain and the timing and volume of such future share repurchases will be guided by management's assessment of market conditions and other pertinent factors. NS' debt-to-total capitalization ratio was 41.7% at March 31, 2009, compared with 41.0% at December 31, 2008.

In January 2009, through a private offering, NS issued $500 million of unsecured notes at 5.75% due 2016 (see Note 7). The net proceeds from the offering were $494 million after deducting the purchase discount and expenses. NS has agreed to exchange the unregistered securities with essentially identical securities registered under the Securities Act of 1933.

NS has authority from its board of directors to issue an additional $1 billion of debt or equity securities through public or private sale. As of March 31, 2009, NS has on file with the Securities and Exchange Commission a Form S-3 automatic shelf registration statement for well-known seasoned issuers under which up to $1 billion could be issued under this authority.

NS also has in place and available a $1 billion, five-year credit agreement expiring in 2012, which provides for borrowings at prevailing rates and includes covenants. NS had no amounts outstanding under this facility at March 31, 2009, and NS is in compliance with all of the covenants. NS also has an accounts receivable securitization program with a 364-day term expiring in October 2009 (see Note 7).

The creation of Pan Am Southern LLC (PAS), a newly formed railroad company in which each of Pan Am Railways, Inc. (Pan Am) and NS has a 50% equity interest, was completed as of April 9, 2009. Pan Am has contributed to PAS a 155-mile main line track that runs between Mechanicville, New York and Ayer, Massachusetts, along with 281 miles of secondary and branch lines, including trackage rights in New York, Connecticut, Massachusetts, New Hampshire, and Vermont (collectively, the "PAS Lines"), and NS has both contributed cash and other property with a value of approximately $60 million and committed to contribute an additional $80 million in cash and other property over the next three years. A significant portion of NS' contributions will be used for capital improvements to the PAS Lines and the related construction of new intermodal and automotive terminals in the Albany, New York and the Ayer, Massachusetts areas.

APPLICATION OF CRITICAL ACCOUNTING ESTIMATES

The preparation of financial statements in accordance with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. These estimates and assumptions may require significant judgment about matters that are inherently uncertain, and future events are likely to occur that may require management to make changes to these estimates and assumptions. Accordingly, management regularly reviews these estimates and assumptions based on historical experience, changes in the business environment, and other factors that management believes to be reasonable under the circumstances. Management regularly discusses the development, selection, and disclosures concerning critical accounting estimates with the Audit Committee of its Board of Directors. There have been no significant changes to the Application of Critical Accounting Estimates disclosure contained in NS' Form 10-K as of December 31, 2008.

OTHER MATTERS

Labor Agreements

Approximately 26,000, or about 85%, of NS' railroad employees are covered by collective bargaining agreements with various labor unions. These agreements remain in effect until changed pursuant to the Railway Labor Act (RLA). NS largely bargains nationally in concert with other major railroads. Moratorium provisions in the labor agreements govern when the railroads and the unions may propose changes.

The most recent national bargaining round began in late 2004. Since that time, the railroads have reached national agreements that extend through 2009 with all of the major rail unions. Additionally, the current agreement with the Brotherhood of Locomotive Engineers and Trainmen (BLET) extends through 2014. Because NS has reached separate agreements with the BLET and the American Train Dispatchers Association (ATDA), only the health and welfare provisions from the national agreements apply to NS' locomotive engineers and ATDA-represented dispatchers. A small number of longshoremen at Ashtabula (Ohio) Docks are represented by the International Longshoremen's Association (ILA) and do not participate in national bargaining. Negotiations are continuing with that organization.

Market Risks and Hedging Activities

NS manages its overall exposure to fluctuations in interest rates by issuing both fixed- and floating-rate debt instruments and by entering into interest-rate hedging transactions to achieve an appropriate mix within its debt portfolio.

At March 31, 2009, NS' debt subject to interest rate fluctuations totaled $114 million. A 1% increase in interest rates would increase NS' total annual interest expense related to all its variable debt by approximately $1 million. Management considers it unlikely that interest rate fluctuations applicable to these instruments will result in a material adverse effect on NS' financial position, results of operations, or liquidity.

Some of NS' capital leases, which carry an average fixed rate of 7%, were effectively converted to variable rate obligations using interest rate swap agreements. On March 31, 2009, the average pay rate under these agreements was 3%, and the average receive rate was 6%. During the first quarter of 2009 and 2008, the effect of the swaps was to reduce interest expense by less than $1 million in both periods. A portion of the lease obligations is payable in Japanese yen. NS eliminated the associated exchange rate risk at the inception of each lease with a yen deposit sufficient to fund the yen-denominated obligation. Most of these deposits are held by foreign banks, primarily Japanese. As a result, NS is exposed to financial market risk relative to Japan. Counterparties to the interest rate swaps and Japanese banks holding yen deposits are major financial institutions believed by management to be creditworthy.

Environmental Matters

NS is subject to various jurisdictions' environmental laws and regulations. It is NS' policy to record a liability where such liability or loss is probable and its amount can be estimated reasonably. Claims, if any, against third parties for recovery of cleanup costs incurred by NS are reflected as receivables (when collection is probable) in the Consolidated Balance Sheets and are not netted against the associated NS liability. Environmental engineers regularly participate in ongoing evaluations of all known sites and in determining any necessary adjustments to liability estimates. NS also has an Environmental Policy Council, composed of senior managers, to oversee and interpret its environmental policy.

NS' Consolidated Balance Sheets include liabilities for environmental exposures in the amount of $40 million at March 31, 2009, and $42 million at December 31, 2008 (of which $12 million is classified as a current liability at the end of each period). At March 31, 2009, the liability represents NS' estimate of the probable cleanup and remediation costs based on available information at 147 known locations. As of that date, 13 sites account for $23 million of the liability, and no individual site was considered to be material. NS anticipates that much of this liability will be paid out over five years; however, some costs will be paid out over a longer period.

At 29 locations, one or more subsidiaries of NS, usually in conjunction with a number of other parties, have been identified as potentially responsible parties by the Environmental Protection Agency (EPA) or similar state authorities under the Comprehensive Environmental Response, Compensation and Liability Act of 1980, or comparable state statutes, which often impose joint and several liability for cleanup costs.

With respect to known environmental sites (whether identified by NS or by the EPA or comparable state authorities), estimates of NS' ultimate potential financial exposure for a given site or in the aggregate for all such sites are necessarily imprecise because of the widely varying costs of currently available cleanup techniques, the likely development of new cleanup technologies, the difficulty of determining in advance the nature and full extent of contamination and each potential participant's share of any estimated loss (and that participant's ability to bear it), and evolving statutory and regulatory standards governing liability.

Based on an assessment of known facts and circumstances, management believes that it is unlikely that any known matters, either individually or in the aggregate, will have a material adverse effect on NS' financial condition, results of operations or liquidity.

New Accounting Pronouncement

Financial Accounting Standards Board Staff Position (FSP) No. 132(R)-1, "Employers' Disclosures about Postretirement Benefit Plan Assets," was issued on December 30, 2008. The FSP, effective for fiscal years ending after December 15, 2009, clarifies an employer's disclosures about plan assets of a defined benefit pension or other postretirement plan. The FSP prescribes expanded disclosures regarding investment allocation decisions, categories of plan assets, inputs, and valuation techniques used to measure fair value, the effect of Level 3 inputs on changes in plan assets and significant concentrations of risk. NS will adopt the FSP at the end of 2009 and expects it will not have a material effect on NS' consolidated financial statements.

Inflation

In preparing financial statements, U.S. generally accepted accounting principles require the use of historical cost that disregards the effects of inflation on the replacement cost of property. NS, a capital-intensive company, has most of its capital invested in such property. The replacement cost of these assets, as well as the related depreciation expense, would be substantially greater than the amounts reported on the basis of historical cost.

FORWARD-LOOKING STATEMENTS

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