UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

   (Mark One)

  x  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 For the quarterly period ended September 30, 2008

OR

  o  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 For the transition period from            to            

Commission file number            1-11535

BURLINGTON NORTHERN SANTA FE CORPORATION

(Exact name of registrant as specified in its charter)

Delaware	41-1804964
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

2650 Lou Menk Drive

Fort Worth, Texas

(Address of principal executive offices)

76131-2830

(Zip Code)

(800) 795-2673

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.                             Yes  [x]  No  [ ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

        Large accelerated filer  [x]  Accelerated filer  [  ]   Non-accelerated filer  [  ] Smaller reporting company  [  ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

                                                                                                                          Yes  [  ]  No  [x]

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Class		Shares Outstanding at October 14, 2008
Common stock, $.01 par value	342,326,358 shares

Table of Contents

PART I	FINANCIAL INFORMATION	PAGE
Item 1.	Financial Statements.	3
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations.	26
Item 3.	Quantitative and Qualitative Disclosures About Market Risk.	40
Item 4.	Controls and Procedures.	42
PART II	OTHER INFORMATION
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds.	43
Item 6.	Exhibits.	43
Signatures		S-1
Exhibits		E-1

2

PART I

FINANCIAL INFORMATION

Item 1.    Financial Statements.

BURLINGTON NORTHERN SANTA FE CORPORATION and SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(In millions, except per share data)

(Unaudited)

		Three Months Ended				Nine Months Ended
		September 30,				September 30,
		2008		2007		2008		2007
Revenues	$	4,906	$	4,069	$	13,645	$	11,557
Operating expenses:
Fuel		1,349		848		3,685		2,332
Compensation and benefits		1,013		937		2,947		2,794
Purchased services		537		501		1,602		1,510
Depreciation and amortization		349		324		1,039		953
Equipment rents		230		235		683		704
Materials and other		221		223		893		728
Total operating expenses		3,699		3,068		10,849		9,021
Operating income		1,207		1,001		2,796		2,536
Interest expense		122		132		396		385
Other expense, net		6		6		11		17
Income before income taxes		1,079		863		2,389		2,134
Income tax expense		384		333		889		822
Net income	$	695	$	530	$	1,500	$	1,312
Earnings per share:
Basic earnings per share	$	2.02	$	1.51	$	4.35	$	3.71
Diluted earnings per share	$	2.00	$	1.48	$	4.30	$	3.64
Average shares:
Basic		343.5		351.3		344.9		353.7
Dilutive effect of stock awards		3.7		5.8		4.3		6.8
Diluted		347.2		357.1		349.2		360.5
Dividends declared per share	$	0.40	$	0.32	$	1.04	$	0.82

See accompanying Notes to Consolidated Financial Statements.

3

BURLINGTON NORTHERN SANTA FE CORPORATION and SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Dollars in millions, shares in thousands)

(Unaudited)

		September 30,			December 31,
		2008			2007
ASSETS
Current assets:
Cash and cash equivalents	$	476		$	330
Accounts receivable, net		623			790
Materials and supplies		626			579
Current portion of deferred income taxes		422			290
Other current assets		318			192
Total current assets		2,465			2,181
Property and equipment, net		30,510			29,567
Other assets		2,658			1,835
Total assets	$	35,633		$	33,583
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable and other current liabilities	$	3,252		$	2,824
Long-term debt due within one year		403			411
Total current liabilities		3,655			3,235
Long-term debt and commercial paper		8,297			7,735
Deferred income taxes		8,847			8,484
Casualty and environmental liabilities		1,004			843
Pension and retiree health and welfare liability		454			444
Employee separation costs		71			77
Other liabilities		1,701			1,621
Total liabilities		24,029			22,439
Commitments and contingencies (see Notes 2, 4 and 5)
Stockholders’ equity:
Common stock, $0.01 par value, 600,000 shares authorized; 541,186 shares and 537,330 shares issued, respectively		5			5
Additional paid-in capital		7,610			7,348
Retained earnings		12,285			11,152
Treasury stock, at cost, 198,894 shares and 189,626 shares, respectively		(8,125	)		(7,222	)
Accumulated other comprehensive loss		(171	)		(139	)
Total stockholders’ equity		11,604			11,144
Total liabilities and stockholders’ equity	$	35,633		$	33,583

See accompanying Notes to Consolidated Financial Statements.

4

BURLINGTON NORTHERN SANTA FE CORPORATION and SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In millions)

(Unaudited)

Nine Months Ended September 30,		2008			2007
OPERATING ACTIVITIES
Net Income	$	1,500		$	1,312
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		1,039			953
Deferred income taxes		248			220
Employee separation costs paid		(11	)		(16	)
Long-term casualty and environmental liabilities, net		181			26
Other, net		50			153
Changes in current assets and liabilities:
Accounts receivable, net		(108	)		(74	)
Change in accounts receivables sales program		278			(100	)
Materials and supplies		(47	)		(30	)
Other current assets		(142	)		(55	)
Accounts payable and other current liabilities		315			76
Net cash provided by operating activities		3,303			2,465
INVESTING ACTIVITIES
Capital expenditures		(1,712	)		(1,775	)
Construction costs for facility financing obligation		(38	)		(18	)
Other, net		(631	)		(318	)
Net cash used for investing activities		(2,381	)		(2,111	)
FINANCING ACTIVITIES
Net decrease in commercial paper and bank borrowings		(261	)		(202	)
Proceeds from issuance of long-term debt		650			1,300
Payments on long-term debt		(174	)		(439	)
Dividends paid		(334	)		(268	)
Proceeds from stock options exercised		87			126
Purchase of BNSF common stock		(878	)		(964	)
Excess tax benefits from equity compensation plans		90			105
Proceeds from facility financing obligation		50			–
Other, net		(6	)		(12	)
Net cash used for financing activities		(776	)		(354	)
Increase in cash and cash equivalents		146			–
Cash and cash equivalents:
Beginning of period		330			375
End of period	$	476		$	375
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid, net of amounts capitalized	$	406		$	364
Income taxes paid, net of refunds	$	565		$	430
Non-cash asset financing	$	79		$	167

See accompanying Notes to Consolidated Financial Statements. 

5

BURLINGTON NORTHERN SANTA FE CORPORATION and SUBSIDIARIES

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

(Shares in thousands, dollars in millions, except per share data)

(Unaudited)

	Common Shares	Treasury Shares			Common Stock and Paid–in Capital		Retained Earnings			Treasury Stock			Accumu­lated Other Compre­hensive Loss			Total Stock­holders’ Equity
Balance at December 31, 2007	537,330	(189,626	)	$	7,353	$	11,152		$	(7,222	)	$	(139	)	$	11,144
Adjustment to change the measurement date pursuant to Statement of Financial Accounting Standards (SFAS) No. 158					–		(7	)		–			2			(5	)
Adjustment to initially apply SFAS No. 158 to equity method investees					–		–			–			(2	)		(2	)
Common stock dividends, $1.04 per share					–		(360	)		–			–			(360	)
Restricted stock and stock options expense					59		–			–			–			59
Restricted stock activity and related tax benefit of $26	695	–			26		–			–			–			26
Exercise of stock options and related tax benefit of $64	3,161	(240	)		177		–			(25	)		–			152
Purchase of BNSF common stocka	–	(9,028	)		–		–			(878	)		–			(878	)
Comprehensive income:
Net income					–		1,500			–			–			1,500
Amortization of prior service costs and actuarial losses, net of tax expense of $4					–		–			–			6			6
Loss on derivative instruments and other items, net of tax benefit of $23					–		–			–			(37	)		(37	)
Unrealized loss on securities held by equity method investees, net of tax benefit of less than $1					–		–			–			(1	)		(1	)
Total comprehensive income																1,468
Balance at September 30, 2008	541,186	(198,894	)	$	7,615	$	12,285		$	(8,125	)	$	(171	)	$	11,604
a Total-to-date share repurchases through September 30, 2008, under the Company’s share repurchase program, were 189 million shares at an average price of $40.82 per share, leaving 21 million shares available for repurchase out of the 210 million shares authorized.

See accompanying Notes to Consolidated Financial Statements.

6

BURLINGTON NORTHERN SANTA FE CORPORATION and SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

1.    Accounting Policies and Interim Results

The Consolidated Financial Statements should be read in conjunction with Burlington Northern Santa Fe Corporation’s Annual Report on Form 10-K for the year ended December 31, 2007, including the financial statements and notes thereto. Burlington Northern Santa Fe Corporation (BNSF) is a holding company that conducts no operating activities and owns no significant assets other than through its interests in its subsidiaries. The Consolidated Financial Statements include the accounts of BNSF and its majority-owned subsidiaries, all of which are separate legal entities (collectively, the Company). BNSF’s principal operating subsidiary is BNSF Railway Company (BNSF Railway). All significant intercompany accounts and transactions have been eliminated. BNSF was incorporated in Delaware on December 16, 1994.

The results of operations for any interim period are not necessarily indicative of the results of operations to be expected for the entire year. In the opinion of management, the unaudited financial statements reflect all adjustments (consisting of only normal recurring adjustments, except as disclosed) necessary for a fair statement of BNSF’s consolidated financial position as of September 30, 2008, and the results of operations for the three and nine month periods ended September 30, 2008 and 2007.

Certain comparative prior period amounts in the Consolidated Financial Statements have been reclassified to conform to the current period presentation. These reclassifications had no effect on previously reported operating income or net income.

Adoption of New Accounting Pronouncements

Fair Value Measurements

In September 2006, the Financial Accounting Standards Board (FASB) issued SFAS No. 157, Fair Value Measurements. SFAS No. 157 defines fair value, establishes a framework for measuring fair value and expands disclosure requirements around fair value measurements.

SFAS No. 157 specifies a three-level hierarchy of valuation inputs which was established to increase consistency, clarity and comparability in fair value measurements and related disclosures.

Ÿ   Level 1–Quoted prices for identical assets or liabilities in active markets that the Company has the ability to access at the measurement date.

Ÿ   Level 2–Quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; and model-derived valuations in which all significant inputs are observable market data.

Ÿ   Level 3–Valuations derived from valuation techniques in which one or more significant inputs are unobservable.

SFAS No. 157 requires companies to maximize the use of observable inputs (Level 1 and Level 2), when available, and to minimize the use of unobservable inputs (Level 3) when determining fair value.

The Company adopted SFAS No. 157 on January 1, 2008, and recorded no financial statement adjustments as a result of adoption. The Company has applied the provisions of the standard to its fuel and interest rate hedges (see Note 2 to the Consolidated Financial Statements).

However, the Company has not applied the provisions of the standard to its property and equipment, goodwill and certain other assets, which are measured at fair value for impairment assessment, nor to any business combinations or asset retirement obligations. The Company will apply the provisions of the standard to these assets and liabilities, beginning January 1, 2009, as required by FASB Staff Position (FSP) SFAS No. 157-2, Effective Date of FASB Statement No. 157. This adoption is not expected to have a material impact on the Company’s results of operations, financial condition or liquidity.

7

BURLINGTON NORTHERN SANTA FE CORPORATION and SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) - (Continued)

2.    Hedging Activities

The Company uses derivative financial instruments to hedge against increases in diesel fuel prices and interest rates as well as to convert a portion of its fixed-rate long-term debt to floating-rate debt. The Company does not hold or issue derivative financial instruments for trading or speculative purposes. The Company formally documents the relationship between the hedging instrument and the hedged item, as well as the risk management objective and strategy for the use of the hedging instrument. This documentation includes linking the derivatives that are designated as fair value or cash flow hedges to specific assets or liabilities on the balance sheet, commitments or forecasted transactions. The Company assesses at the time a derivative contract is entered into, and at least quarterly thereafter, whether the derivative item is effective in offsetting the changes in fair value or cash flows. Any change in fair value resulting from ineffectiveness, as defined by SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended, is recognized in current period earnings. For derivative instruments that are designated and qualify as cash flow hedges, the effective portion of the gain or loss on the derivative instrument is recorded in accumulated other comprehensive loss (AOCL) as a separate component of stockholders’ equity and reclassified into earnings in the period during which the hedge transaction affects earnings. Cash flows related to fuel and interest rate hedges are classified as operating activities in the Consolidated Statements of Cash Flows.

BNSF monitors its hedging positions and credit ratings of its counterparties and does not anticipate any losses due to counterparty nonperformance.

Fuel

Fuel costs represented 34 percent and 26 percent of total operating expenses during the nine month periods ended September 30, 2008 and 2007, respectively. Due to the significance of diesel fuel expenses to the operations of BNSF and the historical volatility of fuel prices, the Company has entered into hedges to partially mitigate the risk of fluctuations in the price of its diesel fuel purchases. The fuel hedges include the use of derivatives that are accounted for as cash flow hedges. The hedging is intended to protect the Company’s operating margins and overall profitability from adverse fuel price changes by entering into fuel-hedge instruments based on management’s evaluation of current and expected diesel fuel price trends. However, to the extent the Company hedges portions of its fuel purchases, it may not realize the impact of decreases in fuel prices. Conversely, to the extent the Company does not hedge portions of its fuel purchases, it may be adversely affected by increases in fuel prices. Based on locomotive fuel consumption (which represents substantially all fuel consumption) during the twelve-month period ended September 30, 2008, and excluding the impact of the hedges, each one-cent increase in the price of fuel per gallon would result in approximately $14 million of additional fuel expense on an annual basis. However, BNSF believes any fuel price increase would be substantially offset by the Company’s fuel surcharge program.

Total Fuel-Hedging Activities

As of September 30, 2008, BNSF’s total fuel-hedging positions covered approximately 10 percent, 9 percent, 5 percent and 2 percent of estimated locomotive fuel purchases for the remainder of 2008, 2009, 2010 and 2011, respectively. Hedge positions are closely monitored to ensure that they will not exceed actual fuel requirements in any period.

The amounts recorded in the Consolidated Statements of Income for fuel-hedge transactions were as follows (in millions):

		Three Months Ended					Nine Months Ended
		September 30,					September 30,
		2008			2007		2008			2007
Hedge benefit	$	17		$	–	$	50		$	24
Ineffective portion of open hedges		(6	)		1		(6	)		1
Tax effect		(4	)		–		(17	)		(9	)
Hedge benefit, net of tax	$	7		$	1	$	27		$	16

The ineffective portion of unrealized gains and losses of open hedges are recorded in the Consolidated Statements of Income as a component of fuel expense.

8

BURLINGTON NORTHERN SANTA FE CORPORATION and SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) - (Continued)

The amounts recorded in the Consolidated Balance Sheets for fuel-hedge transactions were as follows (in millions):

		September 30,			December 31,
		2008			2007
Short-term fuel-hedging asset	$	2		$	29
Long-term fuel-hedging asset		5			10
Short-term fuel-hedging liability		(34	)		–
Ineffective portion of open hedges		6			–
Tax effect		8			(15	)
Amount included in AOCL, net of tax	$	(13	)	$	24
Settled fuel-hedging contracts receivable	$	17		$	6

The Company uses the forward commodity price for the periods hedged to value its fuel-hedge swaps and costless collars. This methodology is a market approach, which under SFAS No. 157 utilizes Level 2 inputs as it uses market data for similar instruments in active markets.

New York Mercantile Exchange (NYMEX) #2 Heating Oil (HO) Hedges

As of September 30, 2008, BNSF had entered into fuel swap agreements utilizing NYMEX #2 HO. The hedge prices do not include taxes, transportation costs, certain other fuel handling costs and any differences that may occur between the prices of HO and the purchase price of BNSF’s diesel fuel. Over the twelve months ended September 30, 2008, the sum of all such costs averaged approximately 20 cents per gallon.

During the first nine months of 2008, the Company entered into fuel swap agreements utilizing HO to hedge the equivalent of 24.02 million gallons of fuel with an average swap price of $2.44 per gallon. The following table provides fuel-hedge data based on the quarter being hedged for all HO fuel hedges outstanding as of September 30, 2008.

		Quarter Ending
2008		December 31,
HO Swaps
Gallons hedged (in millions)		8.99
Average swap price (per gallon)	$	2.47
Fair value (in millions)	$	4

West Texas Intermediate (WTI) Crude Oil Hedges

In addition, BNSF enters into fuel swap and costless collar agreements utilizing WTI crude oil. The hedge prices do not include taxes, transportation costs, certain other fuel handling costs and any differences which may occur between the prices of WTI and the purchase price of BNSF’s diesel fuel, including refining costs. Over the twelve months ended September 30, 2008, the sum of all such costs averaged approximately 66 cents per gallon.

During the first nine months of 2008, the Company entered into fuel swap agreements utilizing WTI to hedge the equivalent of 2.90 million barrels of fuel with an average swap price of $99.61 per barrel and costless collar agreements utilizing WTI to hedge the equivalent of 3.29 million barrels of fuel with an average cap price of $135.09 per barrel and an average floor price of $124.42 per barrel. The following table provides fuel-hedge data based on the quarter being hedged for all WTI fuel hedges outstanding as of September 30, 2008.

9

BURLINGTON NORTHERN SANTA FE CORPORATION and SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) - (Continued)

		Quarter Ending
2008		December 31,
WTI Swaps
Barrels hedged (in thousands)		230
Equivalent gallons hedged (in millions)		9.66
Average swap price (per barrel)	$	63.70
Fair value (in millions)	$	8
WTI Costless Collars
Barrels hedged (in thousands)		445
Equivalent gallons hedged (in millions)		18.69
Average cap price (per barrel)	$	140.03
Average floor price (per barrel)	$	128.72
Fair value (in millions)	$	(13)

		Quarter Ending
2009		March 31,			June 30,			September 30,			December 31,			Annual
WTI Swaps
Barrels hedged (in thousands)		235			185			185			245			850
Equivalent gallons hedged (in millions)		9.87			7.77			7.77			10.29			35.70
Average swap price (per barrel)	$	83.34		$	80.86		$	81.20		$	84.79		$	82.75
Fair value (in millions)	$	4		$	4		$	4		$	4		$	16
WTI Costless Collars
Barrels hedged (in thousands)		800			630			520			475			2,425
Equivalent gallons hedged (in millions)		33.60			26.46			21.84			19.95			101.85
Average cap price (per barrel)	$	132.56		$	132.55		$	135.82		$	135.46		$	133.82
Average floor price (per barrel)	$	121.86		$	122.11		$	125.55		$	125.38		$	123.41
Fair value (in millions)	$	(18	)	$	(13	)	$	(12	)	$	(11	)	$	(54	)

		Quarter Ending
2010		March 31,		June 30,		September 30,		December 31,		Annual
WTI Swaps
Barrels hedged (in thousands)		515		435		405		370		1,725
Equivalent gallons hedged (in millions)		21.63		18.27		17.01		15.54		72.45
Average swap price (per barrel)	$	95.09	$	100.14	$	100.35	$	100.37	$	98.73
Fair value (in millions)	$	4	$	2	$	2	$	2	$	10
		Quarter Ending
2011		March 31,		June 30,		September 30,		December 31,		Annual
WTI Swaps
Barrels hedged (in thousands)		220		185		175		185		765
Equivalent gallons hedged (in millions)		9.24		7.77		7.35		7.77		32.13
Average swap price (per barrel)	$	100.45	$	100.44	$	100.35	$	100.58	$	100.46
Fair value (in millions)	$	1	$	<1	$	<1	$	<1	$	2

10

BURLINGTON NORTHERN SANTA FE CORPORATION and SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) - (Continued)

Interest Rate

From time to time, the Company enters into various interest rate hedging transactions for the purpose of managing exposure to fluctuations in interest rates by establishing rates in anticipation of both future debt issuances and the refinancing of leveraged leases, as well as converting a portion of its fixed-rate long-term debt to floating-rate debt. The Company uses interest rate swaps and treasury locks as part of its interest rate risk management strategy.

Total Interest Rate Hedging Program

All interest rate derivative transactions outstanding are reflected in the following table:

		September 30, 2008
		Maturity Date
		2008			2009			2010			2011			2012			Thereafter			Total			Fair Value
Fair value hedges
Fixed to variable    swaps (in millions)	$	–		$	200		$	250		$	–		$	–		$	400		$	850		$	4
Average fixed rate		–	%		6.13	%		7.13	%		–	%		–	%		5.75	%		6.24	%
Average floating rate		–	%		3.29	%		5.69	%		–	%		–	%		4.22	%		4.44	%
Cash flow hedges
Treasury locks    (in millions)	$	–		$	300		$	–		$	–		$	–		$	–		$	300		$	8
Average rate		–	%		4.04	%		–	%		–	%		–	%		–	%		4.04	%

BNSF’s measurement of the fair value of interest rate derivatives is based on estimates of the mid-market values for the transactions provided by the counterparties to these agreements. This methodology is a market approach, which under SFAS No. 157 utilizes Level 2 inputs as it uses market data for similar instruments in active markets. Unrealized gains and losses for interest rate hedge transactions are not recorded in the Consolidated Statements of Income.

Fair Value Interest Rate Hedges

The Company enters into interest rate swaps to convert fixed-rate long-term debt to floating-rate debt. These swaps are accounted for as fair value hedges under SFAS No. 133. These fair value hedges qualify for the short-cut method of recognition; therefore, no portion of these swaps is treated as ineffective.

In March of 2008, the Company entered into four additional interest rate swaps having an aggregate notional amount of $400 million to convert fixed-rate long-term debt to floating-rate debt. These swaps were entered into at the inception of new 10-year notes (see Note 4 to the Consolidated Financial Statements).

As of September 30, 2008 and December 31, 2007, BNSF had entered into eleven and seven separate swaps, respectively, including the swaps described above, with an aggregate notional amount of $850 million and $450 million, respectively, in which it pays an average floating rate, which fluctuates quarterly, based on the London Interbank Offered Rate (LIBOR). The average floating rate to be paid by BNSF as of September 30, 2008, was 4.44 percent, and the average fixed rate BNSF is to receive is 6.24 percent.

11

BURLINGTON NORTHERN SANTA FE CORPORATION and SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) - (Continued)

The amounts recorded in the Consolidated Statements of Income, as an increase to or reduction of interest expense, for interest rate fair value hedge transactions were as follows (in millions):

		Three Months Ended						Nine Months Ended
		September 30,						September 30,
		2008			2007			2008			2007
Hedge benefit (loss)	$	4		$	(1	)	$	8		$	(2	)
Tax effect		(2	)		1			(3	)		1
Hedge benefit (loss), net of tax	$	2		$	–		$	5		$	(1	)

The amounts recorded in the Consolidated Balance Sheets for interest rate fair value hedge transactions, which represent the fair value of open hedges, with a corresponding adjustment to debt or accrued interest, are as follows (in millions):

		September 30,			December 31,
		2008			2007
Short-term interest rate hedging asset	$	4		$	–
Long-term interest rate hedging asset	$	4		$	6
Long-term interest rate hedging liability	$	(4	)	$	–

Cash Flow Interest Rate Hedges

In anticipation of a future debt issuance, the Company entered into three treasury locks in September 2008 having an aggregate notional amount of $175 million, and an average locked-in rate of 4.20 percent, to fix a portion of the rate for a future 30-year unsecured debt issuance. The treasury locks are expected to be unwound during 2009, and any gain or loss on the hedges will be amortized to interest expense over the life of the issued debt.  These transactions are accounted for as cash flow hedges.

In anticipation of a future debt issuance, the Company entered into five treasury locks in August and September 2008 having an aggregate notional amount of $125 million, and an average locked-in rate of 3.82 percent, to fix a portion of the rate for a future 10-year unsecured debt issuance. The treasury locks are expected to be unwound during 2009, and any gain or loss on the hedges will be amortized to interest expense over the life of the issued debt. These transactions are accounted for as cash flow hedges.

In anticipation of a future debt issuance, the Company entered into nine treasury locks during 2007 and 2008, having an aggregate notional amount of $250 million, and an average locked-in rate of 4.24 percent, to fix a portion of the rate for a future 10-year unsecured debt issuance. The treasury locks were terminated in March 2008 in connection with the issuance of $650 million 10-year notes (see Note 4 to the Consolidated Financial Statements). Upon termination, BNSF paid $13 million to the counterparties, which will be amortized to interest expense over the life of the issued debt. These transactions were accounted for as cash flow hedges.

The amounts recorded in the Consolidated Balance Sheets for interest rate cash flow hedge transactions, which represent the fair value of open and closed hedges, were as follows (in millions):

		September 30,			December 31,
		2008			2007
Interest rate hedging asset (liability) – open hedges	$	8		$	(5	)
Unrecognized gain on closed hedges		6			19
Tax effect		(5	)		(5	)
Unrecognized gain in AOCL, net of tax	$	9		$	9

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BURLINGTON NORTHERN SANTA FE CORPORATION and SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) - (Continued)

3.    Accounts Receivable, Net

BNSF Railway transfers a portion of its accounts receivable to Santa Fe Receivables Corporation (SFRC), a special purpose subsidiary. SFRC transfers an undivided interest in such receivables, with limited exceptions, to a master trust and causes the trust to issue an undivided interest in the receivables to investors (the A/R sales program). The undivided interests in the master trust may be in the form of certificates or purchased interests.

 BNSF Railway’s total capacity to sell undivided interests to investors under the A/R sales program was $700 million at September 30, 2008, which was comprised of two $175 million, 364-day accounts receivable facilities and two $175 million, 3-year accounts receivable facilities, which mature in November 2008 and 2010, respectively. The 364-day facilities are expected to be renewed in November 2008. Outstanding undivided interests held by investors under the A/R sales program were $578 million and $300 million at September 30, 2008 and December 31, 2007. There was $144.5 million and $75.0 million outstanding under each of the four facilities at September 30, 2008 and December 31, 2007, respectively. These undivided interests in receivables are excluded from accounts receivable by BNSF Railway in connection with the sale of undivided interests under the A/R sales program. These undivided interests were supported by $1,195 million and $1,105 million of receivables transferred by SFRC to the master trust at September 30, 2008 and December 31, 2007, respectively. When SFRC transfers these receivables to the master trust, it retains an undivided interest in the receivables sold, which is included in accounts receivable in the Company’s Consolidated Financial Statements. The interest that continues to be held by SFRC of $617 million and $805 million at September 30, 2008 and December 31, 2007, respectively, less an allowance for uncollectible accounts, reflected the total accounts receivable transferred by SFRC to the master trust less $578 million and $300 million at September 30, 2008 and December 31, 2007, respectively, of outstanding undivided interests held by investors. Due to a relatively short collection cycle, the fair value of the undivided interest transferred to investors in the A/R sales program approximated book value, and there was no gain or loss from the transaction.

BNSF Railway retains the collection responsibility with respect to the accounts receivable. Proceeds from collections reinvested in the A/R sales program were approximately $14.5 billion and $12.3 billion for the nine months ended September 30, 2008 and 2007, respectively. No servicing asset or liability has been recorded because the fees BNSF Railway receives for servicing the receivables approximate the related costs. SFRC’s costs of the sale of receivables are included in other expense, net and were $9 million and $15 million for the nine months ended September 30, 2008 and 2007, respectively. These costs fluctuate monthly with changes in prevailing interest rates and were based on weighted average interest rates of 3.3 percent and 5.6 percent for the nine months ended September 30, 2008 and 2007, respectively. These costs include interest, discounts associated with transferring the receivables under the A/R sales program to SFRC, program fees paid to banks, incidental commercial paper issuing costs and fees for unused commitment availability.

The amount of accounts receivable transferred by BNSF Railway to SFRC fluctuates based upon the availability of receivables and is directly affected by changing business volumes and credit risks, including dilution and delinquencies. In order for there to be an impact on the amount of receivables BNSF Railway could sell, the combined dilution and delinquency percentages would have to exceed an established threshold. BNSF Railway has historically experienced very low levels of dilution or delinquency and was well below the established threshold rates at September 30, 2008. Based on the current levels, if dilution or delinquency percentages were to increase by one percentage point, there would be no impact to the amount of receivables BNSF Railway could sell.

Receivables funded under the A/R sales program may not include amounts over 90 days past due or concentrations over certain limits with any one customer and certain other receivables. At September 30, 2008 and December 31, 2007, $17 million and $11 million, respectively, of accounts receivable were greater than 90 days old.

BNSF Railway maintains an allowance for bill adjustments and uncollectible accounts based upon the expected collectibility of accounts receivable, including receivables transferred to the master trust. Credit losses are based on specific identification of uncollectible accounts and application of historical collection percentages by aging category. At September 30, 2008 and December 31, 2007, $40 million and $36 million, respectively, of such allowances had been recorded, of which $36 million and $34 million, respectively, had been recorded as a reduction to accounts receivable, net. The remaining $4 million and $2 million at September 30, 2008 and December 31, 2007, respectively, had been recorded in accounts payable and other current liabilities because they relate to the outstanding undivided interests held by investors. During the nine months ended September 30, 2008 and 2007, $2 million and $3 million, respectively, of accounts receivable were written off.

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BURLINGTON NORTHERN SANTA FE CORPORATION and SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) - (Continued)

 The investors in the master trust have no recourse to BNSF Railway's other assets except for customary warranty and indemnity claims. Creditors of BNSF Railway have no recourse to the assets of the master trust or SFRC unless and until all claims of their respective creditors have been paid. The A/R sales program includes provisions that, if triggered, allow the investors participating in this program, at their option, to cancel the program. At September 30, 2008, BNSF Railway was in compliance with these provisions.

4.    Debt

 Revolving Credit Facility and Commercial Paper

As of September 30, 2008, the Company had borrowing capacity of up to $1.2 billion under its long-term revolving bank credit facility, which expires in September 2012. Annual facility fees are currently 0.08 percent for the facility. The rate is subject to change based upon changes in BNSF’s senior unsecured debt ratings. Borrowing rates are based upon (i) LIBOR plus a spread determined by BNSF’s senior unsecured debt ratings; (ii) money market rates offered at the option of the lenders; or (iii) an alternate base rate. BNSF must maintain compliance with certain financial covenants under its revolving bank credit facility. At September 30, 2008, the Company was in compliance with these covenants.

At September 30, 2008, there were no bank borrowings against the revolving credit agreement.

BNSF issues commercial paper from time to time that is supported by the revolving bank credit facility. Outstanding commercial paper balances reduce the amount of borrowings available under this agreement.

The maturity value of commercial paper as of September 30, 2008, of $50 million, reduced the total capacity available under the revolving credit agreement to $1,150 million. Commercial paper outstanding consisted of $50 million issued to a consolidated subsidiary of BNSF that was eliminated upon consolidation. There was no consolidated commercial paper outstanding as of September 30, 2008.

 Notes and Debentures

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 of Directors (the Board) authorized an additional $850 million of debt securities that may be issued through the Securities and Exchange Commission (SEC) debt shelf registration process, for a total of $1 billion authorized to be issued as of September 30, 2008.

  Financing Obligation

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.

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BURLINGTON NORTHERN SANTA FE CORPORATION and SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) - (Continued)

Guarantees

 Debt and other obligations of non-consolidated entities guaranteed by the Company as of September 30, 2008, were as follows (dollars in millions):

		Guarantees
		BNSF Ownership Percentage		Principal Amount Guaranteed		Maximum Future Payments		Maximum Recourse Amounta		Remaining Term (in years)		Capitalized Obligations
Kinder Morgan Energy Partners, L.P.	0.5%		$	190	$	190	$	–	Termination of Ownership		$	–
Kansas City Terminal Intermodal Transportation Corporation	0.0%		$	52	$	74	$	74	10		$	29b
Westside Intermodal Transportation Corporation	0.0%		$	39	$	59	$	–	15		$	33b
The Unified Government of Wyandotte County/Kansas City, Kansas	0.0%		$	12	$	18	$	–	15		$	10b
Chevron Phillips Chemical Company, LP	0.0%			N/Ad		N/Ad		N/Ad	9		$	13c
Various lessors (Residual value guarantees)	0.0%			N/A	$	271	$	271	Various		$	68c
All other	0.0%		$	5	$	6	$	2	Various		$	–
a Reflects the maximum amount the Company could recover from a third party other than the counterparty. b Reflects capitalized obligations that are recorded on the Company’s Consolidated Balance Sheets. c Reflects FASB Interpretation (FIN) 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, asset and corresponding liability for the fair value of these guarantees. d There is no cap to the liability that can be sought from BNSF for BNSF’s negligence or the negligence of the indemnified party. However, BNSF could receive reimbursement from certain insurance policies if the liability exceeds a certain amount.

Kinder Morgan Energy Partners, L.P.

Santa Fe Pacific Pipelines, Inc., an indirect, wholly-owned subsidiary of BNSF Railway, has a guarantee in connection with its remaining special limited partnership interest in Santa Fe Pacific Pipelines Partners, L.P. (SFPP), a subsidiary of Kinder Morgan Energy Partners, L.P., to be paid only upon default by the partnership. All obligations with respect to the guarantee will cease upon termination of ownership rights, which would occur upon a put notice issued by BNSF or the exercise of the call rights by the general partners of SFPP.

Kansas City Terminal Intermodal Transportation Corporation

BNSF Railway and another major railroad jointly and severally guarantee $52 million of debt of Kansas City Terminal Intermodal Transportation Corporation, the proceeds of which were used to finance construction of a double track grade separation bridge in Kansas City, Missouri, which is operated and used by Kansas City Terminal Railway Company (KCTRC). BNSF Railway has a 25 percent ownership in KCTRC, accounts for its interest using the equity method of accounting and would be required to fund a portion of the remaining obligation upon default by the original debtor.

Westside Intermodal Transportation Corporation and The Unified Government of

Wyandotte County/Kansas City, Kansas

BNSF Railway has outstanding guarantees of $51 million of debt, the proceeds of which were used to finance construction of a bridge that connects BNSF Railway’s Argentine Yard in Kansas City, Kansas, with the KCTRC mainline tracks in Kansas City, Missouri. The bridge is operated by KCTRC, and payments related to BNSF Railway’s guarantee of this obligation would only be called for upon default by the original debtor.

15

BURLINGTON NORTHERN SANTA FE CORPORATION and SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) - (Continued)

Chevron Phillips Chemical Company, LP

In the third quarter of 2007, BNSF Railway entered into an indemnity agreement with Chevron Phillips Chemical Company, LP (Chevron Phillips), granting certain rights of indemnity from BNSF Railway, in order to facilitate access to a new storage facility. Under certain circumstances, payment under this obligation may be required in the event Chevron Phillips were to incur certain liabilities or other incremental costs resulting from trackage access.

Residual Value Guarantees (RVG)

In the normal course of business, the Company enters into leases in which it guarantees the residual value of certain leased equipment. Some of these leases have renewal or purchase options, or both, that the Company may exercise at the end of the lease term. If the Company elects not to exercise these options, it may be required to pay the lessor an amount not exceeding the RVG. The amount of any payment is contingent upon the actual residual value of the leased equipment. Some of these leases also require the lessor to pay the Company any surplus if the actual residual value of the leased equipment is over the RVG. These guarantees will expire between 2009 and 2011.

The maximum future payments, as disclosed in the Guarantees table above, represent the undiscounted maximum amount that the Company could be required to pay in the event the Company did not exercise its renewal option and the fair market value of the equipment had significantly declined. BNSF does not anticipate such a large reduction in the fair market value of the leased equipment. As of September 30, 2008, the Company had recorded a $68 million asset and corresponding liability for the fair value of RVGs.

All Other

As of September 30, 2008, BNSF guaranteed $5 million of other debt and leases. BNSF holds a performance bond and has the option to sub-lease property to recover up to $2 million of the $5 million of guarantees. These guarantees expire between 2011 and 2013.

Other than as discussed above, there is no collateral held by a third party that the Company could obtain and liquidate to recover any amounts paid under the above guarantees.

Other than as discussed above, none of the guarantees are recorded in the Consolidated Financial Statements of the Company. The Company does not expect performance under these guarantees to have a material effect on the Company in the foreseeable future.

Indemnities

In the ordinary course of business, BNSF enters into agreements with third parties that include indemnification clauses. In general, these clauses are customary for the types of agreements in which they are included. At times, these clauses may involve indemnification for the acts of the Company, its employees and agents, indemnification for another party’s acts, indemnification for future events, indemnification based upon a certain standard of performance, indemnification for liabilities arising out of the Company’s use of leased equipment or other property, or other types of indemnification. Due to the uncertainty of whether events which would trigger the indemnification obligations would ever occur, the Company does not believe that these indemnity agreements will have a material adverse effect on the Company’s results of operations, financial position or liquidity. Additionally, the Company believes that, due to lack of historical payment experience, the fair value of indemnities cannot be estimated with any amount of certainty and that the fair value of any such amount would be immaterial to the Consolidated Financial Statements. Agreements that contain unique circumstances, particularly agreements that contain guarantees that indemnify another party’s acts are disclosed separately if appropriate. Unless separately disclosed above, no fair value liability related to indemnities has been recorded in the Consolidated Financial Statements.

16

BURLINGTON NORTHERN SANTA FE CORPORATION and SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) - (Continued)

5.     Commitments and Contingencies

Personal Injury

Personal injury claims, including asbestos claims and employee work-related injuries and third-party injuries (collectively, other personal injury), are a significant expense for the railroad industry. Personal injury claims by BNSF Railway employees are subject to the provisions of the Federal Employers’ Liability Act (FELA) rather than state workers’ compensation laws. FELA’s system of requiring the finding of fault, coupled with unscheduled awards and reliance on the jury system, contributed to increased expenses in past years. Other proceedings include claims by non-employees for punitive as well as compensatory damages. A few proceedings purport to be class actions. The variability present in settling these claims, including non-employee personal injury and matters in which punitive damages are alleged, could result in increased expenses in future years. BNSF has implemented a number of safety programs designed to reduce the number of personal injuries as well as the associated claims and personal injury expense.

 BNSF records a liability for personal injury claims when the expected loss is both probable and reasonably estimable. The liability and ultimate expense projections are estimated using standard actuarial methodologies. Liabilities recorded for unasserted personal injury claims are based on information currently available. Due to the inherent uncertainty involved in projecting future events such as the number of claims filed each year, developments in judicial and legislative standards and the average costs to settle projected claims, actual costs may differ from amounts recorded. Expense accruals and any required adjustments are classified as materials and other in the Consolidated Statements of Income.

Asbestos

The Company is party to a number of personal injury claims by employees and non-employees who may have been exposed to asbestos. The heaviest exposure for BNSF employees was due to work conducted in and around the use of steam locomotive engines that were phased out between the years of 1950 and 1967. However, other types of exposures, including exposure from locomotive component parts and building materials, continued after 1967 until they were substantially eliminated at BNSF by 1985.

BNSF assesses its unasserted liability exposure on an annual basis during the third quarter. BNSF determines its asbestos liability by estimating its exposed population, the number of claims likely to be filed, the number of claims that will likely require payment, and the estimated cost per claim. Estimated filing and dismissal rates and average cost per claim are determined utilizing recent claim data and trends.

During the third quarter of 2008 and 2007, the Company analyzed recent filing and payment trends to ensure the assumptions used by BNSF to estimate its future asbestos liability were reasonable. In the third quarter of 2007, management recorded a decrease in expense of $17 million due to a statistically significant reduction in filing rate experience for non-malignant claims. In the third quarter of 2008, management determined that the liability remained appropriate and no change was recorded. The Company plans to update its study again in the third quarter of 2009.

Throughout the year, BNSF monitors actual experience against the number of forecasted claims and expected claim payments and will record adjustments to the Company’s estimates as necessary.

The following table summarizes the activity in the Company’s accrued obligations for both asserted and unasserted asbestos matters (in millions):

		Three Months Ended						Nine Months Ended
		September 30,						September 30,
		2008			2007			2008			2007
Beginning balance	$	261		$	297		$	270		$	306
Accruals		–			(17	)		–			(17	)
Payments		(5	)		(5	)		(14	)		(14	)
Ending balance at September 30,	$	256		$	275		$	256		$	275

17

BURLINGTON NORTHERN SANTA FE CORPORATION and SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) - (Continued)

Of the September 30, 2008 obligation, $211 million was related to unasserted claims while $45 million was related to asserted claims. At September 30, 2008, $17 million was included in current liabilities. The recorded liability was not discounted. In addition, defense and processing costs, which are recorded on an as-reported basis, were not included in the recorded liability. The Company is primarily self-insured for asbestos-related claims.

The following table summarizes information regarding the number of asserted asbestos claims filed against BNSF:

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2008		2007		2008		2007
Claims unresolved at beginning of period	1,800		1,930		1,781		1,975
Claims filed	143		107		415		339
Claims settled, dismissed or otherwise resolved	(83	)	(134	)	(336	)	(411	)
Ending balance at September 30,	1,860		1,903		1,860		1,903

Based on BNSF’s estimate of the potentially exposed employees and related mortality assumptions, it is anticipated that unasserted claims will continue to be filed through the year 2050. The Company recorded an amount for the full estimated filing period through 2050 because it had a relatively finite exposed population (former and current employees hired prior to 1985), which it was able to identify and reasonably estimate and about which it had obtained reliable demographic data (including age, hire date and occupation) derived from industry or BNSF specific data that was the basis for the study. BNSF projects that approximately 55, 75 and 95 percent of the future unasserted asbestos claims will be filed within the next 10, 15 and 25 years, respectively.

Because of the uncertainty surrounding the factors used in the study, it is reasonably possible that future costs to settle asbestos claims may range from approximately $235 million to $280 million. However, BNSF believes that the $256 million recorded is the best estimate of the Company’s future obligation for the settlement of asbestos claims.

The amounts recorded by BNSF for the asbestos-related liability were based upon currently known facts. Future events, such as the number of new claims to be filed each year, the average cost of disposing of claims, as well as the numerous uncertainties surrounding asbestos litigation in the United States, could cause the actual costs to be higher or lower than projected.

While the final outcome of asbestos-related matters cannot be predicted with certainty, considering among other things the meritorious legal defenses available and liabilities that have been recorded, it is the opinion of BNSF that none of these items, when finally resolved, will have a material adverse effect on the Company’s financial position or liquidity. However, the occurrence of a number of these items in the same period could have a material adverse effect on the results of operations in a particular quarter or fiscal year.

Other Personal Injury

BNSF estimates its other personal injury liability claims and expense quarterly based on the covered population, activity levels and trends in frequency and the costs of covered injuries. Estimates include unasserted claims except for certain repetitive stress and other occupational trauma claims that result from prolonged repeated events or exposure. Such claims are estimated on an as-reported basis because, while the Company has concluded that a probable loss has occurred, it cannot estimate the range of reasonably possible loss due to other contributing causes of such injuries and the fact that continued exposure is required for the potential injury to manifest itself as a claim. The Company believes that the low end of the range of reasonably possible loss, as that term is used in FIN 14, Reasonable Estimation of the Amount of a Loss, is immaterial for these repetitive stress and other occupational trauma claims.

BNSF monitors quarterly actual experience against the number of forecasted claims to be received, the forecasted number of claims closing with payment and expected claims payments. Adjustments to the Company’s estimates are recorded quarterly as necessary or more frequently as new events or revised estimates develop.

18

BURLINGTON NORTHERN SANTA FE CORPORATION and SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) - (Continued)

The following table summarizes the activity in the Company’s accrued obligations for other personal injury matters (in millions):

		Three Months Ended						Nine Months Ended
		September 30,						September 30,
		2008			2007			2008			2007
Beginning balance	$	474		$	437		$	439		$	439
Accruals		34			46			136			139
Payments		(37	)		(48	)		(104	)		(143	)
Ending balance at September 30,	$	471		$	435		$	471		$	435

At September 30, 2008, $183 million was included in current liabilities. BNSF’s liabilities for other personal injury claims are undiscounted. In addition, defense and processing costs, which are recorded on an as-reported basis, were not included in the recorded liability. The Company is substantially self-insured for other personal injury claims.

The following table summarizes information regarding the number of personal injury claims, other than asbestos, filed against BNSF:

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2008		2007		2008		2007
Claims unresolved at beginning of period	3,941		3,131		3,322		3,130
Claims filed	994		1,033		3,441		2,899
Claims settled, dismissed or otherwise resolved	(861	)	(918	)	(2,689	)	(2,783	)
Ending balance at September 30,	4,074		3,246		4,074		3,246

Because of the uncertainty surrounding the ultimate outcome of other personal injury claims, it is reasonably possible that future costs to settle other personal injury claims may range from approximately $405 million to $585 million. However, BNSF believes that the $471 million recorded is the best estimate of the Company’s future obligation for the settlement of other personal injury claims.

The amounts recorded by BNSF for other personal injury claims were based upon currently known facts. Future events, such as the number of new claims to be filed each year, the average cost of disposing of claims, as well as the numerous uncertainties surrounding personal injury litigation in the United States, could cause the actual costs to be higher or lower than projected.

While the final outcome of these other personal injury matters cannot be predicted with certainty, considering among other things the meritorious legal defenses available and liabilities that have been recorded, it is the opinion of BNSF that none of these items, when finally resolved, will have a material adverse effect on the Company’s financial position or liquidity. However, the occurrence of a number of these items in the same period could have a material adverse effect on the results of operations in a particular quarter or fiscal year.

19

BURLINGTON NORTHERN SANTA FE CORPORATION and SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) - (Continued)

Environmental

The Company’s operations, as well as those of its competitors, are subject to extensive federal, state and local environmental regulation. BNSF’s operating procedures include practices to protect the environment from the risks inherent in railroad operations, which frequently involve transporting chemicals and other hazardous materials. Additionally, many of BNSF’s land holdings are and have been used for industrial or transportation-related purposes or leased to commercial or industrial companies whose activities may have resulted in discharges onto the property. As a result, BNSF is subject to environmental cleanup and enforcement actions. In particular, the federal Comprehensive Environmental Response, Compensation and Liability Act of 1980 (CERCLA), also known as the Superfund law, as well as similar state laws, generally impose joint and several liability for cleanup and enforcement costs on current and former owners and operators of a site without regard to fault or the legality of the original conduct. BNSF has been notified that it is a potentially responsible party (PRP) for study and cleanup costs at Superfund sites for which investigation and remediation payments are or will be made or are yet to be determined (the Superfund sites) and, in many instances, is one of several PRPs. In addition, BNSF may be considered a PRP under certain other laws. Accordingly, under CERCLA and other federal and state statutes, BNSF may be held jointly and severally liable for all environmental costs associated with a particular site. If there are other PRPs, BNSF generally participates in the cleanup of these sites through cost-sharing agreements with terms that vary from site to site. Costs are typically allocated based on such factors as relative volumetric contribution of material, the amount of time the site was owned or operated and/or the portion of the total site owned or operated by each PRP.

Liabilities for environmental cleanup costs are recorded when BNSF’s liability for environmental cleanup is probable and reasonably estimable. Subsequent adjustments to initial estimates are recorded as necessary based upon additional information developed in subsequent periods. Environmental costs include initial site surveys and environmental studies as well as costs for remediation of sites determined to be contaminated.

BNSF estimates the ultimate cost of cleanup efforts at its known environmental sites on an annual basis during the third quarter. Ultimate cost estimates for environmental sites are based on historical payment patterns, current estimated percentage to closure ratios and benchmark patterns developed from data accumulated from industry and public sources, including the Environmental Protection Agency and other governmental agencies. These factors incorporate experience gained from cleanup efforts at other similar sites into the estimates for which remediation and restoration efforts are still in progress.

On a quarterly basis, BNSF monitors actual experience against the forecasted remediation and related payments made on existing sites and conducts ongoing environmental contingency analyses, which consider a combination of factors including independent consulting reports, site visits, legal reviews and analysis of the likelihood of participation in, and the ability to pay for, cleanup of other PRPs. Adjustments to the Company’s estimates will continue to be recorded as necessary based on developments in subsequent periods. Additionally, environmental accruals, which are classified as materials and other in the Consolidated Statements of Income, include amounts for newly identified sites or contaminants, third-party claims and legal fees incurred for defense of third-party claims and recovery efforts.

During the third quarters of 2008 and 2007, the Company analyzed recent data and trends to ensure the assumptions used by BNSF to estimate its future environmental liability were reasonable. As a result of this study, in the third quarters of 2008 and 2007, management recorded additional expense of approximately $13 million and $20 million as of the respective June 30 measurement dates. The Company plans to update its study again in the third quarter of 2009.

 Annual studies do not include (i) contaminated sites of which the Company is not aware; (ii) additional amounts for third-party tort claims, which arise out of contaminants allegedly migrating from BNSF property, due to a limited number of sites; or (iii) natural resource damage claims. BNSF continues to estimate third-party tort claims on a site by site basis when the liability for such claims is probable and reasonably estimable. BNSF’s recorded liability for third-party tort claims as of September 30, 2008, is approximately $17 million.

BNSF is involved in a number of administrative and judicial proceedings and other mandatory cleanup efforts for 340 sites, including 21 Superfund sites, at which it is participating in the study or cleanup, or both, of alleged environmental contamination.

20

BURLINGTON NORTHERN SANTA FE CORPORATION and SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) - (Continued)

The following table summarizes the activity in the Company’s accrued obligations for environmental matters (in millions):

		Three Months Ended						Nine Months Ended
		September 30,						September 30,
		2008			2007			2008			2007
Beginning balance	$	545		$	362		$	380		$	318
Accruals		26			32			223			106
Payments		(28	)		(15	)		(60	)		(45	)
Ending balance at September 30,	$	543		$	379		$	543		$	379

At September 30, 2008, $66 million was included in current liabilities.

In the second quarter of 2008, the Company completed an analysis of its Montana sites to determine its legal exposure related to the potential effect of a Montana Supreme Court decision. The decision, which did not involve BNSF, held that restoration damages (damages equating to clean-up costs which are intended to return property to its original condition) may be awarded under certain circumstances even where such damages may exceed the property’s actual value. The legal situation in Montana, the recent increase in the number of claims against BNSF and others resulting from this decision, and the completion of the analysis have caused BNSF to record additional pre-tax environmental expenses of $175 million, or $0.31 per diluted share in the second quarter of 2008 for environmental liabilities primarily related to the effect of the aforementioned Montana Supreme Court decision on certain of BNSF’s Montana sites.

In the first quarter of 2007, the Company recorded additional pre-tax environmental expenses of $65 million, or $0.11 per share, due to an increase in environmental costs primarily related to a final resolution with the State of Washington and its Department of Ecology on clean-up of an existing environmental site at Skykomish and an adverse reversal of a trial court decision on appeal regarding a site at Arvin, California.

BNSF’s environmental liabilities are not discounted. BNSF anticipates that the majority of the accrued costs at September 30, 2008, will be paid over the next ten years, and no individual site is considered to be material.

The following tables summarize the environmental sites:

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
BNSF Sites	2008		2007		2008		2007
Number of sites at beginning of period	350		347		346		375
Sites added during the period	4		2		16		14
Sites closed during the period	(14	)	(4	)	(22	)	(44	)
Number of sites at September 30,	340		345		340		345

Liabilities recorded for environmental costs represent BNSF’s best estimate of its probable future obligation for the remediation and settlement of these sites and include both asserted and unasserted claims. Although recorded liabilities include BNSF’s best estimate of all probable costs, without reduction for anticipated recoveries from third parties, BNSF’s total cleanup costs at these sites cannot be predicted with certainty due to various factors such as the extent of corrective actions that may be required, evolving environmental laws and regulations, advances in environmental technology, the extent of other parties’ participation in cleanup efforts, developments in ongoing environmental analyses related to sites determined to be contaminated and developments in environmental surveys and studies of contaminated sites.

Because of the uncertainty surrounding these factors, it is reasonably possible that future costs for environmental liabilities may range from approximately $395 million to $860 million. However, BNSF believes that the $543 million recorded at September 30, 2008, is the best estimate of the Company’s future obligation for environmental costs.

21

BURLINGTON NORTHERN SANTA FE CORPORATION and SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) - (Continued)

While the final outcome of these environmental matters cannot be predicted with certainty, it is the opinion of BNSF that none of these items, when finally resolved, will have a material adverse effect on the Company’s financial position or liquidity. However, the occurrence of a number of these items in the same period could have a material adverse effect on the results of operations in a particular quarter or fiscal year.

  Other Claims and Litigation

           In addition to asbestos, other personal injury and environmental matters discussed above, BNSF and its subsidiaries are also parties to a number of other legal actions and claims, various governmental proceedings and private civil suits arising in the ordinary course of business, including those related to disputes and complaints involving certain transportation rates and charges (including complaints seeking refunds of prior charges paid for coal transportation and the prescription of future rates for such movements and claims relating to service under contract provisions or otherwise). Some of the legal proceedings include claims for punitive as well as compensatory damages, and a few proceedings purport to be class actions. While the final outcome of these matters cannot be predicted with certainty, considering among other things the meritorious legal defenses available and liabilities that have been recorded along with applicable insurance, it is the opinion of BNSF that none of these items, when finally resolved, will have a material adverse effect on the Company’s financial position or liquidity. However, an unexpected adverse resolution of one or more of these items could have a material adverse effect on the results of operations in a particular quarter or fiscal year.

6.    Employee Separation Costs

Employee separation costs activity was as follows (in millions):

Nine Months Ended September 30,		2008			2007
Beginning balance at January 1,	$	91		$	107
Accruals		3			5
Payments		(11	)		(16	)
Ending balance at September 30,	$	83		$	96

           Employee separation liabilities of $83 million were included in the Consolidated Balance Sheet at September 30, 2008, and principally represent the following: (i) $79 million for deferred benefits payable upon separation or retirement to certain active conductors, trainmen and locomotive engineers; (ii) $1 million for employee-related severance costs for the consolidation of clerical functions, material handlers in mechanical shops and trainmen on reserve boards; and (iii) $3 million for certain non-union employee severance costs. Employee separation expenses are recorded in materials and other in the Consolidated Statements of Income. At September 30, 2008, $12 million of the remaining liabilities was included in current liabilities.

 The deferred benefits payable upon separation or retirement to certain active conductors, trainmen and locomotive engineers were primarily incurred in connection with labor agreements reached prior to the business combination of BNSF’s predecessor companies, Burlington Northern Inc. and Santa Fe Pacific Corporation (the Merger). These agreements, among other things, reduced train crew sizes and allowed for more flexible work rules. The majority of the remaining costs will be paid between 2008 and 2020. As of September 30, 2008, the Company had updated its estimate and recorded an additional liability of $3 million related to deferred benefits. The remaining costs for (ii) above are expected to be paid out between 2008 and approximately 2011, and the costs for (iii) above are expected be paid out between 2008 and 2021 based on deferral elections made by the affected employees.

22

BURLINGTON NORTHERN SANTA FE CORPORATION and SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) - (Continued)

7.    Employment Benefit Plans

In September 2006, the FASB issued SFAS No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans–an amendment of FASB Statements No. 87, 88, 106 and 132R, which requires the recognition of the overfunded or underfunded status of a defined benefit postretirement plan in the Company’s balance sheet. This portion of the new guidance was adopted by the Company on December 31, 2006. Additionally, the pronouncement eliminates the option for the Company to use a measurement date prior to the Company’s fiscal year-end effective December 31, 2008. SFAS No. 158 provides two approaches to transition to a fiscal year-end measurement date, both of which are to be applied prospectively. BNSF has elected to apply the transition option under which a 15-month measurement was determined as of September 30, 2007, that covers the period until the fiscal year-end measurement is required on December 31, 2008. As a result, the Company recorded a $7 million decrease to retained earnings in January 2008 to reflect the proportionate allocation of the net periodic benefit cost to cover the transition period.

Components of the net periodic benefit cost were as follows (in millions):

		Pension Benefits
		Three Months Ended September 30,						Nine Months Ended September 30,
Net Periodic Cost		2008			2007			2008			2007
Service cost	$	7		$	7		$	19		$	19
Interest cost		25			24			76			73
Expected return on plan assets		(28	)		(26	)		(84	)		(79	)
Amortization of net loss		4			8			12			26
Net periodic benefit cost	$	8		$	13		$	23		$	39

		Retiree Health and Welfare Benefits
		Three Months Ended September 30,						Nine Months Ended September 30,
Net Periodic Cost		2008			2007			2008			2007
Service cost	$	1		$	–		$	2		$	2
Interest cost		4			4			13			12
Amortization of net loss		1			1			3			4
Amortization of prior service cost		(1	)		(1	)		(5	)		(5	)
Net periodic benefit cost	$	5		$	4		$	13		$	13

Due to changes in the Company's funding methodology, the Company is no longer required to make contributions to BNSF's qualified pension plan in 2008.

8.   Earnings Per Share

Basic earnings per share is based on the weighted average number of common shares outstanding. Diluted earnings per share is based on basic earnings per share adjusted for the effect of potential common shares outstanding that were dilutive during the period, arising from employee stock awards and incremental shares calculated using the treasury stock method.

Weighted average stock options totaling 1.8 million and 1.6 million for the three and nine months ended September 30, 2008, respectively, and 2.7 million and 2.3 million for the three and nine months ended September 30, 2007, respectively, were not included in the computation of diluted earnings per share because the options’ exercise price exceeded the average market price of the Company’s stock for those periods.

23

BURLINGTON NORTHERN SANTA FE CORPORATION and SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) - (Continued)

9.   Comprehensive Income

Other comprehensive income (loss) refers to revenues, expenses, gains and losses that under generally accepted accounting principles are included in comprehensive income, a component of Stockholders’ Equity within the Consolidated Balance Sheets, rather than net income on the Consolidated Statements of Income. Under existing accounting standards, other comprehensive income (loss) may include, among other things, unrecognized gains and losses and prior service cost related to pension and other postretirement benefit plans and accounting for derivative financial instruments, which qualify for cash flow hedge accounting.

The following table provides a reconciliation of net income reported in the Consolidated Statements of Income to total comprehensive income (in millions):

		Three Months Ended					Nine Months Ended
		September 30,					September 30,
		2008			2007		2008			2007
Net income	$	695		$	530	$	1,500		$	1,312
Other comprehensive income:
Amortization of prior service costs and actuarial losses, net of tax (see Note 7)		2			5		6			15
(Loss) gain on derivative instruments and other items, net of tax (see Note 2)		(85	)		4		(37	)		6
Unrealized loss on securities held by equity method investees, net of tax		(1	)		–		(1	)		–
Total comprehensive income	$	611		$	539	$	1,468		$	1,333

10.    Report of Independent Registered Public Accounting Firm

PricewaterhouseCoopers LLP’s review report is included in this quarterly report; however, PricewaterhouseCoopers LLP does not express an opinion on the unaudited financial information. Accordingly, such report is not a “report” or “part of a registration statement” within the meaning of Sections 7 and 11 of the Securities Act of 1933 and PricewaterhouseCoopers LLP is not subject to the liability provisions of Section 11 of such Act with respect to the review report.

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Report of Independent Registered Public Accounting Firm

To the Shareholders and Board of Directors of

Burlington Northern Santa Fe Corporation:

We have reviewed the accompanying consolidated balance sheet of Burlington Northern Santa Fe Corporation and its subsidiaries (the “Company”) as of September 30, 2008, and the related consolidated statements of income for each of the three-month and nine-month periods ended September 30, 2008 and 2007, the consolidated statements of cash flows for each of the nine-month periods ended September 30, 2008 and 2007 and the consolidated statement of changes in stockholders’ equity for the nine-month period ended September 30, 2008.  These interim financial statements are the responsibility of the Company’s management.

We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States).  A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole.  Accordingly, we do not express such an opinion.

Based on our review, we are not aware of any material modifications that should be made to the accompanying consolidated interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.

We previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet as of December 31, 2007, and the related consolidated statements of income, of changes in stockholders’ equity, and of cash flows for the year then ended (not presented herein), and in our report dated February 12, 2008, we expressed an unqualified opinion on those consolidated financial statements.  In our opinion, the information set forth in the accompanying consolidated balance sheet information as of December 31, 2007, is fairly stated in all material respects in relation to the consolidated balance sheet from which it has been derived.

/s/ PricewaterhouseCoopers LLP

Fort Worth, Texas

October 23, 2008

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Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations.

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

 Overview:

Ø   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.

Ø   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.

Ø   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.

Market Conditions:

Ø   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.

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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 (in millions)			Cars / Units (in thousands)			Average Revenue 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 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 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.

27

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 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.

28

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.

29

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 (in millions)			Cars / Units (in thousands)			Average Revenue 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.

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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.

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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).

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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 30,		December 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	%
a Net debt to total capitalization is calculated as total debt (long-term debt and commercial paper plus long-term debt due within one year)less cash and cash equivalents divided by the sum of net debt and total stockholders’ equity. b Represents the net present value of future operating lease commitments. c Adjustment for other debt equivalents principally includes accounts receivable financing (see Note 3 to the Consolidated Financial Statements for additional information). d Junior subordinated notes are included in total debt on the respective Consolidated Balance Sheets; however, as they include certain equity characteristics, they have been assigned 50 percent equity credit for purposes of this calculation.

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.

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Nine Months Ended September 30, 2007

Net cash used for financing activities during the first nine months of 2007 was $354 million, primarily related to the common stock repurchases of $964 million, including $33 million to satisfy tax withholding obligations for stock option exercises, and dividend payments of $268 million, partially offset by net borrowings of $659 million, proceeds from stock options exercised of $126 million and excess tax benefits from equity compensation plans of $105 million.

Dividends

Common stock dividends declared for the nine months ended September 30, 2008 and 2007 were $1.04 and $0.82 per share, respectively. Dividends paid on common stock during the first nine months of 2008 and 2007 were $334 million and $268 million, respectively. On July 24, 2008, the Board declared a quarterly dividend of $0.40 per share on outstanding shares of common stock, payable October 1, 2008 to shareholders of record on September 10, 2008. On October 23, 2008, the Board declared a quarterly dividend of $0.40 per share on outstanding shares of common stock, payable January 2, 2009 to shareholders of record on December 12, 2008.

Common Stock Repurchase Program

During the first nine months of 2008, BNSF repurchased 8.4 million shares of its common stock at an average price of $96.97 per share under the Company’s share repurchase program amounting to a total cost of $818 million. Program-to-date repurchases through September 30, 2008, were 189 million shares at an average price of $40.82 per share, leaving 21 million shares available for repurchase out of the 210 million shares authorized. Additionally, during the nine months ended September 30, 2008, the Company acquired shares from employees at a cost of $60 million to satisfy tax withholding obligations.

Long-Term Debt and Lease Obligations

The Company’s business is capital intensive. BNSF has historically generated a significant amount of cash from operating activities, which it uses to fund capital additions, service debt, repurchase shares and pay dividends. Additionally, the Company relies on access to the debt and leasing markets to finance a portion of capital additions on a long-term basis.

BNSF has agreed to acquire 1,245 locomotives by 2013. As of September 30, 2008, BNSF had taken delivery of 268 of the 1,245 locomotives, all of which were delivered in the first nine months of 2008.

BNSF has agreed to acquire 4,000 covered hoppers, 100 automax cars, and 1,371 double-stack cars by 2010. As of September 30, 2008, BNSF had taken delivery of 3,130 of the covered hoppers, 100 automax cars and 797 of the double-stack cars.

The locomotives and freight cars under these agreements have been or are expected to be financed from one or a combination of sources including, but not limited to, cash from operations, capital or operating leases and debt issuances. The decision on the method used for a particular acquisition financing will depend on market conditions and other factors at that time.

In the normal course of business, the Company enters into long-term contracts for future goods and services needed for the operations of the business. Such commitments are not in excess of expected requirements and are not reasonably likely to result in performance penalties or payments that would have a material adverse effect on the Company’s liquidity.

Credit Agreement

Information concerning the Company’s outstanding commercial paper balances and revolving credit agreement is incorporated by reference from Note 4 to the Consolidated Financial Statements.

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Market Conditions

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.

BNSF’s fuel and interest rate hedging programs, revolving credit facility and accounts receivable sales program involve relationships with high-quality counterparties with credit ratings of A+ or higher as of September 30, 2008. As a requirement of certain leasing arrangements, BNSF has approximately $325 million in deposits with various high-quality banks that will be used to make future capital lease payments. These banks had a credit rating of A or higher as of September 30, 2008. On an ongoing basis, BNSF monitors its hedging positions and credit ratings of its various counterparties.

Recently, BNSF’s pension plan has suffered losses associated with the general market downturn which may ultimately impact the timing and/or increase the amount of BNSF’s future cash contributions. BNSF’s plan investments are broadly diversified, and despite the recent downturn, BNSF does not anticipate this will have a significant impact on its ability to fund its future obligation.

Notwithstanding the current market volatility, BNSF continues to have access to capital markets and external sources of funds through debt issuance including commercial paper, leasing of assets, and the sale of a portion of its accounts receivable. See further discussion of funding sources throughout Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Off-Balance Sheet Arrangements

Sale of Accounts Receivable

The accounts receivable sales program of Santa Fe Receivables Corporation, as described in Note 3 to the Consolidated Financial Statements, includes various provisions that, if triggered, would allow the investors participating in this program, at their option, to cancel the program. These provisions include a maximum debt-to-capital test, which is the same as in BNSF’s revolving credit agreements. At September 30, 2008, BNSF Railway was in compliance with these provisions.

The accounts receivable sales program provides efficient financing at a competitive interest rate as compared with traditional borrowing arrangements and provides diversification of funding sources. Since the funding is collateralized by BNSF receivables, the risk of exposure is only as great as the risk of default on these receivables (see Note 3 to the Consolidated Financial Statements for additional information).

Guarantees

The Company acts as guarantor for certain debt and lease obligations of others. During the past few years, the Company has primarily utilized guarantees to allow third-party entities to obtain favorable terms to finance the construction of assets that will benefit the Company. Additionally, in the ordinary course of business, BNSF enters into agreements with third parties that include indemnification clauses. The Company does not expect performance under these guarantees or indemnities to have a material adverse effect on the Company’s liquidity in the foreseeable future (see Note 4 to the Consolidated Financial Statements for additional information).

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Other Matters

    Hedging Activities

The Company uses derivatives to hedge against increases in diesel fuel prices and interest rates as well as to convert a portion of its fixed-rate long-term debt to floating-rate debt. The Company does not hold or issue derivative financial instruments for trading or speculative purposes. The Company formally documents the relationship between the hedging instrument and the hedged item, as well as the risk management objective and strategy for the use of the hedging instrument. This documentation includes linking the derivatives that are designated as fair value or cash flow hedges to specific assets or liabilities on the balance sheet, commitments or forecasted transactions. The Company assesses at the time a derivative contract is entered into, and at least quarterly thereafter, whether the derivative item is effective in offsetting the changes in fair value or cash flows. Any change in fair value resulting from ineffectiveness, as defined by Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended, is recognized in current period earnings. For derivative instruments that are designated and qualify as cash flow hedges, the effective portion of the gain or loss on the derivative instrument is recorded in accumulated other comprehensive loss (AOCL) as a separate component of stockholders’ equity and reclassified into earnings in the period during which the hedge transaction affects earnings. Cash flows related to fuel and interest rate hedges are classified as operating activities in the Consolidated Statements of Cash Flows.

BNSF monitors its hedging positions and credit ratings of its counterparties and does not anticipate losses due to counterparty nonperformance. As of September 30, 2008, BNSF’s counterparties have an investment grade credit rating.

Fuel

BNSF measures the fair value of fuel hedges from data provided by various external counterparties. The Company uses the forward commodity price for the periods hedged to value its fuel-hedge swaps and costless collars. This methodology is a market approach, which under SFAS No. 157 utilizes Level 2 inputs as it uses market data for similar instruments in active markets. Further information on BNSF’s fuel hedging program is incorporated by reference from Note 2 to the Consolidated Financial Statements.

From October 1, 2008 through October 23, 2008, the Company entered into additional swaps and costless collar agreements utilizing West Texas Intermediate (WTI) crude oil. The supporting tables below provide fuel hedge data for hedges entered into subsequent to the end of the third quarter period.

		Quarter Ending
2009		March 31,		June 30,		September 30,		December 31,		Annual
WTI Swaps
Barrels hedged (in thousands)		890		690		455		235		2,270
Equivalent gallons hedged (in millions)		37.38		28.98		19.11		9.87		95.34
Average swap price (per barrel)	$	71.81	$	73.99	$	78.95	$	83.46	$	75.11
WTI Costless Collars
Barrels hedged (in thousands)		175		125		–		–		300
Equivalent gallons hedged (in millions)		7.35		5.25		–		–		12.60
Average cap price (per barrel)	$	98.28	$	99.09	$	–	$	–	$	98.62
Average floor price (per barrel)	$	90.33	$	91.54	$	–	$	–	$	90.84

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		Quarter Ending
2010		March 31,		June 30,		September 30,		December 31,		Annual
WTI Swaps
Barrels hedged (in thousands)		380		380		380		380		1,520
Equivalent gallons hedged (in millions)		15.96		15.96		15.96		15.96		63.84
Average swap price (per barrel)	$	83.78	$	84.99	$	86.14	$	86.27	$	85.30
WTI Costless Collars
Barrels hedged (in thousands)		200		200		–		100		500
Equivalent gallons hedged (in millions)		8.40		8.40		–		4.20		21.00
Average cap price (per barrel)		78.22		79.80		–		82.95		79.80
Average floor price (per barrel)		72.60		74.10		–		77.00		74.08
		Quarter Ending
2011		March 31,		June 30,		September 30,		December 31,		Annual
WTI Swaps
Barrels hedged (in thousands)		380		380		380		380		1,520
Equivalent gallons hedged (in millions)		15.96		15.96		15.96		15.96		63.84
Average swap price (per barrel)	$	86.80	$	87.22	$	87.68	$	87.86	$	87.39

Interest Rate

BNSF’s measurement of the fair value of interest rate derivatives is based on estimates of the mid-market values for the transactions provided by the counterparties to these agreements. This methodology is a market approach, which under SFAS No. 157 utilizes Level 2 inputs as it uses market data for similar instruments in active markets. Further information on BNSF’s interest hedging program is incorporated by reference from Note 2 to the Consolidated Financial Statements.

In anticipation of a future debt issuance, the Company entered intotwo additional treasury locks from October 2, 2008 to October 6, 2008, having an aggregate notional amount of $75 million and an average locked-in rate of 4.15 percent, to fix a portion of the rate for a future 30-year unsecured debt issuance. The treasury locks are expected to be unwound during 2009, and any gain or loss on the hedges will be amortized to interest expense over the life of the issued debt. These transactions are accounted for as cash flow hedges.

In anticipation of a future debt issuance, the Company entered intoan additional treasury lock on October 6, 2008, having a notional amount of $25 million and a locked-in rate of 3.70 percent, to fix a portion of the rate for a future 10-year unsecured debt issuance. The treasury lock is expected to be unwound during 2009, and any gain or loss on the hedge will be amortized to interest expense over the life of the issued debt. This transaction is accounted for as a cash flow hedge.

Depreciation Rate Study

The Company uses the group method of depreciation in which a single depreciation rate is applied to the gross investment in a particular class of property. The Company conducts studies of depreciation rates and the required accumulated depreciation balance as required by the STB, which is generally every three years for equipment property and every six years for track structure and other roadway property. Changes in estimated service lives of the assets and their related depreciation rates are implemented prospectively.

A study completed and implemented in April 2008 resulted in the Company adopting new depreciation rates for other roadway property, which includes items such as bridges, office buildings and facilities, telecommunication and information technology systems and machinery, that will result in a net increase in 2008 depreciation expense of approximately $13 million and approximately $17 million on an ongoing annual basis.

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Employee and Labor Relations

A significant majority of BNSF Railway’s employees are union-represented. Final agreements have been reached in the most recent bargaining round covering 100 percent of BNSF’s unionized workforce. These agreements resolve all wage, work rule and benefit issues through December 31, 2009.

Forward-Looking Information

To the extent that statements made by the Company relate to the Company’s future economic performance or business outlook, projections or expectations of financial or operational results, or refer to matters that are not historical facts, such statements are “forward-looking” statements within the meaning of the federal securities laws. These forward-looking statements include, but are not limited to, statements regarding:

•              Expectations as to operating results, such as revenue growth and earnings per share;

•              Expectations as to the effect on the Company's financial condition of claims, litigation, environmental and personal injury costs, commitments, contingent liabilities,

               and governmental and regulatory investigations and proceedings;

•              Plans and goals for future operational improvements and capital commitments; and

•              Current or future volatility in the credit market and future market conditions or economic performance.

Forward-looking statements involve a number of risks and uncertainties, and actual performance or results may differ materially. For a discussion of material risks and uncertainties that the Company faces, see the discussion in the Annual Report on Form 10-K titled “Risk Factors.” Important factors that could cause actual results to differ materially include, but are not limited to, the following:

•               Economic and industry conditions: material adverse changes in economic or industry conditions, both in the United States and globally, continuing volatility in the capital or credit markets and other changes in the securities and capital markets, changes in customer demand, effects of adverse economic conditions affecting shippers or BNSF’s supplier base, adverse economic conditions in the industries and geographic areas that produce and consume freight, changes in demand due to more stringent regulatory policies such as the regulation of carbon dioxide emissions that could reduce the demand for coal, governmental tariffs or subsidies that could affect the demand for grain, competition and consolidation within the transportation industry, the extent to which BNSF is successful in gaining new long-term relationships with customers or retaining existing ones, level of service failures that could lead customers to use competitors' services, changes in fuel prices and other key materials and disruptions in supply chains for these materials, changes in the securities and capital markets and changes in crew availability, labor costs and labor difficulties, including stoppages affecting either BNSF’s operations or customers’ abilities to deliver goods to BNSF for shipment;

•               Legal, legislative and regulatory factors: developments and changes in laws and regulations, including those affecting train operations or the marketing of services, the ultimate outcome of shipper and rate claims subject to adjudication or claims, investigations or litigation alleging violations of the antitrust laws, increased economic regulation of the rail industry through legislative action and revised rules and standards applied by the U.S. Surface Transportation Board in various areas including rates and services, developments in environmental investigations or proceedings with respect to rail operations or current or past ownership or control of real property, and developments in and losses resulting from other types of claims and litigation, including those relating to personal injuries, asbestos and other occupational diseases, the release of hazardous materials, environmental contamination and damage to property; the availability of adequate insurance to cover the risks associated with operations; and

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•               Operating factors: technical difficulties, changes in operating conditions and costs, changes in business mix, the availability of equipment and human resources to meet changes in demand, the extent of the Company’s ability to achieve its operational and financial initiatives and to contain costs, the effectiveness of steps taken to maintain and improve operations and velocity and network fluidity, including the management of the amount of traffic on the system to meet demand and the ability to acquire sufficient resources to meet that demand, the ability to expand the capacity of the system, congestion on other railroads and capacity constraints affecting all links in the transportation chain that feed traffic and goods to BNSF’s systems, restrictions on development and expansion plans due to environmental concerns, disruptions to BNSF’s technology network including computer systems and software, as well as natural events such as severe weather, fires, floods and earthquakes or man-made or other disruptions of BNSF Railway’s operating systems, structures, or equipment including the effects of acts of terrorism on the Company’s system or other railroads’ systems.

The Company cautions against placing undue reliance on forward-looking statements, which reflect its current beliefs and are based on information currently available to it as of the date a forward-looking statement is made. The Company undertakes no obligation to revise forward-looking statements to reflect future events, changes in circumstances, or changes in beliefs. In the event the Company does update any forward-looking statement, no inference should be made that the Company will make additional updates with respect to that statement, related matters, or any other forward-looking statements. Any corrections or revisions and other important assumptions and factors that could cause actual results to differ materially from forward-looking statements made by the Company may appear in the Company’s public filings with the SEC, which are accessible at www.sec.gov, and on the Company’s website at www.bnsf.com, and which investors are advised to consult.

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Item 3.    Quantitative and Qualitative Disclosures About Market Risk.

In the ordinary course of business, BNSF utilizes various financial instruments that inherently have some degree of market risk. The following table summarizes the impact of these hedging activities on the Company’s results of operations (in millions):

Three months ended September 30,		2008			2007
Fuel hedge benefit (including ineffective portion of unexpired hedges)	$	11		$	1
Interest rate hedge benefit (loss)		4			(1	)
Total hedge benefit		15			–
Tax effect		(6	)		–
Hedge benefit, net of tax	$	9		$	–

Nine months ended September 30,		2008			2007
Fuel hedge benefit (including ineffective portion of unexpired hedges)	$	44		$	25
Interest rate hedge benefit (loss)		8			(2	)
Total hedge benefit		52			23
Tax effect		(20	)		(8	)
Hedge benefit, net of tax	$	32		$	15

The Company’s fuel-hedge benefit is due to increases in fuel prices subsequent to the initiation of various hedges. The information presented in the Management’s Discussion and Analysis of Financial Condition and Results of Operations section and Notes 2 and 4 to the Consolidated Financial Statements describes significant aspects of BNSF’s financial instrument activities that have a material market risk. Additionally, the Company uses fuel surcharges, which it believes substantially mitigates the risk of fuel price volatility.

Commodity Price Sensitivity

BNSF engages in hedging activities to partially mitigate the risk of fluctuations in the price of its diesel fuel purchases. Existing hedge transactions as of September 30, 2008, are based on the front month settlement prices of New York Mercantile Exchange (NYMEX) #2 heating oil (HO) or West Texas Intermediate (WTI) crude oil. For swaps, BNSF either pays or receives the difference between the hedge price and the actual average price of the hedge commodity during a specified determination period for a specified number of gallons. For costless collars, if the average hedge commodity price for a specified determination period is greater than the cap price, BNSF receives the difference for a specified number of gallons. If the average commodity price is less than the floor price, BNSF pays the difference for a specified number of gallons. If the commodity price is between the floor price and the cap price, BNSF neither makes nor receives a payment. Hedge transactions are generally settled with the counterparty in cash. Based on historical information, BNSF believes there is a significant correlation between the market prices for diesel fuel, HO and WTI.

At September 30, 2008, BNSF had recorded a net fuel-hedging liability of $27 million for fuel hedges covering 2008 through 2011.

The following table is an estimate of the impact to earnings that could result from hypothetical price changes during the twelve-month period ending September 30, 2009, and the balance sheet impact from the hypothetical price changes on all open hedges, both based on the Company’s hedge position at September 30, 2008:

Sensitivity Analysis
Hedged commodity price change	Fuel-hedge annual pre-tax earnings impact	Balance Sheet impact of change  in fuel-hedge fair value
10 percent increase	$33 million increase	$65 million increase
10 percent decrease	$34 million decrease	$70 million decrease

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Based on locomotive fuel consumption during the twelve-month period ending September 30, 2008, of 1,441 million gallons and fuel prices during that same period, excluding the impact of the Company’s hedging activities, a 10-percent increase or decrease in the commodity price per gallon would result in an approximate $433 million increase or decrease, respectively, in fuel expense (pre-tax) on an annual basis. Additionally, the Company uses fuel surcharges, which it believes substantially mitigates the risk of fuel price volatility.

At September 30, 2008, BNSF maintained fuel inventories for use in normal operations, which were not material to BNSF’s overall financial position and, therefore, represent no significant market exposure. The frequency of BNSF’s fuel inventory turnover also reduces market exposure, should fuel inventories become material to BNSF’s overall financial position. Further information on fuel hedges is incorporated by reference from Note 2 to the Consolidated Financial Statements.

Interest Rate Sensitivity

From time to time, BNSF enters into various interest rate hedging transactions for purposes of managing exposure to fluctuations in interest rates by establishing rates in anticipation of both future debt issuances and the refinancing of leveraged leases, as well as to convert a portion of its fixed-rate long-term debt to floating-rate debt. These interest rate hedges are accounted for as cash flow or fair value hedges. BNSF’s measurement of the fair value of these hedges is based on estimates of the mid-market values for the transactions provided by the counterparties to these agreements.

At September 30, 2008, the fair value of BNSF’s debt, excluding capital leases and a net fair value interest rate hedge benefit of $4 million, was $7,544 million. Additionally, the Company had recorded an interest rate hedging asset of $8 million for cash flow hedges.

The following table is an estimate of the impact to earnings and the fair value of the total debt, excluding capital leases, and interest rate hedges that could result from hypothetical interest rate changes during the twelve-month period ending September 30, 2009, based on debt levels and outstanding hedges as of September 30, 2008:

Sensitivity Analysis
Hypothetical change in interest rates	Floating rate debt - Annual pre-tax earnings impact	Change in fair value
		Total debta	Interest rate hedges
1 percent decrease	$9 million increase	$697 million increase	$6 million decrease
1 percent increase	$9 million decrease	$590 million decrease	$100 thousand increase

aExcludes the impact of interest rate hedges.

Further information on interest rate hedges is incorporated by reference from Note 2 to the Consolidated Financial Statements. Information on the Company’s debt, which may be sensitive to interest rate fluctuations, is incorporated by reference from Note 4 to the Consolidated Financial Statements.

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Item 4.    Controls and Procedures.

Based on their evaluation as of the end of the period covered by this quarterly report on Form 10-Q, BNSF’s principal executive officer and principal financial officer have concluded that BNSF’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934) are effective to ensure that information required to be disclosed by BNSF in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized, and reported within the time periods specified in Securities and Exchange Commission rules and forms and that such information is accumulated and communicated to BNSF’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Additionally, as of the end of the period covered by this report, BNSF's principal executive officer and principal financial officer have concluded that there have been no changes in BNSF's internal control over financial reporting that occurred during the fiscal quarter that have materially affected, or are reasonably likely to materially affect, BNSF's internal control over financial reporting.

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BURLINGTON NORTHERN SANTA FE CORPORATION and SUBSIDIARIES

PART II OTHER INFORMATION

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds.

Common Stock Repurchases

The following table presents repurchases by the Company of its common stock for each of the three months for the quarter ended September 30, 2008 (shares in thousands):

Issuer Purchases of Equity Securities
Period	Total Number of Shares Purchaseda		Average Price Paid Per Share	Total Number of Shares Purchased as Part of Publicly Announced Plans or Programsb	Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programsb
July 1 – 31	51	$	97.69	50	23,351
August 1 – 31	1,260	$	99.88	1,254	22,097
September 1 – 30	1,029	$	102.43	1,026	21,071
Total	2,340	$	100.95	2,330

a   Total number of shares purchased includes approximately 10 thousand shares where employees delivered already owned shares or used an attestation procedure to satisfy the exercise price of stock options or the withholding of tax payments. Total number of shares purchased does not include approximately 8 thousand shares acquired from employees to satisfy tax withholding obligations that arose on the vesting of restricted stock or the exercise of stock options.

b   On July 17, 1997, the Board initially authorized and the Company announced the repurchase of up to 30 million shares of the Company’s common stock from time to time in the open market. On December 9, 1999, April 20, 2000, September 21, 2000, January 16, 2003, December 8, 2005 and February 14, 2007, the Board authorized and the Company announced extensions of the BNSF share repurchase program, adding 30 million shares at each date for a total of 210 million shares authorized. The share repurchase program does not have an expiration date.

Item 6.    Exhibits.

See Index to Exhibits on page E-1 for a description of the exhibits filed as part of this report.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	BURLINGTON NORTHERN SANTA FE CORPORATION (Registrant)
By:	/s/   Thomas N. Hund
	Thomas N. Hund Executive Vice President and Chief Financial Officer (On behalf of the Registrant and as principal financial officer)

Dated:  October 23, 2008

S-1

BURLINGTON NORTHERN SANTA FE CORPORATION and SUBSIDIARIES

Exhibit Index

		Incorporated by Reference (if applicable)
	Exhibit Number and Description	Form	File Date	File No.	Exhibit
3.1	Amended and Restated Certificate of Incorporation of Burlington Northern Santa Fe Corporation, dated December 21, 1994, as amended.	10-Q	8/13/1998	001-11535	3.1
3.2	By-Laws of Burlington Northern Santa Fe Corporation, as amended and restated, dated July 24, 2008.	10-Q	7/24/08	001-11535	3.2
10.1	Special Retention Cash Award Agreement, dated October 9, 2008, between BNSF Railway Company and Peter J. Rickershauser.* **
12.1	Computation of Ratio of Earnings to Fixed Charges.**
15.1	Independent Registered Public Accounting Firm’s Awareness Letter.**
31.1	Principal Executive Officer’s Certifications Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.**
31.2	Principal Financial Officer’s Certifications Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.**
32.1	Certification Pursuant to 18 U.S.C. § 1350 (Section 906 of the Sarbanes-Oxley Act of 2002).**

Certain instruments defining the rights of the holders of long-term debt of the Company and of its subsidiaries, involving a total

amount of indebtedness not in excess of 10 percent of the total assets of the Company and its subsidiaries on a consolidated basis, have

not been filed as exhibits. The Company hereby agrees to furnish a copy of any of these agreements to the SEC upon request.

__________________

* Management contract or compensatory plan

** Filed herewith

 E-1