Three Months Ended

Nine Months Ended

September 30,

September 30,

2010

2009

2010

2009

(in millions, except per share amounts)

Railway operating revenues:

   Coal

$

709

$

571

$

2,034

$

1,684

   General merchandise

1,283

1,103

3,765

3,056

   Intermodal

464

389

1,325

1,123

      Total railway operating revenues

2,456

2,063

7,124

5,863

Railway operating expenses:

   Compensation and benefits

680

598

2,049

1,788

   Purchased services and rents

377

352

1,086

1,041

   Fuel

259

192

771

504

   Depreciation

204

210

612

624

   Materials and other (note 1)

190

149

572

493

      Total railway operating expenses

1,710

1,501

5,090

4,450

         Income from railway operations

746

562

2,034

1,413

Other income - net

81

37

118

90

Interest expense on debt

113

118

347

348

           Income before income taxes

714

481

1,805

1,155

Provision for income taxes:

   Current

143

80

539

255

   Deferred (note 2)

126

98

172

173

      Total income taxes

269

178

711

428

           Net income

$

445

$

303

$

1,094

$

727

Earnings per share (note 3):

       Basic

$

1.21

$

0.82

$

2.95

$

1.97

       Diluted

$

1.19

$

0.81

$

2.91

$

1.94

Weighted average shares outstanding (notes 3 & 4):

   Basic

366.3

367.3

368.5

366.8

   Diluted

371.6

372.5

373.8

371.7

See accompanying notes to consolidated financial statements.

September 30,

December 31,

2010

2009

($ in millions)

Assets

Current assets:

   Cash and cash equivalents

$

1,129 

$

996 

   Short-term investments

229 

90 

   Accounts receivable - net

908 

766 

   Materials and supplies

179 

164 

   Deferred income taxes

153 

142 

   Other current assets

35 

88 

      Total current assets

2,633 

2,246 

Investments

2,307 

2,164 

Properties less accumulated depreciation

22,893 

22,643 

Other assets

229

316 

      Total assets

$

28,062 

$

27,369 

Liabilities and stockholders' equity

Current liabilities:

   Accounts payable

$

1,131 

$

974 

   Short-term debt

- 

100 

   Income and other taxes

116 

109 

   Other current liabilities

347 

232 

   Current maturities of long-term debt

361 

 374 

      Total current liabilities

1,955 

1,789 

Long-term debt

6,574 

6,679 

Other liabilities

1,784 

1,801 

Deferred income taxes

6,960 

6,747 

      Total liabilities

17,273 

17,016 

Stockholders' equity:

 authorized; outstanding 363,372,120 and 369,019,990 shares,

  respectively, net of treasury shares

364 

370 

Additional paid-in capital

1,890 

1,809 

Accumulated other comprehensive loss

 (804)

(853)

Retained income

9,339 

9,027 

    Total stockholders' equity

10,789 

10,353 

    Total liabilities and stockholders' equity

$

28,062 

$

27,369 

See accompanying notes to consolidated financial statements.

Nine Months Ended

September 30,

2010

2009

($ in millions)

Cash flows from operating activities:

   Net income

$

1,094 

$

727 

   Reconciliation of net income to net cash provided

      by operating activities:

         Depreciation

617 

630 

         Deferred income taxes

172 

173 

         Gains and losses on properties

 (38)

(13)

         Changes in assets and liabilities affecting operations:

            Accounts receivable

 (142)

(26)

            Materials and supplies

 (15)

 22 

            Other current assets

 50 

111 

            Current liabilities other than debt

 254 

(184)

         Other - net

 136 

(65)

               Net cash provided by operating activities

2,128 

1,375 

Cash flows from investing activities:

   Property additions

 (907)

(919)

   Property sales and other transactions

 81 

61 

   Investments, including short-term

 (441)

(119)

   Investment sales and other transactions

 261 

10 

               Net cash used in investing activities

 (1,006)

(967)

Cash flows from financing activities:

   Dividends

(384)

(374)

   Common stock issued - net

 59 

32 

   Purchase and retirement of common stock (note 4)

 (437)

- 

   Proceeds from borrowings - net

 250 

990 

   Debt repayments

(477)

(675)

               Net cash used in financing activities

(989)

(27)

               Net increase in cash and cash equivalents

133 

381 

Cash and cash equivalents:

   At beginning of year

996 

618 

   At end of period

$

1,129 

$

999 

Supplemental disclosure of cash flow information

   Cash paid during the period for:

      Interest (net of amounts capitalized)

$

296 

$

288 

      Income taxes (net of refunds)

$

498 

$

234 

See accompanying notes to consolidated financial statements.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS:

1.   MATERIALS AND OTHER

Second quarter 2009 includes a $21 million favorable adjustment related to settlement of a multi-year state tax dispute.

2.   DEFERRED TAXES

During the first quarter of 2010, the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010 were signed into law.  Provisions of these Acts eliminate, after 2012, the tax deduction available for reimbursed prescription drug expenses under the Medicare Part D retiree drug subsidy program.  As required by the Financial Accounting Standards Board Accounting Standards Codification (ASC) 740, "Income Taxes," NS recorded a $27 million charge to deferred tax expense.

3.   EARNINGS PER SHARE

As required under the provisions of ASC 260-10, "Earnings Per Share," for basic earnings per share, income available to common stockholders for the third quarters of 2010 and 2009 reflects a $2 million reduction and for the first nine months of 2010 and 2009 a $6 million reduction from net income for the effect of dividend equivalent payments made to holders of stock options.  In addition, for the third quarters and first nine months of 2010 and 2009, diluted earnings per share were calculated under the more dilutive two-class method (as compared to the treasury stock method) and income available to common stockholders reflects a $2 million and $6 million reduction, respectively, from net income for dividend equivalent payments.

4.   STOCK REPURCHASE PROGRAM

In July 2010, NS' Board of Directors amended NS' share repurchase program, increasing the authorized amount of share repurchases from 75 million to 125 million and lengthening the term of the program from December 31, 2010 to December 31, 2014.  During the first nine months of 2010, NS purchased and retired 7.8 million shares of common stock at a cost of $437 million.  Since inception of the share repurchase program, NS has repurchased and retired 72.5 million shares at a total cost of $3.7 billion.