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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS:

1.   REQUIRED ACCOUNTING CHANGE – SHARE-BASED PAYMENTS –
Effective January 1, 2006, NS adopted Statement of Financial Accounting Standards No. 123(R), “Share-Based Payment” [SFAS 123(R)].  This statement applies to awards granted, modified, repurchased or cancelled after the effective date as well as awards that are unvested at the effective date and includes, among other things, the requirement to expense the fair value of stock options.  As a result of the implementation of SFAS 123(R), compensation and benefits expense for the year included $23 million for the accelerated recognition of awards granted to retirement eligible employees and $13 million for stock options granted to non-retirement eligible employees.

2.   SETTLEMENTS of Coal Rate Cases –
      In the second quarter of 2005, NS entered into settlement agreements with two utility customers that resolved their rail transportation rate cases before the Surface Transportation Board (STB).  As a result of the settlements, NS recognized additional revenue related to the period in dispute, which net of associated expenses and income taxes increased second-quarter net income by $24 million, or 6 cents per diluted share.

3.   REDUCTION OF DEFERRED TAXES –
In the second quarter of 2005, Ohio enacted tax legislation that phases out its Corporate Franchise Tax, which was generally based on federal taxable income, and phases in a new gross receipts tax called the Commercial Activity Tax, which is based on current year sales and rentals.  The elimination of the Corporate Franchise Tax resulted in a reduction of NS’ deferred income tax liability in the second quarter, as required by Statement of Financial Accounting Standards No. 109, “Accounting for Income Taxes,”  which increased net income by $96 million, or 23 cents per diluted share.

4.   REQUIRED ACCOUNTING CHANGE – PENSION AND OTHER POSTRETIREMENT BENEFITS –
As of Dec. 31, 2006, NS adopted Statement of Financial Accounting Standards No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans” (SFAS 158).  This statement requires an employer to recognize in its statement of financial position the overfunded or underfunded status of defined benefit pension and postretirement plans measured as the difference between the fair value of plan assets and the benefit obligation.  As a result of adopting this standard, NS reduced its pension asset by $217 million and increased its pension and postretirement liabilities by $294 million in its Consolidated Balance Sheet, with a corresponding reduction to stockholders’ equity of $314 million (net of tax) reflected as an increase to accumulated other comprehensive loss.  The adoption of SFAS 158 had no impact on years prior to 2006 and had no effect on the calculation of expenses for pensions and postretirement benefits.

5.   GRANITEVILLE DERAILMENT –
   In the first quarter of 2005, NS recorded a liability related to the Jan. 6, 2005, derailment in Graniteville, SC.  The liability, which includes a current and long-term portion, represents NS’ best estimate based on current facts and circumstances.  The estimate includes amounts related to business property damage and other economic losses, personal injury and individual property damage claims as well as third-party response costs.  NS’ commercial insurance policies are expected to cover expenses related to this derailment above NS’ self-insured retention, including its own response costs and legal fees.  Accordingly, the Consolidated Balance Sheet reflects a current and long-term receivable for estimated recoveries from its insurance carriers.

Results for 2005 include approximately $41 million of expenses related to this incident, which represents NS’ retention under its insurance policies and other uninsured costs, and which reduced net income by approximately $24 million, or 6 cents per diluted share.

While it is reasonable to expect that the liability for covered losses could differ from the amount recorded, such a change would be offset by a corresponding change in the insurance receivable.  As a result, NS does not believe that it is reasonably likely that its net loss (the difference between the liability and future recoveries) will be materially different than the loss recorded in 2005.  NS expects at this time that insurance coverage is adequate to cover potential claims and settlements above its self-insurance retention.

6.   STOCK REPURCHASE PROGRAM –
In November 2005, NS’ Board of Directors authorized the repurchase of up to 50 million shares of NS common stock through the end of 2015.  In 2006, NS purchased and retired 21.8 million shares of common stock at a cost of $964 million under this program.

7.   DEBT EXCHANGE –
In the second quarter of 2005, NS issued $717 million of new unsecured notes ($350 million at 5.64% due 2029 and $367 million at 5.59% due 2025) and paid $218 million of premium in exchange for $717 million of its previously issued unsecured notes ($350 million at 7.8% due 2027, $200 million at 7.25% due 2031, and $167 million at 9.0% due 2021).  The $218 million cash premium payment is reflected as a reduction of debt in the Statement of Cash Flows and is being amortized as additional interest expense over the terms of the new debt.