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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



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FORM 10-Q



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(Mark One)

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



For the quarterly period ended June 30, 2004



OR



| ̈ | 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 1-6324



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THE BURLINGTON NORTHERN AND SANTA FE RAILWAY COMPANY

(Exact name of
registrant as specified in its charter)



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|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Delaware                                                       |  | 41-6034000                          
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)



|                                         |  |           
|---------------------------------------- |  | ----------
|2650 Lou Menk Drive Fort Worth, Texas    |  | 76131     
|(Address of principal executive offices) |  | (Zip Code)



(800) 795-2673

(Registrants telephone number, including area code)



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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 an accelerated filer (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 July 26, 2004
|Common stock, $1.00 par value |  | 1,000 shares                       



Registrant meets the
conditions set forth in General Instruction H (1) (a) and (b) of Form 10-Q and is therefore filing this Form 10-Q with the reduced disclosure format permitted by General Instruction H (2).



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PART I

FINANCIAL INFORMATION



Item 1.
Financial Statements



THE BURLINGTON NORTHERN AND SANTA
FE RAILWAY COMPANY and SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(Dollars in millions)

(Unaudited)



|                                                                      |  |                            |       |   |                          |   |       |      |  |   |       |   |  |   |       |  
|--------------------------------------------------------------------- |  | -------------------------- | ----- | - | ------------------------ | - | ----- | ---- |  | - | ----- | - |  | - | ----- | -
|                                                                      |  | Three Months EndedJune 30, |       |   | Six Months EndedJune 30, |  
|                                                                      |  | 2004                       |       |   | 2003                     |   |       | 2004 |  |   | 2003  |  
|Revenues                                                              |  | $                          | 2,664 |   |                          | $ | 2,285 |      |  | $ | 5,140 |   |  | $ | 4,512 |  
|                                                                      |  |                            |       |   |                          |   |       |      |  |   |       |   |  |   |       |  
|Operating expenses:                                                   |  |                            |       |   |                          |   |       |      |  |   |       |   |  |   |       |  
|Compensation and benefits                                             |  |                            | 816   |   |                          |   | 698   |      |  |   | 1,602 |   |  |   | 1,415 |  
|Purchased services                                                    |  |                            | 334   |   |                          |   | 306   |      |  |   | 664   |   |  |   | 604   |  
|Depreciation and amortization                                         |  |                            | 251   |   |                          |   | 225   |      |  |   | 500   |   |  |   | 450   |  
|Equipment rents                                                       |  |                            | 197   |   |                          |   | 180   |      |  |   | 384   |   |  |   | 349   |  
|Fuel                                                                  |  |                            | 326   |   |                          |   | 267   |      |  |   | 606   |   |  |   | 546   |  
|Materials and other                                                   |  |                            | 228   |   |                          |   | 185   |      |  |   | 458   |   |  |   | 373   |  
|                                                                      |  |                            |       |   |                          |   |       |      |  |   |       |   |  |   |       |  
|Total operating expenses                                              |  |                            | 2,152 |   |                          |   | 1,861 |      |  |   | 4,214 |   |  |   | 3,737 |  
|                                                                      |  |                            |       |   |                          |   |       |      |  |   |       |   |  |   |       |  
|Operating income                                                      |  |                            | 512   |   |                          |   | 424   |      |  |   | 926   |   |  |   | 775   |  
|Interest expense                                                      |  |                            | 34    |   |                          |   | 37    |      |  |   | 66    |   |  |   | 75    |  
|Interest income, related parties                                      |  |                            | (6    | ) |                          |   | (5    | )    |  |   | (12   | ) |  |   | (13   | )
|Other expense, net                                                    |  |                            | 5     |   |                          |   | 3     |      |  |   | 1     |   |  |   | 5     |  
|                                                                      |  |                            |       |   |                          |   |       |      |  |   |       |   |  |   |       |  
|Income before income taxes and cumulative effect of accounting change |  |                            | 479   |   |                          |   | 389   |      |  |   | 871   |   |  |   | 708   |  
|Income tax expense                                                    |  |                            | 182   |   |                          |   | 132   |      |  |   | 331   |   |  |   | 253   |  
|                                                                      |  |                            |       |   |                          |   |       |      |  |   |       |   |  |   |       |  
|Income before cumulative effect of accounting change                  |  | $                          | 297   |   |                          | $ | 257   |      |  | $ | 540   |   |  | $ | 455   |  
|Cumulative effect of accounting change, net of tax                    |  |                            |      |   |                          |   |      |      |  |   |      |   |  |   | 39    |  
|                                                                      |  |                            |       |   |                          |   |       |      |  |   |       |   |  |   |       |  
|Net income                                                            |  | $                          | 297   |   |                          | $ | 257   |      |  | $ | 540   |   |  | $ | 494   |  
|                                                                      |  |                            |       |   |                          |   |       |      |  |   |       |   |  |   |       |  



See accompanying Notes
to Consolidated Financial Statements.



2



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THE BURLINGTON NORTHERN AND SANTA FE RAILWAY COMPANY and SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Dollars
in millions)

(Unaudited)



|                                                                                                |  |              |        |   |                  |   |        |  
|----------------------------------------------------------------------------------------------- |  | ------------ | ------ | - | ---------------- | - | ------ | -
|                                                                                                |  | June 30,2004 |        |   | December 31,2003 |  
|ASSETS                                                                                          |  |              |        |   |                  |   |        |  
|Current assets:                                                                                 |  |              |        |   |                  |   |        |  
|Cash and cash equivalents                                                                       |  | $            | 64     |   |                  | $ | 18     |  
|Accounts receivable, net                                                                        |  |              | 213    |   |                  |   | 121    |  
|Materials and supplies                                                                          |  |              | 294    |   |                  |   | 266    |  
|Current portion of deferred income taxes                                                        |  |              | 285    |   |                  |   | 280    |  
|Other current assets                                                                            |  |              | 390    |   |                  |   | 145    |  
|                                                                                                |  |              |        |   |                  |   |        |  
|Total current assets                                                                            |  |              | 1,246  |   |                  |   | 830    |  
|                                                                                                |  |             
|Property and equipment, net                                                                     |  |              | 25,324 |   |                  |   | 25,016 |  
|Other assets                                                                                    |  |              | 1,287  |   |                  |   | 920    |  
|Intercompany notes receivable, net                                                              |  |              | 1,225  |   |                  |   | 1,455  |  
|                                                                                                |  |              |        |   |                  |   |        |  
|Total assets                                                                                    |  | $            | 29,082 |   |                  | $ | 28,221 |  
|                                                                                                |  |              |        |   |                  |   |        |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                            |  |              |        |   |                  |   |        |  
|Current liabilities:                                                                            |  |              |        |   |                  |   |        |  
|Accounts payable and other current liabilities                                                  |  | $            | 1,862  |   |                  | $ | 2,024  |  
|Long-term debt due within one year                                                              |  |              | 309    |   |                  |   | 244    |  
|                                                                                                |  |              |        |   |                  |   |        |  
|Total current liabilities                                                                       |  |              | 2,171  |   |                  |   | 2,268  |  
|                                                                                                |  |             
|Long-term debt and commercial paper                                                             |  |              | 1,696  |   |                  |   | 1,736  |  
|Deferred income taxes                                                                           |  |              | 7,760  |   |                  |   | 7,474  |  
|Casualty and environmental liabilities                                                          |  |              | 300    |   |                  |   | 305    |  
|Minimum pension liability                                                                       |  |              | 359    |   |                  |   | 359    |  
|Employee separation costs                                                                       |  |              | 133    |   |                  |   | 144    |  
|Other liabilities                                                                               |  |              | 1,346  |   |                  |   | 1,250  |  
|                                                                                                |  |              |        |   |                  |   |        |  
|Total liabilities                                                                               |  |              | 13,765 |   |                  |   | 13,536 |  
|                                                                                                |  |              |        |   |                  |   |        |  
|Commitments and contingencies (see Notes 2, 5 and 6)                                            |  |              |        |   |                  |   |        |  
|Stockholders equity:                                                                           |  |              |        |   |                  |   |        |  
|Common stock, $1 par value, 1,000 shares authorized; issued and outstanding and paid-in capital |  |              | 6,286  |   |                  |   | 6,286  |  
|Retained earnings                                                                               |  |              | 9,073  |   |                  |   | 8,533  |  
|Accumulated other comprehensive loss                                                            |  |              | (42    | ) |                  |   | (134   | )
|                                                                                                |  |              |        |   |                  |   |        |  
|Total stockholders equity                                                                      |  |              | 15,317 |   |                  |   | 14,685 |  
|                                                                                                |  |              |        |   |                  |   |        |  
|Total liabilities and stockholders equity                                                      |  | $            | 29,082 |   |                  | $ | 28,221 |  
|                                                                                                |  |              |        |   |                  |   |        |  



See accompanying Notes
to Consolidated Financial Statements.



3



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THE BURLINGTON NORTHERN AND SANTA FE RAILWAY COMPANY and SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in millions)

(Unaudited)



|                                                                                  |  |      |      |   |      |   |      |  
|--------------------------------------------------------------------------------- |  | ---- | ---- | - | ---- | - | ---- | -
|Six Months Ended June 30,                                                         |  | 2004 |      |   | 2003 |  
|OPERATING ACTIVITIES                                                              |  |      |      |   |      |   |      |  
|Net income                                                                        |  | $    | 540  |   |      | $ | 494  |  
|Adjustments to reconcile net income to net cash provided by operating activities: |  |      |      |   |      |   |      |  
|Depreciation and amortization                                                     |  |      | 500  |   |      |   | 450  |  
|Deferred income taxes                                                             |  |      | 225  |   |      |   | 240  |  
|Employee separation costs paid                                                    |  |      | (15  | ) |      |   | (18  | )
|Cumulative effect of accounting change, net of tax                                |  |      |     |   |      |   | (39  | )
|Other, net                                                                        |  |      | (46  | ) |      |   | (92  | )
|Changes in current assets and liabilities:                                        |  |      |      |   |      |   |      |  
|Accounts receivable, net                                                          |  |      | (92  | ) |      |   | (5   | )
|Materials and supplies                                                            |  |      | (28  | ) |      |   | (3   | )
|Other current assets                                                              |  |      | (122 | ) |      |   | (71  | )
|Accounts payable and other current liabilities                                    |  |      | (97  | ) |      |   | (140 | )
|                                                                                  |  |      |      |   |      |   |      |  
|Net cash provided by operating activities                                         |  |      | 865  |   |      |   | 816  |  
|                                                                                  |  |      |      |   |      |   |      |  
|INVESTING ACTIVITIES                                                              |  |      |      |   |      |   |      |  
|Capital expenditures                                                              |  |      | (692 | ) |      |   | (835 | )
|Other, net                                                                        |  |      | (287 | ) |      |   | (51  | )
|                                                                                  |  |      |      |   |      |   |      |  
|Net cash used for investing activities                                            |  |      | (979 | ) |      |   | (886 | )
|                                                                                  |  |      |      |   |      |   |      |  
|FINANCING ACTIVITIES                                                              |  |      |      |   |      |   |      |  
|Payments on long-term debt, net                                                   |  |      | (71  | ) |      |   | (87  | )
|Net decrease in intercompany notes receivable                                     |  |      | 230  |   |      |   | 171  |  
|Other, net                                                                        |  |      | 1    |   |      |   | 1    |  
|                                                                                  |  |      |      |   |      |   |      |  
|Net cash provided by financing activities                                         |  |      | 160  |   |      |   | 85   |  
|                                                                                  |  |      |      |   |      |   |      |  
|Increase in cash and cash equivalents                                             |  |      | 46   |   |      |   | 15   |  
|Cash and cash equivalents:                                                        |  |      |      |   |      |   |      |  
|Beginning of period                                                               |  |      | 18   |   |      |   | 28   |  
|End of period                                                                     |  | $    | 64   |   |      | $ | 43   |  
|                                                                                  |  |      |      |   |      |   |      |  
|SUPPLEMENTAL CASH FLOW INFORMATION                                                |  |      |      |   |      |   |      |  
|Interest paid, net of amounts capitalized                                         |  | $    | 31   |   |      | $ | 60   |  
|Income taxes paid, net of refunds                                                 |  | $    | 155  |   |      | $ | 110  |  
|Non-cash asset financing                                                          |  | $    | 48   |   |      | $ | 4    |  
|                                                                                  |  |      |      |   |      |   |      |  



See accompanying Notes
to Consolidated Financial Statements.



4



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THE BURLINGTON NORTHERN AND SANTA FE RAILWAY COMPANY AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)



1. Accounting Policies and Interim Results



The Consolidated Financial Statements should be read in conjunction with The
Burlington Northern and Santa Fe Railway Companys Annual Report on Form 10-K for the year ended December 31, 2003, including the financial statements and notes thereto. The Consolidated Financial Statements include the accounts of BNSF
Railway, its majority-owned subsidiaries and a variable interest entity for which BNSF Railway is the primary beneficiary (collectively, BNSF Railway or Company). BNSF Railway is a wholly-owned subsidiary of Burlington Northern Santa Fe Corporation
(BNSF), and is the principal operating subsidiary of BNSF. All significant intercompany accounts and transactions have been eliminated.



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, all adjustments (consisting of only normal recurring adjustments, except as disclosed) necessary to present fairly BNSF Railways consolidated financial position as of June 30, 2004, and the results of operations for the
three and six month periods ended June 30, 2004 and 2003, have been included.



Certain comparative prior year amounts in the Consolidated Financial Statements have been reclassified to conform to the current year presentation.



Implementation of FIN 46R



In 2001, BNSF Railway entered into the San Jacinto Rail Limited partnership (the Partnership) with subsidiaries of three chemical manufacturing
companies that ship their products on BNSF Railways rail lines. The purpose of this Partnership is to construct and operate a 13-mile railroad, which will service several chemical and plastics manufacturing facilities in the Houston, Texas
area. BNSF Railway owns a 48 percent limited partnership interest and a one percent general partnership interest in the Partnership and acts as the general partner and operator of this facility. The Company has determined that San Jacinto Rail
Limited, a previously unconsolidated subsidiary, was required to be consolidated pursuant to Financial Accounting Standards Board (FASB) Interpretation No. 46R (FIN 46R), Consolidation of Variable Interest Entities,on March 31, 2004, as the
Partnership qualifies as a variable interest entity and the Company is the primary beneficiary. This consolidation had a minimal impact to the Consolidated Statements of Income due to the fact that the Company accounted for this investment prior to
the adoption of FIN 46R under the equity method of accounting and the Partnerships losses to date have been minimal. The consolidation resulted in an increase in assets of $54 million, which includes $26 million and $23 million in cash and
land, respectively, an increase in liabilities of $55 million, including $50 million of short-term debt, and a decrease in equity of $1 million.



Cumulative Effect of Accounting Change, Net



The Company adopted Statement of Financial Accounting Standards (SFAS) No. 143, Accounting for Asset Retirement Obligations, on January 1, 2003.
This statement requires BNSF Railway to recognize a liability for legally obligated asset retirement costs associated with tangible long-lived assets. SFAS No. 143 also disallows the accrual of retirement costs that are not legal obligations. As a
result, BNSF Railway and other railroads were required to change their accounting policies for certain track structure assets to exclude removal costs as a component of depreciation expense where the inclusion of such costs would result in
accumulated depreciation balances exceeding the historical basis of the assets. This change will result in lower depreciation and amortization expense primarily offset by higher compensation and benefits and purchased services expenses in the period
in which removal costs are incurred.



The net cumulative effect
of adopting SFAS No. 143 for years prior to 2003 was an increase to net income of $39 million, net of tax, for the six months ended June 30, 2003, which is reflected in the cumulative effect adjustment recorded in the first quarter of 2003. The
Companys liability for legally obligated asset retirement costs is $4 million at June 30, 2004 and December 31, 2003.



5



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THE BURLINGTON NORTHERN AND SANTA FE RAILWAY COMPANY AND SUBSIDIARIES



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



2. 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 debt to floating-rate debt. 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 sheets, commitments or forecasted transactions. The Company assesses at the time a derivative
contract is entered into, and at least quarterly, 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 income (AOCI) as a separate component of stockholders equity and reclassified into earnings in the period during which the hedge transaction affects earnings.



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



Fuel



Fuel costs
represented 14 and 15 percent of total operating expenses during the six months ended June 30, 2004 and 2003, respectively. Due to the significance of diesel fuel expenses to the operations of BNSF Railway and the historical volatility of fuel
prices, the Company maintains a program to hedge against fluctuations in the price of its diesel fuel purchases. The fuel-hedging program includes the use of derivatives that are accounted for as cash flow hedges. The intent of the program is 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 fuel consumption during the first six months of 2004 and excluding the impact of the hedging program, each one-cent increase in the price of fuel would result in approximately $13 million of additional fuel expense on an annual
basis.



Total Fuel-Hedging Program



As of June 30, 2004, BNSF Railways total fuel-hedging program covered
58 percent, 53 percent, 27 percent and 3 percent of estimated fuel purchases for the remainder of 2004, 2005, 2006 and 2007, 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 EndedJune 30, |    | Six Months EndedJune 30,
|                                        |  | 2004                       |    |                          | 2003 |   | 2004 |  | 2003
|Hedge benefit                           |  | $                          | 64 |                          |      | $ | 6    |  | $    | 114 |  | $ | 30
|Ineffective portion of unexpired hedges |  |                            | (1 | )                        |      |   | 2    |  |      | 3   |  |   |  
|Tax effect                              |  |                            | 24 |                          |      |   | 3    |  |      | 45  |  |   | 11
|                                        |  |                            |    |                          |      |   |      |  |      |     |  |   |   
|Hedge benefit, net of tax               |  | $                          | 39 |                          |      | $ | 5    |  | $    | 72  |  | $ | 19
|                                        |  |                            |    |                          |      |   |      |  |      |     |  |   |   



6



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THE BURLINGTON NORTHERN AND SANTA FE RAILWAY COMPANY 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):



|                                          |  |              |     |                  |   |    
|----------------------------------------- |  | ------------ | --- | ---------------- | - | ---
|                                          |  | June 30,2004 |     | December 31,2003
|Short-term fuel-hedging asset             |  | $            | 204 |                  | $ | 102
|Long-term fuel-hedging asset              |  |              | 93  |                  |   | 43 
|Ineffective portion of unexpired hedges   |  |              | 6   |                  |   | 3  
|Tax effect                                |  |              | 111 |                  |   | 55 
|                                          |  |              |     |                  |   |    
|Amount included in AOCI, net of tax       |  | $            | 180 |                  | $ | 87 
|                                          |  |              |     |                  |   |    
|Settled fuel-hedging contracts receivable |  | $            | 64  |                  | $ | 21 
|                                          |  |              |     |                  |   |    



Amounts recorded in
AOCI represent the fair value less the ineffective portion of unexpired hedges.



BNSF Railway measures the fair value of hedges from data provided by various external counterparties. To value a swap, the Company uses the forward commodity price for the period hedged. The fair values of costless
collars are calculated and provided by the corresponding counterparties.



NYMEX #2 Heating Oil Hedges



As of June 30, 2004, BNSF Railway had entered into fuel swap and costless collar agreements utilizing NYMEX #2 heating oil (HO). The hedge prices do not include taxes, transportation costs, certain other fuel handling costs and any
differences which may occur between the prices of HO and the purchase price of BNSF Railways diesel fuel. The sum of all such costs typically ranges between 7 and 17 cents per gallon.



During the first half of 2004, the Company entered into fuel swap agreements
utilizing HO to hedge the equivalent of approximately 85 million gallons of fuel at an average price of approximately $0.95 per gallon. Also during the first half of 2004 the Company entered into costless collar agreements utilizing HO to hedge the
equivalent of approximately 170 million gallons of fuel with an average cap price of $0.94 per gallon and an average floor price of $0.87 per gallon. The following table provides fuel hedge data based on the quarter being hedged for all HO fuel
hedges outstanding as of June 30, 2004.



|                                |  |                |        |              |   |        |  |   |       
|------------------------------- |  | -------------- | ------ | ------------ | - | ------ |  | - | ------
|                                |  | Quarter Ending |        | Total       
|2004                            |  | September 30,  |        | December 31, |  
|HO Swaps                        |  |                |        |              |   |        |  |   |       
|Gallons hedged (in millions)    |  |                | 151.20 |              |   | 154.35 |  |   | 305.55
|Average swap price (per gallon) |  | $              | 0.69   |              | $ | 0.74   |  | $ | 0.72  
|Fair value (in millions)        |  | $              | 51     |              | $ | 47     |  | $ | 98    
|                                |  |                |        |              |   |        |  |   |       



7



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THE BURLINGTON NORTHERN AND SANTA FE RAILWAY COMPANY AND SUBSIDIARIES



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



|                                 |  |                |      |          |   |               |  |              |       |  |   |       |  |   |      
|-------------------------------- |  | -------------- | ---- | -------- | - | ------------- |  | ------------ | ----- |  | - | ----- |  | - | -----
|                                 |  | Quarter Ending |      | Annual  
|2005                             |  | March 31,      |      | June 30, |   | September 30, |  | December 31, |      
|HO Swaps                         |  |                |      |          |   |               |  |              |       |  |   |       |  |   |      
|Gallons hedged (in millions)     |  |                | 9.45 |          |   | 25.20         |  |              | 18.90 |  |   | 15.75 |  |   | 69.30
|Average swap price (per gallon)  |  | $              | 1.00 |          | $ | 0.92          |  | $            | 0.91  |  | $ | 0.93  |  | $ | 0.93 
|Fair value (in millions)         |  | $              |     |          | $ |              |  | $            |      |  | $ | 1     |  | $ | 1    
|                                 |  |                |      |          |  
|HO Collars                       |  |                |      |          |   |               |  |              |       |  |   |       |  |   |      
|Gallons hedged (in millions)     |  |                |     |          |   | 6.30          |  |              | 12.60 |  |   | 22.05 |  |   | 40.95
|Average cap price (per gallon)   |  | $              |     |          | $ | 0.97          |  | $            | 0.96  |  | $ | 0.98  |  | $ | 0.97 
|Average floor price (per gallon) |  | $              |     |          | $ | 0.89          |  | $            | 0.88  |  | $ | 0.90  |  | $ | 0.89 
|Fair value (in millions)         |  | $              |     |          | $ |              |  | $            |      |  | $ |      |  | $ |     



|                                 |  |                |       |          |   |               |  |              |       |  |   |       |  |   |      
|-------------------------------- |  | -------------- | ----- | -------- | - | ------------- |  | ------------ | ----- |  | - | ----- |  | - | -----
|                                 |  | Quarter Ending |       | Annual  
|2006                             |  | March 31,      |       | June 30, |   | September 30, |  | December 31, |      
|HO Collars                       |  |                |       |          |   |               |  |              |       |  |   |       |  |   |      
|Gallons hedged (in millions)     |  |                | 15.75 |          |   | 22.05         |  |              | 28.35 |  |   | 31.50 |  |   | 97.65
|Average cap price (per gallon)   |  | $              | 0.97  |          | $ | 0.92          |  | $            | 0.91  |  | $ | 0.94  |  | $ | 0.93 
|Average floor price (per gallon) |  | $              | 0.90  |          | $ | 0.84          |  | $            | 0.84  |  | $ | 0.87  |  | $ | 0.86 
|Fair value (in millions)         |  | $              |      |          | $ |              |  | $            | 1     |  | $ |      |  | $ | 1    



|                                 |  |                |       |          |   |               |  |              |   |  |   |   |  |   |      
|-------------------------------- |  | -------------- | ----- | -------- | - | ------------- |  | ------------ | - |  | - | - |  | - | -----
|                                 |  | Quarter Ending |       | Annual  
|2007                             |  | March 31,      |       | June 30, |   | September 30, |  | December 31, |  
|HO Collars                       |  |                |       |          |   |               |  |              |   |  |   |   |  |   |      
|Gallons hedged (in millions)     |  |                | 31.50 |          |   |              |  |              |  |  |   |  |  |   | 31.50
|Average cap price (per gallon)   |  | $              | 0.93  |          | $ |              |  | $            |  |  | $ |  |  | $ | 0.93 
|Average floor price (per gallon) |  | $              | 0.86  |          | $ |              |  | $            |  |  | $ |  |  | $ | 0.86 
|Fair value (in millions)         |  | $              |      |          | $ |              |  | $            |  |  | $ |  |  | $ |     



West Texas
Intermediate Crude Oil Hedges



As of June 30, 2004, the
Company had entered into fuel swap and costless collar agreements utilizing West Texas Intermediate crude oil (WTI). 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 Railways diesel fuel, including refining costs. The sum of all such costs typically ranges between 12 and 32 cents per gallon.



8



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THE BURLINGTON NORTHERN AND SANTA FE RAILWAY COMPANY AND SUBSIDIARIES



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



During the first half of 2004, the Company entered into costless collar agreements utilizing WTI to
hedge the equivalent of approximately 154 million gallons of fuel with an average cap price of $32.61 per barrel and an average floor price of $28.31 per barrel. The following tables provide fuel hedge data based on the quarter being hedged for all
WTI fuel hedges outstanding as of June 30, 2004.



|                                        |  |                |       |              |   |       |  |   |      
|--------------------------------------- |  | -------------- | ----- | ------------ | - | ----- |  | - | -----
|                                        |  | Quarter Ending |       | Total       
|2004                                    |  | September 30,  |       | December 31, |  
|WTI Swaps                               |  |                |       |              |   |       |  |   |      
|Barrels hedged (in thousands)           |  |                | 525   |              |   | 675   |  |   | 1,200
|Equivalent gallons hedged (in millions) |  |                | 22.05 |              |   | 28.35 |  |   | 50.40
|Average swap price (per barrel)         |  | $              | 20.61 |              | $ | 21.34 |  | $ | 21.02
|Fair value (in millions)                |  | $              | 9     |              | $ | 10    |  | $ | 19   
|                                        |  |                |      
|WTI Collars                             |  |                |       |              |   |       |  |   |      
|Barrels hedged (in thousands)           |  |                | 300   |              |   | 375   |  |   | 675  
|Equivalent gallons hedged (in millions) |  |                | 12.60 |              |   | 15.75 |  |   | 28.35
|Average cap price (per barrel)          |  | $              | 28.60 |              | $ | 27.76 |  | $ | 28.13
|Average floor price (per barrel)        |  | $              | 24.20 |              | $ | 23.30 |  | $ | 23.70
|Fair value (in millions)                |  | $              | 3     |              | $ | 3     |  | $ | 6    



|                                        |  |                |        |          |   |               |  |              |       |  |   |       |  |   |       
|--------------------------------------- |  | -------------- | ------ | -------- | - | ------------- |  | ------------ | ----- |  | - | ----- |  | - | ------
|                                        |  | Quarter Ending |        | Annual  
|2005                                    |  | March 31,      |        | June 30, |   | September 30, |  | December 31, |      
|WTI Swaps                               |  |                |        |          |   |               |  |              |       |  |   |       |  |   |       
|Barrels hedged (in thousands)           |  |                | 600    |          |   | 675           |  |              | 1,125 |  |   | 1,350 |  |   | 3,750 
|Equivalent gallons hedged (in millions) |  |                | 25.20  |          |   | 28.35         |  |              | 47.25 |  |   | 56.70 |  |   | 157.50
|Average swap price (per barrel)         |  | $              | 24.26  |          | $ | 24.67         |  | $            | 24.55 |  | $ | 24.54 |  | $ | 24.52 
|Fair value (in millions)                |  | $              | 7      |          | $ | 7             |  | $            | 11    |  | $ | 12    |  | $ | 37    
|                                        |  |                |        |          |  
|WTI Collars                             |  |                |        |          |   |               |  |              |       |  |   |       |  |   |       
|Barrels hedged (in thousands)           |  |                | 3,750  |          |   | 3,225         |  |              | 2,325 |  |   | 1,650 |  |   | 10,950
|Equivalent gallons hedged (in millions) |  |                | 157.50 |          |   | 135.45        |  |              | 97.65 |  |   | 69.30 |  |   | 459.90
|Average cap price (per barrel)          |  | $              | 26.73  |          | $ | 26.47         |  | $            | 26.66 |  | $ | 27.11 |  | $ | 26.69 
|Average floor price (per barrel)        |  | $              | 22.13  |          | $ | 21.89         |  | $            | 22.07 |  | $ | 22.57 |  | $ | 22.11 
|Fair value (in millions)                |  | $              | 35     |          | $ | 29            |  | $            | 20    |  | $ | 12    |  | $ | 96    



|                                        |  |                |       |          |   |               |  |              |       |  |   |       |  |   |       
|--------------------------------------- |  | -------------- | ----- | -------- | - | ------------- |  | ------------ | ----- |  | - | ----- |  | - | ------
|                                        |  | Quarter Ending |       | Annual  
|2006                                    |  | March 31,      |       | June 30, |   | September 30, |  | December 31, |      
|WTI Swaps                               |  |                |       |          |   |               |  |              |       |  |   |       |  |   |       
|Barrels hedged (in thousands)           |  |                | 1,350 |          |   | 675           |  |              | 375   |  |   |      |  |   | 2,400 
|Equivalent gallons hedged (in millions) |  |                | 56.70 |          |   | 28.35         |  |              | 15.75 |  |   |      |  |   | 100.80
|Average swap price (per barrel)         |  | $              | 24.43 |          | $ | 25.16         |  | $            | 25.69 |  | $ |      |  | $ | 24.83 
|Fair value (in millions)                |  | $              | 12    |          | $ | 5             |  | $            | 2     |  | $ |      |  | $ | 19    
|                                        |  |                |       |          |  
|WTI Collars                             |  |                |       |          |   |               |  |              |       |  |   |       |  |   |       
|Barrels hedged (in thousands)           |  |                | 1,500 |          |   | 1,500         |  |              | 825   |  |   | 525   |  |   | 4,350 
|Equivalent gallons hedged (in millions) |  |                | 63.00 |          |   | 63.00         |  |              | 34.65 |  |   | 22.05 |  |   | 182.70
|Average cap price (per barrel)          |  | $              | 30.05 |          | $ | 30.20         |  | $            | 30.81 |  | $ | 31.93 |  | $ | 30.47 
|Average floor price (per barrel)        |  | $              | 25.66 |          | $ | 25.79         |  | $            | 26.32 |  | $ | 27.42 |  | $ | 26.04 
|Fair value (in millions)                |  | $              | 7     |          | $ | 6             |  | $            | 3     |  | $ | 1     |  | $ | 17    



9



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THE BURLINGTON NORTHERN AND SANTA FE RAILWAY COMPANY AND SUBSIDIARIES



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



|                                        |  |                |       |          |   |               |  |              |   |  |   |   |  |   |      
|--------------------------------------- |  | -------------- | ----- | -------- | - | ------------- |  | ------------ | - |  | - | - |  | - | -----
|                                        |  | Quarter Ending |       | Annual  
|2007                                    |  | March 31,      |       | June 30, |   | September 30, |  | December 31, |  
|WTI Collars                             |  |                |       |          |   |               |  |              |   |  |   |   |  |   |      
|Barrels hedged (in thousands)           |  |                | 150   |          |   |              |  |              |  |  |   |  |  |   | 150  
|Equivalent gallons hedged (in millions) |  |                | 6.30  |          |   |              |  |              |  |  |   |  |  |   | 6.30 
|Average cap price (per barrel)          |  | $              | 33.00 |          | $ |              |  | $            |  |  | $ |  |  | $ | 33.00
|Average floor price (per barrel)        |  | $              | 29.00 |          | $ |              |  | $            |  |  | $ |  |  | $ | 29.00
|Fair value (in millions)                |  | $              |      |          | $ |              |  | $            |  |  | $ |  |  | $ |     



NYMEX #2 Heating
Oil Refining Spread Hedges



As of June 30, 2004, the
Company had entered into fuel swap agreements utilizing the HO refining spread (HO-WTI). HO-WTI is the difference in price between HO and WTI; therefore a HO-WTI swap in combination with a WTI swap is equivalent to a HO swap. The Company did not
enter into any additional HO-WTI swaps during the first half of 2004. The following table provides fuel hedge data based upon the quarter being hedged for all HO-WTI fuel hedges outstanding as of June 30, 2004.



|                                        |  |                |       |              |   |       |  |   |      
|--------------------------------------- |  | -------------- | ----- | ------------ | - | ----- |  | - | -----
|                                        |  | Quarter Ending |       | Total       
|2004                                    |  | September 30,  |       | December 31, |  
|HO-WTI Swaps                            |  |                |       |              |   |       |  |   |      
|Barrels hedged (in thousands)           |  |                | 525   |              |   | 675   |  |   | 1,200
|Equivalent gallons hedged (in millions) |  |                | 22.05 |              |   | 28.35 |  |   | 50.40
|Average swap price (per barrel)         |  | $              | 3.81  |              | $ | 4.90  |  | $ | 4.42 
|Fair value (in millions)                |  | $              | 1     |              | $ | 2     |  | $ | 3    



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 and establishing rates in anticipation of future debt issuances as well as to convert a portion of its fixed-rate debt to
floating-rate debt. The Company uses interest rate swaps as part of its interest rate risk management strategy.



As of June 30, 2004 and December 31, 2003, BNSF Railway had one swap on a notional amount of $100 million in which it pays an average floating rate, which
fluctuates quarterly, based on London Interbank Offer Rate (LIBOR). The swap transaction outstanding is reflected in the following table (dollars in millions):



|                                      |  |               |      |       |      |   |           |   |      |   |      |   |            |   |  |   |      |   |  |   |  
|------------------------------------- |  | ------------- | ---- | ----- | ---- | - | --------- | - | ---- | - | ---- | - | ---------- | - |  | - | ---- | - |  | - | -
|                                      |  | June 30, 2004
|                                      |  | Maturity Date |      | Total |      |   | FairValue
|                                      |  | 2004          |      |       | 2005 |   | 2006      |   | 2007 |   | 2008 |   | Thereafter |   | 
|Fair value hedges                     |  |               |      |       |      |   |           |   |      |   |      |   |            |   |  |   |      |   |  |   |  
|Fixed to variable swaps (in millions) |  | $             | 100  |       |      |  |           |  |      |  |      |  |            |  |  | $ | 100  |   |  | $ | 1
|Average fixed rate                    |  |               | 8.63 | %     |      |  |           |  |      |  |      |  |            |  |  |   | 8.63 | % |  |   |  
|Average floating rate                 |  |               | 5.46 | %     |      |  |           |  |      |  |      |  |            |  |  |   | 5.46 | % |  |   |  



10



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THE BURLINGTON NORTHERN AND SANTA FE RAILWAY COMPANY AND SUBSIDIARIES



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



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



|                          |  |                            |   |                          |   |      |  |      |   |  |   |  
|------------------------- |  | -------------------------- | - | ------------------------ | - | ---- |  | ---- | - |  | - | -
|                          |  | Three Months EndedJune 30, |   | Six Months EndedJune 30,
|                          |  | 2004                       |   | 2003                     |   | 2004 |  | 2003
|Hedge benefit             |  | $                          | 1 |                          | $ | 1    |  | $    | 2 |  | $ | 1
|Tax effect                |  |                            |  |                          |   |     |  |      | 1 |  |   | 
|                          |  |                            |   |                          |   |      |  |      |   |  |   |  
|Hedge benefit, net of tax |  | $                          | 1 |                          | $ | 1    |  | $    | 1 |  | $ | 1
|                          |  |                            |   |                          |   |      |  |      |   |  |   |  



The amounts recorded
in the Consolidated Balance Sheets for interest rate fair value hedge transactions, which represent the fair value of unexpired hedges, with a corresponding increase to debt, was as follows (in millions):



|                                       |  |              |   |                  |   |  
|-------------------------------------- |  | ------------ | - | ---------------- | - | -
|                                       |  | June 30,2004 |   | December 31,2003
|Short-term interest rate hedging asset |  | $            | 1 |                  | $ | 3
|Long-term interest rate hedging asset  |  | $            |  |                  | $ | 
|                                       |  |              |   |                  |   |  



BNSF Railways
measurement of the fair value of the interest rate swap is based on estimates of the mid-market value for the transaction provided by the counterparty to this agreement.



3. Comprehensive Income



Total comprehensive income was comprised of the following (in millions):



|                                       |  |                             |     |                           |   |      |  |      |     |  |   |    
|-------------------------------------- |  | --------------------------- | --- | ------------------------- | - | ---- |  | ---- | --- |  | - | ---
|                                       |  | Three Months Ended June 30, |     | Six Months Ended June 30,
|                                       |  | 2004                        |     | 2003                      |   | 2004 |  | 2003
|Net income                             |  | $                           | 297 |                           | $ | 257  |  | $    | 540 |  | $ | 494
|Other comprehensive income, net of tax |  |                             | 54  |                           |   | 11   |  |      | 92  |  |   | 15 
|                                       |  |                             |     |                           |   |      |  |      |     |  |   |    
|Total comprehensive income             |  | $                           | 351 |                           | $ | 268  |  | $    | 632 |  | $ | 509
|                                       |  |                             |     |                           |   |      |  |      |     |  |   |    



BNSF Railways
comprehensive income includes net income and changes related to derivatives, which qualify for cash flow hedge accounting.



4. Accounts Receivable, Net



BNSF Railway transfers most 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.



SFRC renewed
$350 million of its $700 million accounts receivable facility, effective June 2004, for an additional 364 days. In addition, SFRC entered into a separate $350 million accounts receivable facility with a five year term in June 2003. The
Companys total capacity to sell undivided interests to investors under the A/R sales program was $700 million at June 30, 2004. Outstanding undivided interests held by investors under the A/R sales program were $625 million at June 30, 2004,
and December 31, 2003. These receivables were derecognized by BNSF Railway in connection with the sale of undivided interests under the A/R sales program. The undivided interests were supported by $916 million and $808 million of receivables
transferred by SFRC to the master trust at



11



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THE BURLINGTON NORTHERN AND SANTA FE RAILWAY COMPANY AND SUBSIDIARIES



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



June 30, 2004 and December 31, 2003, respectively. When SFRC transfers these receivables to the master trust, it
retains an undivided interest in the receivables sold. This retained interest is included in accounts receivable in the Companys financial statements. SFRCs retained interest in these receivables of $291 million and $183 million at June
30, 2004 and December 31, 2003, respectively, less an allowance for uncollectible accounts, reflected the total accounts receivable transferred by SFRC to the master trust less $625 million at June 30, 2004 and December 31, 2003 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.



The Company retains the collection responsibility with respect
to the accounts receivable. Proceeds from collections reinvested in the A/R sales program were approximately $5.5 billion and $4.6 billion for the six months ended June 30, 2004 and 2003, respectively. No servicing asset or liability has been
recorded because the fees the Company 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 $5 million and $4 million for the six months ended
June 30, 2004 and 2003, respectively. These costs fluctuate monthly with changes in prevailing interest rates, and were based on weighted average interest rates of 1.1 percent and 1.3 percent in the six months ended June 30, 2004 and 2003,
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. BNSF Railway has historically experienced very low levels of
default or dilution. If dilution or delinquency percentages were to increase by one percentage point, the amount of receivables BNSF Railway could sell would decrease by approximately $8 million.



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. At June 30, 2004 and December 31, 2003, $76 million and $78 million, respectively, of accounts receivable were greater than 90 days old. The Company maintains an allowance
for bill adjustments and uncollectible accounts based upon the expected collectibility of accounts receivable, including receivables transferred to the master trust. At June 30, 2004 and December 31, 2003, $68 million and $85 million, respectively,
of such allowances had been recorded. Credit losses are based on specific identification of uncollectible accounts and application of historical collection percentages by aging category. During the six months ended June 30, 2004 and 2003, $5 million
and $3 million, respectively, of accounts receivable were written off.



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 June 30, 2004, BNSF Railway was in
compliance with these provisions.



12



---

THE BURLINGTON NORTHERN AND SANTA FE RAILWAY COMPANY AND SUBSIDIARIES



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



5. Debt



Mortgage Bonds



Six Months Ended June 30, 2003



In January 2003, the Company exercised an option to call $29 million of 2.63 percent mortgage bonds issued by a predecessor company and due January 1,
2010. Cash generated from operations was used to fund the call.



Guarantees



Debt and other obligations of
non-consolidated entities guaranteed by the Company as of June 30, 2004 are as follows (dollars in millions):



|                                                               |  |                         |   |  |                           |     |                       |   |                           |  |                           |     |                           |                         |  |   |   
|-------------------------------------------------------------- |  | ----------------------- | - |  | ------------------------- | --- | --------------------- | - | ------------------------- |  | ------------------------- | --- | ------------------------- | ----------------------- |  | - | --
|                                                               |  | Guarantees             
|                                                               |  | BNSFOwnershipPercentage |   |  | PrincipalAmountGuaranteed |     | MaximumFuturePayments |   | MaximumRecourseAmount (a) |  | Remaining Term (in years) |     | CapitalizedObligations(b)
|Kinder Morgan Energy Partners, L.P.                            |  | 0.5                     | % |  | $                         | 190 |                       | $ | 190                       |  | $                         |    |                           | Termination ofOwnership |  | $ |  
|Kansas City Terminal Intermodal Transportation Corporation     |  | 0.0                     | % |  | $                         | 68  |                       | $ | 109                       |  | $                         | 109 |                           | 15                      |  | $ | 38
|Westside Intermodal Transportation Corporation                 |  | 0.0                     | % |  | $                         | 45  |                       | $ | 74                        |  | $                         |    |                           | 19                      |  | $ | 35
|The Unified Government of Wyandotte County/Kansas City, Kansas |  | 0.0                     | % |  | $                         | 14  |                       | $ | 23                        |  | $                         |    |                           | 19                      |  | $ | 12
|Various lessors (Residual value guarantees)                    |  | 0.0                     | % |  |                           | N/A |                       | $ | 48                        |  | $                         | 48  |                           | Various                 |  | $ |  
|All other                                                      |  | 0.0                     | % |  | $                         | 11  |                       | $ | 12                        |  | $                         | 6   |                           | 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.
|--- | ------------------------------------------------------------------------------------------------



Kinder Morgan Energy Partners, L.P.



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



Kansas City Terminal Intermodal Transportation Corporation



BNSF Railway and another major railroad jointly and severally guarantee $68 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 and accounts for its interest using the equity method of accounting.



13



---

THE BURLINGTON NORTHERN AND SANTA FE RAILWAY COMPANY AND SUBSIDIARIES



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



Westside Intermodal Transportation Corporation and The Unified Government of
Wyandotte County/Kansas City, Kansas



BNSF Railway has
guaranteed $59 million of debt, the proceeds of which are being used to finance construction of a bridge that will connect BNSF Railways Argentine Yard in Kansas City, Kansas, with the KCTRC mainline tracks in Kansas City, Missouri. The bridge
will be operated by KCTRC.



Residual value
guarantees (RVG)



In the normal course of business, the
Company enters into operating 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 in the actual residual value of the leased equipment over the RVG. These guarantees will expire between 2005 and 2011. As of June 30, 2004, the Company has recorded a $9 million asset and corresponding liability for
the fair value of the RVGs.



All
other



BNSF Railway guarantees $11 million of other debt.
BNSF Railway holds a performance bond and has the option to sub-lease property to recover up to $6 million of the $11 million of guarantees. These guarantees expire between 2005 and 2014.



Other than as discussed above, there is no collateral held by a third party which 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 Railway 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 the events which would trigger the indemnification obligations will ever occur and, if they did, the extent of the liability which would thereby result, the
exposure for future indemnification payments cannot be estimated with any amount of certainty. However, the Company does not believe, based on information available, that these indemnity agreements will have a material adverse effect on the
Companys results of operations, financial position or liquidity.



14



---

THE BURLINGTON NORTHERN AND SANTA FE RAILWAY COMPANY AND SUBSIDIARIES



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



6. Commitments and Contingencies



Personal Injury and Casualty Losses



Personal injury claims, including work-related injuries and occupational illness claims of employees, are a significant
expense for the railroad industry. Compensation claims by BNSF Railway employees for work-related injuries and occupational illness claims 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. The variability present in awards in these
cases, cases involving non-employee personal injury and casualty loss and matters in which punitive damages are alleged could result in increased expenses in future years. BNSF Railway 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.



Burlington Northern Santa Fe Insurance Company, Ltd. (BNSF IC), a wholly owned subsidiary of BNSF, provides insurance coverage for certain risks incurred after April 1, 1998, FELA claims, railroad protective and force
account insurance claims incurred after January 1, 2002, and certain other claims which are subject to reinsurance. During the six months ended June 30, 2004, BNSF Railway had paid premiums of $140 million to BNSF IC for such coverage of which $70
million is included in other current assets in the Consolidated Balance Sheets at June 30, 2004.



The Company recognized additional personal injury and casualty loss expenses of $23 million and $8 million for the three months ended June 30, 2004 and
2003, respectively, and $38 million and $22 million for the six months ended June 30, 2004 and 2003, respectively. BNSF Railway made payments for personal injuries and casualty losses of $81 million and $86 million during the first six months of
2004 and 2003, respectively. At June 30, 2004 the Company had recorded liabilities of $234 million related to personal injury and casualty loss claims. Of this amount, $94 million is included in current liabilities. BNSF Railways liabilities
for personal injury and casualty loss claims are undiscounted.



Environmental



The Companys operations,
as well as those of its competitors, are subject to extensive federal, state and local environmental regulation. BNSF Railway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 Railway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 Railway 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 Railway has been notified that it is a potentially responsible party (PRP) for study and cleanup costs at approximately 20 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 Railway may be considered a PRP under certain other laws. Accordingly, under CERCLA and other federal and state
statutes, BNSF Railway may be held jointly and severally liable for all environmental costs associated with a particular site. If there are other PRPs, BNSF Railway 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 the portion of the total site owned or operated by
each PRP.



15



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THE BURLINGTON NORTHERN AND SANTA FE RAILWAY COMPANY AND SUBSIDIARIES



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



Environmental costs include initial site surveys and environmental studies of potentially
contaminated sites as well as costs for remediation and restoration of sites determined to be contaminated. Liabilities for environmental cleanup costs are initially recorded when BNSF Railways liability for environmental cleanup is both
probable and a reasonable estimate of associated costs can be made. Adjustments to initial estimates are recorded as necessary based upon additional information developed in subsequent periods. BNSF Railway conducts an ongoing environmental
contingency analysis, which considers a combination of factors including independent consulting reports, site visits, legal reviews, analysis of the likelihood of participation in and the ability of other PRPs to pay for cleanup, and historical
trend analyses.



BNSF Railway is involved in a number of
administrative and judicial proceedings and other mandatory cleanup efforts at approximately 400 sites, including the Superfund sites, at which it is participating in the study or cleanup, or both, of alleged environmental contamination. The Company
recognized environmental expenses of $38 million and $16 million for the three months ended June 30, 2004 and 2003, respectively, and $64 million and $31 million for the six months ended June 30, 2004 and 2003, respectively. For the second quarter
of 2004, BNSF Railway recorded approximately $30 million in expense related to developments at two former fueling facility sites. BNSF Railway paid $21 million and $32 million during the first six months of 2004 and 2003, respectively, for mandatory
and unasserted cleanup efforts, including amounts expended under federal and state voluntary cleanup programs. BNSF Railway has recorded liabilities for remediation and restoration of all known sites of $242 million at June 30, 2004. Of this amount,
$82 million is included in current liabilities. BNSF Railways environmental liabilities are not discounted. BNSF Railway anticipates that the majority of the accrued costs at June 30, 2004, will be paid over the next five years and no
individual site is considered to be material.



Liabilities
recorded for environmental costs represent BNSF Railways best estimates for remediation and restoration of these sites and include both asserted and unasserted claims. Unasserted claims are not considered to be a material component of the
liability. Although recorded liabilities include BNSF Railways best estimates of all costs, without reduction for anticipated recoveries from third parties, BNSF Railway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 potentially contaminated sites. As a result, future charges to income for environmental
liabilities could have a significant effect on results of operations in a particular quarter or fiscal year as individual site studies and remediation and restoration efforts proceed or as new sites arise. However, management believes it is unlikely
any identified matters, either individually or in the aggregate, will have a material adverse effect on BNSF Railways results of operations, financial position or liquidity.



Other Claims and Litigation



BNSF Railway and its subsidiaries are parties to a number of legal actions and claims, various governmental proceedings and private civil suits arising
in the ordinary course of business, including those related to environmental matters, Federal Employers Liability Act claims by BNSF Railway employees, other personal injury claims, and 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). 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 Railways management that none of these items, when finally resolved, will have a material adverse effect on the results of operations, financial position or liquidity of BNSF Railway.
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.



16



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THE BURLINGTON NORTHERN AND SANTA FE RAILWAY COMPANY AND SUBSIDIARIES



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



7. Employee Separation Costs



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



|                                |  |      |     |   |      |   |     |  
|------------------------------- |  | ---- | --- | - | ---- | - | --- | -
|Six Months Ended June 30,       |  | 2004 |     |   | 2003 |  
|Beginning balance at January 1, |  | $    | 179 |   |      | $ | 210 |  
|Payments                        |  |      | (15 | ) |      |   | (18 | )
|Other                           |  |      | 2   |   |      |   | (1  | )
|                                |  |      |     |   |      |   |     |  
|Ending balance at June 30,      |  | $    | 166 |   |      | $ | 191 |  
|                                |  |      |     |   |      |   |     |  



Employee separation
liabilities of $166 million are included in the Consolidated Balance Sheets at June 30, 2004, and principally represent: (i) deferred benefits payable upon separation or retirement to certain active conductors, trainmen and locomotive engineers;
(ii) employee-related severance costs for the consolidation of clerical functions, material handlers in mechanical shops and trainmen on reserve boards; and (iii) certain non-union employee severance costs. Employee separation expenses are recorded
in materials and other in the Consolidated Statements of Income. At June 30, 2004, $33 million of the remaining liabilities are included in current liabilities for anticipated costs to be paid over the next twelve months.



Conductors, Trainmen and Locomotive Engineers



Liabilities related to deferred benefits payable upon
separation or retirement to certain active conductors, trainmen and locomotive engineers were $141 million at June 30, 2004. These costs were primarily incurred in connection with labor agreements reached prior to the consummation of the business
combination of BNSFs predecessor companies Burlington Northern Inc. and Santa Fe Pacific Corporation (the Merger) which, among other things, reduced train crew sizes and allowed for more flexible work rules. The remaining costs will be paid
between 2004 and approximately 2024.



Consolidation of
Clerical Functions



Liabilities related to
the consolidation of clerical functions were $15 million at June 30, 2004. This amount primarily provides for severance costs associated with the clerical consolidation plan adopted in 1995 upon the Merger, and a separation program announced in July
2003. The 1995 consolidation plan resulted in the elimination of approximately 1,500 permanent positions and was substantially completed during 1999. The July 2003 separation program affected approximately 150 employees and was substantially
completed during the fourth quarter in 2003. The liability also includes costs related to the reduction of approximately 40 and 140 material handlers in 2001 and 2000, respectively.



The remaining liability balance at June 30, 2004, represents benefits to be paid to affected employees who did not receive
lump-sum payments, but instead will be paid over five to ten years or in some cases through retirement.



Other Employee Separation Costs



Liabilities principally related to certain remaining non-union employee severances resulting from the fourth quarter 2001 workforce reduction and the
Merger were $10 million at June 30, 2004. These costs will be paid over the next several years based on deferral elections made by the employees. In addition, BNSF Railway recorded other liabilities of approximately $2 million in the second quarter
of 2004 primarily related to a voluntary severance program for certain union employees. As of June 30, 2004, the remaining liability related to this voluntary severance program was less than $1 million.



17



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THE BURLINGTON NORTHERN AND SANTA FE RAILWAY COMPANY AND SUBSIDIARIES



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



8. Related Party Transactions



BNSF Railway is involved with BNSF and certain of its subsidiaries in related party transactions in the ordinary course of
business, which include payments made on each others behalf and performance of services. Under the terms of a tax allocation agreement with BNSF, BNSF Railway made federal and state income tax payments, net of refunds, of $155 million and $110
million, during the first six months of 2004 and 2003, respectively, which are reflected in changes in working capital in the Consolidated Statements of Cash Flows.



BNSF Railway had a net intercompany receivable balance of less than $1 million and a net intercompany payable balance of $4
million June 30, 2004 and December 31, 2003, respectively, which are reflected in the Consolidated Balance Sheets. Net intercompany receivable or payable balances are settled in the ordinary course of business.



At June 30, 2004 and December 31, 2003, BNSF Railway had $125 million and
$107 million, respectively, of intercompany notes payable to BNSF at a variable interest rate of 1.0 percent above the monthly average of the daily effective Federal Funds rate. During the first six months of 2004, BNSF Railway had additional
borrowings of $19 million of variable rate notes and made payments of $1 million. Proceeds from borrowings are primarily used to fund capital expenditures and other investing activities. Interest is paid semi-annually on all intercompany notes
payable. Interest expense on intercompany notes payable is reflected in interest income, related parties in the Consolidated Statements of Income. The intercompany notes are due on demand.



At June 30, 2004 and December 31, 2003, BNSF Railway had $1,350 million and
$1,562 million, respectively, of intercompany notes receivable from BNSF with a variable interest rate of 1.0 percent above the monthly average of the daily effective Federal Funds rate. The $212 million decrease in intercompany notes receivable is
due to repayments of $507 million from BNSF offset by additional borrowings of $295 million during the first six months of 2004. Interest is collected semi-annually on all intercompany notes receivable. The intercompany notes receivable are
presented net of the intercompany notes payable discussed above in the Consolidated Balance Sheets. Interest income from intercompany notes receivable is presented in interest income, related parties in the Consolidated Statements of Income.



Under various stock incentive plans, BNSF has granted options
to employees to purchase its common stock at a price not less than the fair market value on the date of grant. Certain employees of BNSF Railway participate in these plans. In addition, under these plans BNSF has provided other long-term incentives,
to certain BNSF Railway employees, including, among other things, restricted stock and a discounted stock purchase program. Compensation expense is recorded for stock incentive plans in accordance with Accounting Principles Board Opinion 25 and was
$7 million and $4 million for the six months ended June 30, 2004 and 2003, respectively.



18



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THE BURLINGTON NORTHERN AND SANTA FE RAILWAY COMPANY AND SUBSIDIARIES



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



9. Retirement Plans and Other Post-Employment Benefit Plans



Components of the net periodic cost (benefit) for the three and six months
ended June 30 were as follows (in millions):



|                                    |  |                            |     |   |                          |   |     |      |  |   |      |   |  |   |     |  
|----------------------------------- |  | -------------------------- | --- | - | ------------------------ | - | --- | ---- |  | - | ---- | - |  | - | --- | -
|                                    |  | Pension Benefits           |    
|                                    |  | Three Months EndedJune 30, |     |   | Six Months EndedJune 30, |  
|Net Periodic Cost (Benefit)         |  | 2004                       |     |   | 2003                     |   |     | 2004 |  |   | 2003 |  
|Service cost                        |  | $                          | 5   |   |                          | $ | 4   |      |  | $ | 10   |   |  | $ | 8   |  
|Interest cost                       |  |                            | 24  |   |                          |   | 25  |      |  |   | 48   |   |  |   | 50  |  
|Expected return on plan assets      |  |                            | (28 | ) |                          |   | (31 | )    |  |   | (56  | ) |  |   | (62 | )
|Amortization of net loss            |  |                            | 3   |   |                          |   | 1   |      |  |   | 6    |   |  |   | 2   |  
|Amortization of prior service costs |  |                            |    |   |                          |   |    |      |  |   |     |   |  |   |    |  
|                                    |  |                            |     |   |                          |   |     |      |  |   |      |   |  |   |     |  
|Net cost (benefit) recognized       |  | $                          | 4   |   |                          | $ | (1  | )    |  | $ | 8    |   |  | $ | (2  | )
|                                    |  |                            |     |   |                          |   |     |      |  |   |      |   |  |   |     |  



|                                    |  |                             |    |                          |      |   |      |  |   |      |   |  |   |   
|----------------------------------- |  | --------------------------- | -- | ------------------------ | ---- | - | ---- |  | - | ---- | - |  | - | --
|                                    |  | Health and Welfare Benefits
|                                    |  | Three Months EndedJune 30,  |    | Six Months EndedJune 30,
|Net Periodic Cost (Benefit)         |  | 2004                        |    |                          | 2003 |   | 2004 |  |   | 2003
|Service cost                        |  | $                           | 1  |                          |      | $ | 1    |  | $ | 2    |   |  | $ | 2 
|Interest cost                       |  |                             | 5  |                          |      |   | 5    |  |   | 10   |   |  |   | 10
|Expected return on plan assets      |  |                             |   |                          |      |   |     |  |   |     |   |  |   |  
|Amortization of net loss            |  |                             | 1  |                          |      |   | 2    |  |   | 3    |   |  |   | 4 
|Amortization of prior service costs |  |                             | (1 | )                        |      |   |     |  |   | (2   | ) |  |   |  
|                                    |  |                             |    |                          |      |   |      |  |   |      |   |  |   |   
|Net cost (benefit) recognized       |  | $                           | 6  |                          |      | $ | 8    |  | $ | 13   |   |  | $ | 16
|                                    |  |                             |    |                          |      |   |      |  |   |      |   |  |   |   



BNSF sponsors a
postretirement health care benefit plan that provides prescription drug coverage. The recent Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (Act) provides for a federal subsidy for plans that provide prescription drug
benefits that are actuarially equivalent to Medicare Part D.



BNSF adopted guidance pursuant to FASB Staff Position 106-2 Accounting and Disclosure Requirements Related to the Drug, Improvement and Modernization Act of 2003 as of April 1, 2004. The Company and its actuarial advisors have
determined that the prescription drug coverage provided by BNSFs postretirement health care benefit plan is actuarially equivalent to Medicare Part D, and accordingly, the subsidy will provide some relief for BNSFs ongoing retiree
medical costs.



BNSF measured the effects of the Act on the
accumulated post-retirement benefit obligation (APBO) as of January 1, 2004, and as such, the APBO was reduced by $36 million. Net periodic postretirement benefit cost for the three months ended June 30, 2004 was reduced by approximately $2 million
due to the effects of the Act.



19



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THE BURLINGTON NORTHERN AND SANTA FE RAILWAY COMPANY AND SUBSIDIARIES



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



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.



20



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Report of Independent Registered Public Accounting Firm



To the Board of Directors and Shareholder of

The Burlington Northern and Santa Fe Railway Company:



We have reviewed the accompanying consolidated balance sheet of The Burlington Northern and Santa Fe Railway Company and its subsidiaries (BNSF Railway or the
Company) as of June 30, 2004, and the related consolidated statement of income for each of the three-month and six-month periods ended June 30, 2004 and 2003 and the consolidated statement of cash flows for the six-month periods ended
June 30, 2004 and 2003. 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, 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,
2003, and the related consolidated statements of income, of changes in stockholders equity, and of cash flows for the year then ended (not presented herein), and in our report dated February 11, 2004 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, 2003, 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             
|July 21, 2004                 



21



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Item 2. Managements Narrative Analysis of Results of Operations



Managements narrative analysis relates to the financial condition and
results of operations of The Burlington Northern and Santa Fe Railway Company, its majority-owned subsidiaries, and a variable interest entity for which BNSF Railway is the primary beneficiary (collectively BNSF Railway, Registrant or Company).



Results of Operations



Six Months Ended June 30, 2004 Compared with Six Months Ended June 30, 2003



BNSF Railway recorded net income for the first six months
of 2004 of $540 million, compared with first six months of 2003 net income of $494 million, which included the favorable cumulative effect of an accounting change in the first quarter of 2003 of $39 million, net of tax. Operating income of $926
million for the first six months of 2004 was $151 million higher than the first six months of 2003.



Revenues



The following
table presents BNSF Railways revenue information by commodity group for the six months ended June 30, 2004 and 2003:



|                         |  |               |       |                |   |                               |  |       |  |       |  |      |       |  |   |      
|------------------------ |  | ------------- | ----- | -------------- | - | ----------------------------- |  | ----- |  | ----- |  | ---- | ----- |  | - | -----
|                         |  | Revenues      |       | Cars / Units   |   | Average RevenuePer Car / Unit
|                         |  | 2004          |       | 2003           |   | 2004                          |  | 2003  |  | 2004  |  | 2003
|                         |  | (in millions) |       | (in thousands) |   |                               |  |      
|Consumer Products        |  | $             | 1,964 |                | $ | 1,756                         |  | 2,285 |  | 2,091 |  | $    | 860   |  | $ | 840  
|Industrial Products      |  |               | 1,183 |                |   | 1,042                         |  | 757   |  | 697   |  |      | 1,563 |  |   | 1,495
|Coal                     |  |               | 1,073 |                |   | 989                           |  | 1,069 |  | 991   |  |      | 1,004 |  |   | 998  
|Agricultural Products    |  |               | 862   |                |   | 675                           |  | 457   |  | 392   |  |      | 1,886 |  |   | 1,722
|                         |  |               |       |                |   |                               |  |       |  |       |  |      |       |  |   |      
|Total Freight Revenues   |  |               | 5,082 |                |   | 4,462                         |  | 4,568 |  | 4,171 |  | $    | 1,113 |  | $ | 1,070
|                         |  |               |       |                |   |                               |  |       |  |       |  |      |       |  |   |      
|Other Revenues           |  |               | 58    |                |   | 50                            |  |       |  |       |  |      |       |  |   |      
|                         |  |               |       |                |   |                               |  |       |  |       |  |      |       |  |   |      
|Total Operating Revenues |  | $             | 5,140 |                | $ | 4,512                         |  |       |  |       |  |      |       |  |   |      
|                         |  |               |       |                |   |                               |  |       |  |       |  |      |       |  |   |      



Freight revenues for
the first six months of 2004 were $5.1 billion, up 14 percent compared with the same 2003 period. Freight revenues in the first six months of 2004 included $111 million in fuel surcharges compared with $50 million in the prior year. Average revenue
per car/unit increased 4 percent in the first six months of 2004 to $1,113 from $1,070 in the first six months of 2003.



Consumer Products



The Consumer Products freight business includes a significant intermodal component and consists of the following business areas: international,
direct marketing, truckload, intermodal marketing companies, automotive, and perishables and dry boxcar.



Consumer Products revenues of $1,964 million for the first six months of 2004 were $208 million, or 12 percent, greater than the first six months of 2003.
The increase in Consumer Products revenue is primarily due to increased volumes in the international and truckload sectors. The 2 percent increase in revenue per unit is due to price increases across all sectors and increased fuel surcharges,
partially offset by increases in international intermodal business which has lower average revenue per unit.



22



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Industrial Products



Industrial Products freight business consists of four business areas: construction products, building products,
chemicals and plastics, and petroleum products.



Industrial
Products revenues increased $141 million, or 14 percent, to $1,183 million for the first six months of 2004. The revenue increase is due to strength in all four business areas with especially strong gains in lumber, panel products, paper, steel,
plastics and petroleum products. Rate increases in excess of 2 percent along with fuel surcharges and larger volume increases in higher rated commodities contributed to a 5 percent increase in average revenue per car.



Coal



BNSF Railway is one of the largest transporters of low-sulfur coal in the
United States. Approximately 90 percent of all BNSF Railways coal tons originate from the Powder River Basin of Wyoming and Montana.



Coal revenues of $1,073 million, for the first six months of 2004, increased $84 million, or 8 percent, versus the same period a year ago. This increase
is primarily the result of new customer business volumes and higher demand from existing customers. Average revenue per car increased 1 percent, primarily driven by contractual rate escalations. The year-over-year increase in average revenue per car
was reduced as a result of favorable litigation adjustments in 2003.



Agricultural Products



The
transportation of agricultural products includes corn, wheat, soybeans, bulk foods, fertilizer, and other products.



Agricultural Products revenues of $862 million for the first six months of 2004 were $187 million, or 28 percent, higher than revenues for the first six
months of 2003. This increase is primarily due to increased corn and wheat exports. Average revenue per car increased 10 percent. The strong global demand for grain that has driven up commodity prices has also favorably impacted the transportation
rates.



Expenses



Total operating expenses for the first six months of 2004 were $4,214
million, an increase of $477 million, or 13 percent, versus the same in 2003 period primarily related to fuel expense, higher volumes handled and lower gains from property dispositions.



Compensation and benefits



Compensation and benefits includes expenses for BNSF Railway employee compensation and benefit programs. The primary factors
influencing the expenses recorded are volume, headcount, utilization, wage rates, incentives paid or accrued during the period, benefit plan participation, increased pension expenses, and actuarial assumptions.



Compensation and benefits expenses of $1,602 million for the first half of
2004 were $187 million, or 13 percent, higher than the first six months of 2003. The increase primarily reflects higher volumes, wage inflation, crew training, incentive expenses for the Companys salaried and scheduled workforce, and increased
pension expenses.



23



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Purchased services



Purchased services expense includes ramping and drayage, maintenance of equipment and technology, and other services, such
as vegetation control, provided to BNSF Railway. The expenses are driven by the rates established in the service contracts and the volume of services required.



Purchased services of $664 million for the first six months of 2004 were $60 million, or 10 percent, higher than the first six months of 2003. This
increase is primarily due to higher volume-related costs for locomotive contract maintenance expense, intermodal ramp costs and haulage payments for contracted transportation over other roads.



Depreciation and amortization



Depreciation and amortization expenses for the period are determined by
using the group method of depreciation, applying a single rate to the gross investment in a particular class of property. Due to the capital-intensive nature of BNSF Railways operations, depreciation expense is a significant component of the
Companys operating expense. The full effect of inflation is not reflected in operating expenses since depreciation is based on historical cost.



Depreciation and amortization expenses of $500 million for the first six months of 2004 were $50 million, or 11 percent, higher than the same period in
2003. $20 million of this increase in depreciation expense is due to the expiration of the amortization period for locomotives in which BNSF Railway recorded a decrease in the fair market value at the time of the merger of Burlington Northern
Railroad Company and The Atchison, Topeka and Santa Fe Railway Company as required by purchase accounting. In addition, the remaining increase in depreciation expense is due to ongoing capital expenditures.



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, rental rates, the results of lease negotiations, utilization of owned equipment versus leased equipment, and changes in business mix resulting in
equipment usage variances.



Equipment rents expenses for the
first six months of 2004 of $384 million were $35 million, or 10 percent, higher than the first six months of 2003. The increase is primarily due to continuous volume increases which increased car equipment costs. Additionally, the extension of
short-term locomotive leases and reduced short-term lease incentives contributed to the increase.



Fuel



Fuel expense is driven by the level of locomotive consumption, market price and the effects of hedging activities.



Fuel expenses of $606 million for the first six months of 2004 were $60
million, or 11 percent, higher than the first six months of 2003. The increase in fuel expense is due to an increase in consumption driven by higher volumes, offset by a decrease in the average all-in cost per gallon of diesel fuel. Consumption in
the first six months of 2004 was 660 million gallons, up 12 percent compared to the consumption in the first six months of 2003 of 589 million gallons. The average all-in cost per gallon of diesel fuel decreased by less than 1-cent, or $6 million,
which is comprised of an increase in the hedge benefit of approximately 13-cents, or $87 million (first six months 2004 benefit of $117 million less first six months of 2003 benefit of $30 million) offset by an increase in the average purchase price
of more than 12-cents or $81 million.



24



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Materials and other



Material expenses consist mainly of the costs involved to purchase mechanical and engineering materials and other items for
construction and maintenance of property and equipment. Other expenses include personal injury claims, environmental remediation, and derailments as well as employee separation costs, utilities, and property and miscellaneous taxes. The total is
offset by gains on land sales and insurance recoveries.



Materials and other expenses of $458 million for the first six months of 2004 were $85 million, or 23 percent, higher than the first six months of 2003 principally due to approximately $30 million in environmental developments at two former
fueling facility sites, increased casualty costs driven by two large derailments, higher material costs to maintain freight cars and locomotives due to higher volumes, and relocation costs to consolidate one of the Companys locomotive repair
facilities.



Interest expense



Interest expense of $66 million for the first six months of 2004 was $9
million, or 12 percent, lower than the first six months of 2003. This decrease was primarily the result of lower average interest rates partially offset by higher average debt outstanding.



Income taxes



The effective tax rate for the first six months of 2004 was 38.0 percent
compared to 35.7 percent for the prior year period. The increase in the effective tax rate primarily reflects a tax settlement attributable to prior years that was settled favorably in the second quarter of 2003.



Other Matters



Commercial



In July 2004, BNSF Railway initiated an arbitration proceeding under a Joint Service Agreement (JSA) with J.B. Hunt Transportation (J.B. Hunt), a major
truckload carrier with which BNSF Railway handles substantial joint intermodal movements. In the proceeding, BNSF Railway is seeking an increase in its future divisions of joint revenue for intermodal movements. J.B. Hunt has responded with a notice
of arbitration raising other issues under the JSA. In Arkansas state court, J.B. Hunt has filed a petition seeking a declaratory order of the rights of the parties under the JSA. The results of these proceedings are not expected to have a material
adverse effect on the Companys results of operations, financial position or liquidity.



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 debt to floating-rate debt. 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, 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 Income (AOCI) as a separate component of stockholders equity
and reclassified into earnings in the period during which the hedge transaction affects earnings.



25



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Fuel



BNSF Railway measures the fair value of fuel hedges from data provided by various external counterparties. To value a swap, the Company uses the forward
commodity price for the period hedged. The fair values of costless collars are calculated and provided by the corresponding counterparties. BNSF Railway monitors its hedging positions and credit ratings of its counterparties and does not anticipate
losses due to counterparty nonperformance. See Note 2 to the Consolidated Financial Statements.



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 and establishing rates in anticipation of future debt issuances as well as to convert a portion of its fixed-rate debt to floating-rate debt. The Company uses interest rate swaps and treasury locks as part of its interest rate risk management
strategy. BNSF Railways measurement of the fair value of interest rate swaps and treasury locks is based on estimates of the mid-market values for the transactions provided by the counterparties to these agreements. See Note 2 to the
Consolidated Financial Statements.



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. Forward-looking statements involve a number of risks and uncertainties, and actual results may differ materially. Important factors that could cause actual results to differ materially include, but
are not limited to, economic and industry conditions: material adverse changes in economic or industry conditions, both in the United States and globally, changes in customer demand, effects of adverse economic conditions affecting shippers,
adverse economic conditions in the industries and geographic areas that produce and consume freight, competition and consolidation within the transportation industry, the extent to which BNSF Railway is successful in gaining new long-term
relationships with customers or retaining existing ones, changes in fuel prices, changes in the securities and capital markets, and changes in crew availability, labor costs and labor difficulties, including stoppages affecting either BNSF
Railways operations or our customers abilities to deliver goods to BNSF Railway for shipment; legal and regulatory factors: developments and changes in laws and regulations, the ultimate outcome of shipper and rate claims subject
to adjudication, environmental investigations or proceedings and other types of claims and litigation; and operating factors: technical difficulties, changes in operating conditions and costs, commodity concentrations, 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
network fluidity, congestion on other railroads, as well as natural events such as severe weather, floods and earthquakes or man-made or other disruptions of BNSF Railways operating systems, structures, or equipment.



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 may appear in the Companys public filings with the Securities and Exchange Commission, which are accessible at www.sec.gov and on the Companys website at
www.bnsf.com, and which investors are advised to consult.



26



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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 Railways
principal executive officer and principal financial officer have concluded that BNSF Railway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 Railway 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 Railway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 Railways principal executive officer and principal financial officer have concluded that there have been no changes in BNSF Railways internal control over
financial reporting that occurred during BNSF Railways second fiscal quarter that have materially affected, or are reasonably likely to materially affect, BNSF Railways internal control over financial reporting.



27



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THE BURLINGTON NORTHERN AND SANTA FE RAILWAY COMPANY AND SUBSIDIARIES



PART II OTHER INFORMATION



Item 1. Legal Proceedings



Reference is made to the disclosure in the Companys Annual Report on
Form 10-K for the year ended December 31, 2003 and its Quarterly Report on Form 10-Q for the quarter ended March 31, 2004 regarding the scope of BNSF Railways obligation to remediate all or part of diesel contamination in Mandan, North Dakota
in a proceeding brought in state court, North Dakota Department of Health, et al. v. The Burlington Northern and Santa Fe Railway Company; District Court, State of North Dakota, County of Morton, South Central Judicial District Civil No.
02-C-1174, and in an administrative proceeding before the Department of Health (Case No. 84-400 WPC). On June 30, 2004, BNSF Railway, the State of North Dakota and the City of Mandan agreed to a settlement, subject to the execution of a written
agreement, of the state court lawsuit and the administrative proceeding. Under the settlement, BNSF Railway will convey a strip of property to the City and will pay $29 million, of which $1 million is a penalty, and the State will assume clean-up
obligations for certain specified properties in downtown Mandan not owned by BNSF Railway. The State also agreed to the method of remediation to be employed by BNSF Railway for diesel contamination on BNSF Railway property. Although the
intervenors claims in the state court proceeding are not resolved, the potential exposure presented by these claims is not considered material and, accordingly, this matter therefore is considered terminated.



BNSF Railway and its subsidiaries are parties to a number of legal actions
and claims, various governmental proceedings and private civil suits arising in the ordinary course of business, including those related to environmental matters, Federal Employers Liability Act claims by BNSF Railway employees, other personal
injury claims, and 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). 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 Railways management that none of these items will have a material adverse effect on the results of
operations, financial position or liquidity of BNSF Railway. 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.



Item 6. Exhibits and Reports on Form 8-K



| | A. | Exhibits
| | -- | --------



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



| | B. | Reports on Form 8-K
| | -- | -------------------



None.



28



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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.



THE BURLINGTON NORTHERN AND SANTA FE RAILWAY COMPANY(Registrant)By:

/s/ Thomas N. HundThomas N. Hund Executive Vice President and Chief Financial Officer (On behalf of the Registrant and as principal financial officer)




|Dated: | July 26, 2004
|------ | -------------



S-1



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THE BURLINGTON NORTHERN AND SANTA FE RAILWAY COMPANY AND SUBSIDIARIES



Exhibit Index



|     |  |                                                                                                                         
|---- |  | ------------------------------------------------------------------------------------------------------------------------
|12.1 |  | Computation of Ratio of Earnings to Fixed Charges                                                                       
|     | 
|31.1 |  | Principal Executive Officers Certification Pursuant to 18 U.S.C. § 1350 (Section 302 of the Sarbanes-Oxley Act of 2002)
|     | 
|31.2 |  | Principal Financial Officers Certification Pursuant to 18 U.S.C. § 1350 (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)                              



E-1