TABLE OF CONTENTS

NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES (NS)

2

PART I.   FINANCIAL INFORMATION

Item 1.   Financial Statements.

NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES

Consolidated Statements of Income

  (Unaudited)

NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES

Consolidated Balance Sheets

(Unaudited)

NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(Unaudited)

NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

In the opinion of management, the accompanying unaudited interim financial statements contain all adjustments (consisting of normal recurring accruals) necessary to present fairly Norfolk Southern Corporation and subsidiaries' (NS) financial position as of JuneSept. 30, 2006, its results of operations for the three and sixnine months ended JuneSept. 30, 2006 and 2005, and its cash flows for the sixnine months ended JuneSept. 30, 2006 and 2005, in conformity with U.S. generally accepted accounting principles.

These Consolidated Financial Statements should be read in conjunction with the financial statements and notes included in NS’ latest Annual Report on Form 10‑K.

1. Stock Based Compensation

Effective January 1, 2006, NS adopted Statement of Financial Accounting Standards, No. 123(R), “Share-Based Payment,” [SFAS 123(R)].   This statement applies to awards granted, modified, repurchased or cancelled after the effective date as well as awards that are unvested at the effective date and includes, among other things, the requirement to expense the fair value of stock options.   The standard also requires that cash settled awards be measured at fair value at each reporting date until ultimate settlement.   NS adopted SFAS 123(R) using the modified prospective method, which requires application of the standard to all awards granted, modified, repurchased or cancelled on or after January 1, 2006, and to all awards for which the requisite service has not been rendered as of such date.   In accordance with the modified prospective approach, prior period financial statements have not been restated to reflect the impact of SFAS 123(R).   As compared to amounts that would have been recognized under APB Opinion No. 25, “Accounting for Stock Issued to Employees” (APB Opinion 25), the adoption of SFAS No. 123(R) resulted in $28$30 million of additional compensation expense for the sixnine months ended JuneSept. 30, 2006, including the immediate expensing of 2006 grants made to retirement-eligible employees, which reduced net income by $20$22 million, or 5 cents per basic and diluted share.   Through Dec. 31, 2005, NS applied the intrinsic value recognition and measurement principles of APB Opinion 25 and related interpretations in accounting for its stock-based employee compensation plans (see Note 8).     

The following table illustrates the effect on net income and earnings per share if NS had applied the fair value recognition provisions of SFASStatement of Financial Accounting Standards, No. 123, “Accounting for Stock-Based Compensation” to stock-based employee compensation related to all awards:

2.   Investments

Investment in Conrail

Through a limited liability company, Norfolk Southern Corporation ( Norfolk Southern) and CSX Corporation (CSX) jointly own Conrail Inc. (Conrail), whose primary subsidiary is Consolidated Rail Corporation (CRC).   NS has a 58% economic and 50% voting interest in the jointly owned entity, and CSX has the remainder of the economic and voting interests.   CRC owns and operates certain properties (the Shared Assets Areas) for the joint and exclusive benefit of Norfolk Southern Railway Company (NSR) and CSX Transportation, Inc. (CSXT).   The costs of operating the Shared Assets Areas are borne by NSR and CSXT based on usage.   In addition, NSR and CSXT pay CRC a fee for access to the Shared Assets Areas.   "Conrail rents and services" includes expenses for amounts due to CRC for operation of the Shared Assets Areas.   NS’ equity in the earnings of Conrail, net of amortization, is included in “Other income – net.”

“Accounts payable” includes $53$65 million at JuneSept. 30, 2006, and $56 million at Dec. 31, 2005, due to Conrail for the operation of the Shared Assets Areas.   In addition, “Other liabilities” include $133 million in long-term advances from Conrail, maturing 2035, entered into in 2005 that bear interest at an average rate of 4.4%.

3.  Derivative Financial Instruments

NS useshas used derivative financial instruments to reduce the risk of volatility in its diesel fuel costs and to manage its overall exposure to fluctuations in interest rates.   NS does not engage in the trading of derivatives.   Management has determined that its derivative financial instruments qualify as either fair-value or cash-flow hedges, having values that highly correlate with the underlying hedged exposures, and has designated such instruments as hedging transactions.   Credit risk related to the derivative financial instruments is considered to be minimal and is managed by requiring high credit standards for counterparties and periodic settlements.

Diesel Fuel Hedging

In 2001, NS began a program to hedge a portion of its diesel fuel consumption.   The intent of the program was to assist in the management of NS' aggregate risk exposure to fuel price fluctuations, which can significantly affect NS' operating margins and profitability, through the use of one or more types of derivative instruments.   No new hedges have been entered into since May 2004, and the last remaining contracts were settled in the second quarter of this year, bringing an end to this program.

The goal of this hedging strategy was to reduce the variability of fuel costs over an extended period of time while minimizing the incremental cost of hedging. The program provided that NS would not enter into any fuel hedges with a duration of more than 36 months, and that no more than 80% of NS' average monthly fuel consumption would be hedged for any month within any 36-month period. After takingta ki ng into account the effect of the hedges, diesel fuel costs represented 15% and 10%12% of NS' operating expenses in the secondthird quarters of 2006 and 2005, respectively.

NS' fuel hedging activity resulted in decreasesno reduction in diesel fuel expenses of $5 millionexpense for the secondthird quarter of 2006, andbut a decrease of $20 million for the first sixnine months, of 2006, compared with $40$41 million and $80$121 million for the same periods, respectively, in 2005.   Ineffectiveness, or the extent to which changes in the fair values of the heating oil contracts did not offset changes in the fair values of the expected diesel fuel transactions, was zero in third quarter 2006, compared with a less than a $1 million expense in the second quarter of 2006, compared with a $2 million expense in the secondthird quarter of 2005, and a $1 million expense in the first sixnine months of 2006 compared with a $3 million expense in the same period in 2005.

Interest Rate Hedging

NS manages its overall exposure to fluctuations in interest rates by issuing both fixed and floating-rate debt instruments, and by entering into interest rate hedging transactions to achieve an appropriate mix within its debt portfolio.   NS had $99$90 million or 1%, and $116 million, or 1.7%less than 2%, of its fixed rate debt portfolio, hedged at JuneSept. 30, 2006, and Dec. 31, 2005, respectively, using interest rate swaps that qualify for and are designated as fair-value hedge transactions. NS’ interest rate hedging activity resulted in decreases in interest expenses of less than $1 million and $1 millionin interest expenses for the secondthird quarters of 2006 and 2005, respectively, and $1 million and $2 million for the first sixnine months of 2006 and 2005, respectively.2005.   These swaps have been effective in hedging the changes in fair value of the related debt arising from changes in interest rates, and there has been no impact on earnings resulting from ineffectiveness associated with these derivative transactions.

Fair Values

There were no diesel fuel derivative instruments outstanding at JuneSept. 30, 2006.   The fair value of NS' diesel fuel derivative instruments at Dec. 31, 2005, was determined based upon current market values as quoted by independent third party dealers.   Fair values of interest rate swaps were determined based upon the present value of expected future cash flows discounted at the appropriate implied spot rate from the spot rate yield curve.   Fair value adjustments are noncash transactions, and accordingly, are excluded from the Consolidated Statement of Cash Flows.   "Accumulated other comprehensive loss," a component of "Stockholders' equity," included unrealized gains of zero and $20 million (pretax) at JuneSept. 30, 2006, and Dec. 31, 2005, respectively, related to the fair value of derivative fuel hedging transactions that will terminate within twelve months of the respective dates.   Gains or losses actually realized were based on the fair value of the derivative fuel hedges at the time of termination.

The asset and liability positions of NS' outstanding derivative financial instruments were as follows:

4.   Pensions and Other Postretirement Benefits

Norfolk Southern and certain subsidiaries have both funded and unfunded defined benefit pension plans covering principally salaried employees.   Norfolk Southern and certain subsidiaries also provide specified health care and death benefits to eligible retired employees and their dependents.   Under the present plans, which may be amended or terminated at NS’ option, a defined percentage of health care expenses is covered, reduced by any deductibles, co-payments, Medicare payments and, in some cases, coverage provided under other group insurance policies.

Pension and Other Postretirement Benefit Cost Components

Contributions for Pension and Other Postretirement Benefits

NS previously disclosed in its consolidated financial statements for the year ended Dec. 31, 2005, that it expected to contribute $8 million to its unfunded pension plans and $44 million to its other postretirement (medical and life insurance) benefit plans in 2006.   For the sixnine months ended JuneSept. 30, 2006, $4$6 million and $23$33 million of contributions have been made to its unfunded pension plans and its other postretirement benefit plans, respectively.   NS presently anticipates contributingthat prior to year end it will contribute an additional $4$2 million to its unfunded pension plans for a total of $8 million and an additional $21$11 million to fund its other postretirement benefit plans in 2006 for a total of $44 million.

5.  Earnings Per Share

The following table sets forth the reconciliation of the number of weighted-average shares outstanding used in the calculations of basic and diluted earnings per share:

The calculations exclude options whose exercise price exceeded the average market price of Norfolk Southern Corporation Common Stock (Common Stock) for the period as follows:   in 2006, 1 million in the third quarter, none in the second quarter and 1 million in the first quarter; and in 2005, none in the third quarter, 5 million in the second quarter and none in the first quarter.   There are no adjustments to "Net income" or “Income from continuing operations” for the diluted earnings per share computations.

6.  Comprehensive Income

NS' total comprehensive income was as follows:

For NS, “Other comprehensive loss"income (loss)" reflects primarily the fair value adjustments, net of tax, to certain derivative financial instruments.instruments and unrealized gains and losses on available-for-sale securities.

7.   Stock Purchase Program

In November 2005, NS’ Board of Directors authorized the repurchase of up to 50 million shares of Norfolk Southern Corporation Common Stock (Common Stock) through the end of 2015.   The timing and volume of any purchases will be guided by management’s assessment of market conditions and other pertinent facts.   Near-term purchases under the program are expected to be made with internally generated cash; however, future funding sources could include proceeds from the sale of commercial paper notes or the increase of long-term debt.

NS has purchased and retired 2.317.1 million shares of its common stock under this program in the secondthird quarter of 2006 at a cost of $120$730 million, of which $111$662 million was charged to retained earnings.   For the first sixnine months of 2006, NS purchased and retired 3.620.7 million shares of its common stock under this program at a cost of $186$916 million, of which $173$835 million was charged to retained earnings.

8.   Stock-Based Compensation

Under the stockholder-approved Long-Term Incentive Plan (LTIP), a committee of nonemployee directors of the Board of Directors of Norfolk Southern Corporation (Board) or the chief executive officer (if delegated such authority by the committee) may grant stock options, stock appreciation rights (SARs), restricted shares, restricted stock units and performance share units (PSUs), up to a maximum of 88,025,000 shares of Common Stock.   Of these shares, 5,000,000 were approved by the Board for issuance to non-officer participants; as a broad-based issuance, stockholder approval was not required.   In May 2005, the stockholders approved an amended LTIP which provided that 8,500,000 shares of stock previously approved for issuance under LTIP could be granted as restricted shares, restricted stock unit shares or performance shares.   Under the Board-approved Thoroughbred Stock Option Plan (TSOP), the committee may grant stock options up to a maximum of 6,000,000 shares of Common Stock.

The LTIP also permits the payment – on a current or a deferred basis and in cash or in stock – of dividend equivalents on shares of Common Stock covered by options, PSUs or restricted stock units in an amount commensurate with dividends paid on Common Stock.   Tax absorption payments also are authorized for any awards under LTIP in amounts estimated to equal the federal and state income taxes applicable to shares of Common Stock issued subject to a share retention agreement.

During the first quarter of 2006, a committee of nonemployee directors of NS’ Board granted stock options, restricted shares, restricted stock units and PSUs pursuant to the LTIP and granted stock options pursuant to the TSOP.

Accounting Method

As disclosed in Note 1, prior to the adoption of SFAS 123(R), NS applied APB Opinion 25 and related interpretations in accounting for awards made under the plans.   Accordingly, grants of PSUs, restricted shares, restricted stock units, dividend equivalents, tax absorption payments and SARs resulted in charges to net income, while grants of stock options had no effect on net income.   Under SFAS 123(R), all awards will result in charges to net income while dividend equivalents are charged to retained earnings.

Stock-based compensation was a $1 million benefit during the third quarter of 2006, but a cost of $31 million for the same period in 2005.   For the first nine months of 2006 and 2005, stock-based compensation costs were $17$100 million and $6$49 million, duringrespectively.   The total tax effect recognized in income in relation to stock-based compensation was an expense of $1 million versus a benefit of $11 million for the second quarters ofended Sept. 30, 2006 and 2005, respectively, and $101benefits of $34 million and $18 million for the first six months of 2006 and 2005, respectively.   The total tax benefit recognized in income in relation to these compensation costs was $6 million and $2 million for the quarter ended June 30, 2006 and 2005, respectively, and $35 million and $7 million for the first sixnine months of 2006 and 2005, respectively.   Compensation expense in 2006 included the immediate recognition of NS’ awards granted to retirement-eligible employees in accordance with SFAS No. 123(R).   Under APB Opinion 25 and related interpretations, such awards were amortized over the stated service period.

Stock Options

In the first quarter of 2006, 1,188,700 options were granted under the LTIP and 238,000 options were granted under the TSOP.   In each case, the grant price was $49.425, which was the fair market value of Common Stock on the date of grant, and the options have a term of ten years but may not be exercised prior to the first anniversary of the date of grant.   Holders of the options granted under LTIP receive cash dividend equivalent payments for five years commensurate with dividends paid on Common Stock.

The fair value of each option award in 2006 was measured on the date of grant using a lattice-based option valuation model.   Expected volatilities are based on implied volatilities from traded options on Common Stock and historical volatility of Common Stock.   NS uses historical data to estimate option exercises and employee terminations within the valuation model.   The average expected option life is derived from the output of the valuation model and represents the period of time that options granted are expected to be outstanding.   The average risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant.   For options granted that include dividend equivalent payments, a dividend yield of zero was used.   For purposes of pro forma information required under SFAS 123, the fair value of the option awards in 2005 was determined using the Black-Scholes option-pricing model.   The assumptions for both years are shown in the following table:

A summary of options outstanding as of JuneSept. 30, 2006, and changes during the sixnine months then ended is presented below:

The following table provides information related to options exercised.

Prior to the adoption of SFAS 123(R), NS presented tax benefits generated from tax deductions in excess of compensation costs recognized for share-based awards (excess tax benefits) as operating cash flows in the Consolidated Statement of Cash Flows.   Beginning in 2006, SFAS 123(R) requires excess tax benefits to be classified as financing cash flows.   Accordingly, “Common stock issued – net” in the Consolidated Statement of Cash Flows for the sixnine months ended JuneSept. 30, 2006, included $67$70 million of such tax benefits.

Restricted Shares and Restricted Stock Units

Restricted share and restricted stock unit grants were 664,300 in 2006, with a grant-date fair value of $49.60 and a three-year restriction period, and were 960,400 in 2005, with a grant-date fair value of $34.10 and a five-year restriction period (that may be accelerated to a three-year restriction period for the restricted shares upon achievement of specified performance measures).

A summary of the status of restricted shares and restricted stock units as of JuneSept. 30, 2006, and changes during the sixnine months then ended is presented below:

As of JuneSept. 30, 2006, there was $16$14 million and $18$15 million of total unrecognized compensation related to restricted shares and restricted stock units, respectively.   That cost is expected to be recognized over a weighted‑average period of approximately 1.72.0 years.   The total fair value of restricted shares vested and restricted stock units paid in cash during the sixnine months ended JuneSept. 30, 2006 and 2005 was $39$40 million and $2 million, respectively.

Performance Share Units

PSUs provide for awards based on achievement of certain predetermined corporate performance goals at the end of a three-year cycle.   PSU grants and average grant-date fair values were 1,163,600 and $49.425 in 2006 and 1,344,400 and $34.10 in 2005.   One-half of any PSUs earned will be paid in the form of shares of Common Stock with the other half to be paid in cash.   Shares earned and issued may be subject to share retention agreements and held by NS for up to five years.

Performance Share Unit Activity

As of JuneSept. 30, 2006, there was $50$48 million of total unrecognized compensation related to PSUs granted under the LTIP.   That cost is expected to be recognized over a weighted-average period of 1.71.4 years.   The total fair value of PSUs earned and paid in cash during the sixnine months ended JuneSept. 30, 2006 and 2005 was $34 million and $18 million, respectively.

9.    Commitments and Contingencies

Lawsuits

Norfolk Southern and certain subsidiaries are defendants in numerous lawsuits and other claims relating principally to railroad operations.   When management concludes that it is probable that a liability has been incurred and the amount of the liability can be reasonably estimated, it is accrued through a charge to earnings.   While the ultimate amount of liability incurred in any of these lawsuits and claims is dependent on future developments, in management's opinion, the recorded liability is adequate to cover the future payment of such liability and claims.   However, the final outcome of any of these lawsuits and claims cannot be predicted with certainty, and unfavorable or unexpected outcomes could result in additional accruals that could be significant to results of operations in a particular year or quarter.   Any adjustments to the recorded liability will be reflected in earnings in the periods in which such adjustments are known.

NS was involved in mass tort litigation proceedings arising out of historic flooding events that occurred in West Virginia in 2001.   In 2005, one of NS’ subsidiaries was identified as the target defendant for claims related to a specific sub-watershed.   During the first quarter, the parties reached a settlement with respect to NS’ liability in the matter.   The settlement did not have a material effect on the results of operations in the first quarter.

Casualty Claims

Casualty claims include employee personal injury and occupational claims as well as third-party claims, all exclusive of legal costs.   NS engages an independent consulting actuarial firm to aid in valuing its liability for these claims.   Job-related accidental injury and occupational claims are subject to the Federal Employers’ Liability Act (FELA), which is applicable only to railroads.   FELA’s fault-based system produces results that are unpredictable and inconsistent as compared with a no-fault workers’ compensation system.   The variability inherent in this system could result in actual costs being very different from the liability recorded.   While the ultimate amount of claims incurred is dependent on future developments, in management’s opinion, the recorded liability is adequate to cover the future payments of claims and is support ed by the most recent actuarial study.   In all cases, NS records a liability when the expected loss for the claim is both probable and estimable.

In 2005, NS recorded a liability related to the Jan. 6, 2005 derailment in Graniteville , SC.   The liability, which includes a current and long-term portion, represents NS’ best estimate based on current facts and circumstances.   The estimate includes amounts related to business property damage and other economic losses, personal injury and individual property damage claims as well as third-party response costs.   NS’ commercial insurance policies are expected to cover substantially all expenses related to this derailment above NS’ self-insured retention, including NS’ response costs and legal fees.   Accordingly, the Consolidated Balance Sheet reflectsSheets reflect a current and long-term receivable for estimated recoveries from NS’ insurance carriers.   TheExpenses in 2005 included $41 million expense recorded in 2005, including $35 million and $2 million in the first and second quarters of 2005, respectively, related to this incident, representsrepresenting NS’ retention under its insurance policies and other uninsured costs.   While it is reasonable to expect that the liability for covered losses could differ from the amount recorded, such a change would be offset by a corresponding change in the insurance receivable.   As a result, NS does not believe that it is reasonably likely that its net loss (the difference between the liability and future recoveries) will be materially different than the loss recorded in 2005.   NS expects at this time that insurance coverage is adequate to cover potential claims and settlements above its self-insurance retention.

Employee personal injury claims – The largest component of casualties and other claims expense is employee personal injury costs.   The actuarial firm engaged by NS provides quarterly studies to aid in valuing its employee personal injury liability and estimating its employee personal injury expense.   The actuarial firm studies NS’ historical patterns of reserving for claims and subsequent settlements, takingta ki ng into account relevant outside influences.   The actuary uses the results of these analyses to estimate the ultimate amount of the liability, which includes amounts for incurred but unasserted claims.   NS adjusts its liability to the actuarially determined amount on a quarterly basis.   The estimate of loss liabilities is subject to inherent limitation given the difficulty of predicting future events such as jury decisions, court interpretations or legislative changes and as such the actual loss may vary from the actuarial estimate.

Occupational claims – Occupational claims (including asbestosis and other respiratory diseases, as well as repetitive motion) are often not caused by a specific accident or event but rather result from a claimed exposure over time.   Many such claims are being asserted by former or retired employees, some of whom have not been employed in the rail industry for decades.   The actuarial firm provides an estimate of the occupational claims liability based upon NS’ history of claim filings, severity, payments and other pertinent facts.   The liability is dependent upon management’s judgments made as to the specific case reserves as well as judgments of the consulting actuarial firm in the periodic studies.   The actuarial firm’s estimate of ultimate loss includes a provision for those claims that have been incurred but not reported.   This provision is derived by analyzing industry data and projecting NS’ experience into the future as far as can be reasonably determined.   NS adjusts its liability to the actuarially determined amount on a quarterly basis.   However, it is possible that the recorded liability may not be adequate to cover the future payment of claims.   Adjustments to the recorded liability are reflected in operating expenses in the periods in which such adjustments become known.

Third-party claims – NS records a liability for third-party claims including those for highway crossing accidents, trespasser and other injuries, automobile liability, property damage and lading damage.   The actuarial firm assists with the calculation of potential liability for third-party claims, except lading damage, based upon NS’ experience including number and timing of incidents, amount of payments, settlement rates, number of open claims and legal defenses.   The actuarial estimate includes a provision for claims that have been incurred but have not yet been reported.   Each quarter NS adjusts its liability to the actuarially determined amount.   Given the inherent uncertainty in regard to the ultimate outcome of third-party claims, it is possible that future settlement costs may differ from the estimated liability recorded.

Environmental Matters

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

NS' Consolidated Balance Sheets included liabilities for environmental exposures in the amount of $57$55 million at JuneSept. 30, 2006, and $58 million at Dec. 31, 2005 (of which $12 million was accounted for as a current liability at JuneSept. 30, 2006, and Dec. 31, 2005).   At JuneSept. 30, 2006, the liability represented NS' estimate of the probable cleanup and remediation costs based on available information at 180175 known locations.   On that date, 15 sites accounted for $29 million of the liability, and no individual site was considered to be material.   NS anticipates that much of this liability will be paid out over five years; however, some costs will be paid out over a longer period.

At some of the 180175 locations, certain NS subsidiaries, usually in conjunction with a number of other parties, have been identified as potentially responsible parties by the Environmental Protection Agency (EPA) or similar state authorities under the Comprehensive Environmental Response, Compensation and Liability Act of 1980, or comparable state statutes, which often impose joint and several liability for cleanup costs.

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

The risk of incurring environmental liability – for acts and omissions, past, present and future – is inherent in the railroad business.   Some of the commodities in NS' traffic mix, particularly those classified as hazardous materials, can pose special risks that NS and its subsidiaries work diligently to minimize.   In addition, several NS subsidiaries own, or have owned, land used as operating property, or which is leased and operated by others, or held for sale.   Because environmental problems may exist on these properties that are latent or undisclosed, there can be no assurance that NS will not incur environmental liabilities or costs with respect to one or more of them, the amount and materiality of which cannot be estimated reliably at this time.   Moreover, lawsuits and claims involving these and potentially other unidentified environmental sites and matters are likely to arise from time to time.   The resulting liabilities could have a significant effect on financial condition, results of operations or liquidity in a particular year or quarter.

However, based on its assessment of the facts and circumstances now known, management believes that it has recorded the probable costs for dealing with those environmental matters of which the CorporationNS is aware.   Further, management believes that it is unlikely that any known matters, either individually or in the aggregate, will have a material adverse effect on NS' financial position, results of operations or liquidity.

On Oct. 19, 2006, the Pennsylvania Department of Environmental Protection (PDEP) commenced proceedings with the Pennsylvania Environmental Hearing Board (EHB) requesting that the EHB impose civil penalties upon NS for alleged violations of state environmental laws and regulations resulting from a discharge of sodium hydroxide that occurred as a result of the derailment of a NS train in Norwich Township, Pennsylvania, on June 30, 2006.   The PDEP’s actions seek to impose penalties of $8,890,000 for alleged past violations and $46,420 per day for alleged ongoing violations of state environmental laws and regulations.   NS believes that the monetary penalties sought by the PDEP are excessive.   Accordingly, NS intends to vigorously defend the action.   In addition, NS expects the Pennsylvania Fish and Boat Commission to impose a monetary penalty on NS for damages alleged to have been caused by this accident.   NS does not believe that the outcome of these proceedings will have a material effect on its financial condition, results of operations, or liquidity.

Insurance

NS obtains on behalf of itself and its subsidiaries insurance for potential losses for third-party liability and first-party property damages.   Specified levels of risk are retained on a self-insurance basis (up to $25 million per occurrence for bodily injury and property damage to third parties and $25 million per occurrence for property owned by NS or in NS’ care, custody or control).

Purchase Commitments

NSR had outstanding purchase commitments of approximately $324$257 million in connection with its 2006 and 2007 capital programs, including 22 locomotives in 2006 and 63 locomotives in 2007.   In addition, Norfolk Southern has committed to purchase telecommunications services totaling $12 million through 2007.programs.

Report of Independent Registered Public Accounting Firm

The Stockholders and Board of Directors

Norfolk Southern Corporation:

We have reviewed the accompanying consolidated balance sheet of Norfolk Southern Corporation and subsidiaries as of JuneSeptember 30, 2006, the related consolidated statements of income for the three-month and six-monthnine-month periods ended JuneSeptember 30, 2006 and 2005 and the related consolidated statements of cash flows for the six-monthnine-month periods ended JuneSeptember 30, 2006 and 2005.   These consolidated financial statements are the responsibility of the Company’s management.

We conducted our reviews 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 makingma ki ng inquiries of persons responsible for financial and accounting matters.   It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board ( United States ), the objective of which is the expression of an opinion regarding the financial statements taken as a whole.   Accordingly, we do not express such an opinion.

Based on our reviews, we are not aware of any material modifications that should be made to the consolidated financial statements referred to above for them to be in conformity with U.S. generally accepted accounting principles.  

As discussed in note 1 to the consolidated financial statements, effective January 1, 2006, Norfolk Southern Corporation adopted Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment.

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of Norfolk Southern Corporation and subsidiaries as of December 31, 2005, and the related consolidated statements of income, changes in stockholders’ equity and cash flows for the year then ended (not presented herein); and in our report dated February 21, 2006, we expressed an unqualified opinion on those consolidated financial statements.   In our opinion, the information set forth in the accompanying consolidated balance sheet as of December 31, 2005, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

/s/ KPMG LLP

Norfolk , Virginia

July 25,October 30, 2006

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

NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES

Management's Discussion and Analysis of Financial Condition and Results of Operations

OVERVIEW

NS’ second-quarterthird quarter results reflect a continuation ofsubstantial increases in revenues (up $238 million, or 11%), compared with the trends seen in the first quarter.   Revenues increased substantially, notwithstanding the absence of the $55 million benefit from the settlement of two rate cases in the secondthird quarter of 2005.   The increase was a result of2005, resulting from higher pricing, including increased fuel surcharges, as well as traffic volume growth.   High demand for rail freight transportation continued, which coupled with constrained capacity for other modes of transport and the fluidity of the NS network, enabled NS to continue to raise rates and handle additional volume.was flat.   Operating expenses rose $153$51 million, largely because of higher diesel fuel prices and volume-related increases, although casualty expenses also rose.prices.   Despite the 10%3% rise in operating expenses, the operating ratio, a measure of the operating revenues consumed by operating expenses, improved 5.4 percentage points to 71.7%70.1%, and income from railway operations rose $85$187 million, or 14%.35%, compared with the third quarter of 2005.

StrongHigher operating resultsincome for the year to date translated into significantly increased cash flows, which, combined with substantial proceeds from employee stock option exercises earlier in the year, were used to fund increased capital expenditures, purchase and retire common stock, fund increased capital expenditures, increase dividends and pay maturing debt and resulted in adebt.   At Sept. 30, 2006, the cash and short-term investment balance of $1.5 billion at June 30, 2006.   Lookingwas $803 million.   Loo ki ng ahead, NS expects revenue increases to moderate, reflecting tempered volume growth to remain consistentand comparison with current levels for the remainder of the year, subject to the effect that prolonged high energy prices and increased interest rates could have on the economy in general.a strong fourth quarter 2005.   NS plans to continue its focus on improving service levels and maintaining an aggressive pricing strategy as business is renewed.a market-based approach to pricing.

In the third quarter, NS purchased and retired 17.1 million shares of common stock at a total cost of $730 million under the share repurchase program approved by the Board of Directors on Nov. 22, 2005.   Under the program, the Board has authorized the repurchase of up to 50 million shares of NS common stock through the end of 2015.   For the first nine months, 20.7 million shares of common stock were been purchased and retired at a total cost of $916 million.

SUMMARIZED RESULTS OF OPERATIONS

Second-quarterThird-quarter net income was $375$416 million in 2006, $49$115 million, belowor 38%, above the $424$301 million for the secondthird quarter of 2005.   Results in 2005, included a $96 million increase in net income related to state tax law changes and a $24 million increase related to the settlement of two coal rate cases.   The absence of these two items, which together increased 2005 net income by $120 million, was offset in partdriven by higher income from railway operations in 2006.which rose $187 million, or 35% , compared with last year.   Railway operating revenues increased $238 million, or 11%, reflecting higher rates, (includingincluding fuel surcharges) as well as increased traffic volumes.surcharges.   Railway operating expenses rose $153$51 million, or 10%3%, largely because of increased diesel fuel prices, and to a lesser extent higher volume-related expenses and increased costs for casualties and other claims.   Income taxes rose primarily due to the expected phase-out of certain tax credits because of high oil prices, as compared to the second quarter of 2005, which included $16 million more net benefit from such credits.prices.

For the first sixnine months net income was $680$1,096 million in 2006 compared with $618$919 million in 2005.   The $62$177 million improvement in net income was driven by highera $420 million increase in income from railway operations, that was offset in part bynotwithstanding the absence of the favorable effects from the$96 million income tax benefit recorded in 2005 because of Ohio tax law changes and the rate case settlements in 2005.changes.   Railway operating revenues increased $580$818 million, or 14%13%, reflecting higher rates, (includingincluding fuel surcharges)surcharges, and increased traffic volumes.   Railway operating expenses for the first six months rose $347$398 million, or 11%8%, largely because of higher fuel prices, increased compensation and benefit costs higher fuel prices and increased volume-related expenses.   As with the quarter, higher income taxes reflected the expected phase-out of certain tax credits.

DETAILED RESULTS OF OPERATIONS

Railway Operating Revenues

Second-quarterThird-quarter railway operating revenues were $2.4 billion in 2006, up $238 million, or 11%, compared with the secondthird quarter of 2005.   For the first sixnine months, railway operating revenues were $4.7$7.1 billion in 2006, up $580$818 million, or 14%13%, compared with the first sixnine months of 2005.   Revenues for the second quarter and first sixnine months of 2005 included the $55 million of additional coal revenue related to the settlement of thetwo coal rate cases, which, net of associated compensation expenses and income taxes, increased second-quarter 2005 net income by $24 million.   cases.

As shown in the following table, the increases were the result of increased average revenues per unit, including fuel surcharges, and higher traffic volume.

Traffic volume increased 4%was flat in the secondthird quarter, as higher intermodal, metals/construction, and year-to-date,agriculture/consumer products/government volume offset lower automotive and coal shipments.   Year-to-date traffic volume increased 3%, principally due to higher intermodal metals/ construction and coalmetals/construction shipments.   Revenue per unit increased 7%11% for the secondthird quarter and 9%10% year-to-date notwithstanding the(last year included a $55 million benefit recorded in second quarter 2005 from the settlement of the rate cases in 2005.   Approximately 60%cases).   About 40% of the remaining revenue per unit increase for the quarter is related to higher fuel surcharges.   In the fourth quarter, NS expects the year-over-year increase attributable to fuel surcharges to be lower as oil prices are currently expected to be comparable to those of the fourth quarter of 2005.   Fuel surcharge provisions presently cover approximately 90%92% of total revenues.   On April 24, 2006, Norfolk SouthernNS announced that it was revising its base rates and applicable fuel surchargessurcharge program for non-intermodal traffic originating and moving on Norfolk Southern-issuedNS-issued tariffs and public quotes issued on or after July 1, 2006.   While the mechanics of the new fuel surcharge will beare generally the same as the current fuel surcharge, the trigger price will bewas raised from $23 per barrel of West Texas Intermediate (WTI) Crude Oil to $64 per barrel and the percentage by which the line haul rate is increased when oil exceeds the trigger price will bewas decreased from 0.4% to 0.3% for each dollar or portion thereof in excess of the trigger price.   Tariff prices and public quotes have been adjusted to reflect this change.   The fuel surcharge is based on the monthly average price of WTI in the second calendar month prior to the month in which the fuel surcharge is applied.   The traffic moving under these tariffs and public quotes comprises approximately 6% of Norfolk Southern’sNS’s total revenue base.

Revenues, carloads and average revenue per unit for the commodity groups were as follows:follows (prior period amounts for the chemicals, agriculture/consumer products/government and paper/clay/forest groups have been reclassified to conform to the current year presentation):