UNITED STATES SECURITIES AND EXCHANGE COMMISSION	
Washington, D.C. 20549	
 
FORM 10-K	
 	 	
(X)	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES	
 	EXCHANGE ACT OF 1934	
 	For the fiscal year ended DECEMBER 31, 2002	
 	 	
( )	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 1-8339	

 
NORFOLK SOUTHERN CORPORATION	
(Exact name of registrant as specified in its charter)	
Virginia	52-1188014	
(State or other jurisdiction of	(IRS Employer Identification No.)	
incorporation or organization)	 	
 	 	
Three Commercial Place	 	
Norfolk, Virginia	23510-2191	
(Address of principal executive offices)	Zip Code	
 	 	
Registrant's telephone number, including area code	(757) 629-2680	
 	 	
No Change	
(Former name, former address and former fiscal year, if changed since last report.)	
 	
Securities registered pursuant to Section 12(b) of the Act:	
 	
Title of each Class	Name of each exchange	
Norfolk Southern Corporation	on which registered	
Common Stock (Par Value $1.00)	New York Stock Exchange	
 	 	
Securities registered pursuant to Section 12(g) of the Act: NONE	
 	
Indicate by check mark whether the registrant (1) has filed all report 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.          (X)	
 	
The number of shares outstanding of each of the registrant's classes of common stock, as of January 31, 2003:	
389,057,174 (excluding 21,169,125 shares held by registrant's consolidated subsidiaries).	
 	
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).  Yes  (X)   No  (  )	
 	
The aggregate market value of the voting common equity held by nonaffiliates as of June 28, 2002 was $9,079,736,767 (based on the closing price as quoted on the New York Stock Exchange on that date).	

DOCUMENTS INCORPORATED BY REFERENCE:

Portions of the Registrant's definitive proxy statement to be filed electronically pursuant to Regulation 14A not later than 120 days after the end of the fiscal year, are incorporated by reference in Part III.

 

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TABLE OF CONTENTS

NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES (NS)

 	 	Page	
 	 	 	
Part I.	1.    Business	K3	
 	2.    Properties	K3	
 	3.    Legal Proceedings	K12	
 	4.    Submission of Matters to a Vote of Security Holders	K12	
 	       Executive Officers of the Registrant	 	
 	 	 	
Part II.	5.    Market for Registrant's Common Stock and Related Stockholders Matters	K14	
 	6.    Selected Financial Data	K15	
 	7.    Management's Discussion and Analysis of Financial Condition and Results	 	
 	       of Operations	K16	
 	7A. Quantitative and Qualitative Disclosures About Market Risk	K35	
 	8.    Financial Statements and Supplementary Data	K36	
 	9.    Changes in and Disagreements with Accountants on Accounting and	 	
 	       Financial Disclosure	K66	
 	 	 	
Part III.	10. Directors and Executive Officers of the Registrant	K66	
 	11. Executive Compensation	K66	
 	12. Security Ownership of Certain Beneficial Owners and Management	K66	
 	13. Certain Relationships and Related Transactions	K69	
 	 	 	
 	14.   Controls and Procedures	K69	
 	 	 	
Part IV.	15. Exhibits, Financial Statement Schedule and Reports on Form 8-K	K70	
 	        Index to Consolidated Financial Statement Schedule	 	
 	 	 	
 	Power of Attorney	K76	
 	 	 	
 	Signatures	K76	
 	 	 	
 	Certifications of CEO and CFO	K78	
 	 	 	
 	Exhibit Index	K81	

 

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PART I

NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES (NS)

 

Item 1. Business. and Item 2. Properties.

GENERAL - Norfolk Southern Corporation (Norfolk Southern) was incorporated on July 23, 1980, under the laws of the Commonwealth of Virginia. On June l, 1982, Norfolk Southern acquired control of two major operating railroads, Norfolk and Western Railway Company (NW) and Southern Railway Company (Southern) in accordance with an Agreement of Merger and Reorganization dated as of July 31, 1980, and with the approval of the transaction by the Interstate Commerce Commission (ICC) (now the Surface Transportation Board [STB]).

Effective Dec. 31, 1990, Norfolk Southern transferred all the common stock of NW to Southern, and Southern's name was changed to Norfolk Southern Railway Company (Norfolk Southern Railway). Effective Sept. 1, 1998, NW was merged with and into Norfolk Southern Railway. As of Dec. 31, 2002, all the common stock of Norfolk Southern Railway and 22.5% of its voting preferred stock (resulting in 95.2% voting control) was owned directly by Norfolk Southern.

Through a jointly owned entity, Norfolk Southern and CSX Corporation (CSX) own the stock of Conrail Inc., which owns the major freight railroad in the Northeast. Norfolk Southern has a 58% economic and 50% voting interest in the jointly owned entity. See also the discussion concerning operation of a portion of Conrail's rail assets, below.

On March 28, 1998, Norfolk Southern closed the sale of its motor carrier company, North American Van Lines, Inc. (NAVL) (see "Discontinued Operations" and Note 17). NAVL's results are presented as "Discontinued operations" in the accompanying financial information.

Norfolk Southern makes available free of charge through its website, www.nscorp.com, its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports as soon as reasonably practicable after such material is electronically filed with or furnished to the Securities and Exchange Commission.

Unless indicated otherwise, Norfolk Southern and its subsidiaries are referred to collectively as NS.

OPERATION OF A PORTION OF THE CONRAIL RAIL ASSETS - On June 1, 1999, Norfolk Southern and CSX, through their respective railroad subsidiaries, began operating separate portions of Conrail's rail routes and assets. Substantially all such assets are owned by two wholly owned subsidiaries of Consolidated Rail Corporation (CRC); one of those subsidiaries, Pennsylvania Lines LLC (PRR), has entered into various operating and leasing arrangements, more particularly described in Note 2, with Norfolk Southern Railway. Certain rail assets (Shared Assets Areas) still are owned by CRC, which operates them for joint and exclusive use by Norfolk Southern Railway and the rail subsidiary of CSX.

Operation of the PRR routes and assets increased the size of the system over which Norfolk Southern Railway provides service by nearly 50% and afforded access to the New York metropolitan area, to

much of the Northeast and to most of the major East Coast ports north of Norfolk, Virginia. Also, leasing arrangements with PRR augmented Norfolk Southern Railway's locomotive, freight car and intermodal fleet.

RAILROAD OPERATIONS - As of Dec. 31, 2002, NS' railroads operated approximately 21,500 miles of road in the states of Alabama, Delaware, Florida, Georgia, Illinois, Indiana, Iowa, Kentucky, Louisiana, Maryland, Michigan, Mississippi, Missouri, New Jersey, New York, North Carolina, Ohio, Pennsylvania, South Carolina, Tennessee, Virginia, West Virginia, the District of Columbia and in the Province of Ontario, Canada. The miles operated were as follows:

 

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 	Mileage Operated as of Dec. 31, 2002	
 	 	 	 	 	 	 	 	 	 	 	
 	 	 	 	 	 	Passing	 	 	 	 	
 	 	 	 	 	 	Track,	 	 	 	 	
 	 	Miles of Road	 	Second and Other Main Track	 	Crossovers and  Turnouts	 	Way and Yard Switching	 	Total	
 	 	 	 	 	 	 	 	 	 	 	
Owned	 	11,745	 	1,384	 	1,625	 	5,969	 	20,723	
Operated under lease,	 	 	 	 	 	 	 	 	 	 	
  contract or trackage rights	 	9,813	 	3,441	 	891	 	3,647	 	17,792	
      Total	 	21,558	 	4,825	 	2,516	 	9,616	 	38,515	

In addition to the lines leased from Conrail previously discussed, NS' railroads have major leased lines between Cincinnati, Ohio, and Chattanooga, Tennessee, and operate over trackage owned by North Carolina Railway Company (NCRR). The Cincinnati-Chattanooga lease, covering about 335 miles of road, expires in 2026, and is subject to an option to extend the lease for an additional 25 years, at terms to be agreed upon. The trackage rights over NCRR cover approximately 315 miles of road under an agreement through 2014 with the right to renew for two additional 15-year periods.

NS' railroads carry raw materials, intermediate products and finished goods primarily in the Southeast, East and Midwest, and via interchange with other rail carriers, to and from the rest of the United States and parts of Canada. They also transport overseas freight through several Atlantic and Gulf Coast ports. Atlantic ports served by NS include: Norfolk, Virginia; Morehead City, North Carolina; Charleston, South Carolina; Savannah and Brunswick, Georgia; Jacksonville, Florida; Baltimore, Maryland; Philadelphia, Pennsylvania/Camden, New Jersey; Wilmington, Delaware; and the Ports of New York/New Jersey. Gulf Coast ports served include Mobile, Alabama, and New Orleans, Louisiana.

The lines of NS' railroads reach most of the larger industrial and trading centers of the Southeast, Northeast, Mid-Atlantic region and Midwest. Chicago, Norfolk, Detroit, Atlanta, Metropolitan New York City, Jacksonville, Kansas City (Missouri), Baltimore, Buffalo, Charleston, Cleveland, Columbus, Philadelphia, Pittsburgh, Toledo, Greensboro, Charlotte and Savannah are among the leading centers originating and terminating freight traffic on the system. In addition, haulage arrangements with connecting carriers allow NS' railroads to provide single-line service to and from additional markets, including haulage provided by Florida East Coast Railway Company to serve southern and eastern Florida, including the port cities of Miami, West Palm Beach and Fort Lauderdale; and haulage provided by The Kansas City Southern Railway Company to provide transcontinental intermodal service via a connection with the Burlington Northern and Santa Fe Railway Company. Service is provided to New England, including the Port of Boston, via haulage, trackage rights and interline arrangements with Canadian Pacific Railway Company and Guilford Transportation Industries. The system's lines also reach many individual industries, electric generating facilities, mines (in western Virginia, eastern Kentucky, southern and northern West Virginia and western Pennsylvania), distribution centers, transload facilities and other businesses located in smaller communities in its service area. The traffic corridors carrying the heaviest volumes of freight include those from the New York City area to Chicago (via Allentown and Pittsburgh); Chicago to Jacksonville (via Cincinnati, Chattanooga and Atlanta); Appalachian coal fields of Virginia, West Virginia and Kentucky, to Norfolk and Sandusky, Ohio; Cleveland to Kansas City; and Knoxville to Chattanooga. Chicago, Memphis, Sidney/Salem, New Orleans, Kansas City, Buffalo, St. Louis and Meridian are major gateways for interterritorial system traffic.

Triple Crown Operations - Until April 1993, NS' intermodal subsidiary, Triple Crown Services, Inc. (TCS), offered intermodal service using RoadRailer® equipment and domestic containers. RoadRailer® units are enclosed vans that can be pulled over highways in tractor-trailer configuration and over the rails by locomotives. On April 1, 1993, the business, name and operations of TCS were transferred to Triple Crown Services Company (TCSC), a partnership in which subsidiaries of NS and Conrail are equal partners. From April 1, 1993, to June 1, 1999, the revenues of TCSC were not consolidated with the results of NS; however, effective June 1, 1999, NS gained control of TCSC and, therefore, now includes TCSC's results in its

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consolidated financial statements. TCSC offers door-to-door intermodal service using RoadRailer® equipment in major traffic corridors, including those between the Midwest and the Northeast, the Midwest and the Southeast and the Midwest and Texas/Mexico.

The following table sets forth certain statistics relating to NS railroads' operations for the past 5 years, including operations in the Northern Region that commenced June 1, 1999:

Rail Operating Statistics	
 	 	
 	Year Ended Dec. 31,	
 	2002	2001	2000	1999	1998	
 	 	 	 	 	 	
Revenue ton miles (billions)	179  	182   	197   	167   	135   	
Freight train miles traveled (millions)	72.6  	70.0   	74.4   	61.5   	53.0   	
Revenue per ton mile	$0.0350  	$0.0339   	$0.0312   	$0.0315   	$0.0316   	
Revenue ton miles per	 	 	 	 	 	
  man-hour worked	3,067  	3,023   	2,888   	2,577   	2,659   	
Percentage ratio of railway operating	 	 	 	 	 	
  expenses to railway operating revenues	81.5%	83.7%	89.7%	86.3%	75.3%	

RAILWAY OPERATING REVENUES - NS' total railway operating revenues were $6.3 billion in 2002. Revenue, shipments and revenue yield by principal railway operating revenue sources for the past five years are set forth in the following table.

Principal Sources of Railway Operating Revenues	
 	 	
 	Year Ended Dec. 31,	
 	 	 	 	 	 	 	 	 	 	 	
 	 	2002	 	2001	 	2000	 	1999	 	1998	
(Revenues in millions, shipments in thousands, revenue yield in dollars per shipment)	
 	 	 	 	 	 	 	 	 	 	 	
COAL	 	 	 	 	 	 	 	 	 	 	
  Revenues	$	1,441   	$	1,521   	$	1,435   	$	1,322   	$	1,252   	
    % of total revenues	 	23%	 	25%	 	23%	 	25%	 	29%	
  Shipments	 	1,610   	 	1,695   	 	1,687   	 	1,519   	 	1,310   	
    % of total shipments	 	24%	 	26%	 	25%	 	25%	 	27%	
  Revenue Yield	$	895   	$	897   	$	850   	$	870   	$	955   	
 	 	 	 	 	 	 	 	 	 	 	
AUTOMOTIVE	 	 	 	 	 	 	 	 	 	 	
  Revenues	$	961   	$	885   	$	921   	$	746   	$	577   	
    % of total revenues	 	15%	 	14%	 	15%	 	14%	 	13%	
  Shipments	 	662   	 	622   	 	692   	 	611   	 	487   	
    % of total shipments	 	10%	 	9%	 	10%	 	10%	 	10%	
  Revenue Yield	$	1,450   	$	1,423   	$	1,331   	$	1,220   	$	1,186   	
 	 	 	 	 	 	 	 	 	 	 	
CHEMICALS	 	 	 	 	 	 	 	 	 	 	
  Revenues	$	769   	$	752   	$	756   	$	641   	$	492   	
    % of total revenues	 	12%	 	12%	 	13%	 	12%	 	12%	
  Shipments	 	434   	 	432   	 	453   	 	394   	 	315   	
    % of total shipments	 	6%	 	6%	 	6%	 	7%	 	7%	
  Revenue Yield	$	1,773   	$	1,742   	$	1,668   	$	1,627   	$	1,559   	

 

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Principal Sources of Railway Operating Revenues (continued)	
 	 	
 	Year Ended Dec. 31,	
 	 	 	 	 	 	 	 	 	 	 	
 	 	2002	 	2001	 	2000	 	1999	 	1998	
(Revenues in millions, shipments in thousands, revenue yield in dollars per shipment)	
 	 	 	 	 	 	 	 	 	 	 	
METALS/CONSTRUCTION	 	 	 	 	 	 	 	 	 	 	
  Revenues	$	692   	$	674   	$	689   	$	567   	$	375   	
    % of total revenues	 	11%	 	11%	 	11%	 	11%	 	9%	
  Shipments	 	716   	 	703   	 	757   	 	587   	 	372   	
    % of total shipments	 	11%	 	11%	 	11%	 	10%	 	8%	
  Revenue Yield	$	966   	$	959   	$	911   	$	965   	$	1,008   	
 	 	 	 	 	 	 	 	 	 	 	
AGR./CONSUMER	 	 	 	 	 	 	 	 	 	 	
  PRODUCTS/GOVT.	 	 	 	 	 	 	 	 	 	 	
  Revenues	$	623   	$	603   	$	609   	$	539   	$	468   	
    % of total revenues	 	10%	 	10%	 	10%	 	11%	 	11%	
  Shipments	 	507   	 	509   	 	525   	 	489   	 	441   	
    % of total shipments	 	8%	 	8%	 	8%	 	8%	 	9%	
  Revenue Yield	$	1,228   	$	1,185   	$	1,160   	$	1,103   	$	1,063   	
 	 	 	 	 	 	 	 	 	 	 	
PAPER/CLAY/FOREST	 	 	 	 	 	 	 	 	 	 	
  Revenues	$	603   	$	612   	$	630   	$	578   	$	535   	
    % of total revenues	 	10%	 	10%	 	10%	 	11%	 	13%	
  Shipments	 	438   	 	450   	 	491   	 	465   	 	445   	
    % of total shipments	 	6%	 	7%	 	7%	 	8%	 	9%	
  Revenue Yield	$	1,378   	$	1,357   	$	1,285   	$	1,243   	$	1,202   	
 	 	 	 	 	 	 	 	 	 	 	
INTERMODAL	 	 	 	 	 	 	 	 	 	 	
  Revenues	$	1,181   	$	1,123   	$	1,119   	$	849   	$	555   	
    % of total revenues	 	19%	 	18%	 	18%	 	16%	 	13%	
  Shipments	 	2,354   	 	2,214   	 	2,242   	 	1,896   	 	1,443   	
    % of total shipments	 	35%	 	33%	 	33%	 	32%	 	30%	
  Revenue Yield	$	502   	$	507   	$	499   	$	448   	$	385   	
 	 	 	 	 	 	 	 	 	 	 	
TOTALS	 	 	 	 	 	 	 	 	 	 	
  Railway Operating  Revenues	$	6,270   	$	6,170   	$	6,159   	$	5,242   	$	4,254   	
  Railway Shipments	 	6,721   	 	6,625   	 	6,847   	 	5,961   	 	4,813   	
  Railway Revenue Yield	$	933   	$	931   	$	900   	$	879   	$	884   	

COAL TRAFFIC - Coal, coke and iron ore -- most of which is bituminous coal -- is NS' railroads' largest commodity group as measured by revenues. The railroads handled a total of 170.4 million tons in 2002, most of which originated on NS' lines in West Virginia, Virginia, Pennsylvania and Kentucky. Revenues from coal, coke and iron ore accounted for about 23% of NS' total railway operating revenues in 2002.

Coal, coke and iron ore tonnage by market for the past five years are set forth in the following table.

 

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Coal, Coke and Iron Ore Tonnage by Market	
 	 	
 	Year Ended December 31,	
 	2002	 	2001	 	2000	 	1999	 	1998	
 	(tons in thousands)	
 	 	 	 	 	 	 	 	 	 	
Utility	127,747	 	132,325	 	119,284	 	107,381	 	83,225	
Export	11,342	 	13,872	 	19,845	 	18,373	 	24,453	
Steel	21,578	 	20,457	 	25,003	 	21,399	 	18,236	
Industrial	9,733	 	11,377	 	10,781	 	10,348	 	8,382	
 	170,400	 	178,031	 	174,913	 	157,501	 	134,296	

Total coal handled through all system ports in 2002 was 32 million tons. Of this total, 10 million tons (including coastwise traffic) moved through Lamberts Point, Virginia, 3 million tons moved through the Baltimore Terminal, 11 million tons moved to various docks on the Ohio River, and 8 million tons moved to various Lake Erie ports. Other than coal for export, virtually all coal handled by NS' railroads was terminated in states east of the Mississippi River.

See the discussion of coal traffic, by type of coal, in Part II, Item 7, "Management's Discussion and Analysis."

GENERAL Merchandise Traffic - General merchandise traffic is composed of five major commodity groupings:  automotive; chemicals; metals and construction; agriculture, consumer products and government; and paper, clay and forest products. The automotive group includes finished vehicles for BMW, Daimler Chrysler, Ford Motor Company, General Motors, Honda, Isuzu, Jaguar, Land Rover, Mazda, Mercedes-Benz, Mitsubishi, Nissan, Saab, Subaru, Suzuki, Toyota and Volkswagen, and auto parts for Ford Motor Company, General Motors, Mercedes-Benz and Toyota. The chemicals group includes sulfur and related chemicals, petroleum products, chlorine and bleaching compounds, plastics, rubber, industrial chemicals, chemical wastes and municipal wastes. The metals and construction

group includes steel, aluminum products, machinery, scrap metals, cement, aggregates, bricks and minerals. The agriculture, consumer products and government group includes soybeans, wheat, corn, fertilizer, animal and poultry feed, food oils, flour, beverages, canned goods, sweeteners, consumer products and items for the military. The paper, clay and forest products group includes lumber and wood products, pulpboard and paper products, woodfibers, woodpulp, scrap paper and clay. General merchandise carloads handled in 2002 were 2.76 million, compared with 2.72 million handled in 2001, an increase of 2%.

In 2002, 134 million tons of general merchandise freight, or approximately 67% of total general merchandise tonnage handled by NS, originated online. The balance of general merchandise traffic was received from connecting carriers at interterritorial gateways. The principal interchange points for NS-received traffic included Chicago, Memphis, New Orleans, Cincinnati, Kansas City, Detroit, Hagerstown, St. Louis/East St. Louis and Louisville.

See the discussion of general merchandise rail traffic by commodity group in Part II, Item 7, "Management's Discussion and Analysis."

INTERMODAL TRAFFIC - The intermodal market consists of shipments moving in trailers, domestic and international containers, and Roadrailer® equipment. These shipments are handled on behalf

of intermodal marketing companies, international steamship lines, truckers and other shippers. Intermodal units handled in 2002 were 2.35 million, compared with 2.21 million handled in 2001,

an increase of 6%.

See the discussion of intermodal traffic in Part II, Item 7, "Management's Discussion and Analysis."

 

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FREIGHT RATES - In 2002, NS' railroads continued their reliance on private contracts and exempt price quotes as their predominant pricing mechanisms. Thus, a major portion of NS' railroads' freight business is not currently economically regulated by the government. In general, market forces have been substituted for government regulation and now are the primary determinant of rail service prices. However, in 2002 there were significant coal movements moving under common carrier (tariff) rates which had previously moved under rates contained in transportation contracts. Beginning Jan. 1, 2002, coal moving to Duke Energy's (Duke) Belew's Creek, Allen, Buck and Dan River generating stations moved under common carrier rates and beginning April 1, 2002, coal moving to Carolina Power and Light's (CP&L) Hyco and Mayo plants moved under common carrier rates. Duke and CP&L have challenged the reasonableness of these common carrier rates in proceedings currently pending before the Surface Transportation Board.

In 2002, NS' railroads were found by the STB not to be "revenue adequate" based on results for the year 2001. A railroad is "revenue adequate" under the applicable law when its return on net investment exceeds the rail industry's composite cost of capital. This determination is made pursuant to statutory requirement and does not adversely impact NS' liquidity or capital resources.

PASSENGER OPERATIONS - Regularly scheduled passenger trains are operated by Amtrak on NS' lines between Alexandria and New Orleans, and between Greensboro and Selma, North Carolina. Commuter trains are operated on the NS line between Manassas and Alexandria in accordance with contracts with two transportation commissions of the Commonwealth of Virginia. NS also leases the Chicago to Manhattan, Illinois, line to the Commuter Rail Division of the Regional Transportation Authority of Northeast Illinois. Since June 1, 1999, Norfolk Southern Railway has operated former Conrail lines on which Amtrak conducts regularly scheduled passenger operations between Chicago, Illinois, and Detroit, Michigan, and between Chicago and Harrisburg, Pennsylvania.

Also since June 1, 1999, through its operation of PRR's routes, Norfolk Southern Railway has been providing freight service over former Conrail lines with significant ongoing Amtrak and commuter passenger operations, and is conducting freight operations over some trackage owned by Amtrak or by New Jersey Transit, the Southeastern Pennsylvania Transportation Authority, Metro-North Commuter Railway Company and Maryland DOT. Finally, passenger operations are conducted either by Amtrak or by the commuter agencies over trackage owned by Pennsylvania Lines LLC, or by Conrail in the Shared Assets Areas.

NONCARRIER OPERATIONS - NS' noncarrier subsidiaries engage principally in the acquisition, leasing and management of coal, oil, gas and minerals; the development of commercial real estate; telecommunications; and the leasing or sale of rail property and equipment. In 2002, no such noncarrier subsidiary or industry segment grouping of noncarrier subsidiaries met the requirements for a reportable business segment set forth in Statement of Financial Accounting Standards No. 131.

 

RAILWAY PROPERTY

The NS railroad system extends across 22 states and portions of Canada. The railroad infrastructure makes the company very capital intensive with total property of approximately $11 billion and investment in Conrail of approximately $6 billion.

 

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Capital Expenditures - Capital expenditures for road, equipment and other property for the past five years were as follows (including capitalized leases):

 	Capital Expenditures	
 	 	2002	 	2001	 	2000	 	1999	 	1998	
 	($ in millions)	
Road	$	519	$	505	$	557	$	559	$	612	
Equipment	 	174	 	233	 	146	 	349	 	442	
Other property	 	2	 	8	 	28	 	4	 	6	
  Total	$	695	$	746	$	731	$	912	$	1,060	

Capital spending and maintenance programs are and have been designed to assure the ability to provide safe, efficient and reliable transportation services. For 2003, NS has budgeted $798 million of capital spending. See the discussion following "Cash used for investing activities," in Part II, Item 7, "Management's Discussion and Analysis."

Equipment - As of Dec. 31, 2002, NS owned or leased the following units of equipment:

 	Number of Units	Capacity	
 	 	Owned*	 	Leased**	 	Total	of Equipment	
 	 	 	 	 	 	 	 	 	
Locomotives:	 	 	 	 	 	 	(Horsepower)	
  Multiple purpose	 	2,259	 	1,001	 	3,260	 	10,959,200	
  Switching	 	105	 	102	 	207	 	302,800	
  Auxiliary units	 	59	 	18	 	77	 	0	
     Total locomotives	 	2,423	 	1,121	 	3,544	 	11,262,000	
 	 	 	 	 	 	 	 	 	
Freight cars:	 	 	 	 	 	 	(Tons)	
  Hopper	 	18,568	 	5,036	 	23,604	 	2,486,500	
  Box	 	17,184	 	4,438	 	21,622	 	1,687,530	
  Covered hopper	 	9,956	 	3,097	 	13,053	 	1,423,216	
  Gondola	 	27,619	 	11,077	 	38,696	 	4,148,610	
  Flat	 	3,420	 	1,485	 	4,905	 	363,566	
  Caboose	 	169	 	57	 	226	 	0	
  Other	 	3,375	 	0	 	3,375	 	172,247	
     Total freight cars	 	80,291	 	25,190	 	105,481	 	10,281,669	
 	 	 	 	 	 	 	 	 	
Other:	 	 	 	 	 	 	 	 	
  Work equipment	 	4,619	 	1,584	 	6,203	 	 	
  Vehicles	 	3,529	 	1,063	 	4,592	 	 	
  Highway trailers and	 	 	 	 	 	 	 	 	
    containers	 	881	 	7,397	 	8,278	 	 	
  RoadRailer®	 	5,570	 	--	 	5,570	 	 	
  Miscellaneous	 	1,431	 	10,185	 	11,616	 	 	
     Total other	 	16,030	 	20,229	 	36,259	 	 	
 	 	 	 	 	 	 	 	 	
* Includes equipment leased to outside parties and equipment subject to equipment trusts, conditional sale agreements and capitalized leases.	
** Includes locomotives, freight cars and units of other equipment leased from PRR.	

 

K9

The following table indicates the number and year built for locomotives and freight cars owned at Dec. 31, 2002.

 	Year Built	
 	 	 	 	 	 	1993-	1988-	1987 &	 	
 	2002	2001	2000	1999	1998	1997	1992	Before	Total	
Locomotives:	 	 	 	 	 	 	 	 	 	
  No. of units	--   	160   	60   	147   	119   	420   	257   	1,260   	2,423   	
  % of fleet	--%	7%	2%	6%	5%	17%	11%	52%	100%	
 	 	 	 	 	 	 	 	 	 	
Freight cars:	 	 	 	 	 	 	 	 	 	
  No. of units	--   	--   	112   	515   	1,566   	6,048   	6,098   	65,952   	80,291   	
  % of fleet	--%	--%	--%	1%	2%	7%	8%	82%	100%	

As of Dec. 31, 2002, the average age of the locomotive fleet was 16.1 years. During 2002, 52 locomotives, the average age of which was 28.2 years, were retired. The average age of the freight car fleet at Dec. 31, 2002, was 25.9 years. During 2002, 3,013 freight cars were retired.

Since 1988, about 29,000 coal cars have been rebodied. As a result, the remaining serviceability of the freight car fleet is greater than may be inferred from the high percentage of freight cars built in earlier years.

 	Annual Average Bad Order Ratio	
 	2002	2001	2000	1999	1998	
 	 	 	 	 	 	
Freight cars (excluding cabooses):	 	 	 	 	 	
     NS Rail	8.1%	6.9%	5.7%	3.7%	4.1%	
Locomotives:	 	 	 	 	 	
      NS Rail	6.3%	5.8%	5.5%	5.3%	4.3%	

Ongoing freight car and locomotive maintenance programs are intended to ensure the highest standards of safety, reliability, customer satisfaction and equipment marketability. In past years, the freight car bad order ratio reflected the storage of certain types of cars that were not in high demand. The ratio rose in 2000, 2001 and 2002 as a result of decreased maintenance activity. A review began in 2002 to address several hundred unserviceable, overage and commercially obsolete freight cars, which will likely result in their disposition in 2003. The locomotive bad order ratio includes units out of service for required inspections every 92 days and program work such as overhauls. The increase in the locomotive bad order ratio in 1999 was primarily due to the maintenance requirements of units being rented to meet short-term needs and to weather-related failures. The ratio rose slightly in 2000 as maintenance activities were curtailed in response to a slowing economy. The elevated ratio through 2001 and 2002 reflected units out of service related to the resumption of maintenance and modification activities.

Track Maintenance - Of the approximately 38,500 total miles of track operated, NS had responsibility for maintaining about 31,000 miles of track with the remainder being operated under trackage rights. Over 75% of the main line trackage (including first, second, third and branch main tracks, all excluding trackage rights) has rail ranging from 131 to 155 pounds per yard with the standard installation currently at 141 pounds per yard. Approximately 40% of NS lines carried 20 million or more gross tons per track mile.

 

K10

The following table summarizes several measurements regarding NS' track roadway additions and replacements during the past five years:

 	2002	2001	2000	1999	1998	
 	 	 	 	 	 	
Track miles of rail installed	235	254	390	403	429	
Miles of track surfaced	5,270	3,836	3,687	5,087	4,715	
New crossties installed (millions)	2.8	1.5	1.5	2.3	2.0	

Microwave System - The NS microwave system, consisting of approximately 7,282 radio route miles, 442 active stations and 4 passive repeater stations, provides communications between most operating locations. The microwave system is used primarily for voice communications, VHF radio control circuits, data and facsimile transmissions, traffic control operations and AEI data transmissions.

Traffic Control - Of a total of 21,500 route miles operated by NS, excluding trackage rights over foreign lines, 11,511 miles are signalized, including 8,546 miles of centralized traffic control (CTC) and 2,965 miles of automatic block signals. Of the 8,546 miles of CTC, 1,895 miles are controlled by data radio originating at 148 base station radio sites.

Computers - A computer network consisting of a centralized data center in Atlanta, Georgia, and various distributed computers throughout the company connects the yards, terminals, transportation offices, rolling stock repair points, sales offices and other key system locations. Operating and traffic data are processed and stored to provide customers with information on their shipments throughout the system. Computer systems provide current information on the location of every train and each car on line, as well as related waybill and other train and car movement data. In addition, the computer systems are utilized to assist management in the performance of a variety of functions and services including payroll, car and revenue accounting, billing, material management activities and controls, and special studies.

Other - The railroads have extensive facilities for support of operations, including freight depots, car construction shops, maintenance shops, office buildings, and signals and communications facilities.

Encumbrances - Certain railroad equipment is subject to the prior lien of equipment financing obligations amounting to approximately $864 million as of Dec. 31, 2002, and $895 million at Dec. 31, 2001.

Environmental Matters - Compliance with federal, state and local laws and regulations relating to the protection of the environment is a principal NS goal. To date, such compliance has not affected materially NS' capital additions, earnings, liquidity or competitive position. See the discussion of "Environmental Matters" in Part II, Item 7, "Management's Discussion and Analysis," and in Note 18 to the Consolidated Financial Statements.

EMPLOYEES - NS employed an average of 28,970 employees in 2002, compared with an average of 30,894 in 2001. The decrease reflects NS' continuous drive to operate more efficiently, accompanied by railroad retirement legislation late in 2001, which lowered the retirement age for rail employees. The approximate average cost per employee during 2002 was $54,000 in wages and $24,000 in employee benefits.

Approximately 85% of NS' railroad employees are covered by collective bargaining agreements with 15 different labor unions. See the discussion of "Labor Agreements" in Part II, Item 7, "Management's Discussion and Analysis."

GOVERNMENT REGULATION - In addition to environmental, safety, securities and other regulations generally applicable to all businesses, NS' railroads are subject to regulation by the STB, which succeeded the ICC on Jan. 1, 1996. The STB has jurisdiction over some rates, routes, conditions of service and the extension or abandonment of rail lines. The STB also has jurisdiction over the consolidation, merger or acquisition of control of and by rail common carriers. The Department of Transportation regulates certain track and mechanical equipment standards.

The relaxation of economic regulation of railroads, begun over two decades ago by the ICC under the Staggers Rail Act of 1980, has continued under the STB. Significant exemptions are TOFC/COFC (i.e., "piggyback")

 

K11

business, rail boxcar traffic, lumber, manufactured steel, automobiles and certain bulk commodities such as sand, gravel, pulpwood and wood chips for paper manufacturing. Transportation contracts on regulated shipments effectively remove those shipments from regulation as well. About 80% of NS' freight revenues come from either exempt traffic or traffic moving under transportation contracts.

Efforts may be made in 2003 to re-subject the rail industry to unwarranted federal economic regulation. The Staggers Rail Act of 1980, which substantially reduced such regulation, encouraged and enabled rail carriers to innovate and to compete for business, thereby contributing to the economic health of the nation and to the revitalization of the industry. Accordingly, NS will oppose efforts to reimpose unwarranted economic regulation.

COMPETITION - There is continuing strong competition among rail, water and highway carriers. Price is usually only one factor of importance as shippers and receivers choose a transport mode and specific hauling company. Inventory carrying costs, service reliability, ease of handling and the desire to avoid loss and damage during transit are also important considerations, especially for higher-valued finished goods, machinery and consumer products. Even for raw materials, semifinished goods and work-in-process, users are increasingly sensitive to transport arrangements that minimize problems at successive production stages.

NS' primary rail competitor is the CSX system; both operate throughout much of the same territory. Other railroads also operate in parts of the territory. NS also competes with motor carriers, water carriers and with shippers who have the additional option of handling their own goods in private carriage.

Certain marketing strategies between railroads and between railroads and motor carriers enable carriers to compete more effectively in specific markets.

 

Item 3. Legal Proceedings.

None.

 

Item 4. Submission of Matters to a Vote of Security Holders.

There were no matters submitted to a vote of security holders during the fourth quarter of 2002.

 

Executive Officers of the Registrant.

Norfolk Southern's executive officers generally are elected and designated annually by the Board of Directors at its first meeting held after the annual meeting of stockholders, and they hold office until their successors are elected. Executive officers also may be elected and designated throughout the year as the Board of Directors considers appropriate. There are no family relationships among the officers, nor any arrangement or understanding between any officer and any other person pursuant to which the officer was selected. The following table sets forth certain information, as of February 1, 2003, relating to the executive officers.

 

K12

Name, Age, Present Position	Business Experience During Past Five Years	
 	 	
David R. Goode, 62,	Present position since September 1992.	
   Chairman, President and	 	
   Chief Executive Officer	 	
 	 	
L. I. Prillaman, 59,	Present position since August 1998; prior thereto was	
   Vice Chairman and	   Executive Vice President Marketing.	
   Chief Marketing Officer	 	
 	 	
Stephen C. Tobias, 58,	Present position since August 1998; prior thereto was	
   Vice Chairman and	   Executive Vice President Operations.	
   Chief Operating Officer	 	
 	 	
Henry C. Wolf, 60,	Present position since August 1998; prior thereto was	
   Vice Chairman and	   Executive Vice President Finance.	
   Chief Financial Officer	 	
 	 	
John F. Corcoran, 62,	Present position since August 1997; prior thereto was	
   Senior Vice President	   Vice President Public Affairs	
   Public Affairs	 	
 	 	
John W. Fox, Jr., 55,	Present position since April 2001. Served as Senior Vice	
   Senior Vice President	   President Coal Marketing from December 1999 to April 1,	
   Coal Services	   2001, and prior thereto was Vice President Coal Marketing.	
 	 	
James A. Hixon, 49,	Present position since February 2001. Served as Senior Vice	
    Senior Vice President	   President Employee Relations from November 1999 to	
   Administration	   February 2001, and prior thereto was Vice President	
 	   Taxation.	
 	 	
Henry D. Light, 62,	Present position since January 22, 2002. Served as Vice	
   Senior Vice President Law	   President Law from April 2000 to January 22, 2002, and	
 	   prior thereto General Counsel Operations.	
 	 	
James W. McClellan, 63,	Present position since August 1998; prior thereto was Vice	
    Senior Vice President Planning	   President Strategic Planning	
 	 	
Kathryn B. McQuade, 46,	Present position since April 2000. Served as Vice President	
   Senior Vice President	   Financial Planning from August 1998 to April 2000, and	
   Financial Planning	   prior thereto was Vice President Internal Audit.	
 	 	
Charles W. Moorman, 51,	Present position since February 1, 2003. Also serves as	
   Senior Vice President	   President Thoroughbred Technology and	
   Corporate Services	   Telecommunications, Inc. since October 1999, and prior	
 	   thereto was Vice President Information Technology.	
 	 	
John P. Rathbone, 51,	Present position since April 2000; prior thereto was Vice	
   Senior Vice President and	   President and Controller	
   Controller	 	
 	 	
Stephen P. Renken, 59,	Present position since February 2001. Served as Vice	
   Senior Vice President Chief	   President Information Technology September 1999 to	
   Information Officer	   February 2001, Assistant Vice President Program	
 	   Management from December 1997 to September 1999, and	
 	   prior thereto was a consultant to NS.	

 

K13

John M. Samuels, 59,	Present position since April 2000; Served as Vice President	
   Senior Vice President	   Operations Planning and Budget from January 1998 to April	
   Operations Planning and	   2000; and prior thereto was Vice President Operating Assets	
   Support	   of Conrail.	
 	 	
Donald W. Seale, 50,	Present position since December 1999; prior thereto was Vice	
   Senior Vice President	   President Merchandise Marketing.	
   Merchandise Marketing	 	

 

 

 

PART II

 

Item 5. Market for Registrant's Common Stock and Related Stockholder Matters.

NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES

STOCK PRICE AND DIVIDEND INFORMATION

(Unaudited)

The Common Stock of Norfolk Southern Corporation, owned by 51,418 stockholders of record as of Dec. 31, 2002, is traded on the New York Stock Exchange with the symbol NSC. The following table shows the high and low sales prices as reported by Bloomberg L.P. on its internet-based service and dividends per share, by quarter, for 2002 and 2001 (prices quoted in fractions have been rounded to the nearest cent).

 	Quarter	
2002	 	1st	 	2nd	 	3rd	 	4th	
Market price	 	 	 	 	 	 	 	 	
   High	$	26.98	$	24.45	$	23.90	$	22.54	
   Low	 	18.26	 	19.85	 	17.20	 	18.70	
Dividends per share	$	0.06	$	0.06	$	0.07	$	0.07	
 	 	 	 	 	 	 	 	 	
2001	 	1st	 	2nd	 	3rd	 	4th	
Market price	 	 	 	 	 	 	 	 	
   High	$	18.90	$	24.11	$	22.60	$	19.88	
   Low	 	13.63	 	15.80	 	13.41	 	15.19	
Dividends per share	$	0.06	$	0.06	$	0.06	$	0.06	

 

K14

Item 6. Selected Financial Data.

 

NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES

FIVE-YEAR FINANCIAL REVIEW

1998-2002

 	2002	2001	2000(1)	1999(2)	1998	
 	($ in millions, except per share amounts)	
RESULTS OF OPERATIONS	 	 	 	 	 	 	 	 	 	 	
Railway operating revenues	$	6,270	$	6,170	$	6,159	$	5,242	$	4,254	
Railway operating expenses	 	5,112	 	5,163	 	5,526	 	4,524	 	3,202	
   Income from railway operations	 	1,158	 	1,007	 	633	 	718	 	1,052	
 	 	 	 	 	 	 	 	 	 	 	
Other income - net	 	66	 	99	 	168	 	164	 	309	
Interest expense on debt	 	518	 	553	 	551	 	531	 	516	
   Income from continuing operations	 	 	 	 	 	 	 	 	 	 	
     before income taxes	 	706	 	553	 	250	 	351	 	845	
 	 	 	 	 	 	 	 	 	 	 	
Provision for income taxes	 	246	 	191	 	78	 	112	 	215	
   Income from continuing operations	 	460	 	362	 	172	 	239	 	630	
 	 	 	 	 	 	 	 	 	 	 	
Discontinued operations (3)	 	--	 	13	 	--	 	--	 	104	
        Net income	$	460	$	375	$	172	$	239	$	734	
 	 	 	 	 	 	 	 	 	 	 	
PER SHARE DATA	 	 	 	 	 	 	 	 	 	 	
Net income - basic	$	1.18	$	0.97	$	0.45	$	0.63	$	1.94	
Net income - diluted	$	1.18	$	0.97	$	0.45	$	0.63	$	1.93	
Dividends	$	0.26	$	0.24	$	0.80	$	0.80	$	0.80	
Stockholders' equity at year end	$	16.71	$	15.78	$	15.16	$	15.50	$	15.61	
 	 	
FINANCIAL POSITION	 	 	 	 	 	 	 	 	 	 	
Total assets	$	19,956	$	19,418	$	18,976	$	19,250	$	18,180	
Total long-term debt, including	 	 	 	 	 	 	 	 	 	 	
   current maturities	$	7,364	$	7,632	$	7,636	$	8,059	$	7,624	
Stockholders' equity	$	6,500	$	6,090	$	5,824	$	5,932	$	5,921	
 	 	 	 	 	 	 	 	 	 	 	
OTHER	 	 	 	 	 	 	 	 	 	 	
Capital expenditures	$	695	$	746	$	731	$	912	$	1,060	
 	 	 	 	 	 	 	 	 	 	 	
Average number of shares outstanding	 	 	 	 	 	 	 	 	 	 	
   (thousands)	 	388,213	 	385,158	 	383,358	 	380,606	 	378,749	
Number of stockholders at year end	 	51,418	 	53,042	 	53,194	 	51,123	 	51,727	
Average number of employees:	 	 	 	 	 	 	 	 	 	 	
   Rail	 	28,587	 	30,510	 	33,344	 	30,897	 	24,185	
   Nonrail	 	383	 	384	 	394	 	269	 	115	
      Total	 	28,970	 	30,894	 	33,738	 	31,166	 	24,300	
 	 	 	 	 	 	 	 	 	 	 	
(1)	2000 operating expenses include $165 million in work-force reduction costs for early retirement and separation programs. These costs reduced net income by $101 million, or 26 cents per diluted share.	
(2)	On June 1, 1999, NS began operating a substantial portion of Conrail's properties. As a result, both its railroad route miles and the number of its railroad employees increased by approximately 50% on that date.	
(3)	In 1998, NS sold all the common stock of its motor carrier subsidiary, North American Van Lines, Inc. (NAVL), for $207 million and recorded a $90 million pretax ($105 million, or 28 cents per diluted share, after-tax) gain. Accordingly, NAVL's results of operations, financial position and cash flows are presented as "Discontinued operations." Results in 2001 include an additional after-tax gain of $13 million, or 3 cents per diluted share, that resulted from the expiration of certain indemnities contained in the sales agreement.	

 

K15

Item 7 .  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

 

The following discussion and analysis should be read in conjunction with the Consolidated Financial Statements and Notes and the Five-Year Financial Review.

 

SUMMARIZED RESULTS OF OPERATIONS

2002 Compared with 2001

Net income was $460 million in 2002, up $85 million, or 23%. Results in 2001 included a $13 million gain from discontinued operations related to the 1998 sale of NS' former motor carrier subsidiary (see Note 17). Excluding that gain from 2001's results, net income was up $98 million, or 27%, in 2002. The improvement was primarily the result of a $151 million, or 15%, increase in income from railway operations.

Diluted earnings per share were $1.18, up 22%. Excluding the discontinued operations gain, diluted earnings per share increased 26%.

2001 Compared with 2000

Net income in 2001 was $375 million, up 118%. Income from continuing operations, which excludes the $13 million discontinued operations gain, was $362 million, up 110%. Results in 2000 included $165 million of costs related to actions taken to reduce the size of the work force, which reduced income from continuing operations by $101 million, or 26 cents per diluted share. Excluding these costs, income from continuing operations increased $89 million, or 33%, in 2001. The improvement resulted from higher income from railway operations, which was up $209 million, or 26%, that more than offset lower nonoperating income, which was down $69 million (see Note 3).

Diluted earnings per share were 97 cents, up 116%. Diluted earnings per share from continuing operations were 94 cents, up 109%. Excluding the work-force reduction costs in 2000, diluted earnings per share from continuing operations were up 32%.

 

DETAILED RESULTS OF OPERATIONS

Railway Operating Revenues

Railway operating revenues were $6.3 billion in 2002, and $6.2 billion in both 2001 and 2000. The following table presents a three-year comparison of revenues by market group.

 

K16

 

Revenues by Market Group	
 	 	 	 	 	 	 	
 	2002	2001	2000	
 	($ in millions)	
Coal	$	1,441	$	1,521	$	1,435	
General merchandise:	 	 	 	 	 	 	
   Automotive	 	961	 	885	 	921	
   Chemicals	 	769	 	752	 	756	
   Metals/construction	 	692	 	674	 	689	
   Agriculture/consumer products/	 	 	 	 	 	 	
      government	 	623	 	603	 	609	
   Paper/clay/forest	 	603	 	612	 	630	
General merchandise	 	3,648	 	3,526	 	3,605	
Intermodal	 	1,181	 	1,123	 	1,119	
          Total	$	6,270	$	6,170	$	6,159	

In 2002, revenues increased 2%, as a 3% rise in general merchandise revenues coupled with a 5% improvement in intermodal revenues offset a 5% decline in coal revenues. All but one of the general merchandise market groups (paper, clay and forest products) posted increases over 2001. As shown in the following table, most of the revenue improvement was the result of higher traffic volumes. The favorable revenue per unit/mix variance was driven by higher average revenue per unit, offset in part by the effects of unfavorable changes in the mix of traffic.

Revenue Variance Analysis	
Increases (Decreases)	
 	 	 	
 	2002 vs. 2001	2001 vs. 2000	
 	($ in millions)	
 	 	 	 	 	
Volume	$	89	$	(200)	
Revenue per unit/mix	 	11	 	211 	
     Total	$	100	$	11 	

In 2001, revenues fell for all the general merchandise market groups. However, a 6% increase in coal revenues offset the effects of the lower general merchandise revenues. Revenue per unit increased in all market groups, principally due to rate increases, use of higher-capacity equipment and favorable changes in the mix of traffic.

COAL tonnage decreased 4% in 2002 and revenues declined 5%. Revenue per unit declined slightly, reflecting unfavorable changes in the mix of traffic (more shorter-haul business) that offset the effects of rate increases and gains in tonnage per car. Coal, coke and iron ore represented 23% of total railway operating revenues in 2002, and 84% of NS' coal shipments originated on lines it operates.

In 2001, coal tonnage increased 2%, and revenues improved 6%. Revenue per unit increased 6%, a result of rate increases, including lower volume-related refunds on export coal shipments, gains in tonnage per car and favorable changes in the mix of traffic (less shorter-haul business).

 

K17

Total Coal, Coke and Iron Ore Tonnage	
 	 	 	 	 	 	
 	2002	 	2001	 	2000	
 	(In millions of tons)	
 	 	 	 	 	 	
Utility	128	 	133	 	119	
Export	11	 	14	 	20	
Domestic metallurgical	21	 	20	 	25	
Other	10	 	11	 	11	
     Total	170	 	178	 	175	

Utility coal tonnage decreased 3% in 2002, a result of lower demand that reflected the weak economy, high coal stockpile levels entering the year, mild temperatures in the first quarter, reduced stockpile targets set by utility companies and increased generation from new natural gas-fired plants. Licensing requirements for these new plants resulted in additional generation that temporarily displaced coal-fired generation.

In 2001, utility coal traffic increased 11%, reflecting higher demand for coal-fired electricity and the effects of very high natural gas prices early in the year. High demand for coal, a volatile market for natural gas and production problems at a number of large mines in the East late in 2000 combined to increase demand somewhat early in 2001 with a resulting increase in coal prices. Utility coal traffic volume also benefited somewhat from the shifting of coal that traditionally would have been bound for export to the domestic market.

Two of NS' utility customers, Duke Energy (Duke) and Carolina Power and Light (CP&L), have filed rate reasonableness complaints at the Surface Transportation Board (STB) alleging that the NS tariff rates for the transportation of coal to their solely served power plants are unreasonable. NS is disputing these allegations. Since January 1, 2002, in the case of Duke and since April 1, 2002, in the case of CP&L, NS has been billing and collecting amounts from the customers based on the challenged tariff rates. Management expects that the resolution of these cases, which is anticipated to occur in 2003, will not have a material effect on NS' financial statements.

The near-term outlook for utility coal remains positive. Coal-fired generation remains the lowest cost marginal source of electricity. Coal plant generation should continue to track the U.S. economy, and management expects that utilities will use coal-fired plants to meet increased demand because of coal's low cost. As always, demand will be influenced by the weather. In addition, while the price of natural gas can affect demand for utility coal, its higher price and volatility may improve the long-term competitive position of coal-fired generation.

Phase II of Title IV of the Clean Air Act Amendments of 1990, which imposed more stringent limits on sulfur dioxide emissions, took effect on Jan. 1, 2000. Many of the mines served by NS produce coals that satisfy Phase II requirements. In addition, substantial banks of sulfur dioxide allowances held by many NS-served utilities, as well as implementation of sulfur dioxide emission control systems at many NS-served plants, should continue to provide a market for other NS-served mines.

While the Phase II impact on NS utility coal has been minimal, there are a number of other evolving environmental issues that have the potential to increase or ease cost pressures on the utility coal market, depending upon their outcome. These include a potential new national energy policy, proposed multi-pollutant legislation, a proposed new rule concerning "new source review," the impending mercury emissions standard and the fate of U.S. participation in the Kyoto Protocol.

 

K18

Although impending developments with these environmental issues could potentially increase cost pressures on coal-fired generation, the outlook remains positive for maintaining coal's position in the power generation mix for regions served by NS. However, different developments with these issues could actually ease cost pressures on coal-fired generation, further strengthening coal's position.

The 1999 decision by a federal district court judge in West Virginia holding that some common mountaintop mining practices in the coal industry are illegal was overturned in April 2001 by the U.S. Fourth Circuit Court of Appeals. In January 2002, the U.S. Supreme Court refused to hear an appeal of the case. In May 2002, the same district court judge made a similar ruling in a different case in which NS had again intervened. In January 2003, this ruling also was overturned by the Fourth Circuit Court of Appeals.

Export coal tonnage declined 18% in 2002. Steam coal exports through Baltimore declined 4%, and export metallurgical coals through Norfolk declined 22%. During the first half of 2002, demand for U.S. coal was soft as international buyers focused their purchases toward other, lower-priced sources. Market uncertainty resulted in late contract settlements and delayed shipments. Late in 2002, demand for U.S. coking coals increased, reflecting a shift in the market as exports from China, Australia and Poland declined. As a result, shipments through Norfolk increased in the fourth quarter.

In 2001, export coal tonnage decreased 30%. The rapid rise of domestic utility coal prices early in the year enticed many foreign-market suppliers to place much of their 2001 production in the domestic utility markets. In addition, production difficulties at several large NS-served mines and flooding in West Virginia in July significantly reduced the supply of low volatility coal. The combination of these factors resulted in most of the decline in shipments of export coal. Steam coal exports through Baltimore declined 32%, and export metallurgical coals through Norfolk declined by 30%. Demand for steam coal to export strengthened in the last half of 2001; however, strong U.S. demand limited NS' participation in this market. Demand for coking coal to export continued to soften, as steel production moved from traditional NS markets in Europe to Asia, which in recent years has been supplied by Australian or Canadian coals.

It is expected that export coal tonnage will continue to be limited by supply and subject to the fluctuations of the world market. The increase in demand for U.S. coals seen in the fourth quarter of 2002 has continued into the first quarter of 2003, and early indications are that these market forces should remain in place as contracts are settled in the spring for the coming year. Should these market forces continue, U.S. coal export volumes could recover somewhat. However, the inherent volatility and uncertainties in this market make predictions especially vulnerable.

Domestic metallurgical coal, coke and iron ore tonnage increased 5% in 2002, reflecting higher U.S. steel production that was aided by the imported steel tariff program implemented in 2002. In addition, continued strong vehicle production resulted in demand for steel.

In 2001, domestic metallurgical coal, coke and iron ore tonnage decreased 18% due to a decline in the market for domestic steel. The softening economy and an increase in steel imports drastically cut blast furnace production, sharply reducing the demand for coking coal, iron ore and coke. The increase in imported steel also resulted in lower prices that put pressure on the U.S. steel industry and led to plant closures and bankruptcies that included some NS customers.

Domestic metallurgical coal, coke and iron ore traffic is expected to continue to experience modest gains during the two-year life of the import tariffs. However, long-term demand is expected to decline, reflecting advanced technologies that allow production of steel using less coke.

 

K19

Other coal tonnage, principally steam coal shipped to manufacturing plants, decreased 14% in 2002, but increased 6% in 2001. The decline in 2002 was primarily the result of the weak economy. The gain in 2001 resulted from new and increased business from industrial customers.

GENERAL MERCHANDISE traffic volume (carloads) increased 2% in 2002, and revenues increased 3%, principally due to a 9% improvement in automotive revenues. In 2001, traffic volume decreased 7%, and revenues decreased 2%, reflecting the effects of a weak economy.

Automotive traffic volume increased 7%, and revenues increased 9% in 2002, principally due to a rise in vehicle production and new business. Revenue per unit increased 2%, reflecting some pricing improvements, extended length of haul, special ancillary services and the settlement of a disputed charge.

In 2001, automotive traffic volume decreased 10%, and revenues declined 4%, principally due to a 10% drop in vehicle production. Revenue per unit increased 7%, principally due to rate increases, efficiencies gained from the redesign of the mixing center network and use of higher capacity equipment.

Automotive revenues in 2003 are expected to be lower than those of 2002. Light vehicle production is predicted to be down slightly, and NS' largest automotive customer has announced a 5% decrease in first quarter 2003 production.

Chemicals traffic volume increased slightly, and revenues increased 2% in 2002. Higher traffic volume for plastics and a small increase for miscellaneous chemicals offset a decline for petroleum products. Demand for plastics was supported by increases in light vehicle production and housing starts. Traffic volume also benefited from increased shipments through NS' Thoroughbred Bulk Transfer (TBT) facilities that handle chemicals and bulk commodities for customers not located on NS-served lines. Revenue per unit increased as a result of a favorable change in the mix of traffic (more higher-rated business) and market-driven rate increases.

In 2001, chemicals traffic volume decreased 5%, and revenues decreased 1%. The weak economy depressed shipments of petroleum, plastics, industrial and miscellaneous chemicals. These declines were partially offset by new business through NS' TBT facilities. Revenue per unit increased due to higher rates and a favorable change in the mix of traffic (more longer-haul moves).

Chemicals revenues are expected to improve in 2003, supported by a recovering economy, new business and improved revenue per unit.

Metals and construction traffic volume increased 2%, and revenues improved 3% in 2002, reflecting improvement in the steel industry, which was aided by the two-year imported steel tariff program implemented in 2002. Metals volume benefited from resumption of production at some mills that closed in 2001 and increased volume from new mills. Construction traffic declined, primarily as a result of reductions in highway projects due to state government budget pressures.

In 2001, metals and construction traffic volume decreased 7%, and revenues declined 2%, reflecting weakness in the steel and construction industries. The steel industry recession, which began in 2000, resulted in excess capacity and the closing of numerous steel mills. Revenue per unit increased due to higher rates and favorable changes in the mix of traffic.

Metals and construction revenues are expected to continue to benefit from added production along NS' lines, although further consolidation in the steel industry is expected. Construction markets may benefit from new business from stone quarries and cement terminals in the Southeast.

Agriculture, consumer products and government traffic volume decreased slightly in 2002, but revenues increased 3%. Traffic volume increases for corn, food products and beverages largely offset declines for soybeans and feed. Corn volume benefited from increased shipments from the Midwest to

 

K20

drought-stricken areas in the East. The increase for food products was primarily the result of new business. Soybean and feed volumes were adversely affected by lower domestic and export demand. Revenue per unit increased because of higher rates, increased length of haul and favorable changes in the mix of traffic.

In 2001, agriculture, consumer products and government traffic volume decreased 3%, and revenues declined 1%, primarily due to reduced shipments of fertilizer. This decline was due to soft farm demand, record high natural gas prices early in the year (which curtailed production of certain fertilizers) and increased imports. This was mitigated by traffic volume increases for grain, flour and canned goods. The revenue per unit increase was primarily due to favorable changes in the mix of traffic.

Agriculture, consumer products and government revenues in 2003 are expected to continue to benefit from higher corn, fertilizer and food product volume. Fertilizer volumes may be favorably affected by the reopening of a large phosphate fertilizer plant.

Paper, clay and forest products traffic volume declined 3%, and revenues decreased 1%, in 2002, primarily due to continued weakness in the paper market, especially in the first half of the year. Traffic volume improved later in the year as the paper market strengthened. In addition, NS gained business from conversion of truck shipments to rail and from continued strength in housing starts. Revenue per unit benefited from rate increases and a decline in shorter-haul business.

In 2001, paper, clay and forest products traffic volume declined 8%, and revenues decreased 3%, primarily due to a weakened paper market. Paper shipments were adversely affected by reduced production at many NS-served paper mills, a result of sluggish newspaper advertising and soft demand for paper. Lumber traffic began the year weak, improved in late summer, but softened late in the year due to short-term weakness in housing starts. Revenue per unit increased principally due to higher rates.

Paper, clay and forest products revenues are expected to improve slightly in 2003 as a result of a recovering economy, service improvements and new business.

INTERMODAL traffic volume increased 6%, and revenues increased 5%, in 2002. Volume growth was principally the result of new and improved services that resulted in new business, including the conversion of truck business to rail. International traffic, which accounts for about half of intermodal volume, increased 10%, supported by growth in trade activity and new business, including the conversion of over-the-road traffic. Domestic shipments grew 6%, primarily because of new business gained from the conversion of truck shipments. Triple Crown Services Company (TCS) volume increased 4%. Revenue per unit declined as a result of an increase in shorter-haul business and the absence of fuel surcharges that were in place in 2001, which were partially offset by some rate increases.

In 2001, intermodal traffic volume decreased 1%, but revenues increased slightly. Domestic traffic volume was up in the first half of the year, but demand increasingly weakened as the year progressed, which eroded NS' base of traffic. New business supported by the opening of three new terminals and other initiatives mitigated the effects of the weakened economy. International traffic grew slightly as U.S. imports slowed with the economy. TCS traffic volume increased 1% despite economic conditions, as it continued to provide reliable, trucklike service. Intermodal revenue per unit dropped later in the year, reflecting the expiration of fuel surcharges that were implemented late in 2000 and the introduction of new shorter-haul business.

In 2003, intermodal revenues are expected to continue to benefit from new business supported by continued improvements in service and conversion of truck traffic to rail.

 

K21

Railway Operating Expenses

Railway operating expenses decreased 1% in 2002, while carloads increased 1%. In 2001, railway operating expenses declined 7%. However, expenses in 2000 included $165 million of costs related to actions taken to reduce the size of the work force. Excluding these costs, railway operating expenses decreased 4% in 2001, while carloads dropped 3%.

The railway operating ratio, which measures the percentage of railway operating revenues consumed by railway operating expenses, was 81.5% in 2002, compared with 83.7% in 2001 and 87% in 2000 (excluding the work-force reduction costs, which increased the ratio 2.7 percentage points). Both declines primarily resulted from gains in efficiency, although 2002 also benefited from higher traffic volume, and 2001 benefited from increased revenue per unit. The efficiency gains in 2002 were principally the result of the implementation of a new operating plan that emphasizes adherence to a schedule and reductions in service variability. These improvements came despite a continuing change in the mix of traffic (more resource-intensive traffic, such as automotive and intermodal, coupled with the decrease in export coal traffic).

The following table shows the changes in railway operating expenses summarized by major classifications.

Operating Expense Variances	
Increases (Decreases)	
 	 	 	
 	2002 vs. 2001	2001 vs. 2000	
 	($ in millions)	
 	 	 	 	 	
Compensation and benefits*	$	8 	$	(220)	
Materials, services and rents	 	13 	 	(1)	
Conrail rents and services	 	(9)	 	(57)	
Depreciation	 	1 	 	11 	
Diesel fuel	 	(70)	 	(66)	
Casualties and other claims	 	28 	 	1 	
Other	 	(22)	 	(31)	
     Total	$	(51)	$	(363)	

* Includes $165 million of work-force reduction costs in 2000.

Compensation and benefits represented 40% of total railway operating expenses and increased slightly in 2002. Higher wage rates, reduced pension income (see Note 11) and increased health and welfare benefits costs more than offset savings from reduced employment levels and lower payroll taxes (see the discussion of the Railroad Retirement and Survivors' Improvement Act, below). Medical costs are expected to continue to increase in 2003, a result of higher costs for active employees and an increase in the expected inflation related to postretirement benefits.

In 2001, compensation and benefits decreased 10%; however, this comparison reflects the $165 million of work-force reduction costs in 2000. Excluding those costs, compensation and benefits decreased 3%, primarily a result of savings attributable to the reduced size of the work force, which were somewhat offset by higher wages and benefit costs for union employees, higher incentive compensation and reduced pension income.

The Railroad Retirement and Survivors' Improvement Act, which took effect on Jan. 1, 2002, provides for a phased reduction of the employers' portions of Tier II Railroad Retirement payroll taxes. The phase-in calls for a reduction from 15.6% in 2002 to 14.2% in 2003 and 13.1% in 2004. In addition, the supplemental annuity tax was eliminated. These changes resulted in an estimated $21 million reduction in payroll taxes in 2002 and are expected to result in savings of $20 million in 2003, compared with 2002. However, these

 

K22

savings are expected to be offset by an increase in the railroad unemployment tax rate, higher payroll taxes on increased wages and a higher wage base. The new law allows for investment of Tier II assets in a diversified portfolio through the newly established National Railroad Retirement Investment Trust. The law also provides a mechanism for automatic adjustment of future Tier II payroll taxes should the trust assets fall below a four-year reserve or exceed a six-year reserve.

Materials, services and rents includes items used for the maintenance of the railroad's lines, structures and equipment; the costs of services purchased from outside contractors, including the net costs of operating joint (or leased) facilities with other railroads; and the net cost of equipment rentals. This category of expenses increased 1% in 2002 and decreased slightly in 2001.

The increase in 2002 was the result of higher volume-related expenses for automotive and intermodal traffic, increased material costs for locomotives, higher expenses for roadway and bridge repairs and increased derailment costs. These higher costs were largely offset by a significant reduction in equipment rents. In 2001, the effects of lower equipment rents were largely offset by higher costs for purchased services, including expenses for software, consulting and legal fees.

Equipment rents, which includes the cost to NS of using equipment (mostly freight cars) owned by other railroads or private owners, less the rent paid to NS for the use of its equipment, decreased 14% in 2002 and 11% in 2001. The decline in 2002 was principally the result of continued improvement in cycle times, reflecting efficiency gains and, for intermodal equipment, service design and process changes implemented during the year. The decrease in 2001 was primarily due to shorter car cycle times that resulted in fewer car days on line and fewer freight car and locomotive leases.

Locomotive repair costs increased in 2002 and 2001, principally due to renewed maintenance activity, which is expected to continue into 2003. Freight car maintenance costs, which were relatively flat in 2002, are also likely to increase in 2003, as it is expected that the economy will recover and more freight cars are due for maintenance.

Conrail rents and services decreased 2% in 2002 and 12% in 2001. This item includes amounts due to PRR and CRC for use of their operating properties and equipment and CRC's operation of the Shared Assets Areas. Also included is NS' equity in Conrail's net earnings, plus the additional amortization related to the difference between NS' investment in Conrail and its underlying equity (see Note 2). Both declines reflected higher Conrail earnings and lower expenses in the Shared Assets Areas (see "Conrail's Results of Operations, Financial Condition and Liquidity," below).

Depreciation expense was up slightly in 2002 and increased 2% in 2001. Substantial levels of capital spending affected both years; however, depreciation expense in 2002 benefited from lower rates implemented early in the year following completion of a periodic study (see Note 1, "Properties," for NS' depreciation policy).

Diesel fuel expenses decreased 17% in 2002 and 14% in 2001. The decline in 2002 reflected a 16% drop in the average price per gallon and slightly lower consumption. Expenses in 2002 included a $10 million benefit from the hedging program initiated in the second quarter of 2001 (see "Market Risks and Hedging Activities," below and Note 16). The decrease in 2001 was the result of an 8% drop in consumption and a 7% decline in the average price per gallon. Expenses in 2001 included $8 million of cost related to the hedging program. NS expects diesel fuel prices to be higher in 2003.

Casualties and other claims expenses (including the estimates of costs related to personal injury, property damage and environmental matters) increased 20% in 2002, but only slightly in 2001. The increase in 2002 reflected adverse personal injury claims development as indicated by an actuarial study and higher expenses for loss and damage to lading, as well as higher insurance and environmental remediation costs.

 

K23

The largest component of casualties and other claims expense is personal injury costs. In 2002, cases involving occupational injuries comprised about 30% of the total employee injury cases settled and 24% of the total settlement payments made. Injuries of this type are not generally 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 actively employed in the rail industry for decades. NS continues to work actively to eliminate all employee injuries and to reduce the associated costs.

The rail industry remains uniquely susceptible to litigation involving job-related accidental injury and occupational claims because of the Federal Employers' Liability Act (FELA), which is applicable only to railroads. This law, which covers employee claims for job-related injuries, produces results that are unpredictable and inconsistent as compared with a no-fault workers' compensation system.

NS, like many other businesses in the U.S., has experienced difficulty obtaining property and casualty insurance at reasonable terms since the September 11 terrorist attacks. Thus far, NS has been successful in maintaining a substantial amount of commercial insurance for third-party personal injury, property damage and FELA claims that exceed the self-insured retention. However, both the cost of this commercial insurance and the amount of risk that NS retains through self-insurance has more than doubled since the attacks.

Other expenses decreased 10% in 2002 and 13% in 2001. The decline in 2002 reflected lower expenses for property and sales and use taxes. The decrease in 2001 was principally the result of lower bad debt costs, reduced franchise and property taxes, and lower travel and employee-relocation expenses.

Other Income - Net

Other income - net was $66 million in 2002, $99 million in 2001 and $168 million in 2000 (see Note 3). The decline in 2002 was primarily the result of higher interest accruals on federal income tax liabilities, lower gains from the sale of properties and investments, and the absence of a $13 million gain from a nonrecurring settlement that benefited 2001. These reductions were partially offset by reduced discount from the sales of receivables (due to a lower amount of receivables sold and a lower interest rate environment, which favorably affects the amount of discount). The reduction in 2001 resulted from the absence of $101 million of gains that occurred in 2000 related to the sale of timber rights and gas and oil royalty and working interests. This was somewhat offset by lower interest accruals on federal income tax liabilities and the $13 million nonrecurring settlement gain. Results in 2001 also included an $18 million gain from a large property sale that closed in December.

Income Taxes

Income tax expense in 2002 was $246 million for an effective rate of 35%, compared with effective rates of 35% in 2001 and 31% in 2000. Excluding the equity in Conrail's after-tax earnings, the effective rates were 38% in 2002 and 2001 and 34% in 2000.

The effective rates in 2002 and 2001 were higher than that of 2000, primarily due to dispositions of tax benefits related to coal-seam gas properties. The effective rates in all three years benefited from favorable adjustments upon filing the prior year tax returns and favorable adjustments to state tax liabilities. In addition, 2000 benefited from investments in coal-seam gas properties. The 2003 effective rate may benefit from the resolution of various tax audits.

In March 2002, the Job Creation and Worker Assistance Act of 2002 was signed into law and began providing immediate tax incentives for business. A 30% additional first-year depreciation allowance was a primary element of this legislation. This depreciation incentive continues for three years, and during these years the resulting acceleration of tax depreciation deductions will improve cash flow by reducing current tax expense and increasing deferred tax expense by significant amounts.

 

K24

Discontinued Operations

Income from discontinued operations in 2001 consisted of a $13 million after-tax gain related to the sale of NS' motor carrier subsidiary (see Note 17).

 

FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES

Cash provided by operating activities, NS' principal source of liquidity, was $803 million in 2002, compared with $654 million in 2001 and $1.3 billion in 2000. In 2002, the improvement was the result of higher income from railway operations and favorable changes in working capital, which were offset, in part, by fewer accounts receivable sold (see Note 5). Receivable sales declined $270 million in 2002 and $88 million in 2001. The significant decline in operating cash flow in 2001 reflects the commencement in 2000 of the accounts receivable sales program. Excluding the infusion of cash in 2000 from the start of this program, operating cash flow declined by $300 million in 2001. The decrease primarily resulted from an $88 million reduction in the amount of accounts receivable sold, higher tax payments including amounts applicable to prior years, an increase in telecommunication receivables, bonus payments in 2001 (no such payments in 2000) and the timing of payrolls.

A significant portion of payments made to PRR (which are included in "Conrail Rents and Services" and, therefore, are a use of cash in "Cash provided by operating activities") are borrowed back from a PRR subsidiary and, therefore, are a source of cash in "Proceeds from borrowings." NS' net cash flow from these borrowings amounted to $212 million in 2002 and $250 million in 2001.

NS' working capital deficit was $554 million at Dec. 31, 2002, compared with $1.3 billion at Dec. 31, 2001. The decline resulted principally from the change in the terms of the note under which NS borrows funds from a subsidiary of PRR (see Note 2) and a reduction in the amount of debt due within one year. Debt due in 2003 is expected to be paid using cash generated from operations (including sales of accounts receivable) and cash on hand.

NS currently has the capability to increase the amount of accounts receivable being sold under the revolving sale program to meet its more immediate working capital needs. During 2002, the amount of receivables NS could sell under this program ranged from $368 million to $421 million, and the amount of receivables NS sold ranged from $30 million to $400 million. Moreover, NS has the capability to issue up to $1 billion of commercial paper (see Note 8); however, reductions in its credit ratings could limit NS' ability to access the commercial paper markets (see also the discussion of financing activities, below).

NS expects to generate sufficient cash flow from operations to meet its ongoing obligations. This expectation is based on a view that the economy will remain flat for the first half of 2003 and resume growth in the third and fourth quarters.

 

K25

Contractual obligations at Dec. 31, 2002, related to NS' long-term debt (including capital leases), operating leases, agreements with CRC, unconditional purchase obligations and other long-term obligations are as follows:

 	 	 	2004-	2006-	2008 and	
 	Total	2003	2005	2007	Subsequent	
 	($ in millions)	
 	 	 	 	 	 	 	 	 	 	 	
Long-term debt and	 	 	 	 	 	 	 	 	 	 	
   capital leases	$	7,364	$	358	$	856	$	1,153	$	4,997	
Operating leases	 	880	 	113	 	166	 	115	 	486	
Agreements with CRC	 	748	 	30	 	65	 	68	 	585	
Unconditional purchase	 	 	 	 	 	 	 	 	 	 	
   obligations	 	164	 	164	 	--	 	--	 	--	
Other long-term obligations	 	38	 	8	 	16	 	14	 	--	
      Total	$	9,194	$	673	$	1,103	$	1,350	$	6,068	

NS also has contractual obligations to PRR as disclosed in Note 2. However, NS has the ability to borrow back funds from PRR to the extent they are not needed to fund contractual obligations at Conrail. As an indirect owner of Conrail, NS may need to make capital contributions, loans or advances to Conrail to fund its contractual obligations. The following table presents 58% of Conrail's contractual obligations for long-term debt (including capital leases) and operating leases. Conrail has no unconditional purchase or other long-term obligations.

 	 	 	2004-	2006-	2008 and	
 	Total	2003	2005	2007	Subsequent	
 	($ in millions)	
 	 	 	 	 	 	 	 	 	 	 	
Long-term debt and	 	 	 	 	 	 	 	 	 	 	
   capital leases	$	684	$	33	$	62	$	62	$	527	
Operating leases	 	327	 	32	 	64	 	62	 	169	
      Total	$	1,011	$	65	$	126	$	124	$	696	

NS also has two transactions not included in the balance sheets or in the previous table of its contractual obligations consisting of an accounts receivable sale program (see Note 5) and an operating lease covering 140 locomotives (see Note 9).

Under the accounts receivable sale program, NS sells without recourse undivided ownership interests in a pool of accounts receivable to two unrelated buyers. NS has no ownership interest in the buyers. The buyers issued debt to fund their initial purchase, and NS used the proceeds it received from the initial purchase primarily to pay down its outstanding debt. NS has no obligation related to the buyers' debt, and there is no existing obligation to repurchase sold receivables. Upon termination of the program, the buyers would cease purchasing new receivables and would retain collections related to the previously sold receivables (see Note 5).

The operating lease covering the 140 locomotives is renewable annually at NS' option and expires in 2008. The lessor is a special-purpose entity formed to enter into this transaction, but it is not related to NS and its owner has a substantive residual equity capital investment at risk in the entity. The lessor owns the locomotives and issued debt to finance their purchase. NS has no obligation related to the debt. NS has the option to purchase the locomotives, but also can return them to the lessor. The return provisions of the lease are not so onerous as to preclude this option. If NS does not purchase the locomotives at the end of the maximum lease term, it is liable for any shortfall in the then fair value of the locomotives and a specified residual value. NS does not expect to be required to make any payments

 

K26

under this provision (see Note 9). As the primary beneficiary of the business of the lessor, effective

Jan. 1, 2003, NS consolidated the assets (locomotives) and liabilities (debt) of this special-purpose entity when it implemented Financial Accounting Standards Board Interpretation No. 46 (see "New Accounting Pronouncement" on page K34).

Cash used for investing activities increased 12% in 2002 and 3% in 2001. Property additions, which account for most of the recurring spending in this category, were down 8% in 2002, following a 2% increase in 2001. Property sales were significantly lower in 2002, which resulted in the net increase in cash used for investing activities despite the reduction in capital spending. The following tables show capital spending (including capital leases) and track and equipment statistics for the past five years.

Capital Expenditures	
 	 	 	 	 	 	
 	2002	2001	2000	1999	1998	
 	($ in millions)	
 	 	 	 	 	 	 	 	 	 	 	
Road	$	519	$	505	$	557	$	559	$	612	
Equipment	 	174	 	233	 	146	 	349	 	442	
Other property	 	2	 	8	 	28	 	4	 	6	
      Total	$	695	$	746	$	731	$	912	$	1,060	

Capital expenditures (which in 2002 included $6 million of capitalized leases) decreased 7% in 2002, but increased 2% in 2001. The decline in 2002 reflected lower spending for intermodal facilities, as NS completed in 2001 several significant projects that expanded the capacity of the intermodal network. Higher spending on track program work was offset by fewer locomotive purchases (50 in 2002 compared with 100 in 2001). Outlays in 2001 included amounts for locomotive purchases (no such purchases were made in 2000 as locomotives were leased) that were somewhat offset by lower expenditures for freight car purchases and roadway projects. In 2002, 2001 and 2000, spending for road included fiber-optic infrastructure (see "Telecommunications Subsidiary," below).

Track Structure Statistics (Capital and Maintenance)	
 	 	 	 	 	 	
 	2002	2001	2000	1999	1998	
 	 	 	 	 	 	 	 	 	 	 	
Track miles of rail installed	 	235	 	254	 	390	 	403	 	429	
Miles of track surfaced	 	5,270	 	3,836	 	3,687	 	5,087	 	4,715	
New crossties installed (millions)	 	2.8	 	1.5	 	1.5	 	2.3	 	2.0	

 
Average Age of Owned Railway Equipment	
 	 	 	 	 	 	
 	2002	2001	2000	1999	1998	
 	 	 	 	 	(years)   	 	 	 	
Freight cars	 	25.9	 	25.4	 	24.6	 	23.8	 	23.6	
Locomotives	 	16.1	 	15.7	 	16.1	 	15.4	 	15.4	
Retired locomotives	 	28.2	 	22.4	 	24.5	 	22.7	 	20.6	

The table above excludes equipment leased from PRR (see Note 2), which comprises 17% of the freight car fleet and 25% of the locomotive fleet.

Through its coal car rebody program, which was suspended in 2000, NS converted about 29,000 hopper cars into high-capacity steel gondolas or hoppers. As a result, the remaining service life of the freight-car fleet is greater than may be inferred from the increasing average age shown in the table above.

 

K27

For 2003, NS has budgeted $798 million for capital expenditures. The anticipated spending includes $499 million for roadway projects, of which $383 million is for track and bridge program work. Also included are projects for communications, signal and electrical systems, as well as projects for environmental and public improvements such as grade crossing separations and signal upgrades. Other roadway projects include marketing and industrial development initiatives, including increasing track capacity and access to coal receivers and vehicle production and distribution facilities, and continuing investments in intermodal infrastructure. Equipment spending of $246 million includes the purchase of 100 locomotives and upgrades to existing units, improvements to multilevel automobile racks, and projects related to computers and information technology, including additional security and backup systems.

Cash used for financing activities in 2002 was $150 million. Financing activities provided cash of $151 million in 2001 and used cash of $798 million in 2000. The comparisons reflect a net reduction of debt in 2002, a net increase in 2001 and a net reduction in 2000. The comparison in 2001 also reflected the effects of the reduction to the dividend in January 2001. Financing activities include loan transactions with a subsidiary of PRR that resulted in net borrowings of $212 million in 2002 and $250 million in 2001 and net repayments of $72 million in 2000 (see Note 2). Excluding these borrowings, debt was reduced $303 million in 2002, $20 million in 2001 and $422 million in 2000. The net reduction of debt in 2000 was accomplished in part with the proceeds from the sale of accounts receivable. NS' debt-to-total capitalization ratio (excluding notes payable to the PRR subsidiary) at year end was 53.1% in 2002 and 55.6% in 2001.

NS currently has in place a $1 billion, five-year credit agreement, which provides for borrowings at prevailing rates and includes financial covenants (see Note 8).

NS has outstanding $717 million of its 7.05% notes due May 1, 2037. Each holder of a 2037 note may require NS to redeem all or part of the note at face value, plus accrued and unpaid interest, on May 1, 2004. NS will not know the amount of 2037 notes that it may be required to redeem until April 1, 2004. NS expects to be able to redeem any such notes using cash generated from operations (including sales of accounts receivable), cash on hand and proceeds from borrowings.

 

APPLICATION OF CRITICAL ACCOUNTING ESTIMATES

The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. These estimates and assumptions may require significant judgment about matters that are inherently uncertain, and future events are likely to occur that may require management to change them. Accordingly, management regularly reviews these estimates and assumptions based on historical experience, changes in the business environment and other factors that management believes to be reasonable under the circumstances. Management discusses the development, selection and disclosures concerning critical accounting estimates with the Audit Committee of its Board of Directors.

Pensions and Other Postretirement Benefits

Accounting for pensions and other postretirement benefit plans requires management to make several estimates and assumptions (see Note 11). These include the expected rate of return from investment of the plans' assets, projected increases in medical costs and the expected retirement age of employees as well as their projected earnings and mortality. In addition, the amounts recorded are affected by changes in the interest rate environment because the associated liabilities are discounted to their present value. Management makes these estimates based on the company's historical experience and other information that it deems pertinent under the circumstances (for example, expectations of future stock market performance). Management engages an independent consulting actuarial firm to aid it in selecting appropriate assumptions and valuing its related liabilities.

 

K28

NS' net pension benefit, which is included in "Compensation and benefits" on its Consolidated Income Statement, was $79 million for the year ended Dec. 31, 2002. In recording this amount, NS assumed a long-term investment rate of return of 9%, compared with the 10% rate used in the previous two years. Investment experience of the pension fund over the past 10-, 15- and 20-year periods has been in excess of 10%. A one percentage point change to this rate of return assumption would result in a $20 million change to the pension credit and, as a result, an equal change in "Compensation and benefits" expense. Changes that are reasonably likely to occur in assumptions concerning retirement age, projected earnings and mortality would not be expected to have a material effect on NS' net pension benefit or net pension asset in the future. The net pension asset is recorded at its net present value using a discount rate that is based on the current interest rate environment; therefore, management has little discretion in this assumption.

NS' net cost for other postretirement benefits, which is also included in "Compensation and benefits," was $34 million for the year ended Dec. 31, 2002. In recording this expense and valuing the net liability for other postretirement benefits, which is included in "Other benefits" as disclosed in Note 11, management estimated future increases in health-care costs. These assumptions, along with the effect of a one percentage point change in them, are described in Note 11.

Properties and Depreciation

Most of NS' total assets are comprised of long-lived railway properties (see Note 6) and its investment in Conrail (see Note 2). Most of Conrail's assets are long-lived railway properties. As disclosed in Note 1, NS' properties are depreciated using group depreciation. Rail is depreciated primarily on the basis of use measured by gross-ton miles. Other properties are depreciated generally using the straight-line method over the lesser of estimated service or lease lives. NS reviews the carrying amount of properties whenever events or changes in circumstances indicate that such carrying amount may not be recoverable based on future undiscounted cash flows or estimated net realizable value. Assets that are deemed impaired as a result of such review are recorded at the lesser of carrying amount or fair value. NS is amortizing the excess of the purchase price paid for its investment in Conrail over its share of Conrail's net equity using the principles of purchase accounting, based primarily on the estimated remaining useful lives of Conrail's properties.

NS' depreciation expense is based on management's assumptions concerning service lives of its properties as well as the expected net salvage that will be received upon their retirement. These assumptions are the product of periodic depreciation studies that are performed by a firm of consulting engineers. These studies analyze NS' historical patterns of asset use and retirement and take into account any expected change in operation or maintenance practices. NS' recent experience with these studies has been that while they do result in changes in the rates used to depreciate its properties, these changes have not caused a significant effect to its annual depreciation expense. The studies may also indicate that the recorded amount of accumulated depreciation is deficient (or in excess) of the amount indicated by the study. Any such deficiency (or excess) is amortized as a component of depreciation expense over the remaining service lives of the affected class of property. NS' "Depreciation expense" for the year ended Dec. 31, 2002, amounted to $515 million. NS' weighted-average depreciation rates for 2002 are disclosed in Note 6; a one-tenth percentage point increase (or decrease) in these rates would result in a $17 million increase (or decrease) to NS' depreciation expense.

Personal Injury, Environmental and Legal Liabilities

NS' expense for "Casualties and other claims" amounted to $171 million for the year ended Dec. 31, 2002. Most of this expense was composed of NS' accrual related to personal injury liabilities (see discussion of FELA in the discussion captioned "Casualties and other claims" on page K23). NS engages an independent consulting actuarial firm to aid in valuing its personal injury liability and determining the amount to accrue during the year. The actuarial firm studies NS' historical patterns of reserving for claims and subsequent settlements. The actuary also takes into account outside influences considered pertinent. The study uses the results of these analyses to estimate the ultimate amount of the liability, which includes amounts for incurred but unasserted claims. NS has recorded this actuarially determined liability. The liability is dependent upon many individual judgments made as to the specific case reserves as well as the judgments of the consulting

 

K29

actuary and management in the periodic studies. Accordingly, there could be significant changes in the liability, which NS would recognize when such a change became known. The most recent actuarial study was performed as of June 30, 2002, and resulted in an increase to NS' personal injury liability during the third quarter. While the liability recorded is supported by the most recent study, it is reasonably possible that the liability could be higher or lower.

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 (see Note 18). Environmental engineers regularly participate in ongoing evaluations of all known sites and in determining any necessary adjustments to liability estimates. NS also has established an Environmental Policy Council, composed of senior managers, to oversee and interpret its environmental policy.

Operating expenses for environmental matters totaled approximately $15 million in 2002, $12 million in 2001, and $11 million in 2000, and capital expenditures totaled approximately $10 million in each of 2002, 2001 and 2000. Capital expenditures in 2003 are expected to be comparable to those in 2002.

NS' balance sheets included liabilities for environmental exposures in the amount of $29 million at Dec. 31, 2002, and $33 million at Dec. 31, 2001 (of which $8 million was accounted for as a current liability in each year). At Dec. 31, 2002, the liability represented NS' estimate of the probable cleanup and remediation costs based on available information at 114 identified locations. On that date, 10 sites accounted for $16 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 114 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. NS estimates its environmental remediation liability on a site-by-site basis, using assumptions and judgments that management deems appropriate for each site. As a result, it is not practical to quantitatively discuss the effects of changes in these many assumptions and judgments. NS has consistently applied its methodology of estimating its environmental liabilities.

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 or may have been 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 environmentally related 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 now-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 Corporation 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.

 

K30

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 expenses.  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, if any, 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 recorded liability will be reflected in expenses in the periods in which such adjustments are known.

Income Taxes

NS' net deferred tax liability totaled $3,010 million at Dec. 31, 2002 (see Note 4). This liability is estimated based on the expected future tax consequences of items recognized in the financial statements. After application of the federal statutory tax rate to book income, judgment is required with respect to the timing and deductibility of expenses in the corporate income tax returns. For state income and other taxes, judgment is also required with respect to the apportionment among the various jurisdictions. A valuation allowance is recorded if management expects that it is more likely than not that its deferred tax assets will not be realized. NS has only a $24 million valuation allowance on $592 million of deferred tax assets as of Dec. 31, 2002, reflecting the expectation that most of these assets will be realized. For 2002, 2001 and 2000, the effective tax rates, excluding NS' equity in Conrail's earnings, were 38%, 38% and 34%, respectively. For every 1/2% change in the 2002 effective tax rate, net income would have changed by $4 million.

 

CONRAIL'S RESULTS OF OPERATIONS, FINANCIAL CONDITION AND LIQUIDITY

Conrail's net income was $180 million in 2002, compared with $174 million in 2001 and $170 million in 2000 (see Note 2). The increase in 2002 was primarily the result of a favorable federal tax settlement. The improvement in 2001 reflected lower casualties and other claims expenses, a favorable adjustment to state income tax reserves and environmental and insurance settlements in Conrail's favor. These positive items were offset in part by the absence of significant gains from the sale of property.

Conrail's operating revenues were $893 million in 2002, $903 million in 2001 and $985 million in 2000. Both decreases resulted from the expiration of certain equipment leases and lower operating fees, largely because of reduced operating costs in the Shared Assets Areas. The decline in 2001 also reflected lower revenues at Conrail's Indiana Harbor Belt subsidiary.

Conrail's operating expenses were $623 million in 2002, $639 million in 2001 and $749 million in 2000. The decrease in 2002 reflected lower expenses for materials, services and rents and compensation and benefits, which were offset, in part, by higher costs for casualties and other claims. The decline in 2001 was primarily due to lower expenses for materials, services and rents; casualties and other claims; and compensation and benefits.

Conrail's cash provided by operations decreased $79 million, or 16%, in 2002, and increased $140 million, or 39%, in 2001. The decline in 2002 was primarily the result of the absence of two items that benefited 2001: a $50 million cash payment for transferring to a third party certain rights to license, manage and market signboard advertising on Conrail's property for 25 years and proceeds from a favorable insurance settlement. This was offset, in part, by favorable changes in working capital. The increase in 2001 was largely the result of the two unusual items discussed above. Cash generated from operations is Conrail's principal source of liquidity and is primarily used for debt repayments and capital expenditures. Debt repayments totaled $59 million in 2002 and $61 million in 2001. Capital expenditures totaled $23 million in 2002 and $47 million in 2001.

 

K31

Conrail had a working capital deficit of $29 million at Dec. 31, 2002, compared with working capital of $438 million at Dec. 31, 2001, which included $687 million of amounts receivable from NS and CSX. Conrail is not an SEC registrant and, therefore, presently cannot issue any publicly traded securities. Conrail is expected to have sufficient cash flow to meet its ongoing obligations.

NS' equity in earnings of Conrail, net of amortization, was $54 million in 2002, $44 million in 2001 and $21 million in 2000. NS' other comprehensive loss for 2002 and 2001, as shown in the Consolidated Statement of Changes in Stockholders' Equity, included $34 million and $41 million, respectively, for its portion of Conrail's other comprehensive loss (see Note 13).

 

OTHER MATTERS

Telecommunications Subsidiary

NS' subsidiary, Thoroughbred Technology and Telecommunications, Inc. (T-Cubed), has developed fiber optic infrastructure with members of the telecommunications industry. This industry has experienced a severe downturn. As a result of changes in the values of telecommunications assets, T-Cubed is monitoring its carrying amount of these assets, as required by SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." To date, based on known facts and circumstances, management believes that its ultimate investment in these assets will be recovered, and accordingly, no impairment has been recognized (see Note 6).

During 2001, one of T-Cubed's codevelopers, 360networks (USA),inc. ("360"), filed for protection under Chapter 11 of the U.S. Bankruptcy Code and foreign laws. 360 owes T-Cubed amounts for work performed on certain joint projects; and T-Cubed owes 360 amounts for work performed on other joint projects. The bankruptcy judge has approved set-off of these amounts, leaving about $7 million due to T-Cubed from 360. T-Cubed has the right to collect this amount from any proceeds due 360 from the sale of joint assets. Management believes that it will collect this receivable.

T-Cubed is engaged in contract litigation with a second codeveloper, Williams Communications, LLC ("Williams Communications"), concerning the latter's obligation to purchase fiber optic infrastructure installed by T-Cubed between Cleveland, Ohio, and northern Virginia. On Jan. 29, 2003, the United States District Court for the Northern District of Georgia entered an order requiring Williams Communications to pay T-Cubed the remaining amount due for such infrastructure, approximately $36 million, plus prejudgment interest at a rate of 9% per annum. Williams Communications may elect to appeal. The ability to collect and retain a judgment against Williams Communications may be limited due to its financial condition; however, the shortfall, if any, cannot now be determined. Its parent, Williams Communications Group, Inc., filed in April 2002 a voluntary petition for reorganization under Chapter 11 of the U.S. Bankruptcy Code, and emerged from bankruptcy in October 2002. Williams Communications was not included in the bankruptcy petition (see Note 18).

Labor Arbitration

Several hundred claims have been filed with NSR on behalf of employees furloughed after June 1, 1999, for various periods of time, alleging that the furloughs were a result of the Conrail transaction and seeking "New York Dock" income protection benefits. Several labor organizations have initiated arbitration on behalf of individual employees. Other disputes are pending wherein similar benefits are sought under labor agreement provisions that, in management's judgment, do not apply to the involved circumstances.

Based on known facts, including the availability of legal defenses, management believes that NS will prevail in these disputes and that any potential liability for the involved claims should not have a material adverse effect on NS' financial position, results of operations or liquidity. Depending on the outcome of these arbitrations, additional claims may be filed or progressed to arbitration. Should all such claimants prevail, there could be a significant effect on results of operations in a particular quarter (see Note 18).

 

K32

Labor Agreements

Approximately 24,000 of NS' railroad employees are covered by collective bargaining agreements with 15 different labor unions. These agreements remain in effect until changed pursuant to the Railway Labor Act. Moratorium provisions in these agreements permitted NS and the unions to propose such changes in late 1999; negotiations at the national level commenced shortly thereafter. The outcome of these negotiations is uncertain at this time. However, agreements have been reached with the Brotherhood of Maintenance of Way Employes (BMWE), which represents about 4,200 NS employees; the Brotherhood of Locomotive Engineers (BLE), which represents about 4,500 NS employees; the United Transportation Union (UTU), which represents about 6,700 NS employees; the International Brotherhood of Boilermakers and Blacksmiths (IBB), which represents about 100 NS employees; and the Transportation Communications International Union (TCU), which represents about 4,400 NS employees. Health and welfare issues have been resolved with BMWE and TCU. The UTU agreement provides that, subsequent to a further period of negotiation, health and welfare issues may be submitted to arbitration. Health and welfare issues with the other organizations have not yet been resolved.

Market Risks and Hedging Activities

NS uses 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.

In 2001, NS began a program to hedge a portion of its diesel fuel consumption. The intent of the program is 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.

Diesel fuel costs represented 7% of NS' operating expenses for 2002. The program provides that NS will 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 will be hedged for any month within any 36-month period.

As of Dec. 31, 2002, through swap transactions, NS has hedged approximately 62% of expected 2003 diesel fuel requirements. The effect of the hedges is to yield an average cost of 73 cents per hedged gallon, including federal taxes and transportation. A 10% decrease in diesel fuel prices would reduce NS' asset related to the swaps by approximately $30 million as of Dec. 31, 2002.

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.

At Dec. 31, 2002, NS' debt subject to interest rate fluctuations totaled $784 million (excluding debt due to the PRR subsidiary). A 1% increase in interest rates would increase NS' total annual interest expense related to all its variable debt by approximately $8 million. Management considers it unlikely that interest rate fluctuations applicable to these instruments will result in a material adverse effect on NS' financial position, results of operations or liquidity.

Some of NS' capital leases, which carry an average fixed rate of 7%, were effectively converted to variable rate obligations using interest rate swap agreements. On Dec. 31, 2002, the average pay rate under these agreements was 2.1%, and the average receive rate was 7%. During 2002, the effect of the swaps was to reduce interest expense by $9 million. A portion of the lease obligations is payable in Japanese yen. NS eliminated the associated exchange rate risk at the inception of each lease with a yen deposit sufficient to fund the yen-denominated obligation. Most of these deposits are held by foreign banks, primarily Japanese. As a result, NS is exposed to financial market risk relative to Japan. Counterparties to the interest rate swaps and Japanese banks holding yen deposits are major financial institutions believed by management to be creditworthy.

 

K33

New Accounting Pronouncements

The Financial Accounting Standards Board (FASB) has issued Statement No. 143, "Accounting for Asset Retirement Obligations," (SFAS No. 143) which is effective Jan. 1, 2003, and addresses legal obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. In accordance with the Uniform System of Accounts for Railroad Companies (see Code of Federal Regulations, Title 49, Subtitle B, Chapter X, Part 1201), NS depreciates track structure (rail, other track material and ties) to its net salvage value (gross salvage less cost to remove). SFAS No. 143 prohibits the accrual of a liability for removal costs absent a legal obligation to remove the related asset. Management believes that there is no such legal obligation to remove track. The SEC staff has recently taken a position with a registrant in another industry that calls into question whether the use of net salvage that results in depreciating more than the cost basis of an asset (negative salvage) is appropriate once SFAS No. 143 becomes effective. NS is in the process of studying its track accounts to determine where current depreciation rates will result in negative salvage. To the extent that NS' accumulated depreciation includes such amounts, they will be removed. The cumulative effect of this catch-up adjustment will be recorded as a change in accounting principle in the first quarter of 2003. Going forward, this change will result in lower depreciation expense (because the depreciation rate will no longer reflect any negative salvage) and higher compensation and benefits expenses (for the labor cost to remove retired assets); NS does not expect that this will result in a material change to its total railway operating expenses.

The FASB has issued Interpretation No. 46, "Consolidation of Variable Interest Entities," (FIN No. 46), which addresses consolidation of certain variable interest entities (also commonly referred to as "special purpose entities"). NS adopted FIN No. 46, effective Jan 1, 2003. As a result, on that date NS consolidated a special-purpose entity that leases certain locomotives to NS (see Note 9). This entity has no other significant assets or liabilities other than the locomotives and the debt related to their purchase, which will be reflected on NS' Consolidated Balance Sheet in 2003. This change in reporting will also have the following effects to NS' Consolidated Income Statement beginning in 2003: operating lease expense will decline, and depreciation expense and interest expense on debt will increase. The net effect of these income statement changes is not significant. Adoption of FIN No. 46 did not have a significant effect on NS' financial position or liquidity.

Inflation

Generally accepted accounting principles require the use of historical cost in preparing financial statements. This approach disregards the effects of inflation on the replacement cost of property. NS, a capital-intensive company, has most of its capital invested in such assets. The replacement cost of these assets, as well as the related depreciation expense, would be substantially greater than the amounts reported on the basis of historical cost.

Trends

Federal Economic Regulation -- Efforts may be made in 2003 to reimpose unwarranted federal economic regulation on the rail industry. The Staggers Rail Act of 1980, which substantially reduced such regulation, encouraged and enabled rail carriers to innovate and to compete for business. NS and other rail carriers will oppose any efforts to reimpose unwarranted economic regulation.

Utility Deregulation -- Deregulation of the electrical utility industry is expected to increase competition among electric power generators; deregulation over time would permit wholesalers and possibly retailers of electric power to sell or purchase increasing quantities of power to or from distant parties. The effects of deregulation on NS and on its customers cannot be predicted with certainty; however, NS serves a number of efficient power producers who are expected to remain competitive in this evolving environment.

Carbon-Based Fuel -- There is growing concern in some quarters that emissions resulting from burning carbon-based fuel, including coal, are contributing to global warming and causing other environmental changes. To the extent that these concerns evolve into a consensus among policy-makers, the impact could be

 

K34

either a reduction in the demand for coal or imposition of more stringent regulations on emissions, which might result in making coal a less economical source of power generation or make permitting of coal-fired facilities even more difficult. The revenues and net income of NSR and other railroads that move large quantities of coal could be affected adversely.

 

FORWARD-LOOKING STATEMENTS

This Management's Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements that may be identified by the use of words like "believe," "expect," "anticipate" and "project." Forward-looking statements reflect management's good-faith evaluation of information currently available. However, such statements are dependent on and, therefore, can be influenced by, a number of external variables over which management has little or no control, including: domestic and international economic conditions; the business environment in industries that produce and consume rail freight; competition and consolidation within the transportation industry; fluctuation in prices of key materials, in particular diesel fuel; labor difficulties, including strikes and work stoppages; legislative and regulatory developments; changes in securities and capital markets; and natural events such as severe weather, floods and earthquakes. Forward-looking statements are not, and should not be relied upon as, a guaranty of future performance or results. Nor will they necessarily prove to be accurate indications of the times at or by which any such performance or results will be achieved. As a result, actual outcomes and results may differ materially from those expressed in forward-looking statements. The Company undertakes no obligation to update or revise forward-looking statements.

 

Item 7A. Quantitative and Qualitative Disclosures about Market Risk.

The information required by this item is included in Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" under the heading "Market Risks and Hedging Activities."

 

K35

Item 8. Financial Statements and Supplementary Data.

 
INDEX TO FINANCIAL STATEMENTS	
 	 	
 	Page	
 	 	
   Report of Management	K37	
 	 	
   Independent Auditors' Report	K38	
 	 	
   Independent Accountants' Report on Internal Control over Financial Reporting	K38	
 	 	
   Consolidated Statements of Income	K39	
   Years ended December 31, 2002, 2001 and 2000	 	
 	 	
   Consolidated Balance Sheets	K40	
   As of December 31, 2002 and 2001	 	
 	 	
   Consolidated Statements of Cash Flows	K41	
   Years ended December 31, 2002, 2001 and 2000	 	
 	 	
   Consolidated Statements of Changes in Stockholders' Equity	K42	
   Years ended December 31, 2002, 2001 and 2000	 	
 	 	
   Notes to Consolidated Financial Statements	K43	
 	 	
   The Index to Consolidated Financial Statement Schedule in Item 15	K70	

 

K36

Report of Management

 

January 28, 2003

To the Stockholders

Norfolk Southern Corporation

Management is responsible for the preparation and fair presentation of the financial statements included in this annual report. The financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America and reflect management's judgments and estimates concerning effects of events and transactions that are accounted for or disclosed.

Management is also responsible for establishing and maintaining effective internal control over financial reporting. The Corporation's internal control over financial reporting includes those policies and procedures that pertain to the Corporation's ability to record, process, summarize and report reliable financial data. Management recognizes that there are inherent limitations in the effectiveness of any internal control over financial reporting, including the possibility of human error and the circumvention or overriding of internal control. Accordingly, even effective internal control over financial reporting can provide only reasonable assurance with respect to financial statement preparation. Further, because of changes in conditions, the effectiveness of internal control over financial reporting may vary over time.

In order to ensure that the Corporation's internal control over financial reporting is effective, management regularly assesses such controls and did so most recently for its financial reporting as of December 31, 2002. This assessment was based on criteria for effective internal control over financial reporting described in  Internal Control-Integrated Framework  issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, management believes the Corporation maintained effective internal control over financial reporting as of December 31, 2002.

The Board of Directors, acting through its Audit Committee, is responsible for the oversight of the Corporation's accounting policies, financial reporting and internal control. The Audit Committee of the Board of Directors is comprised entirely of outside directors who are independent of management. The Audit Committee is responsible for the appointment and compensation of the independent auditor, and approves decisions regarding the appointment or removal of the Vice President-Internal Audit. It meets periodically with management, the independent auditors, and the internal auditors to ensure that they are carrying out their responsibilities. The Audit Committee is also responsible for performing an oversight role by reviewing and monitoring the financial, accounting and auditing procedures of the Corporation in addition to reviewing the Corporation's financial reports. The independent auditors and the internal auditors have full and unlimited access to the Audit Committee, with or without management, to discuss the adequacy of internal control over financial reporting, and any other matters which they believe should be brought to the attention of the Audit Committee.

KPMG LLP, independent auditors of the Corporation's financial statements, has reported on management's assertion with respect to the effectiveness of the Corporation's internal control over financial reporting as of December 31, 2002.

 

/s/ David R. Goode	/s/ Henry C. Wolf	/s/ John P. Rathbone	
David R. Goode	Henry C. Wolf	John P. Rathbone	
Chairman, President and	Vice Chairman and	Senior Vice President and	
Chief Executive Officer	Chief Financial Officer	Controller	

 

K37

Independent Auditors' Report

The Stockholders and Board of Directors

Norfolk Southern Corporation:

We have audited the accompanying consolidated balance sheets of Norfolk Southern Corporation and subsidiaries as of December 31, 2002 and 2001, and the related consolidated statements of income, changes in stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 2002. In connection with our audits of the consolidated financial statements, we have also audited the financial statement schedule as listed in Item 15(A)2. These consolidated financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Norfolk Southern Corporation and subsidiaries as of December 31, 2002 and 2001, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2002 in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

/s/ KPMG LLP 

Norfolk, Virginia

January 28, 2003

 

INDEPENDENT ACCOUNTANTS' REPORT ON INTERNAL CONTROL

OVER FINANCIAL REPORTING

The Board of Directors

Norfolk Southern Corporation:

We have examined management's assertion, included in the accompanying Report of Management, that Norfolk Southern Corporation maintained effective internal control over financial reporting as of December 31, 2002 based on criteria established in  Internal Control-Integrated Framework  issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Norfolk Southern Corporation's management is responsible for maintaining effective internal control over financial reporting. Our responsibility is to express an opinion on management's assertion based on our examination.

Our examination was conducted in accordance with attestation standards established by the American Institute of Certified Public Accountants and, accordingly, included obtaining an understanding of the internal control over financial reporting, testing, and evaluating the design and operating effectiveness of the internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our examination provides a reasonable basis for our opinion.

Because of inherent limitations in any internal control, misstatements due to error or fraud may occur and not be detected. Also, projections of any evaluation of the internal control over financial reporting to future periods are subject to the risk that the internal control may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, management's assertion that Norfolk Southern Corporation maintained effective internal control over financial reporting as of December 31, 2002 is fairly stated, in all material respects, based on criteria established in  Internal Control-Integrated Framework  issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

/s/ KPMG LLP 

Norfolk, Virginia

January 28, 2003

 

K38

Norfolk Southern Corporation And Subsidiaries

Consolidated Statements of Income

 	Years ended December 31,	
 	2002	2001	2000	
 	($ in millions, except earnings per share)	
 	 	 	 	 	 	 	
Railway operating revenues	$	6,270 	$	6,170 	$	6,159 	
 	 	 	 	 	 	 	
Railway operating expenses	 	 	 	 	 	 	
  Compensation and benefits (Note 11)	 	2,022 	 	2,014 	 	2,234 	
  Materials, services and rents	 	1,457 	 	1,444 	 	1,445 	
  Conrail rents and services (Note 2)	 	412 	 	421 	 	478 	
  Depreciation	 	515 	 	514 	 	503 	
  Diesel fuel	 	342 	 	412 	 	478 	
  Casualties and other claims	 	171 	 	143 	 	142 	
  Other	 	193 	 	215 	 	246 	
 	 	 	 	 	 	 	
    Total railway operating expenses	 	5,112 	 	5,163 	 	5,526 	
 	 	 	 	 	 	 	
    Income from railway operations	 	1,158 	 	1,007 	 	633 	
 	 	 	 	 	 	 	
Other income - net (Note 3)	 	66 	 	99 	 	168 	
Interest expense on debt (Note 6)	 	(518)	 	(553)	 	(551)	
 	 	 	 	 	 	 	
    Income from continuing operations	 	 	 	 	 	 	
      before income taxes	 	706 	 	553 	 	250 	
 	 	 	 	 	 	 	
Provision for income taxes (Note 4)	 	246 	 	191 	 	78 	
 	 	 	 	 	 	 	
    Income from continuing operations	 	460 	 	362 	 	172 	
 	 	 	 	 	 	 	
Discontinued operations - gain on sale	 	 	 	 	 	 	
  of motor carrier, net of taxes (Note 17)	 	-- 	 	13 	 	-- 	
 	 	 	 	 	 	 	
    Net income	$	460 	$	375 	$	172 	
 	 	 	 	 	 	 	
Earnings per share (Note 14)	 	 	 	 	 	 	
  Income from continuing operations -	 	 	 	 	 	 	
    basic and diluted	$	1.18 	$	0.94 	$	0.45 	
 	 	 	 	 	 	 	
  Net income - basic and diluted	$	1.18 	$	0.97 	$	0.45 	
 	 	 	 	 	 	 	
See accompanying notes to consolidated financial statements.	

 

K39

Norfolk Southern Corporation And Subsidiaries

Consolidated Balance Sheets

 	As of Dec. 31,	
 	2002	2001	
 	($ in millions)	
Assets	 	 	 	 	
Current assets:	 	 	 	 	
  Cash and cash equivalents	$	184 	$	204 	
  Accounts receivable-net (Note 5)	 	683 	 	475 	
  Due from Conrail (Note 2)	 	6 	 	8 	
  Materials and supplies	 	97 	 	90 	
  Deferred income taxes (Note 4)	 	187 	 	162 	
  Other current assets	 	142 	 	108 	
    Total current assets	 	1,299 	 	1,047 	
 	 	 	 	 	
Investment in Conrail (Note 2)	 	6,178 	 	6,161 	
Properties less accumulated depreciation (Note 6)	 	11,370 	 	11,208 	
Other assets	 	1,109 	 	1,002 	
     Total assets	$	19,956 	$	19,418 	
 	 	 	 	 	
Liabilities and stockholders' equity	 	 	 	 	
Current liabilities:	 	 	 	 	
  Accounts payable (Note 7)	$	908 	$	848 	
  Income and other taxes	 	269 	 	312 	
  Due to Conrail (Note 2)	 	86 	 	373 	
  Other current liabilities (Note 7)	 	232 	 	248 	
  Current maturities of long-term debt (Note 8)	 	358 	 	605 	
    Total current liabilities	 	1,853 	 	2,386 	
 	 	 	 	 	
Long-term debt (Note 8)	 	7,006 	 	7,027 	
Other liabilities (Note 10)	 	1,029 	 	1,089 	
Due to Conrail (Note 2)	 	513 	 	-- 	
Minority interests	 	45 	 	45 	
Deferred income taxes (Note 4)	 	3,010 	 	2,781 	
    Total liabilities	 	13,456 	 	13,328 	
 	 	 	 	 	
Stockholders' equity:	 	 	 	 	
  Common stock $1.00 per share par value, 1,350,000,000 shares	 	 	 	 	
    authorized; issued 410,154,465 and 407,000,871 shares,	 	 	 	 	
    respectively	 	410 	 	407 	
  Additional paid-in capital	 	481 	 	423 	
  Accumulated other comprehensive loss (Note 13)	 	(65)	 	(55)	
  Retained income	 	5,694 	 	5,335 	
  Less treasury stock at cost, 21,169,125 shares	 	(20)	 	(20)	
 	 	 	 	 	
    Total stockholders' equity	 	6,500 	 	6,090 	
 	 	 	 	 	
    Total liabilities and stockholders' equity	$	19,956 	$	19,418 	
 	 	 	 	 	
See accompanying notes to consolidated financial statements.	

 

K40

Norfolk Southern Corporation And Subsidiaries

Consolidated Statements of Cash Flows

 	Years Ended December 31,	
 	2002	2001	2000	
 	($ in millions)	
Cash flows from operating activities	 	 	 	 	 	 	
  Net income	$	460 	$	375 	$	172 	
  Reconciliation of net income to net cash	 	 	 	 	 	 	
    provided by operating activities:	 	 	 	 	 	 	
      Depreciation	 	529 	 	527 	 	517 	
      Deferred income taxes	 	178 	 	44 	 	2 	
      Equity in earnings of Conrail	 	(54)	 	(44)	 	(21)	
      Gains and losses on properties and investments	 	(47)	 	(59)	 	(160)	
      Income from discontinued operations	 	-- 	 	(13)	 	-- 	
      Changes in assets and liabilities affecting operations:	 	 	 	 	 	 	
         Accounts receivable (Note 5)	 	(208)	 	(74)	 	446 	
          Materials and supplies	 	(7)	 	1 	 	9 	
          Other current assets and due from Conrail	 	1 	 	46 	 	60 	
          Current liabilities other than debt	 	35 	 	(27)	 	220 	
          Other - net (Note 11)	 	(84)	 	(122)	 	97 	
            Net cash provided by operating activities	 	803 	 	654 	 	1,342 	
 	 	 	 	 	 	 	
Cash flows from investing activities	 	 	 	 	 	 	
  Property additions	 	(689)	 	(746)	 	(731)	
  Property sales and other transactions	 	31 	 	156 	 	137 	
  Investments, including short-term	 	(78)	 	(99)	 	(77)	
  Investment sales and other transactions	 	63 	 	88 	 	90 	
            Net cash used for investing activities	 	(673)	 	(601)	 	(581)	
 	 	 	 	 	 	 	
Cash flows from financing activities	 	 	 	 	 	 	
  Dividends	 	(101)	 	(93)	 	(306)	
  Common stock issued - net	 	42 	 	14 	 	2 	
  Proceeds from borrowings	 	672 	 	1,995 	 	1,055 	
  Debt repayments	 	(763)	 	(1,765)	 	(1,549)	
 	 	 	 	 	 	 	
            Net cash provided by (used for) financing activities	 	(150)	 	151 	 	(798)	
 	 	 	 	 	 	 	
            Net increase (decrease) in cash and cash equivalents	 	(20)	 	204 	 	(37)	
 	 	 	 	 	 	 	
Cash and cash equivalents	 	 	 	 	 	 	
  At beginning of year	 	204 	 	-- 	 	37 	
 	 	 	 	 	 	 	
  At end of year	$	184 	$	204 	$	-- 	
 	 	 	 	 	 	 	
Supplemental disclosure of cash flow information	 	 	 	 	 	 	
  Cash paid during the year for:	 	 	 	 	 	 	
    Interest (net of amounts capitalized)	$	525 	$	550 	$	543 	
    Income taxes	$	54 	$	74 	$	5 	
 	 	 	 	 	 	 	
See accompanying notes to consolidated financial statements.	

 

K41

Norfolk Southern Corporation And Subsidiaries

Consolidated Statements of Changes in Stockholders' Equity

 	 	 	Accum.	 	 	 	
 	 	 	Other	 	 	 	
 	 	Additional	Compre-	 	 	 	
 	Common	Paid-in	hensive	Retained	Treasury	 	
 	Stock	Capital	Loss	Income	Stock	Total	
 	($ in millions, except per share amounts)	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Balance Dec. 31, 1999	$	404	$	372	$	(11)	$	5,187 	$	(20)	$	5,932 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Comprehensive income	 	 	 	 	 	 	 	 	 	 	 	 	
  Net income	 	 	 	 	 	 	 	172 	 	 	 	172 	
  Other comprehensive	 	 	 	 	 	 	 	 	 	 	 	 	
    income (Note 13)	 	 	 	 	 	5 	 	 	 	 	 	5 	
      Total comprehensive	 	 	 	 	 	 	 	 	 	 	 	 	
        income	 	 	 	 	 	 	 	 	 	 	 	177 	
Dividends on Common	 	 	 	 	 	 	 	 	 	 	 	 	
  Stock, $0.80 per share	 	 	 	 	 	 	 	(306)	 	 	 	(306)	
Other (Notes 11 and 12)	 	1	 	20	 	 	 	 	 	 	 	21 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Balance Dec. 31, 2000	 	405	 	392	 	(6)	 	5,053 	 	(20)	 	5,824 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Comprehensive income	 	 	 	 	 	 	 	 	 	 	 	 	
  Net income	 	 	 	 	 	 	 	375 	 	 	 	375 	
  Other comprehensive	 	 	 	 	 	 	 	 	 	 	 	 	
    loss (Note 13)	 	 	 	 	 	(49)	 	 	 	 	 	(49)	
      Total comprehensive	 	 	 	 	 	 	 	 	 	 	 	326 	
        income	 	 	 	 	 	 	 	 	 	 	 	 	
Dividends on Common	 	 	 	 	 	 	 	 	 	 	 	 	
  Stock, $0.24 per share	 	 	 	 	 	 	 	(93)	 	 	 	(93)	
Other (Notes 11 and 12)	 	2	 	31	 	 	 	 	 	 	 	33 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Balance Dec. 31, 2001	$	407	$	423	$	(55)	$	5,335 	$	(20)	$	6,090 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Comprehensive income	 	 	 	 	 	 	 	 	 	 	 	 	
  Net income	 	 	 	 	 	 	 	460 	 	 	 	460 	
  Other comprehensive	 	 	 	 	 	 	 	 	 	 	 	 	
    loss (Note 13)	 	 	 	 	 	(10)	 	 	 	 	 	(10)	
      Total comprehensive	 	 	 	 	 	 	 	 	 	 	 	 	
        income	 	 	 	 	 	 	 	 	 	 	 	450 	
Dividends on Common	 	 	 	 	 	 	 	 	 	 	 	 	
  Stock, $0.26 per share	 	 	 	 	 	 	 	(101)	 	 	 	(101)	
Other (Notes 11 and 12)	 	3	 	58	 	 	 	 	 	 	 	61 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Balance Dec. 31, 2002	$	410	$	481	$	(65)	$	5,694 	$	(20)	$	6,500 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
See accompanying notes to consolidated financial statements.	

 

K42

NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

The following Notes are an integral part of the Consolidated Financial Statements.

 

1. Summary of Significant Accounting Policies

Description of Business

Norfolk Southern Corporation is a Virginia-based holding company engaged principally in the rail transportation business, operating approximately 21,500 route miles primarily in the East and Midwest. These consolidated financial statements include Norfolk Southern Corporation (Norfolk Southern) and its majority-owned and controlled subsidiaries (collectively, NS). Norfolk Southern's major subsidiary is Norfolk Southern Railway Company (NSR). All significant intercompany balances and transactions have been eliminated in consolidation.

The railroad transports raw materials, intermediate products and finished goods classified in the following market groups (percent of total railway operating revenues in 2002): coal (23%); automotive (15%); chemicals (12%); metals/construction (11%); agriculture/consumer products/government (10%); paper/clay/forest products (10%); and intermodal (19%). Ultimate points of origination or destination for some of the freight (particularly coal bound for export and intermodal containers) are outside the United States. Approximately 85% of NS' railroad employees are covered by collective bargaining agreements with 15 different labor unions.

Through a jointly owned entity, Norfolk Southern and CSX Corpor­ation own the stock of Conrail Inc., which owns the major Northeast freight railroad. Norfolk Southern has a 58% economic and 50% voting interest in the jointly owned entity (see Note 2).

Use of Estimates

The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Management reviews its estimates, including those related to the recoverability and useful lives of assets, as well as liabilities for litigation, environmental remediation, casualty claims, income taxes, and pension and postretirement benefits. Changes in facts and circumstances may result in revised estimates.

Cash Equivalents

"Cash equivalents" are highly liquid investments purchased three months or less from maturity.

Investments

Marketable equity and debt securities are reported at amortized cost or fair value, depending upon their classification as securities "held-to-maturity," "trading" or "available-for-sale." Unrealized gains and losses for investments designated as "available-for-sale," net of taxes, are recognized in "Accumulated other comprehensive loss."

Investments, where NS has the ability to exercise significant influence over but does not control the entity, are accounted for using the equity method in accordance with APB Opinion No. 18, "The Equity Method of Accounting for Investments in Common Stock."

 

K43

Materials and Supplies

"Materials and supplies," consisting mainly of fuel oil and items for maintenance of property and equipment, are stated at the lower of average cost or market. The cost of materials and supplies expected to be used in capital additions or improvements is included in "Properties."

Properties

"Properties" are stated principally at cost and are depreciated using group depreciation. Rail is depreciated primarily on the basis of use measured by gross ton-miles. Other properties are depreciated generally using the straight-line method over the lesser of estimated service or lease lives. NS capitalizes interest on major capital projects during the period of their construction. Expenditures, including those on leased assets, that extend an asset's useful life or increase its utility are capitalized. Maintenance expense is recognized when repairs are performed. When properties other than land and nonrail assets are sold or retired in the ordinary course of business, the cost of the assets, net of sale proceeds or salvage, is charged to accumulated depreciation rather than recognized through income. Gains and losses on disposal of land and nonrail assets are included in "Other income - net" (see Note 3).

NS reviews the carrying amount of properties whenever events or changes in circumstances indicate that such carrying amount may not be recoverable based on future undiscounted cash flows or estimated net realizable value. Assets that are deemed impaired as a result of such review are recorded at the lower of carrying amount or fair value.

Revenue Recognition

Revenue is recognized proportionally as a shipment moves from origin to destination. Refunds are recorded as a reduction to revenues based on management's best estimate of projected liability.

Derivatives

NS does not engage in the trading of derivatives. NS uses derivative financial instruments to reduce the risk of volatility in its diesel fuel costs and in the management of its mix of fixed and floating-rate debt. Management has determined that these derivative instruments qualify as either fair-value or cash-flow hedges, having values that highly correlate with the underlying hedged exposures and have designated such instruments as hedging transactions. Income and expense related to the derivative financial instruments is recorded in the same category as generated by the underlying asset or liability. 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.

Stock-based Compensation

NS has stock-based employee compensation plans, which are more fully described in Note 12. NS applies the intrinsic value recognition and measurement principles of APB Opinion No. 25, "Accounting for Stock Issued to Employees" (APB Opinion No. 25), and related interpretations in accounting for these plans.

The following table illustrates the effect on net income and earnings per share if NS had applied the fair value recognition provisions of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS No. 123), to stock-based employee compensation:

 

K44

 
 	2002	2001	2000	
 	($ in millions except per share)	
 	 	 	 	 	 	 	
Net income, as reported	$	460 	$	375 	$	172 	
Add: Stock-based employee compensation expense	 	 	 	 	 	 	
  included in reported net income, net of related	 	 	 	 	 	 	
  tax effects	 	14 	 	12 	 	3 	
Deduct: Stock-based employee compensation	 	 	 	 	 	 	
  expense determined under fair value method, net	 	 	 	 	 	 	
  of related tax effects	 	(45)	 	(29)	 	(26)	
Pro forma net income	$	429 	$	358 	$	149 	
 	 	 	 	 	 	 	
Earnings per share:	 	 	 	 	 	 	
   Basic and diluted - as reported	$	1.18	$	0.97	$	0.45	
   Basic and diluted - pro forma	$	1.10	$	0.93	$	0.39	

Required Accounting Changes

The adoption of Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," which was effective Jan. 1, 2002, did not have a material effect on NS' consolidated financial statements.

 

2. Investment in Conrail and Operations Over Its Lines

Overview

Through a limited liability company, Norfolk Southern and CSX Corporation (CSX) jointly own Conrail Inc. (Conrail), whose primary subsidiary is Consolidated Rail Corporation (CRC), the major freight railroad in the Northeast. 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. From time to time, Norfolk Southern and CSX, as the indirect owners of Conrail, may have to make capital contributions, loans or advances to Conrail under the terms of the Transaction Agreement among NS, CSX and Conrail.

Operation of Conrail's Lines

Norfolk Southern's railroad subsidiary, Norfolk Southern Railway Company (NSR), operates as a part of its rail system the routes and assets of Pennsylvania Lines LLC (PRR), a wholly owned subsidiary of CRC, pursuant to operating and lease agreements. CSX Transportation, Inc. (CSXT) operates the routes and assets of another CRC subsidiary under comparable terms.

The Operating Agreement between NSR and PRR governs substantially all nonequipment assets to be operated by NSR and has an initial 25-year term, renewable at the option of NSR for two five-year terms. Payments under the Opera­ting Agreement are subject to adjustment every six years to reflect changes in values. NSR also has leased or subleased for varying terms from PRR a number of equipment assets. Costs necessary to operate and maintain the PRR assets, including leasehold improvements, are borne by NSR. NSR receives all freight revenues on the PRR lines.

NSR and CSXT also have entered into agreements with CRC governing other properties that continue to be owned and operated by CRC (the Shared Assets Areas). NSR and CSXT pay CRC a fee for joint and exclusive access to the Shared Assets Areas. In addition, NSR and CSXT pay, based on usage, the costs incurred by CRC to operate the Shared Assets Areas.

 

K45

Future minimum lease payments due to PRR under the Operating Agreement and lease agreements and to CRC under the Shared Assets Areas (SAA) agreements are as follows:

 	PRR Oper.	PRR Lease	SAA	
 	Agmt.	Agmt.	Agmts.	
 	($ in millions)	
 	 	 	 	 	 	 	
2003	$	217	$	116	$	30	
2004	 	238	 	94	 	32	
2005	 	246	 	74	 	33	
2006	 	246	 	60	 	34	
2007	 	246	 	48	 	34	
2008 and subsequent years	 	4,285	 	129	 	585	
   Total	$	5,478	$	521	$	748	

Operating lease expense related to the agreements, which is included in "Conrail rents and services," amounted to $468 million in 2002, $467 million in 2001 and $502 million in 2000.

Investment in Conrail

NS is applying the equity method of accounting to its investment in Conrail in accordance with APB Opinion No. 18, "The Equity Method of Accounting for Investments in Common Stock." NS is amortizing the excess of the purchase price over Conrail's net equity using the principles of purchase accounting, based primarily on the estimated remaining useful lives of Conrail's depreciable property and equipment, including the related deferred tax effect of the differences in tax and accounting bases for certain assets. At Dec. 31, 2002, the difference between NS' investment in Conrail and its share of Conrail's underlying net equity was $3.7 billion.

NS' consolidated balance sheet at Dec. 31, 2002, includes $60 million of liabilities related to the Conrail transaction, principally for contractual obligations to Conrail employees imposed by the Surface Transportation Board when it approved the transaction. Through Dec. 31, 2002, NS had paid $143 million of such costs.

Related-Party Transactions

NS provides certain general and administrative support functions to Conrail, the fees for which are billed in accordance with several service-provider arrangements and totaled $7 million in 2002, $6 million in 2001 and $7 million in 2000.

"Conrail rents and services" includes: (1) expenses for amounts due to PRR and CRC for use by NSR of operating properties and equipment and operation of the Shared Assets Areas and (2) NS' equity in the earnings of Con­rail, net of amortization.

A significant portion of payments made to PRR is borrowed back from a subsidiary of PRR. Previously, these loans were made under a demand note; however, in the first quarter of 2002, the subsidiary of PRR exchanged this demand note for a new note due in 2032. As a result, borrowings owed to the subsidiary of PRR now comprise the noncurrent balance "Due to Conrail." The interest rate for these loans is variable and was 1.82% at Dec. 31, 2002. The current balance "Due to Conrail" at Dec. 31, 2002, is composed of amounts related to expenses included in "Conrail rents and services," as discussed above. At Dec. 31, 2001, the current balance "Due to Conrail" included $72 million of such amounts and $301 million of advances owed under the previous demand note.

 

K46

Summary Financial Information - Conrail

The following historical cost basis financial information should be read in conjunction with Conrail's audited financial statements, included as Exhibit 99 to this Annual Report on Form 10-K.

Summarized Consolidated Statements of Income - Conrail

 	2002	2001	2000	
 	($ in millions)	
 	 	 	 	 	 	 	
Operating revenues	$	893 	$	903 	$	985	
Operating expenses	 	623 	 	639 	 	749	
   Operating income	 	270 	 	264 	 	236	
Other - net	 	(10)	 	(6)	 	31	
   Income before income taxes	 	260 	 	258 	 	267	
Provision for income taxes	 	80 	 	84 	 	97	
   Net income	$	180 	$	174 	$	170	

Note: Conrail's results for 2000 included gains from the sale of property that had been written up to fair market value in the allocation of NS' investment in Conrail. Accordingly, the gains related to that fair-value write-up, totaling $17 million after taxes, were excluded in determining NS' equity in Conrail's net income.

Summarized Consolidated Balance Sheets - Conrail

 	December 31,	
 	2002	2001	
 	($ in millions)	
Assets:	 	 	 	 	
   Current assets	$	300	$	846	
   Noncurrent assets	 	7,857	 	7,236	
      Total assets	$	8,157	$	8,082	
 	 	 	 	 	
Liabilities and stockholders' equity:	 	 	 	 	
   Current liabilities	$	329	$	408	
   Noncurrent liabilities	 	3,602	 	3,569	
   Stockholders' equity	 	4,226	 	4,105	
      Total liabilities and stockholders equity	$	8,157	$	8,082	

Note: Current assets include amounts due from NS and CSX totaling $158 million at Dec. 31, 2002, and $687 million at Dec. 31, 2001. Noncurrent assets include amounts due from NS and CSX totaling $892 million at Dec. 31, 2002, and zero at Dec. 31, 2001. Current liabilities include amounts payable to NS and CSX totaling $9 million at Dec. 31, 2002, and $12 million at Dec. 31, 2001.

 

K47

3. Other Income - Net

 	2002	2001	2000	
 	($ in millions)	
Income from natural resources:	 	 	 	 	 	 	
   Royalties from coal	$	48 	$	52 	$	55 	
   Gains from sale of timber, oil and gas rights	 	 	 	 	 	 	
      and interests	 	-- 	 	-- 	 	101 	
   Nonoperating depletion and depreciation	 	(14)	 	(13)	 	(13)	
         Subtotal	 	34 	 	39 	 	143 	
 	 	 	 	 	 	 	
Gains from sale of properties and investments	 	47 	 	59 	 	59 	
Rental income	 	36 	 	40 	 	40 	
Interest income	 	12 	 	15 	 	11 	
Other interest expense	 	(31)	 	1 	 	(39)	
Taxes on nonoperating property	 	(7)	 	(11)	 	(9)	
Discount on sales of accounts receivable (Note 5)	 	(4)	 	(17)	 	(23)	
Corporate-owned life insurance - net	 	(1)	 	6 	 	-- 	
Equity in earnings (losses) of partnerships	 	(1)	 	(8)	 	3 	
Charitable contributions	 	-- 	 	(4)	 	(4)	
Other	 	(19)	 	(21)	 	(13)	
         Total	$	66 	$	99 	$	168 	

"Other income - net" includes the income generated by the activities of NS' noncarrier subsidiaries as well as the costs incurred by those subsidiaries in their operations.

"Other current assets" in the Consolidated Balance Sheets includes prepaid interest of $46 million at Dec. 31, 2002, and $45 million at Dec. 31, 2001, arising from corporate-owned life insurance borrowings.

 

4. Income Taxes

Provision for Income Taxes

 	2002	2001	2000	
 	($ in millions)	
 	 	 	 	 	 	 	
Current:	 	 	 	 	 	 	
   Federal	$	61	$	125	$	65	
   State	 	7	 	22	 	11	
      Total current taxes	 	68	 	147	 	76	
 	 	 	 	 	 	 	
Deferred:	 	 	 	 	 	 	
   Federal	 	145	 	35	 	1	
   State	 	33	 	9	 	1	
      Total deferred taxes	 	178	 	44	 	2	
 	 	 	 	 	 	 	
      Provision for income taxes	$	246	$	191	$	78	

 

K48

Reconciliation of Statutory Rate to Effective Rate

Total income taxes as reflected in the Consolidated Statements of Income differ from the amounts computed by applying the statutory federal corporate tax rate as follows:

 	2002	2001	2000	
 	Amount	 	%	Amount	 	%	Amount	 	%	
 	($ in millions)	
Federal income tax at	 	 	 	 	 	 	 	 	 	 	 	 	
  statutory rate	$	247	 	35	$	194 	 	35 	$	87 	 	35 	
State income taxes, net of	 	 	 	 	 	 	 	 	 	 	 	 	
  federal tax benefit	 	26 	 	4 	 	20 	 	4 	 	8 	 	3 	
Equity in earnings of	 	 	 	 	 	 	 	 	 	 	 	 	
  Conrail	 	(19)	 	(3)	 	(16)	 	(3)	 	(7)	 	(3)	
Corporate-owned life	 	 	 	 	 	 	 	 	 	 	 	 	
  insurance	 	(1)	 	-- 	 	(3)	 	-- 	 	(2)	 	(1)	
Other - net	 	(7)	 	(1)	 	(4)	 	(1)	 	(8)	 	(3)	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Provision for income taxes	$	246 	 	35 	$	191 	 	35	$	78 	 	31 	

Deferred Tax Assets and Liabilities

Certain items are reported in different periods for financial reporting and income tax purposes. Deferred tax assets and liabilities are recorded in recognition of these differences.

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities are as follows:

 	December 31,	
 	2002	2001	
 	($ in millions)	
Deferred tax assets:	 	 	 	 	
   Reserves, including casualty and other claims	$	178 	$	158 	
   Employee benefits	 	26 	 	75 	
   Retiree health and death benefit obligations	 	138 	 	137 	
   Taxes, including state and property	 	234 	 	221 	
   Other	 	16 	 	22 	
      Total gross deferred tax assets	 	592 	 	613 	
   Less valuation allowance	 	(24)	 	(18)	
      Net deferred tax asset	 	568 	 	595 	
 	 	 	 	 	
Deferred tax liabilities:	 	 	 	 	
   Property	 	(3,300)	 	(3,126)	
   Other	 	(91)	 	(88)	
      Total gross deferred tax liabilities	 	(3,391)	 	(3,214)	
 	 	 	 	 	
      Net deferred tax liability	 	(2,823)	 	(2,619)	
      Net current deferred tax asset	 	187 	 	162 	
 	 	 	 	 	
      Net long-term deferred tax liability	$	(3,010)	$	(2,781)	

Except for amounts for which a valuation allowance has been provided, management believes the other deferred tax assets will be realized. The total valuation allowance increased $6 million in 2002, $6 million in 2001 and $3 million in 2000.

 

K49

Internal Revenue Service (IRS) Reviews

Consolidated federal income tax returns have been examined and Revenue Agent Reports have been received for all years up to and including 1996. The consolidated federal income tax returns for 1997, 1998 and 1999 are being audited by the IRS. Management believes that adequate provision has been made for any additional taxes and interest thereon that might arise as a result of IRS examinations.

 

5. Accounts Receivable

In May 2000, a bankruptcy-remote special purpose subsidiary of NS began selling without recourse undivided ownership interests in a pool of accounts receivable. Upon commencement of this program, NS received cash proceeds of $460 million. The buyers have a priority collection interest in the entire pool of receivables and, as a result, NS has retained credit risk to the extent the pool of receivables exceeds the amount sold. NS services and collects the receivables on behalf of the buyers; however, no servicing asset or liability has been recognized because the benefits of servicing are estimated to be just adequate to compensate NS for its responsibilities. Payments collected from sold receivables can be reinvested in new accounts receivable on behalf of the buyers. Should NS' credit rating drop below investment grade, the buyers have the right to discontinue this reinvestment.

Accounts receivable sold under this arrangement, and therefore not included in "Accounts receivable, net" on the Consolidated Balance Sheets, were $30 million at Dec. 31, 2002, and $300 million at Dec. 31, 2001. The fees associated with the sale, which are based on the buyers' financing costs, are included in "Other income - net" (see Note 3). NS' retained interest, which is included in "Accounts receivable, net," is recorded at fair value using estimates of dilution based on NS' historical experience. These estimates are adjusted regularly based on NS' actual experience with the pool, including defaults and credit deterioration. NS has historically experienced very low levels of default. If historical dilution percentages were to increase one percentage point, the value of NS' retained interest would be reduced by approximately $5 million.

NS' allowance for doubtful accounts was $5 million at Dec. 31, 2002, and Dec. 31, 2001.

 

6. Properties

 	December 31,	Depreciation	
 	2002	2001	Rate for 2002	
 	($ in millions)	 	
Railway property:	 	 	 	 	 	
   Road	$	10,859 	$	10,452 	2.9%	
   Equipment	 	5,573 	 	5,559 	3.9%	
Other property	 	655 	 	632 	3.1%	
 	 	17,087 	 	16,643 	 	
 	 	 	 	 	 	
Less accumulated depreciation	 	(5,717)	 	(5,435)	 	
 	 	 	 	 	 	
      Net properties	$	11,370 	$	11,208 	 	

Included in properties is approximately $110 million of telecommunications assets consisting of fiber optic conduit. NS evaluated the recoverability of these assets at Dec. 31, 2002, and based on known facts and circumstances, management believes that its investment in these assets will be recovered.

Railway property includes $480 million at Dec. 31, 2002 and $474 million at Dec. 31, 2001, of assets recorded pursuant to capital leases. Other property includes the costs of obtaining rights to natural resources of $341 million at Dec. 31, 2002 and 2001.

 

K50

Capitalized Interest

Total interest cost incurred on debt in 2002, 2001 and 2000 was $529 million, $570 million and $569 million, respectively, of which $11 million, $17 million and $18 million was capitalized.

 

7. Current Liabilities

 	December 31,	
 	2002	2001	
 	($ in millions)	
Accounts payable:	 	 	 	 	
   Accounts and wages payable	$	446	$	385	
   Casualty and other claims	 	207	 	192	
   Equipment rents payable - net	 	116	 	130	
   Vacation liability	 	117	 	118	
   Other	 	22	 	23	
      Total	$	908	$	848	
 	 	 	 	 	
Other current liabilities:	 	 	 	 	
   Interest payable	$	118	$	118	
   Accrued Conrail-related costs (Note 2)	 	34	 	35	
   Liabilities for forwarded traffic	 	34	 	35	
   Retiree health and death benefit obligations (Note 11)	 	31	 	24	
   Derivative instruments	 	--	 	17	
   Other	 	15	 	19	
      Total	$	232	$	248	

 

8. Long-term Debt

 	December 31,	
 	2002	2001	
 	($ in millions)	
Notes at average rates and maturities as follows:	 	 	 	 	
   6.64%, maturing 2003 to 2007	$	1,840 	$	1,500 	
   6.91%, maturing 2008 to 2011	 	1,200 	 	1,750 	
   8.10%, maturing 2017 to 2021	 	800 	 	800 	
   7.54%, maturing 2027 to 2031	 	1,500 	 	1,500 	
   7.05%, maturing 2037	 	717 	 	750 	
   7.90%, maturing 2097	 	350 	 	350 	
Equipment obligations at an average rate of 4.7%, maturing to 2014	 	558 	 	579 	
Capitalized leases at an average rate of 2.1%, maturing to 2015	 	306 	 	316 	
Other debt at an average rate of 6.1%, maturing to 2019	 	122 	 	119 	
Discounts and premiums, net	 	(29)	 	(32)	
      Total long-term debt	 	7,364 	 	7,632 	
      Less current maturities	 	(358)	 	(605)	
      Long-term debt excluding current maturities	$	7,006 	$	7,027 	
 	 	 	 	 	
Long-term debt maturities subsequent to 2003 are as follows:	 	 	 	 	
   2004	$	 356 	 	 	
   2005	 	 500 	 	 	
   2006	 	 295 	 	 	
   2007	 	 858 	 	 	
   2008 and subsequent years	 	 4,997 	 	 	
      Total	$	 7,006 	 	 	

K51

Each holder of a 2037 note may require NS to redeem all or part of the note at face value, plus accrued and unpaid interest, on May 1, 2004.

The railroad equipment obligations and the capitalized leases are secured by liens on the underlying equipment.

Certain lease obligations require the maintenance of yen-denominated deposits, which are pledged to the lessor to satisfy yen-denominated lease payments. These deposits are included in "Other assets" on the balance sheet and totaled $86 million at Dec. 31, 2002, and $78 million at Dec. 31, 2001.

  Shelf Registration

NS filed on Form S-3 a shelf registration statement with the Securities and Exchange Com­mission covering the issu­ance of up to $1 billion of secur­ities. As of Dec. 31, 2002, NS had issued a total of $550 million of notes under this shelf registration.

Commercial Paper and Credit Agreement

NS has the ability to issue commercial paper backed by a $1 billion credit agreement that expires in 2006. At Dec. 31, 2002, and Dec. 31, 2001, NS had no commercial paper outstanding. Any borrowings under the credit agreement are contingent on the continuing effectiveness of the representations and warranties made at the inception of the agreement.

  Debt Covenants

NS is subject to various financial covenants with respect to its debt and under its credit agreement, including a minimum net worth requirement, a maximum leverage ratio restriction and certain restrictions on issuance of further debt. At Dec. 31, 2002, NS was in compliance with all debt covenants.

 

9. Lease Commitments

NS is committed under long-term lease agree­ments, which expire on various dates through 2067, for equipment, lines of road and other property. The following amounts do not include payments to PRR under the Operating Agreement and lease agreements or to CRC under the SAA agreements (see Note 2). Future minimum lease payments and operating lease expense, other than to PRR and CRC, are as follows:

 	Operating	Capital	
 	Leases	Leases	
 	($ in millions)	
 	 	
2003	$	113	$	47 	
2004	 	89	 	52 	
2005	 	77	 	47 	
2006	 	61	 	43 	
2007	 	54	 	40 	
2008 and subsequent years	 	486	 	123 	
   Total	$	880	$	352 	
Less imputed interest on capital leases at an average rate of 7.0%	 	 	 	(46)	
   Present value of minimum lease payments included in debt	 	 	$	306 	

 

K52

Operating Lease Expense

 	2002	2001	2000	
 	($ in millions)	
 	 	 	 	 	 	 	
Minimum rents	$	140	$	149	$	167	
Contingent rents	 	60	 	55	 	61	
     Total	$	200	$	204	$	228	

During 2000, NS entered into an operating lease for 140 locomotives, which is renewable annually at NS' option, has a maximum term of eight years and includes purchase options. Because the fixed, noncancellable term of the lease is one year, future minimum lease payments in the table above do not include amounts related to this lease. However, operating lease expense in the table above does include amounts related to this lease as follows: $13 million in 2002, $18 million in 2001 and $11 million in 2000. If NS does not renew the lease during the eight-year period or does not purchase the locomotives at the end of the maximum lease term, it is liable for any shortfall in the then fair value of the locomotives and a specified residual value. NS does not expect to be required to make any payments under this provision. As of Dec. 31, 2002, the maximum liability under this provision, assuming NS chose not to renew the lease in 2003 and the then fair value of the locomotives was zero, would be $116 million. The lessor is a special-purpose entity whose activities are limited to those incident to this particular transaction. Upon adoption of Financial Accounting Standards Board Interpretation No. 46, "Consolidation of Variable Interest Entities," which will occur in 2003, NS will consolidate this entity. As a result, the locomotives will be shown as assets, debt will increase, operating lease expense will decline, depreciation expense will increase and interest expense on debt will increase.

 

10. Other Liabilities

 	December 31,	
 	2002	2001	
 	($ in millions)	
 	 	 	 	 	
Retiree health and death benefit obligations (Note 11)	$	286	$	291	
Casualty and other claims	 	254	 	265	
Deferred compensation	 	144	 	147	
Net pension obligations (Note 11)	 	82	 	79	
Accrued Conrail-related costs (Note 2)	 	26	 	46	
Other	 	237	 	261	
     Total	$	1,029	$	1,089	

 

11.  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, copayments, Medicare payments and, in some cases, coverage provided under other group insurance policies.

 

K53

Pension and Other Postretirement Benefit Obligations and Plan Assets

 	Pension Benefits	Other Benefits	
 	2002	2001	2002	2001	
 	($ in millions)	
Change in benefit obligations	 	 	 	 	 	 	 	 	
Benefit obligation at beginning of year	$	1,324 	$	1,312 	$	479 	$	445 	
Service cost	 	17 	 	15 	 	13 	 	14 	
Interest cost	 	91 	 	94 	 	33 	 	33 	
Amendment	 	-- 	 	6 	 	-- 	 	-- 	
Legislative changes	 	-- 	 	(19)	 	-- 	 	-- 	
Actuarial (gains) losses	 	54 	 	36 	 	98 	 	21 	
Benefits paid	 	(116)	 	(120)	 	(31)	 	(34)	
     Benefit obligation at end of year	 	1,370 	 	1,324 	 	592 	 	479 	
 	 	 	 	 	 	 	 	 	
Change in plan assets	 	 	 	 	 	 	 	 	
Fair value of plan assets at beginning of year	 	1,798 	 	1,999 	 	118 	 	126 	
Actual return on plan assets	 	(201)	 	(74)	 	(12)	 	(8)	
Employer contribution	 	6 	 	7 	 	31 	 	34 	
401(h) account transfer	 	(18)	 	(14)	 	-- 	 	-- 	
Benefits paid	 	(116)	 	(120)	 	(31)	 	(34)	
     Fair value of plan assets at end of year	 	1,469 	 	1,798 	 	106 	 	118 	
 	 	 	 	 	 	 	 	 	
     Funded status	 	99 	 	474 	 	(486)	 	(361)	
 	 	 	 	 	 	 	 	 	
Unrecognized (gain) loss	 	305 	 	(142)	 	169 	 	46 	
Unrecognized prior service cost	 	26 	 	30 	 	-- 	 	-- 	
     Net amount recognized	$	430 	$	362 	$	(317)	$	(315)	
 	 	 	 	 	 	 	 	 	
Amounts recognized in the Consolidated

Balance Sheets consist of:	 	 	 	 	 	 	 	 	
   Prepaid benefit cost	$	497 	$	426 	$	-- 	$	-- 	
   Accrued benefit liability	 	(82)	 	(79)	 	(317)	 	(315)	
   Accumulated other comprehensive income	 	15 	 	15 	 	-- 	 	-- 	
      Net amount recognized	$	430 	$	362 	$	(317)	$	(315)	

Of the pension plans included above, the unfunded pension plans were the only plans with an accumulated benefit obligation in excess of plan assets. These plans' accumulated benefit obligations were $82 million at Dec. 31, 2002, and $79 million at Dec. 31, 2001. These plans' projected benefit obligations were $94 million at Dec. 31, 2002 and $89 million at Dec. 31, 2001. Because of the nature of such plans, there are no plan assets.

NS received Section 401(h) account transfers, from pension assets, of $18 million in 2002 and $14 million in 2001 as reimbursement for medical payments for retirees.

Legislative changes primarily resulting from the December 2001 amendment to the Railroad Retirement Act ("The Act") increased benefits payable to certain retirees covered by The Act. Since employees' pension benefits paid by NS are offset by a portion of benefits paid under The Act, the amendment served to reduce NS' obligation by approximately $19 million at Dec. 31, 2001.

During 2001, NS amended its qualified and nonqualified pension plans to enhance benefits to certain NS employees. The amendments increased the pension benefit obligation by $6 million at Dec. 31, 2001. During 2000, NS amended its qualified pension plan to allow for the payment of qualifying disability benefits.

 

K54

Pension and Other Postretirement Benefit Costs Components

 	2002	2001	2000	
 	($ in millions)	
Pension benefits	 	 	 	 	 	 	
Service cost	$	17 	$	15 	$	18 	
Interest cost	 	91 	 	94 	 	79 	
Cost of early retirement programs	 	-- 	 	-- 	 	119 	
Expected return on plan assets	 	(179)	 	(202)	 	(192)	
Amortization of prior service cost	 	4 	 	4 	 	4 	
Amortization of initial net asset	 	-- 	 	(3)	 	(7)	
Recognized net actuarial gain	 	(13)	 	(24)	 	(38)	
     Net benefit	$	(80)	$	(116)	$	(17)	
 	 	 	 	 	 	 	
Other postretirement benefits	 	 	 	 	 	 	
Service cost	$	13 	$	14 	$	15 	
Interest cost	 	33 	 	33 	 	27 	
Cost of early retirement programs	 	-- 	 	-- 	 	14 	
Expected return on plan assets	 	(13)	 	(13)	 	(14)	
Amortization of prior service cost	 	-- 	 	-- 	 	(4)	
     Net cost	$	33 	$	34 	$	38 	

Pension Assumptions

Pension and other postretirement benefit costs are determined based on actuarial valuations that reflect appropriate assumptions as of the measurement date, ordinarily the beginning of each year. The funded status of the plans is determined using appropriate assumptions as of each year end. A summary of the major assumptions follows:

 	2002	2001	2000	
Funded status:	 	 	 	
   Discount rate	6.75%	7.25%	7.50%	
   Future salary increases	4.5%	5%	5%	
Pension cost:	 	 	 	
   Discount rate	7.25%	7.50%	7.75%	
   Return on assets in plans	9%	10%	10%	
   Future salary increases	5%	5%	5%	

Health Care Cost Trend Assumptions

For measurement purposes, increases in the per capita cost of covered health care benefits were assumed to be 10% for 2003 and 9% for 2004. It is assumed the rate will decrease gradually to an ultimate rate of 5.0% for 2008 and remain at that level thereafter.

Assumed health care cost trend rates have a significant effect on the amounts reported in the financial statements. To illustrate, a one-percentage-point change in the assumed health care cost trend would have the following effects:

 	One percentage point	
 	Increase	Decrease	
 	($ in millions)	
Increase (decrease) in:	 	 	 	 	
   Total service and interest cost components	$	6	$	(5)	
   Postretirement benefit obligation	$	69	$	(57)	

 

K55

Other Postretirement Coverage

Under collective bargaining agreements, NS and certain subsidiaries participate in a multi-employer benefit plan, which provides certain postretirement health care and life insurance benefits to eligible union employees. Premiums under this plan are expensed as incurred and amounted to $11 million in 2002, $10 million in 2001 and $7 million in 2000.

401(k) Plans

Norfolk Southern and certain subsidiaries provide 401(k) savings plans for employees. Under the plans, NS matches a portion of employee contributions, subject to applicable limitations. Since 1999, NS has contributed newly issued shares of Common Stock for its matching contributions. NS' expenses under these plans were $12 million in 2002, $11 million in 2001 and $12 million in 2000.

Early Retirement Programs in 2000

During 2000, NS offered two voluntary early retirement programs to its salaried employees. The principal incentives offered in these programs were enhanced pension benefits, the cost for most of which will be paid from NS' overfunded pension plan. A February program was accepted by 919 of 1,180 eligible employees, and a December program was accepted by 370 of 846 eligible employees. The total cost of these programs, which is included in "Compensation and benefits," was $133 million. The resulting noncash reduction to NS' pension plan asset is included in "Other - net" in the Consolidated Statement of Cash Flows.

 

12. Stock-based Compensation

Under the stockholder-approved Long-Term Incentive Plan (LTIP), a committee of nonemployee directors of the Board may grant stock options, stock appreciation rights (SARs), restricted stock and performance share units (PSUs), up to a maximum 88,025,000 shares of Norfolk Southern Common Stock (Common Stock). Of these shares, 5,000,000 were approved by the Board for issuance to non-officer participants; as a broadly based issuance, stockholder approval was not required. 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. Options may be granted for a term not to exceed 10 years, but may not be exercised prior to the first anniversary of the date of grant. Options are exercisable at the fair market value of Common Stock on the date of grant.

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 or PSUs in an amount commensurate with dividends paid on Common Stock. Tax absorption payments also are authorized in amounts estimated to equal the federal and state income taxes applicable to shares of Common Stock issued subject to a share retention agreement.

Accounting Method

As disclosed in Note 1, NS applies APB Opinion 25 and related interpretations in accounting for awards made under the plans. Accordingly, grants of PSUs, restricted stock, dividend equivalents, tax absorption payments and SARs result in charges to net income, while grants of stock options have no effect on net income. Related compensation costs were $23 million in 2002, $20 million in 2001 and $5 million in 2000. NS recognized additional paid-in capital of $6 million in 2002, $1 million in 2001 and zero in 2000 related to the tax benefit generated by stock option exercises.

Note 1 includes a table that illustrates the effect on net income and earnings per share had NS applied the fair value recognition provisions of SFAS No. 123 to stock-based employee compensation. The pro forma amounts include compensation costs calculated using the Black-Scholes option-pricing model, with average expected option lives of five years; average risk-free interest rates of 4.6% in 2002, 5.1% in 2001 and 6.8% in

 

K56

2000; average stock-price volatilities of 32% in 2002, 39% in 2001 and 33% in 2000; and dividend yields of zero in 2002, 2% in 2001 and 3% in 2000. These assumptions produced per-share grant-date fair values of $8.26 in 2002, $5.48 in 2001, and $5.22 in 2000.

Stock Option Activity

 	 	Weighted	
 	 	Average	
 	Option Shares	Exercise Price	
Balance 12/31/99	21,116,363 	$	27.77	
 	 	 	 	
Granted	7,705,800 	 	16.94	
Exercised	(273,813)	 	13.95	
Expired	(427,400)	 	26.84	
Balance 12/31/00	28,120,950 	$	24.96	
 	 	 	 	
Granted	6,985,000 	 	15.48	
Exercised	(1,079,902)	 	16.58	
Expired	(612,525)	 	26.51	
Balance 12/31/01	33,413,523 	$	23.21	
 	 	 	 	
Granted	7,384,000 	 	22.49	
Exercised	(2,851,538)	 	17.48	
Expired	(287,341)	 	26.73	
Balance 12/31/02	37,658,644	$	23.47	

Of the total options outstanding at Dec. 31, 2002, 30 million were vested and have a weighted-average exercise price of $23.71.

Stock Options Outstanding

 	 	 	Number	Weighted Average	
Exercise Price	Outstanding	Remaining	
Range	 	Weighted Average	at 12/31/02	Contractual Life	
$15.48 to $16.94	 	$ 16.25	12,317,834	7.6 years	
$20.09 to $22.49	 	22.20	9,001,960	7.7 years	
$24.31 to $27.69	 	26.85	7,708,350	4.7 years	
$29.46 to $33.25	 	32.10	8,630,500	5.5 years	
$15.48 to $33.25	 	$ 23.47 	37,658,644	6.5 years	

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 market values were 815,000 and $22.49 in 2002; 817,500 and $15.48 in 2001; and 937,500 and $16.94 in 2000. PSUs may be paid in the form of shares of Common Stock, cash or any combination thereof. Shares earned and issued may be subject to share retention agreements and held by NS for up to five years.

 

K57

Shares Available and Issued

Shares of stock available for future grants and issued in connection with all features of the LTIP and TSOP are as follows:

 	2002	2001	2000	
Available for future grants 12/31:	 	 	 	
     LTIP	23,645,146	30,816,365	2,554,584	
     TSOP	2,568,200	2,535,000	2,488,700	
 	 	 	 	
Shares of Common Stock issued:	 	 	 	
     LTIP	2,917,898	1,146,346	395,626	
     TSOP	--	--	--	

 

13. Stockholders' Equity

Accumulated Other Comprehensive Loss

"Accumulated other comprehensive loss" reported in the Consolidated Statements of Changes in Stockholders' Equity consisted of the following:

 	Balance	Net	 	Balance	
 	at Beginning	Gain	Reclassification	at End	
 	of Year	(Loss)	Adjustments	of Year	
 	($ in millions)	
 	 	 	 	 	 	 	 	 	
December 31, 2002	 	 	 	 	 	 	 	 	
   Unrealized gains on securities	$	6 	$	-- 	$	(5)	$	1 	
   Cash flow hedges	 	(11)	 	35 	 	(6)	 	18 	
   Minimum pension liability	 	(50)	 	(34)	 	-- 	 	(84)	
      Accumulated other	 	 	 	 	 	 	 	 	
         comprehensive loss	$	(55)	$	1 	$	(11)	$	(65)	
 	 	 	 	 	 	 	 	 	
December 31, 2001	 	 	 	 	 	 	 	 	
   Unrealized gains on securities	$	7 	$	(1)	$	--	$	6 	
   Cash flow hedges	 	-- 	 	(16)	 	5	 	(11)	
   Minimum pension liability	 	(13)	 	(37)	 	--	 	(50)	
      Accumulated other	 	 	 	 	 	 	 	 	
         comprehensive loss	$	(6)	$	(54)	$	5	$	(55)	

 

K58

"Other comprehensive income (loss)" reported in the Consolidated Statements of Changes in Stockholders' Equity consisted of the following:

 	 	Tax	 	
 	Pretax	(Expense)	Net-of-Tax	
 	Amount	Benefit	Amount	
 	($ in millions)	
Year ended Dec. 31, 2002	 	 	 	 	 	 	
Net gain (loss) arising during the year:	 	 	 	 	 	 	
   Cash flow hedges	$	58 	$	(23)	$	35 	
   Reclassification adjustments for gains	 	 	 	 	 	 	
      included in net income	 	(10)	 	4 	 	(6)	
         Subtotal	 	48 	 	(19)	 	29 	
   	 	 	 	 	 	 	
   Reclassification adjustments for realized	 	 	 	 	 	 	
      gains on securities included in net income	 	(9)	 	4 	 	(5)	
 	 	 	 	 	 	 	
   Minimum pension liability	 	(34)	 	-- 	 	(34)	
      Other comprehensive income (loss)	$	5 	$	(15)	$	(10)	
 	 	 	 	 	 	 	
Year ended Dec. 31, 2001	 	 	 	 	 	 	
Net gain (loss) arising during the year:	 	 	 	 	 	 	
   Cash flow hedges	$	(27)	$	11 	$	(16)	
   Reclassification adjustments for gains	 	 	 	 	 	 	
      included in net income	 	8 	 	(3)	 	5 	
         Subtotal	 	(19)	 	8 	 	(11)	
 	 	 	 	 	 	 	
   Unrealized gains (losses) on securities	 	(1)	 	-- 	 	(1)	
   Minimum pension liability	 	(35)	 	(2)	 	(37)	
      Other comprehensive income (loss)	$	(55)	$	6 	$	(49)	
 	 	 	 	 	 	 	
Year ended Dec. 31, 2000	 	 	 	 	 	 	
Net gain (loss) arising during the year:	 	 	 	 	 	 	
   Unrealized gains (losses) on securities	$	7	$	(2)	$	5	
      Other comprehensive income (loss)	$	7	$	(2)	$	5	

In 2002 and 2001, Conrail recorded a $59 million and a $70 million loss, respectively, in other comprehensive income related to an increase in its minimum pension liability. NS' "Other comprehensive loss" includes $34 million for 2002 and $41 million for 2001, arising from the Conrail adjustments.

Undistributed Earnings of Equity Investees

"Retained income" includes undistributed earnings of equity investees, principally attributable to NS' equity in the earnings of Conrail, of $375 million at Dec. 31, 2002; $355 million at Dec. 31, 2001; and $351 million at Dec. 31, 2000.

 

K59

14. Earnings Per Share

The following table sets forth the calculation of basic and diluted earnings per share:

 	2002	2001	2000	
 	($ in millions except per share, shares in millions)	
 	 	 	 	 	 	 	
Income available to common stockholders for	 	 	 	 	 	 	
  basic and diluted computations	$	460	$	375	$	172	
 	 	 	 	 	 	 	
Basic earnings per share:	 	 	 	 	 	 	
   Weighted-average shares outstanding	 	388	 	385	 	383	
            Basic earnings per share	$	1.18	$	0.97	$	0.45	
 	 	 	 	 	 	 	
Diluted earnings per share:	 	 	 	 	 	 	
   Weighted-average shares outstanding per above	 	388	 	385	 	383	
   Dilutive effect of outstanding options, PSUs and	 	 	 	 	 	 	
     SARs (as determined by the application of the	 	 	 	 	 	 	
     treasury stock method)	 	2	 	1	 	--	
   Adjusted weighted-average shares outstanding	 	390	 	386	 	383	
            Diluted earnings per share	$	1.18	$	0.97	$	0.45	

These calculations exclude options for which the exercise price exceeded the average market price of Common Stock as follows: 24 million in 2002, 21 million in 2001 and 26 million in 2000.

There are no adjustments to "Net income" or "Income from continuing operations" for the diluted earnings per share computations.

 

15. Fair Values of Financial Instruments

The fair values of "Cash and cash equivalents," "Short-term investments," "Accounts receivable" and "Accounts payable" approximate carrying values because of the short maturity of these financial instruments. The fair value of corporate-owned life insurance approximates carrying value. The carrying amounts and estimated fair values for the remaining financial instruments, excluding derivatives (see Note 16) and investments accounted for under the equity method in accordance with APB Opinion No. 18, consisted of the following at Dec. 31:

 	2002	2001	
 	Carrying	Fair	Carrying	Fair	
 	Amount	Value	Amount	Value	
 	($ in millions)	
Investments	$	30 	$	39 	$	44 	$	51 	
Notes receivable	 	93 	 	104 	 	93 	 	98 	
Long-term debt	 	(7,364)	 	(8,412)	 	(7,632)	 	(8,067)	

Quoted market prices were used to determine the fair value of marketable securities; underlying net assets were used to estimate the fair value of other investments. The fair values of notes receivable are based on future discounted cash flows. The fair values of debt were estimated based on quoted market prices or discounted cash flows using current interest rates for debt with similar terms, company rating and remaining maturity.

 

K60

Carrying amounts of marketable securities reflect unrealized holding gains of $1 million on Dec. 31, 2002, and $10 million on Dec. 31, 2001. Sales of "available-for-sale" securities were immaterial for the years ended Dec. 31, 2002, 2001 and 2000.

 

16. Derivative Financial Instruments

On Jan. 1, 2001, NS adopted Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS 133), as amended by Statement of Financial Accounting Standards No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities" (SFAS 138). The Statements establish accounting and reporting standards for derivative instruments and hedging activities, requiring that all derivatives be recognized in the financial statements as either assets or liabilities and that they be measured at fair value. Changes in fair value are recorded as adjustments to the assets or liabilities being hedged in "Other comprehensive income," or in current earnings, depending on whether the derivative is designated and qualifies for hedge accounting, the type of hedge transaction represented and the effectiveness of the hedge.

NS uses 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 the second quarter of 2001, NS began a program to hedge a portion of its diesel fuel consumption. The intent of the program is to assist in the management of NS' aggregate risk exposure to fuel price fluctuations, which can significantly affect NS' operating margins and profitability. In order to minimize this risk, NS instituted a continuous hedging strategy for a portion of its estimated future fuel needs by entering into a series of swaps in order to lock in the purchase prices of some of its diesel fuel. Management has designated these derivative instruments as cash-flow hedges of the exposure to variability in expected future cash flows attributable to fluctuations in diesel fuel prices.

Following is a summary of NS' diesel fuel swaps:

 	 	2002	2001	
Number of swaps entered into during the year	 	288	222	
Approximate number of gallons hedged (millions)	 	393	370	
Approximate average price per gallon of Nymex	 	 	 	
   No. 2 heating oil	 	$0.66	$0.68	
 	 	 	 	
 	2003	2004	2005	
Percent of estimated future diesel fuel   consumption covered as of Dec. 31, 2002	62%	22%	--	

Hedges are placed each month by competitive bid among selected counterparties. The goal of this hedging strategy is to average fuel costs over an extended period of time while minimizing the incremental cost of hedging. The program provides that NS will 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 will be hedged for each month within any 36-month period. Diesel fuel costs represented 7%, 8% and 9% of NS' operating expenses for the years ended Dec. 31, 2002, 2001 and 2000, respectively.

 

K61

In 2001, NS also purchased eight monthly call options at a strike price of 84 cents per gallon of Nymex No. 2 heating oil. The cost of the monthly options, which expired serially through Dec. 31, 2001, was amortized as a component of diesel fuel expense. Because the price of diesel fuel did not reach the strike price at any time during the period the options were outstanding, NS did not record any benefit related to these transactions.

NS' fuel hedging activity resulted in a net decrease in 2002 diesel fuel expense of $10 million and a net increase in 2001 diesel fuel expense of $8 million. Ineffectiveness related to the use of diesel fuel hedges in 2002 and 2001 was less than $1 million for each year.

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. NS had $220 million, or 3.2%, and $251 million, or 3.5%, of its fixed rate debt portfolio hedged at Dec. 31, 2002, and Dec. 31, 2001, respectively, using interest rate swaps that qualify for and are designated as fair-value hedge transactions. These swaps have been effective in hedging the changes in fair value of the related debt arising from changes in interest rates and, accordingly, there has been no impact on earnings resulting from ineffectiveness associated with these derivative transactions.

Fair Values

The fair values of NS' diesel fuel derivative instruments at Dec. 31, 2002 and 2001, were determined based upon current fair market values as quoted by 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 $29 million (pretax) at Dec. 31, 2002, relating to an increase, and $15 million (pretax) at Dec. 31, 2001, relating to a decrease in the fair value of derivative fuel hedging transactions that will terminate within 12 months.

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

 	December 31,	
 	2002	2001	
 	($ in millions)	
Interest rate hedges:	 	 	 	 	
   Gross fair market asset position	$	24	$	12 	
   Gross fair market (liability) position	 	--	 	-- 	
Fuel hedges:	 	 	 	 	
   Gross fair market asset position	 	29	 	-- 	
   Gross fair market (liability) position	 	--	 	(19)	
      Total net asset (liability) position	$	53	$	(7)	

 

17. Discontinued Operations - Motor Carrier

On March 28, 1998, NS sold all the common stock of North American Van Lines, Inc. (NAVL), its motor carrier subsidiary. Results in 2001 include an additional after-tax gain of $13 million, or 3 cents per share, that resulted from the expiration of certain indemnities contained in the sales agreement.

 

K62

18. 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 expenses. 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. 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 expenses in the periods in which such adjustments are known.

Presently, there are two matters, one involving labor arbitration and other claims for "New York Dock" and other income protection benefits and the other involving contractual obligations of a fiber optic codeveloper, Williams Communications, LLC ("Williams Communications"), where the aggregated range of loss could be from zero to $75 million. Management believes that NS will prevail in both these matters. On January 29, 2003, the United States District Court for the Northern District of Georgia entered an order requiring Williams Communications to pay T-Cubed approximately $36 million, plus prejudgment interest at a rate of 9% per annum, in connection with its contractual obligations to T-Cubed. Williams Communications may elect to appeal. The ability to collect and retain the $36 million receivable due from Williams Communications may be limited because of its financial condition. The shortfall, if any, cannot now be determined. Its parent, Williams Communications Group, Inc., filed in April 2002 a voluntary petition for reorganization under Chapter 11 of the U.S. Bankruptcy Code, and emerged from bankruptcy in October 2002. Williams Communications was not included in the bankruptcy petition. Unfavorable outcomes in either of these matters could result in accruals that could be significant to results of operations in a particular year or quarter.

Casualty Claims

NS is generally self-insured for casualty claims. Claims in excess of self-insurance levels are insured up to excess coverage limits. The casualty claims liability is determined actuarially, based upon claims filed and an estimate of claims incurred but not yet reported. 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. However, it is possible that the recorded liability may not be adequate to cover the future payment of claims. Adjustments to the recorded liability will be reflected in operating expenses in the periods in which such adjustments are known.

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 in the balance sheet and are not netted against the associated NS liability. Environmental engineers regularly participate in ongoing evaluations of all identified sites and in determining any necessary adjustments to initial liability estimates. NS also has established an Environmental Policy Council, composed of senior managers, to oversee and interpret its environmental policy.

NS' balance sheets included liabilities for environmental exposures in the amount of $29 million at Dec. 31, 2002, and $33 million at Dec. 31, 2001 (of which $8 million was accounted for as a current liability in each year). At Dec. 31, 2002, the liability represented NS' estimate of the probable cleanup and remediation costs based on available information at 114 identified locations. On that date, 10 sites accounted for $16 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.

 

K63

At some of the 114 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 or may have been 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 environmentally related 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 other now-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 Corporation is aware. Further, management believes that it is unlikely that any identified matters, either individually or in the aggregate, will have a material adverse effect on NS' financial position, results of operations or liquidity.

Purchase Commitments

NSR had outstanding purchase commitments of approximately $164 million in connection with its 2003 capital program. In addition, Norfolk Southern has committed to purchase telecommunications services totaling $38 million through 2006.

Change-In-Control Arrangements

Norfolk Southern has compensation agreements with officers and certain key employees that become operative only upon a change in control of the Corporation, as defined in those agreements. The agreements provide generally for payments based on compensation at the time of a covered individual's involuntary or other specified termination and for certain other benefits.

Guarantees

In a number of instances, NS and its subsidiaries have agreed to indemnify lenders for additional costs they may bear as a result of certain changes in laws or regulations applicable to their loans. Such changes may include impositions or modifications with respect to taxes, duties, reserves, liquidity, capital adequacy, special deposits, and similar requirements relating to extensions of credit by, deposits with, or the assets or liabilities of such lenders. Similar provisions exist in NS' accounts receivable sales program. The nature and timing of changes in laws or regulations applicable to NS' financings are inherently unpredictable, and therefore NS' exposure in connection with the foregoing indemnifications cannot be quantified. No liability has been recorded related to these indemnifications. In the case of one type of equipment financing, NSR's Japanese leveraged leases, NSR may terminate the leases and ancillary agreements if such a change-in-law indemnity is triggered. Such a termination would require NSR to make early termination payments that would not be expected to have a material adverse effect on NS' financial condition, results of operations or liquidity.

 

K64

NS has indemnified parties in a number of transactions for U.S. income tax withholding imposed as a result of changes in U.S. tax law. In all cases, NS has the right to unwind the related transaction if the withholding cannot be avoided in the future. Because these indemnities would be triggered and are dependent upon a change in the tax law, the maximum exposure is not quantifiable. Management does not believe that it is likely that it will be required to make any payments under these indemnities.

Norfolk Southern has indemnified the purchaser of North American Van Lines, Inc. (see Note 17) for tax liabilities related to tax years ended on or before the date of sale. The maximum exposure is not quantifiable; however, NS has recorded a reserve for its expected liability under this indemnification. It is unlikely that any additional payments would have a material adverse effect on NS' financial position, results of operations or liquidity.

NS has outstanding warranty liabilities primarily related to work performed at its locomotive facilities. NS has recorded a reserve of less than $2 million as of Dec. 31, 2002 and 2001 for these warranties.

As of Dec. 31, 2002, certain Norfolk Southern subsidiaries are contingently liable as guarantors with respect to $8 million of indebtedness of an entity in which it has an ownership interest, the Terminal Railroad Association of St. Louis, due in 2019. Six other railroads are also jointly and severally liable as guarantors for this indebtedness. No liability has been recorded related to this guaranty.

NS is liable for any shortfall in the then fair market value of certain leased locomotives and a specified residual value for the locomotives if the leases are not renewed, as discussed in Note 9.

NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES

QUARTERLY FINANCIAL DATA

(Unaudited)

 	Three Months Ended	
 	March 31	June 30	Sept. 30	Dec. 31	
 	(In millions of dollars, except per share amounts)	
2002	 	 	 	 	 	 	 	 	
Railway operating revenues	$	1,498	$	1,593	$	1,598	$	1,581	
Income from railway operations	 	237	 	322	 	311	 	288	
Net income	 	86	 	119	 	126	 	129	
Earnings per share -	 	 	 	 	 	 	 	 	
     basic and diluted	$	0.22	$	0.31	$	0.32	$	0.33	
 	 	 	 	 	 	 	 	 	
2001	 	 	 	 	 	 	 	 	
Railway operating revenues	$	1,540 	$	1,592	$	1,508	$	1,530	
Income from railway operations	 	205 	 	282	 	245	 	275	
Net income	 	74*	 	107	 	79	 	115	
Earnings per share -	 	 	 	 	 	 	 	 	
     basic and diluted	$	0.19*	$	0.28	$	0.20	$	0.30	

* Includes a $13 million, or 3 cents per share, after-tax gain related to the 1998 sale of NS' motor carrier subsidiary (see Note 17).

 

K65

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

None.

 

 

PART III

NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES (NS)

Item 10. Directors and Executive Officers of the Registrant.

In accordance with General Instruction G(3), information called for by Part III is incorporated herein by reference from the information appearing under the caption "Election of Directors," including the subcaptions "Nominees for terms expiring in 2006," "Continuing Directors - those whose terms expire in 2004" and "Continuing Directors - those whose terms expire in 2005" in Norfolk Southern's definitive Proxy Statement, for the Norfolk Southern Annual Meeting of Stockholders to be held on May 8, 2003, which definitive Proxy Statement will be filed electronically with the Commission pursuant to Regulation 14A. The information regarding executive officers called for by Item 401 of Regulation S-K is included in Part I hereof beginning under "Executive Officers of the Registrant."

 

Item 11. Executive Compensation.

In accordance with General Instruction G(3), information called for by Part III is incorporated herein by reference from the information appearing under the subcaption "Compensation" under the caption "Board of Directors" for directors and under the caption "Executive Compensation" for executives, including the information appearing in the "Summary Compensation Table" and under the subcaptions "Long-Term Incentive Plan" (including the three tables therein), "Pension Plans" (including the table therein), and "Change in Control Arrangements" in Norfolk Southern's definitive Proxy Statement, for the Norfolk Southern Annual Meeting of Stockholders to be held on May 8, 2003, which definitive Proxy Statement will be filed electronically with the Commission pursuant to Regulation 14A.

 

Item 12. Security Ownership of Certain Beneficial Owners and Management.

In accordance with General Instruction G(3), information called for by Part III is incorporated herein by reference from the information appearing under the caption "Beneficial Ownership of Stock" in Norfolk Southern's definitive Proxy Statement, for the Norfolk Southern Annual Meeting of Stockholders to be held on May 8, 2003, which definitive Proxy Statement will be filed electronically with the Commission pursuant to Regulation 14A.

 

K66

Equity Compensation Plan Information

 	 	 	 	 	 	Number of securities	
 	 	 	 	 	 	remaining available	
 	 	 	 	 	 	for future issuance	
 	 	Number of securities	 	Weighted-average	 	under equity	
 	 	to be issued upon	 	exercise price	 	compensation plans	
 	 	exercise of	 	of outstanding	 	(excluding	
Plan	 	outstanding options,	 	options, warrants	 	securities reflected	
category	 	warrants and rights	 	and rights	 	in column (a))	
 	 	(a)	 	(b)	 	(c)	
Equity compensation	 	 	 	 	 	 	
plans approved by	 	 	 	 	 	 	
security holders (1)	 	31,786,844   	 	$23.57 (4)     	 	23,645,146 (6)	
 	 	 	 	 	 	 	
Equity compensation	 	 	 	 	 	 	
plans not approved by	 	 	 	 	 	 	
security holders (2)	 	8,431,800 (3)	 	$23.12 (3) (5)	 	3,113,200 (7)	
 	 	 	 	 	 	 	
   Total	 	40,218,644   	 	$23.47       	 	26,758,346    	
 	 	 	 	 	 	 	
(1)     The Long-Term Incentive Plan, excluding five million shares for broad-based issuance to non-officers.	
(2)     The Long-Term Incentive Plan's five million shares for broad-based issuance to non-officers, the Thoroughbred	
          Stock Option Plan, the Directors' Restricted Stock Plan and the Safety Incentive Plan.	
(3)     Includes options and performance share units granted under the Long-Term Incentive Plan on five million shares for	
          non-officers and options granted under the Thoroughbred Stock Option Plan.	
(4)     Calculated without regard to 2,315,000 outstanding performance share units.	
(5)     Calculated without regard to 245,000 outstanding performance share units.	
(6)     Of the shares remaining available for grant under plans approved by stockholders, 5,185,000 are available for grant	
          as restricted shares or performance shares under the Long-Term Incentive Plan.	
(7)     Of the shares remaining available for grant under plans not approved by stockholders, 45,000 are available for grant	
          as restricted stock under the Directors' Restricted Stock Plan and 500,000 are available for grant as stock under	
          the Safety Incentive Plan.	

Norfolk Southern Corporation Long-Term Incentive Plan ("LTIP")

Established on June 28, 1983, and approved by the stockholders at their Annual Meetings on May 10, 1984, on May 11, 1995, and most recently on May 10, 2001, LTIP was adopted to promote the success of Norfolk Southern by providing an opportunity for officers and other key employees to acquire a proprietary interest in the Corporation. On January 23, 2001, the Board of Directors approved the issuance of an additional 5,000,000 shares of authorized but unissued Common Stock under LTIP to participants who are not officers of Norfolk Southern. The issuance of these shares was broadly-based, and stockholder approval of these shares was not required. Accordingly, this portion of LTIP is included in the number of securities available for future issuance for plans not approved by stockholders. The Board also adopted an amended plan effective January 23, 2001, subject to stockholder approval, which included the reservation for issuance of an additional 30,000,000 shares of authorized but unissued Norfolk Southern Common Stock, with no more than 6 million of such additional shares to be awarded as restricted shares or performance shares (including performance share units earned as performance shares). This amended plan was approved by stockholders on May 10, 2001, resulting in an aggregate of 74,878,604 shares of Common Stock authorized for issuance under LTIP.

Non-employee directors, officers and other key employees residing in the United States or Canada are eligible for selection to receive LTIP awards. Under LTIP, the Performance-Based Compensation Committee (Committee) may grant incentive stock options, nonqualified stock options, stock appreciation rights, restricted shares and performance share units (in addition, dividend equivalents may be awarded for options and performance share units). The Committee may establish such terms and conditions for the awards as provided in the plan.

K67

For options, the option price per share will not be less than 100% of the fair market value of Norfolk Southern's Common Stock on the effective date the option is granted. All options are subject to a vesting period of at least one year, and the term of the option will not exceed ten years. LTIP specifically prohibits option repricing without stockholder approval, except for capital adjustments.

Performance share units are performance-based awards which are earned upon achievement of goals the Committee establishes at the time of the grant for three equally weighted performance criteria approved by the stockholders -- return on average invested capital, operating ratio, and total return to NS stockholders as compared with the total return on all stocks comprising the S&P 500 Composite Stock Price Index -- and the units may be payable as shares of Norfolk Southern Common Stock or in cash.

Norfolk Southern Corporation Thoroughbred Stock Option Plan

The Board adopted the Norfolk Southern Corporation Thoroughbred Stock Option Plan ("TSOP") on January 26, 1999, to promote the success of Norfolk Southern by providing an opportunity for nonagreement employees to acquire a proprietary interest in Norfolk Southern and thereby to provide an additional incentive to nonagreement employees to devote their maximum efforts and skills to the advancement, betterment, and prosperity of Norfolk Southern and its stockholders. The plan has not been approved by stockholders. Six million shares of authorized but unissued Common Stock were reserved for issuance under TSOP.

Active full-time nonagreement employees residing in the United States or Canada are eligible for selection to receive TSOP awards. Under TSOP, the Compensation and Nominating Committee of the Board of Directors may grant nonqualified stock options and may establish such terms and conditions as provided in the plan.

The option price per share will not be less than 100% of the fair market value of Norfolk Southern's Common Stock on the effective date the option is granted. All options are subject to a vesting period of at least one year, and the term of the option will not exceed ten years. TSOP specifically prohibits option repricing without stockholder approval, except for capital adjustments.

Norfolk Southern Corporation Directors' Restricted Stock Plan

The Norfolk Southern Corporation Directors' Restricted Stock Plan ("Plan") was adopted on January 1, 1994, and is designed to increase ownership of Norfolk Southern's Common Stock by its non-employee directors so as to further align their ownership interest in Norfolk Southern with that of stockholders. The Plan has not been approved by stockholders. Currently, a maximum of 66,000 shares of Corporation Common Stock may be granted under the Plan. To make the grants to eligible directors, Norfolk Southern purchases, through one or more subsidiary companies, the number of shares required in open-market transactions at prevailing market prices, or makes such grants from Common Stock already owned by one or more of Norfolk Southern's subsidiary companies.

Only non-employee directors, who are not and never have been employees of Norfolk Southern, are eligible to participate in the Plan. Upon becoming a director, each eligible director receives a one-time grant of 3,000 restricted shares of Norfolk Southern Common Stock. No individual member of the Board exercises discretion concerning the eligibility of any director or the number of shares granted.

The restriction period begins on the date of the grant and ends on the earlier of six months after the eligible director ceases to be a director by reason of disability, retirement or death. Directors will forfeit the right to receive the restricted shares if they cease to serve as a director of Norfolk Southern for reasons other than their disability, retirement or death.

 

K68

Norfolk Southern Corporation Safety Incentive Plan

The Norfolk Southern Corporation Safety Incentive Plan ("SIP") is designed to provide an additional incentive for eligible agreement employees to work safely. Under the plan, eligible employees who work without injury during the year receive a safety award payable in shares of Norfolk Southern Common Stock. A SIP award is between five and eight shares of stock.

SIP is broadly-based and has not been approved by stockholders. Shares of Common Stock issued under its terms are not registered under the Securities Act of 1933, pursuant to a no-action letter issued by the Securities and Exchange Commission on November 20, 1992. Accordingly, SIP does not define a specific amount of authorized shares for issuance under the plan. The Board has approved using up to 500,000 authorized but unissued shares for awards under the plan, and the number of shares remaining under this authorization are included in the number of securities available for future issuance for plans not approved by shareholders.

Item 13. Certain Relationships and Related Transactions.

In accordance with General Instruction G(3), information called for by Part III is incorporated herein by reference from the information appearing under the caption "Certain Relationships and Related Transactions" in Norfolk Southern's definitive Proxy Statement, for the Norfolk Southern Annual Meeting of Stockholders to be held on May 8, 2003, which definitive Proxy Statement will be filed electronically with the Commission pursuant to Regulation 14A.

Item 14. Controls and Procedures.

(a) Evaluation of Disclosure Controls and Procedures.

NS' Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of NS' disclosure controls and procedures (as such term is defined in Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"). Based on such evaluation, such officers have concluded that, as of the Evaluation Date, NS' disclosure controls and procedures are effective in alerting them on a timely basis to material information relating to NS (including its consolidated subsidiaries) required to be included in NS' periodic filings under the Exchange Act.

(b) Changes in Internal Controls.

Since the Evaluation Date, there have not been any significant changes in NS' internal controls or in other factors that could significantly affect such controls.

 

K69

PART IV

NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES (NS)

Item 15. Exhibits, Financial Statement Schedule and Reports on Form 8-K.

 	 	 	Page	
 	 	 	 	
(A)	 	The following documents are filed as part of this report:	 	
 	 	 	 	
 	1.	Index to Consolidated Financial Statements	 	
 	 	 	 	
 	 	Independent Auditors' Report	K38	
 	 	Consolidated Statements of Income, Years ended Dec. 31, 2002, 2001 and 2000	K39	
 	 	Consolidated Balance Sheets As of Dec. 31, 2002 and 2001	K40	
 	 	Consolidated Statements of Cash Flows, Years ended Dec. 31, 2002, 2001	 	
 	 	   and 2000	K41	
 	 	Consolidated Statements of Changes in Stockholders' Equity, Years ended	 	
 	 	   Dec. 31, 2002, 2001 and 2000	K42	
 	 	Notes to Consolidated Financial Statements	K43	
 	 	 	 	
 	2.	Financial Statement Schedule:	 	
 	 	 	 	
 	 	The following consolidated financial statement schedule should be read in	 	
 	 	connection with the consolidated financial statements:	 	
 	 	 	 	
 	 	Index to Consolidated Financial Statement Schedule	Page	
 	 	 	 	
 	 	Schedule II - Valuation and Qualifying Accounts	K80	
 	 	 	 	
 	 	Schedules other than the one listed above are omitted either because they are not required or are inapplicable, or because the information is included in the consolidated financial statements or related notes.	 	

 	3.	Exhibits	
 	 	 	
Exhibit	 	
Number	Description	
 	 	 	
3	 	Articles of Incorporation and Bylaws -	
 	 	 	
 	 	The Restated Articles of Incorporation of Norfolk Southern Corporation are incorporated	
 	 	by reference to Exhibit 3(i) to Norfolk Southern Corporation's 10-K filed on March 5,	
3(i)	 	2001.	
 	 	 	
 	 	The Bylaws of Norfolk Southern Corporation, as amended December 1, 2002, are filed	
3(ii)	 	herewith.	

 

K70

 
4	 	Instruments Defining the Rights of Security Holders, Including Indentures:	
 	 	 	
 	(a)	Indenture, dated as of January 15, 1991, from Norfolk Southern Corporation to First Trust of New York, National Association, as Trustee, related to the issuance of notes in the principal amount of $750 million, incorporated by reference to Exhibit 4.1 to Norfolk Southern Corporation's Registration Statement on Form S-3 (No. 33-38595).	
 	 	 	
 	(b)	First Supplemental Indenture, dated May 19, 1997, between Norfolk Southern Corporation and First Trust of New York, National Association, as Trustee, related to the issuance of notes in the principal amount of $4.3 billion, is incorporated herein by reference to Exhibit 1.1(d) to Norfolk Southern Corporation's Form 8-K filed on May 21, 1997.	
 	 	 	
 	(c)	Second Supplemental Indenture, dated April 26, 1999, between Norfolk Southern Corporation and U.S. Bank Trust National Association, as Trustee, related to the issuance of notes in the principal amount of $400 million, is incorporated herein by reference to Exhibit 1.1(c) to Norfolk Southern Corporation's Form 8-K filed on April 30, 1999.	
 	 	 	
 	(d)	Third Supplemental Indenture, dated May 23, 2000, between Norfolk Southern Corporation and U.S. Bank Trust National Association, as Trustee, related to the issuance of notes in the principal amount of $600 million, is incorporated herein by reference to Exhibit 4.1 to Norfolk Southern Corporation's Form 8-K filed on May 25, 2000.	
 	 	 	
 	(e)	Fourth Supplemental Indenture, dated as of February 6, 2001, between Norfolk Southern Corporation and U.S. Bank Trust National Association, as Trustee, related to the issuance of notes in the principal amount of $1 billion, is incorporated herein by reference to Exhibit 4.1 to Norfolk Southern Corporation's Form 8-K filed on February 7, 2001.	
 	 	 	
 	(f)	Fifth Supplemental Indenture, dated as of July 5, 2001, between Norfolk Southern Corporation and U.S. Bank Trust National Association, as Trustee, related to the issuance of notes in the principal amount of $250 million, is incorporated herein by reference to Exhibit 4.1 to Norfolk Southern Corporation's Form 8-K filed on July 5, 2001.	
 	 	 	
 	(g)	Rights Agreement, dated as of September 26, 2000, between Norfolk Southern Corporation and The Bank of New York, with exhibits thereto, is incorporated herein

by reference to Exhibit 4 to Norfolk Southern Corporation's Form 8-K filed on

September 26, 2000.	
 	 	 	
 	(h)	Sixth Supplemental Indenture, dated as of April 30, 2002, between Norfolk Southern Corporation and U.S. Bank Trust National Association, as Trustee, relating to the issuance of notes in the principal amount of $200 million, is incorporated herein by reference to Exhibit 4.1 to Norfolk Southern Corporation's Form 8-K filed on May 1, 2002.	
 	 	 	
 	(i)	Seventh Supplemental Indenture, dated as of April 30, 2002, between Norfolk Southern Corporation and U.S. Bank Trust National Association, as Trustee, relating to the issuance of notes in the principal amount of $100 million, is incorporated herein by reference to Exhibit 4.1 to Norfolk Southern Corporation's Form 8-K filed on May 1, 2002.	

 	(j)	Amendment to Rights Agreement, dated as of November 26, 2002, between Norfolk Southern Corporation and The Bank of New York, with exhibits thereto, is incorporated by reference to Exhibit 4 to Norfolk Southern Corporation's Form 8-K filed on November 26, 2002.	

 

K71

 	 	In accordance with Item 601(b)(4)(iii) of Regulation S-K, copies of other instruments of Norfolk Southern Corporation and its subsidiaries with respect to the rights of holders of long-term debt are not filed herewith, or incorporated by reference, but will be furnished to the Commission upon request.	
 	 	 	
10	 	Material Contracts -	
 	 	 	
 	(a)	The Transaction Agreement, dated as of June 10, 1997, by and among CSX, CSX Transportation, Inc., Registrant, Norfolk Southern Railway Company, Conrail Inc., Consolidated Rail Corporation and CRR Holdings LLC, with certain schedules thereto, previously filed, is refiled herewith pursuant to Item 10(d) of Regulation S-K.	
 	 	 	
 	(b)	Amendment No. 1, dated as of August 22, 1998, to the Transaction Agreement, dated as of June 10, 1997, by and among CSX Corporation, CSX Transportation, Inc., Norfolk Southern Corporation, Norfolk Southern Railway Company, Conrail Inc., Consolidated Rail Corporation and CRR Holdings LLC is incorporated herein by reference from Exhibit 10.1 to Norfolk Southern Corporation's Form 10-Q filed on August 11, 1999.	
 	 	 	
 	(c)	Amendment No. 2, dated as of June 1, 1999, to the Transaction Agreement, dated June 10, 1997, by and among CSX Corporation, CSX Transportation, Inc., Norfolk Southern Corporation, Norfolk Southern Railway Company, Conrail Inc., Consolidated Rail Corporation and CRR Holdings LLC is incorporated herein by reference from Exhibit 10.2 to Norfolk Southern Corporation's Form 10-Q filed on August 11, 1999.	
 	 	 	
 	(d)	Operating Agreement, dated as of June 1, 1999, by and between Pennsylvania Lines LLC and Norfolk Southern Railway Company is incorporated herein by reference from Exhibit 10.3 to Norfolk Southern Corporation's Form 10-Q filed on August 11, 1999.	
 	 	 	
 	(e)	Amendment No. 1, dated as of September 29, 2001, to Operating Agreement, dated as of June 1, 1999, by and between Pennsylvania Lines LLC and Norfolk Southern Railway Company, is incorporated herein by reference from Exhibit 10(e) to Norfolk Southern Corporation's Form 10-K filed on February 21, 2002.	
 	 	 	
 	(f)	Shared Assets Area Operating Agreement for North Jersey, dated as of June 1, 1999, by and among Consolidated Rail Corporation, CSX Transportation, Inc. and Norfolk Southern Railway Company, with exhibit thereto, is incorporated herein by reference from Exhibit 10.4 to Norfolk Southern Corporation's Form 10-Q filed on August 11, 1999.	
 	 	 	
 	(g)	Shared Assets Area Operating Agreement for South Jersey/ Philadelphia, dated as of June 1, 1999, by and among Consolidated Rail Corporation, CSX Transportation, Inc. and Norfolk Southern Railway Company, with exhibit thereto, is incorporated herein by reference from Exhibit 10.5 to Norfolk Southern Corporation's Form 10-Q filed on August 11, 1999.	
 	 	 	
 	(h)	Shared Assets Area Operating Agreement for Detroit, dated as of June 1, 1999, by and among Consolidated Rail Corporation, CSX Transportation, Inc. and Norfolk Southern Railway Company, with exhibit thereto, is incorporated herein by reference from Exhibit 10.6 to Norfolk Southern Corporation's Form 10-Q filed on August 11, 1999.	
 	 	 	
 	(i)	Amendment No. 1, dated as of June 1, 2000, to the Shared Assets Areas Operating Agreement for North Jersey, South Jersey/Philadelphia and Detroit, dated as of June 1, 1999, by and among Consolidated Rail Corporation, CSX Transportation, Inc. and Norfolk Southern Railway Company, with exhibit thereto, is incorporated herein by reference to Exhibit 10(h) to Norfolk Southern Corporation's 10-K filed on March 5, 2001.	

 

K72

 	(j)	Amendment No. 2, dated as January 1, 2001, to the Shared Assets Area Operating Agreements for North Jersey, South Jersey/Philadelphia and Detroit, dated as of June 1, 1999, by and among Consolidated Rail Corporation, CSX Transportation, Inc. and Norfolk Southern Railway Company, with exhibit thereto, is incorporated herein by reference to Exhibit 10(j) to Norfolk Southern Corporation's Form 10-K filed on February 21, 2002.	 	
 	 	 	 	
 	(k)	Amendment No. 3, dated as of June 1, 2001, and executed in May of 2002, to the Shared Assets Area Operating Agreement for North Jersey, South Jersey/Philadelphia and Detroit, dated as of June 1, 1999, by and among Consolidated Rail Corporation, CSX Transportation, Inc. and Norfolk Southern Railway Company, with exhibit thereto, is filed herewith.	 	
 	 	 	 	
 	(l)	Monongahela Usage Agreement, dated as of June 1, 1999, by and among CSX Transportation, Inc., Norfolk Southern Railway Company, Pennsylvania Lines LLC and New York Central Lines LLC, with exhibit thereto, is incorporated herein by reference from Exhibit 10.7 to Norfolk Southern Corporation's Form 10-Q filed on August 11, 1999.	 	
 	 	 	 	
 	(m)	The Agreement, entered into as of July 27, 1999, between North Carolina Railroad Company and Norfolk Southern Railway Company, is incorporated herein by reference from Exhibit 10(i) to Norfolk Southern Corporation's Form 10-K filed on March 6, 2000.	 	
 	 	 	 	
 	(n)	The Supplementary Agreement, entered into as of January 1, 1987, between the Trustees of the Cincinnati Southern Railway and The Cincinnati, New Orleans and Texas Pacific Railway Company (the latter a wholly owned subsidiary of Norfolk Southern Railway Company) - extending and amending a Lease, dated as of October 11, 1881 - is incorporated by reference to Exhibit 10(k) to Norfolk Southern Corporation's Form 10-K filed on March 5, 2001.	 	
 	 	 	 	
 	(o)	The Norfolk Southern Corporation Executive Management Incentive Plan, effective January 25, 2000, is incorporated by reference herein from Exhibit 10(1) to Norfolk Southern Corporation's Form 10-K filed on March 6, 2000.	 	
 	 	 	 	
 	(p)	The Norfolk Southern Corporation Long-Term Incentive Plan, as amended effective January 28, 2003, is filed herewith.	 	
 	 	 	 	
 	(q)	The Norfolk Southern Corporation Officers' Deferred Compensation Plan, as amended effective September 26, 2000, is incorporated herein by reference to Exhibit 10(n) to Norfolk Southern Corporation's Form 10-K filed on March 5, 2001.	 	
 	 	 	 	
 	(r)	The Norfolk Southern Corporation Executives' Deferred Compensation Plan, as amended effective January 20, 2001, is incorporated herein by reference to Exhibit 10(o) to Norfolk Southern Corporation's Form 10-K filed on March 5, 2001.	
 	 	 	
 	(s)	The Directors' Deferred Fee Plan of Norfolk Southern Corporation, as amended effective January 23, 2001, is incorporated herein by reference to Exhibit 10(p) to Norfolk Southern Corporation's Form 10-K filed on March 5, 2001.	
 	 	 	
 	(t)	The Norfolk Southern Corporation Directors' Restricted Stock Plan, effective January 1, 1994, as restated November 24, 1998, is incorporated herein by reference from Exhibit 10(h) to Norfolk Southern Corporation's Form 10-K filed on March 24, 1999.	

 

K73

 
 	(u)	Form of Severance Agreement, dated as of June 1, 1996, between Norfolk Southern Corporation and certain executive officers (including those defined as "named executive officers" and identified in the Corporation's Proxy Statement for the 1997 through 2001 Annual Meetings of Stockholders) is incorporated herein by reference from Exhibit 10(t) to Norfolk Southern Corporation's Form 10-K filed on February 21, 2002.	
 	 	 	
 	(v)	Norfolk Southern Corporation Supplemental (formerly, Excess) Benefit Plan, effective as of August 22, 1999, is incorporated herein by reference from Exhibit 10(r) to Norfolk Southern Corporation's Form 10-K filed on March 6, 2000.	
 	 	 	
 	(w)	The Norfolk Southern Corporation Directors' Charitable Award Program, effective February 1, 1996, is incorporated herein by reference from Exhibit 10(v) to Norfolk Southern Corporation's Form 10-K filed on February 21, 2002.	
 	 	 	
 	(x)	The Norfolk Southern Corporation Outside Directors' Deferred Stock Unit Program, as amended effective January 28, 2003, is filed herewith.	
 	 	 	
 	(y)	Agreement, dated as of October 1, 2001, providing enhanced pension benefits to three officers in exchange for their continued employment with Norfolk Southern Corporation for two years, is incorporated herein by reference to Exhibit 10(w) to Norfolk Southern Corporation's Form 10-Q filed on November 9, 2001. The agreement was entered into with L. Ike Prillaman, Vice Chairman and Chief Marketing Officer; Stephen C. Tobias, Vice Chairman and Chief Operating Officer; and Henry C. Wolf, Vice Chairman and Chief Financial Officer.	
 	 	 	
 	(z)	The Norfolk Southern Corporation Thoroughbred Stock Option Plan, as amended effective January 28, 2003, is filed herewith.	
 	 	 	
 	(aa)	The Norfolk Southern Safety Incentive Plan for Operating Agreement Employees and For Non-Operating Agreement Employees, as amended effective October 1, 2002, is filed herewith.	
 	 	 	
 	(bb)	The Norfolk Southern Corporation Restricted Stock Unit Plan, effective January 28, 2003, is filed herewith.	
 	 	 	
12	 	Statement re: Computation of Ratio of Earnings to Fixed Charges.	
 	 	 	
21	 	Subsidiaries of the Registrant.	
 	 	 	
23	 	Consents of Experts -	
 	 	 	
 	(a)	Consent of KPMG LLP.	
 	(b)	Consent of KPMG LLP and Ernst & Young LLP.	
 	 	 	
99	(a)	Certifications of the CEO and CFO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.	
 	 	 	
 	(b)	Conrail Inc. 2002 Annual Report to Stockholders.	
 	 	 	
(B)	 	Reports on Form 8-K.	
 	 	 	
 	 	A report on Form 8-K was filed November 26, 2002, advising of the amendment of the Rights Agreement to terminate it effective November 26, 2002, and attaching as an exhibit the related press release.	

 

K74

 	 	A report on Form 8-K was filed November 12, 2002, advising that the Corporation had decreased its expected long-term rate of return assumption on pension plan assets for purposes of pension accounting, and attaching as an exhibit the related press release.	
 	 	 	
(C)	 	Exhibits.	
 	 	 	
 	 	The Exhibits required by Item 601 of Regulation S-K as listed in Item 14(a)3 are filed herewith or incorporated herein by references.	
 	 	 	
(D)	 	Financial Statement Schedules.	
 	 	 	
 	 	Financial statement schedules and separate financial statements specified by this Item are included in Item 14(a)2 or are otherwise not required or are not applicable.	

 

K75

POWER OF ATTORNEY

Each person whose signature appears below under "SIGNATURES" hereby authorizes Henry C. Wolf and Henry D. Light, or either of them, to execute in the name of each such person, and to file, any amendment to this report and hereby appoints Henry C. Wolf and Henry D. Light, or either of them, as attorneys-in-fact to sign on his or her behalf, individually and in each capacity stated below, and to file, any and all amendments to this report.

 

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Norfolk Southern Corporation has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on this 21st day of February, 2003.

 

NORFOLK SOUTHERN CORPORATION

 

By:  /s/ David R. Goode

       (David R. Goode, Chairman,

        President and Chief Executive Officer)

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on this 21st day of February, 2003, by the following persons on behalf of Norfolk Southern Corporation and in the capacities indicated.

Signature	Title	

 	 	
/s/ David R. Goode	Chairman, President and Chief Executive Officer and Director	
(David R. Goode)	(Principal Executive Officer)	

 	 

/s/ Henry C. Wolf	Vice Chairman and Chief Financial Officer	
(Henry C. Wolf)	(Principal Financial Officer)	

 	
/s/ John P. Rathbone	Senior Vice President and Controller	
(John P. Rathbone)	(Principal Accounting Officer)	

 	
/s/ Gerald L. Baliles	Director	
(Gerald L. Baliles)	 	

 	
/s/ Gene R. Carter	Director	
(Gene R. Carter)	 	

 	
/s/ Alston D. Correll	Director	
(Alston D. Correll)	 	

 

K76

/s/ Landon Hilliard	Director	
(Landon Hilliard)	 	

 	
/s/ Steven F. Leer	Director	
(Steven F. Leer)	 	

 	
___________________	Director	
(Jane Margaret O'Brien)	 	

 	
/s/ Harold W. Pote	Director	
(Harold W. Pote)	 	

 	
/s/ J. Paul Reason	Director	
(J. Paul Reason)	 	

 

K77

I, David R. Goode, certify that:	
 	 	 	
1.	I have reviewed this annual report on Form 10-K of Norfolk Southern Corporation;	
2.	Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;	
3.	Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;	
4.	The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:	
 	a.	designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;	
 	b.	evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and	
 	c.	presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;	
5.	The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):	
 	a.	all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and	
 	b.	any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and	
6.	The registrant's other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.	
 	 	 	
Date: February 21, 2003	
 	 	 	
/s/ David R. Goode	
David R. Goode	
Chairman, President and Chief Executive Officer	

 

K78

 
I, Henry C. Wolf, certify that:	
 	 	 	
1.	I have reviewed this annual report on Form 10-K of Norfolk Southern Corporation;	
2.	Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;	
3.	Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;	
4.	The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:	
 	a.	designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;	
 	b.	evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and	
 	c.	presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;	
5.	The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):	
 	a.	all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and	
 	b.	any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and	
6.	The registrant's other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.	
 	 	 	
Date: February 21, 2003	
 	 	 	
/s/ Henry C. Wolf	
Henry C. Wolf	
Vice Chairman and Chief Financial Officer	

 

K79

 
 	 	 	 	 	 	 	Schedule II	
 	 	 	 	 	 	 	 	 	 	 	
Norfolk Southern Corporation and Subsidiaries	
Valuation and Qualifying Accounts	
Years Ended December 31, 2000, 2001 and 2002	
(In millions of dollars)	
 	 	 	 	 	 	 	 	 	 	 	
 	 	 	Additions charged to:	 	 	 	
 	Beginning	 	 	Other	 	 	Ending	
 	Balance	Expenses	Accounts	Deductions	Balance	
Year ended December 31, 2000	 	 	 	 	 	 	 	 	 	 	
Valuation allowance (included net in deferred tax liability) for deferred tax assets	$	9	$	3	$	-- 	$	-- 	$	12	
Casualty and other claims included in other liabilities	$	275	$	117	$	8 (1)	$	138 (2)	$	262	
Current portion of casualty and other claims included in accounts payable	$	181	$	19	$	221 (1)	$	198 (3)	$	223	
 	 	 	 	 	 	 	 	 	 	 	
Year ended December 31, 2001	 	 	 	 	 	 	 	 	 	 	
Valuation allowance (included net in deferred tax liability) for deferred tax assets	$	12	$	6	$	-- 	$	-- 	$	18	
Casualty and other claims included in other liabilities	$	262	$	110	$	20 (1)	$	127 (2)	$	265	
Current portion of casualty and other claims included in accounts payable	$	223	$	22	$	142 (1)	$	195 (3)	$	192	
 	 	 	 	 	 	 	 	 	 	 	
Year ended December 31, 2002	 	 	 	 	 	 	 	 	 	 	
Valuation allowance (included net in deferred tax liability) for deferred tax assets	$	18	$	6	$	--	$	--	$	24	
Casualty and other claims included in other liabilities	$	265	$	119	$	9 (1)	$	139 (2)	$	254	
Current portion of casualty and other claims included in accounts payable	$	192	$	32	$	124 (1)	$	141 (3)	$	207	
 	 	 	 	 	 	 	 	 	 	 	
(1) Includes revenue refunds and overcharges provided through deductions from operating revenues and transfers from other accounts.	
 	 	 	 	 	 	 	 	 	 	 	
(2) Payments and reclassifications to/from accounts payable.	
 	 	 	 	 	 	 	 	 	 	 	
(3) Payments and reclassifications to/from other liabilities.	

 

K80

EXHIBIT INDEX

NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES (NS)

Electronic	 	
Submission	 	
Exhibit	 	
Number	Description	
 	 	
3(ii)	The Bylaws of Norfolk Southern Corporation, as amended December 1, 2002.	
 	 	
10(a)	The Transaction Agreement, dated as of June 10, 1997, by and among CSX, CSX Transportation, Inc., Registrant, Norfolk Southern Railway Company, Conrail Inc., Consolidated Rail Corporation and CRR Holdings LLC, with certain schedules thereto.	
 	 	
10(k)	Amendment No. 3, dated as of June 1, 2001, and executed in May of 2002, to the Shared Assets Area Operating Agreement for North Jersey, South Jersey/Philadelphia and Detroit, dated as of June 1, 1999, by and among Consolidated Rail Corporation, CSX Transportation, Inc. and Norfolk Southern Railway Company, with exhibit thereto.	
 	 	
10(p)	The Norfolk Southern Corporation Long-Term Incentive Plan, as amended effective January 28, 2003.	
 	 	
10(x)	The Norfolk Southern Corporation Outside Directors' Deferred Stock Unit Program, as amended effective January 28, 2003.	
 	 	
10(z)	The Norfolk Southern Corporation Thoroughbred Stock Option Plan, as amended effective January 28, 2003.	
 	 	
10(aa)	The Norfolk Southern Safety Incentive Plan for Operating Agreement Employees and For Non-Operating Agreement Employees, as amended effective October 1, 2002.	
 	 	
10(bb)	The Norfolk Southern Corporation Restricted Stock Unit Plan, effective January 28, 2003.	
 	 	
12	Statement re: Computation of Ratio of Earnings to Fixed Charges.	
 	 	
21	Subsidiaries of Norfolk Southern Corporation.	
 	 	
23	Consents of Experts -

(a)  Consent of KPMG LLP.

(b)  Consent of KPMG LLP and Ernst & Young LLP.	
 	 	
99	(a)   Certification of the CEO and CFO pursuant to 18 U.S.C. Section 1350, as adopted

        pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.	
 	(b)   Conrail Inc. 2002 Annual Report to Stockholders.	

Exhibits 23(a), 23(b) and 99(a) are included; remaining exhibits are not included in copies assembled for public dissemination. These exhibits are included in the 2002 Form 10-K posted on our website at www.nscorp.com under "SEC documents" or you may request copies by writing to:

 

Office of Corporate Secretary

Norfolk Southern Corporation

Three Commercial Place

Norfolk, Virginia 23510-9219

 

K81

EXHIBIT 10(x)

NORFOLK SOUTHERN CORPORATION

Outside Directors' Deferred Stock Unit Program

I.    Effective Date:  May 9, 1996 (effective at the Organization
Meeting of the Board of Directors),
amended to and including 1-28-03.

II.    Purpose:         To align further each outside director's
ownership interest in Norfolk Southern
Corporation ("Corporation")with that of
stockholders generally.

III.    Eligibility:     Each outside director of the Corporation
serving on the Effective Date and any such
outside director whose term as director
begins after the Effective Date ("Eligible
Director").  For purposes of this Program,
an "outside director" is a director who is
not an officer of the Corporation or any
of its subsidiaries.

IV.    Benefits:        (1)  Each Eligible Director shall be
granted from time to time such deferred
stock units (each such stock unit
representing at the time of grant the
value of one share of Norfolk Southern
Corporation Common Stock) ("Stock
Units"),as the Board of Directors may
authorize.  Each Eligible Director's
Stock Units will be recorded in an
individual memorandum account ("Account")
maintained by the Corporate Secretary or
designated agent.  On each dividend
payment date, an amount equivalent to the
dividend paid on the Common Stock
("Dividend Equivalent") will be credited
for each Stock Unit and each fraction
thereof in the Account and converted into
additional Stock Units and fractions
thereof (rounded to four decimal places)
based on the Fair Market Value of the
Common Stock on the dividend payment date.

For purposes of this Program, "Fair Market
Value" on a particular date is the mean of
the high and low prices at which the Common
Stock is traded on such date as reported in
the Composite Transactions for such date by
Bloomberg L.P., or its successor, on its
internet-based service, or, if Common Stock
was not traded on such date, on the next
preceding day on which Common Stock was
traded.

(2)  Each outside director of the
Corporation serving on June 1, 1996, also
shall have credited to the Account the
number of Stock Units, including fractions
thereof to which such director is entitled
under the Norfolk Southern Corporation
Directors' Pension Plan.  Such Stock Units
will be accounted for separately from any
Stock Units credited under paragraph (1)
above but will be treated the same in all
other respects.

(3)  Each Eligible Director may make an
election at any time up to one year prior
to leaving the Board of Directors to
receive in cash any Stock Units in the
Account either in a lump sum or in 10
annual installments upon leaving the
Board of Directors for any reason.  The
most current election on file with the
Corporate Secretary shall become
irrevocable one year prior to the
eligible Director leaving the Board of
Directors.  Failure to make a valid
election will result in the Account being
distributed in a lump sum.  Separate
elections will be made for Stock Units
credited under paragraphs (1) and  (2)
above.  A lump-sum payment will be valued
based on the Fair Market Value of Common
Stock on the last market day of the month
following a director's termination of
service and will be paid to an Eligible
Director or beneficiary as soon as
practicable thereafter.  The first
distribution under an election to receive
installment payments will be made in
January following the year in which the
Eligible Director terminates service;
Stock Units at any time remaining in the
Account will be credited with Dividend
Equivalents until the final installment
has been paid.  Each annual distribution
will be valued based on the Fair Market
Value of the Common Stock on the third
business day after the date in January
that the Corporation first makes publicly
available its most recent regular annual
financial statements.  The first such
installment will be an amount equal to one
tenth of the total value of the Stock
Units in the Account at that time; the
second installment, one ninth of the
remaining total value; the third
installment, one eighth; and so forth,
until the Account is depleted with payment
of the tenth installment.

(4)  The Board of Directors may make such
adjustments in the number of Stock Units
as may be required by any change in the
corporate structure or shares of the
Corporation, including but not limited to,
recapitalization, stock splits, stock
dividends, combination or exchange of
shares, mergers, consolidations, rights
offerings, separations, reorganizations
and liquidations.

V.  Miscellaneous:          (1)  Each Eligible Director may designate
in writing the person or persons
("Beneficiary") who shall acquire the
rights of the Eligible Director to the
Account in the event of the Eligible
Director's death before final distribution.
In order to be effective, an Eligible
Director's designation of a Beneficiary
must be on file with the Corporate
Secretary before the Eligible Director's
death.  Any such designation may be
revoked and a new designation substituted
therefor by the Eligible Director at any
time before death.

If the named Beneficiary does not survive
the Eligible Director, or if there is no
named Beneficiary, then the rights with
respect to an Eligible Director's Account
shall be acquired by the person or persons
who shall acquire the Eligible Director's
rights to the Account by bequest or
inheritance in accordance with the
applicable laws of descent and
distribution.

(2)  This Program may be amended or
terminated by the Board of Directors of the
Corporation at any time; however, no such
amendment or termination shall deprive an
Eligible Director of any Stock Units
previously credited to his or her Account.

EXHIBIT 10(aa)

SAFETY INCENTIVE PLAN

FOR NON-OPERATING AGREEMENT EMPLOYEES

A.    INTRODUCTION - The Norfolk Southern Safety Incentive Plan for
Non-Operating Agreement Employees ("SIP") is designed to provide
an additional incentive to work safely through Safety Incentive
Awards ("Awards") to eligible agreement employees who work
without injury during the contest year.

B.    ELIGIBILITY AND COVERED EMPLOYMENT - An "eligible employee is an
employee of Norfolk Southern Corporation or one of its rail
subsidiaries or affiliates (the "Company") who works in a
department or unit in Appendix A during a calendar year a
sufficient number of hours in "covered employment" equal to that
required to earn vacation.  "Covered employment" is employment
in a position covered by a collective bargaining agreement.
Partially excepted positions classified as 3A or 3B are not
considered covered employment.  To qualify for an Award for a
given year, an eligible employee must work in covered employment
for more than half of that year in a single contest group and
must have payroll activity of at least 960 hours during that
year in that single contest group.  "Payroll activity" includes
pay for straight time, overtime, vacation, holiday, sick leave
and any other hourly compensation made through the payroll
process.  The eligible groups are listed in Appendix A.  The
definition and scope of the term "eligible employee" and other
terms herein, without limitation, are subject to change at any
time, at the sole discretion of the Company.

C.    SAFETY INCENTIVE AWARDS - 
1.  The Company will award 5 shares of Norfolk Southern
Corporation common stock (as may be adjusted as appropriate by
the Company in the event of any recapitalization, stock split
or other change affecting the capital structure of the Company)
to each eligible employee who (i) is a qualifying member of a
contest team listed in Groups 1, 2, 3 or 4 of Appendix A in the
annual Norfolk Southern Safety Performance Contest for
Non-Operating Agreement Employees which has no reportable
injuries for the contest year and (ii) works in covered
employment without injury during the contest year.

2.  The Company will award 6 shares of Norfolk Southern
Corporation common stock (as may be adjusted as appropriate by
the Company in the event of any recapitalization, stock split
or other change affecting the capital structure of the Company)
to each eligible employee who is a member of a winning contest
team listed in Group 5 of Appendix A in the annual Norfolk
Southern Safety Performance Contest for Non-Operating Agreement
Employees and who works in covered employment without injury
during the contest year.  A winning contest team in Group 5 of
Appendix A shall be that contest team which achieves the lowest
FRA Reportable Injury Ratio of all contest teams in its group
during the contest year (if there is only one team listed in
Group 5, then that team shall compete with the Group 2 Terminals
listed in Appendix A to the Norfolk Southern Safety Incentive
Plan for Operating Agreement Employees, for purposes of this
Award and the additional Award described in the second sentence
following).  In case of ties, duplicate Awards will be provided.
The Company will also award an additional 2 shares of Norfolk
Southern Corporation common stock (as may be adjusted as
appropriate by the Company in the event of any recapitalization,
stock split or other change affecting the capital structure of
the Company) to each eligible employee who works in covered
employment without injury during the contest year and is a
member of a winning contest team listed in Group 5 of Appendix
A in the annual Norfolk Southern Safety Performance Contest for
Non-Operating Agreement Employees which achieves a FRA
Reportable Injury Ratio of zero.

D.    WORKING WITHOUT INJURY - In order to be considered as having
worked in covered employment without injury during a contest
year for purposes of SIP, an eligible employee must not be
named as being injured in an FRA-reportable accident/injury
report during that year.  In the event that an eligible employee
is named as being injured in any such report while employed in
covered employment, he/she and, except as otherwise provided
herein for winning contest teams in Group 5 of Appendix A,
his/her contest team will not be eligible for an Award during
the contest year.  Failure by an eligible employee to make a
proper report of an injury during covered employment will result
in his/her being removed from consideration for an Award in the
calendar year in which the unreported injury occurred, and, if
it is a different year, in the year in which the Company learns
of the failure to make a proper report.

E.    SIP ADMINISTRATION - The SIP will be administered by the Safety
Department.  Employee injury statistics for eligible employees
will be maintained by the Safety Department.

F.    TERMINATION AND AMENDMENT - The Company has and reserves the
right to terminate or amend SIP at any time and for any reason,
in its sole discretion.

APPENDIX A

NORFOLK SOUTHERN
SAFETY PERFORMANCE CONTEST GROUPS
FOR NON-OPERATING AGREEMENT EMPLOYEES

Group 1 - IT, Law, Treasurer, Material Management and All
Ancillary Groups

Group 2 - Accounting - Atlanta

Group 3 - Accounting - Roanoke

Group 4 - Marketing

Group 5 - East Carolina Business Unit

SAFETY INCENTIVE PLAN

FOR OPERATING AGREEMENT EMPLOYEES

A.   INTRODUCTION - The Norfolk Southern Safety Incentive Plan ("SIP")
is designed to provide an additional incentive to work safely
through Safety Incentive Awards ("Awards") to eligible agreement
employees who work without injury during the contest period.

B.   ELIGIBILITY AND COVERED EMPLOYMENT - An "eligible employee" is
an employee of Norfolk Southern Corporation or one of its rail
subsidiaries or affiliates (the "Company") who works in the
Operations Division during a calendar year a sufficient number
of hours in "covered employment" equal to that required to earn
vacation.  "Covered employment" is employment in a position
covered by a collective bargaining agreement.  To qualify for
an Award for a given year, an eligible employee must work in
covered employment for more than half of that year in a single
contest group and must have payroll activity of at least 960
hours during that year in that single contest group.
"Payroll activity" includes pay for straighttime, overtime,
vacation, holiday, sickleave and any other hourly compensation
made through the payroll process.  The eligible groups and
competitive groupings are listed in the "Norfolk Southern
Safety Performance Contest Groups," which is attached as
Appendix A.  The definition and scope of the term "eligible
employee" and other terms herein, without limitation, are
subject to change at any time, at the sole discretion of
the Company.

C.   SAFETY INCENTIVE AWARDS - The Company will award 6 shares
of Norfolk Southern Corporation common stock (as may be
adjusted as appropriate by the Company in the event of any
recapitalization, stock split or other change affecting the
capital structure of the Company) to each eligible employee
who is a member of a winning contest team in the annual
Norfolk Southern Safety Performance Contest and who works
in covered employment without injury during the contest year.
A winning contest team shall be that contest team which
achieves the lowest FRA Reportable Injury Ratio of all
contest teams in its group during the contest year.  In case
of ties, duplicate Awards will be provided.  The Company
will also award an additional 2 shares of Norfolk Southern
Corporation common stock to each eligible employee who works
in covered employment without injury during the contest year
and is a member of a winning contest team in the annual
Norfolk Southern Safety Performance Contest which achieves a
FRA Reportable Injury Ratio of zero.

D.   WORKING WITHOUT INJURY - In order to be considered as
having worked in covered employment without injury during a
contest year for purposes of SIP, an eligible employee must
not be named as being injured in any FRA-reportable
accident/injury report during that year.  In the event that
an eligible employee is named as being injured in any such
report while employed in covered employment, he/she will not
be eligible for an Award during the Contest year.  Failure by
an eligible employee to make a proper report of an injury
during covered employment will result in his/her being removed
from consideration for an Award in the calendar year in which
the unreported injury occurred, and, if it is a different year,
in the year in which the Company learns of the failure to
make a proper report.

E.   EXCEPTIONS - If a Department Head, after consultation with the
Law Department, determines that an injured employee in that
Department was not at fault and could not have avoided the
injury, the employee's injury-free status for SIP purposes will
be restored.  The determination made by the Department Head
will be final and there will be no appeal.

F.   SIP ADMINISTRATION - The SIP will be administered by the Safety
Department.  Employee injury statistics for eligible employees
will be maintained by the Safety Department.

G.   TERMINATION AND AMENDMENT - The Company has and reserves the
right to terminate or amend SIP at any time and for any reason,
in its sole discretion.

APPENDIX A
NORFOLK SOUTHERN SAFETY PERFORMANCE CONTEST GROUPS

***********************************************************************

A.      TRANSPORTATION DEPARTMENT CONTEST

GROUP 1 DIVISIONS               GROUP 2 DIVISIONS

DEARBORN DIVISION               PIEDMONT DIVISION
PITTSBURGH DIVISION             POCAHONTAS DIVISION
HARRISBURG DIVISION             GEORGIA DIVISION
LAKE DIVISION                   CENTRAL DIVISION
ILLINOIS DIVISION               ALABAMA DIVISION
VIRGINIA DIVISION                       

GROUP 1 TERMINALS               GROUP 2 TERMINALS

ATLANTA                             ALLENTOWN
BELLEVUE                            BROSNAN
COLUMBUS                            CHARLOTTE
CHICAGO                             CINCINNATI
CONWAY                              DETROIT
DEBUTTS                             FT. WAYNE
DECATUR                             LOUISVILLE
ELKHART                             NEW ORLEANS
HARRISBURG                          SAVANNAH
KANSAS CITY                         SEVIER
NORFOLK                             SHEFFIELD
NORRIS                              SPENCER
ROANOKE                             TOLEDO
ST. LOUIS                                       

B.      MECHANICAL DEPARTMENT CONTEST

TERRITORIES GROUP 1             TERRITORIES GROUP 2

DEARBORN                             LAKE
VIRGINIA/POCAHONTAS                  ALABAMA
PIEDMONT/GEORGIA                     ILLINOIS
CENTRAL                              PITTSBURGH
HOLLIDAYSBURG SHOP                   HARRISBURG

MECHANICAL SHOPS GROUP 1          MECHANICAL SHOPS GROUP 2

CHATTANOOGA DIESEL                   BELLEVUE SHOP
ENOLA LD                             CONWAY LOCO
SHAFFERS SHOP LD                     ROANOKE SHOP LD
JUNIATA LD                                      

***************************************************************

C.      ENGINEERING DEPARTMENT CONTEST

DIV ENG TERRITORIES GROUP 1          DIV ENG TERRITORIES GROUP 2

HARRISBURG                           POCAHONTAS
DEARBORN                             ALABAMA    
LAKE                                 ILLINOIS
PITTSBURGH                           GEORGIA
PIEDMONT                             CENTRAL
VIRGINIA

ENGINEERING MWS GANGS              ENGINEERING SHOPS    

ATLANTA-TW                           CHARL ROADWAY
HARRISBURG                           PUMP REPAIR NORTH
PITTSBURGH                           PUMP REPAIR SOUTH
ROANOKE                              RDWAY MATL YD
SOMERSET                                

C&S GROUP 1                         C&S GROUP 2    

GS-VIRGINIA                         GS-GEORGIA
GS-LAKE                             GS-POCAHONTAS
GS-PIEDMONT                         GS-CENTRAL
GS-PITTSBURGH                       GS-ALABAMA
GS-DEARBORN                         GS-ILLINOIS
GS-HARRISBURG                   

C&S CONSTRUCTION   

EASTERN REGION
WESTERN REGION
LINES EAST - GANG
LINES WEST - CGA
NORTHERN REG-GRP1
NORTHERN REG-GRP2

*******************************************************************

D.      SUPPORT SERVICES

ENGINEERING MISC
CUSTOMER SERVICES  
TRANSPORTATION SERVICES
MECHANICAL HQ 

EXHIBIT 10(bb)

NORFOLK SOUTHERN CORPORATION
RESTRICTED STOCK UNIT PLAN

Effective January 28, 2003

Section 1.      PURPOSE

The Restricted Stock Unit Plan is adopted January 28, 2003, to 
promote the success of Norfolk Southern Corporation (the "Corporation") 
by providing compensation to officers and other key employees of the 
Corporation and its Subsidiary Companies (as hereinafter defined) 
which is tied to the performance of the common stock of the Corporation, 
thereby providing an additional incentive to officers and other key 
employees to devote their maximum efforts and skills to the success of 
the Corporation and further aligning their interests with those of the 
shareholders.  The Plan provides for the grant of restricted stock 
units whose value is measured by the fair market value of the 
Corporation's common stock and which will be payable in cash upon 
satisfaction of the applicable restrictions, in accordance with the 
terms and conditions set forth below.

Section 2.      DEFINITIONS

The terms used herein shall have the following meanings unless 
otherwise specified or unless a different meaning is clearly required 
by the context:

Award           A grant of Restricted Stock Units.

Beneficiary     The person or persons designated in writing by the 
Participant as his Beneficiary in respect to Awards under 
the Corporation's Long-Term Incentive Plan or, in the
absence of such a designation or if the designated person
or persons predecease the Participant, the person or
persons who shall acquire the Participant's rights in
respect to Awards by bequest or inheritance in accordance
with the applicable laws of descent and distribution. In
order to be effective, a Participant's designation of a
Beneficiary must be on file with the Corporation before
the Participant's death.

Board of        The Board of Directors of the Corporation.
Directors

Code            The Internal Revenue Code of 1986, as amended from time to
time.

Committee       The Compensation and Nominating Committee, Performance-Based 
Compensation Committee or any other committee of the Board
of Directors which is authorized to grant Awards under this
Plan.  

Common  The Common Stock of the Corporation.
Stock

Disability      A disability that enables the Participant to be eligible
for and receive a disability benefit under the Long-Term
Disability Plan of the Corporation or a long-term
disability plan of a Subsidiary Company (whichever is
applicable), as amended from time to time.

Fair Market     The value of Common Stock on a particular date as measured
Value       by the mean of the high and low prices at which it is
traded on such date as reported in the Composite
Transactions for such date by Bloomberg L.P., or its
successor, on its internet-based service, or, if Common
Stock was not traded on such date, on the next preceding
day on which Common Stock was traded.

Participant     Any officer or key employee of the Corporation or a Subsidiary
Company selected by the Committee to participate in the Plan.  

Restricted      Contingent rights to receive cash payment for the Fair
Stock Units Market Value of shares of Common Stock granted pursuant to
Section 5 of the Plan and subject to the restrictions and
other terms and conditions set forth therein.  Each
Restricted Stock Unit shall equal the Fair Market Value
of one share of Common Stock.  

Restriction A period of time not less than twelve (12) nor more
Period      than sixty (60) months, to be determined by the
Committee in its sole discretion, commencing on the 
effective date as of which Restricted Stock Units are 
granted, during which the restrictions imposed by 
paragraph (b) of Section 5 of the Plan shall apply.  
The Committee shall determine the length of the Restriction
Period at the time that the Restricted Stock Units are 
granted.

Retirement      Retirement from the Corporation or a Subsidiary Company
pursuant to the provisions of the Retirement Plan of the
Corporation or a retirement plan of a Subsidiary Company
(whichever is applicable), as amended from time to time.

Subsidiary      A corporation of which more than fifty percent (50%) of
Company     the total combined voting power of all classes of
stock entitled to vote is owned, directly or indirectly,
by the Corporation.

Section 3.      ADMINISTRATION

The Plan shall be administered by the Committee, which, subject to 
the limitations set forth herein, shall have the full and complete 
authority and sole discretion from time to time to construe and 
interpret the Plan; to select the officers and other key employees 
who shall be granted Awards under the Plan; to determine the type, 
size, terms, and conditions of the Award or Awards to be granted 
to each such Participant; to authorize the grant of such Awards 
pursuant to the Plan; in connection with the merger or 
consolidation of the Corporation, to give a Participant an election 
to surrender an Award in exchange for the grant of a new Award; 
to adopt, amend and rescind rules and regulations relating to the 
Plan; and to make all other determinations and take all other 
action it may deem necessary or advisable for the implementation 
and administration of the Plan.  The Committee may authorize the 
grant of Awards subject to differing terms and conditions to any 
eligible employee.  The Committee's decision to authorize the 
grant of an Award to an employee at any time shall not require 
the Committee to authorize the grant of an Award to that employee 
at any other time or to any other employee at any time; nor shall 
its determination with respect to the size or terms and conditions 
of the Award to be granted to an employee at any time require it 
to authorize the grant of an Award of the same size or with the 
same terms and conditions to that employee at any other time or 
to any other employee at any time.  The Committee shall not be 
precluded from authorizing the grant of an Award to any eligible 
employee solely because the employee previously may have been 
granted an Award of any kind under the Plan.

All determinations of the Committee shall be by a majority of its 
members and shall be final, conclusive and binding. Each member 
of the Committee, while serving as such, shall be considered to 
be acting in his capacity as a director of the Corporation, and 
no member of the Committee shall be liable for any action taken 
or decision made in good faith with respect to the implementation 
or administration of the Plan.

Section 4.      ELIGIBILITY

To be eligible for selection by the Committee to participate in the 
Plan, an individual must be a full-time salaried officer or key 
employee of the Corporation, or of a Subsidiary Company, and must 
reside in the United States or Canada, on the date on which the 
Committee authorizes the grant to such individual of an Award. 

Section 5.      RESTRICTED STOCK UNITS 

(a) Type of Award - The Committee, in its sole discretion, may 
fromtime to time authorize the grant of Restricted Stock Units to a 
Participant.  Such Restricted Stock Units will be recorded in 
individual memorandum accounts maintained by the Committee or its 
agent.  The Participant shall have no beneficial ownership interest 
in the Common Stock represented by the Restricted Stock Units and 
no right to receive a certificate representing such shares of Common 
Stock.  Further, the Participant shall have no right to vote the 
Common Stock represented by the Restricted Stock Units or to receive 
dividends (except for any equivalent payments which may be awarded 
by the Committee in connection with such Restricted Stock Units) 
on the Common Stock represented by the Restricted Stock Units.  

(b)        Restrictions - Until the expiration of the Restriction
Period or the lapse of restrictions in the manner provided in 
paragraphs (d) or (e) of this Section 5, Restricted Stock Units
shall be subject to the following restrictions and any additional 
restrictions that the Committee, in its sole discretion, may from 
time to time deem desirable in furtherance of the objectives of 
the Plan:

(i)    the Participant shall not be entitled to receive
cash payment for the Restricted Stock Units which the Participant 
may have a contingent right to receive in the future;

(ii)   the Restricted Stock Units may not be sold, 
transferred, assigned, pledged, conveyed, hypothecated, or 
otherwise disposed of; and

(iii)  the Restricted Stock Units may be forfeited 
immediately as provided in paragraph (d) of this Section 5.

(c)        Distribution of Restricted Stock Units - If a Participant 
to whom Restricted Stock Units have been granted remains in the 
continuous employment of the Corporation or a Subsidiary Company 
during the entire Restriction Period, upon the expiration of the 
Restriction Period all restrictions applicable to the Restricted 
Stock Units shall lapse, and the Restricted Stock Units shall be 
settled in cash, not in shares of Common Stock, based on Fair 
Market Value on the date all applicable restrictions lapse.  

(d)       Termination of Employment - If the employment of a 
Participant is terminated for any reason other than the Retirement, 
Disability or death of the Participant in service before the 
expiration of the Restriction Period, the Restricted Stock Units 
shall be forfeited immediately and all rights of the Participant 
to such units shall terminate immediately without further 
obligation on the part of the Corporation or any Subsidiary 
Company. If the employment of a Participant is terminated by 
reason of Retirement, Disability or death of the Participant 
in service before expiration of the Restriction Period, the 
number of Restricted Stock Units held by the Corporation for 
the Participant's account shall be reduced by the proportion 
of the Restriction Period remaining after the Participant's 
termination of employment; the restrictions on the balance of 
such Restricted Stock Units shall lapse on the date the 
Participant's employment terminated; and the cash settlement 
representing the Restricted Stock Units upon which the restrictions 
have lapsed shall be delivered to the Participant (or, in the 
event of the Participant's death, to his Beneficiary). 

(e)     Waiver of Restrictions - The Committee, in its sole 
discretion, may waive any or all restrictions with respect to 
Restricted Stock Units.

Section 6.       DIVIDEND EQUIVALENT PAYMENTS

The Committee may authorize the payment of dividend equivalents on 
some or all of the Restricted Stock Units representing shares of 
Common Stock, in an amount equal to, and commensurate with, 
dividends declared by the Board of Directors and paid on Common 
Stock.  Dividend equivalents payable on Restricted Stock Units 
under this Section 6 shall be paid immediately in cash or converted 
to additional Restricted Stock Units based on the Fair Market Value 
of Common Stock on the date dividends are paid, as may be 
determined by the Committee.  If the dividend equivalents are 
paid immediately in cash, the settlement thereof will be paid 
in cash.  If the dividend equivalents are converted to additional 
Restricted Stock Units, the additional Restricted Stock Units 
shall be recorded in the Participant's individual memorandum account 
and subject to any remaining Restriction Period applicable to the 
Restricted Stock Units on which the dividend equivalents were paid.
Upon cash settlement of the Restricted Stock Units on which the 
dividend equivalents were paid, the additional Restricted Stock 
Units representing dividend equivalents will be paid in cash.  
The Committee may authorize the payment of dividend equivalents 
under this Section 6 with respect to any Restricted Stock Unit 
for all or some portion of its term. 

Section 7.      CAPITAL ADJUSTMENTS

In the event of a recapitalization, stock split, stock 
dividend, exchange, combination, or reclassification of shares, 
merger, consolidation, reorganization, or other change in or 
affecting the capital structure or capital stock of the Corporation,
the Board of Directors, upon the recommendation of the Committee, 
may make appropriate adjustments in the number of Restricted Stock
Units representing shares of Common Stock, as it deems equitable,
in its absolute discretion, to prevent dilution or enlargement 
of the rights of Participants.

Section 8.      AMENDMENT OR TERMINATION OF THE PLAN

The Corporation may at any time and from time to time 
alter or amend, in whole or in part, any or all of the provisions 
of the Plan, or may at any time suspend or terminate the Plan, 
through written action of its chief executive officer or resolution
of its Board of Directors, provided that no change in any Award
theretofore granted to any Participant may be made which would 
impair or diminish the rights of the Participant without the 
Participant's consent.

Section 9.      MISCELLANEOUS

(a)        Withholding - The Corporation and its Subsidiary 
Companies shall have the right, to the extent permitted by law, to
deduct from any payment of any kind otherwise due to a Participant
any Federal, state or local taxes of any kind required by law to be 
withheld with respect to Awards under the Plan, and to the 
extent any such withholding requirements are not satisfied, each 
Participant shall pay to the Corporation any Federal, state or 
local taxes of any kind required by law to be withheld with 
respect to Awards under the Plan.

(b)        Stockholder Rights - No person shall have any rights
of a stockholder by virtue of a Restricted Stock Unit. 

(c)        No Contract of Employment - This Plan shall not be 
deemed to be an employment contract between the Corporation or 
any Subsidiary Company and any Participant or other employee.  
Nothing contained herein, or in any agreement, certificate or 
other document evidencing, providing for, or setting forth the 
terms and conditions applicable to any Awards shall be deemed 
to confer upon any Participant or other employee a right to 
continue in the employment of the Corporation or any Subsidiary 
Company, or to interfere with the right of the Corporation or 
any Subsidiary Company to terminate the employment of such 
Participant or employee at any time.

(d)        Unfunded Plan - Except as may otherwise be provided 
in the Plan, the Plan shall be unfunded.  Neither the Corporation 
nor any Subsidiary Company shall be required to segregate any 
assets that may be represented by Restricted Stock Units, and 
neither the Corporation nor any Subsidiary Company shall be 
deemed to be a trustee of any amounts to be paid under a 
Restricted Stock Unit.  Any liability of the Corporation to pay 
any Participant or Beneficiary with respect to a Restricted 
Stock Unit shall be based solely upon any contractual obligations 
created pursuant to the provisions of the Plan; no such obligation 
shall be deemed to be secured by any pledge or encumbrance on any 
property of the Corporation or a Subsidiary Company.

(e)        Applicable Law - The Plan, its validity, interpretation, 
and administration, and the rights and obligations of all persons 
having an interest therein, shall be governed by and construed in 
accordance with the laws of the Commonwealth of Virginia, except 
to the extent that such laws may be preempted by Federal law.

(f) Gender and Number - Wherever used in the Plan, words in 
the masculine form shall be deemed to refer to females as well as 
to males, and words in the singular or plural shall be deemed to 
refer also to the plural or singular, respectively, as the context 
may require.

EXHIBIT 10(z)

NORFOLK SOUTHERN CORPORATION
THOROUGHBRED STOCK OPTION PLAN

AS AMENDED EFFECTIVE  JANUARY 28, 2003

Section 1.      PURPOSE

The purpose of the Thoroughbred Stock Option Plan (the "Plan") is to
promote the success of Norfolk Southern Corporation (the "Corporation")
and to provide an opportunity for nonagreement employees of the
Corporation and its Subsidiary Companies (as hereinafter defined) to
acquire or increase a proprietary interest in the Corporation and
thereby to provide an additional incentive to nonagreement employees
to devote their maximum efforts and skills to the advancement,
betterment, and prosperity of the Corporation and its shareholders.
The Plan provides for the grant of non-qualified stock options, in
accordance with the terms and conditions set forth below.

Section 2.      DEFINITIONS

The terms used herein shall have the following meanings unless
otherwise specified or unless a different meaning is clearly
required by the context:

Award                   Non-qualified Stock Option granted under the terms
of the Plan.

Beneficiary             The person or persons designated in writing by
the Participant as his Beneficiary in respect of
Awards or, in the absence of such a designation
or if the designated person or persons predecease
the Participant, the person or persons who shall
acquire the Participant's rights in respect of
Awards by bequest or inheritance in accordance
with the applicable laws of descent and
distribution. In order to be effective, a
Participant's designation of a Beneficiary must
be on file with the Corporation before the
Participant's death.  Any such designation may
be revoked and a new designation substituted
therefor by the Participant at any time before
his death without the consent of the previously
designated Beneficiary.

Board of          The Board of Directors of the Corporation.
Directors

Code              The Internal Revenue Code of 1986, as amended
from time to time.

Committee               The Compensation and Nominating Committee of the
Board of Directors.

Common Stock      The Common Stock of the Corporation.

Disability        A disability that enables the Participant to be
eligible for and receive a disability benefit under
the Long-Term Disability Plan of the Corporation or
a long-term disability plan of a Subsidiary Company
(whichever is applicable), as amended from time to
time.

Effective Date    The effective date of the option, as determined
by the Committee and specified in the Stock Option
Notice.

Fair Market             The value of Common Stock on a particular date as
Value             measured by the mean of the high and low prices
at which it is traded on such date as reported
in the Composite Transactions for such date by
Bloomberg L.P., or its successor, on its
internet-based service, or, if Common Stock was not
traded on such date, on the next preceding day on
which Common Stock was traded.

Long-Term               The Long-Term Disability Plan of Norfolk Southern 
Disability Plan   Corporation and Participating Subsidiary Companies. 

Option            Any non-qualified option to purchase Common Stock
granted pursuant to the provisions of Section 6
of the Plan.

Optionee          A Participant who is the holder of an Option.

Participant       Any nonagreement employee of the Corporation or
a Subsidiary Company, excluding any officer or
director of the Corporation, selected by the
Committee to participate in the Plan.

Retirement              Retirement from the Corporation or a Subsidiary
Company pursuant to the provisions of the
Retirement Plan of the Corporation or a retirement
plan of a Subsidiary Company (whichever is
applicable), as amended from time to time.

Retirement              The Retirement Plan of Norfolk Southern
Plan              Corporation and Participating Subsidiary Companies.

Subsidiary              A corporation of which at least eighty percent
(80%) of the total Company combined voting power
of all classes of stock entitled to vote is owned,
directly or indirectly, by the Corporation.

Section 3.      ADMINISTRATION

The Committee shall have the full and complete authority and sole
discretion to select the nonagreement employees who shall be
granted Awards under the Plan; to determine the size, terms, and
conditions of the Award or Awards to be granted to each such
Participant; to authorize the grant of such Awards pursuant to the
Plan; and to give a Participant an election to surrender an Award
in exchange for the grant of a new Award.  The Committee may
authorize the grant of Awards subject to differing terms and
conditions to any eligible employee.  The Committee's decision
to authorize the grant of an Award to an employee at any time
shall not require the Committee to authorize the grant of an Award
to that employee at any other time or to any other employee at any
time; nor shall its determination with respect to the size or terms
and conditions of the Award to be granted to an employee at any time
require it to authorize the grant of an Award of the same type or
size or with the same terms and conditions to that employee at any
other time or to any other employee at any time.  The Committee
shall not be precluded from authorizing the grant of an Award to
any eligible employee solely because the employee previously may
have been granted an Award of any kind under the Plan.

All determinations of the Committee shall be by a majority of its
members and shall be final, conclusive and binding. Each member
of the Committee, while serving as such, shall be considered to
be acting in his capacity as a director of the Corporation, and no
member of the Committee shall be liable for any action taken or
decision made in good faith with respect to the implementation of
the Plan or granting of awards thereunder.

The Plan shall be administered by the Vice President Human Resources
of the Corporation, which, subject to the limitations set forth
herein, shall have the full and complete authority and sole
discretion from time to time to construe and interpret the Plan;
to adopt, amend and rescind rules and regulations relating to the
Plan; and to make all other determinations and take all other action
it may deem necessary or advisable for the implementation and
administration of the Plan.

Section 4.      ELIGIBILITY

To be eligible for selection by the Committee to participate in
the Plan, an individual must be an active full-time nonagreement
employee of the Corporation or of a Subsidiary Company, and must
reside in the United States or Canada, on the Effective Date on
which the Committee authorizes the grant to such individual of an
Award.  An officer or director of the Corporation shall not be
eligible to participate in the Plan.

Section 5.      SHARES AVAILABLE

Subject to the provisions of Section 7 of the Plan, no more than
an aggregate of 6,000,000 shares of Common Stock may be issued
pursuant to the Plan.  Such shares shall be provided from shares
of Common Stock authorized but not issued.  Any shares of Common
Stock which were subject to an Option and which were not issued
prior to the expiration of the Award shall thereafter again be
available for award under the Plan. 

Section 6.      NON-QUALIFIED STOCK OPTIONS

(a)        General - The Committee may authorize the grant of Options
subject to the terms and conditions set forth in this Section 6.
The grant of an Option shall be evidenced by a written notice
provided by the Corporation setting forth the number of shares of
Common Stock subject to the Option evidenced thereby and the terms,
conditions, and restrictions applicable thereto (Stock Option Notice). 

Except for adjustments pursuant to Section 7 of the Plan, the
Option Price for any outstanding Option granted under the Plan may
not be decreased after the date the Option is granted, nor may an
outstanding Option be modified or replaced if the effect would be to
reduce the Option Price, unless such repricing, modification or
replacement is approved by the vote of a majority of the shares of
Common Stock present or represented and entitled to vote at a
meeting of the stockholders of the Corporation at which a quorum
is present.

(b)        Option Price - The Committee shall determine the Option
price for each share of Common Stock purchased under an Option, but,
subject to the provisions of Section 7 of the Plan, in no event shall
the Option price be less than one hundred percent (100%) of the Fair
Market Value of the Common Stock on the Effective Date the Option is
granted.

(c)    Duration of Options - The Committee shall fix the term
or duration of Options, provided that such term shall not exceed ten
(10) years from the date the Option is granted, and that such term
shall be subject to earlier termination pursuant to the provisions
of paragraph (g) of this Section 6 of the Plan.

(d)    Non-transferability of Options - Options are not
transferable other than by will or the applicable laws of descent
and distribution following the death of the Optionee. Options may
be exercised during the lifetime of the Optionee only by him, and
following his death only by his Beneficiary.

(e)    Exercise of Options - The Committee shall determine the
time or times at which Options may be exercised; provided that such
time or times shall not occur before the later of:

(i)    the first anniversary of the Effective Date on
which the Option was granted; and 

(ii)   the effectiveness of any registration statement
required to be filed under the Securities Act of 1933 for the
registration of the Common Stock to be issued upon exercise of the
Option.

(f)    Payment of Option Price - The purchase price of Common
Stock upon exercise of an Option shall be paid in full to the
Corporation at the time of the exercise of the Option in cash.

(g)    Termination of Options - No Option shall be exercisable
after it expires.  Each Option shall expire upon the earliest of:

(i)    the expiration of the term for which the Option
was granted;

(ii)   (A) except as otherwise provided by the Committee,
in the case of an Optionee whose employment with the Corporation or a
Subsidiary Company is terminated due to Retirement, Disability or death,
the expiration of thirty-six (36) months after such termination of
employment, or

(B) in the case of an Optionee whose employment with
the Corporation or a Subsidiary Company is terminated for any reason
other than Retirement, Disability, or death, at the close of business
on the thirtieth day after the last day of active service by the
Optionee with the Corporation or a Subsidiary Company, or 

(C)  in the case of an Optionee who is granted
a leave of absence, if the Optionee's employment with the
Corporation or a Subsidiary Company terminates at any time during
or at the end of the leave of absence, at the close of business
on the thirtieth day after the last day of employment with the
Corporation or a Subsidiary Company, or 

(iii)  with the Optionee's consent, the grant of a
new Award to replace the Option.

Section 7.      CAPITAL ADJUSTMENTS

In the event of a recapitalization, stock split, stock dividend,
exchange, combination, or reclassification of shares, merger,
consolidation, reorganization, or other change in or affecting
the capital structure or capital stock of the Corporation, the
Board of Directors, upon the recommendation of the Committee,
may make appropriate adjustments in the number of shares of
Common Stock authorized for the Plan and in the annual limitation
imposed by Section 5 of this Plan; and the Committee may make
appropriate adjustments in the number of shares subject to
outstanding Options and in the Option price of any then
outstanding Options, as it deems equitable, in its absolute
discretion, to prevent dilution or enlargement of the rights
of Participants.

Section 8.      REGULATORY APPROVALS

The exercise of each Option shall be subject to the condition that
if at any time the Corporation shall determine in its discretion
that the satisfaction of withholding tax or other tax liabilities,
or the listing, registration, or qualification of any shares of
Common Stock upon any securities exchange or under any Federal or
state law, or the consent or approval of any regulatory body,
is necessary or desirable as a condition of, or in connection
with, such exercise, grant, or distribution, then in any such
event such exercise, grant, or distribution shall not be effective
unless such liabilities have been satisfied or such listing,
registration, qualification, consent, or approval shall have been
effected or obtained free of any conditions not acceptable to the
Corporation.

Section 9.      AMENDMENT OR TERMINATION OF THE PLAN

The Corporation may at any time and from time to time alter or amend,
in whole or in part, any or all of the provisions of the Plan, or
may at any time suspend or terminate the Plan, through written
action of its chief executive officer or Board of Directors, provided
that no change in any Awards theretofore granted to any Participant
may be made which would impair or diminish the rights of the
Participant without the Participant's consent.

Section 10.     MISCELLANEOUS

(a)    Fractional Shares - The Corporation shall not be required
to issue or deliver any fractional share of Common Stock upon the
exercise of an Option but may pay, in lieu thereof, an amount in
cash equal to the Fair Market Value of such fractional share.

(b)    Withholding - The Corporation and its Subsidiary
Companies shall have the right, to the extent permitted by law,
to deduct from any payment of any kind otherwise due to a
Participant any Federal, state or local taxes of any kind required
by law to be withheld with respect to Awards under the Plan, and
to the extent any such withholding requirements are not satisfied,
each Participant shall pay to the Corporation any Federal, state
or local taxes of any kind required by law to be withheld with
respect to Awards under the Plan.

(c)    Stockholder Rights - No person shall have any rights
of a stockholder by virtue of an Option except with respect to
shares of Common Stock actually issued to him, and the issuance
of shares of Common Stock shall confer no retroactive right to
dividends.

(d)    No Contract of Employment - This Plan shall not be
deemed to be an employment contract between the Corporation or
any Subsidiary Company and any Participant or other employee.
Nothing contained herein, or in any agreement, certificate or
other document evidencing, providing for, or setting forth the
terms and conditions applicable to any Awards shall be deemed
to confer upon any Participant or other employee a right to
continue in the employment of the Corporation or any Subsidiary
Company, or to interfere with the right of the Corporation or
any Subsidiary Company to terminate the employment of such
Participant or employee at any time.

(e)    Unfunded Plan - Except as may otherwise be provided
in the Plan, the Plan shall be unfunded.  Neither the Corporation
nor any Subsidiary Company shall be required to segregate any
assets that may be represented by Options and neither the
Corporation nor any Subsidiary Company shall be deemed to be
a trustee of any amounts to be paid under an Option.  Any
liability of the Corporation or a Subsidiary Company to pay
any Participant or Beneficiary with respect to an Option shall
be based solely upon any contractual obligations created pursuant
to the provisions of the Plan; no such obligation shall be deemed
to be secured by any pledge or encumbrance on any property of the
Corporation or a Subsidiary Company.

(f)    Applicable Law - The Plan, its validity, interpretation,
and administration, and the rights and obligations of all persons
having an interest therein, shall be governed by and construed in
accordance with the laws of the Commonwealth of Virginia, except to
the extent that such laws may be preempted by Federal law.

(g)    Gender and Number - Wherever used in the Plan, words
in the masculine form shall be deemed to refer to females as well
as to males, and words in the singular or plural shall be deemed
to refer also to the plural or singular, respectively, as the
context may require.

EXHIBIT 10(k)

AMENDMENT NO. 3

Dated as of June 1, 2001

OF THE

SHARED ASSETS AREA

OPERATING AGREEMENT

FOR

[NORTH JERSEY]
[SOUTH JERSEY/PHILADELPHIA]
[DETROIT]

Dated as of June 1, 1999

By and Among

CONSOLIDATED RAIL CORPORATION

CSX TRANSPORTATION, INC. and

NORFOLK SOUTHERN RAILWAY COMPANY

AMENDMENT NO. 3
OF THE
SHARED ASSETS AREA OPERTING AGREEMENT
FOR
[NORTH JERSEY]
[SOUTH JERSEY/PHILADELPHIA]
[DETROIT]

This AMENDMENT No. 3 dated as of June 1, 2001 ("Amendment No. 3")
of the SHARED ASSETS AREA OPERATING AGREEMENT for [North Jersey]
[South Jersey/Philadelphia] [Detroit] (the "Agreement") dated as
of June 1, 1999, is by and among Consolidated Rail Corporation ("CRC"), 
CSX Transportation, Inc. ("CSXT") and 
Norfolk Southern Railway Company ("NSR").

W I T N E S S E T H

WHEREAS, the parties have previously entered into the Agreement;

WHEREAS, the parties previously amended the Agreement by an
Amendment No. 1, dated as of June 1, 2000 ("Amendment No. 1"), which
provided for the allocation of responsibility for Damage with respect
to certain incidents occurring prior to June 1, 2001;

WHEREAS, the parties now desire to extend the effectiveness of
the provision described in Amendment No. 1 for an indefinite period,
subject to reexamination in the future; and

WHEREAS, it is the intent of the parties that, except as
expressly amended hereby and in Amendment No. 1, the Agreement shall
remain unamended and in full force and effect.

NOW, THEREFORE, the parties hereby further amend the Agreement
as follows:

Section 1.  Definitions.  Capitalized terms used in this
Amendment No. 2 and not defined herein shall have the meanings
assigned to such terms in the Agreement Section 2.  Amendment of the
Agreement.  The Agreement is hereby amended pursuant to and in
compliance with Section 17 as follows:

A.      The heading and text of Section 11(b) are hereby deleted
in their entirety and the following substituted therefore:

(b)     Operators' Joint Responsibility.

(i)     Damages Borne Equally.  Except as otherwise provided
in 1) Section 11(a) (Operators' Sole Responsibility), (2) Section 11(c)
(1)(CRC Damages Generally), (3) Section 11(c)(ii)(B) (No Reallocation
for Insurance), (4) Section 11(f) (Specified Level Damages), and (5)
Section 11(g) (Substance Abuse Exceptions), and subject to Section
11(c)(ii)(A)(Net of Insurance), responsibility for all Damage shall
be borne equally by the Operators, with each being liable for one-half
(1/2) of the Damage.

(ii)    Reexamination.  Either Operator may give written
notice to the other Operator and CRC (the "Proposed Change Notice")
that it wishes to propose a new method for allocating Operators'
Joint Responsibility (Section 11(b)(i) above) and such Proposed Change
Notice shall set forth details of such new method, including the 
language of the proposed amendment of Section 11(b).  The two
Operators and CRC shall have ninety (90) days from the date of the
Proposed Change Notice to agree upon a new method of allocating
Operators' Joint Responsibility, which agreement shall be evidenced
by an amendment ("Change Amendment") to this Agreement executed by 
both Operators and CRC.  From and after the effective date specified
in the Change Amendment, the new method of allocation of Operators'
Joint Responsibility shall be effective.  If both Operators and CRC
are not able to so agree and execute an appropriate Change Amendment
within ninety (90) days after the date of the Proposed Change Notice,
then, at 12:01 a.m. on the Ninety-first (91st) day after the date
of the Proposed Change Notice (the "Default Time"), the Default
Provision allocating Operators' Joint Responsibility (Section
11(b)(iii) below) shall become effective.  The method of allocating
Damage in the case of Operators' Joint Responsibility under the 
Change Amendment or the Default Provision, as the case may be,
shall apply only to incidents that occur on or after the effective
date thereof, and not to Damage related to incidents that occurred
before such effective date.

(iii)   Default Provision.  From and after the Default Time,
except as otherwise provided in (1) Section 11(a) (Operators' Sole
Responsibility), (2) Section 11(c)(i) (CRC Damages Generally), (3)
Section 11(c)(ii)(B) (No Reallocation for Insurance), (4) Section
11(f) (Specified Level Damages), and (5) Section 11(g) (Substance
Abuse Exceptions) and subject to Section 11(c)(ii)(A) (Net of
Insurance), all Damage shall be apportioned between the Operators
in proportion to their respective Total Train Usage Percentages
in the Zone in which the incident giving rise to such Damage
occurred for the 12 calendar month period immediately preceding
the incident giving rise to such Damage.

B.      The heading and text of Section 11(f)(i)(A.1) are
hereby deleted in their entirety and the following substituted
therefor:

(A.1)   Tier One Damages Defined.  In this Section 11(f), 
"Tier One Damages" for any incident occurring on or after June 1,
2001 shall, except as otherwise provided in Section 11(g) (Substance
Abuse Exceptions), include the greater of:

1)      $25 million of Damages; or

2)      the lowest amount of Damages which, when allocated 
among all parties, results in an allocation to either Operator of 
Damages in an amount equal to all insurance benefits available to 
that Operator (called the "Lesser Insured Operator") which has the 
lesser (as between the Operators) amount of insurance benefits 
available to it, including, without limitation, insurance to which
CRC looks under Section 11(c) (CRC Responsibility, Allocation and 
Insurance).  In determining insurance benefits available to the 
Lesser Insured Operator, both property and liability insurance shall 
be considered but (i) only to the extent benefits are actually 
available in connection with that incident; and (ii) they shall be 
calculated separately (i.e., property insurance benefits shall not be 
considered in any determination of available liability insurance 
benefits and vice versa)."

SECTION 3.  Effectiveness.  This Amendment No. 3 shall become
effective as of June 1, 2001 (the "Amendment Date").

SECTION 4.  Integration; Confirmation.  On and after the
Amendment Date, each reference in the Agreement to "this
Agreement," "herein," "hereunder," or words of similar import,
and each reference in any Note or other document delivered in 
connection with the Agreement shall be deemed to be a reference
to the Agreement as amended by this Amendment, and the Agreement as
so amended shall be read as a single integrated document.  Except
as specifically amended by this Amendment, all other terms and
provisions of the Agreement shall continue in full force and effect
and unchanged and are hereby confirmed in all respects.

SECTION 5.  Confirmation of Agreement.  In all respects not
inconsistent with the terms and provisions of this Amendment No. 3,
the Agreement is hereby ratified, adopted, approved and confirmed.

SECTION 6.  Counterparts.  This Amendment No. 3 may be signed
in any number of counterparts, each of which shall be an original,
with the same effect as if the signatures thereto and hereto were
upon the same instrument.

IN WITNESS WHEREOF, the parties hereto have caused this Agreement
to be duly executed as of the day and year first above written.

CSX TRANSPORTATION, INC.

By: /s/ Ellen M. Fitzsimmons
Name:   Ellen M. Fitzsimmons
Title:  Sr. V.P.-Law & General Counsel

NORFOLK SOUTHERN RAILWAY COMPANY

By: /s/ Kathryn B. McQuade
Name:   Kathryn B. McQuade
Title:  Sr. V.P. - Financial Planning

CONSOLIDATED RAIL CORPORATION

By: /s/ Gregory R. Weber
Name:   Gregory R. Weber
Title:  President and Chief Executive
Officer

EXHIBIT 10(p)

NORFOLK SOUTHERN CORPORATION
LONG-TERM INCENTIVE PLAN

AS AMENDED EFFECTIVE JANUARY 28, 2003

Section 1.      PURPOSE

The purpose of the Long-Term Incentive Plan, as amended (the "Plan"),
is to promote the success of Norfolk Southern Corporation (the
"Corporation") and to provide an opportunity for officers and other
key employees of the Corporation and its Subsidiary Companies (as
hereinafter defined) to acquire or increase a proprietary interest
in the Corporation and thereby to provide an additional incentive
to officers and other key employees to devote their maximum efforts
and skills to the advancement, betterment, and prosperity of the
Corporation and its shareholders.  The Plan provides for the grant
of incentive stock options, non-qualified stock options, stock
appreciation rights, performance share units, performance shares,
and shares of the Corporation's common stock (restricted pursuant
to the provisions of Section 9 of the Plan), in accordance with
the terms and conditions set forth below.

Section 2.      DEFINITIONS

The terms used herein shall have the following meanings unless
otherwise specified or unless a different meaning is clearly
required by the context:

Award           Any one or more of the following:  Incentive Stock
Option; Non-qualified Stock Option; Stock Appreciation
Right; Restricted Shares; Performance Share Units;
and Performance Shares.

Beneficiary     The person or persons designated in writing by the
Participant as his Beneficiary in respect of Awards or,
in the absence of such a designation or if the
designated person or persons predecease the Participant,
the person or persons who shall acquire the Participant's
rights in respect of Awards by bequest or inheritance
in accordance with the applicable laws of descent and
distribution. In order to be effective, a Participant's
designation of a Beneficiary must be on file with the
Corporation before the Participant's death.  Any such
designation may be revoked and a new designation
substituted therefor by the Participant at any time
before his death without the consent of the previously
designated Beneficiary.

Board of        The Board of Directors of the Corporation.
Directors

Code            The Internal Revenue Code of 1986, as amended from time
to time.

Committee       The Compensation and Nominating Committee or any other
committee of the Board of Directors which is authorized
to grant Awards under this Plan.  

Common      The Common Stock of the Corporation.
Stock

Disability      A disability that enables the Participant to be eligible
for and receive a disability benefit under the Long-Term
Disability Plan of the Corporation or a long-term
disability plan of a Subsidiary Company (whichever is
applicable), as amended from time to time.

Exercise        With respect to a Stock Appreciation Right, all of the shares
Gain        of Common Stock received upon exercise of the Stock
Shares  Appreciation Right. 

With respect to an Option, the portion of the shares of
Common Stock received upon exercise of the Option equal
to the excess of the Fair Market Value, as of the
exercise date, over the Option price, multiplied by the
number of shares purchased under the Option on the
exercise date, divided by such Fair Market Value, and
rounded down to the nearest whole number of shares.

Fair Market     The value of Common Stock on a particular date as measured
Value       by the mean of the high and low prices at which it is
traded on such date as reported in the Composite
Transactions for such date by Bloomberg L.P., or its
successor, on its internet-based service, or, if
Common Stock was not traded on such date, on the next
preceding day on which Common Stock was traded.

Incentive       An Option that complies with the terms and conditions set
Stock       forth in Section 422(b) of the Code and is designated by
Option      the Committee as an Incentive Stock Option.

Non-        An Option granted under the Plan other than an Incentive
Qualified   Stock Option.
Stock Option

Option      Any option to purchase Common Stock granted pursuant to
the provisions of Section 6 or Section 7 of the Plan.

Optionee        A Participant who is the holder of an Option.

Participant     Any officer or key employee of the Corporation or a
Subsidiary Company selected by the Committee to
participate in the Plan and any non-employee director
of the Corporation, subject to approval of the Plan,
as hereby amended, by the vote of the holders of a
majority of the shares of Common Stock present or
represented and entitled to vote at a meeting of the
stockholders of the Corporation at which a quorum is
present.  

Performance     The period of time, designated by the Committee, over
Cycle       which Performance Shares may be earned.

Performance     Shares of Common Stock granted pursuant to Section 10 of
Shares      the Plan, which may be made subject to the restrictions
and other terms and conditions prescribed in Section
11 of the Plan.

Performance     Contingent rights to receive Performance Shares pursuant
Share Units to Section 10 of the Plan. 

Restricted      Shares of Common Stock granted pursuant to Section 9 of
Shares      the Plan and subject to the restrictions and other
terms and conditions set forth therein.

Restriction A period of time not less than twenty-four (24) nor
Period      more than sixty (60) months, to be determined within
those limits by the Committee in its sole discretion,
commencing on the date as of which Restricted Shares
are granted, during which the restrictions imposed by
paragraph (b) of Section 9 of the Plan shall apply.
The Committee shall determine the length of the
Restriction Period at the time that the Restricted
Shares are granted.

Retirement      Retirement from the Corporation or a Subsidiary Company
pursuant to the provisions of the Retirement Plan of the
Corporation or a retirement plan of a Subsidiary Company
(whichever is applicable), as amended from time to time.

Share           An agreement entered into pursuant to Section 11 of the Plan.
Retention
Agreement

Stock            The right, granted pursuant to the provisions of Section
Appreciation 8 of the Plan, to receive a payment equal to the excess 
Right        of the Fair Market Value of Common Stock over the Option
price of such Common Stock, as specified in Section 8
of the Plan.

Subsidiary      A corporation of which at least eighty percent (80%)
Company     of the total combined voting power of all classes of
stock entitled to vote is owned, directly or
indirectly, by the Corporation.

Section 3.      ADMINISTRATION

The Plan shall be administered by the Committee, which, subject to
the limitations set forth herein, shall have the full and complete
authority and sole discretion from time to time to construe and
interpret the Plan; to select the officers and other key employees
who shall be granted Awards under the Plan; to determine the type,
size, terms, and conditions of the Award or Awards to be granted
to each such Participant; to authorize the grant of such Awards
pursuant to the Plan; in connection with the merger or
consolidation of the Corporation, to give a Participant an
election to surrender an Award in exchange for the grant of a
new Award; to adopt, amend and rescind rules and regulations
relating to the Plan; and to make all other determinations and
take all other action it may deem necessary or advisable for the
implementation and administration of the Plan.  The Committee
may authorize the grant of more than one type of Award, and
Awards subject to differing terms and conditions, to any
eligible employee.  The Committee's decision to authorize the
grant of an Award to an employee at any time shall not require
the Committee to authorize the grant of an Award to that employee
at any other time or to any other employee at any time; nor shall
its determination with respect to the size, type, or terms and
conditions of the Award to be granted to an employee at any time
require it to authorize the grant of an Award of the same type
or size or with the same terms and conditions to that employee
at any other time or to any other employee at any time.  The
Committee shall not be precluded from authorizing the grant of
an Award to any eligible employee solely because the employee
previously may have been granted an Award of any kind under the
Plan.

All determinations of the Committee shall be by a majority of its
members and shall be final, conclusive and binding. Each member of
the Committee, while serving as such, shall be considered to be
acting in his capacity as a director of the Corporation, and no
member of the Committee shall be liable for any action taken or
decision made in good faith with respect to the implementation
or administration of the Plan.

Section 4.      ELIGIBILITY

To be eligible for selection by the Committee to participate in the
Plan, an individual must be a full-time salaried officer or key
employee of the Corporation, or of a Subsidiary Company, and must
reside in the United States or Canada, on the date on which the
Committee authorizes the grant to such individual of an Award.
Subject to approval of the Plan, as hereby amended, by the vote
of the holders of a majority of the shares of Common Stock present
or represented and entitled to vote at a meeting of the
stockholders of the Corporation at which a quorum is present,
a non-employee director shall be eligible to participate in the
Plan if he or she is a director of the Corporation and is not
a full-time salaried employee of the Corporation or a Subsidiary
Company on the date on which the Committee authorizes the grant of an
Award to non-employee directors. 

Section 5.      SHARES AVAILABLE

Subject to the provisions of Section 13 of the Plan, no more than
an aggregate of 39,878,604 shares of Common Stock may be issued
pursuant to the Plan.  Effective January 23, 2001, an additional
5,000,000 shares of Common Stock (an aggregate of 44,878,604) may
be issued to Participants who are not officers of the Corporation.
Subject to approval of the Plan, as hereby amended, by the vote of
the holders of a majority of the shares of Common Stock present
or represented and entitled to vote at a meeting of the stockholders
of the Corporation, at which a quorum is present, an additional
30,000,000 shares of Common Stock (an aggregate of 74,878,604) may
be issued pursuant to the Plan, and no more than 6,000,000 of such
additional shares shall be awarded as Restricted Shares or
Performance Shares.  Such shares shall be provided from shares
of Common Stock authorized but not issued.  Any shares of Common
Stock which were subject to an Option, a Stock Appreciation Right,
or a Performance Share Unit, and which were not issued prior to
the expiration of the Award shall thereafter again be available
for award under the Plan.  Upon the forfeiture of any Restricted
Shares, the forfeited shares of Common Stock shall thereafter be
available for award under the Plan.  Notwithstanding any other
provision to the contrary, no Participant may be awarded a grant
in any one year, which, when added to any other grant of Options,
Restricted Shares, and Performance Share Units in the same year,
shall exceed 750,000 shares of Common Stock.  Subject to approval
of the Plan, as hereby amended, by the vote of the holders of a
majority of the shares of Common Stock present or represented and
entitled to vote at a meeting of the stockholders of the Corporation,
at which a quorum is present, notwithstanding any other provision
to the contrary, no Participant may be awarded a grant in any one
year, which, when added to any other grant of Options, Restricted
Shares, and Performance Share Units in the same year, shall exceed
1,500,000 shares of Common Stock.  If an Option is canceled, the
canceled Option continues to count against the maximum number of
shares for which Options may be granted to a Participant in any
year.

Section 6.      INCENTIVE STOCK OPTIONS

(a)        General - The Committee may authorize the grant of
Incentive Stock Options subject to the terms and conditions set
forth in this Section 6.  The grant of an Incentive Stock Option
shall be evidenced by a written Stock Option Agreement between
the Corporation and the Optionee, setting forth the number of
shares of Common Stock subject to the Incentive Stock Option
evidenced thereby and the terms, conditions, and restrictions
applicable thereto.  The issuance of shares of Common Stock
pursuant to an Incentive Stock Option also shall be subject to
the provisions of any Share Retention Agreement that may be
required by the Committee under Section 11 of the Plan.

Except for adjustments pursuant to Section 13 of the
Plan, the Option Price for any outstanding Incentive Stock Option
granted under the Plan may not be decreased after the date the
Option is granted, nor may an outstanding Option be modified or
replaced if the effect would be to reduce the Option Price,
unless such repricing, modification or replacement is approved
by the vote of a majority of the shares of Common Stock present
or represented and entitled to vote at a meeting of the
stockholders of the Corporation at which a quorum is present.

(b)    Option Price - The Committee shall determine the Option
price for each share of Common Stock purchased under an Option,
but, subject to the provisions of Section 13 of the Plan, in no
event shall the Option price be less than one hundred percent
(100%) of the Fair Market Value of the Common Stock on the date
the Option is granted.

(c)    Duration of Options - The Committee shall fix the
term or duration of Options, provided that such term shall not
exceed ten (10) years from the date the Option is granted, and
that such term shall be subject to earlier termination pursuant
to the provisions of paragraph (g) of this Section 6 or paragraph
(e) of Section 8 of the Plan.

(d)    Non-transferability of Options - Options are not
transferable other than by will or the applicable laws of descent
and distribution following the death of the Optionee. Options may
be exercised during the lifetime of the Optionee only by him, and
following his death only by his Beneficiary.

(e)    Exercise of Options - The Committee shall determine the
time or times at which Options may be exercised; provided that such
time or times shall not occur before the latest of:

(i)    the first anniversary of the date on which the
Option was granted; and

(ii)   the effectiveness of any registration statement
required to be filed under the Securities Act of 1933 for the
registration of the Common Stock to be issued upon exercise of the
Option.

(f)    Payment of Option Price - The purchase price of Common
Stock upon exercise of an Option shall be paid in full to the
Corporation at the time of the exercise of the Option in cash or,
at the discretion of the Committee and subject to any limitations
or requirements that the Committee may adopt, by the surrender to
the Corporation of shares of previously acquired Common Stock, which
have been held by the Optionee for at least twelve (12) months and
which shall be valued at Fair Market Value on the date that the Option
is exercised, or, at the discretion of the Committee, by a combination
of cash and such Common Stock.

(g)    Termination of Options - No Option shall be exercisable
after it expires.  Each Option shall expire upon the earliest of:

(i)   the expiration of the term for which the Option
was granted;

(ii)  (A) Except as otherwise provided by the Committee,
in the case of an Optionee whose employment with the Corporation or
a Subsidiary Company is terminated due to Retirement, Disability or
death, the expiration of thirty-six (36) months after such
termination of employment, or

(B) in the case of an Optionee whose employment
with the Corporation or a Subsidiary Company is terminated for any
reason other than Retirement, Disability, or death, at the close
of business on the last day of active service by the Optionee
with the Corporation or a Subsidiary Company, or

(C) in the case of an Optionee who is granted a
leave of absence, if the Optionee's employment with the Corporation
or a Subsidiary Company terminates at any time during or at the
end of the leave of absence, at the close of business on the last
day of employment with the Corporation or a Subsidiary Company, or 

(iii)  in connection with a merger or consolidation
of the Corporation, with the Optionee's consent, the grant of a new
Award to replace the Option.

(h)   Limitation on Exercisability - The aggregate Fair Market
Value (determined as of the time the Incentive Stock Option is granted)
of the Common Stock with respect to which Incentive Stock Options
(granted on or after January 1, 1987) are exercisable for the first
time by the Optionee during any calendar year shall not exceed
$100,000.

(i)        Order of Exercise - An Incentive Stock Option granted
prior to January 1, 1987, shall not be exercisable while there is
outstanding any Incentive Stock Option which was granted to the
Optionee before the grant of the first-mentioned Incentive Stock
Option.  For this purpose, an Incentive Stock Option shall be
treated as outstanding until it is exercised in full or expires
in accordance with paragraph (c) of this Section 6.

As used in paragraphs (h) and (i) of this Section 6, the term
Incentive Stock Option shall mean an option to purchase stock
which is granted pursuant to the provisions of this Plan or of
any other plan of the Corporation or of a parent or subsidiary
corporation (as defined by Section 424(f) of the Code) and which
complies with the terms and conditions set forth in Section 422(b)
of the Code.

Section 7.      NON-QUALIFIED STOCK OPTIONS

The Committee may authorize the grant of Non-qualified Stock Options
subject to the terms and conditions specified in this Section 7.
The grant of a Non-qualified Stock Option shall be evidenced by
a written Non-qualified Stock Option Agreement between the
Corporation and the Optionee, setting forth the number of shares
of Common Stock subject to the Non-qualified Stock Option evidenced
thereby and the terms, conditions, and restrictions applicable
thereto.  Non-qualified Stock Options granted pursuant to the
provisions of this Section 7 shall be subject to the terms,
conditions, and restrictions set forth in paragraphs (a), (b) and
(d) through (g) of Section 6 of the Plan.  The limitations set forth
in paragraphs (c), (h) and (i) of Section 6 of the Plan shall not
apply to Non-qualified Stock Options.  The issuance of shares of
Common Stock pursuant to a Non-qualified Stock Option also shall
be subject to the provisions of any Share Retention Agreement that
may be required by the Committee under Section 11 of the Plan.

Section 8.      STOCK APPRECIATION RIGHTS

(a)    General - The Committee may grant a Stock Appreciation
Right to a Participant in connection with an Option, or portion
thereof as determined by the Committee, subject to the terms and
conditions set forth in this Section 8. The Stock Appreciation Right
may be granted at the time of grant of the related Option and shall
be subject to the same terms and conditions as the related Option,
except as this Section 8 may otherwise provide.  The grant of a Stock
Appreciation Right shall be evidenced either by provisions in the
Option agreement evidencing the related Option or by a written Stock
Appreciation Right Agreement between the Corporation and the Optionee,
identifying the related Option, specifying the number of shares of
Common Stock subject thereto, and setting forth the terms and
conditions applicable to the Stock Appreciation Right.

(b)        Exercise - A Stock Appreciation Right shall be exercisable
only at such time or times, to such extent, and by such persons, as
the Option to which it relates shall be exercisable; provided that:

(i)    if the Committee determines that all or part of
a payment in respect of a Stock Appreciation Right shall be made in
cash, the Stock Appreciation Right shall not be exercised before
the expiration of one (1) year from the date on which it was granted;
provided, however, that this subparagraph (i) shall not apply if
the death or Disability of the Optionee occurs within one (1) year
after the grant of the Stock Appreciation Right;

(ii)  if the Committee determines that all or part of
a payment in respect of a Stock Appreciation Right shall be made
in cash, such exercise may occur only on a day that is at least
three (3) and no more than twelve (12) business days after the
date on which the Corporation first made publicly available its
most recent regular quarterly or annual financial statements; and

(iii)  a Stock Appreciation Right granted in connection
with an Incentive Stock Option may not be exercised on any date
on which the Fair Market Value of a share of Common Stock is
less than or equal to the Option price per share under the
related Incentive Stock Option.

A Stock Appreciation Right shall be exercised by surrendering
the related Option, or the portion thereof pertaining to the shares
with respect to which the Stock Appreciation Right is exercised,
and providing the Corporation with a written notice in such form
and containing such information (including the number of shares
of Common Stock with respect to which the Stock Appreciation
Right is being exercised) as the Committee may specify.  The date
on which the Corporation receives such notice shall be the date
on which the related Option, or portion thereof, shall be deemed
surrendered and the Stock Appreciation Right shall be deemed
exercised.

(c)        Payment - Upon exercise of a Stock Appreciation Right
in the manner provided in paragraph (b) of this Section 8, the
Optionee shall be entitled to receive Exercise Gain Shares equal
to the number of shares of Common Stock that have an aggregate
Fair Market Value on the exercise date equal to the amount by
which the Fair Market Value of a share of Common Stock on the
exercise date exceeds the Option price per share of the related
Option, multiplied by the number of shares covered by the related
Option, or portion thereof, surrendered in connection with the
exercise of the Stock Appreciation Right.  The Exercise Gain
Shares shall be subject to the provisions of any Share Retention
Agreement that may be required by the Committee under Section 11
of the Plan.  In the sole discretion of the Committee, all or
part of the payment in respect of a Stock Appreciation Right
may be made in cash in lieu of Exercise Gain Shares.

(d)    Termination of Right - A Stock Appreciation Right
shall expire, unless previously exercised or canceled, upon the
expiration of the Option to which it relates.

(e)    Effect of Exercise - A Stock Appreciation Right shall
be canceled when, and to the extent that, the related Option is
exercised, and an Option shall be canceled when, and to the extent
that, the Option is surrendered to the Corporation upon the exercise
of a related Stock Appreciation Right.

Section 9.      RESTRICTED SHARES

(a)    General - The Committee, in its sole discretion, may
from time to time authorize the grant of Restricted Shares to a
Participant.  A certificate or certificates representing the number
of Restricted Shares granted shall be registered in the name of
the Participant.  Until the expiration of the Restriction Period
or the lapse of restrictions in the manner provided in paragraph
(d) or paragraph (e) of this Section 9, the certificate or
certificates shall be held by the Corporation for the account of
the Participant, and the Participant shall have beneficial ownership
of the Restricted Shares, including the right to receive dividends
on, and the right to vote, the Restricted Shares.

(b)    Restrictions - Until the expiration of the Restriction
Period or the lapse of restrictions in the manner provided in
paragraph (d) or paragraph (e) of this Section 9, Restricted Shares
shall be subject to the following restrictions and any additional
restrictions that the Committee, in its sole discretion, may from
time to time deem desirable in furtherance of the objectives of
the Plan:

(i)    the Participant shall not be entitled to receive
the certificate or certificates representing the Restricted Shares;

(ii)   the Restricted Shares may not be sold, transferred,
assigned, pledged, conveyed, hypothecated, or otherwise disposed of;
and

(iii)  the Restricted Shares may be forfeited immediately
as provided in paragraph (d) of this Section 9.

(c)    Distribution of Restricted Shares - If a Participant to whom
Restricted Shares have been granted remains in the continuous employment
of the Corporation or a Subsidiary Company during the entire
Restriction Period, upon the expiration of the Restriction Period all
restrictions applicable to the Restricted Shares shall lapse, and
the certificate or certificates representing the shares of Common
Stock that were granted to the Participant in the form of Restricted
Shares shall be delivered to the Participant.

(d)    Termination of Employment - If the employment of a
Participant is terminated for any reason other than the Retirement,
Disability, or death of the Participant in service before the
expiration of the Restriction Period, the Restricted Shares shall
be forfeited immediately and all rights of the Participant to such
shares shall terminate immediately without further obligation on
the part of the Corporation or any Subsidiary Company.  If the
Participant's employment is terminated by reason of the Retirement,
Disability, or death of the Participant in service before the
expiration of the Restriction Period, the number of Restricted
Shares held by the Corporation for the Participant's account shall
be reduced by the proportion of the Restriction Period remaining
after the Participant's termination of employment; the restrictions
on the balance of such Restricted Shares shall lapse on the date
the Participant's employment terminated; and the certificate or
certificates representing the shares of Common Stock upon which the
restrictions have lapsed shall be delivered to the Participant
(or, in the event of the Participant's death, to his Beneficiary). 

(e)    Waiver of Restrictions - The Committee, in its sole
discretion, may waive any or all restrictions with respect to
Restricted Shares.

Section 10.     PERFORMANCE SHARES

The Committee, in its sole discretion, may from time to time authorize
the grant of Performance Share Units to a Participant.  Performance
Share Units shall entitle the Participant to Performance Shares
(or cash in lieu thereof) upon the achievement of such performance
goals as may be established by the Committee at the time of grant 
for three equally weighted performance criteria:  (a)  the 
Corporation's total stockholder return as compared to the S&P 500 
Index; (b) the Corporation's operating ratio; and (c) the Corporation's
return on average capital invested.  At such time as it is certified 
by the Committee that the performance goals established by the 
Committee have been attained or otherwise satisfied, the Committee 
shall authorize the payment of cash in lieu of Performance Shares 
or the issuance of Performance Shares registered in the name of the 
Participant, subject to the provisions of any Share Retention 
Agreement that may be required by the Committee under Section 11 
of the Plan, or both.

If the Participant's employment with the Corporation or a Subsidiary 
Company is terminated before the end of a Performance Cycle for any 
reason other than Retirement, Disability, or death, the Participant 
shall forfeit all rights with respect to any Performance Shares 
that were being earned during the Performance Cycle.  If the 
Participant is granted a leave of absence before the end of a 
Performance Cycle, the Participant shall not forfeit all rights 
with respect to any Performance Shares that were being earned 
during the Performance Cycle, unless the Participant's employment 
with the Corporation or a Subsidiary Company terminates at any time 
during or at the end of the leave of absence, at which time the 
Participant shall forfeit all rights with respect to any Performance 
Shares that were being earned during the Performance Cycle.  The 
Committee, in its sole discretion, may establish guidelines 
providing that if a Participant's employment is terminated before 
the end of a Performance Cycle by reason of Disability, or death, 
the Participant shall be entitled to a prorated payment with 
respect to any Performance Shares that were being earned during 
the Performance Cycle.  If the Participant's employment is 
terminated before the end of a Performance Cycle by reason of 
Retirement, the Participant's rights with respect to any Performance 
Shares being earned during the Performance Cycle shall, subject to 
the other provisions of this Section 10, continue as if the 
Participant's employment had continued through the end of the 
Performance Cycle.

Section 11.     SHARE RETENTION AGREEMENTS

(a)    General - The Committee, in its sole discretion, may 
require as a condition of an Award of an Option, Stock Appreciation 
Right, or Performance Share Unit that the Participant and the 
Corporation enter into a Share Retention Agreement, which shall 
provide that the certificate or certificates representing any Exercise 
Gain Shares or Performance Shares, when issued, shall be held by the 
Secretary of the Corporation for the benefit of the Participant 
until such time as the retention period specified by the Share 
Retention Agreement has expired or has been waived by the Committee,
whichever occurs first.  Each Share Retention Agreement may include 
some or all of the terms, conditions and restrictions set forth in 
paragraphs (b) through (g) of this Section 11.

(b)    Retention Period - Exercise Gain Shares and Performance 
Shares that are subject to the Share Retention Agreement may not be 
sold, transferred, assigned, pledged, conveyed, hypothecated or 
otherwise disposed of within such period of time, of not less than 
twenty-four (24) months and not more than sixty (60) months following 
the date of exercise (in the case of Exercise Gain Shares) or the 
date of issuance (in the case of Performance Shares), as shall be 
prescribed by the Committee.

(c)    Tax Absorption Payment - The Corporation may make a 
cash payment, either directly to the Participant or on the 
Participant's behalf, in an amount that the Committee estimates 
to be equal (after taking into account any Federal and state 
taxes that the Committee estimates to be applicable to such cash 
payment) to any additional Federal and state income taxes that 
are imposed upon the Participant as a result of the issuance of 
the Exercise Gain Shares or Performance Shares that are subject 
to the Share Retention Agreement.  In determining the amount to 
be paid pursuant to this paragraph (c), the Committee may adopt 
such methods and assumptions as it considers appropriate, and
it shall not be required to examine the individual tax liability
of each Participant who has entered into a Share Retention 
Agreement.

(d)    Termination of Employment - If a Participant's employment
with the Corporation or a Subsidiary Company is terminated for any
reason other than Retirement, Disability, or death, Exercise Gain
Shares or Performance Shares subject to the Share Retention 
Agreement shall continue to be held,  following the Participant's 
termination of employment, until the expiration of the retention 
period specified by the Share Retention Agreement.  If the 
Participant's employment is terminated by reason of Retirement 
or Disability, Exercise Gain Shares and Performance Shares then 
held subject to the Share Retention Agreement shall continue to 
be held until the expiration of the applicable retention period 
following termination of employment, but any such retention 
period shall cease upon the earlier of the Participant's attainment 
of age 65 or the expiration of two (2) years after the 
Participant's Retirement or Disability, if either of those 
events occurs before the expiration of the applicable retention 
period.  If the Participant dies while Exercise Gain Shares or 
Performance Shares are subject to a retention period under the 
Share Retention Agreement, such retention period shall expire 
immediately at the time of death.

(e)    Change in Control - Upon a Change in Control, the 
retention periods specified by all Share Retention Agreements 
shall immediately expire.

A Change in Control shall occur if: 

(i)    any person, other than the Corporation or a
Subsidiary Company or any employee benefit plan sponsored by the
Corporation or a Subsidiary Company, shall become the beneficial
owner of, or obtain voting control over, 20% or more of the 
Corporation's outstanding Common Stock; 

(ii)   the stockholders of the Corporation shall 
approve (A) any consolidation or merger of the Corporation in 
which the Corporation is not the continuing or surviving 
corporation or pursuant to which shares of Common Stock would 
be converted into cash, securities, or other property, other 
than a merger of the Corporation in which holders of Common 
Stock immediately prior to the merger have the same proportionate 
ownership of common stock of the surviving corporation immediately 
after the merger as immediately before, or (B) any sale, lease, 
exchange, or other transfer (in one transaction or a series of 
related transactions) of all or substantially all the assets of 
the Corporation; or 

(iii)  there shall have been a change in the composition 
of the Board of Directors such that within any period of two (2) 
consecutive years or less individuals who at the beginning of such 
period constituted such Board, together with any new directors 
whose election, or nomination for election by the Corporation's 
stockholders, was approved by a vote of at least two-thirds of 
the directors then in office who were directors at the beginning 
of such period, shall for any reason no longer constitute a 
majority of the directors of the Corporation.

If the expiration of a Share Retention Agreement pursuant 
to this paragraph (e) causes a Participant to be subject to an 
excise tax under Section 4999 of the Code, or any successor 
provision thereto (the "Excise Tax"), the Corporation shall make 
a cash payment, either directly to the Participant or on the 
Participant's behalf, in an amount that the Committee estimates 
to be equal (after taking into account any Federal and state 
taxes, including interest and penalties, that the Committee 
estimates to be applicable to the additional cash payment) to 
the additional Excise Tax imposed on the Participant as a result 
of the expiration of the Share Retention Agreement.  In 
determining the amount to be paid pursuant to this subparagraph, 
the Committee may adopt such methods and assumptions as it 
considers appropriate, and it shall not be required to examine 
the individual tax liability of each Participant to whom this 
subparagraph applies.

(f)    Waiver of Requirements - The Committee, in its sole 
discretion, may waive any or all retention periods or other 
restrictions in the Share Retention Agreement.

(g)    Distribution of Shares - The Secretary of the
Corporation shall promptly distribute the certificate or
certificates representing the Exercise Gain Shares or Performance
Shares subject to a Share Retention Agreement upon expiration of
the retention period or other termination or waiver of the
restrictions under this Section 11.

Section 12.      DIVIDEND EQUIVALENT PAYMENTS

The Committee may authorize the immediate or deferred payment 
of dividend equivalents on some or all of the shares of Common 
Stock covered by Options or Performance Share Units granted 
after January 1, 1989, in an amount equal to, and commensurate 
with, dividends declared by the Board of Directors and paid on 
Common Stock.  Dividend equivalents payable on Option shares or 
on Performance Share Units under this Section 12 may be paid 
in cash or in Common Stock at the discretion of the Committee.  
The Committee may authorize the immediate payment of dividend 
equivalents under this Section 12 with respect to any Option 
for all or some portion of its term by including a specific 
provision, authorizing such immediate payment, in the Incentive 
Stock Option Agreement required under Section 6(a) of the Plan 
or the Non-qualified Stock Option Agreement required under 
Section 7 of the Plan.  The Committee may authorize the immediate 
payment of dividend equivalents under this Section 12 with 
respect to any Performance Share Unit for all or some portion 
of its term as a term and condition of the Performance Share 
Unit grant.  The Committee also may authorize the deferred payment 
of dividend equivalents under this Section 12 with respect to any 
Option for all or some portion of its term by including a specific 
provision authorizing such deferred payment (including the manner 
in which such payment will be credited to Optionees and 
subsequently paid) in the Incentive Stock Option Agreement 
required under Section 6(a) of the Plan or the Non-qualified 
Stock Option Agreement required under Section 7 of the Plan.  
The Committee may authorize the deferred payment of dividend 
equivalents under this Section 12 with respect to any Performance 
Share Unit for all or some portion of its term by including a 
specific provision authorizing such deferred payment (including 
the manner in which such deferred payment will be credited to 
Optionees and subsequently paid) as a term and condition of the 
Performance Share Unit grant.

Section 13.     CAPITAL ADJUSTMENTS

In the event of a recapitalization, stock split, stock dividend, 
exchange, combination, or reclassification of shares, merger, 
consolidation, reorganization, or other change in or affecting 
the capital structure or capital stock of the Corporation, the 
Board of Directors, upon the recommendation of the Committee, 
may make appropriate adjustments in the number of shares of Common 
Stock authorized for the Plan and in the annual limitation imposed 
by Section 5 of this Plan; and the Committee may make appropriate 
adjustments in the number of shares subject to outstanding Options, 
Stock Appreciation Rights, Restricted Stock, or Performance Share 
Unit grants, and in the Option price of any then outstanding 
Options, as it deems equitable, in its absolute discretion, to 
prevent dilution or enlargement of the rights of Participants.

Section 14.     REGULATORY APPROVALS

The exercise of each Option and Stock Appreciation Right, and 
the grant or distribution of Restricted Shares and Performance 
Shares, shall be subject to the condition that if at any time 
the Corporation shall determine in its discretion that the 
satisfaction of withholding tax or other tax liabilities, or the 
listing, registration, or qualification of any shares of Common 
Stock upon any securities exchange or under any Federal or state 
law, or the consent or approval of any regulatory body, is 
necessary or desirable as a condition of, or in connection with, 
such exercise, grant, or distribution, then in any such event 
such exercise, grant, or distribution shall not be effective 
unless such liabilities have been satisfied or such listing, 
registration, qualification, consent, or approval shall have been 
effected or obtained free of any conditions not acceptable to 
the Corporation.

Section 15.     TERM OF THE PLAN

(a)    Term of the Plan - Awards may be granted from time to 
time under the terms and conditions of the Plan, but no Incentive 
Stock Option may be granted after the expiration of ten (10) 
years from the date of adoption of the Plan, as hereby amended, 
by the Board of Directors; provided, that any future amendment 
to the Plan that is approved by the stockholders of the Corporation 
in the manner provided under paragraph (a) of this Section 15 shall 
be regarded as creating a new Plan, and an Incentive Stock Option 
may be granted under such new Plan until the expiration of ten (10) 
years from the earlier of the approval by the Board of Directors, 
or the approval by the stockholders of the Corporation, of such new 
Plan.  Incentive Stock Options theretofore granted may extend 
beyond the expiration of that ten-year period, and the terms and 
conditions of the Plan shall continue to apply thereto and to 
shares of Common Stock acquired upon the subsequent exercise of an 
Incentive Stock Option or related Stock Appreciation Right.

Section 16.     AMENDMENT OR TERMINATION OF THE PLAN

The Corporation may at any time and from time to time alter or 
amend, in whole or in part, any or all of the provisions of the Plan, 
or may at any time suspend or terminate the Plan, through resolution 
of its Board of Directors, provided that no change in any Awards 
theretofore granted to any Participant may be made which would impair 
or diminish the rights of the Participant without the Participant's 
consent, and provided further, that no alteration or amendment may 
be made without the approval of the holders of a majority of the 
Common Stock then outstanding and entitled to vote if such stockholder 
approval is necessary to comply with the requirements of any rules 
promulgated under Section 16 of the Securities Exchange Act of 1934 
or such other Federal or state laws or regulations as may be 
applicable.

Section 17.     MISCELLANEOUS

(a)    Fractional Shares - The Corporation shall not be 
required to issue or deliver any fractional share of Common Stock 
upon the exercise of an Option or Stock Appreciation Right, the 
award of Performance Shares, or the payment of a dividend equivalent 
in Common Stock pursuant to Section 12 of the Plan, but may pay, in 
lieu thereof, an amount in cash equal to the Fair Market Value of 
such fractional share.

(b)    Withholding - The Corporation and its Subsidiary Companies 
shall have the right, to the extent permitted by law, to deduct from 
any payment of any kind otherwise due to a Participant any Federal, 
state or local taxes of any kind required by law to be withheld with 
respect to Awards under the Plan, and to the extent any such 
withholding requirements are not satisfied, each Participant shall 
pay to the Corporation any Federal, state or local taxes of any kind 
required by law to be withheld with respect to Awards under the Plan.

(c)    Stockholder Rights - No person shall have any rights of 
a stockholder by virtue of an Option, Stock Appreciation Right, or 
Performance Share Unit except with respect to shares of Common Stock 
actually issued to him, and the issuance of shares of Common Stock 
shall confer no retroactive right to dividends.

(d)    No Contract of Employment - This Plan shall not be deemed 
to be an employment contract between the Corporation or any Subsidiary 
Company and any Participant or other employee.  Nothing contained 
herein, or in any agreement, certificate or other document evidencing, 
providing for, or setting forth the terms and conditions applicable 
to any Awards shall be deemed to confer upon any Participant or other 
employee a right to continue in the employment of the Corporation or 
any Subsidiary Company, or to interfere with the right of the 
Corporation or any Subsidiary Company to terminate the employment 
of such Participant or employee at any time.

(e)    Unfunded Plan - Except as may otherwise be provided in 
the Plan, the Plan shall be unfunded.  Neither the Corporation nor 
any Subsidiary Company shall be required to segregate any assets 
that may be represented by Options, Stock Appreciation Rights, or 
Performance Share Units, and neither the Corporation nor any 
Subsidiary Company shall be deemed to be a trustee of any amounts 
to be paid under an Option, Stock Appreciation Right, or Performance 
Share Unit.  Any liability of the Corporation to pay any Participant 
or Beneficiary with respect to an Option, Stock Appreciation Right, 
or Performance Share Unit shall be based solely upon any contractual 
obligations created pursuant to the provisions of the Plan; no such 
obligation shall be deemed to be secured by any pledge or encumbrance 
on any property of the Corporation or a Subsidiary Company.

(f)    Applicable Law - The Plan, its validity, interpretation, 
and administration, and the rights and obligations of all persons 
having an interest therein, shall be governed by and construed in 
accordance with the laws of the Commonwealth of Virginia, except 
to the extent that such laws may be preempted by Federal law.

(g)    Gender and Number - Wherever used in the Plan, words in 
the masculine form shall be deemed to refer to females as well as to 
males, and words in the singular or plural shall be deemed to refer 
also to the plural or singular, respectively, as the context may 
require.

EXHIBIT 10(a)

TRANSACTION AGREEMENT

by and among

CSX CORPORATION,

CSX TRANSPORTATION, INC.,

NORFOLK SOUTHERN CORPORATION,

NORFOLK SOUTHERN RAILWAY COMPANY,

CONRAIL INC.,

CONSOLIDATED RAIL CORPORATION

and

CRR HOLDINGS LLC

Dated as of June 10, 1997

TABLE OF CONTENTS
Page

ARTICLE I

DEFINITIONS

Section 1.1.   Defined Terms. . . . . . . . . . . .    1
Section 1.2.   Other Definitive Provisions. . . . .   15

ARTICLE II

DESIGNATION AND ALLOCATION OF ASSETS
AND LIABILITIES

Section 2.1.   Conveyance of Assets.. . . . . . . .   16
Section 2.2.   Allocation of Certain Assets . . . .   16
Section 2.3.   System Support Operations; Dispatching 24
Section 2.4.   Transition Period Accommodation. . .   27
Section 2.5.   Trackage, Haulage, Shared Asset and Other 
Operating Agreements . . . . . . . .   30
Section 2.6.   Equipment. . . . . . . . . . . . . .   30
(a)  Locomotive Equipment.   . . . .   30
(b)  Rolling Stock Equipment . . . .   31
(c)  Work Equipment. . . . . . . . .   32
(d)  Assignment. . . . . . . . . . .   32
(e)  Lease of Equipment. . . . . . .   32
(f)  Equitable Adjustment. . . . . .   33
Section 2.7.   Inventory at Altoona and Hollidaysburg 33
Section 2.8.   Allocated and Retained Liabilities .   34
Section 2.9.   Other Liabilities. . . . . . . . . .   35
Section 2.10.  Interline Accounts and Allocation. .   36
Section 2.11.  Insurance Proceeds . . . . . . . . .   37

ARTICLE III

CLOSING AND CLOSING DATE

Section 3.1.   Closing. . . . . . . . . . . . . . .   37
Section 3.2.   Pre-Closing Actions. . . . . . . . .   37
Section 3.3.   Closing Deliveries . . . . . . . . .   37

ARTICLE IV

CRR PARENT, CRR AND CRC GOVERNANCE AND FUNDING

Section 4.1.   Pre-Control Date Matters . . . . . .   39
Section 4.2.   Post-Control Date CRC Governance . .   40
Section 4.3.   Post-Closing Date CRC Funding. . . .   41
Section 4.4.   Post-Control Date CRC and Other
Distributions.                         41
Section 4.5.   Operating Fees, Interest Rentals and 
Base Rent. . . . . . . . . . . . . . . 42

ARTICLE V

NYC and PRR GOVERNANCE AND CONDUCT

Section 5.1.   NYC Governance . . . . . . . . . . .   42
Section 5.2.   PRR Governance . . . . . . . . . . .   43
Section 5.3.   NYC and PRR Actions. . . . . . . . .   43
Section 5.4.   NYC and PRR Distributions. . . . . .   43
Section 5.5.   Actions. . . . . . . . . . . . . . .   43

ARTICLE VI

EMPLOYEE MATTERS

Section 6.1.   Employees of CRR and CRC . . . . . .   43
Section 6.2.   Employee Related Liabilities . . . .   44
Section 6.3.   Non-Agreement Employee Benefit Plans   46
Section 6.4.   Residual Liability . . . . . . . . . . 47

ARTICLE VII

REPRESENTATIONS AND WARRANTIES

Section 7.1.   CSX. . . . . . . . . . . . . . . . .   48
(a)  Organization and Good Standing.   48
(b)  Authority . . . . . . . . . . .   48
(c)  Enforceability. . . . . . . . .   48
(d)  No Violation. . . . . . . . . .   48
(e)  No Approvals. . . . . . . . . .   48
Section 7.2.   NSC. . . . . . . . . . . . . . . . .   49
(a)  Organization and Good Standing.   49
(b)  Authority . . . . . . . . . . .   49
(c)  Enforceability. . . . . . . . .   49
(d)  No Violation. . . . . . . . . .   49
(e)  No Approvals. . . . . . . . . .   49

ARTICLE VIII

COVENANTS

Section 8.1.   Conduct of Business. . . . . . . . .   50
Section 8.2.   Best Efforts . . . . . . . . . . . .   50
Section 8.3.   Further Assurances; Consents . . . .   50
Section 8.4.   STB Approval . . . . . . . . . . . .   51
Section 8.5.   Other Approvals. . . . . . . . . . .   52
Section 8.6.   INTENTIONALLY OMITTED. . . . . . . .   52
Section 8.7.   Risk of Loss; Forced Disposal. . . .   53
Section 8.8.   Public Statements; Public Filings. .   53
Section 8.9.   Restructuring of CRC . . . . . . . .   53
Section 8.10.  Provision of Corporate Records . . .   55
Section 8.11.  Access to Information. . . . . . . .   55
Section 8.12.  Production of Witnesses and Individuals56
Section 8.13.  Confidentiality. . . . . . . . . . .   56
Section 8.14.  Privileged Matters . . . . . . . . .   57
Section 8.15.  Administration of Actions. . . . . .   58
Section 8.16.  Administration of FELA Claims. . . .   59
Section 8.17.  Tax Matters. . . . . . . . . . . . .   60
Section 8.18.  Committees . . . . . . . . . . . . .   60
Section 8.19.  Chicago Gateway Access . . . . . . .   60
Section 8.20.  Car Hire and Car Service . . . . . .   61

ARTICLE IX

CONDITIONS PRECEDENT TO THE CLOSING

Section 9.1.   Conditions Precedent to Obligations.   61

ARTICLE X

INDEMNIFICATION

Section 10.1.  Indemnification. . . . . . . . . . . . 62
Section 10.2.  Indemnification Procedures . . . . . . 62
Section 10.3.  Remedies . . . . . . . . . . . . . . . 63

ARTICLE XI

MISCELLANEOUS

Section 11.1.  Amendment. . . . . . . . . . . . . . . 64
Section 11.2.  Extension; Waiver. . . . . . . . . . . 64
Section 11.3.  Notices. . . . . . . . . . . . . . . . 64
Section 11.4.  Interpretation . . . . . . . . . . . . 65
Section 11.5.  Entire Agreement . . . . . . . . . . . 65
Section 11.6.  Parties in Interest. . . . . . . . .   66
Section 11.7.  Governing Law. . . . . . . . . . . .   66
Section 11.8.  Counterparts . . . . . . . . . . . . . 66
Section 11.9.  Assignment . . . . . . . . . . . . .   66
Section 11.10  Severability . . . . . . . . . . . .   67
Section 11.11. Lack of Control; Effect on CRR and its
Controlled Subsidiaries. . . . . . .   67
Section 11.12. Dispute Resolution . . . . . . . . .   67
Section 11.13. CRC Status . . . . . . . . . . . . .   68

Schedule 1
Assets 
Attachment I
Attachment II

Schedule 2
Major Decisions

Schedule 3
Preservation of Fair Access to Chicago Gateway

Schedule 4
Schedule of Trackage Rights, Haulage, 
Shared Assets and Other Operating Agreements

Exhibit A
Form of Operating Agreements
Exhibit A-1 (CSXT Operating Agreement)
Exhibit A-2 (NSR Operating Agreement)   

Exhibit B
Form of LLC Agreements 

Exhibit C
Form of Trackage Rights Agreements
Exhibit C-1 (NSR on CSXT)
Exhibit C-2 (CSXT on NSR)

Exhibit D
Form of CSX/NSC Haulage Agreements

Exhibit E
Form of Capital Contribution, Assignment 
And Assumption Agreements 

Exhibit F
Tax Allocation Agreement 

Exhibit G
North Jersey Shared Assets Agreement

Exhibit H
South Jersey/Philadelphia Shared Assets Agreement

Exhibit I
Detroit Shared Assets Agreement 

Exhibit J
Ashtabula Interlocking Agreement

Exhibit K
CP-Mounds Interlocking Agrement

Exhibit L
Warsaw Interlocking Agreement

Exhibit M
Crestline Interlocking Agreement

Exhibit N
Buckeye Interlocking Agreement

Exhibit O
Mike Interlocking Agreement

Exhibit P
Bucyrus Interlocking Agreement

Exhibit Q
CP 138 Interlocking Agreement

Exhibit R
Short Interlocking Agreement

Exhibit S
Berea Interlocking Agreement

Exhibit T
Ashtabula Access Agreement

Exhibit U
Seneca Yard Access Agreement

Exhibit V
Ford (Rockport) Switching Agreement

Exhibit W
GM Parma Switching Agreement

Exhibit X
Indianapolis Switching Agreement

Exhibit Y
GM Lordstown Switching Agreement

Exhibit Z
Lorain Switching Agreement

Exhibit AA
Fairlane Switching Agreement

Exhibit BB
Crawfordsville Switching Agreement

Exhibit CC
Sidney Switching Agreement

Exhibit DD
Sandusky Switching Agreement

Exhibit EE
Upper Sandusky Switching Agreement

Exhibit FF
Indiana Harbor Belt Agreement

Exhibit GG
Monongahela Access and Use Agreement

Exhibit HH
Park Manor Temporary Lease Agreement

Exhibit II
NSR and CSXT Construction Rights Agreement

Exhibit JJ
NSR Buckeye Construction Rights Agreement

Exhibit KK
NSR Field-Belmont Construction Rights Agreement

Exhibit LL
Erie Deed of Easement

Exhibit MM
Fort Wayne-Chicago/Streator Line Exchange Agreement

Exhibit NN
Piqua Yard Agreement

Exhibit OO
Elizabethport Yard Access Agreement

Exhibit PP
Agreement for Assignment of CRC Rights

Exhibit QQ
CSXT Eastwick Construction Agreement

Exhibit RR
Agreement for Assignment of CRC Rights 
(Northeast Corridor)

Exhibit SS
Agreement for Assignment of Chicago Rights

TRANSACTION AGREEMENT

TRANSACTION AGREEMENT, dated as of June 10, 1997 
("Agreement"), by and among CSX CORPORATION, a Virginia
corporation ("CSX"), CSX TRANSPORTATION, INC., a Virginia
corporation, for itself and on behalf of its controlled
Subsidiaries (collectively, "CSXT"), NORFOLK SOUTHERN
CORPORATION, a Virginia corporation ("NSC"), NORFOLK SOUTHERN
RAILWAY COMPANY, a Virginia  corporation, for itself and on
behalf of its controlled Subsidiaries (collectively, "NSR"),
CONRAIL INC., a Pennsylvania corporation, for itself and on
behalf of its controlled Subsidiaries (collectively, "CRR"),
CONSOLIDATED RAIL CORPORATION, a Pennsylvania corporation
("CRC"), and CRR HOLDINGS LLC, a Delaware limited liability
company ("CRR Parent").

WHEREAS, CSX and NSC have entered into a letter
agreement dated as of April 8, 1997 (the "April 8 Agreement").

WHEREAS, pursuant to the April 8 Agreement, CSX and NSC
have jointly acquired all of the outstanding capital stock of CRR
through CRR Parent, in which CSX and NSC each owns a 50% voting
interest.

WHEREAS, CSX and NSC are seeking the approval of the
STB to undertake the transactions contemplated by this Agreement
and the April 8 Agreement.

WHEREAS, pursuant to the April 8 Agreement the parties
wish to provide herein for the governance and operation of CRR
and its Affiliates and for the basis pursuant to which CRR's
assets and liabilities will be allocated to or shared by CSX and
its Affiliates, on the one hand, and NSC and its Affiliates, on
the other hand, after the Closing Date (as hereinafter defined).

NOW, THEREFORE, in consideration of the premises and
the respective agreements hereinafter set forth, the parties
hereto agree as follows:

ARTICLE I

DEFINITIONS

Section 1.1.  Defined Terms.  As used in this
Agreement, the following terms have the meanings set forth below:

"AAC" means Atlantic Acquisition Corporation, a
Pennsylvania corporation and a wholly owned Subsidiary of NSC.

"AAR" means the Association of American Railroads. 

"AAR Car Service Rules" means the Code of Car Service
Rules/Code of Car Hire Rules contained in AAR Circular OT-10 as
promulgated in the Official Railway Equipment Register.

"AAR Depreciated Value" means depreciated value as
determined in accordance with Rule 107 of the Office and Field
Manuals of the AAR Interchange Rules adopted by the AAR Technical
Services Division, Mechanical Section, Operations and Maintenance
Department.

"Action" shall mean any action, claim, suit,
arbitration, inquiry, subpoena, discovery request, proceeding or
investigation by or before any Governmental Entity or forum or
authority having jurisdiction over the matter involving or
related to CRR, CRC or their respective Affiliates, the Assets,
the Retained Liabilities or the Allocated Liabilities, but shall
exclude FELA Claims.

"Affiliate" means, with respect to a specified Person,
any Person that directly or indirectly controls, is controlled by
or is under common control with, the specified Person or any
trust for the benefit of such Person or any entities controlled
by such Person; provided that, for the purposes of this Agree-
ment, (a) NYC shall not be an Affiliate of CSX and its Subsidiar-
ies or NSC and its Subsidiaries, (b) PRR shall not be an Affili-
ate of NSC and its Subsidiaries or CSX and its Subsidiaries and
(c) CSX and NSC and their respective Subsidiaries shall not be
Affiliates of CRR or CRR Parent and their respective Subsidiaries
and vice versa.

"Allocated Assets" means the Assets to be transferred
at the Closing to either NYC ("NYC Allocated Assets") or PRR
("PRR Allocated Assets").

"Allocated Liabilities" means the Liabilities of CRR,
CRC or their respective Affiliates to be assumed at the Closing
by either NYC ("NYC Allocated Liabilities") or PRR ("PRR
Allocated Liabilities").

"Amended and Restated Voting Trust Agreement" means the
Voting Trust Agreement among CSX, NSC, CRR Parent, Green and
Deposit Guarantee National Bank, dated as of April 8, 1997.

"Ancillary Agreements" means the Equipment Agreements,
the CSXT Operating Agreement, the NSR Operating Agreement, the
NYC LLC Agreement, the PRR LLC Agreement, the CRR Holdings LLC
Agreement, the Trackage Rights Agreements, the CSXT/NSR Haulage
Agreements, the Tax Allocation Agreement, the Shared Assets
Agreements and the Other Operating Agreements.

"April 8 Agreement" has the meaning set forth in the
preamble to this Agreement.

"Assets" means any and all of CRR's, CRC's or their
respective Affiliates' right, title and interest in and to all of
the rights, properties, assets, claims, Contracts and businesses
of every kind, character and description, whether real, personal
or mixed, whether tangible or intangible, whether accrued,
contingent or otherwise and wherever located, owned or used
primarily by such party.  On the Closing Date, all Assets will be
either (i) NYC Allocated Assets, (ii) PRR Allocated Assets or
(iii) Retained Assets.  

"Base Inventory" has the meaning ascribed thereto in
Section 2.7.

"Base Rent" has the meaning set forth in the CSXT
Equipment Agreement and the NSR Equipment Agreement.

"Books and Records" means the books, files and records
(including computerized databases and records) of CRR, CRC or
their respective Affiliates and includes the NYC Books and
Records and the PRR Books and Records.

"Capital Contribution, Assignment and Assumption Agree
ments" means the instruments (including quitclaim deeds or other
instruments transferring title to real estate) pursuant to which
the Allocated Assets and the Allocated Liabilities will be trans-
ferred at the Closing to NYC or PRR, as the case may be, substan-
tially in the form attached hereto as Exhibit E.

"Closing" has the meaning ascribed thereto in Section
3.1.

"Closing Date" has the meaning ascribed thereto in Sec-
tion 3.1.

"Co-Chairmen" means the co-chairmen of the CRC Board
after the Control Date, being the CSX Co-Chairman and the NSC
Co-Chairman.

"Code" means the Internal Revenue Code of 1986, as
amended from time to time or any successor United States federal
tax statute.  References to a specific section of the Code shall
include a reference to the corresponding provisions of any such
successor United States federal tax statute.

"Communications Team" has the meaning ascribed thereto
in Section 2.2.

"Continuing CRC Management" means employees (regardless
of craft, position or classification) of CRR, CRC or their
respective Affiliates (other than NYC, PRR and their respective
Subsidiaries) who are determined to be Continuing CRC Management
pursuant to Section 6.1(c), which employees will consist of the
following categories:  (a) employees performing general and
administrative functions for CRR, CRC or their respective Affili-
ates (other than NYC, PRR and their respective Subsidiaries), (b)
employees performing interim general, administrative or technical
functions for CRR, CRC or their respective Affiliates (other than
NYC, PRR and their respective Subsidiaries) (including employees
performing such functions at CRR's headquarters office building
and information technology center in Philadelphia, PA) which
functions CSX and NSC shall identify prior to the Closing Date
and shall agree are necessary for an interim period after the
Closing Date in accordance with Section 2.4, (c) employees
operating, managing or performing work at the SSO Facilities, and
(d) employees (other than those described in clauses (a), (b) and
(c) above) operating, managing or performing work on Retained
Assets that are to be operated pursuant to the Shared Assets
Agreements.

"Contracts" means any contract, lease, loan agreement,
deed, easement, license, reversion, mortgage, security agreement,
trust indenture or other agreement or instrument to which any of
CRR, CRC or their respective Affiliates is a party or by which
any of them is bound or to which any of the Assets is subject.   

"Contracts Team" has the meaning ascribed thereto in
Section 2.2.

"Control Date" means the effective date on which CSX
and NSC are authorized by the STB to exercise control over CRR.

"Corporate Level Liabilities" means the following Li-
abilities of CRR, CRC or their respective Affiliates: (a) Envi-
ronmental Liabilities that are designated as Corporate Level Li-
abilities pursuant to Section 2.8(b)(iii); (b) all Liabilities
(except as specified in Section 2.8(b)(i) or (ii), Section 2.8(c)
or Section 2.9) associated with the handling and disposition of
Actions arising prior to the Closing Date; (c) all Liabilities
(except as specified in Section 2.8(b)(i) or (ii), Section 2.8(c)
or Section 2.9) associated with the handling and disposition of
Actions arising on or after the Closing Date and that do not
relate predominantly to Allocated Assets; (d) all Liabilities
(except as specified in Section 2.8(b)(i) or (ii), Section 2.8(c)
or Section 2.9) associated with the handling and disposition of
Actions arising on or after the Closing Date designated as Corpo-
rate Level Liabilities pursuant to Section 2.8; (e) Employee
Related Liabilities that are designated as Corporate Level Lia-
bilities pursuant to Article VI; (f) all Taxes accruing for
periods prior to the Closing Date, including in respect of tax
leverage transactions; (g) Taxes, if any, associated with the
designation, allocation and transfer of the Assets as
contemplated in this Agreement; (h) Liabilities under leases
(including without limitation lease termination costs) that arise
prior to the Closing Date (other than the lease Liabilities in
respect of the CRC headquarters office building in Philadelphia,
PA, or the information technology center in Philadelphia, PA, or
the Altoona, PA or Hollidaysburg, PA shops); (i) Indebtedness
(other than intercorporate Indebtedness of direct or indirect
Subsidiaries of CRR the capital stock, or similar interests, of
which is included in the Allocated Assets, which will be treated
as agreed to by the parties prior to the Closing); (j) all
Liabilities associated with the handling and disposition of FELA
Claims made prior to the Control Date and all Liabilities
associated with the handling and disposition of FELA Claims made
on or after the Control Date and designated as Corporate Level
Liabilities pursuant to Section 2.8(c); (k) all employee costs
not otherwise allocated under this Agreement; (l) all Liabilities
arising prior to the Closing Date not otherwise allocated under
this Agreement; (m) transition costs not the sole responsibility
of CSX, CSXT, NYC, NSC, NSR or PRR and not otherwise allocated
under this Agreement; and (n) all Liabilities incurred with
respect to Continuing CRC Management, the SSO Facilities and the
Retained Assets, except where this Agreement (including the
Schedules and Exhibits hereto) or the Ancillary Agreements may
expressly designate the Liability in some other manner. 

"Corporate Memorabilia" means all corporate memora-
bilia, antiques, artifacts, charters and art owned by CRR, CRC or
their respective Affiliates, wherever located.

"CRC" has the meaning set forth in the preamble to this
Agreement.

"CRC Board" means the Board of Directors of CRC.

"CRR" has the meaning set forth in the preamble to this
Agreement.

"CRR Holdings LLC Agreement" means the Limited Liabili-
ty Company Agreement of CRR Holdings LLC, dated May 21, 1997, as
amended from time to time.

"CRR Industries" means CRR Industries, Inc., a
Pennsylvania corporation and a wholly owned Subsidiary of CRR.

"CRR Parent" has the meaning set forth in the preamble
to this Agreement.

"CRR Shares" means the shares of Common Stock and Se-
ries A ESOP Convertible Junior Preferred Stock of CRR.

"CRR Stay Bonus Program" means either the Conrail Inc.
Stay Bonus Program, Classes 8 And Below, or the Conrail Inc. Stay
Bonus Program Classes 9-11, both to be entered into pursuant to
Attachment A to the Third Amendment.

"CSX" has the meaning set forth in the preamble to this
Agreement.

"CSX Co-Chairman" has the meaning ascribed thereto in
Section 4.2.

"CSX Directors" has the meaning ascribed thereto in
Section 4.2.

"CSXT" has the meaning set forth in the preamble to
this Agreement.

"CSXT Equipment" means the Equipment subject to the
CSXT Equipment Agreement.

"CSXT Equipment Agreement" means the agreement to be
entered into between NYC and CSXT in a form to be agreed by CSX
and NSC, to provide CSXT with the right to use, operate and main-
tain certain of the Equipment which NYC has the right to use and
operate pursuant to the NYC Equipment Agreement.

"CSXT/NSR Haulage Agreements" means the agreements
pursuant to which CSXT and/or NSR will provide haulage services
for the other, in substantially the form attached hereto as
Exhibit D; each CSXT/NSR Haulage Agreement shall be in respect of
a Route identified on Item 2 of Schedule 4 and shall incorporate
the terms set forth therein.

"CSXT Operating Agreement" means the agreement to be
entered into between CSXT and NYC, substantially in the form at-
tached hereto as Exhibit A-1, to provide for the use, operation
and maintenance by CSXT of certain of the NYC Allocated Assets
after the Closing Date.

"Damages" means all assessments, losses, damages, li-
abilities, costs and expenses, including without limitation in-
terest, penalties and attorneys' and consultants' fees.

"Distribution" means any dividend or other distribution
with respect to any shares of capital stock or similar equity
interests.

"Employee Related Liabilities" means Liabilities to be
designated as NYC Allocated Liabilities, PRR Allocated
Liabilities or Corporate Level Liabilities pursuant to Article
VI.

"Environmental Laws" means any and all federal, state,
local and foreign statutes, laws, judicial decisions, regula-
tions, ordinances, rules, judgments, orders, decrees, codes,
plans, injunctions, permits, concessions, grants, franchises,
licenses, agreements and governmental restrictions, whether now
or hereafter in effect, relating to human health, the environment
or to emissions, discharges, or releases of pollutants, contami-
nants, hazardous or toxic materials or substances or wastes into
the environment, including, without limitation, ambient air, sur-
face water, ground water or land, or otherwise relating to the
manufacture, processing, distribution, use, treatment, storage,
disposal, transport or handling of pollutants, contaminants, haz-
ardous or toxic materials or substances or wastes or the cleanup
or other remediation thereof.

"Environmental Liabilities" means any and all
Liabilities arising in connection with or in any way relating to
any Asset (or formerly held Asset) and which arise under or
relate to matters covered by any Environmental Laws.

"Equipment" means all freight car rolling stock, ca-
booses, trailers, containers, end of train devices, locomotives
and Work Equipment of CRR, CRC or their respective Affiliates,
whether owned or leased.

"Equipment Agreements" means the NYC Equipment Agree-
ment, the PRR Equipment Agreement, the CSXT Equipment Agreement
and the NSR Equipment Agreement.         

"Fair Market Rental Value" has the meaning set forth in
the CSXT Operating Agreement, the NSR Operating Agreement, the
CSXT Equipment Agreement and the NSR Equipment Agreement.   

"FELA Claim" means a claim made under the Federal
Employers Liability Act, as amended from time to time.  A FELA
Claim shall be considered "made" upon the earliest to occur of
the following:  (i) the claimant's employer has received or pre-
pared a written report (including, in the case of an alleged
occupational injury, a questionnaire) of the claim or of the
incident from which the claim arises; or (ii) the claimant's
employer has received written notice of the claim from the claim-
ant or the claimant's attorney; or (iii) an action, claim or suit
asserting the claim has been filed and properly served on the
claimant's employer.  For the purposes of this definition (i) the
term "written report" shall include reports which are
electronically prepared or transmitted, and (ii) the term
"employer" shall include the employer currently responsible under
the Federal Employers Liability Act for the claim or cause of
action being asserted and such employer's attorney.

"FF&E" means all furniture, fixtures, computers,
office supplies and equipment (other than Equipment and system
stock- piles of supplies and inventory) of CRR, CRC or their
respective Affiliates.

"Governmental Entity" means any federal, state, local
or foreign court, administrative agency or commission or other
governmental or regulatory authority or commission or any arbi-
tration tribunal.

"Green" means Green Acquisition Corp., a Pennsylvania
corporation and a wholly owned Subsidiary of CRR Parent.

"Indebtedness" means, when used with reference to a
specified Person, at any date, without duplication, (a) all obli-
gations of such Person for borrowed money, including, without
limitation, all principal, interest, premiums, fees, expenses,
overdrafts and penalties with respect thereto, (b) all obliga-
tions of such Person evidenced by bonds, debentures, notes or
other similar instruments, (c) all obligations of such Person to
pay the deferred purchase price of property or services, except
trade accounts payable, (d) all obligations of such Person to
reimburse any bank or other Person in respect of amounts paid
under a letter of credit or similar instrument, (e) all payment
obligations under capitalized leases and (f) all indebtedness of
any other Person of the type referred to in clauses (a) to (e)
above directly or indirectly guaranteed by such Person.

"Indemnified Party" means a Person who requires or re-
quests indemnification under Article X.

"Indemnifying Party" means a Person who is required or
requested to indemnify another Person under Article X.

"Interest Rental" has the meaning set forth in the
Shared Assets Agreements.

"Inventory Team" has the meaning ascribed thereto in
Section 2.2.

"IRS Submission" has the meaning ascribed thereto in
Section 8.9.

"Liabilities" means any and all debts, liabilities and
obligations of any kind whatsoever, whether or not accrued, con-
tingent or reflected on a balance sheet, known or unknown, abso-
lute, determined, determinable or otherwise, including, without
limitation, those arising under any law, rule, regulation, ac-
tion, order or consent decree of any Governmental Entity or any
judgment in any Action of any kind or award of any arbitrator of
any kind and those arising under any Contract.  At the Closing
Date, all Liabilities of CRR, CRC or their respective Affiliates
will be either (i) NYC Allocated Liabilities, (ii) PRR Allocated
Liabilities or (iii) Retained Liabilities.

"Locomotive Team" has the meaning ascribed thereto in
Section 2.6.

"Major Decisions" means any of the items identified on
Schedule 2 hereto.

"Merger" means the merger of a subsidiary of Green
with and into CRR pursuant to the Merger Agreement.

"Merger Agreement" means the Agreement and Plan of
Merger by and among CRR, CSX and Green dated as of October 14,
1996 and as amended as of November 5, 1996, December 18, 1996,
March 7, 1997 and April 8, 1997 and as may be further amended
from time to time in accordance with its terms and the terms of
this Agreement.

"NSC" has the meaning set forth in the preamble to
this Agreement.

"NSC Co-Chairman" has the meaning ascribed thereto in
Section 4.2.

"NSC Directors" has the meaning ascribed thereto in
Section 4.2.

"NSR" has the meaning set forth in the preamble to
this Agreement.

"NSR Equipment" means the Equipment subject to the NSR
Equipment Agreement.

"NSR Equipment Agreement" means the agreement to be
entered into between PRR and NSR, in a form to be agreed among
CSX and NSC, to provide NSR with the right to use, operate and
maintain certain of the Equipment which PRR has the right to use
and operate pursuant to the PRR Equipment Agreement.

"NSR Operating Agreement" means the agreement to be
entered into between NSR and PRR, substantially in the form at-
tached hereto as Exhibit A-2, to provide for the use, operation
and maintenance by NSR of certain of the PRR Allocated Assets
after the Closing Date.

"NYC" means New York Central Lines LLC (or such other
name as may be specified by CSX), which will be organized on or
prior to the Closing pursuant to Section 3.2 as a Delaware
limited liability company and a wholly owned Subsidiary of CRC.

"NYC Action" has the meaning ascribed thereto in Sec-
tion 8.14.

"NYC Allocated Assets" means the Assets identified on
Item 1 of Schedule 1 hereto and the Transportation Contracts
allocated to NYC pursuant to Section 2.2(c) (unless CSX and NSC
in their discretion agree that any such Assets shall not be NYC
Allocated Assets) together with the Unallocated Assets designated
as NYC Allocated Assets prior to the Closing Date pursuant to
Article II, including any cash benefit in lieu of such Assets
pursuant to Section 8.7.

"NYC Allocated Liabilities" means the Liabilities des-
ignated as NYC Allocated Liabilities pursuant to Section 2.8 or
Article VI, together with all Liabilities allocated to and the
responsibility of NYC under any Ancillary Agreement.

"NYC Books and Records" shall mean the books, files
and records (including computerized databases and records) of
CRR, CRC or their respective Affiliates that relate principally
to the NYC Allocated Assets or NYC Allocated Liabilities and are
necessary or useful for the operation of the business in
respect thereof.

"NYC Equipment Agreement" means the agreement to be
entered into between CRC and NYC, in a form to be agreed among
CSX and NSC, to provide NYC with the right to use, operate and
maintain certain of the Equipment allocated to NYC pursuant to
Section 2.6(e)(i).

"NYC LLC Agreement" means the Limited Liability
Company Agreement of NYC, substantially in the form attached
hereto as Exhibit B.

"NYC Restructuring" has the meaning ascribed thereto
in Section 8.9.

"Operating Fee" has the meaning set forth in the CSXT
Operating Agreement and the NSR Operating Agreement.

"Other Operating Agreements" means the agreements to
be entered into between and among CRC, NYC, PRR, CSXT and/or NSR,
substantially in the forms attached hereto as Exhibits J through
RR, providing for various operating, access, construction and
other matters.  The Other Operating Agreements are listed in Item
4 of Schedule 4 hereto.

"PBCL" means the Pennsylvania Business Corporation Law
of 1988, as amended from time to time.

"Pennsylvania Control Transaction Law" means
Subchapter E of Chapter 25 of the PBCL, as amended from time to
time.

"Percentage" means, in the case of CSX, 42% and, in
the case of NSC, 58%.

"Person" includes any individual, corporation,
association, partnership (general or limited), joint venture,
trust, estate, limited liability company or other legal entity or
organization.

"Pooled Assets" means all Unallocated Assets for which
no allocation methodology is provided for in Section 2.2(a)
through (i), including the Assets identified on Item 4 of Sched-
ule 1.

"Privileged Information" has the meaning ascribed
thereto in Section 8.14.

"Privileges" has the meaning ascribed thereto in Sec-
tion 8.14.

"PRR" means Pennsylvania Lines LLC (or such other name
as may be specified by NSC), which will be organized on or prior
to Closing pursuant to Section 3.2 as a Delaware limited li-
ability company and a wholly owned Subsidiary of CRC.

"PRR Action" has the meaning ascribed thereto in Sec-
tion 8.15.

"PRR Allocated Assets" means the Assets identified on
Item 2 of Schedule 1 hereto and the Transportation Contracts
allocated to PRR pursuant to Section 2.2(c) (unless CSX and NSC
in their discretion agree that any such Assets shall not be PRR
Allocated Assets), together with the Unallocated Assets designat-
ed as PRR Allocated Assets prior to the Closing Date pursuant to
Article II, including any cash benefit in lieu of such Assets
pursuant to Section 8.7.

"PRR Allocated Liabilities" means the Liabilities des-
ignated as PRR Allocated Liabilities pursuant to Section 2.8 or
Article VI, together with all Liabilities allocated to and the
responsibility of PRR under any Ancillary Agreement.

"PRR Books and Records" shall mean the books, files
and records (including computerized databases and records) of
CRR, CRC or their respective Affiliates that relate principally
to the PRR Allocated Assets or PRR Allocated Liabilities and are
necessary or useful for the operation of the business in
respect thereof.

"PRR Equipment Agreement" means the agreement to be
entered into between CRC and PRR, in a form to be agreed among
CSX and NSC, to provide PRR with the right to use, operate and
maintain certain of the Equipment allocated to PRR pursuant to
Section 2.6(e)(i).

"PRR LLC Agreement" means the Limited Liability
Company Agreement of PRR, substantially in the form attached
hereto as Exhibit B.

"PRR Restructuring" has the meaning ascribed thereto
in Section 8.9.

"Radio Licenses" has the meaning ascribed thereto in
Section 2.2.

"Required Approvals" has the meaning ascribed thereto
in Section 7.1.

"Restructuring" means either the NYC Restructuring or
the PRR Restructuring, as the context requires.

"Retained Assets" means the Assets identified on Item
3 of Schedule 1 hereto (unless CSX and NSC in their discretion
agree that any such Assets shall not be Retained Assets) together
with the Unallocated Assets designated as Retained Assets prior
to the Closing Date pursuant to Article II, including (a)
Equipment that is not included in the Allocated Assets, (b) the
SSO Facilities and (c) the Pooled Assets not designated as
Allocated Assets pursuant to Section 2.2(j).

"Retained Liabilities" means the Liabilities
designated as Retained Liabilities pursuant to Section 2.8
(including, without limitation, all Corporate Level Liabilities),
together with all Liabilities allocated to and the responsibility
of CRR, CRC or their respective Affiliates under any Ancillary
Agreement.

"Rolling Stock Team" has the meaning ascribed thereto
in Section 2.6.

"Route" means the rights and Assets used to provide
transportation service along a railroad line connecting two or
more stations and consisting of one or more tracks (together with
associated sidings, side tracks, signaling, land and other
related facilities).

"Ruling" has the meaning ascribed thereto in Section
8.9.

"Separation Costs" means labor protection costs, in-
cluding dismissal allowances, displacement allowances and the
cost of administering, arbitrating and litigating such labor
protection provisions, severance (including payments under
severance agreements), personnel relocation expenses and all
other dismissal expenses and stay bonuses, including any payment
intended to reimburse for excess parachute excise tax imposed
under Section 4999 of the Code with respect to such dismissal ex-
penses or stay bonuses.

"Service" has the meaning ascribed thereto in Section
8.9.

"Shared Assets Agreements" means the agreements
between and among CRC, NYC, PRR, CSXT and/or NSR, substantially
in the forms attached hereto as Exhibits G through I, providing
for the operation of certain Retained Assets for the benefit of
CSXT and NSR.  The Shared Assets Agreements are listed in Item 3
of Sched- ule 4 hereto.

"Shared Assets Areas" means (a) the North Jersey
shared Asset facility to be covered by the Shared Assets
Agreement substantially in the form attached hereto as Exhibit G,
(b) the South Jersey/Philadelphia shared Asset facility to be
covered by the Shared Assets Agreement substantially in the form
attached hereto as Exhibit H and (c) the Detroit shared Asset
facility to be covered by the Shared Assets Agreement
substantially in the form attached hereto as Exhibit I.

"SSO Facilities" means the CRR or CRC system support
operations facilities described in Item 3(B) of Schedule 1
(including equipment and other Assets associated with such
facilities) used as of the date hereof by CRR and CRC or their
respective Affiliates to provide support functions benefitting
the CRC rail system as a whole, including: (a) the customer
service center in Pittsburgh, PA; (b) the crew management facili-
ty in Dearborn, MI; (c) the system maintenance-of-way equipment
center in Canton, OH; (d) the signal repair center in Columbus,
OH; (e) the system freight claims facility in Buffalo, NY; (f)
the system non-revenue billing facility at Bethlehem, PA; (g) the
system rail welding plant at Lucknow (Harrisburg), PA; (h) the
system road foreman/engineer training center at Philadelphia and
Conway, PA; (i) the CRC police operations center at Mt. Laurel,
NJ; and (j) such other facilities providing system-wide support
functions as CSX and NSC shall identify and agree upon prior to
the Closing Date.

"STB" means the Surface Transportation Board or, if
there shall be no Surface Transportation Board, any federal
agency which is charged with the function of approving combina-
tions by rail carriers or persons controlling them, or of other
arrangements between such rail carriers, and granting exemptions
from other laws with respect thereto or regulating other specific
functions with respect to the context in which such term is em-
ployed or any successor entity thereof.

"Subsidiary" means, when used with reference to a
specified Person, any corporation or other organization, whether
incorporated or unincorporated, of which at least a majority of
the securities or other interests having by their terms ordinary
voting power to elect a majority of the Board of Directors or
others performing similar functions with respect to such corpora-
tion or other organization is directly or indirectly owned or
controlled by such Person or by any one or more of its Subsidiar-
ies, or by such Person and one or more of its Subsidiaries; pro-
vided that CRR Parent and any Person in which CRR Parent owns,
directly or indirectly an interest (it being assumed for the pur-
poses of this Agreement that CRR Parent does not own, directly or
indirectly, an interest in either CSX or NSC) shall not be a Sub-
sidiary of either CSX or NSC.

"Surviving Corporation" means the surviving
corporation of the Merger.

"Tax" or "Taxes" means taxes of any kind, levies or
other similar assessments, customs, duties, imposts, charges or
fees, including, without limitation, income taxes, gross re-
ceipts, ad valorem, excise, real or personal property, sales,
use, payroll, withholding, unemployment, transfer and gains taxes
or other governmental taxes imposed by or payable to the United
States, or any state, local or foreign government or subdivision
thereof, and in each instance such term shall include any inter-
est, penalties or additions to tax attributable to such Tax or
Taxes.  The term "Tax" or "Taxes" shall not include any payment
intended to reimburse the recipient for an excess parachute ex-
cise tax imposed under Section 4999 of the Code.

"Tax Allocation Agreement" means the agreement to be
entered into among Green, CRR, CRC, CRR Industries, PRR and NYC,
substantially in the form attached hereto as Exhibit F, pursuant
to which the rights and obligations relating to Tax matters
involving the operations of CRR, CRC, PRR and NYC shall be
allocated.

"Tax Returns" means all returns, information returns,
statements, certifications, reports or other documentation
relating to Taxes.

"Third Amendment" means the third amendment, dated
March 7, 1997, to the Merger Agreement.

"Third Party Claim" has the meaning ascribed thereto
in Section 10.2.

"Trackage Rights Agreements" means the agreements pur-
suant to which CSXT and NSR will grant trackage rights to the
other, in substantially the form attached hereto as Exhibit C;
each Trackage Rights Agreement shall be in respect of a Route
identified on Item 1 of Schedule 4 and shall incorporate the
terms set forth therein.

"Transaction Expenses" means, with respect to a speci-
fied Person, all of such Person's fees and expenses, including,
without limitation, filing fees and fees and expenses of legal
counsel, depositaries, dealer managers, proxy solicitors, infor-
mation agents, printers, investment bankers or advisors, financ-
ing sources, accountants, public relations advisors and other
consultants and advisors incurred in connection with the acquisi-
tion of CRR Shares, the Merger, the April 8 Agreement, this
Agreement, the Ancillary Agreements and the transactions
contemplated herein and therein.

"Transportation Contracts" means Contracts between
rail carrier(s) and a Person or Persons relating to the purchase
of transportation services as specified in 49 U.S.C. Section
10102(9)(A) and (B); provided that, if a Transportation Contract
covers service between more than one pair of points, the
provisions governing service between each pair of points shall be
treated as a distinct Transportation Contract.

"Unallocated Assets" means Assets which are not as of
the date of this Agreement identified on Schedule 1 hereto as
Allocated Assets or Retained Assets.

"Valuation Date" has the meaning set forth in the CSXT
Operating Agreement, the NSR Operating Agreement, the CSXT
Equipment Agreement, the NSR Equipment Agreement and the Shared
Assets Agreements.

"Voting Trust" means the voting trust for the shares
of capital stock of CRR or CRC created under the Amended and
Restated Voting Trust Agreement.

"Work Equipment" means track machinery, non-revenue
rolling stock dedicated to track maintenance (such as ballast and
tie cars), other mobile equipment (such as backhoes, bulldozers
and the like), other engineering equipment and automobiles and
trucks assigned to CRC system and staff functions (automobiles
and trucks assigned to Allocated Asset locations shall be
included in the Allocated Assets).

"Work Equipment Team" has the meaning ascribed thereto
in Section 2.6.

Section 1.2.  Other Definitive Provisions.  When used
in this Agreement in respect of a Liability or an Action, the
terms "arise" or "arising" mean that the circumstances giving
rise to the Liability or Action have transpired, whether or not
such Action or Liability has been discovered, asserted or
accrued.  When used in this Agreement, the term "control" means
the possession, directly or indirectly, of the power to direct or
cause the direction of the management and policies of a Person,
whether through the ownership of voting securities, by contract
or otherwise.      

ARTICLE II
DESIGNATION AND ALLOCATION OF ASSETS
AND LIABILITIES

Section 2.1.  Conveyance of Assets.  On the Closing
Date and upon the terms and subject to the conditions set forth
in this Agreement, (i) CRC and its Affiliates shall contribute,
assign, transfer, convey and deliver the NYC Allocated Assets to
NYC and NYC shall accept from CRC and its Affiliates all of the
right, title and interest of CRC and its Affiliates in all of the
NYC Allocated Assets, and (ii) CRC and its Affiliates shall con-
tribute, assign, transfer, convey and deliver the PRR Allocated
Assets to PRR and PRR shall accept from CRC and its Affiliates
all of the right, title and interest of CRC and its Affiliates in
all of the PRR Allocated Assets.  Except as expressly provided in
this Agreement, CSX and its Affiliates, on the one hand, and NSC
and its Affiliates, on the other hand, shall retain all their
existing rights with respect to the Assets.    

Section 2.2.  Allocation of Certain Assets.  As soon as
practicable after the date hereof and in any event prior to the
Closing Date, CSX and NSC shall use their best efforts to desig-
nate the Unallocated Assets as either NYC Allocated Assets, PRR
Allocated Assets or Retained Assets.  CSX and NSC shall continue
to monitor such designation up to, and shall update such designa-
tion as of, the Closing Date.  Such designation shall be as
agreed between CSX and NSC in accordance with the following
guidelines (which shall not, unless CSX and NSC otherwise agree,
affect Assets already designated as Allocated Assets or Retained
Assets pursuant to Schedule 1 hereto):    

(a)  Unallocated FF&E shall be designated as follows:  
(i) all FF&E located in or along Allocated Assets shall be desig-
nated in the same manner as such Allocated Assets, (ii) all FF&E
located in or along Retained Assets shall be designated as Re-
tained Assets and (iii) all FF&E not designated pursuant to
clause (i) or (ii) above shall be designated as NYC Allocated
Assets or PRR Allocated Assets by value in proportion to CSX's
and NSC's respective Percentage.    

(b)  On or prior to the Closing Date, CSX, NSC and CRR
shall take an inventory of all Corporate Memorabilia, and CSX and
NSC shall value the principal items or categories, engaging an
appraiser if they cannot agree on the value thereof.  One half of
the Corporate Memorabilia by value shall be designated as NYC
Allocated Assets and the other half shall be designated as PRR
Allocated Assets by the mutual agreement of CSX and NSC.  If CSX
and NSC have not agreed on the particular items or categories of
Corporate Memorabilia to be designated as NYC Allocated Assets
and PRR Allocated Assets, respectively, they will alternate se-
lecting Corporate Memorabilia having a value of 5% (as near as
may be) of the total value of all of the Corporate Memorabilia,
with the party having first choice selected by lot.    

(c)  The parties recognize the importance of assuring
that the acquisition of CRC does not create shipping disruptions
for CRC customers and hence are hereby making arrangements to
carry out CRC's Transportation Contracts in the manner
hereinafter set forth.    

(i)  All CRC Transportation Contracts in effect as of  
the Closing Date ("Existing Transportation Contracts") shall 
remain in effect through their stated term and the
obligations thereunder shall be carried out thereafter by
CSXT   utilizing NYC Allocated Assets and NSR utilizing PRR
Allocated Assets, or pursuant to the Shared Assets
Agreements, as the case may be.    

(ii) CSXT and NSR shall allocate the responsibilities  
to serve customers under the Existing Transportation
Contracts in a manner to achieve reliability and proper
service to the customers, and the revenues and expenses
associated with the Existing Transportation Contracts and
related   services shall be allocated and accounted for
between CSXT and NSR in accordance with the Percentage
Division to the extent that the performance of contracts
allocated by Percentage Division departs from the Percentage
Division.     

(iii) The following decision rules shall be applied on  
an annual basis with tentative settlements to the extent  
required by subsection (c)(ii) on a quarterly basis 60 days  
after the end of the quarter and an annual true-up 90 days  
after the end of the year:     

(A)  For purposes of this Subsection (c), "Local"  
means a station that is not Dual and is served solely   
by CSXT or NSR, and "Dual" means a station with
line-haul service by both, including service accessed
by one or the other through trackage rights or haulage,
in each case as of the date of this Agreement giving   
effect to the effectuation of the Closing.  For
purposes of the definition of "Dual", the term includes 
(a) as to commodities that are handled by rail before   
or after shipment by water, all stations at which such  
commodities are handled in Ocean, Gulf and Great Lakes  
port cities to which each of CSXT and NSR has line haul 
service to any such station, and (b) as to intermodal   
service, all intermodal facilities in any city in which 
each of CSXT and NSR has line haul service to any   
intermodal facility.  Further, references to "Off Line" 
stations in this Subsection (c) do not include a
situation where such station is Local or Dual to NSR or
CSXT or a third railroad whose sole connection is with
CSXT or NSR.     

(B)  In addition, for purposes of this Subsection  
(c) only, the phrase "Percentage Division" shall mean   
50% CSXT - 50% NSR.     

(C)  Revenues shall be allocated as follows:

(aa) Where the Existing Transportation
Contract calls for transportation from an origin   
station located on the PRR Allocated Assets, the   
allocation shall be solely to NSR, except as
follows:       

(x)  If the origin station is Local to   
NSR and the destination station is on the NYC
Allocated Assets and Local to CSXT, then the
allocation shall be on a joint line basis 
between NSR and CSXT with the interchange to  
be negotiated between NSR and CSXT and the    
revenues to be split 30% to NSR, 30% to CSXT, 
and the remainder to be based upon a mileage  
prorate; and       

(y)  If, notwithstanding its location on 
the PRR Allocated Assets, the origin station
is Dual and the destination station is on the
NYC Allocated Assets and Local to CSXT, then
the allocation shall be solely to CSXT.      

(bb) Where the Existing Transportation
Contract calls for transportation from an origin   
station located on the NYC Allocated Assets, the   
allocation shall be solely to CSXT, except as    
follows:       

(x)  If the origin station is Local to   
CSXT and the destination station is on the    
PRR Allocated Assets and Local to NSR, then   
the allocation shall be on a joint line basis
between CSXT and NSR with the interchange to  
be negotiated between CSXT and NSR and the    
revenues to be split 30% to CSXT, 30% to NSR, 
and the remainder to be based an a mileage    
prorate; and       

(y)  If, notwithstanding its location on 
the NYC Allocated Assets, the origin station  
is Dual and the destination station is on the 
PRR Allocated Assets and Local to NSR, then   
the allocation shall be solely to NSR.     

(cc) Where the Existing Transportation
Contract calls for transportation where at least
one of the origin and destination stations is Dual
or which is located in a Shared Assets Area or
located on or accessed from the tracks of the
former Monongahela Railway or Waynesburg Southern
Railway ("MGA") (collectively, a "Specified
Station"), the following shall apply as to such
Existing Transportation Contract:       

(x)  If the other station is located on  
a PRR Allocated Asset and is Local to NSR,   
then the allocation shall be solely to NSR;   

(y)  If the other station is located on  
an NYC Allocated Asset and is Local to CSXT,  
then the allocation shall be solely to CSXT;  
and       

(z) If the other station is a Specified  
Station, then CSXT and NSR shall divide the   
allocation on the Percentage Division (by     
revenue) annually.      

(dd) Where the origin station is Off Line and 
the destination station is within the former CRC   
territory, the following shall apply as to the    
Existing Transportation Contract:       

(x)  If the destination station is
located on an NYC Allocated Asset and is
Local to CSXT, the allocation shall be solely
to CSXT.       

(y)  If the destination station is
located on a PRR Allocated Asset and is Local 
to NSR, the allocation shall be solely to     
NSR.       

(z) If the destination Station is Dual   
or is located in a Shared Assets Area or in   
MGA, CSXT and NSR shall divide the allocation 
on the Percentage Division (by revenue)
annually.      

(ee) Where the origin station is within the  
former CRR territory and the destination station   
is Off Line, the following shall apply as to the   
Existing Transportation Contracts:       

(x)  If the origin station is located on 
an NYC Allocated Asset and is Local to CSXT,
the allocation shall be solely to CSXT. 

(y)  If the origin station is located on
a PRR Allocated Asset and is Local to NSR,
the allocation shall be solely to NSR.      

(z) If the origin station is Dual or is  
located in a Shared Asset Area or in MGA,     
CSXT and NSR shall divide the allocation on   
the Percentage Division (by revenue)
annually.      

(ff) Where the origin station and the
destination station are both Off Line, CSXT and
NSR shall divide the allocation on the Percentage  
Division.      

(gg) As to any joint line Existing    
Transportation Contract which involves either CSXT 
and CRC and NSR and CRC, that Transportation
Contract shall be treated, for the purposes of the 
above rules, as if it involved an NSR or CSXT    
Local origin or off-line destination (as the case  
may be) and only that portion of the
transportation over former CRC Routes shall be
governed by the foregoing.      

(hh) Where, as of the Closing Date, CRC has a 
proportional rate Existing Transportation Contract 
which provides a through rate in combination with  
a separate proportional rate CSXT or NSR
transportation contract, the separate CSXT or NSR
transportation contract shall be unaffected and
only the CRC portion of the transportation shall
be governed by the foregoing.    

(iv) There shall be a presumption that responsibility  
for the performance of contracts shall follow the
allocations referred to above and that presumption, except
in extraordinary cases, shall control in all cases except
those provided for in Sections 2.2(c)(iii)(C)(cc)(z),  
2.2(c)(iii)(C)(dd)(z), and 2.2(c)(iii)(C)(ee)(z). 
Exceptions in those cases just mentioned shall be made to
promote   the use of efficient routes, high-quality service
and consistency of service to customers, and in that
connection there shall be a presumption against dividing a
contract between a single destination and a single origin
between the two carriers.    

(v)  In the case of a single Existing Transportation  
Contract which covers multiple origin and destination pairs, 
allocation of revenue shall be on the basis of each pair but 
CSXT and NSR shall cooperate as necessary to assure that the 
shippers under such Existing Transportation Contracts
receive the benefits (e.g., volume pricing, refunds, etc.)
to which they are entitled thereunder, notwithstanding any  
division of responsibility in providing the transportation.  

(vi) Nothing in this Section 2.2(c) shall limit any  
right of the parties to provide service to or enter into  
transportation contracts with shippers with Existing
Transportation Contracts.    

(d)  All Contracts granting any unrelated Person the
right to bury fiber optic cable longitudinally along Assets shall
be designated as Retained Assets (if any Assets in respect of
which such rights are given are Allocated Assets, NYC or PRR, as
the case may be, will license or otherwise grant rights to CRC or
its Affiliates to maintain the subject matter of the Contracts
granting such rights), except where such rights relate only to
either NYC Allocated Assets or PRR Allocated Assets, in which
case such Contracts shall be designated in the same manner as
such Allocated Assets; provided that NYC and PRR shall, to the
extent permitted under such Contracts that are designated as
Retained Assets, be given equal access to CRC's or its
Affiliate's rights to use capacity on such fiber optic cable and
shall participate equally in any other benefits of such
Contracts.    

(e)  Promptly after the date hereof, CSXT and NSR each
shall appoint up to five members of a committee (the "Contracts
Team").  The Contracts Team shall meet and not later than January
1, 1998 shall negotiate an equitable designation of all Contracts
(other than Transportation Contracts and Contracts otherwise
allocated or designated under the terms hereof) based on the
following guidelines:    

(i)  Contracts that relate predominantly to either NYC  
Allocated Assets, PRR Allocated Assets or Retained Assets  
will be designated in the same manner as such Assets.   

(ii)  Contracts (A) that benefit CRC as a whole (such  
as unfilled system purchase and supply Contracts), (B) that  
relate predominantly to Retained Assets (such as certain  
intermodal terminal Contracts) or (C) that the Contract Team 
cannot designate for whatever reason, shall be Retained  
Assets and CRC shall, to the extent permitted under the  
relevant Contract, subcontract its duties, obligations and  
rights under such Contract to NYC or PRR by value in
proportion to CSX's and NSC's respective Percentage in
accordance   with the procedure set forth in Section 8.5(b). 

(f)  Promptly after the date hereof, NSR and CSXT each
shall appoint up to five members of a committee (the
"Communications Team").  The Communications Team shall meet and
not later than January 1, 1998 shall negotiate an equitable
designation of all radio licenses held or owned by CRR, CRC or
their respective Affiliates ("Radio Licenses") based on the
following guidelines:   

(i)  In general, Radio Licenses will be designated as  
PRR Allocated Assets or NYC Allocated Assets depending on  
the designation of the Allocated Assets to which the Radio  
Licenses most relate.  The designation of Radio Licenses  
will be made in such manner as to facilitate and permit  
continued operations on the PRR Allocated Assets and the NYC 
Allocated Assets substantially as conducted before the  
Closing Date.    

(ii)  Base Radio Licenses shall be designated and  
reissued on their present frequencies to PRR or NYC,
depending on whether the Allocated Assets on or near which
the   base radio operates are NYC Allocated Assets or PRR
Allocated Assets.  If the base radio is used for train
operations on a line that includes both PRR Allocated Assets
and NYC Allocated Assets, the Radio License shall be
allocated   in the same manner as the Allocated Assets on
which the base radio is located and the party allocated such
Radio License shall grant to the other party the right to
operate a base station and other needed radio equipment on
that frequency.    

(iii)  Mobile Radio Licenses (such as those relating to 
engine radios and end-of-train-devices) will be designated  
as NYC Allocated Assets or PRR Allocated Assets giving  
effect to the relative operating needs and existing systems  
of each of NYC and/or CSXT, on the one hand, and PRR and/or  
NSR on the other hand.    

(iv)  Radio Licenses for which the Communications Team  
can not agree upon the designation as PRR Allocated Assets  
or NYC Allocated Assets prior to the Closing Date or that  
are required for CRC operations under the Shared Assets  
Agreements will be Retained Assets and held by CRR for the  
benefit of both NYC and PRR.    

(g)  In connection with its negotiations under Section
2.2(f), the Communications Team also shall not later than January
1, 1998 negotiate an equitable designation in accordance with
CSX's and NSC's respective Percentage of all Unallocated Assets
that are signal and communications equipment or facilities and
leased communications services.  This will include all signal and
communications equipment and facilities and leased services that
are (i) used by CRC system-wide, (ii) used in conjunction with
the operation of both a Route included in NYC Allocated Assets
and a Route included in PRR Allocated Assets (such as a microwave
tower), or (iii) of a character that precludes such Assets from
being logically segregated and designated by Route.  In making
its designation, the Communications Team shall consider, among
other things, Asset value and each party's relative ability to
maintain current operations and compatibility with existing
equipment. Items for which the Communications Team cannot agree
upon the designation as PRR Allocated Assets or NYC Allocated
Assets prior to the Closing Date or that are required for CRC
operations under the Shared Assets Agreements will be Retained
Assets and held for the benefit of both NYC and PRR, although it
is the intention of the parties that such signal and
communications equipment or facilities and leased communications
equipment (other than items required for CRC operations under the
Shared Assets Agreements) be designated to the extent possible as
Allocated Assets.    

(h)  System stockpiles of inventory, material and
supplies of CRR, CRC or their respective Affiliates, regardless
of location (other than such Assets designated as PRR Allocated
Assets pursuant to Section 2.7) are Pooled Assets that shall be
Retained Assets at the Closing Date unless otherwise designated
hereunder.  Promptly after the date hereof, CSXT and NSR each
shall appoint up to four members of a committee (the "Inventory
Team").  In addition to its functions pursuant to Section 2.7,
the Inventory Team shall not later than January 1, 1998 determine
whether and to what extent system stockpiles of inventory,
material and supplies of CRR, CRC or their respective Affiliates
(i) shall be designated as NYC Allocated Assets or PRR Allocated
Assets (such designation to be in proportion to CSX's and NSC's
respective Percentage) or (ii) shall be Retained Assets as to
which NYC and CSXT, on the one hand, and PRR and NSR, on the
other hand, shall have access to in accordance with the procedure
to be determined by the Inventory Team pursuant to this Section
2.2(h).  In making its identification and designation, the Inven-
tory Team shall specify that (i) inventory, materials and
supplies acquired for the purpose of fulfilling third-party Con-
tracts shall be designated in the same manner as and be applied
to fulfill such Contracts and (ii) inventory, materials and sup-
plies held for maintenance of facilities that are included in
Allocated Assets shall be designated in the same manner as such
Allocated Assets.  System stockpiles or portions thereof that are
not specifically designated by the Inventory Team shall be
Retained Assets.  The Inventory Team shall determine an appro-
priate procedure for NYC and CSXT, on the one hand, and PRR and
NSR, on the other hand, to have access to all system stockpiles
of inventory, material and supplies that are Retained Assets by
value in proportion to CSX's and NSC's respective Percentage.    

(i)  Unless otherwise agreed upon by CSX and NSC prior
to the Closing, all computer software and associated data and
engineering CADD systems owned or used by CRR, CRC or their re-
spective Affiliates which may be copied and used by both NYC and
PRR without the permission of, or payment to, any Person shall be
designated in the same manner as the hardware on which it is
stored; provided that PRR shall have the right to copy and to re-
ceive a non-exclusive license of such computer software, rights,
data, licenses and systems that are designated as NYC Allocated
Assets and NYC shall have the right to copy and to receive a
non-exclusive license of such computer software, rights, data,
licenses and systems that are designated as PRR Allocated Assets. 
Unless otherwise agreed upon by CSX and NSC prior to the Closing,
all computer software and associated data and engineering CADD
systems owned or used by CRR, CRC or their respective Affiliates
which may not be copied or used (or which may not be copied or
used without the permission of or payment to any Person) by both
NYC and PRR shall be Retained Assets, provided that CRR, CRC and
their respective Affiliates shall use their reasonable commercial
efforts to assign, license or otherwise make available on an
equal basis to each of CSX, NSC or their designees, upon request,
the nonexclusive use of all or any portion of such software,
data, licenses and systems.  Notwithstanding the foregoing, no
party shall be required to maintain any item of software on
computer equipment included in Allocated Assets, or be required
to make license or other payments for such software, for a period
longer than 12 months.    

(j)  To the extent not otherwise agreed upon by CSX and
NSC prior to the Closing Date, all Pooled Assets shall be Re-
tained Assets available for the benefit of both CSXT and NYC, on
the one hand, and NSR and PRR, on the other hand in accordance
with CSX's and NSC's respective Percentage.  If CSX and NSC agree
prior to the Closing Date that specified Pooled Assets (or groups
of Pooled Assets) should be allocated to NYC or PRR, such speci-
fied Pooled Assets shall, at the Closing, be designated as NYC
Allocated Assets or PRR Allocated Assets, as the case may be.    

Section 2.3.  System Support Operations; Dispatching. 
(a) The parties recognize that each SSO Facility has been used by
CRR and CRC to provide a support function benefitting the CRC
rail system as a whole (e.g., system-wide crew management or
signal repair support functions).  It is expected that each of
CSXT and NYC, on the one hand, and NSR and PRR, on the other
hand, may require the use or benefit of or access to the func-
tions and support provided by the SSO Facilities for a period of
time after the Closing Date.  Accordingly, the SSO Facilities
shall be included in Retained Assets and will continue to be
owned by CRR, CRC or its Affiliates.  Until a party terminates
its use of an SSO Facility as provided below, (i) the costs of
operating such SSO Facility shall be included in Corporate Level
Liabilities and (ii) such SSO Facility shall be operated for the
benefit of both CSXT and NYC, on the one hand, and NSR and PRR,
on the other hand, based on their operating and administrative
needs.    

(b)  Each of CSXT and NYC, on the one hand, and NSR and
PRR, on the other hand, shall have the right, upon six months'
prior written notice, to notify the other that it no longer needs
the use of or access to all or any specified portion of the func-
tions performed at a particular SSO Facility.  If the party
receiving such notice notifies the other party within thirty days
of receipt of such notice that it no longer needs the use of or
access to all or the same specified portion of the functions
performed at a particular SSO Facility, then the effective date
of the notice sent by the receiving party shall be deemed to be
the same as that of the notice which it received from the
notifying party.  If the notice relates to less than the entire
SSO Facility, it shall state with specificity the particular
func- tion(s) and/or Continuing CRC Management position(s)
covered by the notice.  Notices may be given at any time before
or after the Closing Date and in each case shall specify an
effective date which shall be a date on or after the Closing Date
that is not less than six months after the date such notice is
given. From and after the effective date of a notice, all costs
associated and incurred after the effective date of such notice
with the SSO Facility (or portion thereof) and Continuing CRC
Management positions identified in the notice shall cease to be
Corporate Level Liabilities and will be allocated entirely to and
be the responsibility of the party continuing to use the
functions performed at the SSO Facility or portion thereof. 
Costs associated with an SSO Facility (or portion thereof) or the
Continuing CRC Management employees performing work at that SSO
Facility which are not terminated by such notice but continue to
be incurred for the benefit of both parties will continue to be
Corporate Level Liabilities.  Notwithstanding the foregoing,
Separation Costs associated with Continuing CRC Management
employees after the Control Date shall be allocated and paid as
provided in Article VI.    

(c)  In the case of an SSO Facility as to which both
CSXT and NYC, on the one hand, and NSR and PRR, on the other
hand, have discontinued use of the entire SSO Facility by each
giving six-month termination notices that have become effective,
CSX and NSC will cause CRC and its Affiliates to take such action
as may be appropriate to discontinue the use of or provide for
the disposition of such SSO Facility (which may include a
disposition to NYC or PRR), and costs associated with such SSO
Facility between the effective date of the second notice and such
discontinuance or disposition shall be Corporate Level
Liabilities and the cash proceeds, if any, of such discontinuance
or disposition shall, subject to Section 4.4, be for the benefit
of CRC.    

(d)  The full costs of maintaining and operating SSO
Facilities shall include all direct and indirect costs (excluding
return on investment and system overheads), compensation and
benefits, purchased services, insurance, facility costs and
computer processing costs.  CSX and NSC shall establish
appropriate accounting systems and controls designed to capture
and track such costs.    

(e)  To facilitate the division of dispatching
functions currently performed for the five CRC operating
divisions, NSC and CSX agree that the territorial boundaries of
the operating divisions will be changed and dispatching functions
will be assigned and transferred as follows:    

(i)  Dearborn division:  The Dearborn division office
building will be included in PRR Allocated Assets.  All
dispatching functions at such facility will be assigned to
PRR and NSR except (A) those for dispatching the Cleveland
East, Cleveland terminal and other Dearborn division
segments included in the NYC Allocated Assets, which
functions will be assigned and transferred to NYC and CSXT,
and (B) those for dispatching of the Detroit Shared Assets
Area which functions will be assigned and transferred to CRC
and will   be relocated to a neutral site.    

(ii)  Indianapolis division:  The Indianapolis  
division office building will be included in NYC Allocated
Assets.  All dispatching functions at such facility will be
assigned to NYC and CSXT except those for dispatching the
Marion branch, the Cincinnati line, the West Virginia
secondary and other Indianapolis division segments included
in the PRR Allocated Assets, which functions will be
assigned and transferred to PRR and NSR.    

(iii)  Pittsburgh division:  The Pittsburgh division
office building will be included in PRR Allocated Assets. 
All dispatching functions at such facility will be assigned
to PRR and NSR except those for dispatching Pittsburgh
division segments included in the NYC Allocated Assets,
which functions will be assigned and transferred to NYC and
CSXT.    

(iv)  Philadelphia division (Mt. Laurel, NJ):  The  
Philadelphia division office building will be included in
the Retained Assets.  All dispatching functions at such
facility will be assigned to PRR and NSR except (A) those
for dispatching the Trenton line, the River line, the Popes
Creek secondary, the Herbert secondary, the Landover line
and other Philadelphia division segments included in the NYC
Allocated Assets, which functions will be assigned and
transferred to NYC and CSXT, and (B) those for dispatching
the North Jersey Shared Assets Area and the South
Jersey/Philadelphia Shared Assets Area and segments included
in the Re tained Assets, which functions will be assigned to
CRC.    

(v)  Albany division:  The Albany division office  
building will be included in the NYC Allocated Assets.   
All dispatching functions will be assigned to NYC and CSXT
except those for dispatching the Southern tier, including
the Corning secondary, the New Jersey transit line, the
Buffalo line and other Albany division segments included in
the PRR Allocated Assets, which functions will be assigned
and transferred to PRR and NSR.  The parties intend that the
dispatching desks, equipment and similar property associated
with a dispatching function will, to the extent practicable,
follow the assignment of that function to the party
designated pursuant to clauses (i) through (v) above, to
enable such party to perform dispatching necessary in
connection with the Assets allocated to or used by such
party.  In addition, the parties recognize that interim
dispatching services may be required to be provided to each
other for the above Routes during a brief interim period
(which shall be no longer than reasonably necessary) and
that the parties may charge reasonable fees for such
services.    

Section 2.4.  Transition Period Accommodation.  (a) To
the extent that (i) the CRR headquarters office building in
Philadelphia, PA or (ii) the CRR information technology center in
Philadelphia, PA (both of which are NYC Allocated Assets) were
used by CRR or CRC prior to the Closing Date for the benefit of
the CRR and CRC system as a whole, CSX will (or will cause CSXT
or NYC to) furnish and make available for the benefit of NSC or
its Affiliates access to and use of such NYC Allocated Assets
(including, without limitation, office and other space,
equipment, computer systems, and data and other information) as
are necessary or convenient in order to reasonably accommodate
the needs of NSC, NSR and PRR for the services and functions
performed at such facilities for a transition period not to
exceed (A) twenty-four months following the Closing Date in
respect of the CRR headquarters office building in Philadelphia,
PA and (B) six months following the Closing Date (extendable for
an additional six months at NSC's option) in respect of the CRR
information technology center in Philadelphia, PA.  CSX may
accommodate such needs of NSC, NSR and PRR for such services and
functions using premises in Philadelphia, PA other than the
premises referred to in clauses (i) and (ii) of this Section
2.4(a); provided that NSC consents to such arrangement, such
consent not to be unreasonably delayed or withheld.  CSX, CSXT or
NYC, as the case may be, shall furnish and make available to NSC,
NSR or PRR such NYC Allocated Assets at those facilities as may
be reasonably requested by NSC, NSR or PRR; provided that the
nature and scope of the use of such NYC Allocated Assets shall
not be greater than the nature and scope of the use of such NYC
Allocated Assets for the benefit of the CRR and CRC system prior
to the Closing Date.  CSX may charge NSC, NSR or PRR, as the case
may be, charges calculated at fair market value by CSX and NSC
for such use of such NYC Allocated Assets.    

(b)  To the extent that (i) the CRC car shop at
Hollidaysburg, PA or (ii) the CRC locomotive shop at Altoona, PA
(both of which are PRR Allocated Assets) were used by CRR or CRC
prior to the Closing Date for the benefit of the CRR and CRC
system as a whole, NSC will (or will cause NSR or PRR to)
reasonably accommodate the needs of CSX, CSXT or NYC for the
services and functions performed at such facilities for a
transition period not to exceed twenty-four months following the
Closing Date.  NSC may accommodate such needs of CSX, CSXT and
NYC for such services and functions using premises other than the
premises referred to in clauses (i) and (ii) of this Section
2.4(b); provided that CSX consents to such arrangement, such
consent not to be unreasonably delayed or withheld.  NSC, NSR or
PRR, as the case may be, shall furnish and make available to CSX,
CSXT or NYC such services and functions at those facilities as
may be reasonably requested by CSX, CSXT or NYC; provided that
the nature and scope of such services and functions shall not be
greater than those which were provided in respect of the NYC
Allocated Assets by those facilities prior to the Closing Date. 
NSC may charge CSX, CSXT or NYC, as the case may be, charges
calculated at fair market value by CSX and NSC for such services
and functions.    

(c)  In complying with Section 2.4(a) and Section
2.4(b), (i) the accommodating party will provide or make
available the Assets or the services, functions and systems of,
and data and information from, the specified facilities to the
extent it can reasonably do so and (ii) if the accommodating
party so requests, the party accommodated will use its reasonable
commercial efforts to discontinue its need for such Assets or
services, functions, information, systems and data at the
earliest time practicable following, but not later than
twenty-four months after, the Closing Date (or earlier time as
provided in Section 2.4(a) in respect of the information
technology center in Philadelphia, PA).  Nothing herein shall
preclude a party from agreeing to make available the Assets or
services, functions and systems of and information and data from,
its facilities to the using party after such maximum periods
provided for in Sections 2.4(a) and 2.4(b), but it shall not be
required to do so.    

(d)  CSX will (or will cause CSXT or NYC to) make
available to CRR, CRC and their respective Affiliates the CRR
headquarters office building and the CRR information technology
center in Philadelphia, PA (both of which are NYC Allocated
Assets) for use by those employees identified in clause (b) of
the definition of "Continuing CRC Management" in Section 1.1. 
Unless otherwise agreed to by CSX and NSC, CRR, CRC and their
respective Affiliates shall have the right to use those
facilities for such Continuing CRC Management employees to
perform such general, administrative and technical services and
functions for an interim period not to exceed (i) twenty-four
months following the Closing Date in respect of the CRR
headquarters office building in Philadelphia, PA and (B) six
months following the Closing Date (extendable for an additional
six months at NSC's option) in respect of the CRR information
technology center in Philadelphia, PA.  CSX may move such
facilities to new premises or may move the Continuing CRC
Management using the facilities to new premises; provided that
NSC consents to such arrangement, such consent not to be
unreasonably withheld and; provided further that CSX and NSC
agree on the new fair market value of such facilities which will
be Corporate Level Liabilities pursuant to this Section 2.4(d). 
Until a party terminates its use of the support functions and
services of any such Continuing CRC Management employee as
provided below, the costs of employing such employee and the fair
market value of related facilities shall be Corporate Level
Liabilities and such employee's services will be available for
the benefit of both CSXT and NYC, on the one hand, and NSR and
PRR, on the other hand, based on the operating and administrative
needs of each.    

(e)  Each of CSX and NSC and their respective
Affiliates shall have the right, upon six months' prior written
notice, to notify the other party that the notifying party no
longer needs the support functions and services provided by any
one or more of the Continuing CRC Management employees referred
to in Section 2.4(d).  The notice shall state with specificity
the particular Continuing CRC Management position(s) covered by
the notice.  If the party receiving such notice notifies the
other party within thirty days of receipt of such notice that it
no longer needs the support functions and services provided by
the same (or more) continuing CRC Management employees as are
included in the first notice, then the effective date of such
second notice shall be deemed to be the same as that of the first
notice.  Notices may be given at any time before or after the
Closing Date and in each case shall specify an effective date on
or after the Closing Date, but not less than six months after the
date such notice is given.  From and after the effective date of
such a notice, all costs associated with the Continuing CRC
Management positions identified in the notice shall cease to be
Corporate Level Liabilities but shall be allocated entirely to
and be the responsibility of the party continuing to use the
functions and services provided by such Continuing CRC Management
positions; provided that in the case of Continuing CRC Management
positions as to which both parties have given termination notices
that have become effective, all costs associated with such
Continuing CRC Management positions after the date the second
termination notice becomes effective shall be Corporate Level
Liabilities.  Notwithstanding the foregoing, Separation Costs
associated with all Continuing CRC Management employees after the
Closing Date shall be allocated and paid as otherwise provided in
Article VI.    

Section 2.5.  Trackage, Haulage, Shared Asset and Other
Operating Agreements.  On the Closing Date and upon the terms and
subject to the conditions set forth in this Agreement, each of
CRC, CSXT and NSR shall execute and deliver, and the parties
shall cause their respective Affiliates and NYC and PRR to
execute and deliver, the following agreements to which it is a
party:    

(a)  The Trackage Rights Agreements:  A Trackage Rights
Agreement covering each of the Routes listed in Item 1 of
Schedule 4 and containing the terms and provisions applicable to
such Route as set forth in Item 1 of Schedule 4 will be executed
by the parties designated in such Item 1.    

(b)  The CSXT/NSR Haulage Agreements:  A CSXT/NSR
Haulage Agreement covering each of the Routes listed in Item 2 of
Schedule 4 and containing the terms and provisions applicable to
such Route as set forth in Item 2 of Schedule 4 will be executed
by the parties designated in such Item 2.    

(c)  The Shared Assets Agreements.    

(d)  The Other Operating Agreements (in respect of
Other Operating Agreements for which the relevant Exhibit hereto
sets forth all or some of the terms of an agreement rather than
the form of agreement, the parties shall use their best efforts
to agree to the form of such Other Operating Agreements prior to
the Closing Date).    

Section 2.6.  Equipment.  The parties intend that all
Equipment will be allocated between NYC and PRR (either as
Allocated Assets or as Retained Assets which are subject to the
NYC Equipment Agreement or the PRR Equipment Agreement) by series
and condition such that NYC and PRR each receives Equipment by
value in proportion to CSX's and NSC's respective Percentage. 
Disputes concerning such allocation shall be subject to binding
arbitration under Section 11.12.  After the Equipment has been
allocated, the parties may agree in their sole discretion to
changes in the allocation giving consideration to other factors. 
In furtherance of the foregoing sentence, the parties will
appoint representatives to various teams to consider appropriate
adjustments to allocations of Equipment as described below:    

(a)  Locomotive Equipment.  Promptly after the date
hereof, CSXT and NSR shall each appoint up to three members of a
committee (the "Locomotive Team").  The Locomotive Team shall
meet not later than January 1, 1998, to consider an adjustment to
the allocation of locomotive Equipment (including appurtenances
and assigned or related equipment such as locomotive radios) to
NYC and PRR, taking into consideration the following guidelines:  

(i)  The Locomotive Team shall agree upon parameters to 
be considered in any adjustment to the allocation of
locomotive Equipment to NYC and PRR, including CRC's book
value, actual numbers of locomotives, horsepower, tractive
effort, powered axles, ownership and encumbrances, age and
condition.    

(ii)  The CSXT appointees and the NSR appointees on the 
Locomotive Team shall separately develop and present to
each other proposals for any adjustments to the allocation
of locomotive Equipment to NYC and PRR.    

(iii)  In its negotiations, the Locomotive Team may  
consider CRC yard service, minimizing maintenance costs,
enhancing reliability, and meeting service needs.  The
Locomotive Team may consider trades of CSXT and NSR
locomotives to avoid the division of small groups of
locomotive Equipment and to minimize the number of different
models each would have as a result of the allocation.   

(iv)  If agreement is not reached prior to March 31,  
1998, the Locomotive Team will submit a list of disputed  
issues for resolution to the chief operating officers of  
CSXT and NSR.    

(b)  Rolling Stock Equipment.  Promptly after the date
hereof, CSXT and NSR each shall appoint up to four members of a
committee (the "Rolling Stock Team").  The Rolling Stock Team
shall meet not later than  January 1, 1998 to consider an
adjustment to the allocation of rolling stock Equipment
(including cabooses and non-revenue rolling stock but excluding
Work Equipment) to NYC and PRR, taking into consideration the
following guidelines:    

(i)  Consideration may be given to class and builder's  
lot, series within a given AAR car type and AAR Depreciated  
Value.  Consideration may be given to splitting between NYC  
and PRR so as to minimize ongoing maintenance and repair  
cost, facilitate the assignment of car reporting marks,  
permit customary and efficient handling, movement and
interchange of rolling stock in compliance with the AAR Car  
Service Rules and other applicable industry requirements.   

(ii)  All rolling stock Equipment that CSXT and NSR  
agree is either (A) obsolete or (B) damaged beyond
economical repair necessary to return the same to service,
may be grouped in a separate category and allocated between
NYC and PRR in accordance with CSX's and NSC's respective
Percentage (based on AAR Depreciated Value).    

(iii)  Consideration will be given to traffic and
service requirements on the Routes comprising the Allocated  
Assets based on the most current traffic information
(including current and anticipated traffic density, customer 
needs and transportation requirements).    

(iv)  Head-of-train-devices and end-of-train-devices  
may be allocated between NYC and PRR based on current
transportation needs and train starts in respect of the NYC  
Allocated Assets and PRR Allocated Assets, as the case may  
be.    

(v)  If agreement is not reached prior to March 31,  
1998, the Rolling Stock Team will submit a list of disputed  
issues to the chief operating officers of CSXT and NSR.      

(c)  Work Equipment.  Promptly after the date hereof,
NSR and CSXT each shall appoint up to three members of a
committee (the "Work Equipment Team").  The Work Equipment Team
shall, not later than January 1, 1998, meet to consider an
adjustment to the allocation of all Work Equipment that is part
of the Unallocated Assets.  The Work Equipment Team may allocate
such Work Equipment to NYC and PRR by value in proportion to
CSX's and NSC's respective Percentage based on category of
equipment, then model, then age and then condition.  If agreement
is not reached prior to March 31, 1998, the Work Equipment Team
will submit a list of disputed issues to the chief operating
officers of CSXT and NSR.      

(d)  Assignment.  CSXT and NSR recognize that it may be
desirable to cause CRC to assign and transfer ownership of
certain of the allocated Equipment to NYC and PRR as part of the
NYC Allocated Assets or the PRR Allocated Assets, respectively,
to the extent such transfer is consistent with existing leases
and financing agreements relating to such Equipment.  If CSXT and
NSR agree, Indebtedness related to Equipment may also be assigned
to and assumed by NYC and PRR as part of the NYC Allocated
Liabilities and the PRR Allocated Liabilities, respectively.   

(e)  Lease of Equipment.  Equipment that is allocated
to NYC and PRR as provided in this Section 2.6  will be made
available to NYC and PRR as follows:  (i) Equipment that is
included in the Retained Assets shall be leased by CRC or its
Affiliates to NYC or PRR, as the case may be, pursuant to the NYC
Equipment Agreement or the PRR Equipment Agreement and will
thereupon be leased or otherwise made available by NYC to CSXT
and by PRR to NSR pursuant to the CSXT Equipment Agreement or the
NSR Equipment Agreement, respectively; and (ii) Equipment that
CSXT and NSR agree shall be assigned and transferred by CRC or
its Affiliates to NYC or PRR, as the case may be, will be
included in the NYC Allocated Assets or the PRR Allocated Assets,
respectively, and will be leased or otherwise made available by
NYC to CSXT and PRR to NSR  pursuant to the CSXT Equipment
Agreement or the NSR Equipment Agreement, respectively. 
Liabilities arising from the ownership, operation and maintenance
of Equipment shall be borne by the parties as provided for in the
relevant Equipment Agreements.  If the foregoing arrangements are
impracticable in respect of any Equipment due to the requirements
of any Contracts relating to such Equipment, the parties will
negotiate other arrangements to achieve substantially the same
effect.    

(f)  Equitable Adjustment.  The parties recognize that
the allocation of Equipment in general and the allocation of
Equipment that is collateral with respect to Indebtedness may not
reflect precisely CSX's and NSC's respective Percentage and that
an equitable adjustment may be required with respect to Corporate
Level Liabilities or otherwise to assure that each of NYC and PRR
receives the benefits and bears the costs of Equipment as nearly
as practicable in proportion to CSX's and NSC's respective
Percentage.  The Locomotive Team, the Rolling Stock Team and the
Work Equipment Team, assisted as necessary by CSX and NSC
accounting personnel, shall specify an appropriate adjustment
mechanism which may include, but need not include or be limited
to, trades between CSXT and NSR of locomotive Equipment, rolling
stock Equipment and/or Work Equipment.    

Section 2.7.  Inventory at Altoona and Hollidaysburg. 
(a)  As soon as practicable before the Closing Date, the
Inventory Team shall determine the Base Inventory.  "Base
Inventory" (i) will consist of and mean all rolling-stock-related
and locomotive-related inventory and supplies (including
rolling-stock-related and locomotive-related system stockpiles)
of CRR, CRC or their respective Affiliates located at the Altoona
and Hollidaysburg shops as of a date at least thirty days prior
to the anticipated Closing Date to be agreed by the Inventory
Team, and (ii) will exclude (A) all obsolete or damaged material
and supplies and (B) all inventory acquired for the purpose of
fulfilling third-party Contracts which inventory will follow and
be applied to fulfillment of such Contracts.  The Inventory Team
will code and group the items of inventory, materials and
supplies included in the Base Inventory as "new,"
"reconditioned," "re-usable," and the like, and will value the
groups based on CRC's material costs or other mutually agreeable
methodology (excluding additives and overheads).  The sum of the
values of the groups will be the value of the Base Inventory.   

(b)  Rolling-stock-related and locomotive-related
inventory and supplies (including rolling-stock-related and
locomotive-related system stockpiles) of CRR, CRC and their
respective Affiliates located at the Altoona and Hollidaysburg
shops as of the Closing Date will be included in the PRR
Allocated Assets.  To the extent that, after the Closing Date,
any work is performed at the request and for the account of CSXT
or NYC at the Altoona shop or the Hollidaysburg shop pursuant to
Section 2.4(b), CSXT and NYC will not be charged for inventory
and supplies used in such work up to an amount of inventory and
supplies equal to 42% of the total value of the Base Inventory,
but only to the extent that such work requires material and
supplies of the types included in the Base Inventory. 
Notwithstanding the foregoing, NSR or PRR will separately charge
CSXT or NYC for the fair market value of work performed for the
account of CSXT or NYC.    

Section 2.8.  Allocated and Retained Liabilities.  The
parties agree that on and as of the Closing Date (x) NYC shall
assume and agree to pay, perform and discharge as and when due
all of the NYC Allocated Liabilities, (y) PRR shall assume and
agree to pay, perform and discharge as and when due all of the
PRR Allocated Liabilities, and (z) CRC and its Affiliates shall
retain and pay, perform and discharge as and when due all of the
Retained Liabilities.  In furtherance of the foregoing, the
parties agree that, in addition to Employee Related Liabilities
that are designated as Allocated Liabilities or Retained
Liabilities under Article VI, the Allocated Liabilities and the
Retained Liabilities shall consist of the following:    

(a)  All Liabilities of CRR, CRC or their Affiliates,
other than Environmental Liabilities (which are expressly
allocated pursuant to Section 2.8(b)), Corporate Level
Liabilities (which are expressly allocated pursuant to Section
2.8(f)), Employee Related Liabilities (which are expressly
allocated pursuant to Article VI), Liabilities referred to in
Section 2.9 or Liabilities expressly allocated to any Person
pursuant to any of the Ancillary Agreements, including
Liabilities associated with the handling and disposition of
Actions, that (i) arise on or after the Closing Date and relate
predominantly to NYC Allocated Assets shall be NYC Allocated
Liabilities, and (ii) arise on or after the Closing Date and that
relate predominantly to PRR Allocated Assets shall be PRR
Allocated Liabilities.    

(b)  Environmental Liabilities (other than
Environmental Liabilities expressly allocated to any Person
pursuant to any of the Ancillary Agreements) shall be designated
as follows:  (i) Environmental Liabilities that relate
predominantly to NYC Allocated Assets shall be NYC Allocated
Liabilities; (ii) Environmental Liabilities that relate
predominantly to PRR Allocated Assets shall be PRR Allocated
Liabilities; and (iii) Environmental Liabilities that do not
relate predominantly to Allocated Assets shall be Corporate Level
Liabilities; provided that, in the case of Environmental
Liabilities allocated to either NYC or PRR pursuant to clause (i)
or (ii) above, NYC or PRR, as the case may be, will be reimbursed
by CRC as amounts are expended by NYC or PRR, as the case may be,
in respect of an Environmental Liability to the extent of the
amount of the reserve existing in respect of such Environmental
Liability as of April 8, 1997, reduced by any payments made and
charged against such reserve prior to the Closing Date, except
that NYC or PRR, as the case may be, will repay the amounts under
this Section 2.8(b) to CRC to the extent that they receive the
proceeds of any insurance recoveries in respect of an Allocated
Liability which exceed such Allocated Liability net of such
payments made.    

(c)  All Liabilities (other than Liabilities expressly
allocated to any Person pursuant to any of the Ancillary
Agreements) associated with the handling and disposition of FELA
Claims made on or after the Control Date shall be NYC Allocated
Liabilities, PRR Allocated Liabilities or Corporate Level
Liabilities based upon the final allocation under this Article II
of the Asset where the incident or incidents giving rise to the
FELA Claim occurred, or, if the FELA Claim arises from an
incident or incidents occurring at more than one location, based
upon the final allocation under this Article II of the Asset most
significantly involved.    

(d)  Except as provided in Section 2.8(a), Section
2.8(b) or Section 2.8(c), all Liabilities associated with the
handling and disposition of Actions arising from incidents which
occur in part prior to the Closing Date and in part on or after
the Closing Date shall be allocated as follows:    

(i)  that portion of the Liability which is fairly
attributable to incidents occurring prior to the Closing
Date shall be Corporate Level Liabilities; and    

(ii)  that portion of the Liability which is fairly
attributable to incidents occurring on or after to the
Closing Date shall be NYC Allocated Liabilities, PRR
Allocated Liabilities or Corporate Level Liabilities based
upon the final allocation under this Article II of the Asset
where the incident or incidents giving rise to the Action
occurred, or, if the Action arises from an incident or
incidents occurring at multiple locations, based upon the
final allocation under this Article II of the Asset most
significantly involved.    

(e)  Except as provided in Section 2.9(b) or Section
2.9(c), all Liabilities incurred after April 8, 1997 relating to
the Merger Agreement, including without limitation Liabilities
for CRR Shares, if any, that are put pursuant to the Pennsylvania
Control Transaction Law, shall be Retained Liabilities.    

(f)  Except as provided in Sections 2.8(b) through (e),
all Liabilities that arise prior to the Closing Date and all
Corporate Level Liabilities shall be Retained Liabilities.    

Section 2.9.  Other Liabilities.  (a)  Each of CSX and
NSC shall bear its own Transaction Expenses.    

(b)  CSX shall bear and pay all of CSX's, CRR's, the
Surviving Corporation's and their respective Affiliates'
Liabilities to current or former CRR shareholders with respect to
the handling (which CSX shall control) and disposition (which CSX
shall control) of claims pending on April 8, 1997 in shareholder
Actions pending on April 8, 1997 (other than Actions brought by
NSC or its Affiliates) together with all related litigation costs
(which shall not include CRR legal fees incurred prior to April
8, 1997).    

(c)  CSX's, Green's, CRR's and the Surviving
Corporation's, on the one hand, and NSC's and AAC's on the other
hand, Liability with respect to the handling (which shall be
controlled by the liability bearing party) and disposition (which
shall be controlled by the liability bearing party) of
disclosure-based claims based on disclosures made prior to April
8, 1997 brought by current or former CRR shareholders in
connection with the Merger Agreement, the Amended Second Offer
(as defined in the April 8 Agreement) or the transactions
contemplated thereby based on the accuracy or completeness of
information supplied by such party, together with all related
litigation costs (which shall not include CRR legal fees incurred
prior to April 8, 1997), shall be borne solely by CSX or NSC,
respectively.    

Section 2.10.  Interline Accounts and Allocation.   
(a)  The parties acknowledge that interline railroads often
allocate certain assets and liabilities arising from interline
activities between and among themselves on the basis of AAR or
industry agreements and rules, including, without limitation, AAR
rules for the allocation of freight revenues and freight loss and
damage claims.  If any Asset or Liability which is allocated
under this Agreement to NYC or PRR would, in the usual course of
business under applicable AAR or industry agreement, rule or
practice, be allocated between or among participating interline
railroads, then the subsequent allocation of that Asset or
Liability between or among NYC, PRR and/or any railroad
subsidiary of either CSX or NSC under that agreement, rule or
practice shall not in any manner be affected by this Agreement
and the parties shall accept and be governed by that subsequent
reallocation under the applicable AAR or industry agreement, rule
or practice, notwithstanding any provision of this Agreement
which may be construed or interpreted to the contrary, including,
without limitation, the provisions of Section 2.2 and Section
2.8.  The parties shall also accept and be governed by any
provision of any AAR or industry agreement, rule or practice
applicable to processes and procedures for dealing with the
circumstances underlying any such subsequent reallocation
(including without limitation the investigation and processing of
third party claims), notwithstanding any provision of this
Agreement which may be construed or interpreted to the contrary,
including, without limitation, the provisions of Section 8.14 and
Section 10.2.    

(b)  If any dispute, controversy or claim arises with
regard to the subsequent reallocation of any portion of any asset
or liability allocated under Section 2.10(a), and the pertinent
AAR or industry agreement, rule or practice provides for
arbitration, then the arbitration provisions of that agreement,
rule or practice shall, as to that subsequent reallocation,
supersede any provisions of this Agreement which may be construed
or interpreted to the contrary, including, without limitation,
the arbitration provisions of Section 11.12.    

Section 2.11.  Insurance Proceeds.  Except as otherwise
provided in this Agreement, the proceeds of any insurance
recoveries from insurance carried by CRR, CRC or their respective
Affiliates on or prior to the Closing Date covering Assets,
Retained Liabilities or Allocated Liabilities, which are received
on or after the Closing Date, shall accrue to the benefit of and
be held by or paid over to CRC, NYC or PRR in proportion to the
obligation each bears under this Agreement for the particular
Liabilities to which the insurance recoveries are applicable.     

ARTICLE III 
CLOSING AND CLOSING DATE    

Section 3.1.  Closing.  Subject to the terms and
conditions of this Agreement, the closing of the transactions
contemplated in Article II and Article VI (the "Closing") shall
take place at a place to be mutually agreed by CSX and NSC on the
third business day following the date on which all of the
conditions set forth in Article IX shall have been satisfied or
waived, or at such other time, date and place as the parties
shall agree upon (the "Closing Date").    

Section 3.2.  Pre-Closing Actions.  Prior to the
Closing, CRR shall cause CRC to establish NYC and PRR as wholly
owned Subsidiaries of CRC and shall cause CRC and NYC to enter
into the NYC LLC Agreement and shall cause CRC and PRR to enter
into the PRR LLC Agreement.    

Section 3.3.  Closing Deliveries.  At the Closing:   

(a)  CSX and CSXT shall deliver or cause to be
delivered to NSC the following documents:    

(i)  an executed counterpart of the CSXT Equipment  
Agreement;    

(ii)  an executed counterpart of the CSXT Operating  
Agreement;    

(iii)  an executed counterpart of each of the Trackage  
Rights Agreements to which CSXT or its Affiliates is to be a 
party;    

(iv)  an executed counterpart of each of the CSXT/NSR  
Haulage Agreements to which CSXT or its Affiliates is to be  
a party;    

(v)  an executed counterpart of each of the Shared  
Assets Agreements and Other Operating Agreements to which  
CSXT or its Affiliates is to be a party; and    

(vi)  such other and further certificates, assurances  
and documents otherwise necessary for the consummation of  
the transactions contemplated by this Agreement and the  
Ancillary Agreements.    

(b)  NSC and NSR shall deliver or cause to be delivered
to CSX the following documents:    

(i)  an executed counterpart of the NSR Equipment  
Agreement;    

(ii)  an executed counterpart of the NSR Operating  
Agreement;    

(iii)  an executed counterpart of each of the Trackage  
Rights Agreements to which NSR or its Affiliates is to be a  
party;    

(iv)  an executed counterpart of each of the CSXT/NSR  
Haulage Agreements to which NSR or its Affiliates is to be a 
party;    

(v)  an executed counterpart of each of the Shared  
Assets Agreements and Other Operating Agreements to which  
NSR or its Affiliates is to be a party; and    

(vi)  such other and further certificates, assurances  
and documents otherwise necessary for the consummation of  
the transactions contemplated by this Agreement and the  
Ancillary Agreements.    

(c)  CRR Parent, CRR and CRC (for itself and, if
applicable, as CRR's successor entity) shall deliver or cause to
be delivered to each of CSX and NSC:    

(i)  the NYC Equipment Agreement executed by CRC and  
NYC;    

(ii)  a counterpart of the CSXT Equipment Agreement
executed by NYC;    

(iii)  the PRR Equipment Agreement executed by CRC and  
PRR;    

(iv)  a counterpart of the NSR Equipment Agreement
executed by PRR;    

(v)  a counterpart of the CSXT Operating Agreement
executed by NYC;    

(vi)  a counterpart of the NSR Operating Agreement
executed by PRR;    

(vii)  an executed counterpart of each of the Trackage  
Rights Agreements, the CSXT/NSC Haulage Agreements, the  
Shared Assets Agreements and the Other Operating Agreements  
to which CRC or its Affiliates is a party;    

(viii)  the Tax Allocation Agreement executed by Green, 
CRR, CRC, CRR Industries, PRR and NYC;    

(ix)  the NYC LLC Agreement executed by CRC;    

(x)  the PRR LLC Agreement executed by CRC;    

(xi)  a Capital Contribution, Assignment and Assumption 
Agreement executed by CRC and NYC to effectuate the
transfer of the NYC Allocated Assets and the NYC Allocated
Liabilities to NYC;    

(xii)  a Capital Contribution, Assignment and
Assumption Agreement executed by CRC and PRR to effectuate
the  transfer of the PRR Allocated Assets and the PRR
Allocated Liabilities to PRR; and    

(xiii)  such other and further certificates, assurances 
and documents otherwise necessary for the consummation of  
the transactions contemplated by this Agreement and the  
Ancillary Agreements.       

ARTICLE IV
CRR PARENT, CRR AND CRC GOVERNANCE AND FUNDING

Section 4.1.  Pre-Control Date Matters.  (a)  Unless
expressly permitted in another agreement between CSX and NSC,
neither CSX nor NSC will, without the prior agreement of the
other, agree to any modifications of the terms and conditions of,
or give any consent or waiver under, the Merger Agreement,
including without limitation under Section 4.1 of the Merger
Agreement.  Without limiting the foregoing, neither CSX nor NSC
will, without the other's prior consent, agree to any
determinations with respect to, direct CRR to take any action
with respect to, or object to or prohibit any action with respect
to CRR's employee stock ownership plan, pension plan, stock
employee compensation trust or any other CRR benefit plan,
program, arrangement or other contract, or any trust or other
funding arrangement that is intended to be used in whole or in
part to provide or fund benefits under any CRR or CRC benefit
plans, programs, arrangements or contracts.  In addition, CSX
will consult and agree with NSC prior to providing any notices to
CRR under the Merger Agreement and shall promptly provide NSC
with copies of all written notices provided by CSX to CRR or
received by CSX from CRR under the Merger Agreement.    

(b)  Prior to the Control Date CRR shall be governed in
accordance with the terms of the Amended and Restated Voting
Trust Agreement.    

Section 4.2.  Post-Control Date CRC Governance.  CRR
Parent shall vote all of the shares in the capital stock of CRC
and all of the parties shall take all other necessary or
desirable action within their respective control to effectuate
the following:    

(a)  Following the Control Date, the business and
affairs of CRC shall be managed under the direction of the CRC
Board consisting of six persons divided into two classes of three
directors.  Three directors shall be designated by CSX (the "CSX
Directors") and three directors shall be designated by NSC (the
"NSC Directors").    

(b)  Approval of the CRC Board shall be required for
all Major Decisions of CRC.  The power of the CRC Board to
approve such actions and decisions shall be exclusive to the CRC
Board, and no officer may take any such action or make any such
decision without the approval of the CRC Board.  Any action or
decision of the CRC Board, whether at a meeting of the CRC Board
or by written consent, may only be taken if approved by a
majority of CSX Directors and a majority of NSC Directors.    

(c)  The CSX Directors may appoint by majority vote one
Co-Chairman (the "CSX Co-Chairman") and the NSC Directors may
appoint by majority vote one Co-Chairman (the "NSC Co-Chairman"). 
The Co-Chairmen shall preside at all meetings of the CRC Board
and shall have and perform such other duties as may be assigned
to them by the CRC Board.    

(d)  If the office of any CSX Director becomes vacant,
the remaining CSX Directors by a majority vote may appoint any
qualified individual to fill such vacancy, and such individual
shall hold office for the unexpired term and until his or her
successor shall be duly chosen.  If the office of any CSX
Director becomes vacant and there are no remaining CSX Directors,
CSX may appoint any qualified individuals to fill the CSX
Directors vacancies by a writing to such effect.  If the office
of any NSC Director becomes vacant, the remaining NSC Directors
by a majority vote may appoint any qualified individual to fill
such vacancy, and such individual shall hold office for the
unexpired term and until his or her successor shall be duly
chosen.  If the office of any NSC Director becomes vacant and
there are no remaining NSC Directors, NSC may appoint any
qualified individuals to fill the NSC Directors vacancies by a
writing to such effect.    

(e)  Any CSX Director may be removed either for or
without cause at any time, but only by CSX in a writing to such
effect.  Any NSC Director may be removed either for or without
cause at any time, but only by NSC in a writing to such effect.   

(f)  In addition to the two Co-Chairmen of the CRC
Board, the officers of CRC may include a chief executive officer,
one or more vice presidents, a treasurer and a secretary, all of
whom shall be elected by and shall serve at the direction of the
CRC Board.    

(g)  The parties agree to take all necessary action
such that each of CSX and NSC shall have rights identical to
those set forth in paragraphs (a) through (f) above with respect
to the Boards of Directors and management of CRR and each of its
Affiliates in addition to CRC other than NYC and PRR.    

Section 4.3.  Post-Closing Date CRC Funding.  (a)  From
and after the Closing Date, CSX and NSC shall ensure that CRR,
CRC and their Affiliates have sufficient cash to satisfy the
Retained Liabilities as they become due and any operating and
other expenses incurred by CRR, CRC and their Affiliates in the
conduct of their business consistent with this Agreement and the
Ancillary Agreements after giving effect to any Distributions
received or to be received from NYC and PRR.  In furtherance of
the foregoing sentence, following receipt by CRR Parent of
written notice from CRC of a CRC Board decision that CRC requires
such cash, CRR Parent shall provide such cash to CRC by capital
contribution, loan or advance to be made on the next business day
following the expiration of 30 days after receipt of such notice,
unless a later date is determined by the CRC Board or another
date is agreed in writing by CRC and CRR Parent.      

(b)  It is the intent of the parties that the economic
burden of the Corporate Level Liabilities will be borne, directly
or indirectly, by CSX or NSC in accordance with their respective
Percentage.    

Section 4.4.  Post-Control Date CRC and Other
Distributions.  Following the Control Date, subject to any legal
and contractual restrictions, the CRC Board shall cause CRC to
make a Distribution to CRR Parent as soon as is practical and in
any event within 45 days after each fiscal quarter of all cash
received by CRC from operations and any dividends, interest or
other cash Distributions from any Person in which CRC has an
interest which is in excess of 120% of the amount of cash
reasonably contemplated by the CRC Board as being necessary for
the cash payment of CRC's operating expenses (net of receipts),
debt service, contingencies, budgeted capital expenditures and
working capital requirements (all of which shall take into
account cash on hand and future expected cash surpluses and cash
requirements).  Notwithstanding the foregoing, no Distribution
shall be made which would render CRC insolvent or which is
prohibited by the terms of any Indebtedness of CRC or its
Affiliates.    

Section 4.5.  Operating Fees, Interest Rentals and Base
Rent.  The parties anticipate that as of the Closing Date, the
sum of the following amounts will total seven hundred and fifty
million dollars: (i) Interest Rentals payable under the Shared
Assets Agreements, (ii) Operating Fees payable under the CSXT
Operating Agreement and the NSR Operating Agreement and (iii)
Base Rent payable under the CSXT Equipment Agreement and the NSR
Equipment Agreement.  The parties acknowledge that as of a
Valuation Date, (i) the Interest Rentals, Operating Fees and Base
Rent shall be determined as set forth in the CSXT Operating
Agreement, the NSR Operating Agreement, the CSXT Equipment
Agreement, the NSR Equipment Agreement and the Shared Assets
Agreements and (ii) the allocation between CSXT and NSR of the
Operating Fees and Base Rent payable under the CSXT Operating
Agreement, the NSR Operating Agreement, the CSXT Equipment
Agreement and the NSR Equipment Agreement shall reflect the then
relative Fair Market Rental Values of the NYC Allocated Assets,
the PRR Allocated Assets, the CSXT Equipment and the NSR
Equipment as of the most recent Valuation Date (which allocation,
in the case of a Valuation Date that is also the Closing Date,
shall be a 58% allocation to NSR and a 42% allocation to CSXT).   

ARTICLE V
NYC and PRR GOVERNANCE AND CONDUCT    

Section 5.1.   NYC Governance.  From and after the
Control Date, CSX shall have exclusive authority to direct the
appointment of the officers and directors of NYC who shall in
their discretion, but subject to the provisions of this
Agreement, direct the operation of NYC.  Without limiting the
foregoing but subject to Section 5.3, CRC, in its capacity as the
sole member of NYC, shall follow CSX's directions with respect to
the management and operation of NYC to the extent that such
directions are not inconsistent with the terms of this Agreement,
the NYC LLC Agreement or any applicable laws and do not involve
the transfer, sale, conveyance, distribution, pledge,
hypothecation, encumbrance or assignment of such membership
interest (other than in connection with a Restructuring).    

Section 5.2.  PRR Governance.  From and after the
Control Date, NSC shall have exclusive authority to direct the
appointment of the officers and directors of PRR, who shall in
their discretion, but subject to the provisions of this
Agreement, direct the operation of PRR.  Without limiting the
foregoing but subject to Section 5.3, CRC, in its capacity as the
sole member of PRR, shall follow NSC's directions with respect to
the management and operation of PRR to the extent that such
directions are not inconsistent with the terms of this Agreement,
the PRR LLC Agreement or any applicable laws and do not involve
the transfer, sale, conveyance, distribution, pledge,
hypothecation, encumbrance or assignment of such membership
interest (other than in connection with a Restructuring).    

Section 5.3.  NYC and PRR Actions.  Notwithstanding
anything to the contrary contained in Section 5.1 or Section 5.2,
unless it receives the prior written consent of CSX and NSC to
the contrary, CRC, as the sole member of each of NYC and PRR,
shall cause NYC and PRR respectively to enforce, to the fullest
extent permitted by law or Contract, their rights under the
Ancillary Agreements, including any right to receive payments or
any indemnities thereunder.    

Section 5.4.  NYC and PRR Distributions.  The parties
agree that, from and after the Control Date, other than
Distributions made by NYC and PRR contemporaneously and in
proportion to the respective Percentage of CSX and NSC, NYC and
PRR shall not be required, without the consent of CSX or NSC,
respectively, to make any Distributions to CRC or its Affiliates. 

Section 5.5.  Actions.  CRC shall exercise its
ownership interest in NYC and PRR, respectively, and all of the
parties shall take all other necessary or desirable action within
their respective control, in order to effectuate the provisions
of this Article V.       

ARTICLE VI
EMPLOYEE MATTERS

Section 6.1.  Employees of CRR and CRC.  (a)  On the
Closing Date, or as soon thereafter as any applicable labor
agreements, statutes, regulations and STB conditions, and
implementing agreements thereunder, may permit or require, each
of CSX, NSC, NYC or PRR or their respective Affiliates shall make
employment available to CRR and CRC agreement employees pursuant
to the requirements and procedures under the said applicable
labor agreements, statutes, regulations, conditions and
implementing agreements.    

(b) Prior to the Closing Date, each of CSX and NSC and
their respective Affiliates shall comply with the Staffing
Process Guidelines dated June 1, 1997 as adopted by CSX and NSC.  

(c) Not later than thirty days prior to the Closing
Date, CSX and NSC jointly shall determine the location, functions
to be performed by, resources and positions required by, and
methodology for cost determination for Continuing CRC Management. 
Each function shall be defined in terms of a description of the
function, the number of positions required to perform the
function and general descriptions of the nature of each function,
including whether it is intended to be performed on an interim or
on-going basis.  CSX and NSC jointly may enter into one or more
agency agreements by which CSX or NSC or their respective
Affiliates may perform any Continuing CRC Management functions.   
(d)  To the extent implementing agreements are required by
STB-imposed conditions in order to effect the transactions
contemplated by Article II and Article VI, each party agrees to
use its commercially reasonable efforts to obtain implementing
agreements reasonably determined by the parties to be necessary
to effect such transactions.  Where necessary to effect the
transactions contemplated by Article II and Article VI, the
parties will jointly negotiate (and if no agreement is reached
will jointly arbitrate to reach an agreement) an implementing
agreement to which they will be parties with the employee
representative(s) of the appropriate craft or class of employees
of each carrier.  Notwithstanding the foregoing, no party shall
be required by this Section 6.1(d) to agree to implementing
agreements which it, in its reasonable judgment, determines to be
contrary to its business interests.    

Section 6.2.  Employee Related Liabilities.  Employee
Related Liabilities shall be designated as follows:    

(a)  Separation Costs subsequent to the Control Date
associated with agreement employees at CRC's or its Affiliates'
shops in Altoona and Hollidaysburg shall be the responsibility of
NSR.  Separation Costs subsequent to the Control Date associated
with agreement employees at CRC's or its Affiliates' headquarters
in Philadelphia, technology center in Philadelphia, and customer
service center in Pittsburgh (notwithstanding its joint use as a
SSO Facility) will be the responsibility of CSXT.    

(b)  The on-going employee expenses related to
Continuing CRC Management after the Control Date shall be
Corporate Level Liabilities; provided that (i) each of CSX and
NSC shall have the right pursuant to Section 2.3 to discontinue
use of a Continuing CRC Management function or a position related
to a SSO Facility and (ii) each of CSX and NSC shall have the
right pursuant to Section 2.4 to discontinue use of a function
performed by, or a position occupied by, an employee identified
pursuant to clause (b) of the definition of Continuing CRC
Management.  Notwithstanding the foregoing, Separation Costs
associated with Continuing CRC Management employees after the
Closing Date shall be allocated as otherwise provided in this
Agreement.    

(c)  In each instance subsequent to the Control Date
and subject to the provisions of Section 6.2(a) above, (i)
Separation Costs associated with CRC agreement employees working
jobs at or in respect of NYC Allocated Assets will be the sole
responsibility of CSXT, (ii) Separation Costs associated with CRC
agreement employees working jobs at or in respect of PRR
Allocated Assets will be the sole responsibility of NSR, (iii)
for each CRC agreement employee working a job at or in respect of
Retained Assets, Separation Costs will be a Corporate Level
Liability, and (iv) Separation Costs associated with CRC or CRR
agreement employees working jobs at or in respect of two or more
such properties (i.e., NYC Allocated Assets, PRR Allocated Assets
and Retained Assets) will be treated as the responsibility of
CSXT, NSR, or as a Corporate Level Liability, depending upon the
Asset at or in respect of which the employee predominantly works. 

(d)  Subject to Sections 6.2(a) and (e), if an employee
of CRR, CRC or their respective Affiliates on the Control Date
who is subject to any protective conditions imposed by the STB
pursuant to the transactions contemplated by this Agreement or
the Ancillary Agreements cannot obtain employment with CRC, PRR,
NYC, CSX, NSC or their respective Affiliates after the Control
Date, then the Separation Costs in respect of such employee shall
be included among Corporate Level Liabilities, NYC Allocated
Liabilities or PRR Allocated Liabilities on the basis of whether
the employee performed the preponderance of his or her service in
the six months preceding the first day of the month in which the
Control Date occurred at or in respect of a Retained Asset, an
NYC Allocated Asset or a PRR Allocated Asset.  The Separation
Costs of employees as to whom no reasonable determination can be
made shall be Corporate Level Liabilities, but shall be assigned
on an alternating basis to NYC and PRR for the purpose of
administering the claims.    

(e)  If an employee of CRC, CSX, NSC, PRR, NYC or their
respective Affiliates who is subject to any protective conditions
imposed by the STB pursuant to the transactions contemplated by
this Agreement or the Ancillary Agreements moves his or her
employment from one of such parties to another of such parties on
or after the Control Date (including any employee in respect of
whom the Separation Costs have already been allocated to one of
CRC, PRR, NYC, CSX, NSC or their respective Affiliates),
responsibility for such employee's Separation Costs arising
thereafter shall be assumed by the new employer; provided that
any relocation costs shall be the responsibility of the first
employer.    

(f)  Separation Costs associated with employees who
were employed by CSX or NSC or their Affiliates on the day
preceding the Control Date will be the sole responsibility of
such employer.    

(g)  Separation Costs associated with employees who
are, as of the Control Date, non-agreement employees of CRR or
CRC (including payments to be made by CSX, CRR or the Surviving
Corporation under the Merger Agreement) shall be Corporate Level
Liabilities.  Compensation and other expenses after the Control
Date associated with those non-agreement CRC employees who are
not designated as Continuing CRC Management and who are not
employed by either CSX or NSC, or their respective Affiliates,
shall be Corporate Level Liabilities until such time as such
employees are no longer employed by CRC.     

(h)  Compensation and other expenses (excluding
Separation Costs) for agreement employees (other than Continuing
CRC Management) working jobs at or in respect of NYC Allocated
Assets shall be the sole responsibility of CSXT.  Compensation
and other expenses (excluding Separation Costs) for agreement
employees (other than Continuing CRC Management) working jobs at
or in respect of PRR Allocated Assets shall be the sole
responsibility of NSR.    

(i)  Notwithstanding anything in this Section 6.2 to
the contrary, Separation Costs (other than payments made pursuant
to the CRR Stay Bonus Program) under CRR or CRC plans and
agreements (including the Third Amendment) for a CRC
non-agreement employee who becomes employed after the Control
Date by CSX or its Affiliates or NSC or its Affiliates, which
Separation Costs arise subsequent to the date of such employment,
will be borne by the employing party.    

Section 6.3.  Non-Agreement Employee Benefit Plans. 
(a)  The employee benefit plans, programs and policies which
currently are provided to the non-agreement employees of CRR, CRC
or their respective Affiliates will continue to be provided to
the non-agreement employees of CRC and its Affiliates and to
non-agreement Continuing CRC Management on and after the Control
Date, unless it is determined jointly by CSX and NSC that such
benefits shall be changed; provided that CSX and NSC shall not
make any changes in such plans, programs or policies that
contravene Attachment A to the CRR Disclosure Schedule delivered
in connection with the Third Amendment.  The costs associated
with such plans, programs and policies shall be Corporate Level
Liabilities, except that Separation Costs shall be allocated and
paid as otherwise provided herein.  CSX and NSC jointly may enter
into one or more agency agreements with CRR, CRC or their
respective Affiliates for CSX or NSC to provide any of such
benefits, programs or policies.    

(b)  Any employee benefit plans, programs and policies
for the employees of NYC and its Subsidiaries shall be the sole
responsibility of NYC and included in the NYC Allocated
Liabilities.  Any employee benefit plans, programs and policies
for the employees of PRR and its Subsidiaries shall be the sole
responsibility of PRR and included in the PRR Allocated
Liabilities.  However, notwithstanding the foregoing, NYC, PRR
and CRC shall provide to each other any information that is
necessary to determine whether any benefit plan is or continues
to be tax qualified, and in the event that NYC, PRR or CRC
reasonably determines that the benefit plans of NYC, PRR and CRC,
when considered together, may cause one or more benefit plans to
lose or fail to obtain their tax qualification, NYC, PRR and CRC
shall agree to appropriate changes to prevent such loss of tax
qualification.    

(c)  CSX, NSC and CRC agree to take any actions
permitted by law that are necessary or appropriate to determine
the amount of excess assets in CRC benefit plans and to allow
allocation to CSX and NSC or their respective Affiliates in
proportion to their respective Percentage; provided that no such
transfer shall reduce the assets remaining in any CRC defined
benefit plans to a level that is less than 100% of the
Liabilities for benefits on a termination basis as reasonably
calculated by Price Waterhouse employing usual and customary
methodology and assumptions and; provided further that no such
transfer shall reduce the assets remaining in any other CRC
benefit plan to a level that is less than 100% of the Liabilities
for those other CRC benefit plans as reasonably calculated by
Price Waterhouse.  CSX, NSC and CRC shall reach an agreement as
to the transfer of accrued benefits and related assets with
respect to employees that are transferred.    

(d)  Any Liabilities incurred prior to the Closing Date
by CRR, CRC or any of their respective Affiliates with respect to
any employee benefit plan, program, policy or arrangement, other
than to the extent a Liability is funded under a CRC benefit
plan, shall be Corporate Level Liabilities.    

Section 6.4    Residual Liability.  The allocation of
liabilities associated with the employees of CRR, CRC or any of
their respective Affiliates hereunder is intended merely to
assign primary responsibility for such liabilities among the
parties.  Nothing in the Agreement shall be interpreted or
construed as a restriction or limitation of the duties and
responsibilities of CRR, CRC, their respective Affiliates and CSX
with respect to employee-related liabilities as set forth in the
Merger Agreement and Attachment A to the CRR Disclosure Schedule
delivered in connection with the Third Amendment.       

ARTICLE VII
REPRESENTATIONS AND WARRANTIES

Section 7.1.   CSX.  CSX represents and warrants to
NSC, CRR and CRR Parent as of the date hereof and as of the
Closing Date as follows:    

(a)  Organization and Good Standing.  CSX is a
corporation duly organized, validly existing and in good standing
under the laws of the Commonwealth of Virginia.    

(b)  Authority.  CSX has full corporate power and
authority to execute and deliver this Agreement and the Ancillary
Agreements and to consummate the transactions contemplated hereby
and thereby.  All corporate acts and other corporate proceedings
required to be taken by or on the part of CSX to authorize CSX to
execute, deliver and authorize the performance of this Agreement
and the Ancillary Agreements and the transactions contemplated
hereby and thereby have been duly and properly taken.    

(c)  Enforceability.  This Agreement has been and each
of the Ancillary Agreements will be duly executed and delivered
by CSX and, when duly executed and delivered by NSC and (to the
extent such agreement is not being entered into as of the date
hereof) CSX, will constitute the legal, valid and binding
obligation of CSX enforceable in accordance with its terms,
except as enforcement may be limited by bankruptcy, insolvency,
reorganization and other laws of general application relating to
or affecting enforcement of creditors' rights and except that the
availability of equitable remedies, including specific
performance, is subject to the discretion of the court before
which any proceeding therefor may be brought.    

(d)  No Violation.  The execution and delivery by CSX
of this Agreement and the Ancillary Agreements will not violate
in any material respect any law, or in any material respect
conflict with, result in any breach of, constitute a default (or
any event which with notice or lapse of time or both would become
a default) under the Articles of Incorporation or Bylaws of CSX
or any material Contract to which CSX is a party or by which it
or its property or assets is bound.    

(e)  No Approvals.  Except for required approvals by
the STB and filings required under the Securities Exchange Act of
1934, as amended (the "Required Approvals"), no declaration,
filing or registration with, or notice to, or authorization,
consent or approval of, any Governmental Entity is necessary for
the consummation by CSX of the transactions contemplated hereby
or by the Ancillary Agreements, other than such filings,
registrations, authorizations, consents or approvals which, if
not obtained or made, will not, in the aggregate, materially
adversely affect the ability of CSX to consummate the
transactions contemplated hereby or by the Ancillary Agreements.  

Section 7.2.  NSC.  NSC represents and warrants to CSX,
CRR and CRR Parent as of the date hereof and as of the Closing
Date as follows:    

(a)  Organization and Good Standing.  NSC is a
corporation duly organized, validly existing and in good standing
under the laws of the Commonwealth of Virginia.    

(b)  Authority.  NSC has full corporate power and
authority to execute and deliver this Agreement and the Ancillary
Agreements and to consummate the transactions contemplated hereby
and thereby.  All corporate acts and other corporate proceedings
required to be taken by or on the part of NSC to authorize NSC to
execute, deliver and authorize the performance of this Agreement
and the Ancillary Agreements and the transactions contemplated
hereby and thereby have been duly and properly taken.    

(c)  Enforceability.  This Agreement has been and each
of the Ancillary Agreements will be duly executed and delivered
by NSC and, when duly executed and delivered by CSX and (to the
extent such agreement is not being entered into as of the date
hereof) NSC, will constitute the legal, valid and binding
obligation of NSC enforceable in accordance with its terms,
except as enforcement may be limited by bankruptcy, insolvency,
reorganization and other laws of general application relating to
or affecting the enforcement of creditors' rights and except that
the availability of equitable remedies, including specific
performance, is subject to the discretion of the court before
which any proceeding therefor may be brought.    

(d)  No Violation.  The execution and delivery by NSC
of this Agreement and the Ancillary Agreements will not violate
in any material respect any law, or in any material respect
conflict with, result in any breach of, constitute a default (or
any event which with notice or lapse of time or both would become
a default) under the Articles of Incorporation or Bylaws of NSC
or any material Contract to which NSC is a party or by which it
or its property or assets is bound.    

(e)  No Approvals.  Except for the Required Approvals,
no declaration, filing or registration with, or notice to, or
authorization, consent or approval of, any Governmental Entity is
necessary for the consummation by NSC of the transactions
contemplated hereby or by the Ancillary Agreements, other than
such filings, registrations, authorizations, consents or
approvals which, if not obtained or made, will not, in the
aggregate, materially adversely affect the ability of NSC to
consummate the transactions contemplated hereby or by the
Ancillary Agreements.  

ARTICLE VIII
COVENANTS

Section 8.1.   Conduct of Business.  Except as provided
for in this Agreement or as otherwise consented to by CSX and NSC
in writing, between the Control Date and the Closing Date, the
parties will use reasonable commercial efforts to cause the
Assets to be operated by CRR, CRC and their respective Affiliates
in the ordinary course consistent with past practice and in
compliance in all material respects with all applicable laws and
regulations and will use their reasonable commercial efforts to
preserve intact the Assets, use reasonable efforts to keep
available the services of CRR's, CRC's and their respective
Affiliates' current officers and other key employees as a group
and preserve CRR's, CRC's and their respective Affiliates'
relationships with those Persons having business dealings with
CRR, CRC and their respective Affiliates to the end that their
goodwill and ongoing businesses shall be unimpaired at the
Closing Date.  Without limiting the foregoing, between the
Control Date and the Closing Date, the parties will use
reasonable commercial efforts to ensure that CRR, CRC and their
respective Affiliates continue their maintenance and improvement
of Assets in the ordinary course in accordance with past practice
without discriminating between Assets on the basis of whether
they are or will be NYC Allocated Assets, PRR Allocated Assets or
Retained Assets.    

Section 8.2.  Best Efforts.  Subject to the terms and
conditions of this Agreement, each party agrees to use best
efforts to take, or cause to be taken, all action, and to do, or
cause to be done, all things reasonably necessary, proper or
advisable under applicable laws and regulations to consummate and
make effective the transactions contemplated by this Agreement
and the Ancillary Agreements.  No party shall knowingly take any
action in contravention of, or which is inconsistent with, the
transactions contemplated by this Agreement.    

Section 8.3.  Further Assurances; Consents.  (a)  From
time to time after the Closing Date, each of the parties will
execute and deliver such further instruments and will take such
other actions as CSX, on the one hand, or NSC, on the other hand,
may reasonably request in order to effectuate the purposes of
this Agreement and the Ancillary Agreements and to carry out the
terms hereof and thereof.  To the extent that any consent or
concurrence is required under this Agreement by any party or its
Affiliates, such consent or concurrence shall not be unreasonably
withheld.    

(b)  If any of the Allocated Assets cannot be
transferred as contemplated by this Agreement (other than
Contracts which are dealt with in Section 8.5), the parties will
cooperate to make the Allocated Asset available through whatever
alternative arrangements will best carry out the purpose and
accomplish the intent of this Agreement, except that this
requirement shall not apply to Allocated Assets which cannot be
transferred because of regulatory constraints.    

Section 8.4.  STB Approval.  (a)  The parties will as
expeditiously as possible seek STB approval necessary for the
consummation of the transactions contemplated by this Agreement
and the Ancillary Agreements.  The parties will use their
reasonable best efforts to obtain such approvals, and no party
will take any position (at the STB or with any other Governmental
Entity or elsewhere) inconsistent with this Agreement and the
Ancillary Agreements.    

(b)  Each of CSX and NSC shall (i) coordinate and
cooperate with one another to prepare and present to the STB, as
soon as practicable, all applications, petitions, notices,
filings and other presentations in connection with seeking all
STB approvals, exemptions or other authorizations necessary to
consummate the transactions contemplated by this Agreement and by
the Ancillary Agreements, using, to the extent practicable, joint
legal counsel and expert witnesses, (ii) prosecute such
applications,  petitions, notices, filings and other
presentations with diligence, (iii) diligently oppose any
objections to, appeals from or petitions to reconsider or reopen
any such STB approval, (iv) take all such further action as in
their judgment may facilitate obtaining a final order or orders
of the STB approving the transactions contemplated by this
Agreement and the Ancillary Agreements and (v) bear the burden,
without adjustment in the Percentage or other consideration, of
any STB imposed condition it accepts.    

(c)  Each of CSX and NSC shall coordinate and consult
with one another with respect to all settlements involving the
STB approval process.  The parties further agree that, (i) any
settlement or agreement pertaining to the Shared Assets Areas and
the Shared Assets Agreements will require the joint approval of
CSX and NSC; (ii) none of CRR, CRC nor CSX shall make any
settlement or agreement with respect to any PRR Allocated Asset
without NSC's prior written consent; (iii) none of CRR, CRC nor
NSC shall make any settlement or agreement with respect to any
NYC Allocated Asset without CSX's prior written consent and (iv)
nothing contained herein shall require joint action for either
CSX or NSC to enter into any settlement or Transportation
Contract with any shipper or receiver of freight.  CSX and NSC
may act in their sole discretion in respect of the matters set
forth in this Section 8.4(c).    

(d)  If the STB, as a condition to its approval of the
transactions contemplated by this Agreement and the Ancillary
Agreements, imposes a non-standard condition which would
materially reduce the benefits to either CSX or NSC from the
transactions contemplated by this Agreement and the Ancillary
Agreements, then the materially affected party may in its sole
discretion (i) accept such condition and proceed with the
transactions contemplated by this Agreement and the Ancillary
Agreements, or (ii) appeal such condition to the courts and
postpone the Closing Date for up to thirty months (and its
election under this Section 8.4(d)) until final action on its
appeal, and (iii) if such appeal is unsuccessful, reject the
condition and proceed in accordance with the terms of the Amended
and Restated Voting Trust Agreement.    

Section 8.5.  Other Approvals.  (a)  The parties shall
as expeditiously as possible use their reasonable best efforts to
obtain any consent, authorization, order or approval of, or any
exemption by, any Governmental Entity (other than the STB which
is covered by Section 8.4) or private Person required to be
obtained or made by the parties or their respective Affiliates to
effectuate the purposes of this Agreement or the Ancillary
Agreements and the transactions contemplated herein and therein,
which actions shall include, without limitation, furnishing all
information required under or in connection with approvals of or
filings with any such Governmental Entity or private Person. 
Each party shall reasonably cooperate with each other in
connection with the foregoing.  CRC will use reasonable
commercial efforts to transfer and assign to NYC and PRR all
Contracts which are to be transferred pursuant to Article II, it
being understood that CRC shall not seek any consents of any
third party unless requested to do so by NYC, in the case of a
Contract that is a NYC Allocated Asset, or PRR, in the case of a
Contract that is a PRR Allocated Asset, and in no event shall CRC
be obligated to make payments to third parties in order to obtain
such consents.    

(b)  All Contracts and rights which are Allocated
Assets and are not transferred pursuant to Section 8.5(a) shall
be handled in accordance with the following procedure:  (i) CRC
or its Affiliates shall continue to be bound thereby and to hold
the rights thereunder and (ii) NYC, in the case of a Contract
that is a NYC Allocated Asset, and PRR, in the case of a Contract
that is a PRR Allocated Asset, shall pay, perform and discharge
fully all of the obligations of CRC or its Affiliates thereunder
from and after the Closing Date.  CRC or its Affiliates shall,
without further consideration therefor, pay, assign and remit
promptly to NYC or PRR, as appropriate, all monies, rights and
other consideration received in respect of such performance.  CRC
or its Affiliates shall exercise or exploit the rights and
options under all such Contracts only as reasonably directed by
NYC, in the case of a Contract that is a NYC Allocated Asset, and
PRR, in the case of a Contract that is a PRR Allocated Asset, and
at NYC's or PRR's expense.      

Section 8.6.  [Intentionally Omitted.]    

Section 8.7.  Risk of Loss; Forced Disposal.  (a)  In
the event of any loss or damage to or destruction of, prior to
the Closing, any or all of the Allocated Assets by fire or other
casualty, the title to and other rights associated with such
Allocated Assets shall nevertheless pass to NYC or PRR as
provided for herein without any liability or obligation on the
part of any of the parties or their respective Affiliates as a
result of such loss, damage or destruction and without any
adjustment of the Percentage; provided, however, that at the
Closing, CRC shall transfer to NYC or PRR, as the case may be,
CRC's or its Affiliates' rights to any proceeds of any casualty
insurance policies covering such damage or destruction plus the
net proceeds, if any, actually collected by CRC or its Affiliates
under the provisions of the casualty insurance policies, if any,
covering such loss, damage or destruction.    

(b)  If any of the Allocated Assets are disposed of by
CRR, CRC or their respective Affiliates because of conditions
imposed by the STB prior to the Closing, in lieu of the transfer
of such Allocated Assets, CRR, CRC or their respective Affiliates
shall deliver to NYC or PRR, as the case may be, the benefit of
any net after-tax consideration attributable to any such
Allocated Assets received by CRR, CRC or their respective
Affiliates pursuant to such disposition.    

Section 8.8.  Public Statements; Public Filings.  Any
written news releases prior to the Closing and any other
disclosure required to be filed prior to the Closing with any
Governmental Entity (other than routine information and filings
with the Securities and Exchange Commission) pertaining to this
Agreement, the Ancillary Agreements or the transactions
contemplated hereby or thereby will be subject to prior review by
both CSX and NSC prior to release.    

Section 8.9.  Restructuring of CRC.  (a)  It is the
parties' intent that, at some time after the Closing Date, CRC
will transfer PRR or the assets and liabilities of PRR to NSC,
transfer NYC or the assets and liabilities of NYC to CSX or
otherwise separate PRR (for the benefit of NSC) and NYC (for the
benefit of CSX) from CRC in the most efficient manner for U.S.
federal income tax purposes (the transaction separating PRR from
CRC for the benefit of NSC hereinafter referred to as the "PRR
Restructuring", and the transaction separating NYC from CRC for
the benefit of CSX hereinafter referred to as the "NYC
Restructuring").  A Restructuring shall not be consummated unless
(i) CRC obtains a private letter ruling from the Internal Revenue
Service (the "Service") substantially to the effect that such
Restructuring qualifies as a tax-free transaction (except with
respect to gain or income required to be recognized with respect
to intercompany items or excess loss accounts pursuant to
regulations under Section 1502 of the Code or with respect to
gain or income recognized in the Restructuring under Section 356
or Section 361 of the Code as the result of the receipt of "other
property or money" within the meaning of such sections, provided
that the amount of such gain or income recognized by CRR or its
Affiliates is not substantial) under the Code (the "Ruling"), or
the parties otherwise agree to proceed with such Restructuring on
the basis of an opinion of tax counsel generally to the same
effect, (ii) any required approval of the STB is obtained, (iii)
Tax indemnities mutually satisfactory to CSX and NSC have been
agreed to and (iv) the conveyance of the CRR Parent interests is
structured in a way to ensure to the mutual satisfaction of CSX
and NSC that after a Restructuring, NSC (in the case of the PRR
Restructuring) and CSX (in the case of the NYC Restructuring)
continue to hold their respective Percentage of the equity and 50
percent of the vote with respect to the Retained Assets and the
Retained Liabilities and NSC (in the case of the PRR
Restructuring) has no continuing interest whatsoever in NYC and
CSX (in the case of the NYC Restructuring) has no continuing
interest whatsoever in PRR.  In addition, a PRR Restructuring
shall not be consummated if, based upon the written opinion of
outside tax counsel to CSX, such Restructuring would more likely
than not impair the ability to consummate a subsequent NYC
Restructuring, and a NYC Restructuring shall not be consummated
if, based upon the written opinion of outside tax counsel to NSC,
such Restructuring would more likely than not impair the ability
to consummate a subsequent PRR Restructuring.  The parties agree
that the application referred to in Section 8.4(b) shall not seek
the authority to effect any transaction referred to in this
Section 8.5.    

(b)  CRC shall seek a Ruling at the request of either
CSX or NSC or both of them.  If CRC seeks a Ruling at the request
of either CSX or NSC or both of them, after consultation with the
party or parties requesting the Ruling, CRC shall prepare the
Ruling request and any supplements or materials relating thereto
that are required to be submitted to the Service in connection
with the Ruling request (each, an "IRS Submission").  Each IRS
Submission shall be true and correct in all material respects,
and all material facts relating to the requested Ruling shall be
disclosed to the Service.  CRC shall provide CSX and NSC with a
reasonable opportunity to review and comment on each IRS
Submission prior to the filing of such IRS Submission with the
Service, and no IRS Submission shall be filed with the Service
unless the party or parties requesting the Ruling have agreed in
writing as to the contents of such IRS Submission prior to such
filing.  CRC shall provide CSX and NSC with copies of each IRS
Submission as filed with the Service.  Neither CRC nor its
Affiliates or representatives shall conduct any communications
with the Service concerning the Ruling request, including
meetings or conferences with personnel from the Service, whether
in person, telephonically or otherwise, without notifying CSX and
NSC and giving CSX and NSC the opportunity to participate.  CRC
shall provide CSX and NSC with copies of any correspondence
between CRC and the Service with respect to the Ruling request.   

(c)  If the requirements of clauses (i), (ii), (iii)
and (iv) of the second sentence of Section 8.9(a) are satisfied
and no opinion meeting the requirements of the third sentence of
Section 8.9(a) is delivered with respect to a Restructuring, NSC
(in the case of the PRR Restructuring) and CSX (in the case of
the NYC Restructuring) shall have the right, consistent with the
Ruling (or opinion of counsel, if applicable), to exchange some
or all of its interests in CRR Parent for PRR (in the case of the
PRR Restructuring) and NYC (in the case of the NYC
Restructuring).  At the request of PRR (in the case of a PRR
Restructuring) or NYC (in the case of a NYC Restructuring) CRR
Parent, CRR, CRC and their respective Affiliates shall take all
action necessary or convenient in the reasonable opinion of PRR
(in the case of a PRR Restructuring) or NYC (in the case of a NYC
Restructuring) to effect a Restructuring that is permitted under
Section 8.9(a).    

Section 8.10.  Provision of Corporate Records.  As soon
as practicable after the Closing Date CRC shall (a) deliver to or
to the order of NYC all NYC Books and Records in the possession
of CRC or its Affiliates and (b) deliver to or to the order of
PRR all PRR Books and Records in the possession of CRC or its
Affiliates; provided that Books and Records that relate to and
are necessary for the operation of both the NYC Allocated Assets
and the PRR Allocated Assets will be duplicated and included in
both the NYC Books and Records and the PRR Books and Records; and
provided further that copies of Books and Records necessary or
useful to the operation of Shared Assets Areas, Continuing CRC
Management, SSO Facilities and other Retained Assets shall be
maintained at CRC.  Such NYC Books and Records and PRR Books and
Records shall be the property of NYC and PRR, respectively, but
shall be retained and made available readily to CRC for review
and duplication, subject to the limitations set forth in Section
8.11, until the earlier of notice from CRC that such records are
no longer needed by CRC and the seventh anniversary of the
Closing Date, but in all events until the tax year to which the
Books and Records pertain is closed or settled with the Service
and/or state tax authorities, unless a longer retention period is
otherwise required by law.    

Section 8.11.  Access to Information.  From and after
the Closing Date, the parties shall afford (and CSX and NSC shall
cause NYC and PRR to afford) each other and each other's
authorized accountants, counsel and other designated
representatives reasonable access and duplicating rights (with
copying costs to be borne by the requesting party) during normal
business hours and at such other times as may be agreed upon to
all books and records and documents, communications, items and
matters, including computer programs and data within each other's
knowledge, possession or control relating to the Assets, the
Allocated Liabilities, the Retained Liabilities or the conduct of
CRC's and its Affiliates' businesses, insofar as such access is
reasonably required by a party or NYC or PRR and is consistent
with applicable law (and shall use reasonable efforts to cause
persons or firms possessing relevant items or information to give
similar access).  Items or information may be requested under
this Section 8.11 only for the following purposes:  audit,
accounting, legal proceedings, litigation, tax preparation,
transition planning and implementation planning purposes, as well
as for purposes of fulfilling disclosure and reporting
obligations.  Information shall be provided pursuant to this
Section 8.11 in accordance with reasonable procedures established
by the parties in order to ensure compliance with the provisions
of Section 8.13 and 8.14.     

Section 8.12.  Production of Witnesses and Individuals. 
From and after the Closing Date, CRR Parent, CRC, NYC, PRR, CSX
and NSC shall use reasonable efforts to make available to each
other, upon written request, their respective officers,
directors, employees and agents for fact finding, consultation
and interviews and as witnesses to the extent that any such
person may reasonably be required in connection with any Action
in which the requesting party may from time to time be involved
relating to the transactions contemplated by this Agreement and
the Ancillary Agreements, the Assets, the Allocated Liabilities,
the Retained Liabilities or the conduct of CRC's and its
Affiliates' business.  Except as otherwise agreed between the
parties, the parties agree to reimburse each other for reasonable
documented out-of-pocket expenses (but not labor charges, salary
payments or overheads) incurred by the other in connection with
providing individuals and witnesses pursuant to this Section
8.12.    

Section 8.13.  Confidentiality.  The parties shall hold
(and CSX and NSC shall cause NYC and PRR to hold), and shall
cause their respective officers, employees, agents, consultants
and advisors to hold, in strict confidence, unless compelled to
disclose by judicial or administrative process or, in the opinion
of its independent legal counsel, by other requirements of law,
all information furnished it by another party, NYC or PRR or
their respective representatives pursuant to this Agreement or
the Ancillary Agreements (except to the extent that such
information can be shown to have been (i) available to such
Person on a non-confidential basis prior to its disclosure by the
other Person, (ii) in the public domain through no fault of such
Person or (iii) later lawfully acquired from other sources by the
Person to which it was furnished), and no Person shall release or
disclose such information to any other person, except its
auditors, attorneys, financial advisors, bankers and other
consultants and advisors who shall be bound by the provisions of
this Section 8.13.  In the event that a subpoena, discovery or
other request that arguably calls for production or disclosure of
such confidential information is received, the Person receiving
such request must promptly notify in writing the Person whose
information has been requested.  The Person receiving such
request shall provide the Person whose confidential information
has been requested, a reasonable opportunity to review such
information and to assert any rights it may have with respect to
the potential disclosure of such confidential information.  Each
party shall be deemed to have satisfied its obligation to hold
confidential information concerning or supplied by the other
parties, NYC or PRR if it exercises the same care as it takes to
preserve confidentiality for its own similar information.    

Section 8.14.  Privileged Matters.  (a)  The parties
agree that from and after the Control Date CRC and its Affiliates
will maintain, preserve and assert all privileges, including,
without limitation, privileges arising under or relating to the
attorney-client relationship (which shall include, without
limitation, the attorney-client and work product privileges) that
relate directly or indirectly to the Assets, the Allocated
Liabilities or the Retained Liabilities or CRC's and its
Affiliates' business for any period prior to the Closing Date
("Privileges").  CRC shall not waive any Privilege that could be
asserted under applicable law without the prior written consent
of CSX and NSC.  The rights and obligations created by this
Section 8.14 shall apply to all information as to which, but for
the transactions contemplated by this Agreement and the Ancillary
Agreements, CRC would have been entitled to assert or did assert
the protection of a Privilege ("Privileged Information"),
including but not limited to (i) any and all information
generated prior to the Closing Date but which, after the Closing,
is in the possession of CSX, NSC, NYC or PRR (ii) all
communications subject to a Privilege occurring prior to the
Closing Date between counsel for CRC and any person who, at the
time of the communication, was an employee of CRC, regardless of
whether such employee is or becomes an employee of CSX, NSC, NYC
or PRR and (iii) all information generated, received or arising
after the Closing that refers or relates to Privileged
Information generated, received or arising prior to the Closing.  

(b)  From and after the Control Date, upon receipt by
CRC or any of its Affiliates of any subpoena, discovery or other
request that arguably calls for the production or disclosure of
Privileged Information or if CRC or any of its Affiliates obtains
knowledge that any current or former employee of CRC or any of
its Affiliates has received any subpoena, discovery or other
request which arguably calls for the production or disclosure of
Privileged Information, CRC shall promptly notify in writing CSX,
NSC, NYC and PRR of the existence of the request and shall
provide CSX and NSC a reasonable opportunity to review the
information and to assert any rights it may have under this
Section 8.14 or otherwise to prevent the production or disclosure
of Privileged Information.  CRC will not produce or disclose any
information arguably covered by a Privilege under this Section
8.13 unless (i) CSX and NSC have both provided their written
consent to such production or disclosure or (ii) a court of
competent jurisdiction has entered a final, nonappealable order
finding that the information is not entitled to protection under
any applicable privilege.    

(c)  If there is a reasonable likelihood that the
waiver by CRC of any Privilege could expose CSX, NSC, NYC or PRR
to Liability or could prejudice the other party's position in
pending or threatened litigation, otherwise adversely affect CSX,
NSC, NYC or PRR, CRC will promptly notify in writing CSX and NSC
prior to such waiver, and, at CSX's and NSC's request, CRC will
assert or preserve the Privilege, as applicable, if CRC's
interests will not be adversely affected by its assertion or
preservation of the Privilege.    

Section 8.15.  Administration of Actions.  After the
Closing Date, (a) NYC shall have exclusive authority and control
over the investigation, prosecution, defense and appeal of all
Actions relating primarily to NYC, the NYC Allocated Assets, the
NYC Allocated Liabilities or a Retained Liability (except for
Retained Liabilities for which the monetary claim is more than
$500,000 or injunctive relief is sought) which arose at the
location of a NYC Allocated Asset, or with which a NYC Allocated
Asset is most significantly involved (each, an "NYC Action"), and
may settle or compromise, or consent to the entry of any judgment
with respect to, any such NYC Action without the consent of CRC,
NSC or PRR and (b) PRR shall have exclusive authority and control
over the investigation, prosecution, defense and appeal of all
Actions relating primarily to PRR, the PRR Allocated Assets, the
PRR Allocated Liabilities, or a Retained Liability (except for
Retained Liabilities for which the monetary claim is more than
$500,000 or injunctive relief is sought), which arose at the
location of a PRR Allocated Asset or with which a PRR Allocated
Asset is most significantly involved (each a "PRR Action"), and
may settle or compromise, or consent to the entry of any judgment
with respect to, any such PRR Action without the consent of CRC,
CSX or NYC; provided that neither NYC or PRR may settle or
compromise, or consent to the entry of any judgment with respect
to, any such Action without the prior written consent of the
other if such settlement, compromise or consent to such judgment
(i) includes any form of injunctive relief binding upon such
other party or CRC or (ii) does not include as an unconditional
term thereof the giving by the claimant or plaintiff to such
other party or CRC and any Affiliates of CRC subject to such
Action of a full and final release from all liability in respect
to such claim or litigation.  After the Closing Date with respect
to an Action not covered under clauses (a) or (b) of the
foregoing sentence (including Actions relating to Corporate Level
Liabilities), the handling, administration and disposition of
such Actions shall be the joint responsibility of CSX and NSC and
the costs thereof shall be Corporate Level Liabilities.  In
assigning joint responsibility for the administration, handling
and disposition of Actions to CSX and NSC, hereunder it is not
the parties' intent that CSX and NSC will actually administer,
handle and dispose of such Actions jointly, but rather that CSX
and NSR will agree on the most practical and efficient
arrangements with the objective of eliminating unnecessary
duplication of effort and minimizing overall costs.  The costs
and expenses of the administration and handling of such Actions
shall be Corporate Level Liabilities; provided that the salaries
of, expenses incurred by and overheads associated with full-time
employees of CSX or NSC while engaged in investigating or
handling such Actions shall be the responsibility of the
employing party and shall not be Corporate Level Liabilities.    

Section 8.16.  Administration of FELA Claims.    (a) 
The administration, handling and disposition of FELA Claims
(whenever made) that are Corporate Level Liabilities shall be (i)
the responsibility of the party controlling the Allocated Asset
where the incident or incidents giving rise to the FELA Claim
occurred, or (ii) the responsibility of the party controlling the
Allocated Asset most significantly involved if the FELA Claim
arises from an incident or incidents occurring at multiple
locations on Allocated Assets, or (iii) the joint responsibility
of CSX and NSC if the FELA Claim arises from an incident or
incidents occurring at unknown locations or a location not
otherwise covered by clauses (i) or (ii) of this sentence.  In
assigning joint responsibility for the administration, handling
and disposition of FELA Claims to CSX and NSC under the foregoing
clause (iii), it is not the parties' intent that CSX and NSC will
actually administer, handle and dispose of such actions jointly,
but rather that CSX and NSR will agree on the most practical and
efficient arrangements with the objective of eliminating
unnecessary duplication of effort and minimizing overall costs. 
The costs and expenses of the administration, handling and
disposition of (A) FELA Claims made prior to the Closing Date and
(B) all other FELA Claims that are Corporate Level Liabilities,
shall be Corporate Level Liabilities and shall be borne by CSX
and NSC in proportion to their respective Percentages; provided
that the salaries of, expenses incurred by and overheads
associated with full-time employees of CSX or NSC while engaged
in investigating or handling such FELA Claims shall be the
responsibility of the employing party and shall not be Corporate
Level Liabilities; provided, further that the party responsible
for the administration of FELA Claims which are Retained
Liabilities shall, before agreeing to any single settlement of a
FELA Claim or group of related FELA Claims, involving a payment
of more than $1 million, obtain the written consent of the other
party.  Failure of either party to respond to such a request for
consent within fourteen days of receipt of such request shall be
deemed to constitute consent.    

(b)  The administration, handling and disposition of
FELA Claims (and the costs and expenses thereof) that are made on
or after the Control Date and that are NYC Allocated Liabilities
pursuant to Section 2.8(c) hereof shall be the responsibility of
CSX.  The administration, handling and disposition of FELA Claims
(and the costs and expenses thereof) that are made on or after
the Control Date and that are PRR Allocated Liabilities pursuant
to Section 2.8(c) hereof shall be the responsibility of NSC.    

Section 8.17.  Tax Matters.  (a)  From the date hereof
until the Closing Date, CRR and Green (i) shall timely and duly
file, or cause to be timely and duly filed, all Tax Returns of
CRR, CRC and their respective Affiliates required to be filed on
or prior to the Closing Date and (ii) other than Taxes being
contested in good faith, shall timely pay, or cause to be timely
paid, all Taxes required to be paid by CRR, CRC or their
respective Affiliates.  From the Control Date until the Closing
Date, CRR and Green, with respect to each of CRR, CRC and their
respective Affiliates, shall not settle or compromise any Tax
Liability, agree to any adjustment to any Tax attribute, change
any method of accounting or make any election with respect to
Taxes without first obtaining the prior written consent of CSX
and NSC.  CRR and its Subsidiaries agree to be included in a
consolidated federal income tax return of Green.    

(b)  From and after the Closing Date, the Tax
Allocation Agreement shall govern the rights and obligations of
Green, CRR, CRC, CRR Industries, PRR and NYC with respect to Tax
matters involving the operations of CRC, PRR and NYC.    

Section 8.18.  Committees.  Within 90 days following
the execution of this Agreement, two committees shall be
established by CSX and NSC:  the "Buffalo Committee" and the
"Vickers Committee".  Both committees shall consist of
representatives appointed by CSX and representatives appointed by
NSC.  The Buffalo Committee will examine the CP-Draw drawbridge
and interlocking in Buffalo, New York and will investigate ways
of minimizing or eliminating conflict between CSX and NSC traffic
flows through the area after the Closing Date.  The Vickers
Committee will examine the Vickers crossing in Toledo, Ohio and
will investigate ways of minimizing or eliminating conflict
between CSX and NSC traffic flows through the area after the
Closing Date.  Within 90 days of appointment, each such committee
will prepare a report detailing options for solving the traffic
conflict problems, along with cost estimates for each such
option.     

Section 8.19.  Chicago Gateway Access.  CSXT and NSR
will preserve and enhance the independent competitive capability
of each to move traffic to and through the Chicago Gateway (as
defined in Schedule 3) by adhering to the requirements of
Schedule 3.    

Section 8.20.  Car Hire and Car Service.  The parties
recognize that industry rules, including the AAR Car Service
Rules, may pose problems with respect to the payment and
collection of car hire in connection with Equipment that is
included in Retained Assets and that is used or operated with the
Allocated Assets and with the Shared Assets Areas.  The parties
shall use their reasonable best efforts and take all actions,
including seeking changes in industry rules, as may be necessary
or appropriate to allow each party, in the most favorable manner
possible, to collect car hire on the Equipment allocated to it
pursuant to Section 2.6 hereof and to pay the car hire due for
cars used or operated with Allocated Assets and with the Shared
Assets Areas.       

ARTICLE IX
CONDITIONS PRECEDENT TO THE CLOSING

Section 9.1.   Conditions Precedent to Obligations. 
The respective obligations of CSX, NSC, CRR Parent, CRR and CRC
to effect the transactions contemplated by Article II shall be
subject to the fulfillment or mutual waiver at or prior to the
Closing Date of the following conditions:    

(a)  No preliminary or permanent injunction or other
order or decree issued by a court of competent jurisdiction or
any other legal restraint or prohibition which prevents the
consummation of the transactions contemplated by this Agreement
or the Ancillary Agreements shall be in effect and no statute,
rule or regulation shall have been enacted by any Governmental
Entity prohibiting the consummation of the transactions
contemplated by this Agreement or the Ancillary Agreements.    

(b)  The STB shall have issued a decision (which
decision shall not have been stayed or enjoined) that constitutes
a final order approving, exempting or otherwise authorizing, as
of such date, consummation of the transactions contemplated by
this Agreement and the Ancillary Agreements as may require such
authorization and neither party shall have exercised a right to
postpone pursuant to Section 8.4(c).    

(c)  Each of CSX and NSC shall have reasonably
determined that it has obtained sufficient labor implementing
agreements so as to be authorized by law to effect the
transactions contemplated by Article II and Article VI.   

ARTICLE X
INDEMNIFICATION

Section 10.1.  Indemnification.  (a)  Subject to the
provisions of this Article X, CRR Parent and CRR jointly and
severally shall indemnify, defend and hold harmless the other
parties and any director, officer, employee or agent of any of
them from and against any and all Damages asserted against,
relating to, imposed upon or incurred by any such Person,
directly or indirectly, by reason of or resulting from:    

(i)  the breach or nonperformance of any agreement of  
CRR Parent, CRR, CRC or any of their respective Affiliates  
(other than NYC and PRR) contained in or made pursuant to  
this Agreement or any of the Ancillary Agreements; and   

(ii) any Retained Liability.    

(b)  Subject to the provisions of this Article X, CSX
and CSXT jointly and severally shall indemnify, defend and hold
harmless the other parties and any director, officer, employee or
agent of any of them from and against any and all Damages
asserted against, relating to, imposed upon or incurred by any
such Person, directly or indirectly, by reason of or resulting
from:    

(i)  the untruth or inaccuracy of any representation or 
warranty of CSX, CSXT or their respective Affiliates
contained in or made pursuant to this Agreement or any of
the   Ancillary Agreements; and    

(ii) the breach or non-performance of any agreement of  
CSX, CSXT or their respective Affiliates contained in or  
made pursuant to this Agreement or any of the Ancillary  
Agreements.    

(c)  Subject to the provisions of this Article X, NSC and
NSR jointly and severally shall indemnify, defend and hold
harmless the other parties and any director, officer, employee or
agent of any of them from and against any and all Damages
asserted against, relating to, imposed upon or incurred by any
such Person, directly or indirectly, by reason of or resulting
from:    

(i)  the untruth or inaccuracy of any representation or 
warranty of NSC, NSR or their respective Affiliates
contained in or made pursuant to this Agreement or any of
the Ancillary Agreements; and    

(ii)  the breach or non-performance of any agreement of 
NSC, NSR or their respective Affiliates contained in or
made pursuant to this Agreement or any of the Ancillary
Agreements.    

Section 10.2.  Indemnification Procedures.  (a)  If any
Action shall be threatened or instituted or any claim or demand
shall be asserted against any Indemnified Party in respect of
which indemnification may be sought under the provisions of this
Agreement, the Indemnified Party shall promptly cause written
notice of the assertion of any such claim, demand or Action of
which it has knowledge to be forwarded to the Indemnifying Party. 
Such notice shall contain a reference to the provisions hereof or
of such other agreement, instrument or certificate delivered
pursuant hereto, in respect of which such claim is being made. 
The Indemnified Party's failure to give the Indemnifying Party
prompt notice shall not preclude the Indemnified Party from
obtaining indemnification from the Indemnifying Party under this
Article X unless the Indemnified Party's failure has materially
prejudiced the Indemnifying Party's ability to defend the claim,
demand or Action.    

(b)  If the Indemnified Party seeks indemnification
from the Indemnifying Party as a result of a claim or demand
being made by a third party (a "Third Party Claim"), the
Indemnifying Party shall have the right to promptly assume the
control of the defense of any Action with respect to such Third
Party Claim, including, at its own expense, employment by it of
counsel reasonably satisfactory to the Indemnified Party.  The
Indemnified Party may, in its sole discretion and at its own
expense, employ counsel to represent it in the defense of the
Third Party Claim, and in such event counsel for the Indemnifying
Party shall cooperate with counsel for the Indemnified Party in
such defense, provided that the Indemnifying Party shall direct
and control the defense of such Third Party Claim or proceeding. 
The Indemnifying Party shall not consent to the entry of any
judgment, except with the written consent of the Indemnified
Party, and shall not enter into any settlement of such Third
Party Claim without the written consent of the Indemnified Party
which does not include as an unconditional term thereof the
release of the Indemnified Party from all Liability in respect of
such Third Party Claim.    

Section 10.3.  Remedies.  (a)  Each party acknowledges
and agrees that the other parties would be irreparably damaged in
the event any of the provisions of this Agreement were not
performed by it in accordance with their specific terms or were
otherwise breached.  It is accordingly agreed that each party
shall be entitled to an injunction or injunctions to prevent
breaches of such provisions and to specifically enforce such
provisions, in addition to any other remedy to which such party
may be entitled, at law or in equity.     

(b)  In no event shall any party be liable to the other
parties for any consequential, indirect, incidental, punitive or
other similar damages including but not limited to lost profits
for any breach or default, or any act or omission arising out of
or in any way relating to, this Agreement, the Assets, the
Retained Liabilities, the Allocated Liabilities, the Ancillary
Agreements, the transactions contemplated herein or therein or
any matter or theory concerning or relating to any of the
foregoing, under any form or theory of action whatsoever whether
in contract, tort or otherwise.      

ARTICLE XI
MISCELLANEOUS

Section 11.1.  Amendment.  This Agreement may be
amended by the parties at any time by an instrument in writing
signed on behalf of each party.    

Section 11.2.  Extension; Waiver.  At any time prior to
the Closing Date the parties may (a) extend the time for the
performance of any of the obligations or other acts of the other
parties, (b) waive any inaccuracies in the representations and
warranties contained herein or in any document delivered pursuant
hereto and (c) waive compliance with any of the agreements or
conditions contained herein.  Any agreement on the part of a
party hereto to any such extension or waiver shall be valid if
set forth in an instrument in writing signed on behalf of such
party.    

Section 11.3.  Notices.  All notices and other
communications hereunder shall be in writing and shall be deemed
given on the date delivered if delivered personally (including by
reputable overnight courier), on the date transmitted if sent by
telecopy (which is confirmed) or on the date received if mailed
by registered or certified mail (return receipt requested) to the
parties at the following addresses (or at such other address for
a party as shall be specified by like notice):    

(a)  If to CSX, CSXT or CRR Parent, to:
CSX Corporation
One James Center
901 East Cary Street
Richmond, Virginia  23219    
Telecopy number:  804-783-1380    
Attention:   Mark G. Aron, Esq.
and Peter J. Shudtz, Esq.

CSX Transportation
500 Water Street
Jacksonville, Florida  32202
Telecopy number:  904-366-5436
Attention:   P. Michael Giftos, Esq.

with a copy to:     

Wachtell, Lipton, Rosen & Katz    
51 West 52nd Street    
New York, New York  10019    
Telecopy number:  212-403-2000    
Attention:  Pamela S. Seymon, Esq.    

(b)  If to NSC, NSR or CRR Parent, to:     

Norfolk Southern Corporation    
Three Commercial Place    
Norfolk, Virginia  23510    
Telecopy number:  757-629-2750    
Attention:  James C. Bishop, Jr., Esq.        

with a copy to:     

Skadden, Arps, Slate, Meagher & Flom LLP    
919 Third Avenue    
New York, New York  10022    
Telecopy number:  212-735-2000    
Attention:  Randall H. Doud, Esq.    

(c)  If to CRR or CRC, to:     

Conrail Inc.    
2001 Market Street    
Philadelphia, PA  19103    
Telecopy number:  215-209-4068    
Attention:  General Counsel        

All notices regarding matters requiring handling within thirty
days will be given by overnight mail or confirmed telecopy.    

Section 11.4.  Interpretation.  When a reference is
made in this Agreement to Sections, such reference shall be to a
Section of this Agreement unless otherwise indicated.  The
headings contained in this Agreement are for reference purposes
only and shall not affect in any way the meaning or
interpretation of this Agreement.    

Section 11.5.  Entire Agreement.  This Agreement
(including the Exhibits and Schedules hereto and the Ancillary
Agreements and other documents and instruments referred to
herein) and the Merger Agreement, collectively, constitute the
entire agreement and supersede all other prior agreements and
understandings, both written and oral, among the parties with
respect to the subject matter hereof, except the April 8
Agreement to the extent the April 8 Agreement covers matters not
addressed or amended hereby and the CRR Holdings LLC Agreement;
provided that it is the intent of the parties hereto that this
Agreement shall be an effectuation of the April 8 Agreement
consistent with the terms of the April 8 Agreement and that the
provisions of this Agreement should be interpreted to give effect
to the April 8 Agreement; and provided further that in the event
of any inconsistency between the terms of this Agreement and the
April 8 Agreement this Agreement shall prevail; and provided
further that CSX and NSC agree that the fourth paragraph of Item
III of Exhibit A to the April 8 Agreement (at page two thereof)
in respect of Lake Erie coal dock capacity is rescinded and no
longer in effect.    

Section 11.6.  Parties in Interest.  This Agreement
shall be binding upon and inure solely to the benefit of each
party and their respective successors and assigns and is not
intended to confer upon any other Person any rights or remedies,
except for the rights of an Indemnified Party as contemplated by
Article X.    

Section 11.7.  Governing Law.  This Agreement shall be
governed and construed in accordance with the laws of the State
of New York, regardless of the laws that might otherwise govern
under applicable principles of conflicts of law thereof;
provided, however, that the laws of the respective jurisdictions
of incorporation of each of the parties shall govern the relative
rights, obligations, powers, duties and other internal affairs of
such party and its board of directors.    

Section 11.8.  Counterparts.  This Agreement may be
executed in two or more counterparts, each of which shall be
deemed to be an original, but all of which shall constitute one
and the same agreement.    

Section 11.9.  Assignment.  (a)  Except as provided in
Section 11.9(b), neither this Agreement (including the documents
and instruments referred to herein) nor any of the rights,
interests or obligations hereunder, shall be assigned by any
party, including by operation of law, without the prior written
consent of the other parties which may be withheld at the sole
discretion of the relevant party.    

(b)  Any party without the consent of the other parties
may assign all or any part of its rights and obligations under
this Agreement to (i) any of its controlled Subsidiaries or (ii)
any successor in the event of a merger, consolidation, sale of
all or substantially all its assets, liquidation or dissolution,
if such assignee executes and delivers to the other parties
hereto an agreement reasonably satisfactory in form and substance
to such other party under which such assignee, which is
reasonably satisfactory to the other party, assumes and agrees to
perform and discharge all the obligations and liabilities of the
assigning party; provided that any such assignment shall not
relieve the assigning party from the performance and discharge of
such obligations and liabilities.    

(c)  This Agreement shall be binding upon and inure to
the benefit of the parties hereto and their respective permitted
assignees.    

Section 11.10.  Severability.  If any term, provision,
covenant or restriction of this Agreement is held by a court of
competent jurisdiction or other authority to be invalid, void,
unenforceable or against its regulatory policy, such provision is
to be intended to be ineffective only to the most limited extent
possible in such context and the remainder of the terms,
provisions, covenants and restrictions of this Agreement shall
remain in full force and effect and shall in no way be affected,
impaired or invalidated.    

Section 11.11.  Lack of Control; Effect on CRR and its
Controlled Subsidiaries.  (a)  None of CSX, CSXT, NSC or NSR
shall be liable for failing to take any action which they are
required to take under this Agreement if the time when CSX, CSXT,
NSC or NSR is required to take such action occurs prior to the
Control Date and such action requires the assistance or
cooperation of CRR or its Board of Directors, which assistance is
requested but not provided; provided, however, that CSX and NSC
shall use their best efforts to obtain such assistance or
cooperation and, after the Control Date, will be required to take
such action if, as and when required by this Agreement.    

(b)  Notwithstanding anything to the contrary contained
in this Agreement (which term for purposes of this Section
11.11(b) shall include the Exhibits and Schedules hereto and the
Ancillary Agreements and other documents and instruments referred
to herein), except as expressly set forth in Section 3.2, neither
CRR nor any of its controlled Subsidiaries shall be bound by the
terms of this Agreement (other than Section 8.17) or subject to
any Liabilities or obligations hereunder (other than under
Section 8.17) at any time prior to the Control Date.  CRR and CSX
shall continue to be bound by those terms of the Merger Agreement
that by their terms survive beyond June 2, 1997, including,
without limitation, Attachment A to the CRR Disclosure Schedule
delivered in connection with the Third Amendment; provided that
in the event of any inconsistency between the terms of this
Agreement and the terms of such Attachment A, the terms of such
Attachment A shall prevail.    

Section 11.12.  Dispute Resolution.  Any dispute,
controversy or claim (or any failure by the parties to agree on a
matter as to which this Agreement expressly or implicitly
contemplates subsequent agreement by the parties, except for
matters left to the sole discretion of a party) arising out of or
relating to this Agreement, or the breach, termination or
validity hereof, shall be finally settled through binding
arbitration by a sole, disinterested arbitrator in accordance
with the Commercial Arbitration Rules of the American Arbitration
Association.  The arbitrator shall be jointly selected by the
parties but, if the parties do not agree on an arbitrator within
thirty days after demand for arbitration is made by a party, they
shall request that the arbitrator be designated by the American
Arbitration Association.  The award of the arbitrator shall be
final and conclusive upon the parties.  Each party to the
arbitration shall pay the compensation, costs, fees and expenses
of its own witnesses, experts and counsel. The compensation and
any costs and expenses of the arbitrator shall be borne equally
by the parties.  The arbitrator shall have the power to require
the performance of acts found to be required by this Agreement
and to require the cessation or nonperformance of acts found to
be prohibited by this Agreement.  The arbitrator shall not have
the power to award consequential or punitive damages.  The
arbitrator's award shall be binding and conclusive upon the
parties to the fullest extent permitted by law.  Judgement upon
the award rendered may be entered in any court having
jurisdiction thereof, which court may order appropriate relief at
law or equity.  All proceedings relating to any such arbitration,
and all testimony, written submissions and award of the
arbitrator therein, shall be private and confidential as among
the parties, and shall not be disclosed to any other Person,
except as required by law and except as reasonably necessary to
prosecute or defend any judicial action to enforce, vacate or
modify such arbitration award.     

Section 11.13.  CRC Status.  The parties intend that
after the Closing Date CRC and its Affiliates shall be a rail
carrier that performs transportation services for the account of
CSXT or NSR, as the case may be, or as agent or subcontractor of
CSXT or NSR, as the case may be.       

IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be duly executed as of the day and year first above
written.

CSX CORPORATION       

By:  /s/ John W. Snow
Name:
Title:       

CSX TRANSPORTATION, INC. (for
itself and on behalf of its
controlled Subsidiaries)      

By:  ________________________
Name:
Title:

NORFOLK SOUTHERN CORPORATION   

By:  ________________________
Name:
Title:

NORFOLK SOUTHERN RAILWAY COMPANY
(for itself and on behalf of its
controlled Subsidiaries)      

By:  ________________________
Name:
Title:

CONRAIL INC. (for itself and on
behalf of its controlled
Subsidiaries)

By:  ________________________
Name:
Title:

IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be duly executed as of the day and year first above
written.

CSX CORPORATION       

By:  ___________________
Name:
Title:       

CSX TRANSPORTATION, INC. (for
itself and on behalf of its
controlled Subsidiaries)      

By:  /s/ A. R. Carpenter
Name:  A. R. Carpenter
Title: President and CEO

NORFOLK SOUTHERN CORPORATION   

By:  ________________________
Name:
Title:

NORFOLK SOUTHERN RAILWAY COMPANY
(for itself and on behalf of its
controlled Subsidiaries)      

By:  ________________________
Name:
Title:

CONRAIL INC. (for itself and on
behalf of its controlled
Subsidiaries)

By:  ________________________
Name:
Title:

IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be duly executed as of the day and year first above
written.

CSX CORPORATION       

By:  ________________________
Name:
Title:       

CSX TRANSPORTATION, INC. (for
itself and on behalf of its
controlled Subsidiaries)      

By:  ________________________
Name:
Title:

NORFOLK SOUTHERN CORPORATION   

By:  /s/ David R. Goode
Name:
Title:

NORFOLK SOUTHERN RAILWAY COMPANY
(for itself and on behalf of its
controlled Subsidiaries)      

By:  /s/ David R. Goode
Name:
Title:

CONRAIL INC. (for itself and on
behalf of its controlled
Subsidiaries)

By:  ________________________
Name:
Title:

IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be duly executed as of the day and year first above
written.

CSX CORPORATION       

By:  ________________________
Name:
Title:       

CSX TRANSPORTATION, INC. (for
itself and on behalf of its
controlled Subsidiaries)      

By:  ________________________
Name:
Title:

NORFOLK SOUTHERN CORPORATION   

By:  ________________________
Name:
Title:

NORFOLK SOUTHERN RAILWAY COMPANY
(for itself and on behalf of its
controlled Subsidiaries)      

By:  ________________________  
Name:
Title:

CONRAIL INC. (for itself and on
behalf of its controlled
Subsidiaries)

By:  /s/ Timothy O'Toole
Name:
Title:

CONSOLIDATED RAIL CORPORATION

By:  /s/ Timothy O'Toole
Name:
Title:

CRR HOLDINGS LLC

By:  _________________________
Name:
Title:

CONSOLIDATED RAIL CORPORATION

By:  ________________________
Name:
Title:

CRR HOLDINGS LLC

By:  /s/ John W. Snow
Name:
Title:

SCHEDULE 1

ASSETS

Attached to and incorporated in this Schedule 1 are the
following attachments:

(i)  Attachment I, which is the line segment allocation
list identifying each Route owned, operated or used by CRC
and its Affiliates and indicating as to each Route whether
it is included in the NYC Allocated Assets, the PRR
Allocated Assets or the Retained Assets; and

(ii)  Attachment II, which is a system map showing all
Routes comprising the CRC rail system and indicating by
color coding the Routes which are to be NYC Allocated
Assets, PRR Allocated Assets and Retained Assets,
respectively;  Attachment II is intended to show graphically
the Routes described in Attachment I.

ITEM 1 - NYC ALLOCATED ASSETS

The "NYC Allocated Assets" shall include all of CRR's, CRC's
and their respective Affiliates' right, title and interest in and
to the following Assets:

(A)  Routes and Assets Related to Routes.  All Routes
identified as NYC Allocated Assets in Attachment I and Attachment
II (i.e., those lines colored in red and/or orange on Attachment
II, except for those lines already owned by CSXT or its
Affiliates), together with the following Assets that are related
to such Routes (except as otherwise expressly provided in this
Schedule 1 or the Ancillary Agreements):

(1)     the track structure (rails, ties, other track
material, grading, bridges, tunnels, culverts,
etc.);

(2)     the underlying right-of-way, operating and
non-operating, regardless of its width, and
associated structures and fixtures;

(3)     except in the areas where the parties' respective
Routes are approximately equidistant from the
Asset in question (where in each case other
arrangements are made pursuant to one or more
Ancillary Agreements), appurtenant yards, sidings,
switch tracks and repair or other maintenance
facilities;

(4)     real estate (whether or not used for operating
purposes) adjacent or in proximity to the Routes 
included in the NYC Allocated Assets, or
underlying, adjacent or in proximity to those
structures or facilities described in the
preceding clauses (2) and (3) and the following
clause (5);

(5)     signal, communications and computer facilities and
equipment on the right-of-way and (to the extent
used to operate the Routes included in the NYC
Allocated Assets) off the right-of-way;

(6)     tools and supplies located on and along, and
automobiles, hi-rail cars and trucks assigned to,
the Routes included in the NYC Allocated Assets,
including repair materials and local repair
equipment, except system stockpiles of inventory,
material and supplies and Work Equipment;

(7)     Contracts (other than Transportation Contracts)
relating to a Route included in NYC Allocated
Assets, including without limitation trackage and
other operating rights, public and private grade
crossing agreements, side track and industrial
track agreements, pipeline and wireline
agreements, building and yard maintenance
agreements, leases, licenses, reversions,
longitudinal easements and other occupancy
agreements, and the rents, security deposits and
profits arising therefrom or in connection
therewith;

(8)     muniments of title, all original valuation maps,
land schedules, track charts, surveys, bridge and
other drawings, bridge inspection reports,
environmental reports, permits, signal and
communications plans, other engineering
documentation, deeds (including such originals of
acquisition or out-conveyances as may be in CRC's
possession), current billing records (including
billing addresses and, if in a computer format,
the data and the programs), real estate work
files, property tax records (and any computer
database for such records), and all other Books
and Records relating to a Route included in NYC
Allocated Assets;

(9)     mineral rights or easements of any sort held by
CRR, CRC or their respective Affiliates located
on, over, across and/or in the real estate or
property heretofore described in this paragraph
(A); and

(10)    royalties or other payments in respect of real
estate or other Assets heretofore described in
this paragraph (A).

(B)  Philadelphia Offices.  The CRC headquarters office
building located at Philadelphia, PA, and the CRC information
technology center building located at Philadelphia, PA and all
FF&E located at such facilities.

(C)  Yards and Yard Access.  The following CRC yards, land
and yard access tracks:

(1)     Seneca Yard (Buffalo, NY) (subject to access and
use by NSR pursuant to Ancillary Agreement);

(2)     59th Street ("Panhandle") Yard site (Chicago, IL);

(3)     Collinwood Yard (Cleveland, OH);

(4)     Former "local yard" and intermodal terminal at
Buckeye (Columbus, OH);

(5)     Buckeye Yard Lead track from the north limit of
"CP Buckeye" to "CP Darby" (Columbus, OH);

(6)     West track between "CP 138" and "CP 136"
(Columbus, OH);

(7)     Portion of Piqua Yard (Fort Wayne, IN) to be
agreed upon between NSR and CSXT;

(8)     Hawthorne Yard (Indianapolis, IN) (subject to
access and use by NSR pursuant to Ancillary
Agreement);

(9)     North Bergen intermodal terminal (New Jersey);

(10)    South Kearny intermodal terminal including APL
leased areas; however, NSR to have access to the
APL leased terminal and NSR to have the right to
serve APL and any successor lessee to APL using
such leased premises;

(11)    Greenwich Yard (Philadelphia), but excluding yard
tracks and areas used to support the movement of
local freight (including port traffic, but
excluding intermodal) and to support the movement
of rail traffic to and from the ore pier, which
tracks and areas will be included in Retained
Assets;

(12)    Track from CP Field to Pier 122 (Greenwich Yard
area, Philadelphia);

(13)    Stanley Yard (Toledo, OH); 

(14)    Elizabeth Yard (Trumbull Street Yard), but subject
to use of and access to two tracks by NSR to
support E-Rail Intermodal Facility as provided in
Ancillary Agreements; and

(15)    Manville Yard (subject to use by CRC, CSX and NSR
pursuant to Ancillary Agreements).

(D)  Miscellaneous Property.  The following Assets:

(1)     Developable property west of CRC's Chemical Coast
Secondary in northern New Jersey in the vicinity
of the current CRC Elizabethport Yard (Trumbull
St. Yard);

(2)     Indianapolis Division headquarters building,
offices and land; and

(3)     Albany Division headquarters building, offices and
land.

(E)  Stock Ownership and Other Interests.  The following
interests:

(1)     50% of the issued and outstanding capital stock in
Lakefront Dock & Railroad Terminal Company;

(2)     100% of the issued and outstanding capital stock
in St. Lawrence & Adirondack Railway;

(3)     50% of the issued and outstanding capital stock in
Albany Port Railroad Corp.; and

(4)     10.125% of the issued and outstanding capital
stock in TTX Company.

ITEM 2 - PRR ALLOCATED ASSETS

The "PRR Allocated Assets" shall include all of CRR's, CRC's
and their respective Affiliates' right, title and interest in and
to the following Assets:

(A)  Routes and Assets Related to Routes.  All Routes
identified as PRR Allocated Assets in Attachment I and Attachment
II (i.e., those lines colored in green and/or yellow on
Attachment II, except for those lines already owned by NSR or its
Affiliates), together with the following Assets that are related
to such Routes (except as otherwise expressly provided in this
Schedule 1 or the Ancillary Agreements):

(1)  the track structure (rails, ties, other track
material, grading, bridges, tunnels, culverts,
etc.);

(2)  the underlying right-of-way, operating and
non-operating, regardless of its width, and
associated structures and fixtures;

(3)  except in the areas where the parties' respective
Routes are approximately equidistant from the
Asset in question (where in each case other
arrangements are made pursuant to one or more
Ancillary Agreements), appurtenant yards, sidings,
switch tracks and repair or other maintenance
facilities;

(4)  real estate (whether or not used for operating
purposes) adjacent or in proximity to the Routes 
included in the PRR Allocated Assets, or
underlying, adjacent or in proximity to those
structures or facilities described in the
preceding clauses (2) and (3) and the following
clause (5);

(5)  signal, communications and computer facilities and
equipment on the right-of-way and (to the extent
used to operate the Routes included in the PRR
Allocated Assets) off the right-of-way;

(6)  tools and supplies located on and along, and
automobiles, hi-rail cars and trucks assigned to,
the Routes included in the PRR Allocated Assets,
including repair materials and local repair
equipment, except system stockpiles of inventory,
material and supplies and Work Equipment;

(7)  Contracts (other than Transportation Contracts)
relating to a Route included in PRR Allocated
Assets, including without limitation trackage and
other operating rights, public and private grade
crossing agreements, side track and industrial
track agreements, pipeline and wireline
agreements, building and yard maintenance
agreements, leases, licenses, reversions,
longitudinal easements and other occupancy
agreements, and the rents, security deposits and
profits arising therefrom or in connection
therewith;

(8)  muniments of title, all original valuation maps,
land schedules, track charts, surveys, bridge and
other drawings, bridge inspection reports,
environmental reports, permits, signal and
communications plans, other engineering
documentation, deeds (including such originals of
acquisition or out-conveyances as may be in CRC's
possession), current billing records (including
billing addresses and, if in a computer format,
the data and the programs), real estate work
files, property tax records (and any computer
database for such records), and all other Books
and Records relating to a Route included in PRR
Allocated Assets;

(9)  mineral rights or easements of any sort held by
CRR, CRC or their respective Affiliates located
on, over, across and/or in the real estate or
property heretofore described in this paragraph
(A); and

(10) royalties or other payments in respect of real
estate or other Assets heretofore described in
this paragraph (A).

(B)  Altoona and Hollidaysburg Shops.  The CRC car and
locomotive repair shops located at Altoona, PA and Hollidaysburg,
PA and all rolling-stock-related and locomotive-related inventory
and supplies (including rolling-stock-related and
locomotive-related system stockpiles) located at such facilities
(subject to provisions of Section 2.7 of the Agreement) and all FF&E located
on or at such facilities.

(C)  Yards and Yard Access.  The following CRC yards, land
and yard access tracks:

(1)  Ashtabula Harbor facilities (subject to access and
use by CSX pursuant to Ancillary Agreements);

(2)  Rockport Yard (Cleveland, OH);

(3)  Buckeye Hump Yard (Columbus, OH);

(4)  East track between "CP 138" and "CP 136"
(Columbus, OH);

(5)  the right of way east of and parallel to the
single track portion of the Columbus Line
immediately north of "CP 136" (the current end of
double track), and the Clintonville Siding east of
the single track portion;

(6)  portion of Piqua Yard (Fort Wayne, IN) used by or
for Triple Crown Services Company, together with
portion of Piqua Yard to be agreed upon between
NSR and CSXT;

(7)  Croxton Yard (New Jersey);

(8)  E-Rail intermodal facility (New Jersey);

(9)  Morrisville intermodal facility;

(10) Airline Jct. Yard (Toledo, OH); and

(11) Stanley E Yard (Toledo, OH).

(D)  Miscellaneous Property.  The following CRC assets and
properties:

(1)  Developable property east of CRC's Chemical Coast
Secondary in the vicinity of the E-Rail intermodal
facility (northern New Jersey);

(2)  real estate comprising a portion of the right-of-way
(east of the current single track) between
PRR's Clintonville Siding and the north end of the
double track at CP 136 on which NSR may construct
new track;

(3)  real estate comprising a portion of the right-of-way
on which the Buckeye Yard lead track is
located to enable NSR to construct a parallel
track to the Buckeye Yard lead track (Buckeye
Yard, Columbus, OH) (constructions to be governed
by an Ancillary Agreement);

(4)  Pittsburgh Division headquarters building, offices
and land;

(5)  Dearborn Division headquarters building, offices
and land; and

(6)  All undeveloped property that is part of, adjacent
to or in the vicinity of Lincoln Yard (Detroit,
MI).

(7)  All real estate, trackage, track material and
other Assets comprising CRC's abandoned Danville
Secondary, together with all other Assets lying
on, adjacent to or in the vicinity of the CRC
right-of-way between Schneider and Danville, IL,
including without limitation all Assets comprising
such Danville Secondary thereon or adjacent
thereto necessary for construction of connections
at Schneider and Danville (excluding any NYC
Allocated Assets).  (If NSR elects to restore the
line between Schneider and Danville, CSXT shall
have the option to share in the costs of the line
restoration on a reasonable basis that is mutually
agreeable and, if CSXT elects so to share in such
restoration costs, CSXT shall be granted overhead
trackage rights on such line on a fair basis
taking into consideration the cost paid by CSXT
for such restoration.)

(E)  Stock Ownership and Other Interests.  The following
interests:

(1)  16.67% of the issued and outstanding capital stock
in The Belt Railway Company of Chicago;

(2)  25.64% of the issued and outstanding capital stock
in Peoria and Pekin Union Railway Company;

(3)  100% of the issued and outstanding capital stock
in TCV, Inc. (which owns a 50% partnership
interest in Triple Crown Services Company); and

(4)  11.682% of the issued and outstanding capital
stock in TTX Company.

ITEM 3 - RETAINED ASSETS

The "Retained Assets" shall include all of CRR's, CRC's and
their respective Affiliates' right, title and interest in and to
the following Assets:

(A)  Routes and Assets Related to Routes.  Routes within the
Shared Asset Areas identified as Retained Assets in Attachment I
and Attachment II (i.e., those lines colored in blue on
Attachment II), together with the following Assets within the
Shared Asset Areas that are related to such Routes (except as
otherwise expressly provided in this Schedule 1 or the Ancillary
Agreements):

(1)  the track structure (rails, ties, other track
material, grading, bridges, tunnels, culverts,
etc.);

(2)  the underlying right-of-way, operating and      
non-operating, regardless of its width, and
associated structures and fixtures;

(3)  appurtenant yards, sidings, switch tracks and
repair or other maintenance facilities (including
but not limited to Oak Island Yard, auto terminals
at Doremus Avenue, Greenville and Ridgefield
Heights);

(4)  real estate (whether or not used for operating
purposes) adjacent or in proximity to the Routes 
included in the Retained Assets, or underlying,
adjacent or in proximity to those structures or
facilities described in the preceding clauses (2)
and (3) and the following clause (5);

(5)  signal, communications and computer facilities and
equipment on the right-of-way and (to the extent
used to operate the Routes included in Retained
Assets) off the right-of-way;

(6)  tools and supplies located on and along, and
automobiles, hi-rail cars and trucks assigned to,
the Routes included in the Retained Assets,
including repair materials and local repair equip-
ment, except system stockpiles of inventory,
material and supplies and Work Equipment;

(7)  Contracts (other than Transportation Contracts)
relating to a Route included in Retained Assets,
including without limitation trackage and other
operating rights, public and private grade
crossing agreements, side track and industrial
track agreements, pipeline and wireline
agreements, building and yard maintenance
agreements, leases, licenses, reversions,
longitudinal easements and other occupancy
agreements, and the rents, security deposits and
profits arising therefrom or in connection
therewith;

(8)  muniments of title, all original valuation maps,
land schedules, track charts, surveys, bridge and
other drawings, bridge inspection reports,
environmental reports, permits, signal and
communications plans, other engineering
documentation, deeds (including such originals of
acquisition or out-conveyances as may be in CRC's
possession), current billing records (including
billing addresses and, if in a computer format,
the data and the programs), real estate work
files, property tax records (and any computer
database for such records), and all other Books
and Records relating to a Route included in
Retained Assets;

(9)  mineral rights or easements of any sort held by
CRR, CRC or any of their respective Affiliates
located on, over, across and/or in the real estate
or property heretofore described in this paragraph
(A); and

(10) royalties or other payments in respect of real
estate or other Assets heretofore described in
this paragraph (A).

(B)  The "Retained Assets" shall include the SSO Facilities
which shall be as follows:

(1)  the building and offices, together with underlying
land, of the Philadelphia Division headquarters
located at Mt. Laurel, NJ within the
Philadelphia/South Jersey Shared Assets Area;

(2)  the Customer Service Center building and offices,
together with underlying land, located at
Pittsburgh, PA;

(3)  use of the office space in the Dearborn Division
headquarters building (the building and land are
included in the PRR Allocated Assets) currently
used for the crew management facility until the
crew management facility is discontinued;

(4)  the system maintenance-of-way equipment center
building located adjacent to Canton Yard in
Canton, OH on land included in the PRR Allocated
Assets;

(5)  the signal repair center building located within
Buckeye Yard at Columbus, OH on land included in
the PRR Allocated Assets;

(6)  the offices of the system freight claims facility
located at Buffalo, NY on land included in the NYC
Allocated Assets;

(7)  the offices of the system non-revenue billing
facility and land located at Bethlehem, PA;

(8)  the system rail welding plant building located at
Lucknow (Harrisburg, PA) on land at Harrisburg
Yard that is included in the PRR Allocated Assets;

(9)  use of the offices located at Conway Yard,
Pittsburgh, PA (the building and land are included
in the PRR Allocated Assets), for the system road
foreman/engineer training center until such center
is discontinued; and

(10) the police operations center offices and land at
Mt. Laurel, NJ.

(C)  51% of the issued and outstanding capital stock in
Indiana Harbor Belt Railroad Co. (subject to provisions of
Ancillary Agreement referred to in Schedule 4, Item 4(E)(1)).

ITEM 4 - POOLED ASSETS

The "Pooled Assets" shall include the following Assets of
CRR, CRC and their respective Affiliates:

(A)  Non-Operating property and improvements not in
proximity to an Allocated Asset or a Retained Asset.

(B)  Employee benefit plans and Assets of such plans.

(C)  System stockpiles of inventory, materials and supplies
regardless of location (other than those at Hollidaysburg and
Altoona shops which shall be subject to Section 2.7 of the
Agreement).

(D)  The following interests:

(1)  100% of the issued and outstanding capital stock
in Merchants Despatch Trans. Corp.;

(2)  100% of the issued and outstanding capital stock
in CRC Properties, Inc.; and

(3)  100% of the issued and outstanding capital stock
in CRR Investments, Inc.

However, if any of the Assets of the entities
identified in clauses (D)(1) through (3) above are part of the
Routes included in the NYC Allocated Assets (Item 1(A) above) or
the PRR Allocated Assets (Item 2(A) above), then the Assets of
such entity will be designated as and included in the NYC
Allocated Assets or the PRR Allocated Assets, as the case may be;
provided that if such assets are valued at greater than $1
million, then there shall be an equitable adjustment by way of a
cash payment from NYC or PRR, as the case may be, to the other
equal to the CSX's or NSC's respective Percentage, as the case
may be, applied against the value of such Assets or failing such
payment, by way of including CRC cash equal to the value of such
Assets in the NYC  Allocated Assets or the PRR Allocated Assets
as the case may be.

(E)  The following interests:

(1)  100% of the issued and outstanding capital stock
in CRR Industries, Inc.;

(2)  100% of the issued and outstanding capital stock
in Conrail Direct, Inc.;

(3)  100% of the issued and outstanding capital stock
in CG Projects, Inc.;

(4)  100% of the issued and outstanding capital stock
in PennCentral Comm. Co.;

(5)  100% of the issued and outstanding capital stock
in General American Ins. Co.; and

(6)  19.136% of the issued and outstanding capital
stock in Amtech Logistics Corp.

(F)  CRC's rights and interests in and with respect to the
following:

(1)  Locomotive Management Services Partnership (a
partnership with General Electric relating to use
of locomotives); and

(2)  EMP (bilateral agreements relating to use of
containers by CRC, NSR and UP).

The parties intend that CRC's rights and interests with respect
to LMS and EMP will be shared based on their respective
Percentage, that both CSXT and NSR will participate therein and
that, in the case of EMP, CSX will participate as a partner.

NOTE:  Notwithstanding any provision of this Schedule, to the
extent an item herein describes an Ancillary Agreement between
the parties the form of which is set forth as an Exhibit to this
Agreement, such description shall be for purposes of
identification only, and the terms of such Ancillary Agreement
shall control.

Conrail Line Allocation

Attachment I

All CRC lines are not listed herein.  Lines listed include main
line routes, primary branch lines and other lines which may need
clarification.  Lines pertain to allocated CRC ownership or where
identified (TR) to assumed present CRC freight rights.  Customer
access is attributed to the acquiror of the line on which the
customer is located, unless otherwise identified in the
Transaction Agreement.  Lines not specifically listed are to be
acquired by the owner/acquirer of the CRC route/line to which
they connect. In the case that a line not listed connects to a
line allocated to PRR and to a line allocated to NYC, allocation
will be determined at a later date.

NYC ALLOCATED ASSETS

Primary Route And 
Extension Acquisitions  

NY/NJ to Cleveland - Water Level Route & Extensions

Segmt  From                        To

1      South End N. Bergen Yd NJ   Selkirk/Albany Term. NY
1      Poughkeepsie           NY   New York City        NY  TR
1      Poughkeepsie           NY   New York City        NY
1      New York City          NY   White Plains         NY  TR
1      Selkirk/Albany Term.   NY   
1      Selkirk                NY   Poughkeepsie         NY    
2      Selkirk/Albany Term.   NY   Syracuse             NY  
3      Syracuse               NY   Buffalo              NY
3      Lyons Yard             NY   
4      Buffalo                NY   Ashtabula            OH    
5      Ashtabula              OH   Cleveland Terminal   OH
5      Portion of Kinsman     OH
Conn.
5      Portion of 44 I.T OH
5      All of 45 I.T.(including
Dock 22, 24, & 26 Lds) OH
5      Old Line
Lead(Cleveland)        OH
40     Boston                 MA   Selkirk/Albany Term. NY
41     Syracuse               NY   Adirondack Jct.      PQ
41     Adirondack Jct.        PQ   Montreal (St. Luc)   PQ  TR
41     Woodard                NY   Oswego               NY
41     Syracuse               NY   Hawk                 NY  
41     Hawk                   NY   Port of Oswego       NY  TR
43     Frontier Yard          NY   
43     Belt Line Branch       NY   
42     Buffalo Terminal       NY   Niagra Falls/LockportNY
42     Lockport               NY   West Somerset        NY  TR
94     Syracuse               NY   NYSW/FL Connections  NY   
165    Boston Terminal        MA   
165    Selkirk/Boston Line    MA   MA Branch Lines      MA
165    Selkirk/Boston Line    MA   MA Branch Lines      MA  TR
1      West 30th St. I.T.     NY   
1      Fremont Secondary NY   
166    New York City          NY   Connecticut Branch
Lines                    TR
166    Connecticut Branch
Lines                  
166    Connecticut Branch
Lines (including Amtrak)                             TR
3      Churchville            NY   Wayneport            NY
3      Mortimer               NY   Avon                 NY
3      Rochester Branch       NY   

Crestline to Chicago-Pennsylvania Route & Extensions

17     Crestline              OH   Dunkirk              OH
17     Bucyrus Yard Track and 
Connector              OH
18     Dunkirk                OH   Fort Wayne           IN
18     Decatur Sec. & Hunt 
I.T.                   IN                            
From NS 
via CR 
19     Fort Wayne             IN   Warsaw               IN
From NS 
via CR
20     Warsaw                 IN   Chicago Terminal
(Clarke Jct.)        IN
18     Adams                  IN   Decatur              IN

Berea to E. St. Louis Route & Extensions

21     Cleveland Terminal     OH   Crestline            OH
122    Crestline              OH   Galion               OH
22     Galion                 OH   Ridgeway             OH
23     Ridgeway               OH   Indianapolis         IN
24     Indianapolis           IN   Terre Haute          IN
25     Terre Haute            IN   Effingham            IL
26     Effingham              IL   St. Elmo             IL
27     St. Elmo               IL   E. St. Louis         IL
27     Anderson               IN   Emporia              IN
55     Columbus(CP138)        OH   Galion               OH
55     Columbus(Hocking)      OH   Columbus(CP138)      OH
55     Neil I.T.              OH   
83     Terre Haute            IN   Danville             IL
151    Danville               IL   Olin                 IN
80     Pekin R.T              IL   
100    Indianapolis Terminal  IN   
99     Indianapolis           IN   Rock Island          IN
100    Indianapolis           IN   Crawfordsville/
Bringhurst st        IN
154    Indianapolis           IN   Shelbyville          IN
105    HN Cabin               IL   Valley Jct.          IL
106    St. Elmo               IL   Salem                IL  TR
98     Terre Haute            IN   Beehunter            IN  TR
28     Muncie(Walnut Street)  IN   New Castle R.T.      IN  TR
28     New Castle RT          IN   
28     Muncie I.T.            IN   

Columbus to Toledo Route & Extensions

53     Mounds Connector       OH   
53     Western Branch         OH   
53     Buckeye Yard Lead      OH
53     Columbus               OH   Ridgeway             OH
52     Ridgeway               OH   Blanchard            OH
51     Blanchard              OH   Toledo Terminal      OH
51     Toledo Terminal        OH   Woodville            OH
(Caruthers Sec. and
I.T.)
51     Toledo Terminal        OH   Stonyridge           OH
51     Main Freight Tk. & Wye OH   
51     Stanley Yard and       
Interlocking           OH   
51     Eastern R.T.           OH   
51     Lakefront Docks Lead
Tracks                 OH   

Bowie to Woodzell, MD

90     Bowie                  MD   Morgantown           MD
90     Brandywine             MD   Chalk Point          MD

NY/NJ to Philadelphia (West Trenton Line)

182    Manville Yard & Lead   NJ   
182    Drill Track Lead       NJ 
182    Philadelphia/Greenwich PA   North NJ Terminal    NJ
Yd.
182    Park Jct.              PA   Belmont              PA
182    Phil                   PA   CP-Field/CP-Gray     PA
182    Eastwick               PA   Vicinity of CP-      PA
Field/CP-Gray

Washington, DC to Landover, MD

33     Washington Terminal    DC                            TR
33     Washington (RO)        DC   Landover             MD

Quakertown Branch

130    Philadelphia Terminal  PA   Quakertown           PA  TR

Chicago Area

192    Porter                 IN   Ivanhoe              IN
190    Panhandle Stub         IN   South of 49th Street IL
190    Ivanhoe                IN   Westernmost point of IN
CR Ownership

Monongahela

113    Monongahela RR         PA/                      Subject 
WV                       to joint   
use
agreement

PRR ALLOCATED ASSETS

Primary Route And 
Extension Acquisitions  

Segmt  From                        To

NJ Terminal to Crestline - Pennsylvania Route & Extensions

10     North NJ Terminal      NJ   Somerville           NJ
10     Somerville             NJ   Allentown            PA
10     Little Falls           NJ   Dover                NJ  TR
10     Orange                 NJ   Denville             NJ  TR
10     Dover                  NJ   Rockport             NJ  TR
10     Rockport               NJ   Phillipsburg         NJ
10     Phillipsburg           PA   E. Stroudsburg       PA
10     Allentown Terminal     PA   
186    Orange                 NJ   North Jersey TerminalNJ  TR
170    North Jersey Terminal  NJ   Little Falls         NJ  TR
182    Bound Brook            NJ   Ludlow               NJ  TR
11     Allentown              PA   Reading              PA
12     Reading                PA   Harrisburg           PA
12     Harrisburg Terminal    PA   
13     Harrisburg             PA   Pittsburgh           PA
13     Creekside              PA   Homer City           PA  TR
13     Conemaugh Line              via Saltsburg        PA
13     Pittsburgh             PA   W. Brownsville       PA
113    Monongahela RR         PA/
WV
13     Central City           PA   South Fork           PA
13     Pittsburgh Terminal    PA   
13     Monongahela            PA   Marianna             PA
14     Pittsburgh Terminal    PA   
14     Pittsburgh             PA   Salem                OH
14     Salem                  OH   Alliance             OH
14     Beaver Falls           PA   Wampum               PA
15     Alliance               OH   Cleveland Terminal   OH
120    Mantua                 OH   Cleveland Terminal   OH
120    Portion of Kinsman     OH
Conn.
120    Portion of 44 I.T.     OH
(including Dock 20 Ld.)
16     Alliance               OH   Crestline            OH
114    Alliance               OH   Omal                 OH
114    Rochester              PA   Yellow Creek         OH
114    E. Steubenville        WV   Weirton              WV
114    Steubenville Branches  OH
Bridge
114    Pittsburgh Branches    PA   
45     Ashtabula              OH   Youngstown           OH
162    Ashtabula Harbor       OH   Ashtabula            OH
46     Niles                  OH   Latimer              OH
46     Alliance               OH   Youngstown           OH  
46     Gem I.T. - Lordstown   OH   
48     Youngstown             OH   Rochester            PA
87     Allentown              PA   Hazelton             PA
CP  Harris             PA   Cloe                 PA  TR
Cloe                   PA   Shelocta             PA
Tyrone                 PA   Lock Haven           PA  TR

Cleveland to Chicago - Water Level Route

6      Cleveland Terminal     OH   Toledo Terminal      OH
6      Elyria                 OH   Lorain               OH
159    Toledo Terminal        OH   Sylvania             OH
7      Toledo Terminal        OH   Goshen               IN
107    Elkhart                IN   Goshen               IN
8      Elkhart                IN   Porter               IN

Philadelphia to Washington (NEC) Route & Extensions

31     Philadelphia Terminal  PA   Perryville           MD  TR
31     Wilmington Terminal    DE   
32     Perryville             MD   Baltimore            MD  TR
32     Baltimore Terminal     MD   
32     Claremont R.T.         MD
32     Loneys Lane Lead       MD
32     Grays Yard             MD                            TR
33     Balt. BayView          MD   Landover             MD  TR
33     Baltimore Terminal     MD
33     Baltimore              MD   Cockeysville         MD
33     Landover               MD   Union Station        DC  TR
34     Pocomoke               MD   New Castle Jct       DE  TR
34     Harrington             DE   Frankford/           DE
Indian River
131    Newark                 DE   Porter               DE  TR

Michigan Operations (Excluding Joint Detroit Area)

50     Toledo Terminal        OH   Detroit Terminal     MI
60     Detroit Terminal       MI   Jackson              MI
61     Jackson                MI   Kalamazoo            MI
62     Kalamazoo              MI   Elkhart              IN
70     Jackson                MI   Lansing              MI
71     Kalamazoo              MI   Grand Rapids         MI
71     Kalamazoo I.T.         MI   
71     Comstock I.T.          MI   
156    Kalamazoo              MI   Porter               IN  TR

Eastern PA Lines & Extensions

37     Philadelphia Terminal  PA   Reading              PA
37     Reading Terminal
37     Thorndale              PA   Woodbourne           PA
37     Portion of Stoney      PA
Creek Branch
37     West Falls Yard        PA
37     Venice I.T.            PA
136    Leola/Chesterbrook     PA
Lines
137    Philadelphia           PA   Lancaster            PA  TR
Terminal
111    Lancaster              PA   Royalton             PA  TR
112    Lancaster              PA   Lititz/Columbia      PA

Indiana Lines & Extensions

84     Anderson               IN   Warsaw               IN  
85     Warsaw                 IN   Goshen               IN
163    Marion                 IN   Red Key              IN
101    Layfayette I.T.        IN   Lancaster 

Buffalo to NY/NJ Terminal Route & Extensions

44     NJ/NY Jct.             NJ   Suffern              NY  TR
44     Suffern                NY   Port Jervis          NY
44     Port Jervis            NY   Binghamton           NY
44     Binghamton             NY   Waverly              NY
44     NJ/NY Jct.             NJ   Spring Valley        NY  TR
44     Paterson Jct.          NJ   Ridgewood            NJ  TR
38     Waverly                NY   Buffalo              NY
88     Waverly                NY   Mehoopany            PA
89     Sayre                  PA   Ludlowville          NY
93     Lyons                  NY   Himrods Jct          NY
95     Corning                NY   Himrods Jct          NY
171    North Jersey Terminal  NJ   Paterson Jct         NJ  TR
171    Paterson  Jct.         NJ   North Newark         NJ
171    NJ/NY Jct.             NJ   North Jersey TerminalNJ  TR

Buffalo to Harrisburg and South

35     Perryville             MD   Harrisburg           PA
35     Carlisle               PA   Harrisburg           PA
35     Wago                   PA   York (area)          PA
35     Harrisburg             PA   Shocks               PA
36     Williamsport           MD   Harrisburg           PA
39     Harrisburg             PA   Buffalo              NY
39     Watsontown             PA   Strawberry Ridge     PA
4      Ebenezer Jct.          NY   Lackawanna           NY
91     Hornell                NY   Corry                PA
91     Corry                  PA   Erie                 PA  TR
91     Youngstown             OH   Oil City             PA

Cincinnati, OH to Columbus, OH to Charleston, WV

54     Columbus               OH   Cincinnati           OH
54     Cincinnati Terminal    OH   
56     Columbus Terminal      OH   Truro                OH
57     Truro                  OH   Charleston           WV
150    Charleston             WV   Cornelia             WV
150    Charleston             WV   Morris Fork          WV

Chicago South/Illinois Operations

193    Osborne                IN   Hartsdale            IN
193    Hartsdale              IN   Chicago Heights      IL
82     Hartsdale              IN   Schneider            IN
81     Schneider              IN   Hennepin             IL
97     Keensburg              IL   Carol                IL
152    Schneider              IN   Wheatfield           IN

Chicago Market

194    Western Ave                 Cicero/Elsdon        IL
Operations/Loop
194    Western Ave. I.T.      IL
194    Old Western Ave. I.T.  IL
194    North Joint Tracks     IL
194    Elevator Lead & Tri-   IL
River Dock
195    Chicago                IL   Porter               IN
196    Clarke Jct.            IN   CP501                IN
196    CP 509                 IL   Calumet Park         IL
194    CR&I Branch            IL
194    49th Street I.T.       IL
194    75th Street            IL   51st Street          IL  TR
197    Port of Indiana        IN   
196    Bernice I.T.           IL   
190    CP502                  IN   Osborne              IN

CRC RETAINED ASSETS - DETROIT SHARED ASSETS AREA

Segmt               From           To

Detroit Line       Gibraltar(MP20) MI CP West Detroit    MI
Michigan Line      CP Townline     MI CP 15th Street     MI
Part TR
North Yard Branch  CP Bay City Jct MI North Yard         MI
Sterling Secondary North Yard      MI Sterling Yard      MI
Junction Yard 
Secondary        CP Townline     MI River Rouge Yard   MI
Marsh Industrial   River Rouge     MI Tecumsah  Yard     MI
Track              Yard          
Lincoln Industrial Ecorse Jct.     MI Carleton           MI
Track
Term. East Ind.    Mack Yard       MI North Yard         MI
Track
Term. West Ind.    North Yard      MI Fullerton          MI
Track
Highland Park Ind. Fullerton       MI West Belt Jct.     MI
Track
Utica Industrial   Sterling Yard   MI Ford Utica Plant   MI
Track
Forman Wye Track   Fort St -       MI NS Drawbridge      MI
Rougemere
Overhead Rights    West Belt Jct.  MI Delray             MI  TR
on CSXT
Local Rights on    Oak             MI End of Track - W.  MI  TR
CSXT                               Detroit
Rights on Delray Connecting RR

CRC RETAINED ASSETS - SOUTH JERSEY/PHILADELPHIA SHARED ASSETS
AREA

Segmt               From           To

NEC (Amtrak)       Zoo             PA Trenton            NJ TR
Harrisburg Line    Zoo             PA Overbrook          PA TR
(Amtrak)
Delair Branch      CP Park         PA Pavonia Yard       NJ  
West Chester Line  Arsenal         PA Media              PA TR
(SEPTA)
Chestnut Hill W.   N. Philadelphia PA Midvale            PA TR
Line (SEPTA)
Midvale Yard/                      PA
Midvale I.T.
Main Line (SEPTA)  Market East     PA Newtown Jct.       PA TR
Chester Secondary  Eastwick        PA Essington          PA  
Chester Industrial Essington       PA Marcus Hook        PA
Track
Bordertown         Pavonia         NJ Trenton            NJ
Secondary
Beasley's Pt.      CP Brown        NJ Palermo            NJ
Secondary                                            Part TR
Vineland Secondary CP Brown        NJ Landis             NJ
Millville          Landis          NJ Manumiskin         NJ
Industrial Track
Manumuskin Ind.    Manumuskin      NJ WW RR Connection   NJ
Track
Penns Grove        Woodbury        NJ Deepwater          NJ
Secondary
Salem Running      Woodbury        NJ Swedesboro         NJ
Track
Pemberton Ind.     CP Jersey       NJ Mt. Holly          NJ
Track                                                Part TR
Grenloch           CP Brown        NJ Bellmawr           NJ
Industrial Track
Shell Industrial   Shell           NJ End of Track       NJ  
Track
Bustleton Ind.     Holmes          PA Bustleton          PA
Track
Morrisville Line   CP "MA"         PA Morris             PA
Fairless Spur      Morrisville Yd. PA Fairless Works     PA
Richmond Ind.      Nice            PA Pt. Richmond       PA
Track
60th Street Ind.   Essington       PA End of Track       PA
Track
Camden Running     CP Brown        NJ Pavonia            NJ
Track                                                Part TR
Philadelphia Belt                  PA                       TR
Line
Swanson St. IT     South           PA 
Philadelphia

Port of Philadelphia               PA
Pier I22                           PA
Blue Line          Wayne Jct.      PA Nice               PA
Connecting Track

CRC RETAINED ASSETS - NORTH JERSEY/NEW YORK SHARED ASSETS AREA

Segmt               From           To

NEC (Amtrak)       Trenton         NJ Penn Station NY    NY TR
Raritan Valley     Aldene          NJ Bound Brook        NJ TR
Line (NJT)
North Coast Line   Rahway(Union)   NJ Neptune Yard       NJ TR
(NJT)
Bayonne Line (NJT) Bayonne         NJ Greenville         NJ TR
Southern Secondary Red Bank        NJ Glidden            NJ TR
(NJT)
Freehold Secondary Freehold        NJ Farmingdale        NJ TR
(NJT)
Lehigh Line        CP Port Reading NJ Oak Island Yard    NJ  
Jct.
River Line         CP Waldo        NJ North Bergen       NJ  
Port Reading       Bound Brook     NJ PD Port Reading    NJ
Secondary
Chemical Coast     "PN" Oak Island NJ Perth Amboy        NJ  
Secondary
P&H Branch         Lane            NJ Hack               NJ  
Nave - Croxton     Nave            NJ CP-Croxton         NJ
Running Tk.
Northern Running   CP-Croxton      NJ North Bergen       NJ
Track
Marion Running     Hack            NJ CP-Croxton         NJ
Track
National Docks     Oak Island      NJ Nave               NJ
Secondary
Amboy Secondary    South Amboy     NJ Monmouth Jct.      NJ       
(Midway)
Bonhamton/Raritan  Metuchen        NJ Perth Amboy        NJ
Ind. Tks.
Linden Industrial  Carteret        NJ Linden             NJ
Track
Perth Amboy                           Center             NJ  
GSA Lead           NS Lehigh Line  NJ CSX Trenton Line   NJ
Conn.
Reformatory Ind.   Carteret        NJ Chrome Yard        NJ
Track
Elizabeth Ind.     Aldene          NJ Elizabeth          NJ
Track
Hightstown Ind.    Jamesburg       NJ Hightstown         NJ
Track
Toms River Ind.    Lakehurst       NJ Ciba               NJ
Track
Meadows #1 Track                   NJ                    NJ
Port Newark/Port                   NJ                    NJ
Elizabeth Access
Auto Terminal Lead Ridgefield      NJ                    NJ
Heights 
Greenville Yard    Greenville      NJ                    NJ
and Lead

ATTACHMENT II

[Attachment II - not provided in this filing - is a detailed map
of the entire Consolidated Rail Corporation (CRC) rail system,
indicating by color coding the Routes which are to be NYC
Allocated Assets, PRR Allocated Assets and Retained
Assets, respectively;  Attachment II is intended to show
graphically the Routes described in Attachment I.]

SCHEDULE 2

MAJOR DECISIONS

1.   From and after the Control Date, except by
resolution of the CRC Board, none of CRR, CRC or any of their
respective Affiliates (other than NYC and PRR) shall (other than
as is necessary or convenient in connection with a Restructuring
or is expressly set forth in this Agreement or the Ancillary
Agreements), in any single transaction or series of transactions,
take or commit to take any of the following actions:

(a)  any action which would require or cause NYC or PRR
to declare, make or pay any Distributions;

(b)  conduct any business other than, or engage in any
transaction not substantially related to and in the ordinary
course of, the business of CRC and its Affiliates (other than NYC
and PRR) as contemplated under this Agreement and the Ancillary
Agreements (the "Continuing CRC Business");

(c)  make any loans, advances or capital contributions
to, or investments in, any other Person except CRC's wholly owned
Subsidiaries;

(d)  acquire any business or assets, other than assets
acquired in the ordinary course of the Continuing CRC Business;

(e)  consolidate with or merge into any Person or
otherwise engage in any business combination;

(f)  issue, sell, adjust, split, combine, subdivide,
reclassify, transfer, pledge, redeem or otherwise acquire any
shares of its capital stock;

(g)  sell, transfer, lease, sublease, license or
otherwise dispose of any assets (including leasehold interests
and intangible assets) not in the ordinary course of the
Continuing CRC Business or in excess of $100,000 in aggregate
value in any 12 month period;

(h)  commit to or make any capital expenditure other
than in compliance in all material respects with the capital
expenditure budget adopted by the CRC Board from time to time;

(i)  commence or settle any litigation for equitable
relief or for an amount in excess of $100,000 in any such
commencement or settlement or series of related commencements or
settlements;

(j)  form or participate in a joint venture or
partnership outside the ordinary course of the Continuing CRC
Business or involving over $100,000 in assets or over $100,000 in
revenues;

(k)  enter into or amend Contracts outside the ordinary
course of the Continuing CRC Business or with a notional value in
excess of $100,000 or for a period in excess of 12 months;
provided that in respect of Contracts that are Allocated Assets,
CRC shall follow NYC's (in the case of Contracts that are NYC
Allocated Assets) or PRR's (in the case of Contracts that are PRR
Allocated Assets) reasonable instructions in respect of such
Contracts and no CRC Board approval shall be necessary for CRC to
take such actions;

(l)  create liens on or encumbrances of assets outside
the ordinary course of the Continuing CRC Business or with an
aggregate net book value in excess of $50,000;

(m)  incur, assume, pre-pay, guarantee, endorse or
otherwise become liable or responsible (whether directly,
contingently or otherwise) for any indebtedness for borrowed
money except in the ordinary course of the Continuing CRC
Business;

(n)  declare, make or pay any Distributions, other than
Distributions to CRC by its wholly owned Subsidiaries (other than
NYC and PRR);

(o)  appoint or terminate any executive management;

(p)  enter into or amend any written employment
agreement or contract or employee benefit plan or employee
policy;

(q)  appoint or replace the independent auditors of
CRR, CRC and their respective Affiliates;

(r)  unless required by law or a change in generally
accepted accounting principles in the United States, make any
material change in the accounting methods of CRR, CRC and their
respective Affiliates;

(s)  dissolve, liquidate or wind up CRR, CRC or their
respective Affiliates or commence a voluntary proceeding seeking
reorganization or similar relief;

(t)  approve, enter into or perform any transactions
with any director, officer or employee of CRR, CRC or their
respective Affiliates, or with an Affiliate of CSX or NSC,
respectively, or with any partner, family member or other person
that, directly or indirectly through one or more intermediaries,
controls or is controlled by or is under common control with any
such director, officer or employee;

(u)  transfer, pledge, create a security interest, or
otherwise part with ownership or possession, in whole or part, of
its membership interest in NYC or PRR; or

(v)  any other action that could be reasonably expected
to have a material impact on the performance, financial condition
or prospects of CRR, CRC or their respective Affiliates.

2.   Except by resolution of the CRC Board, CRC shall
not (other than as is necessary or convenient in connection with
a Restructuring) in its capacity as the sole member of NYC and
PRR, respectively, amend or restate the NYC LLC Agreement or the
PRR LLC Agreement, or suffer or permit NYC or PRR, as the case
may be, to take or commit to any of the following actions:

(a)  declare, make or pay any Distributions;

(b)  conduct any business other than, or engage in any
transaction not substantially related to and in the ordinary
course of, the business of NYC or PRR, as the case may be, as
contemplated under the Transaction Agreement and the Ancillary
Agreements or the freight transportation business generally;

(c)  consolidate with or merge into any Person or
otherwise engage in any business combination;

(d)  issue, sell, adjust, split, combine, subdivide,
reclassify, transfer, pledge, redeem or otherwise acquire any
interest in NYC or PRR, as the case may be;

(e)  sell, transfer, lease, sublease, license, exchange
or otherwise dispose of all or substantially all of their Assets,
respectively (including leasehold interests and intangible
Assets);

(f)  dissolve, liquidate or wind up or commence a
voluntary proceeding seeking reorganization or similar relief;

(g)  enter into any agreement or arrangement with
respect to, or engage in, any transaction (i) between NYC or PRR,
as the case may be, on the one hand, and CRC or its Affiliates,
on the other hand, and (ii) between the NYC or PRR, as the case
may be, on the one hand, and CSX or NSC and their respective
Affiliates, on the other hand, other than such a transaction
which is on arm's length terms;

(h)  transfer, provide trackage or operating rights or
otherwise grant the right to use any railroad line (regardless of
whether the grantor's rights depend on ownership or trackage
rights or a combination thereof) which is part of any Main Line
within the States of New Jersey or New York, or the area within
twenty-five miles of the city of Philadelphia, PA (or consent to
any such action by the "Operator" under the CSXT Operating
Agreement or the NSR Operating Agreement).  As used in the
preceding sentence, "Main Line" means a line of railroad that has
daily rail service, but does not include any branch line
connecting to a Main Line and does not include the Main Line that
lies east of the Hudson River and south of Selkirk, NY; or

(i)  amend any material provision of the CSXT Operating
Agreement, the CSXT Equipment Lease, the NSR Operating Agreement
or the NSR Equipment Lease.

SCHEDULE 3

PRESERVATION OF FAIR ACCESS TO CHICAGO GATEWAY

(a)  For purposes of this Schedule 3, the following
terms shall have the following meanings:

(i)  "Chicago Area" means the geographic area in
the States of Illinois and Indiana located within a 100-mile
radius of the office building presently located at One First
National Plaza in Chicago, Illinois;

(ii)  "Chicago Area Terminal Railroad" means any
railroad, whether currently in existence or later created,
whose primary business is the provision of terminal or
switching services within the Chicago Area including,
without limitation, the Indiana Harbor Belt Line Railroad
Company, the Belt Railway Company of Chicago, the Baltimore
and Ohio Chicago Terminal Railroad Company and the Elgin,
Joliet and Eastern Railroad Company; and

(iii)  "Chicago Gateway" means railroad lines
and interchange, dispatching and other related facilities
necessary to the function of carrying by railroad freight
moving through the Chicago Area generally in the direction
from east to west or west to east, whether by interchange
between carriers in the Chicago Area or by single-line ser-
vice between points east of the Chicago Area and points west
of the Chicago Area and passing through the Chicago Area.

(b)  If CSXT or NSR shall after the Control Date
acquire, directly or indirectly, ownership, or rights to exercise
effective voting control, of any voting stock in any Chicago Area
Terminal Railroad (the "Interests"), the party acquiring such
Interests (the "Acquiror") shall, at the request of the other
party, sell or transfer to the other party, on terms and condi-
tions substantially the same on a pro rata per Interest basis as
those governing the Acquiror's acquisition of Interests, one-half
of such newly acquired Interests, provided, however, that if the
Interests would give the Acquiror control, not theretofore held,
of a Chicago Area Terminal Railroad, the Acquiror's obligation to
sell or transfer shall attach to the lesser of (A) one-half of
all the Interests (not solely newly acquired Interests) it holds
in that Chicago Area Terminal Railroad, or (B) such portion of
all the Interests (not solely newly acquired Interests) it holds
in that Chicago Area Terminal Railroad as necessary to equalize
the Interests of each party.  The sale or transfer price for each
such Interest shall be the per Interest price paid by the
Acquiror for the newly acquired Interests.

(c)  Neither CSXT nor NSR shall, following the Control
Date, enter into any arrangement with any Chicago Area Terminal
Railroad, or any other railroad operating in the Chicago Area
related to the Chicago Gateway, under which, in connection with
the grant by such Chicago Area Terminal Railroad or such other
railroad of trackage rights or similar operating rights to either
CSXT or NSR, such Chicago Area Terminal Railroad or other
railroad shall agree not to grant trackage rights or similar
operating rights to the other of CSXT or NSR, with respect to
such Chicago Area Terminal Railroad or the lines of such other
railroad related to the Chicago Gateway.

(d)  Should CSX or CSXT enter into a transaction in
which either one shall be acquired by Burlington Northern Santa
Fe Corporation ("BNSF"), or in which CSX or CSXT acquires BNSF,
or in which substantially all of the rail operations of CSXT and
BNSF shall be otherwise combined and put under common control or
be merged together in any manner, at the request of CSX and any
successor thereto made no later than one year following the
consummation of such transaction, NSR shall sell and transfer to
CSXT or its successor, at fair value, the Streator Line from
Osborne, IN to Streator, IL (being the rail line located between
Osborne, IN, and Schneider, IN, and Wheatfield, IN, and Moronts,
IL), including all dispatching control with respect to said line. 
As used in this subsection, the term "fair value" shall mean the
fair market value as determined by the parties by agreement or,
failing agreement, as determined by binding arbitration.  Any
such sale and transfer shall be subject to all requisite
governmental and regulatory approvals.

(e)  Any dispute concerning the interpretation or
application of this Schedule 3 shall be finally settled by
binding arbitration pursuant to Section 11.12 of the Transaction
Agreement.  In any such arbitration, the arbitrator(s) shall have
the authority to direct, subject to any required governmental or
regulatory approvals and in accordance with any contractual
limitations on transfer or assignment contained in any agreement
with third parties (except one made in contravention of this
Schedule 3), CSXT, NSR or both to transfer to each other owner-
ship or control of voting stock in any Chicago Area Terminal
Railroad, or to direct the release by a party violating
subsection (c) of any obligation of exclusivity made in such
violation, as are necessary to carry out the purposes of this
Schedule 3.

SCHEDULE 4

SCHEDULE OF TRACKAGE RIGHTS,
HAULAGE, SHARED ASSET AND OTHER OPERATING AGREEMENTS

ITEM 1 - TRACKAGE RIGHTS AGREEMENTS

All Trackage Rights Agreements referred to in Items 1.A and
1.B below will be substantially in the form of the Trackage
Rights Agreement attached hereto as Exhibit C-1 (in the case
of those referred to in Item 1.A.) or C-2 (in the case of
those referred to in Item 1.B.) and will be between the
operator of the involved rail line, the owner, and the
tenant road.  Forms of addenda and/or assignments relating
to the trackage rights referred to in Item 1.A. are included
with Exhibit C-1 and forms of addenda and/or assignments
relating to the trackage rights referred to in Item 1.B. are
included with Exhibit C-2.  Unless otherwise provided here-
in, a trackage rights tenant shall only have the right to
enter on and exit from the trackage rights lines at points
other than the endpoints where the tenant may make a
connection with its existing railroad line and joint
CSXT/NSR lines ("Point of Permitted Entry or Exit").  If, in
the opinion of the tenant, a new or upgraded connection is
required at a Point of Permitted Entry or Exit other than
the endpoints, or, if in the opinion of the tenant, other
upgrading, including but not limited to switches, power
switches, signals, communications, etc., is required for
operational efficiency, the landlord will, subject to its
own operational needs, cooperate and the tenant will be
responsible for funding that construction/upgrading at
actual cost or a cost mutually agreed to by CSXT and NSR.
Where a tenant has access to 2-to-1 points via trackage
rights, the tenant may at its option access the points via
haulage.

A.   NSR on CSXT:  CSXT will grant to NSR trackage rights on the
following rail lines which will be owned or operated by CSXT
after the Closing Date:

1.   Junction - Hadley (Fort Wayne, IN):  NSR rights to
operate over and share with CSXT the former CRC line
between Junction and Hadley (the crossing of the former
Pennsylvania RR and NYC&SL west of Fort Wayne).

2.   Lafayette, IN - Crawfordsville (area):  assignment of
overhead trackage rights on CSXT s Lafayette -
Crawfordsville, IN line to serve 2-to-1 shippers at
Crawfordsville, IN, and to move overhead between
Lafayette and Indianapolis.

3.   Crawfordsville, IN - Indianapolis (area):  overhead
trackage rights on CRC's Crawfordsville - Indianapolis
line to serve 2-to-1 shippers, the GM metal fabrication
plant and the INRD via Hawthorne Yard.

4.   Indianapolis:  overhead trackage rights on CRC's
Crawfordsville Branch from Woods to Washington Street
in Indianapolis to serve 2-to-1 shippers, the GM metal
fabrication plant and the INRD via Hawthorne Yard.

5.   Indianapolis:  overhead trackage rights on CSXT between
Washington Street and Pine in Indianapolis to serve     
2-to-1 shippers, the GM metal fabrication plant and the
INRD via Hawthorne Yard.

6.   Buffalo (CP 437) - Niagara Falls (Suspension Bridge): 
overhead trackage rights on CRC s Belt Line Branch and
Niagara Branch to connect with, or with trackage of
Canadian carriers at Suspension Bridge.

7.   Philadelphia(Park Jct.) - Anacostia Jct., MD:  NSR is
assigned CRC s overhead trackage rights on CSXT.

8.   Landover - RO (Alexandria, VA):  overhead trackage
rights on CRC s Landover Line.

9.   Cleveland, OH:  overhead trackage rights on CRC s Short
Line from Quaker to Berea, OH.

10.  Cleveland, OH:  overhead trackage rights on CRC s
Chicago Line (allocated to CSXT) from CP 181 to
Collinwood Yard for purposes of interchange with CSXT.

11.  Crestline, OH - Fort Wayne (Mike), IN:  overhead
trackage rights on CRC s Fort Wayne Line (which is to
be allocated to CSXT), with train limits as follows:
-   8 total trains/day between Crestline and
Bucyrus            
-   6 total trains/day between Bucyrus and
Fort Wayne including rights to serve 2-1
customers at Upper Sandusky.
NSR trains over the above limits are subject to
negotiations between CSXT and NSR for NSR contribution
to CSXT investment needed for additional capacity.  NS
will supervise the dispatching of the Ft. Wayne to
Crestline line until CSXT haulage over CRC Chicago Line
between Berea and Chicago is terminated.  NS will
control the Bucyrus interlocking permanently.

12.  Fort Wayne(Mike), IN - Chicago(Clarke Jct., IN):
overhead trackage rights on former CRC Fort Wayne Line
(Ft. Wayne - Chicago, now NSR), with ten total
trains/day limit (limit does not apply in Fort Wayne
terminal). NSR trains over the above limits are subject
to negotiations between CSXT and NSR for NSR
contribution to CSXT investment needed for additional
capacity.  NSR will dispatch the line until CSXT
haulage over CRC Chicago Line between Berea and Chicago
is terminated.

13.  Porter - Gibson Interlocking, IN:  overhead trackage
rights on CRC s Porter Branch.

14.  CP Hocking - CP 138 (Columbus, OH):  overhead trackage
rights on CRC Buckeye Line from "CP Hocking" to "CP
138".

15.  Scioto - CP Mounds (Columbus, OH): overhead trackage
rights on CRC Western Branch from Scioto to "CP
Mounds," including the Mounds Connection.

16.  CP Buckeye - CP Darby (Columbus, OH):   overhead
trackage rights on Buckeye Yard Lead from "CP Buckeye"
to "CP Darby".

17.  CP 138 - MP 133.5 (Columbus, OH):  overhead trackage
rights on the CSXT - assigned west track of the CRC
Columbus Line from  CP 138" to the vicinity of Milepost
133.5 (point of new NS connection).

18.  Parsons Yard - Scioto (Columbus, OH):  overhead
trackage rights on CSXT between the south end of
Parsons Yard (connection with Watkins - Parsons
transfer track) and Scioto.

19.  Lima, OH - Sidney, OH:  overhead trackage rights on
CSXT's Toledo Subdivision to serve 2-to-1 customers at
Sidney.

20.  Bound Brook, NJ - Woodbourne, PA:  overhead trackage
rights for twelve total trains/day limit on CRC s
Trenton Line for dimensional trains until Pattenburg
Tunnel on CRC s Lehigh line is cleared of dimensional
restrictions, not to exceed three years.

21.  Piqua Yard - Mike Interlocking (Fort Wayne, IN):  NSR
overhead rights to operate trains for Triple Crown
Services Company between Piqua Yard and Mike
interlocking (Fort Wayne).  

22.  Muncie, IN - Indianapolis (area):  overhead trackage
rights on CRC s Indianapolis Line, South Anderson
Cutoff and part of Dow Secondary to serve 2-to-1 ship-
pers the GM metal fabrication plant and the INRD via
Hawthorne Yard.

23.  Toledo Terminal:  overhead rights on CSXT-controlled
portion of former Toledo Terminal Railroad.

24.  Erie, PA:  overhead trackage rights on CRC between
Downing Avenue and Wallace Street in Erie, PA, subject
to restriction against NSR use of CRC Chicago line main
tracks.

25.  CP Short - Parma, OH:  overhead trackage rights on CRC
Short Line from CP Short to Parma to serve but not
directly switch Parma auto plant.

26.  McCook - Franklin Park, IL:  overhead trackage rights
granted by B&OCT.

27.  Pine Junction, IN - McCook, IL:  overhead trackage
rights on B&OCT.

B.   CSXT on NSR:  NSR will grant to CSXT trackage rights on the
following rail lines which will be owned or operated by NSR
after the Closing Date:

1.   CP River (West Falls), PA - Abrams, PA:  overhead
trackage rights on CRC s Harrisburg Line for
dimensional traffic.

2.   CP King (Norristown), PA - Woodbourne (CP Wood), PA: 
overhead trackage rights on CRC s Morrisville Line for
dimensional traffic plus incidental rights on short
portion of SEPTA s Norristown Line.

3.   Berea, OH - CP 181 (Cleveland, OH):  overhead trackage
rights on CRC s existing Chicago Line.

4.   CP Short - CP 190 (Cleveland, OH) and Berea, OH -
Lorain and Fairlane, OH:  overhead trackage rights on
CRC's line allocated to NSR and rights to serve 2-to-1
Ford Motor plants at Avon Lake and Fairlane.

5.   CP Hocking - Buckeye Yard: overhead trackage rights on
CRC Buckeye Line from "CP Hocking" to Buckeye Yard.

6.   Bannon - Scioto, OH:  overhead trackage rights on CRC
Western Branch from Bannon to Scioto.

7.   CP 139 - Buckeye Yard:  overhead trackage rights on CRC
Cincinnati Line from  CP 139" to Buckeye Yard, via the
Miami Lead.

8.   CP 138 - MP 133.5 (Columbus, OH):  overhead trackage
rights on the NSR-assigned east track of the CRC
Columbus Line from CP 138 to the vicinity of MP 133.5
(point of new NSR connection).

9.   CP Camp - CP 139 (Columbus):  overhead trackage rights
on CRC Auburn Connection from "CP Camp" to "CP 139".

10.  Bannon - Watkins Yard:  overhead trackage rights on NSR
from Bannon to the south (RR east) end of NSR Watkins
Yard (connection with Watkins - Parsons transfer
track).

11.  Youngstown (Center St.) - Ashtabula Harbor, OH:
overhead trackage rights on CRC Youngstown Line to
access Ashtabula Harbor facilities and the Water Level
Route.

12.  Osborne, IN - Streator, IL: overhead trackage rights on
CRC Kankakee Line, Kankakee Secondary and Streator
Secondary for up to 8 total trains/day to connect with,
or with trackage of other intersecting railroads.  CSXT
trains over the above limits are subject to
negotiations between CSXT and NSR for CSXT contribution
to investment needed for additional capacity.

13.  Clarke Jct., IN - CP 501: overhead trackage rights on
CRC's Fort Wayne Line between Clarke Junction, IN and
CP 501.

14.  Pine, IN - Rock Island Jct. (Chicago, IL): CSXT
overhead trackage rights on CRC's Chicago Line
(allocated to NSR).

15.  CP Short - CP Belt, OH: CSXT overhead trackage rights
to allow CSXT to serve but not directly switch 2-to-1
Ford Motor Company plant at CP Belt, OH.

16.  Ecorse Junction - Delray (Detroit, MI): overhead track-
age rights on existing NSR tracks in the Detroit area
from Ecorse Junction to Delray, MI.

17.  Bucyrus - Sandusky:  overhead trackage rights on NSR
between Bucyrus and Sandusky to serve a 2-to-1 shipper
at Sandusky, OH.

18.  Brighton Park - Ash Street (Chicago IL):  overhead
trackage rights on CRC's Western Avenue Industrial
Track from crossover connection with B&OCT at Brighton
Park to Ash Street (Chicago, IL).

19.  CP 509 - 63rd Street (Chicago, IL):  overhead trackage
rights on CRC's Chicago line limited, in combination
with NSR haulage of CSXT trains, to a total of 6
trains/day in each direction between the above points
for trains entering or leaving NSR trackage at Clarke
Junction up to a maximum of three years.

C.   CRC ASSIGNMENTS TO NSR/CSXT:  CRC will assign to NSR and
CSXT existing CRC rights with respect to the Northeast
Corridor as follows (see Ancillary Agreement governing
assignment of CRC rights as to Northeast Corridor):

NEC RIGHTS/OPERATING DEFINITION

1.   Zoo Tower - Penn Station trackage:  Rights shall be
shared equally by NSR and CSXT and, in the event of an
operating conflict, trains will be scheduled
alternately.

2.   Baltimore - Zoo Tower Trackage:  CSXT shall be limited
to 4 trains a day.

3.   Landover - Baltimore:  Rights will be shared equally by
NSR and CSXT and, in the event of an operating
conflict, trains will be scheduled alternately.

4.   Washington Union Station - Landover, MD:  Rights shall
be shared equally by NSR and CSXT and, in the event of
an operating conflict, trains will be scheduled
alternately.

NEC RIGHTS/COMMERCIAL DEFINITION

1.   Philadelphia (Zoo) - New York (Penn Station):  Will be
part of the North Jersey Shared Assets Area and the
South Jersey/Philadelphia Shared Assets Area where NSR
and CSXT will have equal customer access.

2.   Washington, D.C. - Philadelphia (Zoo):  Will be
exclusive to NSR.

3.   North of New York (Penn Station):  Will be exclusive to
CSXT.

ITEM 2 - CSX/NSC HAULAGE AGREEMENTS

The Haulage Agreement referred to in Item 2.A.1 will be
substantially in the form of the Haulage Agreement included
with Exhibit D and will be between the operator of the in-
volved rail line (and with the owner, if appropriate) and
the tenant road.  The assignment of the Haulage Agreement
referred to in Item 2.A.2 will be in the form included with
Exhibit D.

A. NSR Haulage for CSXT on NSR Lines:

1.   Berea, OH - Chicago (63rd St.):  Overhead haulage for
CSXT by NSR on CRC s Chicago Line for maximum of six
merchandise and/or intermodal trains/day each way to 
the Park Manor Yard at 63rd St. in Chicago, until CRC s
Ft. Wayne Line (Ft. Wayne - Chicago now NS) is
upgraded, up to a maximum of 3 years.

2.   Normal, IL - Lafayette, IN:  Assignment to CSXT of
CRC's Haulage Agreement with NSR for 2-to-1 automotive
traffic only.

ITEM 3 - SHARED ASSETS AGREEMENTS

1.   North Jersey Shared Assets Agreement among CRC, CSXT
and NSR (attached as Exhibit G), covering the following
matters:

(1)   North Jersey Shared Assets Area
(2)   North Jersey CSXT/NSR Trackage

2.   Philadelphia\Southern Jersey Shared Assets Agreement
among CRC, CSXT and NSR (attached as Exhibit H),
covering the following matters:

(1)   Philadelphia/South Jersey Shared Assets
Area
(2)   Philadelphia/South Jersey NS/CSXT
Trackage

3.   Detroit Area Shared Assets Agreement among CRC, CSXT
and NSR (attached as Exhibit I), covering the following
matters:

(1)   Detroit Shared Assets Area
(2)   Detroit Dispatching
(3)   NSR/CSXT trackage Rights - Detroit

ITEM 4 - OTHER OPERATING AGREEMENTS

A.   INTERLOCKING AGREEMENTS (CSXT-Controlled) between CSXT and
NSR as to which the interlocking will be controlled by CSXT:

1.   Ashtabula Interlocking (crossing of the existing CRC
Youngstown Line and Chicago Line at Ashtabula, OH)

2.   CP-Mounds Interlocking (Columbus, OH)

3.   Warsaw Interlocking (Warsaw, IN)

4.   Crestline Interlocking (Crestline, OH)

B.   INTERLOCKING AGREEMENTS (NSR-Controlled) between NSR and
CSXT as to which the interlocking will be controlled by NSR:

1.   Buckeye Interlocking (Columbus, OH)

2.   Mike Interlocking (Fort Wayne, IN)

3.   Bucyrus Interlocking (Bucyrus, OH)

C.   INTERLOCKING SEPARATION AGREEMENTS between NSR and CSXT as
to which the interlocking will be "separated" (i.e., divided
so that each operator is not subject to the control of the
other when making moves on the operator's own lines through
a point) prior to or as soon as possible after the Closing
Date:

1.   CP 138 Interlocking (Columbus, OH)

2.   Short Interlocking (Cleveland, OH)

3.   Berea Interlocking (Berea, OH)

D.   SWITCHING AND/OR YARD ACCESS AGREEMENTS between CSXT and
NSR:

1.   Ashtabula - Agreement between NSR and CSXT providing
for CSXT use of and access to Ashtabula Harbor
facilities owned by CRC, up to a proportion of the
total ground storage, throughput and tonnage capacity
of the facilities equal to the Percentage 

2.   Yard Access Agreement - Agreement between CSXT and NSR
providing for access by NSR to yard tracks in Seneca
Yard at Buffalo, NY (yard to be assigned to CSXT)
sufficient for the origination and termination of
trains, at the end of the existing CRC Buffalo Line to
be assigned to NSR, for purposes of improved
interchange with the South Buffalo RR.

3.   Ford (Rockport) - Agreement between NSR and CSXT
providing for NSR switching for CSXT at the Ford engine
plant in Cleveland (located on NSR portion of CRC lines
in Cleveland).

4.   GM Parma - Agreement between CSXT and NSR providing for
CSXT switching for NSR at Parma auto plant located on
the CSXT Portion of CRC in Cleveland.

5.   Indianapolis Switching - Agreement between CSXT and NSR
relating to NSR's use of Hawthorne Yard providing that
NSR will have sufficient tracks and space for the
arrival, departure and make-up of trains and will have
reasonable access to and from the designated tracks;
also providing for CSXT switching for NSR at 2-to-1
shippers in Indianpolis, the GM metal fabrication
plant, and the INRD.

6.   GM Lordstown - Agreement between CSXT and NSR for
switching at GM assembly plant at Lordstown, OH.

7.   Lorain Switching:  Agreement between CSXT and NSR
providing for NSR switching for CSXT at Lorain/Avon
Lake auto plant located in Lorain, OH.

8.   Fairlane Switching:  Agreement between CSXT and NSR
providing for NSR switching for CSXT at Fairlane auto
plant located in Fairlane, OH.

9.   Crawfordsville Switching:  Agreement between CSXT and
NSR providing for CSXT switching for NSR at 2-to-1
customers located in Crawfordsville, IN.

10.  Sidney Switching:  Agreement between CSXT and NSR
providing for CSXT switching for NSR at 2-to-1
customers located in Sidney, OH.

11.  Sandusky Switching:  Agreement between CSXT and NSR
providing for NSR switching for CSXT at a 2-to-1
customer at Sandusky, OH.

12.  Upper Sandusky Switching:  Agreement between CSXT and
NSR providing for CSXT switching for NSR at 2-to-1
customers at Upper Sandusky, OH.

E.  MISCELLANEOUS AGREEMENTS between NSR and CSXT:

1.   IHB Agreement:  Agreement among CRC, CSXT and NSR
covering matters relating to Indiana Harbor Belt.

2.   Monongahela Agreement - Agreement among NSR and CSXT
providing for shared access to and joint use by CSXT of
NSR assigned, controlled, operated and maintained lines
serving the Monongahela coal fields' current and future
facilities.

3.   Temporary Lease Agreement between NSR or its designee
and CSXT providing interim use by CSXT of the Park
Manor (63rd St., Chicago, IL) intermodal facility
during the period of CSXT's interim haulage between
Chicago and Berea. 

4.   Letter Agreement providing for NSR and CSXT
construction projects:

(a)  NSR construction of connection in eastern
Cleveland, OH (granting to NSR rights to
construct a connection in eastern Cleveland to
make direct moves between NSR's Cleveland-Buffalo
Line and the CRC's existing Chicago
Line, using NSR rights over existing CRC
Cleveland Short Line to be assigned to CSXT)

(b)  North of the current end of double track at CP
136 (Columbus, OH), NSR will be assigned the
right of way east of the single remaining track
and the Clintonville Siding (which is also east
of the single remaining track), with the right
to connect these two segments of track, at NSR's
expense, at CP 136 and the Clintonville Siding
into a continuous track east of and parallel to
the single remaining track.  Another new con-
nection will be constructed, at NSR expense,
between the Clintonville Siding and the existing
NSR Bellevue - Portsmouth main line in the
vicinity of Milepost 133.5, where both the NSR
and CRC rights of way are parallel and level. 
CSXT shall, at its option and expense, have the
right to construct a connection from its as-
signed track (i.e., the west located track of
the right of way) to the new NSR Clintonville
Siding, so that both tracks can be utilized for
operational flexibility between the vicinity of
Milepost 133.5 to CP 138, under the control of
the respective assignee of each track.

(c)  Construction of Junction - Hadley trackage (a
line relocation project underway in Fort Wayne
will force NSR and CSXT to share the former CRC
line between Junction and Hadley (the crossing
of the former Pennsylvania RR and NYC&SL west of
Fort Wayne); if NSR and CSXT decide that capac-
ity needs mandate an additional track, NSR and
CSXT will equally share the cost of constructing
a new track between Junction and Hadley on the
north side of the existing track, and ownership
of the south track will revert to NSR and
ownership of the north track will revert to
CSXT).

5.   Construction at Buckeye Yard - Letter Agreement
providing for NSR to have the right to construct a
parallel track to the Buckeye Yard lead track (at
Buckeye Yard, Columbus, OH) in order to provide for the
proper functioning of Buckeye Yard.

6.   Construction from Field - Belmont - Letter Agreement
giving NSR the right to reconstruct, own and control an
additional track where practical between Belmont and CP
Field.

7.   Deed of Easement between CSXT and NSR providing for
conveyance by CSXT to NSR of a free easement (for NSR
relocation of mainline in Erie, PA area) along existing
CRC right of way through Erie, PA (assigned to CSXT) to
replace NSR right of way through streets in downtown
Erie at its expense.  NSR will have trackage rights in
Erie to connect its route from Corry to its existing
Buffalo - Cleveland line if such connection can be
achieved without using the CR Buffalo - Cleveland line.

8.   Letter agreement between NSR and CSXT providing that
(i)  NSR's existing Fort Wayne - to - Chicago (former
CRC line) line will be transferred to CSXT as part of a
like kind exchange transaction for the Streator line
and (ii) if CSXT were to merge with BNSF and if CSXT
requests, then NSR would transfer the Streator Line
from Osborne, IN including the dispatching control, for
fair value.

9.   Piqua Yard (Fort Wayne) - Letter Agreement between NSR
and CSXT providing for division of space in Piqua Yard
and determine most efficient means of utilizing the
physical plant in Fort Wayne; Triple Crown Services
Company will retain its current space in Piqua Yard and
the right to have NSR operate its trains between Piqua
Yard and Mike interlocking.

10.  E-Rail Support Tracks - Letter Agreement between CSXT
and NSR providing for access by NSR to use up to two
tracks located on NYC allocated property of
Elizabethport Yard (Trumbell St. Yard) for support of
PRR's E-Rail intermodal facility.

11.  Agreement between CSXT and NSR providing for assignment
of CRC rights over CSXT lines to NSR (except as
otherwise provided in the Transaction Agreement) and
for assignment of CRC rights over NSR lines to CSXT
(except as otherwise provided in the Transaction
Agreement).

12.  Letter Agreement between NSR and CSXT providing CSXT
the right to construct an Eastwick connection to
provide a contiguous route through Philadelphia, via CP
Field and portions of CR's Harrisburg and Trenton Lines
to CP River and points north.

13.  Letter Agreement among CRC, NSR and CSXT providing for
assignment by CRC of rights relating to the Northeast
Corridor.

14.  Letter Agreement between NSR and CSXT providing for
(i) assignment to both NSR and CSXT of CRC's trackage
rights over BNSF to access BNSF's Willow Springs Yard
(Chicago), subject to approval of BNSF, and (ii) if
such trackage rights are assigned, CSXT's right to
construct a connection in the vicinity of Ash Street
(Chicago) to enable CSXT to use these rights, if
necessary.

NOTE:  Notwithstanding any provision of this Schedule, to the
extent an item herein describes an Ancillary Agreement between
the parties the form of which is set forth as an Exhibit to this
Agreement, such description shall be for purposes of
identification only, and the terms of such Ancillary Agreement
shall control.

CSXT and NSR will cooperate with one another for the construction
of various connections and improvements of the involved carriers
referred to in their respective Operating Plans.

Exhibit 12	
 	 	 	 	 	 	 	 	 	 	 	
NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES	
Computation of Ratio of Earnings to Fixed Charges	
(Millions of Dollars)	
 	 	 	 	 	 	 	 	 	 	 	
 	Year ended December 31,	
 	2002	2001	2000	1999	1998	
 	 	 	 	 	 	 	 	 	 	 	
EARNINGS	 	 	 	 	 	 	 	 	 	 	
Income from continuing operations before income taxes as reported	$	706	$	553	$	250	$	351	$	845	
 	 	 	 	 	 	 	 	 	 	 	
Add:	 	 	 	 	 	 	 	 	 	 	
   Total interest expenses (as detailed below)	 	663	 	674	 	721	 	708	 	688	
   Amortization of capitalized interest	 	6	 	5	 	5	 	4	 	3	
   Income (loss) of partially owned entities (1)	 	36	 	39	 	60	 	47	 	165	
   Subsidiaries' preferred dividend requirements	 	2	 	2	 	2	 	2	 	2	
Income before income taxes, as adjusted	$	1,413	$	1,273	$	1,038	$	1,112	$	1,703	
 	 	 	 	 	 	 	 	 	 	 	
FIXED CHARGES	 	 	 	 	 	 	 	 	 	 	
Interest expense on debt	$	518	$	553	$	551	$	531	$	516	
Other interest expense	 	32	 	2	 	42	 	35	 	27	
Calculated interest portion of rent expense	 	40	 	41	 	40	 	35	 	31	
NS' share of Conrail interest	 	73	 	78	 	88	 	107	 	114	
Total interest expenses	 	663	 	674	 	721	 	708	 	688	
 	 	 	 	 	 	 	 	 	 	 	
Capitalized interest	 	11	 	17	 	18	 	15	 	21	
 	 	 	 	 	 	 	 	 	 	 	
Subsidiaries' preferred dividend requirement on a pretax basis	 	4	 	4	 	4	 	4	 	4	
Total fixed charges	$	678	$	695	$	743	$	727	$	713	
 	 	 	 	 	 	 	 	 	 	 	
RATIO OF EARNINGS TO FIXED CHARGES	 	2.08	 	1.83	 	1.40	 	1.53	 	2.39	
<TABLE>

<CAPTION>

<S>  <C>  <C>  <C>  <C>  <C>

</TABLE>

Includes: (a) the distributed income of 20%-49% owned entities, net of equity recorded in undistributed income and the minority income of consolidated entities which have fixed charges; and (b) NS' share of Conrail's income before income taxes, net of equity in earnings of Conrail included in NS' income from continuing operations before taxes as reported.

The computations do not include $0.3 million of interest expense related to $7.8 million of debt guaranteed for a less than 50% owned entity.

CONSOLIDATED (MORE THAN 50% OWNED) SUBSIDIARIES

OF NORFOLK SOUTHERN CORPORATION AND STATES OF INCORPORATION

AS OF FEBRUARY 1, 2003
 	State or Country	
 	of Incorporation	
 	 	
Agency Media Services, Inc.	Indiana	
Atlantic Acquisition Corporation	Pennsylvania	
Atlantic Investment Company	Delaware	
Norfolk Southern Properties, Inc.	Virginia	
Norfolk Southern Railway Company	Virginia	
Northern Horizons Insurance Company	Vermont	
NS Fiber Optics, Inc.	Virginia	
NS Transportation Brokerage Information	Virginia	
PDC Timber LLC	Delaware	
PLC Timber LLC	Delaware	
Pocahontas Development Corporation	Kentucky	
Pocahontas Land Corporation	Virginia	
Scioto Fuels, LLC	Virginia	
TCS Leasing, Inc.	Oklahoma	
T-Cubed of North America, Inc.	Delaware	
T-Cubed of South Carolina, Inc.	South Carolina	
T-Cubed of Virginia, Inc.	Virginia	
Thoroughbred Direct Intermodal Services, Inc.	Pennsylvania	
Thoroughbred Funding, Inc.	Virginia	
Thoroughbred Technology and Telecommunications, Inc.	Virginia	
Transworks Company	Indiana	
Transworks Inc.	Virginia	
Transworks of Indiana, Inc.	Indiana	
Triple Crown Services Company	 	
 	 	
Norfolk Southern Railway Company Subsidiaries	 	
Airforce Pipeline, Inc.	North Carolina	
Alabama Great Southern LLC	Virginia	
Alabama Great Southern Railroad Company, The	Alabama	
Atlantic and East Carolina Railway Company	North Carolina	
Camp Lejeune Railroad Company	North Carolina	
Central of Georgia LLC	Virginia	
Central of Georgia Railroad Company	Georgia	
Chesapeake Western Railway	Virginia	
Cincinnati, New Orleans and Texas Pacific Railway Company, The	Ohio	
Citico Realty Company	Virginia	
Georgia Southern and Florida Railway Company	Georgia	
High Point, Randleman, Asheboro and Southern Railroad Company	North Carolina	
Interstate Railroad Company	Virginia	
Lamberts Point Barge Company, Inc.	Virginia	
Mobile and Birmingham Railroad Company	Alabama	
Norfolk and Portsmouth Belt Line Railroad Company	Virginia	
Norfolk Southern International, Inc.	Virginia	
Norfolk Southern - Mexico, LLC	Virginia	
North Carolina Midland Railroad Company, The	North Carolina	
NorfolkSouthernMexicana, S. de R.L. de C.V.	Mexico	
Rail Investment Company	Delaware	
Rail Technologies, Inc.	Georgia	
Shenandoah-Virginia Corporation	Virginia	
South Western Rail Road Company, The	Georgia	
Southern Rail Terminals, Inc.	Georgia	
Southern Rail Terminals of North Carolina, Inc.	North Carolina	
Southern Region Coal Transport, Inc.	Alabama	
Southern Region Materials Supply, Inc.	Georgia	
State University Railroad Company	North Carolina	
Tennessee, Alabama & Georgia Railway Company	Delaware	
Tennessee Railway Company	Tennessee	
Virginia and Southwestern Railway Company	Virginia	
Wheelersburg Terminal LLC	Virginia	
Yadkin Railroad Company	North Carolina	
 	 	
Norfolk Southern Properties, Inc. Subsidiaries:	 	
Alexandria-Southern Properties, Inc.	Virginia	
Arrowood-Southern Company	North Carolina	
Arrowood Southern Executive Park, Inc.	North Carolina	
Carlyle CA Corporation	Virginia	
Carlyle Development Corporation	Virginia	
Charlotte-Southern Corporation	North Carolina	
Charlotte-Southern Hotel Corporation	North Carolina	
Lambert's Point Docks, Incorporated	Virginia	
Nickel Plate Improvement Company, Inc., The	Indiana	
NKPI Management, Inc.	Indiana	
Norfolk Southern Industrial Development Corp.	Virginia	
Norfolk Southern Tower, L.L.C.	Virginia	
Northmont Limited Partnership	Georgia	
NS-Charlotte Tower Corporation	North Carolina	
NS Gas Properties, Inc.	Virginia	
NS Gas Properties, II, Inc.	Virginia	
Sandusky Dock Corporation	Virginia	
Southern Region Industrial Realty, Inc.	Georgia	
SRIR Timber, L.L.C.	Delaware	
Virginia Holding Corporation	Virginia	

In addition, NS owns direct or indirect equity interest in:

Conrail Inc.

Consolidated Rail Corporation and its consolidated subsidiaries including New York Central Lines LLC and

     Pennsylvania Lines LLC and their subsidiaries.

CRR Holdings LLC

Delaware Otsego Corporation

DOCP Acquisition, LLC

Green Acquisition Corp.

EXHIBIT 23(a), Page 1 of 1

CONSENT OF INDEPENDENT AUDITORS

The Board of Directors

Norfolk Southern Corporation:

We consent to the incorporation by reference in Registration Statements Nos. 33-52031, 333-40993, 333-60722, 333-71321 and 333-100936 on Form S-8 and Registration Statements Nos. 333-57872 and 333-57872-01 on Form S-3 of Norfolk Southern Corporation of our report dated January 28, 2003, with respect to the consolidated balance sheets of Norfolk Southern Corporation and subsidiaries as of December 31, 2002 and 2001, and the related consolidated statements of income, changes in stockholders' equity and cash flows, and the related financial statement schedule for each of the years in the three-year period ended December 31, 2002, which report appears in the December 31, 2002 Annual Report on Form 10-K of Norfolk Southern Corporation.

/s/ KPMG LLP

Norfolk, Virginia

February 20, 2003

EXHIBIT 23(b), Page 1 of 1

CONSENT OF INDEPENDENT AUDITORS

The Board of Directors

Norfolk Southern Corporation:

We consent to the incorporation by reference in Registration Statements Nos. 33-52031, 333-40993, 333-60722, 333-71321 and 333-100936 on Form S-8 and Registration Statements Nos. 333-57872 and 333-57872-01 on Form S-3 of Norfolk Southern Corporation of our report dated January 28, 2003, with respect to the consolidated balance sheets of Conrail Inc. and subsidiaries as of December 31, 2002 and 2001, and the related consolidated statements of income, stockholders' equity and cash flows, for each of the years in the three-year period ended December 31, 2002, which report appears in the December 31, 2002 Annual Report on Form 10-K of Norfolk Southern Corporation.

/s/ KPMG LLP                      /s/ Ernst & Young LLP

KPMG LLP                      Ernst & Young LLP

Norfolk, Virginia                      Jacksonville, Florida

February 20, 2003                      February 20, 2003

EXHIBIT 3(ii)

B Y L A W S

OF

NORFOLK SOUTHERN CORPORATION

AS AMENDED

December 1, 2002

BYLAWS

OF

NORFOLK SOUTHERN CORPORATION

ARTICLE I

Stockholders' Meetings

SECTION 1.  Annual Meeting.  The annual meeting of the 
stockholders of the corporation shall be held on such date in March, 
April, May or June as the board of directors may designate.  If the 
date of the annual meeting shall be a legal holiday, the meeting 
shall be held on the next succeeding day not a legal holiday.

SECTION 2.  Special Meetings.  Special meetings of the
stockholders shall be held whenever called by the chief executive
officer or by a majority of the directors.

SECTION 3.  Time and Place.  All meetings of the stockholders
shall be held at the time and place stated in the notice of meeting.

SECTION 4.  Quorum.  The holders of a majority of the 
outstanding shares of capital stock entitled to vote, represented
in person or by proxy, shall constitute a quorum at any meeting
of the stockholders.  If less than a quorum is present at an
annual or special meeting, then a majority in interest of the
stockholders present in person or by proxy may from time to time
adjourn the meeting to a fixed time and place, no further notice 
of any adjourned meeting being required.  Each stockholder shall
be entitled to one vote in person or by proxy for each share 
entitled to vote then outstanding in his name on the books of 
the corporation.

SECTION 5.  Record Date.  The board of directors may fix 
in advance a date as the record date for a determination of 
stockholders for any purpose, such date to be not more than 
seventy days before the meeting or action requiring a 
determination of stockholders.

SECTION 6.  Conduct of Meetings.  The chief executive 
officer, or any officer or director he may designate, shall 
preside over all meetings of the stockholders.  The secretary 
of the corporation, or an assistant secretary, shall act as 
secretary of all the meetings, if present.  If the secretary 
or an assistant secretary is not present, the chairman of the 
meeting shall appoint a secretary.

The board of directors, prior to the annual meeting of 
the stockholders each year, shall appoint one or more inspectors
of election to act at such annual meeting and at all other 
meetings of stockholders held during the ensuing year.  In the 
event of the failure of the board to make such appointment or if
any inspector of election shall for any reason fail to attend and
to act at such meeting, an inspector or inspectors of election, 
as the case may be, may be appointed by the chairman of the meeting.
The inspectors of election shall determine the qualification of
voters, the validity of proxies and the results of ballots.

SECTION 7.  Proposals by Stockholders.  No business may be 
transacted at an annual or special meeting of stockholders other 
than business that is either (a) specified in the notice of meeting
(or any supplement thereto) given by or at the direction of the board
of directors, (b) otherwise properly brought before the meeting by
or at the direction of the board of directors or (c) otherwise
properly brought before the meeting by a stockholder (i) who is a
stockholder on the date of the giving of the notice provided for
in this Section 7 and on the record date for the determination of
stockholders entitled to vote at such meeting and (ii) who gives
to the corporation notice in writing of the proposal, provided that
such written notice is received at the principal executive office of
the corporation, addressed to the Corporate Secretary, (A) in the
case of an annual meeting, not less than ninety (90) nor more than
one hundred sixty (160) calendar days prior to the anniversary date
of the immediately preceding annual meeting and, (B) in the case of
a special meeting, not later than the tenth calendar day next following
the date on which notice of the holding of the special meeting is
mailed to stockholders or public disclosure of the date of the special
meeting was made, whichever first occurs.  The written notice given
to the corporation shall include (i) the specific language on which
stockholders will be asked to vote, (ii) the name and address of
such stockholder, (iii) the class or series and number of shares of
the capital stock of the corporation which are owned beneficially
and/or of record by such stockholder, (iv) a representation as to
the existence and nature of any agreement or understanding between
the proposing stockholder and any other person or persons (including
their identities) in connection with bringing the proposal, and
(v) a representation as to any material interest of the proposing
stockholder (and the other person or persons) in the subject matter
of the proposal.  The requirements of this Section 7 are in addition
to any other applicable requirements.   

ARTICLE II

Board of Directors

SECTION 1.  Election, Number and Term.  The board of directors
shall be chosen at the annual meeting of the stockholders.  The number
of directors shall be nine, and the directors shall be classified and
shall hold office for terms as provided in the articles of
incorporation.  This number may be increased or decreased at any
time by amendment of these bylaws, but shall always be a number
of not less than three.  Directors need not be stockholders.
Directors shall hold office until their successors are elected.

SECTION 2.  Quorum.  A majority of the number of directors
fixed by these bylaws shall constitute a quorum.  If less than a
quorum is present at a meeting, then a majority of those present
may adjourn the meeting to a fixed time and place, no further
notice of any adjourned meeting being required.

SECTION 3.  Vacancies.  Any vacancy arising among the directors,
including a vacancy resulting from an increase by not more than
thirty percent in the number of directors of all classes elected by
the stockholders, may be filled by a majority vote of the remaining
directors though less than a quorum unless sooner filled by the
stockholders.

SECTION 4.  Meetings.  Meetings of the board of directors
shall be held at times fixed by resolution of the board or upon
the call of the chief executive officer or of one-third of the
members of the board.  Notice of any meeting not held at a time
fixed by a resolution of the board shall be given to each director
at least two days before the meeting at his residence or business
address or by delivering such notice to him or by telephoning or
telegraphing it to him at least one day before the meeting.
Any such notice shall contain the time and place of the meeting.
Meetings may be held without notice if all the directors are
present or those not present waive notice before or after the
meeting.  The chief executive officer, or any director he may
designate, shall preside over all meetings.

SECTION 5.  Committees.  The board of directors may by
resolution designate an executive committee and one or more other
committees, each of which shall consist of two or more directors.
Any such committee, to the extent provided in the resolution of 
the board of directors and except as otherwise provided by law, shall
have and may exercise the powers and authority of the board of
directors in the management of the business and affairs of the
corporation.

SECTION 6.  Nominations of Directors.  Except as otherwise
provided in the Articles of Incorporation, only persons who are
nominated in accordance with the following procedures shall be
eligible for election as directors.  Nominations of persons for
election to the board of directors may be made at any annual
meeting of the stockholders (a) by or at the direction of the
board of directors or (b) by any stockholder (i) who is a stockholder
on the date of the giving of the notice provided for in this Section
6 and on the record date for the determination of stockholders
entitled to vote at such meeting and (ii) who gives to the
corporation notice in writing of the nomination, provided that such
written notice is received at the principal executive office of the
corporation, addressed to the Corporate Secretary, not less than
ninety (90) nor more than one hundred sixty (160) calendar days
prior to the anniversary date of the immediately preceding annual
meeting.  The written notice given to the corporation shall include
all the information about the nominee that would be required by
applicable rules and regulations of the Securities and Exchange
Commission to be included for nominees listed in the proxy statement
for such meeting and shall include (i) the name and address of such
stockholder and (ii) the class or series and number of shares of
the capital stock of the corporation which are owned beneficially
and/or of record by such stockholder.  Such notice must be
accompanied by a written consent of each proposed nominee to being
named as a nominee and to serve as a director if elected.

ARTICLE III

Officers

SECTION 1.  Election, Number and Term.  The board of directors,
promptly after its election in each year, may elect a chairman of the
board and shall elect a president (one of whom shall be designated chief
executive officer), a secretary and a treasurer, and may elect one or
more vice chairmen and vice presidents and may appoint such other
officers as it may deem proper.  Any officer may hold more than one
office except that the same person shall not be president and
secretary.  Each officer shall hold office until his successor is
elected or until his death or until he resigns or is removed in the
manner hereinafter provided.

SECTION 2.  Removal.  Any officer may be removed at any time
by the vote of the board of directors and any officer or agent
appointed otherwise than by the board of directors may be removed
by any officer having authority to appoint that officer or agent.

SECTION 3.  Vacancies.  Vacancies among the officers elected
by the board of directors shall be filled by the directors.

SECTION 4.  The Chief Executive Officer.  The chief executive
officer, subject to the control of the board of directors, shall
in general supervise and control all of the business and affairs
of the corporation.  All officers and agents, other than officers
or agents elected or appointed by the board of directors, shall be
appointed by the chief executive officer or by the heads of
departments, subject to the approval of the chief executive
officer.  Unless otherwise specifically provided in these bylaws
or by direction of the board of directors, the chief executive
officer or, at his direction, any officer, employee or agent of the
corporation designated by him, may sign and execute all
representations, securities, conveyances of real and personal
property, leases, licenses, releases, contracts and other
obligations and instruments in the name of the corporation.

SECTION 5.  The Vice Chairmen and Vice Presidents.  The vice
chairmen and the vice presidents shall perform such duties as from
time to time may be assigned to them by the chief executive officer
or by the board of directors.  In the absence of the chief executive
officer, or in the event of his death, inability or refusal to act,
the officer designated by the chief executive officer or the board
of directors shall perform the duties of the chief executive officer,
and, when so acting, shall have all the powers of and be subject to
all the restrictions upon the chief executive officer.  Any vice
chairman or vice president may sign, with the secretary or an
assistant secretary, certificates for shares of the corporation.

SECTION 6.  The Secretary.  The secretary shall:
(a) keep the minutes of the meetings of the stockholders and the
board of directors in one or more books provided for that purpose;
(b) see that all notices are duly given in accordance with the
provisions of these bylaws or as required by law; (c) be custodian
of the corporate records and of the seal of the corporation and
see that the seal of the corporation is affixed to all documents
the execution of which on behalf of the corporation under its seal
is duly authorized; (d) keep a register of the post office address
of each stockholder which shall be furnished to the secretary by
such stockholders; (e) sign with the chairman of the board, a
vice chairman, the president, or a vice president, certificates
for shares of the corporation, the issuance of which shall have
been authorized by resolution of the board of directors; (f)
have general charge of the stock transfer books of the corporation;
and (g) in general perform all duties incident to the office of
secretary and such other duties as from time to time may be
assigned to him by the chief executive officer or by the board
of directors.

SECTION 7.  The Treasurer.  If required by the board of
directors, the treasurer shall give a bond for the faithful
discharge of his duties in such sum and with such surety or
sureties as the board of directors shall determine.  He shall:
(a) have charge and custody of and be responsible for all
funds and securities of the corporation; receive and give
receipts for moneys due and payable to the corporation from any
source whatsoever, and deposit all such moneys in the name of the
corporation in such banks, trust companies or other depositaries
as shall be selected in accordance with the provisions of Article
IV of these bylaws; (b) when duly authorized, disperse all moneys
belonging or coming to the corporation; and (c) in general
perform all the duties incident to the office of treasurer and
such other duties as from time to time may be assigned to him by
the chief executive officer or by the board of directors.

SECTION 8.  Assistant Secretaries and Assistant 
Treasurers.  The assistant secretaries, when authorized by the
board of directors, may sign with the chairman of the board, a vice
chairman, the president or a vice president certificates for shares
of the corporation the issuance of which shall have been authorized
by a resolution of the board of directors.  The assistant
treasurers shall respectively, if required by the board of
directors, give bonds for the faithful discharge of their duties
in such sums and with such sureties as the board of directors
shall determine.  The assistant secretaries and assistant
treasurers, in general, shall perform such duties as shall be
assigned to them by the secretary or the treasurer, respectively,
or by the chief executive officer or the board of directors.

SECTION 9.  Salaries.  The salaries of the officers elected
by the board of directors shall be fixed by the board of directors.
The salaries of all other officers shall be fixed by the chief
executive officer or by the heads of departments, subject to the
approval of the chief executive officer.

ARTICLE IV

Checks and Deposits

SECTION 1.  Checks and Drafts.  All checks, drafts or other
orders for the payment of money, notes or other evidences of
indebtedness issued in the name of the corporation, shall be
signed by such officer or officers, agent or agents of the
corporation and in such manner as shall from time to time be
determined by resolution of the board of directors.

SECTION 2.  Deposits.  All funds of the corporation not
otherwise employed shall be deposited from time to time to the
credit of the corporation in such banks, trust companies or other
depositories as may be selected in a manner authorized by the board
of directors.

ARTICLE V

Certificate of Stock

Each stockholder shall be entitled to a certificate or
certificates of stock in such form as may be approved by the board
of directors signed by the chairman of the board, a vice chairman,
the president or a vice president and by the secretary or an
assistant secretary or the treasurer or any assistant treasurer.

All transfers of stock of the corporation shall be made upon
its books by surrender of the certificate for the shares
transferred accompanied by an assignment in writing by the holder
and may be accomplished either by the holder in person or by a
duly authorized attorney in fact.

In case of the loss, mutilation or destruction of a
certificate of stock, a duplicate certificate may be issued upon
such terms not in conflict with law as the board of directors
may prescribe.

The board of directors may also appoint one or more transfer
agents and registrars and may require stock certificates to be
countersigned by a transfer agent or registered by a registrar
or may require stock certificates to be both countersigned by
a transfer agent and registered by a registrar.  If certificates
of capital stock of the corporation are signed by a transfer
agent or by a registrar (other than the corporation itself or
one of its employees), the signature thereon of the officers
of the corporation and the seal of the corporation thereon may
be facsimiles, engraved or printed.  In case any officer or
officers who shall have signed, or whose facsimile signature
or signatures shall have been used on, any such certificate
or certificates shall cease to be such officer or officers
of the corporation, whether because of death, resignation or
otherwise, such certificate or certificates may nevertheless
be issued and delivered as though the person or persons who
signed such certificate or certificates or whose facsimile
signature or signatures shall have been used thereon had not
ceased to be such officer or officers of the corporation.

ARTICLE VI

Seal

The seal of the corporation shall be a flat-faced circular die,
of which there may be any number of counterparts, with the word
"SEAL" and the name of the corporation and the state and year of
incorporation engraved thereon.

ARTICLE VII

Fiscal Year

The fiscal year of the corporation shall begin on the first
day of January and end on the thirty-first day of December in each year.

ARTICLE VIII

Voting of Stock Held

Unless otherwise ordered by the board of directors, the chief
executive officer, or his designee, shall have full power and authority
in behalf of the corporation to attend and to act and to vote at any
meetings of stockholders of any corporation in which the corporation
may hold stock, and at any such meeting shall possess and may exercise
any and all the rights and powers incident to the ownership of such
stock, which, as the owner thereof, the corporation might have
possessed and exercised if present, and may sign proxies on behalf
of the corporation with respect to any such meeting or sign consents
on behalf of the corporation with respect to corporate actions
permitted without a meeting of stockholders.  The board of directors,
by resolution, from time to time, may confer like powers upon any
other person or persons.

ARTICLE IX

Amendments

These bylaws may be altered, amended or repealed and new bylaws
may be adopted by the board of directors at any regular or special
meeting of the board of directors.
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EXHIBIT 99(a), Page 1 of 1

CERTIFICATION OF CEO AND CFO PURSUANT TO 18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

I certify, to the best of my knowledge, that the Annual Report on Form 10-K for the year ended December 31, 2002 of Norfolk Southern Corporation fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that the information contained in the Form

10-K fairly presents, in all material respects, the financial condition and results of operations of Norfolk Southern Corporation.

Signed:

/s/ David R. Goode

David R. Goode

Chairman, President and Chief Executive Officer

Norfolk Southern Corporation

Dated: February 21, 2003

I certify, to the best of my knowledge, that the Annual Report on Form 10-K for the year ended December 31, 2002 of Norfolk Southern Corporation fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that the information contained in the Form

10-K fairly presents, in all material respects, the financial condition and results of operations of Norfolk Southern Corporation.

Signed:

/s/ Henry C. Wolf

Henry C. Wolf

Vice Chairman and Chief Financial Officer

Norfolk Southern Corporation

Dated: February 21, 2003

EXHIBIT 99(b)
-------------

REPORT OF MANAGEMENT

The Stockholders
Conrail Inc.

Management is responsible for the preparation, integrity and objectivity 
of the Company's consolidated financial statements. The consolidated 
financial statements are prepared in conformity with accounting principles 
generally accepted in the United States of America and include amounts 
based on management's best estimates and judgment.

The Company maintains a system of internal accounting controls and 
procedures, which is continually reviewed and supported by written policies 
and guidelines and supplemented by internal audit services.  The system 
provides reasonable assurance that assets are safeguarded against loss from 
unauthorized use and that the books and records reflect the transactions of 
the Company and are reliable for the preparation of financial statements.  
The concept of reasonable assurance recognizes that the cost of a system of 
internal accounting controls should not exceed the benefits derived and also 
recognizes that the evaluation of these factors necessarily requires 
estimates and judgments by management.

The Company's consolidated financial statements are audited by its 
independent accountants.  Their audit is conducted in accordance with 
auditing standards generally accepted in the United States of America and 
includes a study and evaluation of the Company's system of internal accounting
controls to determine the nature, timing and extent of the auditing procedures
required for expressing an opinion on the Company's financial statements.

The Company's Board of Directors, which is comprised of an equal number of
directors from Norfolk Southern Corporation ("NSC") and CSX Corporation 
("CSX"), pursues its oversight responsibilities for the consolidated 
financial statements and corporate conduct through periodic meetings with and 
written reports from the Company's management.

/s/ Gregory R. Weber 
Gregory R. Weber
President and Chief
Executive Officer

/s/ Patrick F. Rogers 
Patrick F. Rogers
Assistant Vice President-
Accounting and Tax

January 28, 2003

INDEPENDENT AUDITORS' REPORT

The Stockholders and Board of Directors 
Conrail Inc.:

We have audited the accompanying consolidated balance sheets of Conrail Inc.
and subsidiaries as of December 31, 2002 and 2001, and the related 
consolidated statements of income, stockholders' equity, and cash flows for 
each of the years in the three-year period ended December 31, 2002.  These 
consolidated financial statements are the responsibility of the Company's 
management.  Our responsibility is to express an opinion on these 
consolidated financial statements based on our audits.  

We conducted our audits in accordance with auditing standards generally 
accepted in the United States of America.  These standards require that we 
plan and perform the audit to obtain reasonable assurance about whether the 
financial statements are free of material misstatement.  An audit includes 
examining, on a test basis, evidence supporting the amounts and disclosures 
in the financial statements.  An audit also includes assessing the 
accounting principles used and significant estimates made by management, 
as well as evaluating the overall financial statement presentation.  We 
believe that our audits provide a reasonable basis for our opinion. 

In our opinion, the consolidated financial statements referred to above 
present fairly, in all material respects, the financial position of Conrail 
Inc. and subsidiaries as of December 31, 2002 and 2001, and the results of 
their operations and their cash flows for each of the years in the three-year 
period ended December 31, 2002, in conformity with accounting principles 
generally accepted in the United States of America.   

/s/ KPMG LLP                              /s/ Ernst & Young LLP
KPMG LLP                                  Ernst & Young LLP
Norfolk, Virginia                         Jacksonville, Florida

January 28, 2003

- 2 -

CONRAIL INC.
CONSOLIDATED STATEMENTS OF INCOME

Years ended December 31,

($ In Millions)                            2002         2001         2000
----         ----         ----

Revenues - NSC/CSX (Note 2)               $ 813        $ 823        $ 886
Revenues - Third parties                     80           80           99
----         ----         ----
Total operating revenues                893          903          985
----         ----         ----

Operating expenses (Note 3)
Compensation and benefits                 151          158         195
Fuel                                        6            7          10
Material, services and rents              125          143         162
Depreciation and amortization             322          325         331
Casualties and insurance                    2          (13)         33
Other                                      17           19          18
----         ----        ----
Total operating expenses                623          639         749
----         ----        ----
Income from operations                  270          264         236

Interest expense                           (104)        (109)       (124)
Other income, net (Note 10)                  94          103         155
----         ----        ----
Income before income taxes                  260          258         267

Income taxes (Note 7)                        80           84          97
----         ----        ----
Net income                            $ 180        $ 174       $ 170
====         ====        ====

See accompanying notes to the consolidated financial statements.

- 3 -

CONRAIL INC.
CONSOLIDATED BALANCE SHEETS

December 31,

($ In Millions)                                          2002        2001
------      ------
ASSETS
Current assets
Cash and cash equivalents                            $    23     $    34
Accounts receivable, net                                  35          32
Due from NSR/CSXT (Note 2)                               158         172
Notes receivable from NSC/CSX (Note 2)                     -         515
Material and supplies                                      8           9
Deferred tax assets (Note 7)                              65          76
Other current assets                                      11           8
-----       -----
Total current assets                                  300         846
Property and equipment, net (Note 4)                     6,382       6,688
Notes receivable from NSC/CSX (Note 2)                     892           -
Other assets                                               583         548
-----       -----
Total assets                                      $ 8,157     $ 8,082
=====       =====

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Current maturities of long-term debt (Note 6)             57          60
Accounts payable                                          33          41
Due to NSC/CSX (Note 2)                                    9          12
Wages and employee benefits                               31          37
Casualty reserves                                         69         101
Accrued and other current liabilities (Note 5)           130         157
-----       -----
Total current liabilities                             329         408
Long-term debt (Note 6)                                  1,123       1,156
Casualty reserves                                          119         134
Deferred income taxes (Note 7)                           1,822       1,833
Other liabilities                                          538         446
-----       -----
Total liabilities                                   3,931       3,977
-----       -----
Commitments and contingencies (Note 11)
Stockholders' equity (Notes 3 and 9)
Common stock ($1 par value; 100 shares 
authorized, issued and outstanding)                      -           -
Additional paid-in capital                             2,221       2,221
Retained earnings                                      2,134       1,954
Accumulated other comprehensive loss                    (129)        (70)
-----       -----
Total stockholders' equity                          4,226       4,105
-----       -----
Total liabilities and stockholders' equity        $ 8,157     $ 8,082
=====       =====

See accompanying notes to the consolidated financial statements.

- 4 -

CONRAIL INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

Accumualted
Additional    Unearned                  Other
Paid-In       ESOP      Ratained  Comprehensive
Capital   Compensation  Earnings       Loss        Total
($ in Millions)                ----------  ------------  --------  -------------    -----

Balance, January 1, 2000        $ 2,229       $ (20)      $ 1,610     $    -      $ 3,819
Net Income                          -           -           170          -          170
Other                              (7)          -             -          -           (7)
-----         ---         -----       ----        -----
Balance December 31, 2000         2,222         (20)        1,780          -        3,982

Comprehensive income - 2001
Net Income                          -           -           174          -          174
Minimum pension liability,
net of $45 million income
taxes (Note 8)                     -           -             -        (70)         (70)
-----
Total comprehensive income                                                          104
-----
Allocation of unearned ESOP
compensation                      (1)         20             -          -           19
-----       -----         -----      -----        -----
Balance, December 31, 2001        2,221           -         1,954        (70)       4,105

Comprehensive income - 2002
Net Income                          -           -           180          -          180
Minimum pension liability,
net of $39 million income
taxes (Note 8)                     -           -             -        (59)         (59)
-----
Total comprehensive income                                                          121
-----
-----       -----         -----      -----        -----
Balance, December 31, 2002      $ 2,221       $   -       $ 2,134     $ (129)     $ 4,226
=====       =====         =====      =====        =====

See accompanying notes to the consolidated financial statements.

- 5 -

CONRAIL INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS

Years ended December 31,

($ In Millions)                                     2002     2001     2000
----     ----     ----

Cash flows from operating activities
Net income                                       $ 180    $ 174    $ 170
Adjustments to reconcile net income to
net cash provided by operating activities:

Depreciation and amortization                     322      325      331
Deferred income taxes                              (9)     (18)     101
Gains from sales of property                       (3)      (2)     (70)
Pension credit                                    (17)     (19)     (12)
Dividends from affiliated companies                 -        -       55
Changes in:
Accounts receivable                              (3)       1       18
Accounts and wages payable                      (14)     (32)       8
Due from NSR/CSXT                                14       60      (36)
Due to NSC/CSX                                   (3)     (19)    (128)
Other                                             (44)      32      (75)
----     ----     ----
Net cash provided by operating activities      423      502      362
----     ----     ----

Cash flows from investing activities
Property and equipment acquisitions                (23)     (47)    (220)
Notes receivable from NSC/CSX                     (377)    (424)     125

Proceeds from disposal of property and equipment    14       14       86
Other                                               11        -       (7)
----     ----     ----
Net cash used in investing activities         (375)    (457)     (16)
----     ----     ----

Cash flows from financing activities
Payment of long-term debt                          (59)     (61)    (318)
----     ----     ----
Net cash used in financing activities          (59)     (61)    (318)
----     ----     ----

Increase (decrease) in cash and cash equivalents     (11)     (16)      28

Cash and cash equivalents
Beginning of year                                   34       50       22
----     ----     ----
End of year                                    $  23    $  34    $  50
====     ====     ====

See accompanying notes to the consolidated financial statements.

- 6 -

CONRAIL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Summary of Significant Accounting Policies

Description of Business

Conrail Inc. ("Conrail") is a holding company whose principal subsidiary 
is Consolidated Rail Corporation ("CRC"), the major freight railroad in 
the Northeast. Norfolk Southern Corporation ("NSC") and CSX Corporation 
("CSX"), the major railroads in the Southeast, jointly control Conrail 
through their ownership interests in CRR Holdings LLC ("CRR"), whose 
primary subsidiary is Green Acquisition Corporation ("Green Acquisition"), 
which owns Conrail. NSC and CSX have equity interests in CRR of 58% and 42%, 
respectively, and voting interests of 50% each. Under operating and lease 
agreements, NSC and CSX operate a substantial portion of the Conrail 
properties through their railroad subsidiaries, Norfolk Southern Railway 
Company ("NSR") and CSX Transportation, Inc. ("CSXT")(Note 2). 

Principles of Consolidation

The consolidated financial statements include Conrail and majority-owned
subsidiaries. Investments in 20% to 50% owned companies are accounted for 
by the equity method.

Cash Equivalents

Cash equivalents consist of commercial paper, certificates of deposit and 
other liquid securities purchased with a maturity of three months or less, 
and are stated at cost which approximates market value.

Material and Supplies

Material and supplies consist of maintenance material valued at the lower 
of cost or market.

Property and Equipment

Property and equipment are recorded at cost. Depreciation is provided using 
the composite straight-line method over estimated service lives. 
Expenditures, including those on leased assets that extend an asset's useful 
life or increase its utility, are capitalized.  Maintenance expense is 
recognized when repairs are performed. The cost (net of salvage) of 
depreciable property retired or replaced in the ordinary course of business 
is charged to accumulated depreciation and no gain or loss is recognized. 
In 2002, the overall depreciation rate averaged 3.6% for all roadway 
and equipment.

The Company is finalizing a study to update the estimated useful lives of 
its roadway and equipment property and the associated accumulated 
depreciation reserves. Based on this review, the Company anticipates a 
pretax increase in overall depreciation expense in the range of $20-$25 
million in 2003.

- 7 -

In August 2001, The Financial Accounting Standards Board issued Statement of 
Financial Accounting Standards (SFAS) No. 143, "Accounting for Asset 
Retirement Obligations."  This standard which is effective for the 
Corporation's fiscal year beginning January 1, 2003, addresses the 
accounting and reporting of legal obligations associated with the retirement 
of tangible long-lived assets.  The Company is currently evaluating the 
impact the new rules may have on its consolidated financial statements.

Asset Impairment

Long-lived assets are reviewed for impairment whenever events or changes in 
circumstances indicate that the carrying amount of an asset may not be 
recoverable.  Expected future cash flows from the use and disposition of 
long-lived assets are compared to the current carrying amounts to determine 
the potential impairment loss.

The adoption of SFAS No. 144, "Accounting for the Impairment or Disposal of 
Long-Lived Assets", which was effective January 1, 2002, did not have a 
material effect on the Company's consolidated financial statements.

Revenue Recognition

The Company's major sources of revenues are from NSC and CSX, primarily in 
the form of rental revenues and operating fees, which are recognized when 
earned (Note 2).  Conrail also has third party revenues, which are recognized 
when earned, related to the operations of Indiana Harbor Belt Railroad 
Company, a 51% owned terminal railroad subsidiary. 

Use of Estimates

The preparation of financial statements in conformity with generally accepted 
accounting principles requires management to make estimates and assumptions 
that affect the reported amounts of assets and liabilities, the disclosure of 
contingent assets and liabilities at the date of the financial statements, 
and the reported amounts of revenues and expenses during the reporting 
period. Management reviews its estimates, including those related to the 
recoverability and useful lives of assets as well as liabilities for 
litigation, environmental remediation, casualty claims, income taxes and 
pension and postretirement benefits. Changes in facts and circumstances may 
result in revised estimates.

- 8 -

2. Related Parties Transactions

Background

On May 23, 1997, NSC and CSX completed their joint acquisition of Conrail 
stock.  On June 17, 1997, NSC and CSX executed an agreement that generally 
outlines the methods of governing and operating Conrail and its subsidiaries
("Transaction Agreement"). On July 23, 1998, the Surface Transportation Board 
("STB") issued a written opinion that permitted NSC and CSX to exercise 
operating control of Conrail beginning August 22, 1998.  On June 1, 1999, 
NSC and CSX began to operate over certain Conrail lines. 

Operations by NSR and CSXT

The majority of CRC's routes and assets are segregated into separate 
subsidiaries of CRC, Pennsylvania Lines LLC ("PRR") and New York Central 
Lines LLC ("NYC"). PRR and NYC have separate but identical operating and 
lease agreements with NSR and CSXT, respectively, (the "Operating Agreements") 
which govern substantially all nonequipment assets to be used by NSR and CSXT 
and have initial 25-year terms, renewable at the options of NSR and CSXT for 
two 5-year terms.  Payments made under the Operating Agreements are based on 
appraised values that are subject to adjustment every six years.  NSR and CSXT 
have also leased or subleased certain equipment assets at rentals based on 
appraised values for varying term lengths from PRR and NYC, respectively, as 
well as from CRC.

NSC and CSX also have agreements with CRC governing other Conrail properties 
that continue to be owned and operated by Conrail ("the Shared Assets 
Areas").  NSR and CSXT pay CRC a fee for joint and exclusive access to the 
Shared Assets Areas.  In addition, NSR and CSXT pay, based on usage, the 
costs incurred by CRC to operate the Shared Assets Areas plus a profit 
factor.  

Payments made by NSR to Conrail under the Shared Assets agreements were 
$115 million and $168 million during 2002 and 2001, respectively, of which 
$23 million and $27 million, were minimum rents.  Payments made by CSXT to 
Conrail under the Shared Assets agreements were $92 million and $140 million 
during 2002 and 2001, respectively, of which $17 million and $19 million, 
were minimum rents.  

Payments from NSR under the Operating Agreements to PRR amounted to 
$339 million and $331 million during 2002 and 2001, respectively. Payments 
from CSXT under the Operating Agreements to NYC amounted to $248 million 
and $241 million during 2002 and 2001, respectively.  In addition, costs 
necessary to operate and maintain the related assets under these agreements,
including leasehold improvements, are borne by NSR and CSXT. 

- 9 -

Future minimum lease payments to be received from NSR/CSXT are as follows:

$ in Millions
-------------
NSR       NSR      CSXT      CSXT
To PRR    To CRC    To NYC    To CRC      Total
-----      ---      -----      ---      ------

2003                        $   333    $  30    $   230    $  21    $    614
2004                            332       32        230       23         617
2005                            320       33        221       24         598
2006                            306       34        210       24         574
2007                            294       34        203       24         555
2008 and Beyond               4,414      585      2,909      402       8,310
-----      ---      -----      ---      ------
Total                  $ 5,999    $ 748    $ 4,003    $ 518    $ 11,268
=====      ===      =====      ===      ======

Related Party Balances and Transactions

"Due from NSR/CSXT" at December 31, 2002 and 2001, is primarily comprised 
of amounts due for the above-described operating and rental activities.

PRR and NYC have interest-bearing notes receivable due from NSC and CSX. 
Previously, these notes were payable on demand and classified as current. 
However during the first quarter of 2002, they were exchanged for new 
longer-term notes. As of December 31, 2002, the notes receivable due from
NSC and CSX included in noncurrent assets were $513 million and $379 million,
respectively. At December 31, 2001, the notes receivable balances from NSC 
and CSX under the previous demand note totaled $301 million and $214 million,
respectively. The interest rates on the notes receivable from NSC and CSX 
are variable and were both 1.82% at December 31, 2002. Interest income 
related to the PRR and NYC notes receivable was $18 million in 2002, 
$13 million in 2001 and $10 million in 2000.

"Due to NSC/CSX" includes amounts payable for property and equipment rentals, 
as well as amounts related to service provider agreements with both NSC and 
CSX to provide certain general and administrative support to CRC. 

- 10 -

A summary of the "Due to NSC and CSX" activity for the services described 
above follows:

$ in Millions
-------------
Payments      Payments
to NSC        to CSX
----------    ----------

2002  2001    2002  2001

Service Provider Agreements         $  5  $  6    $  -  $  -
Material purchases                    20    31       -     -
Rental of locomotives,
equipment and facilities              5     8       4     6
Capital Project activities             -    17       -     3
----  ----    ----  ----
Total payments                 $ 30  $ 62    $  4  $  9
====  ====    ====  ====

2002  2001    2002  2001
----  ----    ----  ----
Due to "NSC and CSX" at
December 31                        $  7  $  9    $  2  $  3

From time to time, NSC and CSX, as the indirect owners of Conrail, may need 
to provide some of Conrail's cash requirements through capital contributions,
loans or advances. Through December 31, 2002 there have been no transactions 
under these arrangements.

3. Transition, Acquisition-Related and Other Items

During the first quarter of 2002 and the fourth quarter of 2001, the Company 
received cash proceeds totaling $4 million and $42 million respectively, from
several London-based insurance carriers as settlement for current and future
exposures related to personal injury, occupational, environmental and other 
claims. The Company recognized pretax gains of $4 million and $14 million, 
respectively, which is included in the "Casualties and insurance" line item 
of the income statement for 2002 and 2001.

During 2002, accrued termination payments totaling $1 million were made to 6 
non-union employees whose non-executive positions were eliminated as a result 
of the joint acquisition of Conrail. Most of these termination payments have 
been made in the form of supplemental retirement benefits from the Company's 
pension plan. During 2001 and 2000 accrued termination payments of 
$15 million and $50 million respectively, were made. The remaining amount of 
this liability is less than $1 million and is expected to be paid out within 
the next year. 

- 11 -

During the second quarter of 2001, the Company received a $50 million cash 
payment for transferring to a third party certain of its rights to license, 
manage and market signboard advertising on the Company's property for 
25 years. The payment is being recognized into other income on a straight-
line basis over the 25 year contract period. 

Also during 2001, the Company made final settlement of a long-term liability 
related to the non-union Employee Stock Ownership (ESOP) termination, which 
did not require use of the Company's cash for settlement. The liability, the 
balance of which was $20 million at December 31, 2000, was settled as the 
remaining cash proceeds held by the ESOP as a result of selling its ESOP 
preferred stock in conjunction with the joint acquisition, were allocated to 
eligible participants.

During the first quarter of 2000, the Company completed a significant 
property sale and recognized a gain of $61 million on the sale ($37 million 
after income taxes), which is included in "Other income, net"  (Note 10).

The Company has a long-term liability in connection with employment "change 
in control" agreements with certain current and former executives, which 
became operative as a result of the joint acquisition of Conrail.  In 2002 
and 2001, payments of $1 million and $9 million respectively, were made 
primarily from the Company's pension plan.  The remaining amount, 
$24 million at December 31, 2002, will be paid out at the discretion of 
the participants in the program.

4. Property and Equipment

December 31,
2002      2001
------    ------
(In Millions)

Roadway                                   $ 7,476   $ 7,496
Equipment                                   1,511     1,519
Less:  Accumulated depreciation           (2,828)   (2,570)
-----     -----
6,159     6,445
-----     -----

Capital leases (primarily equipment)          496       616
Accumulated amortization                     (273)     (373)
-----     -----
223       243
-----     -----
$ 6,382   $ 6,688
======    ======

Substantially all assets are leased to NSR or CSXT (Note 2).

- 12 -

5. Accrued and Other Current Liabilities

December 31,
2002      2001
----      ----
(In Millions)

Operating leases                         $  47     $  45
Property and corporate taxes                43        37
Income taxes payable                         4        27
Other                                       36        48
---       ---
$ 130     $ 157
===       ===

6. Long-Term Debt and Leases

Long-term debt

Long-term debt outstanding, including the weighted average interest rates at 
December 31, 2002, is composed of the following:

December 31,
2002      2001
------    ------
(In Millions)

Capital leases                          $   192   $   208
Debentures payable,7.88%,due 2043           250       250
Debentures payable,9.75%,due 2020           550       550
Equipment and other obligations,6.95%       188       208
-----     -----
1,180     1,216
Less current portion                        (57)      (60)
-----     -----
$ 1,123   $ 1,156
=====     =====

Interest payments were $105 million in 2002, $113 million in 2001 and $121 
million in 2000.

Equipment and other obligations mature in 2003 through 2043 and are 
collateralized by assets with a net book value of $222 million at 
December 31, 2002.  Maturities of long-term debt other than capital leases 
are $20 million in 2003, $21 million in 2004, $20 million in 2005, 
$21 million in 2006, $43 million in 2007 and $863 million in total from 
2008 through 2043.

Leases

The Company's noncancelable long-term leases generally include options to 
purchase at fair value and to extend the terms. Certain lease obligations 
are payable in Japanese yen, which require the maintenance of yen-
denominated deposits sufficient to satisfy the yen-denominated obligation. 
These deposits are included in the "Other assets" line item of the balance 

- 13 -

sheet and totaled $45 million and $35 million at December 31, 2002 and 
December 31, 2001, respectively.  Capital leases have been discounted at 
rates ranging from 3.09% to 14.26% and are collateralized by assets with a 
net book value of $223 million at December 31, 2002.

Minimum commitments, exclusive of executory costs borne by the Company, 
are:

Capital        Operating
Leases          Leases
-------        ---------
(In Millions)

2003                                $  51           $  56
2004                                   53              56
2005                                   38              55
2006                                   24              54
2007                                   28              53
2008 - 2025                            52             289
---             ---
Total                                 246           $ 563
===
Less interest portion                 (54)
---
Present value                       $ 192
===

Operating lease rent expense was $62 million in 2002, $70 million in 2001 
and $75 million in 2000.

7. Income Taxes

The provisions for income taxes are composed of the following:

2002    2001    2000
----    ----    ----
(In Millions)

Current
Federal                           $ 81    $ 77    $ (5)
State                                8      25       1
----    ----    ----
89     102      (4)
----    ----    ----

Deferred
Federal                            (20)    (22)     81
State                               11       4      20
----    ----    ----
(9)    (18)    101
----    ----    ----
$ 80    $ 84    $ 97
====    ====    ====

- 14 -

Reconciliation of the U.S. statutory tax rates with the effective tax rates 
is as follows:

2002     2001     2000
----     ----     ----

Statutory tax rate                   35.0%    35.0%    35.0%
State income taxes,
net of federal benefit              4.2      4.2      4.2
Settlement of IRS audit              (5.6)       -        -
Settlement of state tax issues          -     (3.5)       -
Other                                (2.8)    (3.1)    (2.9)
----     ----     ----
Effective tax rate                   30.8%    32.6%    36.3%
====     ====     ====

The Company has reached final settlements with the Internal Revenue 
Service ("IRS") related to all of the audits of the Company's consolidated 
federal income tax returns through the fiscal year May 23,1997.  As a 
result of the settlement Conrail received tax refunds of $24 million and 
reduced tax expense by $14 million during 2002.  Federal and state income 
tax payments were $113 million in 2002, $86 million in 2001 and $3 million 
in 2000.

Significant components of the Company's deferred income tax liabilities 
(assets) are as follows:

December 31,
2002       2001
----       ----
(In Millions)

Current assets                            $    (5)   $    57
Current liabilities                           (60)      (125)
Miscellaneous                                   -         (8)
-----      -----
Current deferred tax asset, net           $   (65)   $   (76)
=====      =====

Noncurrent liabilities:
Property and equipment                     2,000      2,008
Other                                        112        191
-----      -----
2,112      2,199
-----      -----
Noncurrent assets:
Nondeductible reserves and other
liabilities                                (290)      (366)
-----      -----
Deferred income tax liabilities, net      $ 1,822    $ 1,833
=====      =====

- 15 -

The Company has reviewed its deferred income tax assets and believes a 
valuation allowance is not necessary.

8. Pension and Postretirement Benefits

The Company and its subsidiaries sponsor several qualified and 
nonqualified pension plans and other postretirement benefit plans for 
its employees. 

The following tables provide a reconciliation of the changes in the 
plans' benefit obligations and fair value of assets over the two-year 
period ending December 31, 2002, and a statement of the funded status as 
of December 31 of both years:

Other Postretirement
Pension Benefits          Benefits
----------------    --------------------

2002     2001          2002     2001
(In Millions)                          ----     ----          ----     ----
Change in benefit obligation
Net benefit obligation
at beginning of year                 $ 662    $ 687         $ 36     $ 37
Service cost                              1        2            -        -
Interest cost                            44       45            3        3
Plan participant's contributions          -        -            6        5
Actuarial losses                          5       16            2        -
Benefits paid                           (66)     (88)         (10)      (9)
----     ----          ---      ---
Net benefit obligation
at end of year                     $ 646    $ 662         $ 37     $ 36

Change in plan assets
Fair value of plan assets
at beginning of year                 $ 613    $ 720         $  8     $  8
Actual return on plan assets            (28)     (20)           1        1
Employer contributions                    3        1            2        3
Plan participant's contributions          -        -            6        5
Benefits paid                           (66)     (88)         (10)      (9)
----     ----          ---      ---
Fair value of plan assets
at end of year                     $ 522    $ 613         $  7     $  8

Funded status at end of year           $(124)   $ (49)        $(30)    $(28)
Unrecognized prior service cost           8        8           (1)      (1)
Unrecognized actuarial (gains)losses     206      111           (9)     (11)
----     ----          ---      ---
Net amount recognized at year end   $  90    $  70         $(40)    $(40)
====     ====          ===      ===

- 16 -

The following amounts have been recognized in the balance sheets as of 
December 31:

Other Postretirement
Pension Benefits          Benefits
----------------    --------------------

2002     2001         2002     2001
(In Millions)                           ----     ----         ----     ----

Prepaid pension cost                   $ 126    $ 110            -        -
Accrued benefit cost                    (257)    (163)        $(40)    $(40)
Intangible asset                           8        8            -        -
Accumulated other comprehensive loss     213      115            -        -
---      ---          ---      ---
$ 90     $ 70         $(40)    $(40)
===      ===          ===      ===

All of the Company's plans for postretirement benefits other than pensions 
have no plan assets except for the retiree life insurance plan, which has 
$7 million and $8 million of assets in 2002 and 2001, respectively.  The 
aggregate benefit obligation for the postretirement plans other than 
pensions was $37 million and $36 million at December 31, 2002 and 2001, 
respectively. 

The projected benefit obligation, accumulated benefit obligation and fair 
value of plan assets for the pension plans with accumulated benefit 
obligations in excess of plan assets were $639 million, $635 million and 
$514 million, respectively, as of December 31, 2002 and $656 million, 
$655 million and $605 million, respectively as of December 31, 2001. As 
required by Statement of Financial Accounting Standard No. 87 "Employers' 
Accounting for Pensions", the Company has recorded an additional minimum 
liability of $220 million and $123 million at December 31, 2002 and 
December 31, 2001, respectively. The additional liability was partially 
offset by an intangible asset to the extent of previously unrecognized 
prior service costs of $7 million and $8 million at December 31, 2002 and 
December 31, 2001, respectively. The remaining amounts are recorded as a 
component of stockholders' equity, net of related tax benefits as 
"Accumulated Other Comprehensive Loss". 

The assumptions used in the measurement of the Company's benefit obligation 
are as follows:

Other Postretirement
Pension Benefits          Benefits
----------------    --------------------

2002     2001         2002     2001
----     ----         ----     ----

Discount rate                           6.75%    7.25%        6.75%    7.25%
Expected return on plan assets          9.00%    9.00%        8.00%    8.00%
Rate of compensation increase           5.00%    5.00%        5.00%    5.00%

- 17 -

A 10% annual rate of increase in the per capita cost of covered health care 
benefits was assumed for 2003, gradually decreasing to 5% by the year 2007.

Assumed health care cost trend rates affect amounts reported for the health 
care plans.  The effect of a one percentage point increase and (decrease) in 
the assumed health care cost trend rate on the accumulated postretirement 
benefit obligation is $1 million and $(1) million, respectively. 

The components of the Company's net periodic benefit cost for the plans are 
as follows:

Other Postretirement
Pension Benefits          Benefits
----------------    --------------------

2002  2001  2000      2002  2001  2000
(In Millions)                         ----  ----  ----      ----  ----  ----
Service cost                          $  1  $  2  $  4       $ -   $ -   $ -
Interest cost                           44    45    51         3     3     3
Expected return on assets              (62)  (66)  (70)       (1)   (1)   (1)
Amortization of:
Transition asset                        -    (1)   (1)        -     -     -
Prior service cost                      1     1     1         -     -     -
Actuarial (gain)loss                   (1)   (1)    1         -    (1)   (1)
----  ----  ----      ----  ----  ----
$(17) $(20) $(14)      $ 2   $ 1   $ 1
====  ====  ====      ====  ====  ====

Savings Plans

The Company and certain subsidiaries provide 401(k) savings plans for union 
and non-union employees.  Under the Company's current non-union savings 
plan, 50% of employee contributions are matched for the first 6% of a 
participating employee's base pay and 25% of employee contributions are 
matched in excess of 10% of a participating employee's base pay.  Savings 
plan expense related to the current non-union savings plan was $1 million in 
each of the years 2002, 2001 and 2000. There is no Company match provision 
under the union employee plan except for certain unions, which negotiated a 
Company match as part of their contract provisions.

Incentive Compensation Plans

The Company has an incentive compensation plan for all non-union employees in 
which employees receive targeted cash awards upon attainment of certain 
performance criteria established by the Company's Board of Directors. 
Compensation expense under this plan was $3 million in 2002, $2 million in 
2001 and $5 million in 2000.

- 18 -

The Company also has a long-term incentive plan under which phantom stock 
options are granted to officers and other key non-union employees. The option
price for the phantom shares is equal to the blended fair market value of 
NSC and CSX common stock at the date of grant. Options will vest one year 
after grant date and the option term may not exceed ten years. Upon exercise,
eligible participants will receive cash payments equal to the appreciation 
on the composite NSC and CSX common stock fair values. Compensation expense 
for this plan was less than $1 million in 2002 and 2000 and $2 million 
in 2001. 

9. Stockholders' equity

Common Stock

On May 23, 1997, the NSC/CSX joint tender offer for the remaining 
outstanding shares of Conrail's common and preferred stock was concluded, 
and on June 2, 1997, Conrail became the surviving corporation in a merger 
with Green Merger Corp. and remained the only subsidiary of Green 
Acquisition, an entity jointly-owned by NSC and CSX.  As a result, the 
remaining outstanding capital stock of Conrail was acquired by NSC and CSX 
and Green Acquisition was issued 100 shares of Conrail's common stock. 

Undistributed Earnings of Equity Investees

"Retained earnings" includes undistributed earnings of equity investees of 
$199 million, $180 million and $157 million at December 31, 2002, 2001 and 
2000, respectively.

10. Other Income, Net

2002    2001    2000
----    ----    ----
(In Millions)

Interest income                      $ 23   $  21   $  21
Rental income                          45      47      45
Property sales                          3       2      70
Equity in earnings of affiliates       20      24      24
Other, net                              3       9      (5)
----    ----    ----
$ 94   $ 103   $ 155
====    ====    ====

- 19 -

11. Commitments and Contingencies

Environmental

The Company is subject to various federal, state and local laws and 
regulations regarding environmental matters.  CRC is a party to various 
proceedings brought by both regulatory agencies and private parties under 
federal, state and local laws, including Superfund laws, and has also 
received inquiries from governmental agencies with respect to other 
potential environmental issues.  At December 31, 2002, CRC has received, 
together with other companies, notices of its involvement as a potentially 
responsible party or requests for information under the Superfund laws with 
respect to cleanup and/or removal costs due to its status as an alleged 
transporter, generator or property owner at 35 locations. Due to the number 
of parties involved at many of these sites, the wide range of costs of 
possible remediation alternatives, the changing technology and the length 
of time over which these matters develop, it is often not possible to 
estimate CRC's liability for the costs associated with the assessment and 
remediation of contaminated sites.  

Although the Company's operating results and liquidity could be 
significantly affected in any quarterly or annual reporting period if CRC 
were held principally liable in certain of these actions, at December 31, 
2002, the Company had accrued $66 million, an amount it believes is 
sufficient to cover the probable liability and remediation costs that will 
be incurred at Superfund sites and other sites based on known information 
and using various estimating techniques. The Company anticipates that much 
of this liability will be paid out over five years; however some costs will 
be paid out over a longer period.  The Company believes the ultimate 
liability for these matters will not materially affect its consolidated 
financial condition.

The Company spent $6 million in 2002, $10 million in 2001 and $9 million in 
2000 for environmental remediation and related costs.  In addition, the 
Company's capital expenditures for environmental control and abatement 
projects were less than $1 million in both 2002 and 2001 and approximately 
$1 million in 2000.

Casualty

The Company is involved in various legal actions, principally relating to 
occupational health claims, personal injuries, casualties and property 
damage. The casualty claim liability is determined actuarially, based upon 
claims filed and an estimate of claims incurred but not yet reported. The 
Company is generally self-insured for casualty claims. Claims in excess of 
self-insurance levels are insured up to excess coverage limits. While the 
ultimate amounts of claims incurred are dependent upon future developments, 
in management's opinion, the recorded liability is adequate to cover 
expected probable payments.

- 20 -

During both 2002 and 2001, the Company, based on favorable claims 
development, recognized actuarial determined gains of approximately 
$16 million and $12 million respectively, which is included in the 
"Casualties and insurance" line item of the income statement. 

Labor 

CRC had 1,415 employees at December 31, 2002; approximately 89% of whom are 
represented by 11 different labor organizations and are covered by 16 
separate collective bargaining agreements.  The Company was engaged in 
collective bargaining at December 31, 2002 with labor organizations 
representing approximately 54% of its labor force.

Guarantees

CRC currently guarantees the principal and interest payments in the amount 
of $30 million on Equipment Trust Certificates for Locomotive Management 
Services, a general partnership of which CRC holds a fifty percent non-
controlling interest. In addition, CRC is also contingently liable as 
guarantor with respect to $7 million of indebtedness for an affiliate 
company, Triple Crown Services. No liability has been recorded related to 
these guarantees.

Also the Company may be contingently liable under indemnification 
provisions related to the sale of tax benefits. This liability is recorded 
in the "Other liability" line item of the balance sheet and totaled 
$13 million at both December 31, 2002, and December 31, 2001.

12. Fair Values of Financial Instruments

The fair values of "Cash and cash equivalents," "Accounts receivable," 
"Notes receivable from NSC/CSX" and "Accounts payable" approximate the 
carrying values of these financial instruments at December 31, 2002 
and 2001.

Using current market prices when available, or a valuation based on the 
yield to maturity of comparable debt instruments having similar 
characteristics, credit rating and maturity, the total fair value of 
the Company's long-term debt, including the current portion, but 
excluding capital leases, is $1,254 million and $1,204 million at 
December 31, 2002 and 2001, respectively, compared with carrying values 
of $988 million and $1,008 million at December 31, 2002 and 2001.

- 21 -