-----------------------------UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington , D.C. 20549

~~FORM 10-Q~~	FORM 10-Q
(X)	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
	EXCHANGE ACT OF 1934
	For the quarterly period ended SEPT. 30, 2003
	For the quarterly period ended MARCH 31, 2004
( )	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
	EXCHANGE ACT OF 1934
	For the transition period from __________ to __________
	Commission file numbers 1-743; 1-3744; 1-4793; 1-546-2

NORFOLK SOUTHERN RAILWAY COMPANY

(Exact name of registrant as specified in its charter)

Virginia	53-6002016
(State or other jurisdiction of	(IRS Employer Identification No.)
incorporation or organization)
Three Commercial Place
Norfolk, Virginia	23510-2191
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.)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13
or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.	(X) Yes	( ) No
Indicate by check mark whether registrant is an accelerated filer (as defined in Rule 12b-2 of The Exchange Act).
	( ) Yes	(X) No
The number of shares outstanding of each of the registrant's classes of Common Stock, as of the last
practicable date:
Class			Outstanding as of ~~Sept.~~March 3031, ~~2003~~2004
Common Stock (par value $1.00)			16,668,997
The registrant meets the conditions set forth in General Instruction H(1)(a) and (b) of Form 10-Q and is therefore filing this form with the reduced disclosure format.

TABLE OF CONTENTS

				Page
Part I.	~~Financial information:~~	Financial information:
	~~Item 1.~~	Item 1.	Financial statements:
			Consolidated Statements of Income	3
			Three and Nine Months Ended Sept. 30, 2003 and 2002
			Three Months Ended March 31, 2004 and 2003
			Consolidated Balance Sheets	4
			Sept. 30, 2003 and Dec. 31, 2002
			March 31, 2004 and Dec. 31, 2003
			Consolidated Statements of Cash Flows	5
			Nine Months Ended Sept. 30, 2003 and 2002
			Three Months Ended March 31, 2004 and 2003
			Notes to Consolidated Financial Statements	6
			Independent Accountants' Review Report	1213
	~~Item 2.~~	Item 2.	Management's Discussion and Analysis of	1314
			Financial Condition and Results of Operations
	~~Item 3.~~	Item 3.	Quantitative and Qualitative Disclosures	1918
			About Market Risks
	Item 4.		Controls and Procedures	1918
Part II.	Other Information:
	Item 1.		Legal Proceedings	20
	Item 6.		Exhibits and Reports on Form 8-K	19
	Item 6.		Exhibits and Reports on Form 8-K	20
Signatures				19
Signatures				21
Exhibit Index				19
Exhibit Index				22

2
PART I. FINANCIAL INFORMATION

Item 1. Financial Statements.

NORFOLK SOUTHERN RAILWAY COMPANY AND SUBSIDIARIES

(A Wholly ~~Majority-~~Owned Subsidiary of Norfolk Southern ~~Corporation~~ ~~[NS]~~Corporation)

Consolidated Statements of Income

($ in millions)

(Unaudited)

	Three months Ended				Nine Months Ended
	Sept. 30,				Sept. 30,
	2003		2002		2003		2002
Railway operating revenues:
Coal	$	372	$	371	$	1,115	$	1,080
General merchandise		911		917		2,773		2,734
Intermodal		270		268		773		746
Total Railway Operating Revenues		1,553		1,556		4,661		4,560
Railway operating expenses:
Compensation and benefits		396		390		1,197		1,150
Materials, services and rents		449		465		1,395		1,372
Conrail rents and services (Note 2)		119		112		356		348
Depreciation		124		125		370		373
Diesel fuel		86		81		283		246
Casualties and other claims		44		57		143		129
Other		68		67		215		206
Total Railway Operating Expenses		1,286		1,297		3,959		3,824
Income from railway operations		267		259		702		736
Other income (expense) - net		(60)		(44)		(176)		(156)
Interest expense on debt		(6)		(6)		(18)		(22)
Income before income taxes and
accounting changes		201		209		508		558
Provision for income taxes		74		85		193		223
Income before accounting changes		127		124		315		335
Cumulative effect of changes in accounting
principles, net of taxes (Note 1)		--		--		104		--
Net Income	$	127	$	124	$	419	$	335
See accompanying notes to consolidated financial statements.

	Three Months Ended
	March 31,
	2004		2003
	($ in millions)

*Railway operating revenues*
Coal	$	398	$	354
General merchandise		967		918
Intermodal		280		247

Total railway operating revenues		1,645		1,519

*Railway operating expenses*
Compensation and benefits		420		400
Materials, services and rents		454		459
Conrail rents and services (Note 1)		116		119
Depreciation		126		123
Diesel fuel		107		104
Casualties and other claims		40		51
Other		80		74

Total railway operating expenses		1,343		1,330

Income from railway operations		302		189

Other income (expense) - net		(65)		(51)
Interest expense on debt		(5)		(7)

Income before income taxes and accounting changes		232		131

Provision for income taxes		89		51

Income before accounting changes		143		80

Cumulative effect of changes in accounting principles, net of taxes (Note 4)		--		104

Net income	$	143	$	184

See accompanying notes to consolidated financial statements.

NORFOLK SOUTHERN RAILWAY COMPANY AND SUBSIDIARIES

(A Wholly ~~Majority-~~Owned Subsidiary of Norfolk Southern ~~Corporation~~ ~~[NS]~~Corporation)

Consolidated Balance Sheets

($ in millions)

(Unaudited)

~~Sept.~~March 3031, Dec. 31, ~~2003~~2004 ~~2002~~2003 ~~Assets~~ ($ in millions) ~~Current assets:~~Assets ~~Cash~~Current ~~and cash equivalents~~assets: $ ~~129~~ $ ~~130~~ ~~Accounts~~Cash ~~receivable,~~and ~~net (Note~~cash 2)equivalents $ ~~123~~ 82 $ ~~117~~ 257 ~~Due~~Accounts ~~from~~receivable, ~~Conrail~~ net (Note 21) 6 121 6 121 Materials and supplies 91 96 95 91 Deferred income taxes ~~184~~ 182 ~~174~~ 175 Other current assets 46 151 ~~131~~ 159 Total current assets ~~579~~ 632 ~~653~~ 803 Investments ~~(Note 4)~~ ~~753~~ 769 ~~703~~ 779 Properties less accumulated depreciation 11,~~167~~ 397 1011,~~837~~ 346 Other assets ~~693~~ 706 ~~660~~ 684 Total assets $ 13,~~192~~ 504 $ 1213,~~853~~ 612 Liabilities and ~~Stockholders~~Stockholder's Equity Current liabilities: Accounts payable $ ~~884~~ 827 $ ~~860~~ 890 Income and other taxes ~~202~~ 212 ~~187~~ 168 Due to NS - net (Note 21) ~~430~~ 765 ~~384~~ 781 Due to Conrail (Note 21) 65 89 86 81 Other current liabilities ~~114~~ 119 ~~122~~ 112 Current maturities of long-term debt 102 94 102 Total current liabilities 12,~~797~~ 114 12,~~733~~ 134 Long-term debt ~~830~~ 783 ~~763~~ 813 Other liabilities ~~991~~ 1,035 ~~971~~ 1,033 Due to Conrail (Note 21) ~~688~~ 785 ~~513~~ 716 ~~Minority interests 8 3~~ Deferred income taxes 4,~~271~~ 406 4,~~057~~ 372 Total liabilities 89,~~585~~ 123 89,~~040~~ 068 ~~Stockholders~~Stockholder's equity: ~~Serial preferred stock 55 55~~ Common stock 167 167 Additional paid-in capital ~~709~~ 721 ~~709~~ 721 Accumulated other comprehensive income (Note 45) ~~243~~ 308 ~~266~~ 323 Retained income 3,~~433~~ 185 3,~~616~~ 333 Total ~~stockholders~~stockholder's equity 4,~~607~~ 381 4,~~813~~ 544 Total liabilities and ~~stockholders~~stockholder's equity $ 13,~~192~~ 504 $ 1213,~~853~~ 612 See accompanying notes to consolidated financial statements.

4 NORFOLK SOUTHERN RAILWAY COMPANY AND SUBSIDIARIES

~~NORFOLK~~(A Wholly ~~SOUTHERN~~Owned ~~RAILWAY~~Subsidiary ~~COMPANY AND~~of ~~SUBSIDIARIES~~ Norfolk Southern Corporation)

(A Majority-Owned Subsidiary of Norfolk Southern Corporation [NS])

Consolidated Statements of Cash Flows

($ in millions)

(Unaudited)

~~Nine~~Three Months Ended ~~Sept.~~March 3031, 2004 2003 ~~2002~~ ($ in millions) Cash flows from operating activities Net income $ ~~419~~143 $ ~~335~~184 Reconciliation of net income to net cash provided by operating activities: ~~Net~~ Net cumulative effect of changes in accounting principles ~~(104)~~-- -- (104) Depreciation ~~371~~126 ~~374~~124 Deferred income taxes ~~115~~31 ~~142~~24 Gains and losses on properties and investments ~~(9)~~-- (152) Changes in assets and liabilities affecting operations: Accounts receivable (Note 1) ~~(6)~~-- 26 (2) Materials and supplies 4 (5) (13) Other current assets ~~and due from Conrail~~ 7719 7222 Income tax liabilities 6856 4612 Other short-term liabilities (957) (3125) Other - net (2618) (7826) Net cash provided by operating activities ~~900~~295 ~~870~~204 Cash flows from investing activities Property additions (~~392~~171) (~~501~~104) Property sales and other transactions 34 (6) 7 (3) Investments, including short-term (8021) (5420) Investment sales and other transactions 31 -- Net cash used for investing activities (~~435~~197) (~~548~~127) Cash flows from financing activities Dividends ~~(2)~~-- (21) Advances to NS (~~586~~315) (~~556~~192) Advances and repayments from NS 316 61 Proceeds from borrowings ~~218~~88 ~~281~~87 Debt repayments (~~127~~52) (~~142~~39) Net cash used for financing activities (~~466~~273) (~~413~~144) Net decrease in cash and cash equivalents (1175) (9167) Cash and cash equivalents At beginning of year ~~130~~257 ~~167~~130 At end of period $ ~~129~~82 $ 7663 Supplemental disclosures of cash flow information Cash paid during the period for: Interest (net of amounts capitalized) $ 8 29 $ 9 38 Income taxes $ -- 9 $ 14 29 See accompanying notes to consolidated financial statements.

NORFOLK SOUTHERN RAILWAY COMPANY AND SUBSIDIARIES

(A Wholly ~~Majority-~~Owned Subsidiary of Norfolk Southern ~~Corporation~~ ~~[NS]~~Corporation)

Notes to Consolidated Financial Statements

(Unaudited)

In the opinion of management, the accompanying unaudited interim financial statements contain all adjustments (consisting of normal recurring accruals) necessary to present fairly Norfolk Southern Railway Company and Subsidiaries' ("NS Rail") financial position as of ~~Sept.~~March 3031, ~~2003~~2004, and its results of operations ~~for the three~~ and ~~nine months ended Sept. 30, 2003 and 2002, and~~ its cash flows for the ~~nine~~three months ended ~~Sept.~~March 3031, ~~2003~~2004 and ~~2002,~~2003 in conformity with accounting principles generally accepted in the United States of America.

Although management believes that the disclosures presented are adequate to make the information not misleading, these Consolidated Financial Statements should be read in conjunction with: (a) the financial statements and notes included in NS Rail's latest Annual Report on Form 10-K and (b) any Current Reports on Form 8-K.

1. ~~Changes~~Related ~~in Accounting Principles~~Parties

NS Rail adopted Financial Accounting Standards Board (FASB) Statement No. 143, "Accounting for Asset Retirement Obligations," (SFAS No. 143) effective Jan. 1, 2003, and recorded a $100 million net adjustment ($165 million before taxes) for the cumulative effect of this change in accounting on years prior to 2003. Pursuant to SFAS No. 143, the cost to remove crossties must be recorded as an expense when incurred; previously these removal costs were accrued as a component of depreciation. This change in accounting lowered depreciation expense by about $7 million in the third quarter and $21 million in the first nine months (because the depreciation rate for crossties no longer reflects cost to remove) and increased compensation and benefits and other expenses by about $6 million for the quarter and $16 million for the first nine months (for the costs to remove retired assets).

NS Rail also adopted FASB Interpretation No. 46, "Consolidation of Variable Interest Entities," (FIN No. 46) effective Jan. 1, 2003, and recorded a $4 million net adjustment ($6 million before taxes) for the cumulative effect of this change in accounting on years prior to 2003. Pursuant to FIN No. 46, NS Rail has consolidated a special-purpose entity that leases certain locomotives to NS Rail. This entity's assets and liabilities at Jan. 1, 2003, included $169 million of locomotives and $157 million of debt related to their purchase as well as a $6 million minority interest liability. This change in accounting increased depreciation and interest expense (to reflect the locomotives as owned assets) and lowered lease expense. The net effect to total railway operating expenses and net income was not material.

2. Related Parties

General

NSNorfolk Southern Corporation (NS) is the parent holding company of Norfolk Southern Railway Company (NSR, collectively with its subsidiaries, NS Rail). Rail operations are coordinated at the holding company level by the NS Vice Chairman and Chief Operating Officer. NS charges NS Rail a fee for management services it performs for NS Rail~~. This fee~~ ~~amounted~~(which tototaled $~~140~~127 million and ~~$118~~included ~~million~~an ~~in the third quarters of 2003 and 2002, respectively (including a~~ $8 million ~~and $7 million~~ mark-up in ~~each quarter, respectively) and $420 million and $392 million for~~ the first ~~nine months~~quarter of ~~2003~~2004 and ~~2002,~~totaled ~~respectively (including an~~ $26134 million and included an $248 million mark-up in ~~each~~the ~~period,~~first ~~respectively~~quarter of 2003). In addition, NS charges NS Rail a revenue-based licensing fee for use of certain intangible assets owned by NS. This fee amounted to $2324 million in ~~each of~~ the ~~third~~first ~~quarters~~quarter of ~~2003 and~~2004 ~~2002,~~ and $6921 million ~~and~~in ~~$68 million for~~ the first ~~nine~~quarter ~~months~~ of 2003 ~~and 2002, respectively~~.

NS Rail owns 21,~~116~~016,125 shares of NS common stock.

6 Operations Over Conrail's Lines

Overview -- Through a limited liability company, NS and CSX Corporation (CSX) jointly own Conrail Inc. (Conrail), whose primary subsidiary is Consolidated Rail Corporation (CRC), ~~the~~a ~~major~~principal freight railroad in the Northeast. NS has a 58% economic and 50% voting ~~interest~~ interest in the jointly owned entity, and CSX has the remainder of the economic ~~and~~ and voting interests.

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 (NYC) under comparable terms.

~~Operations~~ Operation of Conrail's Lines -- The June 1999 Operating ~~Agreement~~ Agreement between NSR and PRR governs substantially all track assets operated by NSR and has an initial 25-year term, renewable at the option of NSR for two five-year terms. Payments under the Opera-ting Agreement are subject to adjustment every six years to reflect changes in values. NSR also has leased or or subleased equipment for varying terms from PRR. 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.

~~Proposed~~NS ~~Spin-Off~~Rail's ofConsolidated ~~PRR~~Balance ~~and~~Sheet ~~NYC --~~at InMarch ~~June 2003~~31, ~~NS together with CSX and~~2004 ~~Conrail~~, ~~filed~~includes a$27 million ~~joint~~of ~~petition~~liabilities ~~with~~related ~~the Surface Transportation Board ("STB")~~ to ~~establish~~the ~~direct~~Conrail ~~ownership and control by NSR and CSXT of PRR and NYC~~transaction, ~~respectively. The~~ ~~proposed~~principally ~~transaction~~for ~~would~~contractual ~~replace~~obligations ~~the existing operating agreements and allow NSR and CSXT~~ to ~~operate~~ ~~PRR~~Conrail ~~and~~employees ~~NYC,~~imposed ~~respectively,~~by ~~via~~the ~~direct ownership.~~Surface ~~The~~Transportation ~~proposed~~Board ~~transaction~~when ~~does~~it ~~not~~approved ~~involve~~ the ~~Shared Assets Areas~~transaction. ~~The proposed~~Through ~~transaction~~March is31, ~~subject to a number of conditions~~2004 , ~~including~~NS ~~STB~~Rail ~~approval and an~~has ~~Internal~~paid ~~Revenue~~$156 million ~~Service~~of ~~ruling~~these ~~qualifying it as a nontaxable distribution~~costs.

~~As a part of the proposed transaction, Conrail~~6 would undertake a restructuring of its existing unsecured and secured public indebtedness. There are currently two series of unsecured public debentures with an outstanding principal amount of $800 million and 13 series of secured debt with an outstanding principal amount of approximately $350 million. It is currently contemplated that guaranteed debt securities of two newly formed corporate subsidiaries of NSR and CSXT would be offered in a 58%/42% ratio in exchange for Conrail's unsecured debentures. Upon completion of the proposed transaction, the new debt securities would become direct unsecured obligations of NSR and CSXT, respectively, and would rank equally with all existing and future senior unsecured debt obligations, if any, of NSR and CSXT. These new debt securities will have maturity dates, interest rates and principal and interest payment dates identical to those of the respective series of Conrail's unsecured debentures. In addition, these new debt securities will have covenant packages substantially similar to those of the publicly traded debt securities of NS and CSX, respectively. Registration statements on Form S-4 will be filed with the U.S. Securities and Exchange Commission in connection with the proposed exchange offer.

NS Rail provides certain general and administrative support functions to Conrail, the fees for which are billed in accordance with several service-provider arrangements and amount to approximately $7 million annually.

"Conrail rents and services" includes expenses for amounts due to PRR and CRC for use by NSR of operating properties and equipment and operation of the Shared Assets Areas.

A significant portion of payments made to PRR is borrowed back from a subsidiary of PRR under a note due in 2032. Amounts outstanding under the note comprise the long-term balance of "Due to Conrail." The interest rate for these loans is variable and was 1.6% at March 31, 2004 . The current balance "Due to Conrail" is composed of amounts related to expenses included in "Conrail rents and services," as discussed above.

Conrail Corporate Reorganization

NS, CSX and Conrail are jointly seeking to reorganize Conrail and establish direct ownership and control by NSR and CSXT of PRR and NYC, respectively. The proposed reorganization would replace the operating agreements described above and allow NSR and CSXT to directly own and operate PRR and NYC, respectively. The reorganization would not involve the Shared Assets Areas, and would have no effect on the competitive rail service provided in the Shared Assets Areas. Conrail would continue to own, manage and operate the Shared Assets Areas as previously approved by the Surface Transportation Board (STB).

Consummation of the reorganization requires a ruling from the Internal Revenue Service (IRS), the approval of the STB and filings with the Securities Exchange Commission. In addition, NS, CSX and Conrail must obtain the consent of Conrail's debt holders to carry out the transaction and obtain a valuation of PRR and of NYC.

In 2003, the IRS issued a ruling that the reorganization as contemplated would qualify as a tax-free distribution. In order to implement the reorganization approved by the IRS, the companies have engaged an investment banking firm to provide a valuation. Also in 2003, the STB granted its authorization to carry out the reorganization, subject to a condition requiring NS, CSX and Conrail to either: (i) obtain the voluntary consent of the Conrail debt holders; or (ii) propose further proceedings to determine whether the terms offered to the Conrail debt holders are fair, just and reasonable. NSR and CSXT have filed registration statements on Form S-4 with the SEC to allow a proposed exchange offer relating to Conrail's unsecured debt (see below).

As a part of the proposed reorganization, Conrail would undertake a restructuring of its existing unsecured and secured public indebtedness. There are currently two series of unsecured public debentures with an outstanding principal amount of $800 million and 13 series of secured debt with an outstanding principal amount of approximately $321 million. Guaranteed debt securities of two newly formed corporate subsidiaries of NSR and CSXT will be offered in a 58%/42% ratio in exchange for Conrail's unsecured debentures. Upon completion of the proposed transaction, the new debt securities would become direct unsecured obligations of NSR and CSXT, respectively, and would rank equally with all existing and future senior unsecured debt obligations, if any, of NSR and CSXT. These new debt securities will have maturity dates, interest rates and principal and interest payment dates identical to those of the respective series of Conrail's unsecured debentures. In addition, these new debt securities will have covenants substantially similar to those of the publicly traded debt securities of NS and CSX, respectively.

Conrail's secured debt and lease obligations will remain obligations of Conrail and are expected to be supported by new leases and subleases which, upon completion of the proposed transaction, would be the direct lease and sublease obligations of NSR or CSXT.

~~Related-Party~~NS, ~~Transactions~~CSX ~~with~~and Conrail --are diligently working to complete all steps necessary to consummate the Conrail corporate reorganization in 2004. NS NS Rail ~~provides~~expects to record the proposed ~~certain~~transaction ~~general~~at ~~and~~fair ~~administrative~~value ~~support~~as ~~functions~~a contribution to ~~Conrail~~its capital from NS. As a result, the ~~fees~~assets ~~for~~and liabilities of ~~which~~PRR ~~are~~will ~~billed~~be reflected in ~~accordance~~their ~~with~~respective ~~several~~line ~~service-provider~~items ~~arrangements~~in ~~and~~NS Rail's Consolidated ~~amount~~Balance Sheet, and any amounts due to ~~approximately~~PRR $7would ~~million~~be ~~annually~~extinguished. On the Consolidated Income Statement, Conrail Rents and Services will be reduced to reflect only the expenses associated with the

"Conrail rents and services" includes: (1) expenses for amounts due to PRR for use of operating properties and equipment and (2) expenses for amounts due to CRC for operation of the Shared Assets Areas.

A significant portion of payments made to PRR is borrowed back from a subsidiary of PRR under a note due in 2032. Amounts outstanding under this note comprise the long-term balance of "Due to Conrail." The interest rate

~~for~~Shared ~~these~~Assets ~~loans~~Areas, ~~is variable~~ and ~~was~~other ~~1.51% at Sept. 30~~expenses, ~~2003. On~~primarily ~~a consolidated basis,~~ the ~~proposed spin-off~~depreciation ~~transaction described above would effectively relieve NS Rail of this obligation. The current balance "Due to Conrail" is composed of amounts~~ related to ~~expenses~~the ~~included~~PRR inassets, ~~"Conrail~~will ~~rents~~be ~~and~~reflected ~~services,"~~in astheir ~~discussed~~respective ~~above~~line items.

NS Rail'sSale Consolidated Balance Sheet at Sept. 30, 2003, includes $38 million of liabilities relatedAccounts to the Conrail transaction, principally for contractual obligations to Conrail employees imposed by the STB when it approved the transaction. Through Sept. 30, 2003, NS Rail has paid $145 million of such costs. Receivable

~~Sales~~ NS Rail sells, without recourse, to a bankruptcy-remote special-purpose NS subsidiary, a pool of accounts ~~Accounts~~receivable. NS ~~Receivable~~Rail services and collects the sold receivables; however, no servicing asset or liability has been recognized because the benefits of servicing are estimated to be just adequate to compensate NS Rail for its responsibilities. Payments collected from sold receivables are remitted to the special-purpose NS subsidiary, which, in turn, reinvests the amounts by purchasing new receivables from NS Rail. NS Rail has no retained interest in the sold receivables. Under the terms of the new sale agreement, the receivables are treated as sold and, accordingly, $597 million at March 31, 2004 , and $528 million at Dec. 31, 2003 , of sold receivables are not included on the NS Rail Consolidated Balance Sheets. Fees associated with the sale, which are based on historical dilution and prevailing interest rates, are included in "Other income (expense) - net."

~~NS Rail~~Noncash ~~sells, without recourse, to a bankruptcy-remote special-purpose NS~~Dividend subsidiary, a pool of accounts receivable. NS Rail services and collects all of the sold 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 Rail for its responsibilities. Payments collected from sold receivables are remitted to the special-purpose NS subsidiary, which, in turn, reinvests the amounts by purchasing new receivables from NS Rail. NS Rail has no retained interest in the sold receivables.

~~Under the~~NSR ~~terms~~declared ofand ~~the~~issued to ~~new~~NS ~~sale~~a ~~agreement,~~noncash ~~the~~dividend ~~receivables~~of ~~are~~$291 ~~treated~~million asin ~~sold~~the ~~and, accordingly,~~first ~~$571 million~~quarter atof ~~Sept. 30~~2004, ~~2003,~~which was ~~and~~settled ~~$513~~by ~~million~~reduction ~~at Dec. 31, 2002,~~ of ~~sold~~NSR's ~~receivables~~interest-bearing ~~are~~advances ~~not~~due ~~included~~from ~~on the~~ NS ~~Rail Consolidated Balance Sheets~~. ~~Fees~~Noncash ~~associated~~dividends ~~with the sale, which~~ are ~~based~~excluded onfrom ~~historical dilution and prevailing interest rates,~~the ~~are~~Consolidated ~~included~~Statements inof ~~"Other~~Cash ~~income (expense) - net~~Flows."

Intercompany Accounts

~~Sept.~~ 30March 31, ~~2003~~2004 Dec. 31, ~~2002~~2003 Average Average Interest Interest Balance Rate Balance Rate ($ in millions) Advances due from NS $ 6768 2% $ 68 2% Advances and notes due to NS (~~497~~833) 2% (~~452~~849) 2% Due to NS - net $ (~~430~~765) $ (~~384~~781)

Interest is applied to certain advances at the average NS yield on short-term investments and to the notes at specified rates. NS Rail's results for the ~~nine~~three months ended March ~~Sept.~~31 30 include interest income of $82 million in ~~2003~~2004 and in ~~2002~~2003 and interest expense of $62 million in ~~2003~~2004 and ~~$8 million~~ in ~~2002~~2003 related to these intercompany accounts. These amounts are included in "Other income (expense) - net."

Noncash Dividend

NS Rail declared and issued to NS noncash dividends totaling $600 million in June and Sept. 2003, and $333 million in Sept. 2002, which were settled by reduction of NS Rail's interest-bearing advances due from NS. Noncash dividends are excluded from the Consolidated Statements of Cash Flows.

Intercompany Federal Income Tax Accounts

In accordance with the NS Tax Allocation Agreement, intercompany federal income tax accounts are recorded between companies in the NS consolidated group. NS Rail had long-term intercompany federal income tax payables (which are included in "Deferred income taxes" in the Consolidated Balance Sheets) of $~~979~~997 million at ~~Sept.~~ ~~30,~~March ~~2003~~31, 2004 , and $~~938~~994 million at Dec. 31, ~~2002~~2003 .

32. Derivative Financial Instruments

NS Rail 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~~ interest rates. NS Rail does not engage in the trading of derivatives. NSManagement has ~~Rail's~~determined that its derivative financial instruments qualify as either fair-value or cash-flow hedges, having values which 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.

management has determined that its derivative financial instruments qualify as either fair-value or cash-flow hedges, having values which 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 Rail ~~began~~has a program to hedge a ~~portion~~significant portion of its diesel fuel consumption. The intent ~~of the program~~ is to assist in the management of NS Rail's aggregate risk exposure to fuel price fluctuations, which can significantly affect NS Rail's operating margins and profitability. In order to ~~minimize~~ minimize this risk, NS Rail ~~instituted~~has a continuous hedging strategy ~~for~~using 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 Rail's diesel fuel swaps:

~~Third~~First ~~quarter~~Quarter ~~2003~~2004 ~~2002~~2003 Number of swaps entered into during the ~~third~~first quarter 72 72 Approximate number of gallons hedged (millions) 9592 9794 Approximate average price per gallon of Nymex No. 2 heating oil $0.7383 $0.6974 Remainder of ~~2003~~2004 ~~2004~~2005 ~~2005~~2006 Percent of estimated future diesel fuel consumption covered as of March ~~Sept. 30~~31, ~~2003~~2004 7767% 5231% 132%

Hedges are placed each month by competitive ~~bid~~ bid among selected counterparties. The goal of this hedging strategy is to ~~average~~ average fuel costs over an extended period of time while minimizing the incremental cost of hedging. The program provides that NS Rail will not enter into any fuel hedges with a duration of more than 36 months, and ~~that no more than 80% of NS Rail's average monthly~~ forecasted fuel consumption will be hedged for any month within the 36-month period. Diesel fuel costs represented 7% and 6% of NS Rail's operating expenses for the third quarters of 2003 and 2002, respectively.

NSthat ~~Rail's~~no ~~fuel~~more ~~hedging activity~~than ~~had~~80% ~~the~~of ~~following~~NS ~~effects~~Rail's onaverage monthly ~~diesel~~ fuel ~~expense: for~~consumption ~~the~~will ~~third~~be ~~quarter,~~hedged ~~decreases of $11 million and $5 million~~ for ~~2003~~any ~~and~~month ~~2002,~~within ~~respectively,~~any ~~and for the first nine~~36‑month ~~months, decreases of $45 million and $2 million for 2003 and 2002, respectively~~period. ~~The~~ ~~effect~~Diesel offuel ~~the hedges was to yield average~~ costs ~~per~~represented ~~gallon~~8% ~~(including federal taxes and transportation)~~ of 77NS ~~cents~~Rail's ~~and~~operating 73expenses ~~cents~~ for ~~the third quarters~~ each of ~~2003 and 2002, respectively, and 81 cents and 70 cents for~~ the first ~~nine~~quarters ~~months~~ of ~~2003~~ 2004 and ~~2002, respectively~~2003. Ineffectiveness, or the extent to which changes in the fair values of the heating oil contracts do not offset changes in the fair values of the expected diesel fuel oil transactions, was less than $1 million for each quarter.

NS Rail's fuel hedging activity resulted in net decreases in diesel fuel expense of $23 million for first quarter 2004 and $26 million for first quarter 2003. Ineffectiveness, or the extent to which changes in the fair values of the heating oil contracts do not offset changes in the fair values of the expected diesel fuel transactions, was approximately $3 million for the first quarter of 2004 and $1 million for the first quarter of 2003.

Interest Rate Hedging

NS Rail 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 Rail had $~~194~~177 million, or ~~34.5~~33%, and $~~220~~186 million, or ~~35.4~~34%, of its fixed rate debt portfolio hedged at March ~~Sept. 30~~31, ~~2003~~2004 , and Dec. 31, ~~2002~~2003 , 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~~ derivative transactions.

Fair Values

The fair values of NS Rail's diesel fuel derivative instruments at March ~~Sept. 30~~31, ~~2003,~~2004 and Dec. 31, ~~2002~~2003 , 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 non-cash transactions, and accordingly, are excluded from the Consolidated Statement of Cash Flows. "Accumulated other comprehensive loss," a component of "Stockholder's equity," included unrealized gains of $50 million and $40 million (pretax) at March 31, 2004, and Dec. 31, 2003, respectively, related to the fair value of derivative fuel hedging transactions that will terminate within twelve months of the respective dates.

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 non-cash transactions, and accordingly, are excluded from the Consolidated Statement of Cash Flows. "Accumulated other comprehensive loss," a component of "Stockholders' equity," included an unrealized pretax gain of $22 million and an unrealized pretax loss of $1 million at Sept. 30, 2003, and an unrealized pretax gain of $29 million at Dec. 31, 2002, related to the fair value of derivative fuel hedging transactions that will terminate within twelve months of the respective dates.

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

~~Sept.~~March 3031, Dec. 31, ~~2003~~2004 ~~2002~~2003 ($ in millions) Interest rate hedges: Gross fair market asset position $ 1916 $ 2416 Gross fair market (liability) position -- -- Fuel hedges: Gross fair market asset position 2559 2945 Gross fair market (liability) position (1) -- Total net asset position $ 4374 $ 5361

43. ~~Comprehensive~~Pensions ~~Income~~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. The following relates to the combined NS plans.

Pension and Other Postretirement Benefit Cost Components

	Three months ended March 31,
	2004		2003		2004		2003
	Pension Benefits				Other Benefits

Service cost	$	4	$	5	$	4	$	3
Interest cost		22		22		11		8
Expected return on plan assets		(37)		(40)		(4)		(3)
Amortization of prior service cost (benefit)		1		1		(3)		(1)
Recognized net actuarial gains (losses)		1		1		--		--
Amortization of unrecognized net (gain) loss		--		--		4		4
Net (benefit) cost	$	(9)	$	(11)	$	12	$	11

Contributions for Pension and Other Postretirement Benefits

NS previously disclosed in its consolidated financial statements for the year ended Dec. 31, 2003 , that it expected to contribute $7 million to its unfunded pension plans and $42 million to its other postretirement benefit plans in 2004. For the three months ended March 31, 2004 , $1 million and $10 million of contributions have been made to its unfunded pension plans and its other postretirement benefit plans, respectively. NS presently anticipates contributing an additional $6 million to its unfunded pension plans for a total of $7 million and an additional $32 million to fund its postretirement benefit plans in 2004 for a total of $42 million.

4. Changes in Accounting Principles in 2003

NS Rail also adopted FASB Interpretation No. 46, "Consolidation of Variable Interest Entities," (FIN No. 46) effective Jan. 1, 2003, and recorded a $4 million net adjustment ($6 million before taxes) for the cumulative effect of this change in accounting on years prior to 2003. Pursuant to FIN No. 46, NS Rail has consolidated a special-purpose entity that leases certain locomotives to NS. This entity's assets and liabilities at Jan. 1, 2003 , included $169 million of locomotives and $157 million of debt related to their purchase as well as a $6 million minority interest liability.

5. Comprehensive Income

NS Rail's total comprehensive income was as follows:

Three ~~months~~ ~~Ended Nine~~Months ~~months~~ Ended ~~Sept.~~March 3031, ~~Sept. 30,~~ ~~2003~~2004 ~~2002~~ 2003 ~~2002~~ ($ in millions) Net income $ ~~127~~143 $ ~~124~~184 ~~$ 419 $ 335~~ Other comprehensive income (loss) (1615) (3520) ~~(23) 50~~ Total comprehensive income $ ~~111~~128 $ 89164 ~~$ 396 $ 385~~

For NS Rail, "Other comprehensive income (loss)" is the unrealized gains and losses on certain investments in debt and equity securities, principally NS common stock, and net fair value adjustments to certain derivative financial instruments.

56. Commitments and Contingencies

Lawsuits

NSR 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 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.

Presently, there are claims for income protection benefits where the aggregated range of loss could be from zero to $9 million. A number of 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. 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. A number

of claims on behalf of individual employees have been submitted to arbitration. Three significant cases have been heard and NSR received favorable decisions in each of them. Management believes that NSR will prevail in these matters; however, an unfavorable outcome could result in accruals that could be significant to results of operations in a particular year or quarter.

Casualty Claims

NS Rail is generally self-insured for casualty claims. NS Rail has insurance, subject ~~for~~to ~~catastrophic events~~limits, ~~but~~for ~~that~~catastrophic ~~coverage has upper limits~~events. The casualty claims liability is determined actuarially, based upon claims filed and an estimate of ~~claims~~ 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 payments of claims. Adjustments to the recorded liability are reflected in ~~operating~~ operating expenses in the periods in which such adjustments are known.

Environmental Matters

NS Rail is subject to various jurisdictions' environmental laws and regulations. It is NS Rail's 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 Rail are reflected as receivables (when collection is probable) onin the balance sheet and are not netted against the associated NS Rail liability. Environmental engineers ~~regularly~~ regularly participate in ongoing evaluations of all identified sites and in ~~determining~~ determining any necessary adjustments to liability estimates. NS Rail also has established an Environmental Policy Council, composed of senior managers, to oversee and interpret its environmental policy.

NS11 Rail's balance sheets included liabilities for environmental exposures in the amount of $25 million at Sept. 30, 2003, and $29 million at Dec. 31, 2002 (of which $8 million was accounted for as a current liability for each period). At Sept. 30, 2003, the liability represented NS Rail's estimate of the probable cleanup and remediation costs based on available information at 113 known locations. On that date, 10 sites accounted for $13 million of the liability, and no individual site was considered to be material. NS Rail anticipates that much of this liability will be paid out over five years; however, some costs will be paid out over a longer period.

AtNS ~~some~~Rail's ofbalance ~~the~~sheets ~~113~~included ~~locations,~~liabilities ~~certain~~for NSenvironmental ~~Rail~~exposures ~~subsidiaries,~~in ~~usually~~the amount inof ~~conjunction~~$24 million at ~~with~~March 31, a2004 , ~~number~~and of$25 ~~other~~million ~~parties~~at Dec. 31, ~~have~~2003 (of ~~been~~which ~~identified~~$8 million was accounted for as ~~potentially~~a ~~responsible~~current liability for each period). ~~parties~~At March by31, 2004 , the ~~Environmental~~liability ~~Protection~~represented ~~Agency~~NS ~~(EPA)~~Rail's orestimate ~~similar~~of ~~state~~the probable cleanup and ~~authorities~~remediation ~~under~~costs ~~the~~based ~~Comprehensive~~on ~~Environmental~~available ~~Response,~~information ~~Compensation~~at ~~and~~112 ~~Liability~~identified locations. ~~Act~~On ofthat ~~1980~~date, or10 ~~comparable~~sites ~~state~~accounted ~~statutes,~~for ~~which~~$12 ~~often~~million ~~impose~~of ~~joint~~the liability, and ~~several~~no individual site was considered to be material. NS Rail anticipates that much of this liability ~~for~~will ~~cleanup~~be paid out over five years; however, some costs will be paid out over a longer period.

At some of the 112 locations, certain NS Rail 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 Rail or by the EPA or comparable state authorities), estimates of NS Rail's 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 Rail's traffic mix, particularly those classified as hazardous materials, can pose special risks that NS Rail and its subsidiaries work diligently to minimize. In addition, several NS Rail 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 Rail 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 assessments of the facts and circumstances now known, management believes that it has recorded the probable costs for dealing with those environmental matters of which NSthe ~~Rail~~Corporation is aware. Further, management believes that it is unlikely that any identified matters, either individually ~~Further~~or in the aggregate, will have a material adverse effect on NS Rail's financial position, results of operations or liquidity.

management believes that it is unlikely that any identified matters, either individually or in the aggregate, will have a material adverse effect on NS Rail's financial position, results of operations or liquidity.

Purchase Commitments

At ~~Sept.~~March 3031, ~~2003~~2004 , NS Rail had outstanding purchase commitments of approximately $14270 million in connection with its ~~2003~~ 2004 capital program, including purchases of locomotives and equipment.

12 Independent Accountants' Review Report

The ~~Stockholders and~~ Board of Directors

Norfolk Southern Railway Company:

We have reviewed the accompanying consolidated balance sheet of Norfolk Southern Railway Company and subsidiaries as of ~~September~~March 3031, ~~2003~~2004 , and the related consolidated statements of income ~~for the three-month~~ and ~~nine-month periods ended September 30, 2003 and 2002 and the related consolidated statements of~~ cash flows for the ~~nine~~ three-month periods ended ~~September~~March 3031, ~~2003~~2004 and ~~2002~~2003. These consolidated financial statements are the responsibility of the Company's management.

We conducted our reviews in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with auditing standards generally accepted in the United States of America , the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

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

As discussed in ~~Note~~note 14 to the consolidated financial statements, the Company adopted Financial Accounting Standards Board Statement No. 143, Accounting for Asset Retirement Obligations, and Financial Accounting Standards Board Interpretation No. 46, Consolidation of Variable Interest Entities, as of January 1, 2003 .

We have previously audited, in accordance with auditing standards generally accepted in the United States of America, the consolidated balance sheet of Norfolk Southern Railway Company and subsidiaries as of December 31, ~~2002~~2003, and the related consolidated statements of income, changes in stockholders' equity and cash flows for the year then ended (not presented herein); and in our report dated January 2827, ~~2003~~2004, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet as of December 31, ~~2002~~2003 , is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

/s/ KPMG LLP

Norfolk , Virginia

~~October~~April 2820, ~~2003~~2004

1213

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

~~NORFOLK~~The ~~SOUTHERN~~information ~~RAILWAY~~called for ~~COMPANY~~by ~~AND~~Item ~~SUBSIDIARIES~~2 is omitted in accordance with General Instruction (H)(2)(a). However, pursuant to the same instructions, the registrant provides herein management's narrative analysis of the results of operations.

~~(A M~~MANAGEMENT'S ~~ajority-Owned Subsidiary~~NARRATIVE ofANALYSIS ~~Norfolk~~OF ~~Southern~~THE ~~Corporation~~RESULTS ~~[NS])~~OF OPERATIONS

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

RESULTS OF OPERATIONS

Net IncomeOverview

~~Third~~First-quarter net income was $~~127~~143 million in ~~2003~~2004, compared upwith $3184 million, orin ~~2%,~~2003. The following ~~compared~~table ~~with~~shows the ~~same period~~components ~~last~~of the change:

~~year,~~ ~~benefiting~~ First ~~from~~Quarter ~~higher~~ ~~income~~ ~~from~~ 2004 ~~operations~~vs. 2003 ~~For~~ ~~the~~ ~~first~~ ~~nine~~ Increase ~~months~~ of 2004 2003, (Decrease) ~~net~~ ~~income was $419~~ ~~million~~ ($ ~~and~~in ~~included~~millions) ~~$104~~ ~~million~~ ~~for~~ Income ~~the~~from ~~cumulative~~continuing ~~effect~~operations before onaccounting ~~years~~changes $ 143 $ 80 $ 63 ~~prior~~ to Cumulative ~~2003~~effect of changes in accounting principles, asnet ~~required by the adoption~~ of ~~two accounting~~ ~~pronouncements (see Note 1).~~ taxes ~~Nine~~ -~~month~~- 104 (104) ~~income~~ ~~before~~ Net ~~accounting changes was~~ income $~~315 million, down~~ 143 $20 ~~million, or 6%, compared with results for the same period of 2002.~~ ~~The decline was primarily the result of~~ ~~lower~~ 184 $ (41) ~~income from railway operations offset, in part, by a lower effective tax~~ ~~rate.~~

The decline reflected the absence of the accounting changes included in net income in 2003. Income from continuing operations before accounting changes increased $63 million, or 79%, in the first quarter of 2004, compared with the same period of 2003. The growth resulted from a $126 million, or 8%, increase in railway operating revenues coupled with only a slight rise in railway operating expenses, which led to strong income from railway operations. The revenue gain was primarily the result of a 7% rise in traffic volume. Expenses were up 1% as the fluidity of the railroad network resulted in an increase in efficiency as measured by average train speed, terminal dwell time and cars on line.

Railway Operating Revenues

~~Third~~First-quarter railway ~~operating~~ operating revenues were $1.665 billion in ~~2003~~2004, ~~down~~up $3126 million, ~~compared~~or ~~with~~8%, ~~the third~~compared ~~quarter~~with ~~of last year. For~~ the first ~~nine~~ ~~months,~~quarter ~~revenues~~of ~~were $4~~2003.7 ~~billion, up $101 million, or 2%.~~ As shown in the following table, the ~~third~~increase ~~quarter decrease~~ was ~~due~~the toresult ~~reduced~~of higher traffic volume ~~offset~~and ~~in part by higher average revenues, while the increase for the first nine months was the result of~~ increased average ~~revenues~~ ~~and higher traffic volume~~revenues.

~~Third~~First quarter ~~First nine~~ ~~months~~ ~~2003~~2004 vs. ~~2002~~2003 ~~2003 vs.~~ ~~2002~~ Increase (Decrease) ~~Increase (Decrease)~~ ($ in millions) Traffic volume (carloads) $ ~~(13)~~ $100 42 Revenue per unit/mix 10 26 59 Total $ ~~(3)~~ 126 $ ~~101~~

~~Revenues,~~14 ~~carloads and average revenue per unit for the commodity groups were as follows (prior year amounts have been reclassified to conform to the current presentation):~~

Revenues ~~Third Quarter~~ and carloads for ~~Revenue Carloads Revenue per~~the ~~Unit~~ commodity groups ~~2003 2002 2003 2002 2003 2002~~ were as ($ in millions) (in thousands) ($ per unit) Coal $ 372 $ 371 407 413 $ 915 $ 900 General merchandisefollows: Automotive 205 231 142 155 1,447 1,494 Chemicals 196 194 108 110 1,805 1,768 Metals/construction 180 181 187 193 965 935 Agr./consumer prod./govt. 167 156 138 127 1,212 1,219 Paper/clay/forest 163 155 113 113 1,445 1,379 General merchandise 911 917 688 698 1,325 1,313 Intermodal 270 268 627 625 430 429 Total $ 1,553 $ 1,556 1,722 1,736 $ 902 $ 896

13 First Quarter Revenues Carloads Revenue per Unit 2004 2003 2004 2003 2004 2003 ($ in millions) (in thousands) ($ per unit) Coal $ 398 $ 354 406.3 395.2 $ 979 $ 895 General merchandise: Automotive 248 242 166.9 166.4 1,486 1,453 Chemicals 203 192 110.2 105.7 1,844 1,823 Metals/construction 183 166 177.2 161.3 1,033 1,027 Agr./consumer prod./govt. 176 168 141.0 134.6 1,251 1,247 Paper/clay/forest 157 150 107.3 106.6 1,459 1,404 General merchandise 967 918 702.6 674.6 1,377 1,360 Intermodal 280 247 648.1 578.2 432 427 Total $ 1,645 $ 1,519 1,757.0 1,648.0 $ 936 $ 922

First Nine Months Revenues Carloads Revenue per Unit 2003 2002 2003 2002 2003 2002 ($ in millions) (in thousands) ($ per unit) Coal $ 1,115 $ 1,080 1,222 1,204 $ 913 $ 897 General merchandise: Automotive 689 718 477 499 1,444 1,439 Chemicals 578 567 319 319 1,812 1,779 Metals/construction 521 530 532 551 980 962 Agr./consumer prod./govt. 510 469 409 382 1,245 1,227 Paper/clay/forest 475 450 333 330 1,428 1,365 General merchandise 2,773 2,734 2,070 2,081 1,340 1,314 Intermodal 773 746 1,814 1,774 426 421 Total $ 4,661 $ 4,560 5,106 5,059 $ 913 $ 901

Coal

~~Coal~~First-quarter coal revenues increased $144 million ~~in the third quarter and $35 million~~, or 312%, ~~in the first nine months,~~ compared with ~~the same periods~~ last year. Total traffic volume (~~tonnage~~carloads) ~~handled decreased~~was 1up 3%, inprincipally ~~the~~because ~~quarter,~~of ~~but~~higher ~~increased~~traffic volume 2% for ~~the~~utility ~~first~~coal, ~~nine~~which ~~months, primarily~~benefited ~~because~~from ofweather-related ~~higher~~demand ~~utility~~coupled with ~~and~~lower ~~export~~utility ~~coal~~stockpiles, ~~volume. Shipments~~economic ofexpansion ~~export~~and ~~coal~~high ~~increased~~natural ~~40%~~gas inprices ~~the~~(which ~~quarter~~can ~~and~~result ~~12%~~in ~~for~~increased ~~the~~coal-fired ~~first~~electricity ~~nine~~generation). Export ~~months,~~coal ~~due~~volume toincreased ~~blend changes~~2%, ~~the~~as ~~impact~~the effects of ~~ocean~~higher ~~rates~~global ~~and~~demand ~~the~~were ~~value~~somewhat ofconstrained ~~the~~by ~~dollar~~tight supplies. ~~Industrial~~Domestic metallurgical coal, ~~volume~~coke ~~increased~~and 8%iron ore inshipments ~~the~~declined ~~quarter~~5%, as ~~low~~shortages ~~inventories at~~in ~~plants~~raw ~~began~~materials hampered the ability to bemeet ~~replenished,~~increased ~~but~~demand. Industrial coal ~~decreased~~shipments 6rose 16%, ~~for~~a result of the ~~first~~expanding ~~nine~~economy and new ~~months~~business. Average revenue per carload ~~was~~ upfor 2coal increased 9%, inshowing the ~~third~~effects ~~quarter~~of ~~and~~higher ~~first nine months~~rates, ~~reflecting~~including athe effects of favorable ~~change~~developments in the coal rate cases (see discussion below), as well as an increase in the ~~mix~~proportion of ~~traffic~~longer length of haul (~~increased~~and therefore ~~export~~higher ~~volume~~rated) traffic.

~~For~~In 2002, two of NS Rail's utility customers, Duke Energy (Duke) and Carolina Power & Light (CP&L), filed rate reasonableness complaints at the ~~remainder~~STB alleging ofthat NS Rail's tariff rates for the ~~year,~~transportation of coal ~~volumes~~were unreasonable. In ~~are~~the Duke proceeding the ~~expected~~STB toinitially ~~continue~~found NS Rail's rates to be ~~higher~~reasonable in November 2003, ~~although~~but subsequently ~~mild~~issued ~~weather~~technical ~~patterns~~corrections ~~could~~in ~~dampen~~February 2004 finding that in ~~this~~certain ~~outlook~~years some portion of the rates was unreasonable. ~~Utility~~The ~~stockpiles~~case ~~are~~is currently stayed while the STB ~~estimated~~considers toboth beparties' ~~below~~petitions ~~normal~~for reconsideration, and ~~utilities~~the ~~should~~STB ~~begin~~has ~~rebuilding~~not ~~stockpiles~~yet ordered any rate relief. In the CP&L proceeding the STB found NS Rail's rates to be unreasonable in ~~anticipation~~December 2003, but upheld a significant portion of ~~winter,~~NS ~~and~~Rail's ~~gas~~tariff ~~prices~~increase. Both of the STB's rate decisions remain ~~relatively~~subject to ~~high,~~appeal. NS ~~which~~Rail ~~could~~is currently ~~lead~~recognizing torevenues ~~greater~~based ~~utilization~~on the rates upheld or prescribed by the STB. Future developments in the two cases may result in adjustments that could have a significant impact on results of operations ~~coal-fired~~in ~~generation~~a ~~plants~~particular quarter. Over the long term, Management believes the STB decisions in the Duke and CP&L proceedings will help support improved pricing for coal transportation services.

~~As disclosed in NS Rail's 2002 10-K, since early~~Coal ~~2002,~~revenues ~~two~~are ~~utility~~expected ~~customers~~to ~~have~~continue ~~rate~~to ~~reasonableness~~show ~~complaints~~growth ~~before~~for the ~~STB. Until~~ ~~resolved,~~remainder NSof ~~Rail~~the ~~is billing~~year, ~~and~~reflecting ~~collecting~~higher ~~amounts~~utility ~~from~~volume, ~~these~~driven ~~customers~~by ~~based on~~ the ~~challenged~~replenishment ~~tariff rates. NS~~of ~~Rail currently expects the~~depleted ~~STB~~stockpiles to(which ~~issue~~may ~~its~~be ~~decisions~~affected inby ~~the~~weather-related ~~fourth quarter of 2003~~demand), ~~although~~and ~~ultimate resolution may not occur until~~ a ~~later date.~~ ~~While~~continuation ~~the accompanying financial statements reflect management's best estimate~~ of the ~~resolution~~favorable ofmarket ~~these~~conditions ~~matters,~~for ~~due~~export toand ~~the~~domestic metallurgical ~~passage of time~~coal, ~~their ultimate~~coke ~~outcome~~and ~~could~~iron ~~have~~ore acoupled ~~significant~~with ~~effect~~an oneasing ~~results~~ of ~~operations~~the insupply ~~the~~constraints ~~particular~~seen ~~quarter~~in orthe ~~year~~first ~~resolved~~quarter.

General Merchandise

~~General~~ First-quarter general merchandise revenues ~~decreased~~ increased $649 million, or 15%, ~~in the third quarter, but increased $39 million, or 1%, in the first nine months,~~ compared with ~~the same periods~~ last year. ~~The decline for~~ ~~the~~Total ~~quarter was the result of lower~~ traffic volume ~~(carloads), which~~ was ~~partially~~ ~~offset~~up ~~by higher average revenues. For the first nine months~~4%, ~~the~~as ~~revenue~~all ~~increase~~five ~~reflected~~commodity ~~higher~~groups ~~average~~posted ~~revenues~~increases. ~~For~~The ~~both periods, the largest volume decreases were in the automotive and~~ metals and construction ~~groups. Automotive~~group ~~traffic~~posted ~~volume reflected plant downtime at Ford and DaimlerChrysler. Metals and construction volume suffered from continued softness in~~ the ~~imported steel market.~~ Agriculture, consumer products and government volume increased 8% in the quarter and 7% for the first nine months reflecting increased volume for fertilizer, higher military shipments and more shipments of corn into markets affected by the 2002 drought. Paper, clay and forest products volume increased slightly for the quarter and was up 1% for the first nine months.

~~General merchandise average revenue per carload~~15 ~~increased 1% in the third quarter and 2% for the first nine months reflecting fuel surcharges, increased rates and longer lengths of haul.~~

14largest volume increase, up 10% on strong construction traffic, supported by increased public and commercial construction projects, and increased domestic steel production, reflecting a soft market for imported steel. Agriculture, consumer products and government traffic volume rose 5% on higher traffic volume for sweeteners, ethanol, fertilizer and wheat. Corn volumes declined reflecting a return to normal sourcing patterns in the East. Chemicals traffic volume increased 4%, a result of strong demand for petroleum-related products, and more shipments of chlorine, industrial intermediates and plastics. The paper, clay and forest products and automotive groups posted modest gains. General merchandise average revenue per carload increased 1%, reflecting improved pricing and a higher proportion of longer-haul (higher revenue per carload) business.

~~While~~General ~~improvements~~merchandise revenues are expected to incontinue ~~out~~to ~~metals~~compare ~~and~~favorably ~~construction,~~with ~~chemicals~~the ~~and~~prior ~~agriculture~~year ~~business~~as ~~groups~~2004 progresses; however, ~~overall,~~a ~~general~~continuation ~~merchandise~~of ~~revenues~~this ~~are~~trend ~~expected~~is toless ~~show~~certain ~~weakness~~in ~~during~~ the ~~last~~ fourth quarter ofdue to the strength ~~year~~of ~~and are largely dependent upon~~ the ~~performance~~fourth quarter of ~~the economy~~last year.

Intermodal

~~Intermodal~~ First-quarter intermodal revenues increased $~~2 million, or 1%, in the third quarter and~~33 ~~$27~~ million, or 413%, ~~in the first nine months,~~ compared with ~~the same periods~~ last year. ~~Traffic~~ Total traffic volume (units) ~~was~~grew ~~slightly~~12%, ~~higher~~reflecting strength in ~~the~~all ~~third~~lines of ~~quarter~~business. Container ~~and~~traffic volume increased 210% ~~for the first nine months~~, ~~which~~trailer ~~reflected~~traffic ~~higher~~volume ~~trailer~~rose 28% and Triple Crown ~~traffic~~Services RoadRailer® traffic volume grew 8%. Container and trailer traffic ~~volume~~ volumes benefited from ~~increased~~the ~~international~~conversion ~~and~~of shipments ~~domestic~~from ~~truckload~~highway ~~business~~to rail, as ~~well~~strong demand, higher fuel costs for motor ascarriers and the ~~conversion~~early effect of ~~truck~~new ~~traffic~~hours of service laws combined to ~~rail~~increase shipments. ~~Intermodal~~International ~~revenue~~traffic ~~per~~volume grew ~~unit~~by ~~was~~7%, ~~just~~reflecting ~~about~~strength ~~even~~in U.S. ~~for~~foreign ~~the quarter, but up~~trade. 1%Intermodal ~~for~~average ~~the~~revenue ~~first~~per ~~nine~~unit ~~months~~rose 1%, asa ~~the~~result ~~favorable effects~~ of ~~fuel~~increased ~~surcharges~~rates and a ~~ancillary~~larger ~~revenues~~proportion ~~offset~~of anhigher ~~unfavorable~~rated ~~change~~trailer inand ~~the~~RoadRailer® ~~mix of~~ traffic volume.

Intermodal revenues are expected to ~~show~~continue ~~growth due~~ to ~~favorable year-over-year comparison from the~~show ~~2002~~growth ~~West~~during ~~Coast port shutdown~~2004, ~~market~~provided ~~share gains and new products, in addition to a steady recovery in~~ the ~~economy~~retail and ~~continued~~manufacturing ~~high~~sectors ~~levels~~continue ~~of consumer~~to ~~spending~~expand.

Railway Operating Expenses

~~Third~~First-quarter railway operating expenses were $1.3 34 billion in ~~2003~~2004, ~~down~~up $1113 million, or 1%, compared with ~~last year. For the first nine months, expenses were~~ $41.033 billion, ~~up $135 million, or 4%~~in 2003.

AsCompensation discussed in Note 1, effective Jan. 1, 2003, NS Rail's method of accounting for crosstie removal was changed as a result of implementation of SFAS No. 143. This change in accounting lowered depreciation expense and ~~increased compensation and~~ benefits ~~and other~~ expenses asincreased ~~disclosed in Note 1.~~$20 ~~For~~million, ~~the~~or ~~year~~5%, itprimarily isdriven ~~expected~~by ~~that~~higher ~~the depreciation~~wage ~~reduction~~rates, ~~will~~less ~~total~~in ~~approximately~~pension ~~$29~~income and ~~million,~~increased ~~while~~costs ~~the~~for ~~expense increases~~health ~~will~~and ~~total~~welfare ~~about $20 million~~benefits.

~~Compensation~~Materials, services and ~~benefits~~rents ~~expenses~~decreased ~~increased~~ $65 million, or 21%, inreflecting ~~the~~a ~~third~~lower ~~quarter~~management ~~and~~fee ~~$47 million,~~charged orby ~~4%,~~NS in(see ~~the~~Note ~~first~~1) ~~nine~~and ~~months,~~lower ~~compared~~equipment ~~with~~rents, ~~the~~which ~~same~~were ~~periods~~offset ~~last~~in ~~year. Both~~part ~~comparisons~~by ~~reflected lower pension income,~~ higher ~~wage rates, increased medical costs (despite additional employee~~volume-related ~~contributions),~~intermodal ~~expenses~~purchased ~~attributable~~services toand ~~employee turnover (primarily~~ an increase in ~~train~~locomotive and ~~engine~~freight ~~trainees)~~car maintenance expenses.

InConrail ~~the~~rents third quarter, NS announced a voluntary separation program for nonagreement employees with at least two years of service. The program offers severance pay of three weeks' salary for each year of service up to a maximum of 100 weeks, continued health care for one year at no cost and ~~outplacement~~ services ~~for~~expenses updecreased ~~to 90 days.~~$3 ~~Voluntary~~million, ~~separations will be effective on~~ or ~~before Nov. 30~~3%, ~~2003. The~~reflecting ~~cost~~lower ofcosts ~~this program, approximately $100 million, will be reflected~~ in ~~fourth quarter results and consists of a cash and non-cash component. The cash component is estimated at approximately $65 million for severance benefits and~~ the ~~balance~~ ~~will~~Shared beAssets ~~a non-cash charge for postretirement medical and pension benefits~~Areas.

~~Materials, services~~Diesel ~~and~~fuel ~~rents~~expenses ~~decreased~~increased $163 million, or 3%, as ina ~~the~~6% ~~third~~rise ~~quarter~~in ~~but increased~~consumption ~~$23 million,~~was orpartially ~~2%,~~offset inby ~~the~~a ~~first~~3% ~~nine~~decline ~~months,~~in ~~compared with~~ the average ~~same~~price ~~periods~~per ~~last year~~gallon. ~~Both~~Expenses ~~periods~~in 2004 ~~reflected~~included ~~higher~~a ~~expenses~~$23 ~~for~~million ~~the~~benefit ~~management~~from ~~fee~~the ~~charged~~hedging byprogram, NScompared ~~(see~~with ~~Note~~a ~~2);~~$26 ~~however,~~million ~~for~~benefit in the first quarter, ~~this~~of ~~was~~2003. For ~~more~~the ~~than~~remainder ~~offset~~of bythe ~~lower~~year, ~~automotive~~as ~~traffic~~of ~~volume~~March in31, ~~addition~~2004 , to240 ~~adjustments~~million gallons, ~~relating~~or toabout ~~periodic~~67% ~~studies~~of ~~and~~expected ~~favorable~~consumption has been hedged at an average ~~settlements~~price per gallon of ~~recent~~80 ~~bills~~cents.

~~Conrail~~Casualties ~~rents~~ and ~~services~~other ~~expenses~~claims ~~increased~~expense ~~$7 million,~~decreased ~~or 6%, in the third quarter and~~ $811 million, or 222%, inreflecting the ~~first nine~~absence ~~months,~~of ~~compared~~higher ~~with~~derailment ~~the~~costs ~~same~~and ~~periods~~accruals ~~last year.~~for ~~The~~personal ~~increases~~injury ~~were~~claims ~~principally~~development ~~the~~that ~~result~~burdened ~~of higher Operating Agreement fees and higher~~ expenses in the ~~Shared~~first ~~Assets~~quarter of ~~Areas~~2003.

~~Depreciation~~Other expense ~~was~~increased ~~down~~$6 ~~slightly~~million, inor ~~both~~8%, ~~the~~reflecting ~~third~~an ~~quarter~~increase ~~and~~in ~~the~~property ~~first~~taxes ~~nine~~and ~~months, compared with~~ the ~~same~~absence ~~periods last year, as the effects~~ of ~~property~~a ~~additions~~favorable ~~were offset by the change in~~sales ~~accounting~~and ~~related~~use totax ~~crosstie~~adjustment ~~removal~~that ~~costs~~benefited ~~(see Note 1)~~2003.

Diesel fuel expenses increased $5 million, or 6%, in the third quarter and $37 million, or 15%, in the first nine months, compared with the same periods last year, reflecting higher average prices. The hedging program produced

benefits of $11 million and $45 million in the third quarter and first nine months of 2003, respectively, compared with a $5 million and a $2 million benefit for the same periods of 2002.

Casualties and other claims expense decreased $13 million, or 23%, in the third quarter, but increased $14 million, or 11%, in the first nine months, compared with the same periods last year. The decrease for the quarter reflected lower unfavorable periodic study adjustments as compared with the prior year. The increase for the first nine months was largely the result of continuing adverse personal injury claims development and higher insurance premiums, mitigated by an insurance recovery related to a previous settlement. The increase for the first nine months also reflected damage costs incurred because of several derailments early in the year.

Other expense increased $1 million, or 1%, in the third quarter and $9 million, or 4%, in the first nine months, compared with the same periods of last year. Both periods reflected the absence of prior year settlements - sales and use tax for the quarter and a favorable bad debt settlement for the first nine months.

FINANCIAL CONDITION AND LIQUIDITY

Cash provided by operating activities, NS Rail's principal source of liquidity, was $900 million in the first nine months of 2003, compared with $870 million in the first nine months of 2002.

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 Rail's net cash flow from these borrowings amounted to $174 million in the first nine months of 2003 and $162 million for the same period of 2002.

NS Rail's working capital deficit was $1.2 billion at Sept. 30, 2003, and $1.1 billion at Dec. 31, 2002.

NS Rail looks to NS to provide needed funding. NS currently has the capability to increase the amount of accounts receivable being sold under the revolving sale program. Over the last twelve months, the amount of receivables NS could sell under this program ranged from $358 million to $433 million, and the amount of receivables NS sold ranged from zero to $120 million. Moreover, NS has a $1 billion credit facility, which expires in 2006, that it can borrow under or use to support commercial paper debt; however, reductions in its credit rating could limit NS' ability to access the commercial paper markets.

As the major NS subsidiary, NS Rail provides funding to service NS' debt. NS' debt at Sept. 30, 2003, totaled $6.2 billion. Of this debt, $1.8 billion is due between 2003 and 2007.

NS Rail expects to generate sufficient cash flow from operations to meet its ongoing obligations, as well as to advance amounts to NS to service its debt.

Cash used for investing activities decreased in the first nine months of 2003, compared with the first nine months of 2002, principally because of a decline in capital expenditures. The decrease reflected the absence of locomotive purchases in 2003.

Cash used for financing activities was $466 million in the first nine months of 2003, compared with $413 million in the same period of 2002, reflecting the absence in 2003 of proceeds from equipment financing. Advances to NS typically account for most of the cash used for financing activities and reflect NS' requirements.

OTHER MATTERS

Labor Arbitration

A number of 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.~~ Other ~~disputes~~Income ~~are pending~~(Expense) ~~wherein~~- ~~similar benefits are sought under labor agreement provisions~~Net that, in management's judgment, do not apply to the involved circumstances. A number of claims on behalf of individual employees have been submitted to arbitration. Three significant cases have been heard and NSR received favorable decisions in each of them. In addition, a number of other claims have been settled or withdrawn.

~~Based on~~Other ~~known~~income ~~facts,~~(expense) ~~including~~- ~~the~~net ~~availability~~was ofan ~~legal~~expense ~~defenses, management~~of ~~believes~~$65 NSmillion ~~Rail will prevail~~ in ~~these disputes and that any potential liability for~~ the ~~involved~~first ~~claims~~quarter ~~should~~of ~~not~~2004, ~~have~~$14 ~~material~~million ~~adverse~~higher ~~effect~~than onthe first ~~NS Rail's~~quarter ~~financial position, results~~ of ~~operations or liquidity~~2003. ~~Depending~~The onincrease reflected the ~~outcome~~absence of ~~these arbitrations~~a ~~and~~favorable ~~claims,~~adjustment ~~other~~that ~~claims~~benefited ~~may~~2003 berelated ~~filed or progressed~~ to ~~arbitration. Should~~ ~~all such claimants~~interest ~~prevail,~~accruals ~~there~~upon ~~could~~settlement ~~be a significant effect on results~~ of ~~operations~~federal intax ~~a particular quarter (see Note 5)~~audits.

OTHER MATTERS

Labor Agreements

Approximately 24,000 of NS Rail's employees are covered by collective bargaining agreements with 14 different labor unions. These agreements remain in effect until changed pursuant to the Railway Labor Act. Moratorium provisions in these ~~agreements~~ agreements permitted NS Rail and the unions to propose such changes in late 1999; negotiations at the national level commenced shortly thereafter. Agreements have been reached with the Brotherhood of Maintenance of Way Employes (BMWE), which represents about 4,200 NS Rail employees; the Brotherhood of Locomotive Engineers (BLE), which represents about 4,500 NS Rail employees; the United Transportation Union (UTU), which represents about 6,700 NS Rail employees; the International Brotherhood of Boilermakers and Blacksmiths (IBB), which represents about 100 NS Rail employees; the Transportation Communications International Union (TCU), which represents about 4,400 NS Rail employees; the International Brotherhood of Electrical Workers (IBEW), which represents about 900 NS Rail employees; the American Train Dispatchers Department (ATDD), which represents about 400 NS Rail employees; and the Brotherhood of Railway Signalmen (BRS), which represents about 1,100 NS Rail employees. The agreement previously reached with the BLE was through 2004; NS Rail recently reached a further contract extension with the BLE through 2009 (subject to ratification). Health and welfare issues have been resolved with the BMWE, TCU and BRS. Tentative agreements (subject to ratification) have been reached with BLE, UTU and IBEW that would resolve health and welfare issues. Health and welfare issues with the other organizations have not yet been resolved.

Agreements have been reached with the Brotherhood of Maintenance of Way Employes (BMWE), which represents about 4,000 NS Rail employees; the United Transportation Union (UTU), which represents about 7,000 NS Rail employees; the International Brotherhood of Boilermakers and Blacksmiths (IBB), which represents about 100 NS Rail employees; the Transportation Communications International Union (TCU), which represents about 4,000 NS Rail employees; the American Train Dispatchers Department (ATDD), which represents about 350 NS Rail employees; the Brotherhood of Railroad Signalmen (BRS), which represents about 1,000 NS Rail employees; and the Brotherhood of Locomotive Engineers (BLE), which represents about 4,400 NS Rail employees. The agreement with the BLE is through 2009. A third tentative agreement with the International Brotherhood of Electrical Workers (IBEW), which represents about 900 NS Rail employees, failed ratification in April 2004.

Health and welfare issues have been resolved with BMWE, TCU, BRS, BLE and UTU. Health and welfare issues with the other organizations have not yet been resolved.

Market Risks and Hedging Activities

NS Rail 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.

InThe ~~2001,~~intent ~~NS Rail began a program to hedge a portion~~ of ~~its~~the diesel fuel ~~consumption. The intent~~hedging ~~of the~~ program is to assist in the management of NS Rail's aggregate risk exposure to fuel price fluctuations, which can significantly affect NS Rail's operating margins and profitability, through the use of one or more types of derivative instruments. Diesel fuel costs represented 8% of NS Rail's operating expenses for the first quarter of 2004. The program provides that NS Rail will not enter into any fuel hedges with a duration of more than 36 months, and that no more than 80% of NS Rail's average monthly fuel consumption will be hedged for any month within any 36-month period.

~~Diesel~~As ~~fuel~~of March ~~costs~~31, ~~represented~~2004 , through 7%swap oftransactions, NS Rail~~'s operating~~ ~~expenses~~has ~~for~~hedged ~~the~~approximately ~~third~~67% ~~quarter~~ of ~~2003.~~expected 2004 ~~The~~diesel ~~program~~fuel ~~provides~~requirements. ~~that~~The NSeffect ~~Rail~~of ~~will~~the ~~not~~hedges ~~enter~~is ~~into~~to ~~any~~yield ~~fuel hedges~~an ~~with~~average ~~a duration~~ cost of ~~more~~80 cents ~~than~~per 36hedged ~~months~~gallon, ~~and~~including ~~that~~federal notaxes ~~more~~and ~~than~~transportation. A 8010% ofdecrease in diesel fuel prices would reduce NS Rail's ~~average~~asset ~~monthly~~related ~~fuel~~to the ~~consumption~~swaps ~~will~~by beapproximately ~~hedged~~$41 ~~for~~million ~~any~~as ~~month~~of March ~~within any~~31, ~~36-month~~ ~~period~~2004 .

As of Sept. 30, 2003, through swap transactions, NS Rail has hedged approximately 77% of expected diesel fuel requirements for the remainder of 2003, and 52% and 13% of expected requirements for 2004 and 2005, respectively. The effect of the hedges is to yield an average cost of 79 cents per hedged gallon for the rest of 2003, including federal taxes and transportation. A 10% decrease in diesel fuel prices would reduce NS Rail's asset related to the swaps by approximately $31 million as of Sept. 30, 2003.

NS Rail 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 March ~~Sept. 30~~31, ~~2003~~2004 , NS NS Rail's debt subject to interest rate exposure totaled $~~546~~509 million. A 1 percentage point increase in interest rates would increase NS Rail's total annual interest expense related to all its variable debt by approximately $5 million. Management considers it unlikely that interest rate fluctuations applicable to these instruments will result in a material adverse effect on NS Rail's financial position, results of operations or liquidity.

~~approximately~~Some $5of NS Rail's ~~million~~capital leases, which carry an average fixed rate of 7%, were effectively converted to variable rate obligations using interest rate swap agreements. ~~Management~~On March ~~considers~~31, it2004 ~~unlikely~~, the ~~that~~average ~~interest~~pay rate ~~fluctuations~~under ~~applicable~~these agreements was 2%, and the average receive rate was 7%. The effect of the swaps was to ~~these~~reduce ~~instruments~~interest ~~will~~expense by $2 million in each of the first quarters of 2004 ~~result~~and 2003. A portion of the lease obligations is payable in Japanese yen. NS Rail eliminated the associated exchange rate risk at the inception of each lease with a ~~material~~yen ~~adverse~~deposit ~~effect~~sufficient onto fund the yen-denominated obligation. Most of these deposits are held by foreign banks, primarily Japanese. As a result, NS Rail's is exposed to financial market ~~position,~~risk ~~results~~relative ofto ~~operations~~Japan . Counterparties orto ~~liquidity~~the interest rate swaps and Japanese banks holding yen deposits are major financial institutions believed by management to be creditworthy.

Some of NS Rail's capital leases, which carry an average fixed rate of 7%, were effectively converted to variable rate obligations using interest rate swap agreements. On Sept. 30, 2003, the average pay rate under these agreements was 2%, and the average receive rate was 7%. The effect of the swaps was to reduce interest expense by $3 million and $2 million for the third quarters of 2003 and 2002, respectively, and by $7 million for both the first nine months of 2003 and 2002, respectively. A portion of the lease obligations is payable in Japanese yen. NS Rail 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 Rail 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.

Environmental Matters

NS Rail is subject to various jurisdictions' environmental laws and regulations. It is NS Rail's 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 Rail are reflected as receivables (when collection is probable) in the balance sheet and are not netted against the associated NS Rail liability. Environmental engineers regularly participate in ongoing evaluations of all known sites and in determining any necessary adjustments to liability estimates. NS Rail 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 $6 million for the first nine months of 2003 and $12 million for the same period of 2002. Capital expenditures totaled approximately $3 million and $5 million for the first nine months of 2003 and 2002, respectively.

NS Rail's balance sheets included liabilities for environmental exposures in the amount of $25 million at Sept. 30, 2003, and $29 million at Dec. 31, 2002 (of which $8 million was accounted for as a current liability in each period). At Sept. 30, 2003, the liability represented NS Rail's estimate of the probable cleanup and remediation costs based on available information at 113 known locations. On that date, 10 sites accounted for $13 million of the liability, and no individual site was considered to be material. NS Rail 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 113 locations, certain NS Rail 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 Rail's ultimate potential financial exposure for a given site or in the aggregate for all such sites are unavoidably 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 Rail's traffic mix, particularly those classified as hazardous materials, can pose special risks that NS Rail and its subsidiaries work diligently to minimize. In addition, several NS Rail 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 that are latent or undisclosed may exist on these properties, there can be no assurance that NS will not incur environmental liabilities or costs with respect to one or more of them, the amount and materiality of which cannot be estimated reliably at this time. Moreover, lawsuits and claims involving these and potentially other unidentified environmental sites and matters are likely to arise from time to time. The resulting liabilities could have a significant effect on financial condition, results of operations or liquidity in a particular year or quarter.

However, based on an assessment of known facts and circumstances, management believes that it is unlikely that any known matters, either individually or in the aggregate, will have a material adverse effect on NS Rail's financial position, results of operations or liquidity.

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 3. Quantitative and Qualitative Disclosures About Market Risks.

~~The~~ The information required by this item is included in Part I, Item 2, "Management's ~~Discussion~~Narrative ~~and~~ Analysis of ~~Financial Conditions and Results~~the Results of Operations" on page 17 under the heading "Market Risks and ~~Hedging~~ Hedging Activities."

Item 4. Controls and Procedures.

(a) Evaluation of Disclosure Controls and Procedures.

NS Rail's Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of NS Rail's disclosure controls and procedures (as such term is defined in Rules 13a-1415(ce) and 15d-1415(ce) under the Securities ~~Exchange Act of 1934, as amended~~ (the "Exchange Act")) as of the end of the period covered by this report. Based on such evaluation, such officers have concluded that, as of the end of the period covered by this report, NS Rail's disclosure controls and procedures are effective in alerting them on a timely basis to material information relating to NS Rail (including its consolidated subsidiaries) required to be included in NS Rail's periodic filings under the Exchange Act.

Exchange Act of 1934, as amended (the "Exchange Act")) as of March 31, 2004 . Based on such evaluation, such officers have concluded that, as of March 31, 2004 , NS Rail's disclosure controls and procedures are effective in alerting them on a timely basis to material information relating to NS Rail (including its consolidated subsidiaries) required to be included in NS Rail's periodic filings under the Exchange Act.

(b) Changes in Internal Controls.

During the ~~most~~first ~~recent fiscal~~ quarter of 2004, ~~there~~management has not ~~been~~identified any ~~change~~changes in NS Rail's internal ~~control~~ controls over financial reporting that ~~has~~have materially affected, or isare reasonably likely to materially affect, NS Rail's internal ~~control~~controls over financial reporting.

1918

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

Norfolk Southern Railway Company, Conrail and PRR have entered into a consent order and agreement with the Commonwealth of Pennsylvania Department of Environmental Protection agreeing to pay a lump-sum civil penalty of $550,000 in settlement of the state's claims for alleged environmental violations at Conway Yard, located in western Pennsylvania. In addition, the parties agreed to stipulated civil penalties of $1,000 per month for the first two years and $1,500 per month thereafter until certain conditions at the Yard are remediated.

Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits:

31 ~~Certifications~~. ~~of the CEO and CFO pursuant to Exchange Act~~ Rule 13a-14(a) ~~or Rule~~ /15d-14(a). Certfications

32 ~~Certifications~~. ~~of the CEO and CFO required by Rule 13a-14(b) or Rule 15d-14(b) and Section~~ Section 1350 ~~of Chapter 63 of Title 18 of the U. S. Code.~~Certifications

(b) Reports on Form 8-K:

None.

20 SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

		NORFOLK SOUTHERN RAILWAY COMPANY
		Registrant
Date:	~~Oct.~~April 3027, ~~2003~~2004	/s/ Reginald J. Chaney
		Reginald J. Chaney
		Corporate Secretary (Signature)
Date:	~~Oct.~~April 3027, ~~2003~~2004	/s/ ~~John~~Marta PR. ~~Rathbone~~Stewart
		John P. Rathbone
		Marta R. Stewart
		Vice President and Controller
		(Principal Accounting Officer) (Signature)

21 Exhibit Index

Electronic
Submission
Exhibit
Number	Description
31	~~Certifications of the CEO and CFO pursuant to Exchange Act~~ Rule 13a-14(a)/15d-14(a) Certfications
	or Rule 15d-14(a).
32	Section 1350 Certifications
32	Certifications of the CEO and CFO required by Rule 13a-14(b) or Rule 15d-14(b)
	and Section 1350 of Chapter 63 of Title 18 of the U. S. Code.

2219

Filing Compare · NORFOLK SOUTHERN RAILWAY CO /VA/