In 2003, your company posted significant improvements in performance not only in the bottom line, but in overall results, affirming our formula for creating continued growth and improvement in stockholder value.

Our formula is based on our belief that if we perform well — really well — improvements in our business process will drive better service for our customers. In turn, we are convinced we can sell more of our enhanced transportation products at better value. At the same time, improving performance drives a more efficient transportation system and better productivity.

In short, focusing intently on improving performance allows us to introduce new products higher up on the logistics value chain and reduce costs by better managing and utilizing capacity.

Inevitably, execution of that formula makes our returns better, and that flows to all our constituents — the communities and customers we serve, our own people and, of course, our investors. I believe 2003 shows the formula works and suggests the growth we can produce if we stay focused and continue the momentum we have developed.

The year’s hallmark, along with our continued leadership in safety, was the service improvement shown by Norfolk Southern in a time when the North American rail transportation system as a whole was stretched to provide strong service. With full implementation of our proprietary Thoroughbred Operating Plan — in effect, our scheduled railroad — we were able to achieve clearly visible improvements in the consistency and quality of our service. As a result, we were ready to serve our customers as the economy grew stronger in the second half of 2003. We are well equipped for what promises to be a continuing strong recovery in 2004.

We were able to respond to early challenges from harsh weather and slow economic conditions and hit the strong third and fourth quarters with good service and improving efficiency. That is due to the great response of our people to the diagnostic operating tools our technology has produced and our relentless search for improvement.

The commitment of Norfolk Southern people to provide the highest levels of service is central to all we do. Norfolk Southern long has been the industry leader in safety. Our intent is to continue as an industry benchmark in safety and apply the same level of commitment to service so we can assume transportation leadership in both.

I believe our strong revenue growth and our improvement in margins over time are directly attributable to making our products more attractive and more valuable while improving our efficiency and costs through better performance. Norfolk Southern’s improving results are proof of the strategy. Now, we have to perform at world-class levels to produce the results our customers and investors deserve. We showed in ’03 that we’ve just begun to roll.

For the past couple of years in this letter, I have said we would accomplish several specific objectives. Let’s take a quick look at how we did in 2003.

Improve service: Measuring more aspects of the transportation cycle means we can hone in on specific service issues. Metrics improved, and consistency improved even more. Customers noticed, and you can read in this annual report a list of some of the service awards Norfolk Southern received during the year.

Improve productivity: Process analysis of work functions and our ongoing Six Sigma initiatives produced better asset utilization and work force productivity during 2003.

Grow revenue: Despite a particularly challenging economic environment in the first half, annual revenue increased more than 3 percent overall and set a record. This was primarily the result of service improvements, value-based pricing and highway-to-rail traffic conversions. Importantly, the increases were seen in all our major business lines.

Generate cash flow, pay down debt: We achieved more than $400 million of debt reduction during the year and redeemed $43 million of preferred stock. Our credit ratings continue to be among the top of the industry.

Earn fair returns: Earnings per share grew 16 percent. We increased our dividend for the second consecutive year.

Improve governance: We continued our tradition of strong ethics and governance for the company by working proactively to make sure our standards remain at the very top. I refer you to “NS Strengthens Corporate Governance” for a list of actions taken.

What does this mean for tomorrow? We’ll take the experience and wisdom gained over the last few years and make them pay off. Our people have worked hard to restore Norfolk Southern to the efficient and highly productive organization our customers and shareholders deserve. A lot of progress has been made, with more to come. We clearly are ready to grow now that the economy is improving and demand for our transportation is increasing.

We’ll grow revenues — both in values and increasingly by emphasizing our high-end transportation products. We’ll continue to improve productivity. The reductions in staffing and overheads achieved in ’03 and the improvements of technology will be fully felt in ’04. We have taken constructive actions to control medical cost increases and other administrative costs. Meanwhile, we will maintain our world-class performance as a safe operation.

We’ll push even harder to help policymakers understand, as our transportation partners and shippers already do, that it pays to use rail whenever possible. Rail is better for the environment. It reduces road congestion, thereby enhancing mobility. It is more economical and efficient.

We’ll continue to improve on our balance sheet. We’ll pay off debt and use our assets even more effectively. We’ll generate cash flow to continue our capital investment program and enhance returns to our shareholders.

Norfolk Southern will make improvements and changes in performance. We will, however, do that in the continuing environment of sound corporate governance, strong ethical commitment and safety, which have been hallmarks of our company and culture. We’re making improvements in our structure and governance practices. Norfolk Southern will continue its tradition of absolute devotion to honesty, high ethics and clear financial reporting.

The rail transportation industry is showing stability and strength, I believe the best in many years. It has enormous potential to grow and be an even greater piece of the fabric that makes our economy strong.

We at Norfolk Southern have shown willingness and an ability to make the necessary commitment to growth, in the conviction that we can both serve and benefit by that commitment. Now, we see the value of our capacity and the investments we have made.

We have been tested by our own expansion and by an economy that failed to expand at the pace we had counted on. Now, however, we are seeing much greater demand for our services. This comes at an ideal time, because we have a system second to none and a lean, tested and experienced group of Norfolk Southern people ready to serve our customers.

This combination of factors has every prospect of enabling our success, as long as we perform at the levels we know we can. That’s why we put the word “performance” on the heading of this report. We’ll constantly remind ourselves of our obligation to our owners, customers and communities to perform better and better. I have every confidence the Thoroughbred will continue to respond.

David R. Goode
January 27, 2004