Dear Fellow Employee,

I'd like to share with you some messages I first delivered in March during our annual General Management Meeting in Norfolk. These are important, timely considerations for all of us as we work together to make the Thoroughbred run strong in 2004.

I have a two-word theme this year - performance and opportunity. The context for opportunity is the best I've seen in many years - maybe even in my four decades of railroading. Here's why.

• This company is moving in the right direction. Scheduling our service with our Thoroughbred Operating Plan was the right move, and we're learning how to do it better all the time. It's working because you are committed to its success, and our customers have accepted our strategy.
• We are focusing on continuously improving performance. New metrics are helping us manage for consistency and improvement. Time after time, we have demonstrated that if we manage appropriately, we produce.
• Outside momentum is in our favor. The economy appears to be picking up, and it's doing so at a good time for us. Our fuel advantage over trucks is a clear opportunity. Highways are congested. The hours-of-service law favors rail by complicating trucking. These factors make customers want to use us, but only if we can perform. We will increase our partnerships with aggressive and progressive intermodal partners. We'll work hard to increase our top line. High natural gas prices help our coal franchise by pushing utilities our way, and the dollar/euro relationship helps us sell export coal.
• We have a better chance of charging a fair price. Our improved service comes at just the right time, as economic factors put our transportation in greater demand. When we give customers something more valuable - that is, consistent service - we can ask for more and we should.
• Politically, we may be getting at least a little break. We're beginning finally to plant the idea that rail is an essential element in the transportation menu, especially when overcrowded highways can choke our economy. The policy mix is in our favor now. The relative stability of the merger scene right now helps also.

This is a great time for us to be recovering our own strength in a climate that plays in our favor. We have a real chance to surge ahead. It's the best chance we're going to get.

But - there's always a "but," and this is it - we can benefit from these factors only if we perform. I am convinced that if we do, we could make this a breakout year. Remember our commitment is 7 and 7 - $7 billion or better in revenues and an operating ratio that begins with a 7. With outstanding performance, combined with a strong economy and your will and desire to be the best, it can happen.

No one has better people than we do. All we have to do to prove that and establish our leadership is to amaze and delight our customers with our consistent and high level of service, and sell it hard. Results will surely follow, and we'll all benefit when that happens.

David R. Goode
president, chairman and chief executive officer

NS must earn its cost of capital

Norfolk Southern, like the other North American Class I railroads, has not been earning its cost of capital, but that must change. This was a key message from several speakers at the General Management Meeting in Norfolk.

The cost of capital is the rate of return that any business must return to its investors in order to incent them to invest in that business.

"Over periods of time, a business must earn its cost of capital. If it doesn't earn its cost of capital, investors will reallocate their capital to other business opportunities. It's as simple as this: If we don't earn our cost of capital, investors in Norfolk Southern stock will sell their stock and invest their money in other companies," said Hank Wolf, vice chairman and chief financial officer. "If there are more sellers than buyers of any stock, the price of the stock will most likely go down."

The cost of capital is the rate of return required by suppliers of capital and takes into account the risk profile of a business. Competition for capital is strong, and NS has to either generate it internally or rely on external sources. Either way, there is a cost associated with it.

"Because freight railroads are the most capital-intensive industry in America, we have to put more of our earnings back into our infrastructure, making these earnings unavailable for our investors. It is therefore vital to earn our cost of capital and create shareholder value in order to remain an attractive investment," said Kathryn McQuade, senior vice president finance.

Trevor Pardee, assistant vice president finance, showed how different entities calculate cost of capital in different ways. He said regardless of which method is used, the result for Class I railroads and NS is always the same.

"It doesn't matter whose method you use, we have to do better," Pardee said.

Christy Marron, assistant vice president financial planning, explained how NS people can improve the company's ability to earn its cost of capital.

"As part of our capital budget process, each proposed project is analyzed to determine if it produces a high-enough internal rate of return to justify investing our resources in it. However, much of what we have to invest in is required for replacement, safety, regulatory, legal, research and test, renovation or environmental reasons, or it's a computer-related project whose specific benefits are difficult to quantify," Marron said. "We need to better allocate our resources to projects with specifically identified economic benefits, more efficiently manage our existing assets and structure our business mix to generate more shareholder value."

Wick Moorman, senior vice president corporate planning and services, said that NS' strategy for earning its cost of capital includes growing its markets, improving service, controlling costs and developing employees.

NS has earned its cost of capital in the past and is capable of doing so again, Wolf said.

"Today, we are poised to secure the opportunities for business growth. The challenge that we face is to demonstrate to the world that we can produce improved service and generate the financial performance that will enable us to earn our cost of capital," Wolf said.

TDIS hosts draymen conference

Thoroughbred Direct Intermodal Services, Norfolk Southern's postal and retail intermodal logistics subsidiary, invited its trucking partners for a daylong conference in February to review policies and procedures and discuss the impact of the new hours of service regulations enacted by Congress in January.

"While NS is the backbone of our service network, TDIS works with all railroads and more than 50 trucking companies throughout the U.S.," said Joe Dryburgh, TDIS general manager. "This inaugural conference gave all the participants a hands-on opportunity to discuss and implement process enhancements that will provide attractive transportation options for current and prospective TDIS customers."

"In order to provide high-quality, efficient door-to-door intermodal services, we need to create a better communication environment for our dray partners," said Joe Radecke, TDIS director operations. "This meeting provided them a forum to raise issues, such as terminal cycle times and equipment availability, that impact their ability to provide the services TDIS customers expect."

"Invest in YOUR Future - Invest in Safety"

Norfolk Southern employees gathered at the company's annual safety awards meeting in March to celebrate achievements and renew their commitment to continuously improving safety. Forty-two groups were honored for being injury-free in 2003.

"Invest in YOUR Future - Invest in Safety" was the theme introduced to keep the momentum going to improve safety in 2004. Special guests included Federal Railroad Administration Administrator Allan Rutter and representatives from labor organizations and safety programs such as Operation Lifesaver.

David Goode, chairman, president and chief executive officer, congratulated employees on their success in safety. "Never forget that everything begins with safety," he said. "The success we are having in service starts from our concentration on safety."

Goode said reportable injuries in 2003 were higher than in 2002. "We simply can't afford to go backward," he said. "We've got to focus - and hard - on continuous improvement."

Steve Tobias, vice chairman and chief operating officer, said, "Our efforts are not about winning awards. They are about going home safely."

Michael Patrick is Norfolk Southern's 2003 Harold F. Hammond Award nominee.

Michael Patrick, water service repairman, Decatur, Ill., was introduced as NS' Hammond Award nominee for 2003. Patrick is a longtime safety committee member who has worked 31 years without a reportable injury and has demonstrated his commitment to workplace and community safety.

Seven employees received special recognition for their heroic deeds in 2003. Dave Granato, engineer, Waynesburg, Penn., helped rescue three teenagers who were trapped in a burning car after it veered off the road and struck a tree. Dennis Angelo, yardmaster, Tonawanda, N.Y., assisted an underwater rescue team to retrieve a person who jumped from a bridge into icy waters. Mark Lemmers, yard foreman, Elkhart, Ind., administered first aid to a fellow employee until the rescue squad arrived.

Also receiving awards were engineer Albert Anzalone and conductor Randy Janiel, members of a Pittsburgh division train crew, plus Donald Deboy, assistant track supervisor, and John Senich, track patrol foreman, who together stopped an assault in progress after noticing a suspicious vehicle in the right of way.

Other railroaders also expressed their personal commitment to safety. T. M. Holloway, carman, Knoxville, Tenn., J.H. Wilkins, yardmaster, Tilton, Ill., and F.W. Eason, track repairman helper, Greenville, S.C., emphasized that now was the time to set an example for the next generation of railroaders.

"What better way to plan for the future than to invest in safety?" said Chuck Wehrmeister, vice president safety and environmental. "This investment requires commitment but will yield substantial results for yourselves, your co-workers and your families. Our destinies are truly in our control."

NS territory benefits from industrial development in 2003

Norfolk Southern participated in the location of 69 new industries and provided support for the expansion of 20 additional industries along its rail lines in 2003. The new plants and expansions represent an investment of $1.5 billion by NS customers and are expected to create an estimated 7,200 jobs in the railroad's territory and eventually to generate more than 85,000 carloads of new rail traffic annually.

The largest project coming on line last year was an automobile assembly plant at Lincoln, Ala., for Honda Manufacturing of Alabama LLC. Honda will complete a second assembly plant at the same location this year, with a total investment of more than

$1 billion. Other industries locating on NS lines during 2003 included TDS Automotive, an auto parts distribution warehouse in Chesapeake, Va.; Collier Metals LLC, a steel service center in Atlanta, and ConAgra Foods Inc., a temperature-controlled distribution warehouse in Emigsville, Pa.

"Warehouse and distribution projects led the way in 2003," said Larry Collingwood, assistant vice president industrial development. "Nearly 40 percent of new and expanded industries were involved in distribution of products such as lumber, cement, steel, plastics, food, paper, chemicals, aggregates and auto parts."

During the past 10 years, NS' industrial development department has participated in the location or expansion of 1,144 industries, which invested $24.5 billion and created more than 60,000 jobs in the territory served by the railroad.

Duty. Honor. Country.

NS employees called to active duty for Operation Iraqi Freedom, Operation Enduring Freedom and Operation Noble Eagle are serving in many capacities. Here are some of their stories.

Stephen J. Pierce, an electrician apprentice at the Shaffers Crossing Locomotive Shop in Roanoke, was called to active duty in February 2003 and arrived in Iraq in April of that year. He is part of the 181st Transportation Battalion stationed in Balad, near Camp Anaconda. Taking his commitment to safety with him, he reports that his company has traveled more than two million miles with just minor injuries.

Charles Pilkington, a conductor trainee in Knoxville, Tenn., serves as a sergeant in the U.S. Army Reserves and currently is stationed in Baghdad. He is serving with the 489th Civil Affairs team. The Knoxville-based unit helped build a new radio station in Iraq in December. His work has been gratifying.

"We have a job to do, and it's one that I believe in and enjoy doing," Pilkington said. "You really get a chance to meet some extraordinary people who you'll never forget."

Roger Gregg, carman, Knoxville, Tenn., was called to active duty in January 2001. His duties have taken him to Washington, D.C. to help investigate the bombing of the USS Cole and to the Pentagon to work for the Chief of Naval Operations dealing with Antiterrorism/Force Protection and Law Enforcement/Physical Security.

Gregg reports that he has been assigned recently to Naval Mobile Construction Battalion 14 in Gulfport, Miss., as the battalion's personnel officer. He is helping to prepare the troops for deployment to the Middle East. He will stay in Gulfport for now.

"We are all working 14 hour days, 7 days per week, getting ready for the battalion to ship out. No complaints from me, though - the ones going over are the ones that really have it rough," he said.

NS operates record coal trains from Monongahela Valley

In February, Norfolk Southern ran more coal trains than ever from Pennsylvania's Monongahela Valley. Most of the deliveries went to Northern Region utilities that were rebuilding stockpiles due to an extremely cold winter.

"The weather actually worked in our favor, despite the difficult operating conditions it caused," said Alan Shaw, director coal transportation. "We ran a record 244 trains in February from the valley, and it was only a 29-day month."

Other factors for the record coal shipments are increases in natural gas and oil prices, increased mine production and aggressive NS marketing.

"We have worked with power producers to bring more of them on line," Shaw said. He cited new business, such as coal diverted from truck and barge to Sammis Power Plant in Stratton, Ohio.

Shaw said the commitment of Pittsburgh Division employees has been instrumental in NS' ability to serve its coal customers and achieve the record-breaking number of trains from the Monongahela Valley.

"We had its best three weeks ever hauling Monongahela coal in February. We worked with the coal business group to keep trains moving to and from the mines, sometimes on very short notice," said Jim Young, assistant division superintendent, Pittsburgh Division. "Our people rose to the occasion, and we were able to serve our customers when they needed us the most."

Shaw expects to see increasing tonnage through May.

"Then, we'll hope for a hot summer," he said.