My Fellow Employees,

To do better in business, we must measure what we do. Without measurements, we never know whether we are doing better or worse. To use a sports analogy, if you don't keep score, you never know whether you are winning or losing.

In safety, we measure injuries per 200,000 employee-hours worked in our quest for zero incidents and zero injuries. In service, we measure on-time performance; in operations, average system speeds and terminal dwell times.

From a financial standpoint, we can measure our success in terms of earnings or cash flow, which are the drivers of stock price. But perhaps for Norfolk Southern, the most important financial measure is our operating ratio.

The operating ratio is calculated by dividing railway operating expenses (which does not include interest on debt) by railway operating revenues. Stated somewhat differently, it is the percentage of each revenue dollar that is used to operate our railroad. Lower is better - the lower the operating ratio, the better will be the financial health of the railroad.

In our last quarter, we had an operating ratio of 82.3 percent. However, during the 1990s, we improved from the high 70s to a low of 71.3 in 1998. Our operating ratio increased in 1999 following the integration of Conrail to more than 90 percent.

We need to work together to get our operating ratio back down in the 70s again, and thanks to the efforts of employees across the system, we are moving in the right direction. To reduce the operating ratio, we need to focus on both increasing revenues and reducing expenses. We can raise revenues by improving service and increasing the number of shipments we handle for our customers, while assuring that our pricing or rates reflect the value of our transportation services. At the same time, we must continue to squeeze out costs that are not absolutely necessary to provide safe, reliable service.

Every employee can contribute to reducing the operating ratio by focusing on (1) improving service, (2) capturing new business and (3) avoiding unnecessary expenses.

Nothing is more important to the financial health and success of Norfolk Southern, and the financial opportunities that our work provides to us, than improving the operating ratio. We can reduce the operating ratio - even in this time of economic challenge - as evidenced by the progress we have made in the last two years.

As we move into the fourth quarter, let's all do everything we can to improve Norfolk Southern's operating ratio for the balance of this year and beyond.

Hank Wolf
Vice Chairman and Chief
Financial Officer

Protect data with a strong password

"Please enter your password." For many people, supplying a password has become a regular part of life. Whether you are logging on to Norfolk Southern's computers, using a credit card or accessing an automated teller machine, passwords frequently are used for security. For that reason, passwords and personal identification numbers (PINS) should be protected; otherwise someone could assume your identity and access systems with your authority.

"Many people have several passwords just for work, not counting their private passwords and PINS," said Tony Samms, director Information Security. "Choosing ones that are easy to remember but hard for others to guess or crack can be difficult."

Samms offered some basic guidelines for choosing a strong password.

"Use a password that's six to eight characters long and has a mixture of upper and lower case letters, numbers and special symbols, and make it easy to remember," he said.

One way to create a unique combination that's easy to remember is to take the title of a book or film or a line from a song, and use the first letter from each word as your password, adding capitalization, numbers and special characters. For example, the first line of the Beatles tune "When I'm Sixty Four" (when I get older losing my hair) could become "WigoLMh@64." "To be or not to be" could become "2B/noT2b?"

"It's best not to use personal names or the names of family members, even in a modified form," said Samms. "Avoid using addresses or license plate, telephone and Social Security numbers, because hackers easily can obtain that information. Don't use a word that can be found in any dictionary, even a foreign language dictionary. There are programs now that can quickly check your password against very large lists of dictionary words and place names, even if they are spelled backward."

Samms advises NS employees to change passwords regularly.

"Choosing a unique password and changing it frequently is one of the best ways to protect important information from intruders," he said.

Steam locomotive donated to city of Roanoke

Norfolk Southern formally presented the Class A 1218 steam locomotive to the city of Roanoke on Aug. 17 following announcement that a museum dedicated to the late photographer O. Winston Link will be housed in the former Norfolk and Western Railway passenger station there.

"Once more, we feel the power of the 1218 as its pull helps bring the O. Winston Link Museum to Roanoke," said David Goode, NS chairman, president and chief executive officer. "The N&W passenger station is a fitting destination for Link's work, and Norfolk Southern is pleased to have assisted in attracting this important cultural addition to the Roanoke Valley."

Kathryn McQuade, senior vice president Financial Planning, presented title to the locomotive to Roanoke Mayor Ralph Smith. "With this donation, we help secure a useful future for our old friend number 1218," McQuade said. "Such a joining of art, architecture and transportation honors Roanoke's proud railroading heritage, makes it available to a wider range of American and international visitors, and helps preserve it for future generations."

Donation of the 1218 was contingent on Roanoke's Center in the Square museum complex obtaining exclusive rights from Link's estate to house the museum in the passenger station. Of all the locomotives Link photographed, the Class As were his favorites. It was his wish that the 1218, the last of the Class A locomotives, be restored and displayed near his works. Plans call for the locomotive to be refurbished for permanent display at the Virginia Museum of Transportation, just blocks from the passenger station.

Land donated for W.Va. flood relief

Norfolk Southern, through its Pocahontas Land Corporation (PLC) subsidiary, donated 42 acres of flat land to the West Virginia Housing Development Fund (WVHDF) to aid victims of recent flooding in southern West Virginia.

The donation was made with the concurrence of PLC's coal mining lessees, National Resources Inc. and Mega Minerals Inc. and its operating subsidiary Mid-Vol Leasing, Cannelton Industries Inc., as well as timber owner Bluefield Timber LLC.

The land, all in McDowell County, includes 20 acres of reclaimed surface mine property at Tom's Mountain near Welch, 20 acres of a former coal camp area at Anawalt and approximately two acres at the site of the former school and gym at Kimball.

At the Tom's Mountain site, WVHDF, the Army Corps of Engineers and the Federal Emergency Management Agency (FEMA) are constructing water and sewer infrastructure and plan to provide initial housing in FEMA mobile homes. Future development is expected to involve conversion to subdivisions for conventional housing. Plans for the Anawalt and Kimball sites are being developed.

It is anticipated that the donated sites will be able to accommodate approximately 200 families displaced by the flooding. The sites will be developed to provide both temporary and permanent housing opportunities.

"Flat land, above the flood plain and suitable for residential and economic development, has always been at a premium in West Virginia," said Daniel D. Smith, PLC president. "The people of Norfolk Southern and Pocahontas Land are pleased to make this contribution in support of our family, friends, coworkers and customers in the areas affected by flooding. We thank our mining lessees and the timber owner for their cooperation in making the donation possible."

"West Virginia's good corporate citizens have always come through in times of disaster," said Joe W. Hatfield, executive director of the WVHDF. "On behalf of the Mountain State, we would like to thank Pocahontas Land and all who have contributed their much needed resources to the recovery effort."

Earlier, the Norfolk Southern Foundation announced a contribution of $50,000 to the American Red Cross to help victims of the July 8 flood, one of the state's worst natural disasters in decades. Pocahontas Land donated $5,000 to the Bluefield Union Mission, and employees of both the railroad and the resource management company collected and distributed food, clothing and cleaning materials.

Thoroughbred award presented for safety, service enhancements

Three Norfolk Southern employees received the company's highest honor, the Thoroughbred Award, for developing systems to improve safety and customer service. The Thoroughbred Award recognizes outstanding, highly visible contributions that have significant, long-term impact on the success of NS.

Adam Mastrangelo (l), Randy King (2nd from left) and Greg Lowe (r) received the company's highest honor, The Thoroughbred Award, from David Goode in ceremonies in Norfolk, July 30.

Adam Mastrangelo and Greg Lowe of the company's Research and Tests Department developed a locomotive digital video system to better document highway-rail grade crossing and trespasser incidents. Randy King of the Transpor-tation Department created a computer model for forecasting train crew requirements to handle customers' shipments.

"The outstanding accomplishments of these Thoroughbred Award winners demonstrate the commitment of our people to continuing excellence in safety and service," said David Goode, chairman, president and chief executive officer, who presented the awards.

The system designed by Mastrangelo, research project manager, and Lowe, senior innovations engineer, both of Roanoke, enhances safety of operations along rights of way and at highway-rail grade crossings. Called "RailView," the system is mounted in locomotives and records information important to the investigation of grade crossing incidents.

"There's only so much you can get from witnesses," said Mastrangelo. "RailView gives us a clear picture as to what happened."

NS began installation of RailView on its locomotives in 1999. Today, about 170 locomotives are equipped with the cameras. Work is continuing with a goal of installing RailView on the entire NS road fleet.

"Information furnished by RailView also has been useful in deterring potential claims," said Roger Petersen, general solicitor and general manager Casualty Claims. "It gives NS an opportunity to demonstrate what actually occurred in the moments before an accident."

The forecasting model software developed by King, a crew management analyst based at Atlanta, assists the Transportation Department in determining the number of engineer and conductor trainees needed up to 24 months in the future. It improves NS' ability to maintain the work force required to provide customer service and to accommodate business growth.

"In the past, we've predicted future work force needs based on the intuition of managers, and we've estimated future needs based on previous results and expenses," said King. "It takes six months to train someone as a railroad conductor, and it takes one year to train a conductor to become an engineer. We now know the right time and the right number of employees to hire and train."

Second-quarter, first-half earnings reported

Norfolk Southern reported second-quarter net income of $107 million, or $0.28 per diluted share, compared with net income of $116 million, or $0.30 per diluted share, in the second quarter of 2000, which included a $17 million, or $0.04 per diluted share, gain from the sale of interests in certain oil and gas properties. Excluding this gain, last year's second-quarter net income was $99 million, or $0.26 per diluted share.

"We are encouraged with our progress in the second quarter in light of the economic downturn that is proving to be longer and deeper than we anticipated," said David Goode, chairman, president and chief executive officer. "While we can't directly control the economic forces that affect us, we are focused on managing Norfolk Southern's costs and on continuing to improve service to keep our business as strong as possible."

For the first six months, income from continuing operations was $168 million, or $0.44 per diluted share. Net income for the period was $181 million, or $0.47 per diluted share, and included an after-tax gain of $13 million, or $0.03 per diluted share, related to the 1998 sale of NS' former trucking subsidiary. For the comparable period of 2000, income from continuing operations was $68 million, or $0.18 per diluted share, and included the cost of a work-force reduction program. Excluding the charge, last year's net income for the first six months would have been $130 million, or $0.34 per diluted share.

Second-quarter railway operating revenues were $1.59 billion, unchanged compared with 2000, despite a 4 percent or 68,800 decrease in carloads. For the first six months of 2001, operating revenues were $3.13 billion, up slightly compared with the same period of 2000, despite a 3 percent or 92,800 decrease in carloads.

Coal revenues climbed 5 percent in the second quarter and 9 percent in the first half, reflecting increased utility shipments. Intermodal revenues rose 1 percent in the quarter and 6 percent for the first six months. The sluggish economy affected general merchandise revenues, which dropped 2 percent in the quarter and 3 percent during the first half.

Railway operating expenses were $1.31 billion for the quarter, down slightly compared to 2000, and $2.65 billion for the first six months, down 2 percent compared to the first six months of 2000, excluding last year's work-force reduction charge.

For the quarter, the railway operating ratio improved to 82.3 percent compared with 82.5 percent in the same period of 2000. For the first six months of 2001, the operating ratio improved to 84.5 percent, compared with 86.9 percent, excluding the cost of the work-force reduction charge, during the same period of 2000. Including the charge, last year's six-month operating ratio was 90.1 percent.

NS moves record amount of coal from the Powder River Basin

Norfolk Southern participated in two of the longest hauls of coal ever from Montana's Powder River Basin to power plants in the East.

"This is significant," said Bill Patterson, manager Utility Coal. "Powder River Basin coal is making its way east because eastern coal is less available. For us, it means longer hauls, resulting in more revenue."

The first train was to the Mount Tom station of Northeast Utilities in Massachusetts. The other went to the Public Service Company of New Hampshire in Merrimack, N.H.

Both plants are trying to reduce sulfur emissions by using coal from the Powder River Basin, the nation's largest low-sulfur coal-producing region. It produces about one-fifth of all coal mined in the U.S.

For the trip to Mount Tom, the coal originated from the Peabody Group's North Antelope/Rochelle complex on the Union Pacific Railway and moved to Chicago. It then moved over NS from Chicago to Binghamton, N.Y., where Canadian Pacific Railway and finally Guilford Rail System delivered it to destination.

The shipment into Merrimack is believed to be the longest west-to-east train movement of Powder River Basin coal to a U.S. utility to date. The 100-car train originated at Spring Creek Mine in Montana and moved about 10,000 tons of coal 2,350 miles through nine states on four different rail lines: Burlington Northern Santa Fe, Canadian Pacific Railway, NS and Guilford Rail System.

Patterson said several factors are contributing to the Montana coal making its way east.

"Smaller mines have been shut down but now are starting to come back on line," he said. "Utilities are burning more coal due to high gas and oil prices, and some of the mines produce high-sulfur coal as opposed to low-sulfur Powder River Basin coal. All of this adds up to more business for NS."

NS, Roanoke Cement celebrate milestone

Norfolk Southern and Roanoke Cement recently celebrated 50 years of doing business together.

Roanoke Cement President John Summerbell presented NS with a model locomotive to commemorate the long business relationship.

Norfolk and Western Railway, an NS predecessor, began hauling materials for Roanoke Cement on June 15, 1951. Today, NS continues the relationship, helping Roanoke Cement serve customers in seven states and the District of Columbia. NS delivers coal and slag into the factory and hauls cement and cement clinker out.

Roanoke Cement produces up to a million tons of cement a year and is owned by Titan Cement of Greece and Tarmac of the United Kingdom.

NS, BNSF begin new intermodal service

Norfolk Southern and Burlington Northern Santa Fe began a seamless, coast-to-coast intermodal trailer service for time-sensitive premium freight moving between Southern California and Rutherford, Pa., and Croxton, N.J., on Aug. 16.

BNSF provides the line-haul service between Southern California and Chicago, while NS provides the line-haul service between Chicago and the East Coast.