Dear Colleagues,

Amid a global war on terrorism and continuing economic softness, there are encouraging prospects in our business mix that should help us stay focused on delivering safe and reliable transportation services.

Certainly, the events of Sept. 11 further damaged an already-frail economy. Some economists are now saying a turnaround may not occur until mid-2002 or beyond. Many of our customers are experiencing declines in their business. Despite these challenging economic conditions, our third-quarter results were encouraging as we were able to increase our revenue per car and achieve a 5 percent decline in expenses. Our people have been working hard to grow our business and optimize our assets and facilities.

Growth opportunities are readily apparent with our intermodal, automotive and utility coal businesses, and we must ensure that our efforts maximize those opportunities.

Demand for utility coal continues to grow. The nation's energy policies position utility coal well. NS has an excellent coal franchise. We have expanded that franchise, not only with the addition of the Northern Region, but also by joining Western carriers in transporting low-sulfur Powder River Basin coal to the East.

In our automotive markets, we serve 36 vehicle assembly plants. That is 58 percent of the nation's rail-served plants. We serve 32 distribution terminals strategically positioned across our network. Our Industrial Development department works with vehicle and parts manufacturers to develop NS rail-served facilities. All of this gives us a distinct advantage as an important partner in the vehicle manufacturing supply chain. As a result, we have been able to convert some business from trucks. There is more out there, and we are pursuing it aggressively.

We continue to invest in our intermodal network, because we know that strategically-placed terminals and reliable service are what will bring more business.

New terminals in Harrisburg, Pa., Cleveland, Savannah and Austell, Ga., are open, and we are building one in Philadelphia. With our existing large terminals in Chicago and New Jersey, we now have the facilities and network that will support intermodal growth, with north-south capability as well as east-west.

Motor carriers are our customers as well as our competitors, and our market has grown in both truckload and less-than-truckload business. Also, NS and Triple Crown Services have entered into partnerships with other rail carriers to provide new and faster services.

As we aggressively pursue new business, we also are supporting growth opportunities for all our carload business, including metals, chemicals, paper and agriculture.

Late last year, we began a redesign of our merchandise service network. A cross-functional team worked to develop our Thoroughbred Operating Plan that we've now implemented on two-thirds of our merchandise network. We now have a single comprehensive plan that allows all of us to work much more closely to provide the reliable and dependable service our customers must have, and what we must offer and deliver in order to grow our business.

As a result of your continued focus on these efforts, we will be in a position to realize more opportunity when the economy rebounds, as it surely will.

Ike Prillaman
Vice Chairman and Chief Marketing Officer

TOP marks for new operating plan

A redesigned operating plan for Norfolk Southern's merchandise service network is in place on more than two-thirds of the network. The plan will make NS service more reliable and consistent and reduce car handling and shorten routes.

The Thoroughbred Operating Plan, or TOP, is the combined effort of Marketing, Transportation Planning, Car Distribution, Strategic Planning and field operations employees working with MultiModal Applied Systems, a consulting company.

"This has been a team effort from the beginning," said Mark Manion, vice president Transportation Services and Mechanical. "Late last year, we began working to develop a plan with the clear objective of providing more reliable transportation to customers while realizing improvements in asset utilization."

"We started from the premise that reducing the number of times a car is handled and the distance it travels will reduce both costs and variability, with improved shipment velocity. These added efficiencies, coupled with consistency, will help boost customer confidence and drive new business opportunities," said Don Seale, senior vice president Merchandise Marketing.

The process began with a study of daily waybills over a three-month period. That gave the NS team an accurate database showing how traffic varies from day to day. From that, optimum schedules were developed for light, medium and heavy traffic days.

With that in place, the NS team built car blocks, worked to streamline routes and tested the routes using software.

"Being able to use a model to test our ideas to minimize car handling and improve transit times gave us a tremendous advantage," said Tony Ingram, vice president Transportation Operations. "We could analyze our routes and make improvements in the plan without having to test in the field. It saved time and resources and provided a plan that will help us achieve our goals."

"An example of how well the plan has worked is the route between Birmingham, Ala., and Allentown, Pa.," said Manion. "Transit time on the route was 96.1 hours. On the redesigned route, we've reduced that time to 57.4 hours."

The new plan is being phased in to prevent service disruptions and to give the team the opportunity to fine-tune its work.

"TOP is a work in progress," said Ingram. "We're closely monitoring performance to ensure that connections are made, we have the right cars on the right trains and that overall train performance continues to improve."

The team will continue to phase in the remaining routes, with full implementation expected in the first quarter of 2002.

"It's vitally important that everyone involved in the process stays with the plan as written," said Manion. "For Transportation, that means running on schedule."

"We're committed to making this plan work," said Seale. "For Marketing, that means providing our customers with service they can depend on and that Norfolk Southern can deliver consistently. Working together, we can achieve our mutual goals of enhanced customer satisfaction, business growth and improved efficiency."

Third-quarter results announced

Norfolk Southern reported third-quarter net income of $79 million, or $0.20 per diluted share, compared with net income of $99 million, or $0.26 per diluted share, in the third quarter of 2000, which included a gain of $46 million, or $0.12 per diluted share, from the sale of timber properties.

"An improvement in revenue yield and effective cost controls allowed us to improve operating income by 16 percent in the third quarter, although continued weakness in the U.S. economy impacted carloadings," said David Goode, chairman, president and chief executive officer.

For the first nine months, net income was $260 million, or $0.67 per diluted share, and included an after-tax gain of $13 million, or $0.03 per share, related to the 1998 sale of NS' former trucking subsidiary, North American Van Lines Inc. This compares with reported net income for the first nine months of 2000 of $167 million, or $0.44 per diluted share, which included a work-force reduction charge and gains on the sale of timber rights and certain interests in oil and natural gas properties.

Railway operating revenues for the quarter were $1.51 billion, down 2 percent, and for the first nine months were $4.64 billion, unchanged compared to the same period last year.

Coal revenues improved 1 percent in the third quarter and climbed 6 percent in the first nine months, reflecting increased utility shipments. The slow economy affected general merchandise revenues, which declined 2 percent in the quarter and 3 percent in the nine-month period. Auto-motive revenues showed the greatest decline during both periods, due to soft sales and related production cutbacks. The economy also impacted intermodal revenues, which declined 5 percent in the quarter but were 2 percent ahead of last year for the first nine months.

Railway operating expenses for the quarter were $1.26 billion, a reduction of 5 percent, and for the first nine months were $3.90 billion, down 3 percent, excluding last year's work-force reduction charge.

"With the opening of our southeastern intermodal hub at Austell, Ga., we are introducing new freight service to the Northeast, Southwest and Northwest," Goode said. "We also are establishing coast-to-coast train services with western carriers, offering certain guaranteed on-time deliveries and making strides in reducing transit times. Our strategy will be to continue to focus on tightly controlling costs while we continue to launch new services to meet our customers' needs."

The railway operating ratio for the quarter improved to 83.8 percent compared to 86.3 percent for the same period of 2000. For the first nine months, the operating ratio improved to 84.2 percent compared with 88.8 percent in 2000. Excluding the work-force reduction charge, last year's nine-month operating ratio was 86.7 percent.

Whitaker Intermodal Terminal dedicated

The John W. Whitaker Intermodal Terminal is the largest intermodal terminal in the East.

Norfolk Southern dedicated the John W. Whitaker Intermodal Terminal at Austell, Ga., Oct. 30, capping a four-year, $380 million investment in intermodal transportation infrastructure systemwide.

The Whitaker terminal expedites the movement of containerized freight between North, East, West and South while increasing NS' ability to handle local and regional demand for intermodal transportation. Whitaker and the Rutherford hub at Harrisburg, Pa., along with major terminals in Chicago, form the backbone of the East's most comprehensive intermodal network.

"The new Whitaker terminal will enhance transportation capacity for Norfolk Southern, for the state of Georgia and for our domestic and international customers," said David Goode, chairman, president and chief executive officer. "As our intermodal crossroads in the Southeast, the facility will allow us to offer our customers additional services, more reliable transit times, a competitive transportation alternative to over-the-road shipping and help reduce congestion on the nation's highways - a combination that supports economic growth for all our partners."

John W. Whitaker

Operations at Whitaker began July 30.

The facility is named for John Wesley Whitaker, a prominent railroader who served with several NS predecessor railroads.

Whitaker began his railroad career as a youth, with a summer job on the Georgia Northern Railway. During World War II, he became a combat pilot - one of the famed Tuskegee Airmen.

As a locomotive fireman on the Central of Georgia Railway after the war, Whitaker and other African-American railroaders formed the International Brotherhood of Railroad Employees to address workplace discrimination issues. He served as its second president. In the early 1950s, the union brought a lawsuit challenging racially discriminatory practices that contributed to the Supreme Court's landmark 1954 decision in "Brown v. Board of Education," declaring segregation unconstitutional.

In 1964, Whitaker became the Central of Georgia's first African-American locomotive engineer. He later was named road foreman of engines on Southern Railway - that railroad's first African-American transportation officer. Whitaker served as one of Southern's first road foreman instructors in the locomotive engineer training program. He served as a trainmaster until 1981, when he retired to his home in Moultrie, Ga.

"Mr. Whitaker's distinguished record of service is a source of inspiration to people everywhere who continue to make America's transportation infrastructure the envy of the world," Goode said. "We will honor his name by the high quality of service we provide at this facility."

NS, UP offer Blue Streak guaranteed service to West Coast

Norfolk Southern and Union Pacific Railroad launched a new intermodal container service Oct. 1 between Los Angeles and Atlanta, with a guaranteed on-time delivery option.

The new service, named Blue Streak, offers customers a choice of three service levels: Standard, Premium and guaranteed SuperFlyer. The service levels are designed to meet a broad range of customer pricing and transit requirements.

The SuperFlyer service will offer "on-time or free" service for each load that does not meet the scheduled availability time for customer pickup. SuperFlyer service features include guaranteed train space, designated equipment from the EMP program of 22,000 48-foot and 53-foot containers, preferred cutoff and availability times and active shipment monitoring, including customer updates.

Premium service offers priority train space, freight monitoring and improved cutoff and availability times.

Standard service allows price-sensitive customers access to Blue Streak trains, subject to space availability.

This seamless, double-stack container service will be handled by UP between Los Angeles and Memphis and by NS between Memphis and Atlanta.

NS, CP launch new service to Eastern Canada

Norfolk Southern and Canadian Pacific Railway launched joint intermodal service Oct. 1 between the Port of New York/New Jersey and Eastern Canada.

"Shippers have been demanding better service between the Port and Canada," said Mike McClellan, vice president Intermodal Marketing. "This service provides an improved link between three of the largest markets in North America."

Rail transit time between the Port of New York/New Jersey and Eastern Canada is typically three days. But the new CPR-NS package uses the port authority's fast-throughput on-dock ExpressRail intermodal terminal with priority passage through rail terminals along the route.

Benefits enhanced for reservists activated for Operation Enduring Freedom

Norfolk Southern offers enhanced benefits for employee reservists called up for active duty in Operation Enduring Freedom.

The military leave benefits are designed to help provide support for employees and their families during the deployments. They include:

• a monthly income supplement of $1,500, and
• continuation of health care and life insurance benefits.

"These measures help express our appreciation and support for employees called up for duty as members of the armed forces reserves," said David Goode, chairman, president and chief executive officer. "The Norfolk Southern family wishes them safety and success in their mission."

The benefits, which began Oct. 1, will be provided for the first 90 days of active duty and may be extended.

Employee Resource Center up and running

Norfolk Southern's electronic Employee Resource Center, or ERC, is now available to employees who have access to the company's intranet, NSIGHT, from their company computers. The site features benefit, payroll and other information.

Information about medical and dental insurance, tuition assistance, 401(k) plans, NS scholarships and employee purchase plans is posted on the site. Also included are a catalog of NS training courses and a federal tax withholding calculator.

Future enhancements will include Internet accessibility so employees can access the site from a home computer, detailed pay information and new training and development opportunities.

To visit the ERC, employees can select NSIGHT, the company's intranet home page at nsight.nscorp.com, then click on the ERC option. At the log-in screen, employees use their mainframe (RCAF) ID and password to access ERC. Internet Explorer 5.0 or higher is required.

If employees encounter difficulty, they should call Network Support Services at 529-1527 on the company's internal phone network, or 1-800-525-2360.

Employees express appreciation

Norfolk Southern Chairman, President and Chief Executive Officer David Goode received the following messages of thanks from NS employees:

"I just wanted to say thank you very much for Norfolk Southern's offer of support to any reservist who is activated. While I am retired Navy, I doubt if I will be activated, but the reservists who are will very much appreciate the extra support. It is very difficult for many of the lower-ranked individuals to make ends meet, and this will alleviate some concerns and anxieties. Thank you sincerely for helping the reservists."

Ronald S. Bedra, HMC, USNR-Ret.
Casualty Claims
Dearborn, Mich.

"A tip of the hat to you for Norfolk Southern's offer of help to New York. As a conductor on NS211, my engineer and I sign up at Croxton, N.J. We drive past the smoke where the great towers stood. I know several people who lost loved ones in this mess. I am always proud to be an American. I am also proud to be part of your team. Please keep up the good work and continue to pray for the affected. Thank you."

Mike Gildea
Conductor
Croxton, N.J.