The following summarizes the effect of the transaction on NS' Consolidated Balance Sheet ($ in millions):

The amounts shown above for the net assets received reflect the fair value of such assets.   Properties have been valued based on information received from an independent valuation consultant, and NS will receive a final detailed valuation report in the fourth quarter.   Debt has been recorded at fair value based on interest rates at the time of the reorganization.

On the Consolidated Income Statement, "Conrail rents and services" is reduced as a result of the transaction.   After the ConrailCorporate Reorganization, "Conrail rents and services" reflects only the expenses associated with the Shared Assets Areas, and other expenses (primarily the depreciation related to the former PRR assets) are reflected in their respective line items.   The transaction's impact on net income was the $53 million gain discussed above.   Prospectively, the transaction will not have a significant ongoing effect on net income.

Investment in Conrail

NS is continuing to apply the equity method of accounting to its remaining investment in Conrail in accordance with APB Opinion No. 18, "The Equity Method of Accounting for Investments in Common Stock."   NS is amortizing the excess of the purchase price over Conrail's net equity using the principles of purchase accounting, based primarily on the estimated remaining useful lives of Conrail's depreciable property and equipment, including the related deferred tax effect of the differences in tax and accounting bases for certain assets.   At Sept. 30, 2004 , the difference between NS' investment in Conrail and its share of Conrail's underlying net equity was $593 million.

NS' Consolidated Balance Sheet at Sept. 30, 2004 , includes $21 million of liabilities related to the original Conrail transaction, principally for contractual obligations to Conrail employees imposed by the STB when it approved the transaction.   Through Sept. 30, 2004 , NS has paid $182 million of such costs.

Reclassification

In finalizing information contained in this report, certain Sept. 30, 2004, balance sheet amounts have been reclassified from information furnished on Oct. 20, 2004, on Form 8-K as follows:   a $58 million increase to "Investment in Conrail," a $96 million decrease to "Properties" and a $38 million decrease to related "Deferred income taxes."

Related-Party Transactions

NS 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.

"ConrailAccordingly, "Conrail rents and services" includes:   (1) expenses for amounts due to PRR for use by NSR of operating properties and equipment prior to the Conrail Corporate Reorganization, (2) NS' equity in the earnings of Conrail, net of amortization, prior to the Conrail Corporate Reorganization, and (3) expenses for amounts due to CRC for operation of the Shared Assets Areas.   After the Conrail Reorganization, "Conrail rents and services" includes only expenses for amounts due to CRC for operation of the Shared Assets Areas.   NS' equity in the earnings of Conrail, net of amortization, after the Reorganizationreorganization is included in "Other income - net."

"Accounts payable" includes $86 million at March 31, 2005 , and $78 million at Dec. 31, 2004 , due to Conrail for the operation of the Shared Assets Areas.   In addition, "Other liabilities" includes a $32 million long-term advance from Conrail entered into in the first quarter of 2005 and bears interest at 4.5%.

Prior to the Conrail Corporate Reorganization, a significant portion of the payments made to PRR under the operating and lease agreements was borrowed back from a subsidiary of PRR, under a note due in 2032.   Amounts outstanding under this note comprised the long‑term balance of "Due to Conrail," and this note was effectively extinguished by the reorganization.   "Duereorganization in 2004.   These borrowings amounted to Conrail" included in current liabilities is composed of amounts related to expenses included in "Conrail rents and services," as discussed above.

Summary Financial Information - Conrail

As a result of the Conrail Reorganization discussed above, two CRC subsidiaries, PRR and NYC, were distributed to NS and CSX, respectively, and CRC's public indebtedness was restructured.   The results of the operations of these subsidiaries and their net assets are presented in the following financial information as "Discontinued Operations."   This historical cost basis financial information should be read in conjunction with Conrail's audited financial statements, included as Exhibit 99 with NS' 2003 Annual Report on Form 10‑K.  

Summarized Consolidated Statements of Income - Conrail

Note:   Conrail adopted FIN No. 46(R) "Consolidation of Variable Interest Entities," and recorded$69 million in the first quarterthree months of 2004 a $1 million net adjustment for the cumulative effect of this change in accounting on years prior to 2004.   Conrail adopted SFAS No. 143, effective Jan. 1, 2003 , and recorded a $40 million net adjustment for the cumulative effect of this change in accounting on years prior to 2003 (including $38 million related to discontinued operations).   NS excluded this amount from its determination of equity in earnings of Conrail because an amount related to Conrail is included in NS' cumulative effect adjustment for SFAS No. 143.

Summarized Consolidated Balance Sheets - Conrail

3.

 Accounts Receivable

NS has in place an accounts receivable sales program.   Under this program, a bankruptcy-remote special purpose subsidiary of NS sells without recourse undivided ownership interests in a pool of accounts receivable.   The buyers have a priority collection interest in the entire pool of receivables, and as a result, NS retains credit risk to the extent the pool of receivables exceeds the amount sold.   NS services and collects the receivables on behalf of the buyers, and payments collected from sold receivables can be reinvested in new accounts receivable on behalf of the buyers.   Should NS' credit rating drop below investment grade, the buyers have the right to discontinue this reinvestment.

While there were some sales during the first nine months of 2004, there were no accounts receivable sold under this arrangement as of Sept. 30, 2004 , or as of Dec. 31, 2003 ..   The change in "Accounts receivable" included on the Consolidated Statements of Cash Flows related to receivable sales was zero for the nine months ended Sept. 30, 2004 , compared with a decrease of $30 million for the same period of 2003.   The fees associated with the sales, which are based on the buyers' financing costs, are included in "Other income - net."

NS' allowance for doubtful accounts was $7 million at Sept. 30, 2004 , and Dec. 31, 2003 ..

4.  Derivative Financial Instruments

NS 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.   NS does not engage in the trading of derivatives.   Management has determined that its derivative financial instruments qualify as either fair-value or cash-flow hedges, having values whichthat 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

NS has hedged a significant portion of its diesel fuel consumption.   The intent of the hedges is to assist in the management of NS' aggregate risk exposure to fuel price fluctuations, which can significantly affect NS' operating margins and profitability.   In order to minimize this risk, NS has entered 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' diesel fuel swaps:

Hedges are entered into periodically by competitive bid among selected counterparties; however, no hedges have been placed since May 2004.   The goal of this hedging strategy is to reduce the variability ofaverage fuel costs over an extended period of time while minimizing the incremental cost of hedging. The program provides that NS will not enter into any fuel hedges with a duration of more than 36 months, and that no more than 80% of NS' average monthly fuel consumption will be hedged for any month within theany 36-month period. After taking into account the effect of hedging,the hedges, diesel fuel costs represented 7%10% and 8% of NS' operating expenses forin the thirdfirst quarters of 2005 and 2004, and 2003.respectively.

NS' fuel hedging activity had the following effects onresulted in net decreases in diesel fuel expense:   for the third quarter, decreasesexpense of $41 million and $11$40 million for 2004first quarter 2005 and 2003, respectively, and for the first nine months, decreases of $90 million and $45$23 million for 2004 and 2003, respectively.first quarter 2004.   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 $5a $1 million forexpense in the first nine monthsquarter of 20042005 and less than $1a $3 million forbenefit in the same periodfirst quarter of 2003.2004.

Interest Rate Hedging

NS 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 had $159$141 million and $151 million, or about 2%, and $186 million, or 3%, of its fixed rate debt portfolio hedged as of Sept. 30, 2004at March 31, 2005 , and Dec. 31, 20032004 , respectively, using interest rate swaps that qualify for and are designated as fair-value hedge transactions. NS' interest rate hedging activity resulted in decreases in interest expenses of $1 million and $2 million for first quarter 2005 and 2004, respectively.   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 transactions.

Fair Values

The fair values of NS' diesel fuel derivative instruments as of Sept. 30, 2004 ,at March 31, 2005 and Dec. 31, 20032004 , were determined based upon current fair market values as quoted by an independent third party.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 noncash transactions, and accordingly, are excluded from the Consolidated Statement of Cash Flows.   "Accumulated other comprehensive income (loss),loss," a component of "Stockholders' equity," included unrealized gains (pretax) of $123$115 million (pretax) as of Sept. 30, 2004, and $40$75 million (pretax) as ofat March 31, 2005, and Dec. 31, 2003 , related2004, respectively, relating to an increase in the fair value of derivative fuel hedging transactions that will terminate within twelve months of the respective dates.   Any future gain or loss actually realized will be based on the fair value of the derivative fuel hedges at the time of termination.

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

5.4.   Pensions and Other Postretirement Benefits

NS and certain subsidiaries have both funded and unfunded defined benefit pension plans covering principally salaried employees.   NS 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 tables show the pensionPension and other postretirement benefit cost components:Other Postretirement Benefit Cost Components

Contributions for Pension and Other Postretirement Benefits

NS previously disclosed in its consolidated financial statements for the year ended Dec. 31, 20032004 , that it expected to contribute in 2004 $7 million to its unfunded pension plans for payments to pensioners and $42$44 million to its other postretirement benefit plans for retiree health benefits.in 2005.   For the ninethree months ended Sept. 30, 2004March 31, 2005 , $5$1 million and $34$11 million of contributions have been made to its unfunded pension plans and its other postretirement benefit plans, respectively.   Accordingly, NS presently anticipates contributing in the fourth quarter the remaining $2an additional $6 million to its unfunded pension plans for a total of $7 million and the remaining $8an additional $33 million to fund its other postretirement benefit plans.plans in 2005 for a total of $44 million.

6.   Long-term5. Long-Term Debt

In September 2004,On March 11, 2005, NS exchanged $400issued $300 million of 6% Senior Notes due March 2105 under its 7.350% notes maturing May 2007 for $442 million of 5.257% notes maturing Sept. 2014.   The $42 million difference will be recognized as additional interest expense over the life of the new notes.

In September 2004, NS filedshelf registration statement on Form S-3 a shelf registration statementfiled with the Securities and Exchange Commission covering theSEC in September 2004.   At March 31, 2005 , $700 million is available for future issuance of up to $550 million of securities.   This, together with the $450 million of securities authorized but unissued from a prior $1 billion shelf registration, allows the company to issue up to $1 billion of registered debt or equity securities.   As of Sept. 30, 2004 , NS had issued no securities under this registration.

In August 2004, NS renewed its $1 billion credit facility, and the new facility will expire in 2009.   The terms and covenants are substantially the same as the previous facility.

7.   Discontinued Operations

Results for the first nine months of 2003 included an additional after-tax gain of $10 million, or 3 cents per share (basic and diluted), related to the 1998 sale of NS' motor carrier subsidiary, North American Van Lines, Inc.   This noncash gain resulted from the resolution of tax issues related to the transaction.

8.   Changes in Accounting Principlesregistration statement.

NS adopted Financial Accounting Standards Board ( FASB ) Statement No. 143, "Accountinghas commenced offers to exchange existing notes for Asset Retirement Obligations," (SFAS No. 143) effective Jan. 1, 2003,new notes and recorded a $110 million net adjustment ($182 million before taxes) forcash as described in the cumulative effectregistration statement on Form S-4 and the related prospectuses filed with the SEC in April 2005.   The purpose of this change in accounting on years priorthe exchange offers is 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.improve NS' debt maturity profile.

NS 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 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.

The cumulative effect of these changes amounted to $114 million, or 29 cents per share (basic and diluted).

9.6.  Earnings Per Share

The following table sets forth the reconciliation of the number of weighted-average shares outstanding used in the calculations of basic and diluted earnings per share:

The calculations exclude options whose exercise price exceeded the average market price of Common Stock for the period as follows: none in 2004, 13 million in the third quarter, 15 million in the second quarter2005 and 22 million in the first quarter; and in 2003, 31 million in the third quarter, 25 million in the second quarter and 31 million in the first quarter.2004.   There are no adjustments to "Net income" for the diluted earnings per share computations.

10.7.  Comprehensive Income

NS' total comprehensive income was as follows:

For NS, "Other comprehensive income (loss)"income" reflects primarily the net fair value adjustments, net of tax, to certain derivative financial instruments and unrealized gains and losses on certain investments in debt and equity securities.instruments.

11.8.    Commitments and Contingencies

Lawsuits

Norfolk Southern 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 earnings.   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 the recorded liability will be reflected in earnings in the periods in which such adjustments are known.

Casualty Claims

NS is generally self-insured for casualtyCasualty claims include employee personal injury and occupational claims as well as third-party claims.   NS has insurance,engages an independent consulting actuarial firm to aid in valuing its liability for these claims.   Job-related accidental injury and occupational claims are subject to limits, for catastrophic events.the Federal Employers' Liability Act (FELA), which is applicable only to railroads.   FELA's fault-based system produces results that are unpredictable and inconsistent as compared with a no-fault workers' compensation system.   The casualty claimsvariability inherent in this system could result in actual costs being very different from the liability is determined actuarially, based upon claims filed and an estimate of claims incurred but not yet reported.recorded.   While the ultimate amount of claims incurred is dependent on future developments, in management's opinion, the recorded liability after considering applicable insurance coverage is adequate to cover the future payments of claims and is supported by the most recent actuarial study.   In all cases, NS records a liability when the expected loss for the claim is both probable and estimable.

In the first quarter of 2005, NS recorded a liability related to the Jan. 6, 2005 derailment in Graniteville , SC.   The liability, which includes a current and long-term portion, represents NS' best estimate based on current facts and circumstances.   The estimate includes amounts related to business property damage and other economic losses, personal injury and individual property damage claims as well as third-party response costs.   NS' commercial insurance policies are expected to cover substantially all expenses related to this derailment above NS' self-insured retention, including NS' response costs and legal fees.   Accordingly, the Consolidated Balance Sheet reflects a current and long-term receivable for estimated recoveries from NS' insurance carriers.   First-quarter expenses include approximately $35 million related to this incident, which represents NS' retention under its insurance policies and other uninsured costs.   While it is reasonable to expect that the liability for covered losses could differ from the amount recorded, such a change would be offset by a corresponding change in the insurance receivable.   As a result, NS does not believe that it is reasonably likely that its total loss (the difference between the liability and future recoveries) will be materially different than the loss recorded in the first quarter of 2005.   NS expects at this time that insurance coverage is adequate to cover potential claims and settlements above its self-insurance retention.

Employee personal injury claims - The largest component of casualties and other claims expense is employee personal injury costs.   The actuarial firm engaged by NS provides quarterly studies to aid in valuing its employee personal injury liability and estimating its employee personal injury expense.   The actuarial firm studies NS' historical patterns of reserving for claims and subsequent settlements, taking into account relevant outside influences.   The actuary uses the results of these analyses to estimate the ultimate amount of the liability, which includes amounts for incurred but unasserted claims.   NS adjusts its liability to the actuarially determined amount on a quarterly basis.   The estimate of loss liabilities is subject to inherent limitation given the difficulty of predicting future events such as jury decisions, court interpretations or legislative changes and as such the actual loss may vary from the actuarial estimate.

Occupational claims - - Occupational claims (including asbestosis and other respiratory diseases, as well as repetitive motion) are often not caused by a specific accident or event but rather result from a claimed exposure over time.   Many such claims are being asserted by former or retired employees, some of whom have not been employed in the rail industry for decades.   The actuarial firm provides an estimate of the occupational claims liability based upon NS' history of claim filings, severity, payments and other pertinent facts.   The liability is dependent upon management's judgments made as to the specific case reserves as well as judgments of the consulting actuarial firm in the periodic studies.   The actuarial firm's estimate of ultimate loss includes a provision for those claims that have been incurred but not reported.   This provision is derived by analyzing industry data and projecting NS' experience into the future as far as can be reasonably determined.   NS adjusts its liability to the actuarially determined amount on a quarterly basis.   However, it is possible that the recorded liability may not be adequate to cover the future payment of claims.   Adjustments to the recorded liability are reflected in operating expenses in the periods in which such adjustments arebecome known.

Third-party claims - - NS records a liability for third-party claims including those for highway crossing accidents, trespasser and other injuries, automobile liability, property damage and lading damage.   The actuarial firm assists with the calculation of potential liability for third-party claims, except lading damage, based upon NS' experience including number and timing of incidents, amount of payments, settlement rates, number of open claims and legal defenses.   The actuarial estimate includes a provision for claims that have been incurred but have not yet been reported.   Each quarter NS adjusts its liability to the actuarially determined amount.   Given the inherent uncertainty in regard to the ultimate outcome of third-party claims, it is possible that future settlement costs may differ from the estimated liability recorded.

Environmental Matters

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

NS' balance sheetsConsolidated Balance Sheets included liabilities for environmental exposures in the amount of $66$64 million at  Sept. 30, 2004March 31, 2005 , and $25 million at Dec. 31, 20032004 (of which $12 million was accounted for as a current liability at Sept. 30, 2004in each period).   At March 31, 2005 , and $8 million at Dec. 31, 2003 ).   The increase in the liability was the result of the Conrail Reorganization and relates to sites on the former PRR properties.   At Sept. 30, 2004, the liability represented NS' estimate of the probable cleanup and remediation costs based on available information at 207206 known locations.   On that date, 1415 sites accounted for $31$32 million of the liability, and no individual site was considered to be material.   NS 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 207206 locations, certain NS 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' 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' traffic mix, particularly those classified as hazardous materials, can pose special risks that NS and its subsidiaries work diligently to minimize.   In addition, several NS 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, 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 now-unidentifiedunidentified 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 assessment of the facts and circumstances now known, management believes that it has recorded the probable costs for dealing with those environmental matters of which the Corporation is aware.   Further, management believes that it is unlikely that any known matters, either individually or in the aggregate, will have a material adverse effect on NS' financial position, results of operations or liquidity.

Purchase CommitmentsInsurance

At Sept. 30, 2004NS obtains on behalf of itself and its subsidiaries commercial insurance for potential losses for third-party liability and first-party property damages.   Specified levels of risk are retained on a self-insurance basis (up to $25 million per occurrence for bodily injury and property damage to third parties and $12.5 million per occurrence for property owned by NS or in NS' care, custody or control).

Purchase Commitments

As of March 31, 2005 , NSNSR had outstanding purchase commitments of approximately $200$481 million in connection with its 20042005 and 2006 capital programs, including 102 locomotives in 2005 capital programs.and 183 locomotives in 2006.   In addition, Norfolk Southern has committed to purchase telecommunications services totaling $30$23 million through 2006.2007.

Report of Independent Registered Public Accounting Firm

The Stockholders and Board of Directors

Norfolk Southern Corporation:

We have reviewed the accompanying consolidated balance sheet of Norfolk Southern Corporation and subsidiaries as of September 30, 2004March 31, 2005 , and the related consolidated statements of income for the three-month and nine-month periods ended September 30, 2004 and 2003 and the related consolidated statements of cash flows for the nine-monththree-month periods ended September 30, 2004March 31, 2005 and 2003.2004.   These consolidated financial statements are the responsibility of the Company's management.

We conducted our reviews in accordance with the standards of the Public Company Accounting Oversight Board ( United States ).   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 the standards of the Public Company Accounting Oversight Board ( United States ), 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 U.S. generally accepted accounting principles.

As discussed in Note 8 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 the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of Norfolk Southern Corporation and subsidiaries as of December 31, 2003,2004, 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 27, 2004,February 28, 2005, 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, 20032004 , 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 27, 2004April 26, 2005

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

NORFOLK SOUTHERN CORPORATION AND SUBSIDIARIES

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

RESULTS OF OPERATIONS

Overview

Third-quarterFirst-quarter net income was $288$194 million in 2004,2005, compared with $137$158 million in 2003.2004.   The increase was the result of a $158$57 million, or 51%16%, increase in income from railway operations, which was driven by a 16% rise in revenues, which reflected increased volumes as well as higher rates and also included a $53 million net noncash gain from the Conrail Reorganization reported in "Other income - net" (see Note 2).fuel surcharges.   Railway operating expenses rose only 8% despite an 11% increase16%, reflecting increased traffic volume, higher diesel fuel prices and costs arising from the derailment in carloads, evidencing the continued fluidity of the railroad network.

For the first nine months,Graniteville, SC (see Note 8), which amounted to approximately $35 million and reduced net income was $659 million in 2004, compared with $483 million in 2003.   The following table shows the components of the change:

Income from continuing operations before accounting changes increased $300 million, or 84%, in the first nine months of 2004, compared with the same period last year.   The growth resulted from a $571 million, or 12%, increase in railway operating revenues coupled with a 4% rise in railway operating expenses, which led to higher income from railway operations, and also reflects the $53 million net noncash gain from the Conrail Reorganization (see Note 2).by $21 million.

Railway Operating Revenues

Third-quarterFirst-quarter railway operating revenues were $1.9a record $1.96 billion in 2004,2005, up $259$268 million, or 16%, compared with the thirdfirst quarter of 2003.   For the first nine months, revenues were $5.4 billion, up $571 million, or 12%.2004.   As shown in the following table, the increases wereincrease was the result of increased average revenues and higher traffic volume and increased average revenues.volume.

Revenues, volumecarloads and average revenue per unit for the commodity groups were as follows: