FORM 10-K

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON,

  For the fiscal year ended December 27, 2002

OR

   For the transition period fromto

Commission file number 1-3359

CSX TRANSPORTATION INC.

(904) 359-3100

Registrant’s telephone number, including area codecode: (904) 359-3100

Securities registered pursuant to Section 12(b) of the Act:

-1-

CSX TRANSPORTATION INC. AND SUBSIDIARIES
2003 FORM 10-K

REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION I (1) (a) AND (b) OF FORM 10-K AND IS THEREFORE FILING THIS FORM WITH THE REDUCED DISCLOSURE FORMAT.

Securities Registered Pursuant to Section 12(g) of the Act: None.

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes (X) No ( )

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. Yes (X)

 No ( )

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 126-2). Yes ( ) No (X)

State the aggregate market value of the voting stock held by nonaffiliatesnon-affiliates of the registrant. The aggregate market value of the voting stock at June 28, 2002,January 23, 2004, was $-0-, excluding the voting stock held by the parent of the registrant.

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date. The registrant has 9,061,038 shares of common stock, par value $20.00, outstanding at January 24, 2003.

23, 2004.

-2-

CSX TRANSPORTATION INC. AND SUBSIDIARIES

2002
2003 FORM 10-K ANNUAL REPORT

Table of Contents

-3-

CSX TRANSPORTATION INC. AND SUBSIDIARIES
2003 FORM 10-K, PART III

ITEMS 1. & 2. BUSINESS AND PROPERTIES

General

CSX Transportation Inc. (“CSXT” or “Company”) is the largest rail network in the Eastern United States, providing rail freight transportation over a network of more than 23,000 route miles in 23 states, the District of Columbia, and two Canadian provinces. Headquartered in Jacksonville, Florida, CSXT conducts railroad operations in its own name and through railroad subsidiaries, employingsubsidiaries.

     CSXT employed an average of approximately 33,50032,892 employees during its2003. The Company considers employee relations to be good. Most of CSXT’s employees are represented by labor unions and are covered by collective bargaining agreements. Some of these agreements are scheduled to expire in 2004. CSXT is in the process of renegotiating most recent fiscal year.of these agreements, but the outcome of these negotiations is uncertain at this time. These negotiations have generally taken place over a number of years and have previously not resulted in any extended work stoppages. The existing agreements have remained in effect and will continue to remain in effect until new agreements are reached or the Railway Labor Act’s procedures (which include mediation, cooling-off periods, and the possibility of Presidential intervention) are exhausted.

CSXT is a wholly-owned subsidiary of CSX Corporation (“CSX”). CSX is a publicly-owned corporation, with headquarters at 500 Water Street, 15^th15th Floor, Jacksonville, Florida 32202. CSX also owns other transportation businesses, including CSX Intermodal Inc., an intermodalThe Company makes available free of charge through its website at www.csx.com, its annual reports on Form 10-K, quarterly reports on Form 10-Q and trucking company; CSX World Terminals LLC, a container-freight terminal company;current reports on Form 8-K, and CSX Lines LLC, a domestic container-shipping company which isall amendments thereto, as soon as reasonably practicable after such reports are filed with or furnished to the subject of an agreement under which CSX would convey most of its interest in CSX Lines LLC in return for cashSecurities and securities of a new venture, Horizon Lines LLC. CSX also has interests in real estate, resorts and resort management.Exchange Commission.

For additional information concerning business conducted by CSXT during 2002,2003, see “Management’s Narrative Analysis of the Results of Operations” on pages 38-47.7-21.

Rail Lines

On December 27, 2002,26, 2003, CSXT’s consolidated railroad system consisted of 40,29939,826 miles of track consisting of the following:

Included in the above are the following arrangements for use of track not owned by CSXT:

-4-

CSX TRANSPORTATION INC. AND SUBSIDIARIES
2003 FORM 10-K, PART II

ITEMS 1. & 2.  BUSINESS AND PROPERTIES, Continued

Equipment

On December 27, 2002,26, 2003, CSXT and subsidiaries owned or leased the following:

Included in leased equipment are 518502 locomotives and 17,13015,676 freight cars leased from Conrail.

ITEM 3. LEGAL PROCEEDINGS

     CSXT is involved in routine litigation incidental to its business and is a party to a number of legal actions and claims, various governmental proceedings and private civil lawsuits, including those related to environmental matters, Federal Employers’ Liability Act claims by employees, other personal injury claims, and disputes and complaints involving certain transportation rates and charges. Some of the legal proceedings include claims for punitive as well as compensatory damages, and others purport to be class actions. While the final outcome of these matters cannot be predicted with certainty, considering among other things the meritorious legal defenses available and liabilities that have been recorded along with applicable insurance, it is the opinion of CSXT management that none of these items will have a material adverse effect on the results of operations, financial position or liquidity of CSXT. However, an unexpected adverse resolution of one or more of these items could have a material adverse effect on the results of operations in a particular quarter or fiscal year. The Company is also a party to a number of actions, the resolution of which could result in gain realization in amounts that could be material to results of operations in the quarter received.

Please     In further response to this Item, see the information set forth on pages 43in “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” of this document in “Management’s Narrative Analysis of the Results of Operations,” under the caption “Casualty, Legal and Environmental Reserves”. and under the caption “Commitments and Contingencies.”

-5-

CSX TRANSPORTATION INC. AND SUBSIDIARIES
2003 FORM 10-K, PART II

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

Information omitted in accordance with General Instruction I(2)(c).

-5-

PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON STOCK AND RELATED STOCKHOLDER MATTERS

CSXT is a wholly-owned subsidiary of CSX, and accordingly, there is no market for its common stock. During the years 2003, 2002 2001 and 2000,2001, CSXT paid dividends to CSX on its common stock of $230 million, $200 million and $212 million, and $220 million, respectively.

ITEM 6. SELECTED FINANCIAL DATA

Information omitted in accordance with General Instruction I(2)(a).

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS

Information omitted in accordance with General Instruction I(2)(a). However, in compliance with said Instruction, see “Management’s Narrative Analysis of the Results of Operations” on pages 38-47.7-21.

-6-

CSX TRANSPORTATION INC. AND SUBSIDIARIES
2003 FORM 10-K, PART II, ITEM 7
MANAGEMENT’S NARRATIVE ANALYSIS OF THE RESULTS OF OPERATIONS

Overview

General

     CSX Transportation (“CSXT” or the “Company”) operates one of the largest rail networks in the United States. The Company generated revenue of $6.2 billion in 2003 compared to $6.0 billion in 2002. Operating income was $289 million in 2003 compared to $577 million in 2002. In 2003, CSXT revenue and volume grew in response to strategies to persuade new customers to ship via a combination of rail and truck, the introduction of new customer services, and the economic recovery. However, as discussed below increased costs and operating inefficiency in the network decreased overall profitability.

     CSXT’s rail system is a network, defined by its more than 23,000 route miles, through which goods and services flow. The inefficiency of any one element in that network can have an effect on other components, and ultimately affect the operating efficiency of the entire network. The decline in operating efficiency, coupled with the increased price of fuel and other higher costs, reduced CSXT’s profit in 2003.

     In addition to reviewing various financial measures, CSXT management uses non-financial indicators to monitor performance and operating efficiency of its network. Those include:

     The decline in these non-financial performance measures contributed to higher operating expenses and resulted in a higher operating ratio, which increased to 91.2% in 2003 from 86.1% in 2002. The number of injuries per 100 employees increased by 11%, while the number of FRA-reportable train accidents per million train miles showed a 31% increase from 2002 to 2003. Average train velocity, which is a measure of efficiency, decreased 6% from 22.5 miles per hour in 2002 to 21.1 miles per hour in 2003. The average system dwell time, which measures the amount of time between car arrival and departure from yards, increased 9% from 2002 to 2003. The percent of scheduled trains departing the origin station at or prior to the scheduled departure time and the percent of scheduled trains arriving at the destination station within two hours of the scheduled arrival time both showed year-over-year declines. The number of relief crews called per day on average, which is an indicator of efficiency in the use of crews, showed the largest percent decline, increasing from 26 to 50.

     CSXT management is taking steps to identify the source of operating inefficiencies and reduce operating expenses. Management also is evaluating ways to restore the network operating efficiency, while maintaining volume. This includes reducing both gross ton-miles and the number of times a railcar is handled, or switched, en route to its final destination. Because American industry has changed significantly in recent years, management believes there are portions of CSXT’s non-core network that could be more efficiently used by third parties. The Company is currently evaluating the lease or sale of up to 3,000 miles of its non-core network. This will allow CSXT to return approximately 50 locomotives to the core network, reduce capital outlays and decrease operating expenses.

     These changes will allow for and require organizational improvements. CSXT is undertaking a major management restructuring that began in November 2003 and is expected to conclude near the end of the first quarter of 2004.

-7-

CSX TRANSPORTATION INC. AND SUBSIDIARIES
2003 FORM 10-K, PART II, ITEM 7A.    QUANTITATIVE7
MANAGEMENT’S NARRATIVE ANALYSIS OF THE RESULTS OF OPERATIONS

Financial Results of Operations

     CSXT follows a 52/53-week fiscal reporting calendar. Fiscal years 2003 and 2002 consisted of 52 weeks ending on December 26, 2003 and December 27, 2002, respectively.

2003 vs. 2002

Operating Revenue

     Overall revenues were up $179 million to $6.2 billion in 2003 from $6.0 billion in 2002.

Merchandise Revenue

     Merchandise showed strength during 2003 with revenue up 5% on 4% volume growth. All markets showed year-over-year revenue improvement, and all except phosphates and fertilizers experienced increased volumes. Emerging markets realized the most improvement, with 18% revenue growth on 12% volume growth. Aggregates and cement traffic grew faster than average industry growth rates due to new industrial development and increased conversions of truck traffic to rail traffic. Ammunition volumes increased throughout the year and strength continued in waste markets. The metals sector also showed strength in 2003. Revenue improved 8% on 9% volume growth, driven by strong global steel demand, particularly for scrap and sheet steel. Other factors contributing to improvement include strength in semi-finish metals and continued increases in modal conversions. Demand for building products, lumber and paper products resulted in an increase in forest and industrial revenue of 5% on 2% volume growth. The agricultural and food and chemical sectors also realized revenue increases, while volumes remained consistent with 2002. Phosphates and fertilizers revenues increased slightly year-over-year despite decreased volume, due to domestic phosphates and ammonia strength.

Automotive Revenue

     Volume declined largely due to a 200,000 unit year-over-year decrease in North American light vehicle production. Haul extensions and price increases drove improvements in revenue per car.

Coal, Coke and Iron Ore Revenue

     Coal, coke and iron ore volumes and revenue remained consistent with results in the prior year. Export moves were strong due to high European steam coal demand for electricity generation. Steel related traffic was weak throughout the year, but showed renewed strength during the fourth quarter due to consolidation in the steel industry and shifts in scrap metal demands that resulted in increased traffic and revenue for CSX. Utility revenue was favorable due to pricing initiatives and higher average length of haul. Improvements in these areas were offset by abnormally harsh winter weather during the first quarter which adversely affected lake loadings, as lakes were frozen.

-8-

CSX TRANSPORTATION INC. AND QUALITATIVE DISCLOSURES ABOUT SUBSIDIARIES
2003 FORM 10-K, PART II, ITEM 7
MANAGEMENT’S NARRATIVE ANALYSIS OF THE RESULTS OF OPERATIONS

RESULTS OF OPERATIONS, Continued

     Carload and revenue data by service group and commodity is as follows:

Fiscal Years Ended December 26, 2003, December 27, 2002 and December 26, 2001

Operating Expense

     Total operating expenses increased to $5.9 billion, or 9% in 2003 as compared to 2002. The primary component of the expense increase was a charge of $229 million recorded in conjunction with the Company’s change in estimate for its casualty reserves to include an estimate of incurred but not reported claims for asbestos and other occupational injuries that may be received over the next seven years. This charge is reflected as “Provision for Casualty Claims” in the financial statements. (See Note 10, Casualty, Environmental and Other Reserves.)

     Labor and fringe expense increased slightly year-over-year. The cost of labor inflation was offset by December-over-December reductions in staff of approximately 1,000 and the favorable impact of the absence of a management bonus in 2003, as approximately $33 million of such expense was recorded in 2002.

-9-

CSX TRANSPORTATION INC. AND SUBSIDIARIES
2003 FORM 10-K, PART II, ITEM 7
MANAGEMENT’S NARRATIVE ANALYSIS OF THE RESULTS OF OPERATIONS

RESULTS OF OPERATIONS, Continued

     Materials, supplies and other expenses increased $89 million, or 8%, year-over-year. One of the primary drivers was approximately $80 million of increased cost for personal injury and related safety issues. An additional $20 million of the expense deterioration is due to increased cost of derailments. Additionally, due to the adoption of Statement of Financial Accounting Standard (“SFAS”) 143, “Accounting for Asset Retirement Obligations,” as discussed below, depreciation expense has been decreased and materials, supplies and other increased to account for the discontinuation of the accrual of cross-tie removal costs as a component of depreciation expense.

     Conrail rents, fees & services expense increased $11 million in 2003, as compared to the prior year, as a result of increased usage of Shared Asset Areas, a contractual increase in the rental fee for Shared Area facilities, and a favorable tax adjustment in the prior year.

     Related party service fees decreased slightly year-over-year as a result of paying its management service fee at a lower rate. The percentage of revenue on which the fee is charged was lowered in mid-2002, resulting in only a portion of 2002 benefiting from the lower rate, while the lower rate was in effect for the entire year of 2003.

     Building and equipment rent decreased $2 million in 2003 compared to the prior year principally as a result of reduced car rentals from other railroads.

     Depreciation remained consistent year-over-year. The Company had capital additions of $940 million, but the additional depreciation was offset by the reduction in depreciation associated with the adoption of SFAS 143, “Accounting for Asset Retirement Obligations.” In conjunction with the group-life method of accounting for asset costs, the Company historically accrued crosstie removal costs as a component of depreciation, which is not permitted under SFAS 143. The effect is to decrease depreciation expense and increase material, supplies and other expense.

     Fuel expense increased $117 million in 2003, as compared to the prior year. The expense increase is primarily due to $102 million in fuel price increases, while increased volumes were also a factor. The average price per gallon of fuel was 96 cents per gallon for 2003 compared to 78 cents per gallon for 2002. In order to minimize future exposure to fuel price fluctuation risk, during 2003 the Company entered into a series of swaps in order to fix the price of a portion of its estimated future fuel purchases. As of December 26, 2003, 18% and 21% of 2004 and 2005, respectively, estimated fuel purchases were hedged. Fuel swaps did not have an effect on fuel expense for the year ended December 26, 2003.

     The net $13 million restructuring charge in 2003 represents the cost of CSXT’s reorganization charges offset by reductions in 1991/1992 separation reserves. (See Note 3, Restructuring.)

Operating Income

     Operating income decreased $288 million to $289 million in 2003, compared to $577 million in 2002 primarily due to the $229 million provision for casualty claims, the $13 million net restructuring charge and other expense increases as previously discussed.

-10-

CSX TRANSPORTATION INC. AND SUBSIDIARIES
2003 FORM 10-K, PART II, ITEM 7
MANAGEMENT’S NARRATIVE ANALYSIS OF THE RESULTS OF OPERATIONS

RESULTS OF OPERATIONS, Continued

Other Income

     Other income increased $13 million in 2003 as compared to 2002, due mainly to a decrease in discounts on sales of accounts receivable due to the discontinuance of the sale of accounts receivable program mid year.

Interest Expense

     Interest expense was reduced by $11 million in 2003 as compared to 2002, due to lower interest rates on floating rate debt.

Net Earnings

     The Company reported net earnings for 2003 of $196 million compared to $296 million in 2002. The year ended December 26, 2003 included an after-tax cumulative effect of accounting change benefit of $57 million related to the adoption of Statement of Financial Accounting Standard (“SFAS”) 143, “Accounting for Asset Retirement Obligations.” Earnings before the cumulative effect of accounting change were $139 million in 2003. The $100 million year-over-year decrease in net earnings primarily results from a $143 million after-tax charge to increase the Company’s provision for casualty reserves and a $9 million net after-tax charge to record amounts associated with the management restructuring and the change in estimate related to certain separation liabilities, offset by $57 million related to the cumulative effect of an accounting change.

     The remaining decrease results from the decline in operating income as discussed above, somewhat offset by the favorable impact of decreased interest expenses and income taxes.

Liquidity and Capital Resources

Operating Activities

     Cash provided by operations for 2003 was $258 million, compared to $932 million for 2002, and $847 million in 2001. The $674 million decrease in 2003, as compared to the prior year, reflects the $869 million termination of the accounts receivable facility. (See Note 8, Accounts Receivable). Excluding that, cash provided by operating activities was higher than 2002, at $1.2 billion.

     In 2002 cash provided from operations was $932 million, an $85 million increase over 2001. Higher operating income, lower interest expense and significant cash flow relating to real estate activities contributed to the increase, while there was a $85 million negative effect attributable to the New Orleans tank car fire settlement payment.

Investing Activities

     Property additions totaled $940 million in 2003, $981 million in 2002 and $848 million in 2001. Of the $940 million in 2003 capital expenditures, substantially all related to replacing track, locomotives and other costs necessary to maintain the Company’s rail system. Capital expenditures for 2004 are expected to be approximately $900 million.

Financing Activities

     Financing activities provided cash of $680 million during 2003 and $224 million in 2001, compared to a $195 million use of cash during 2002.

-11-

CSX TRANSPORTATION INC. AND SUBSIDIARIES
2003 FORM 10-K, PART II, ITEM 7
MANAGEMENT’S NARRATIVE ANALYSIS OF THE RESULTS OF OPERATIONS

Schedule of Contractual Obligations and Commercial Commitments

(Dollars in Millions)

The following table sets forth maturities of the Company’s contractual obligations:

MARKET RISK

     CSXT addresses market risk exposure to the risk of volatility in its fuel costs through the use of derivative financial instruments. The Company does not hold or issue derivative financial instruments for trading purposes.

The Company is subject to risk relating to changes in the price of diesel fuel. During 2003, the Company began a program to hedge its exposure to fuel price volatility through swap transactions. As of December 26, 2003, CSXT has hedged approximately 18% and 21% of expected requirements for 2004 and 2005, respectively. The Company expects that by the end of 2004 the programs will result in an increase in the amount of fuel hedged to approximately 80% of 2005 annual purchases. At December 26, 2003, a 1% change in fuel prices would result in an increase or decrease in the asset related to the swaps of approximately $1 million. At the end of 2002,2003, the Company had not entered into any long-term commitments for forward fuel purchases. The Company’s rail unit average annual fuel consumption is approximately 570 million gallons. A one-cent change in the price per gallon of fuel would impact fuel expense by approximately $6 million.

CSXT participatesThe Company is exposed to loss in the CSX cash management plan, under which excess cash is advancedevent of non-performance by any counter-party to CSX for investment. CSX than makes cash funds available to CSXT as needed for use in its operations. CSXTthe fuel hedging agreements. The Company does not anticipate non-performance by such counter-parties, and CSX are committed to repay all amounts due on demand should circumstances require. CSXT is charged for borrowings or compensated for investments based on returns earned by the plan portfolio.no material loss would be expected from non-performance.

     At December 26, 2003 and December 27, 2002, and December 28, 2001, CSXT had deficit balances of $1.3 billionapproximately $66 million and $1.1 billion, respectively, relating to its participation in the CSX cash management plan, which is included in Due to Parent Company in the Statement of Financial Position. A 1% change in interest rates would have impacted annual interest expense on the plan by approximately $13 million in 2002 and $11 million in 2001.

CSXT had $101 million, and $108 millionrespectively, of floating rate debt outstanding at December 27, 2002 and December 28, 2001, respectively.outstanding. A 1% change invariance on interest rates would have impactedon average affect annual interest expense on floating-rate debt by approximately $1 million in 2002 and 2001.

ITEM 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The consolidated financial statements of CSXT and notes thereto required in response to this item are included herein (refer to Index to Consolidated Financial Statements on page 12).

ITEM 9.    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

-6-

PART III

ITEM10.    DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS OF THE REGISTRANT

Information omitted in accordance with General Instruction I(2)(c).

ITEM 11.    EXECUTIVE COMPENSATION

Information omitted in accordance with General Instruction I(2)(c).

ITEM 12.    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Information omitted in accordance with General Instruction I(2)(c).

ITEM 13.    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Information omitted in accordance with General Instruction I(2)(c).

-7-

PART IV

ITEM 14.    CONTROLS AND PROCEDURES

As of February 18, 2002, under the supervision and with the participation of the Company’s Chief Executive Officer (CEO) and the Chief Financial Officer (CFO), management has evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based on that evaluation, the CEO and CFO, concluded that the Company’s disclosure controls and procedures were effective as of February 18, 2002. There were no significant changes in the Company’s internal controls or in the other factors that could significantly affect those controls subsequent to the date of the evaluation.

ITEM 15.    EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

See Index to Consolidated Financial Statements on page 12.

The information required by Schedule II is included in Note 9, “Casualty, Environmental and Other Reserves,” to the consolidated financial statements. All other financial statement schedules are not applicable.

Pursuant to Regulation S-K, Item 601 (b)(4)(iii), instruments that define the rights of holders of the Registrant’s long-term debt securities, where the long-term debt securities authorized under each instrument do not exceed 10% of the Registrants’ total assets, have been omitted and will be furnished to the Commission upon request.

-8-

ITEM 15.    EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K, Continued

-9-

ITEM 15.    EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K, Continued

None

-10-

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on the 25th day of February, 2003.

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

-11-

CERTIFICATE OF PRINCIPAL EXECUTIVE OFFICER

I, Michael J. Ward, certify that:

million.

-12-

I, Frederick J. Favorite Jr., certify that:

CSX TRANSPORTATION INC. AND SUBSIDIARIES
2003 FORM 10-K, PART II, ITEM 7
MANAGEMENT’S NARRATIVE ANALYSIS OF THE RESULTS OF OPERATIONS

Index to Consolidated Financial StatementsINTEGRATED RAIL OPERATIONS WITH CONRAIL

See background and accounting and financial reporting effects in Note 2, Integrated Rail Operations with Conrail.

-14-

REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORSRESTRUCTURING

ToIn November 2003, the Shareholder and Board of Directors

of CSX Transportation Inc.

We have audited the accompanying consolidated statements of financial position of CSX Transportation Inc. and subsidiaries as of December 27, 2002 and December 28, 2001, and the related consolidated statements of earnings, cash flows, and retained earnings for each of the three fiscal years in the period ended December 27, 2002. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of CSX Transportation Inc. and subsidiaries at December 27, 2002 and December 28, 2001, and the consolidated results of their operations and their cash flows for each of the three fiscal years in the period ended December 27, 2002, in conformity with accounting principles generally accepted in the United States.

/s/ ERNST & YOUNG LLP

Jacksonville, Florida

February 11, 2003

-15-

CSX TRANSPORTATION INC. AND SUBSIDIARIES

Consolidated Statement of Earnings

(Millions of Dollars)

See accompanying Notes to Consolidated Financial Statements.

-16-

CSX TRANSPORTATION INC. AND SUBSIDIARIES

Consolidated Statement of Cash Flows

(Millions of Dollars)

See accompanying Notes to Consolidated Financial Statements.

-17-

CSX TRANSPORTATION INC. AND SUBSIDIARIES

Consolidated Statement of Financial Position

(Millions of Dollars)

See accompanying Notes to Consolidated Financial Statements.

-18-

CSX TRANSPORTATION INC. AND SUBSIDIARIES

Consolidated Statement of Retained Earnings

(Millions of Dollars)

See accompanying Notes to Consolidated Financial Statements.

-19-

CSX TRANSPORTATION INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1.    SIGNIFICANT ACCOUNTING POLICIES

Nature of Operations

CSX Transportation Inc. (“CSXT” or “Company”) is the largest rail network in the Eastern United States, providing rail freight transportation over a network of more than 23,000 route miles in 23 states, the District of Columbia and two Canadian provinces. CSXT is a wholly-owned subsidiary of CSX Corporation (“CSX”).

Rail shipments include merchandise, automotive products,, the Company’s sole shareholder, announced a management restructuring plan to streamline the structure at a number of its companies, eliminate organizational layers and coal, cokerealign certain functions. The initiative will reduce the non-union workforce by 600 to 750 positions over the last quarter of 2003 and iron ore. Shipments as a percentthe first half of rail revenue are as follows:

Merchandise traffic includes the following markets:

Coal shipments originate mainly from mining locations in the Eastern United States and primarily supply domestic utility and export markets

Principles2004. As of Consolidation

The consolidated financial statements include CSXT and its majority-owned subsidiaries. All significant intercompany accounts and transactionsDecember 26, 2003, 16 employees have been eliminated. Investmentsterminated under this program. The Company recorded an initial charge related to this reduction of $25 million in companies that are not majority-owned are carried at2003, to record the lowest amount of expense to be incurred under this program. The total estimated cost (if less than 20% owned and the Company has no significant influence) or equity (if the Company has significant influence).

Fiscal Year

CSXT follows a 52/53 week fiscal reporting calendar. Fiscal years 2002, 2001 and 2000 consisted of 52 weeks. A 52-week fiscal year has four 13-week quarters. A 53-week year occurs periodically, with the next one occurring in 2004. Fiscal years 2002, 2001 and 2000 ended on:

-20-

CSX TRANSPORTATION INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1.    SIGNIFICANT ACCOUNTING POLICIES, Continued

Cash, Cash Equivalents and Short-term Investments

CSXT participates in the CSX cash management plan, under which excess cash is advanced to CSX for investment. CSX then makes cash available to CSXT as needed. Cash, cash equivalents and short-term investments consists of cash in banks and highly liquid investments having an original maturity of three months or less at the date of acquisition. At December 28, 2001, this included $220 million of deposits relating to the New Orleans litigation settlement that was paid in 2002.

Materials and Supplies

Materials and supplies consist primarily of fuel and items for replacement and maintenance of track and equipment, and are carried at average cost.

Properties

All properties are stated at cost, less an allowance for accumulated depreciation. Rail assets, including main-line track, locomotives and freight cars are depreciated using the group-life method. This method pools similar assets by road and equipment type and then depreciates each group as a whole. The majority of the Company’s total property is accounted for under the group-life method. Other property is depreciated using the straight-line method on a per asset basis. Regulations enforced by the Surface Transportation Board (“STB”) of the United States Department of Transportation require periodic formal studies of ultimate service lives for all railroad assets. Resulting service life estimates are subject to review and approval by the STB. Road assets, including main-line track, have estimated service lives ranging from 7 to 81 years. Equipment assets, including locomotives and freight cars, have estimated service lives ranging from 5 to 28 years.

For retirements or disposals of depreciable rail assets that occur in the ordinary course of business, the asset cost (net of salvage value or sales proceeds) is charged to accumulated depreciation and no gain or loss is recognized. For retirements or disposals of non-rail depreciable assets, infrequent disposal of rail assets outside the normal course of business and for all dispositions of land, the resulting gains or losses are recognized at the time of disposal. Expenditures that significantly increase asset values or extend useful lives are capitalized. Repair and maintenance expenditures are charged to operating expense when the work is performed.

Properties and other long-lived assets are reviewed for impairment whenever events or business conditions indicate the carrying amount of such assets may not be fully recoverable. Initial assessments of recoverability are based on estimates of undiscounted future net cash flows associated with an asset or a group of assets. Where impairment is indicated, the assets are evaluated, and their carrying amount is reduced to fair value based on discounted net cash flows or other estimates of fair value.

-21-

CSX TRANSPORTATION INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

NOTE 1.    SIGNIFICANT ACCOUNTING POLICIES, Continued

Revenue & Expense Recognition

Transportation revenue and expense is recognized proportionately as freight moves from origin to destination. Other revenue, which includes switching, demurrage and incidental service charges, as well as interline switching settlements, is recognized when the service is performed.

Environmental Costs

The Company incurs costs for environmental corrective efforts, such as the study and clean-up of environmental contamination. Environmental costs are charged to expense when they relate to an existing condition caused by past operations and do not contribute to current or future revenue generation. Liabilities for environmental corrective efforts are recorded when CSXT’s responsibility is (1) deemed probable, and (2) the amount can be reasonably estimated. Generally, the timing of these accruals coincides with the completion of a feasibility study or the Company’s commitment to a formal plan of action. Environmental reserves at December 27, 2002 and December 28, 2001 were $35 million and $32 million, respectively.

Casualty Reserves

Casualty reserves represent accruals for the uninsured portion of personal injury, occupational injury (asbestos, carpal tunnel, etc.) and accident claims. These reserves are recorded upon the first reporting of a claim, and estimates are updated as information develops. The amount of liability accrued is based on the type and severity of the claim and an estimate of future claims development based on current trends and historical data. The Company believes it has recorded liabilities in sufficient amounts to cover all identified claims and estimates of incurred but not reported personal injury and accident claims. Unreported occupational injuries are not subject to reasonable estimation, thus no provision is made for incurred but not reported occupational injuries. Personal injury, occupational injury and accident liabilities amount to $395 million and $435 million at December 27, 2002 and December 28, 2001, respectively.

Common Stock and Other Capital

There have been no changes in common stock during the last three years.

New Accounting Pronouncements

In 2002, Statement of Financial Accounting Standards (SFAS) No. 143, “Accounting for Asset Retirement Obligations,” was issued. This statement addresses financial accounting and reporting for legal obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. CSXT is required to adopt this statement for fiscal year 2003. Under the group-life method, the Company accrues removal costs as part of its depreciation expense. This effectively results in establishing a liability in accumulated depreciation in excess of any salvage value for cross ties. The Company is assessing the effect of adopting this statement and expects that it will record a cumulative effect of accounting change to remove any such liability accrued to date in the first quarter of 2003. On an ongoing basis, depreciation expense will be reduced, while material supplies and other expenses will be increased. The change in operating incomeprogram is expected to be immaterial.in the range of $45 million to $60 million. The majority of separation benefits will be paid from CSX Corporation’s qualified pension plans, with the remainder being paid from general corporate funds.

-22-

Also in 2003, CSX TRANSPORTATION INC. AND SUBSIDIARIESrecorded a $10 million restructuring charge related to other workforce reduction programs. Substantially all of this amount had been paid out at December 27, 2003.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

NOTE 1.    SIGNIFICANT ACCOUNTING POLICIES, Continued

Prior-Year Data

Certain prior-year data has been reclassifiedIn 2003, CSX recorded a $22 million pretax credit related to conforma favorable change in estimate related to the 2002 presentation.1991 and 1992 separation plans. These plans provided for workforce reductions, improvements in productivity and other cost reductions. The reduction in estimate for these plans results from lower railroad retirement taxes and other benefits than had been included in the initial $1.3 billion charge.

     A net $13 million restructuring charge was recorded representing the cost of the restructuring initiatives offset by reductions in 1991/1992 separation reserves. The associated expense is included in operating expense on the Income Statement as “Restructuring Charge — Net.”

Use of EstimatesCRITICAL ACCOUNTING ESTIMATES

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires that management make estimates in reporting the amounts of certain assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of certain revenues and expenses during the reporting period. Actual results may differ from those estimates. Significant estimates using management judgment are made for the following areas:

NOTE 2.    INTEGRATED RAIL OPERATIONS WITH CONRAIL

Background2. Pension and postretirement medical plan accounting

     3. Depreciation polices for its assets under the group-life method

CSX and Norfolk Southern Corporation (“Norfolk Southern”) completed the acquisition of Conrail Inc. (“Conrail”) in May 1997. Conrail owns the primary freight railroad system serving the Northeastern United States, and its rail network extends throughout several Midwestern states and into Canada. CSX and Norfolk Southern, through a jointly owned acquisition entity, hold economic interests in Conrail of 42% and 58%, respectively, and voting interests of 50% each. CSX and Norfolk Southern operate over allocated portions of the Conrail lines.-13-

CSXT and Norfolk Southern Railway Company (“Norfolk Southern Railway”), the rail subsidiary of Norfolk Southern, operate their respective portions of the Conrail system pursuant to various operating agreements. Under these agreements, the railroads pay operating fees to Conrail for the use of right-of-way and rent for the use of equipment. Conrail continues to provide rail services in certain shared geographic areas (“Shared Asset Areas”) for the joint benefit of CSXT and Norfolk Southern Railway, for which it is compensated on the basis of usage by the respective railroads.

Accounting and Financial Reporting Effects

CSXT’s operating revenue includes revenue from traffic previously moving on Conrail. Operating expenses include costs incurred to handle that traffic and operate the former Conrail lines. Operating expense includes an expense category, “Conrail Operating Fees, Rents and Services,” which reflects:

-23-

CSX TRANSPORTATION INC. AND SUBSIDIARIES
2003 FORM 10-K, PART II, ITEM 7
MANAGEMENT’S NARRATIVE ANALYSIS OF THE RESULTS OF OPERATIONS

CRITICAL ACCOUNTING ESTIMATES, Continued

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED1. Casualty, Legal and Environmental Reserves

NOTE 2.    INTEGRATED RAIL OPERATIONS WITH CONRAIL, Continued

Conrail Operating Fees, Rents and Services is as follows:

As a result of the integration, a number of employees’ positions at Conrail were eliminated and certain duplicate facilities were closed. Under the agreements among the parties, CSXT and Norfolk Southern Railway assumed various obligations related to these actions. During 2002, 2001, and 2000, CSXT incurred approximately $30, $35, and $42 million, respectively, of costs related to lease payments on certain Conrail facilities no longer being used after the integration, and separation and relocation costs of Conrail employees. These costs are reflected in “Materials, Supplies and Other” expense in the consolidated statement of earnings.

Transactions With Conrail

As listed below, CSXT has amounts payable to Conrail, representing expenses incurred under the operating, equipment and shared area agreements.

The agreement under which CSXT operates its allocated portion of the Conrail route system has an initial term of 25 years and may be renewed at CSXT’s option for two five-year terms. Operating fees paid to Conrail under the agreement are subject to adjustment every six years based on the fair value of the underlying system. Lease agreements for the Conrail equipment operated by CSXT cover varying terms. CSXT is responsible for all costs of operating, maintaining, and improving the routes and equipment under these agreements. On December 27, 2002, future minimum payments to Conrail under the operating, equipment and shared area agreements were as follows:

-24-

CSX TRANSPORTATION INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

NOTE 3.    SUPPLEMENTAL CONSOLIDATED STATEMENT OF EARNINGS FINANCIAL DATA

Operating expense includes the following:

NOTE 4.    OTHER INCOME (EXPENSE)

Other income (expense) consists of the following: