In the opinion of management, the accompanying consolidated financial statements contain all adjustments necessary to fairly present the financial position of CSX Corporation (“CSX”) and subsidiaries (“CSX” or(CSX, together with such subsidiaries, the “Company”) at July 1,September 30, 2005 and December 31, 2004, and the Consolidated Income Statements for the quarters and nine months ended September 30, 2005 and September 24, 2004, and Consolidated Cash Flow Statements for the quarters and sixnine months ended July 1,September 30, 2005 and June 25,September 24, 2004, such adjustments being of a normal recurring nature. Certain prior-year data have been reclassified to conform to the 2005 presentation.

     The Company suggests that theseThese financial statements should be read in conjunction with the audited financial statements and the notes included in the Company’sits most recent Annual Report and Form 10-K, the unaudited financial statements and the notes included in its 2005 First and Second Quarterly ReportReports on Form 10-Q and any Current Reports on Form 8-K. The Company’s SEC reports are accessible on the SEC’s website atwww.sec.gov and the Company’s website atwww.csx.com.

     CSXThe Company follows a 52/53 week fiscal reporting calendar. Fiscal year 2005 consists of 52 weeks ending on December 30, 2005. Fiscal year 2004 consisted of 53 weeks ending on December 31, 2004. The financial statements presented are for the 13-week quarters ended July 1,September 30, 2005 and June 25,September 24, 2004, the 26-week39-week periods ended July 1,September 30, 2005 and June 25,September 24, 2004 and as of December 31, 2004. In 2004, the fourth quarter ending December 31, 2004, consisted of 14 weeks.

     CSX acquires auction rate securities and classifies these investments as available for sale. Accordingly, these investments are included in current assets as Short-term Investments on the Consolidated Balance Sheets. On the Consolidated Cash Flow Statements, purchases and sales of these assets are classified as investing activities.

     The following table sets forth the computation of basic earnings per share and earnings per share, assuming dilution:

     Certain potentially dilutive common sharesstock options at July 1,September 30, 2005, and June 25,September 24, 2004 were excluded from the computation of earnings per share, assuming dilution, since their related option exercise prices were greater than the average market price of the common shares during the period. The following table indicates information about potentially dilutive common sharesstock options excluded from the computation of earnings per share:

     

     In June 2005, the CompanyCSX repurchased $1.0 billion of its publicly-traded notes listed below pursuant to offers to purchase that commenced in May 2005, and expired in June 2005.

     The total consideration paid for these notes totaled $1.2 billion, which includes a pretax charge of $192 million for costs to repurchase the debt which primarily reflects the market value above original issue value. The CompanyCSX used cash on hand to finance this repurchase.

     The CompanyPursuant to the terms of CSX’s Zero Coupon Convertible Debentures (“Debentures”) due October 30, 2021, the holders of such Debentures have the right to require CSX to purchase their Debentures on October 30, 2005. CSX notified these holders of this right on September 30, 2005. Holders must submit notice for purchase by October 24, 2005 and have the right to withdraw such notice by October 27, 2005. If any of the Debentures are required to be purchased by CSX, they will be purchased for cash. As of September 30, 2005, the Company’s cash and short-term investments balance was $590 million, which is more than adequate to fund the potential purchase of the Debentures if CSX is required to do so on October 30, 2005. As of September 30, 2005, the aggregate value of the Debentures is approximately $467 million and is included in Current Maturities of Long-term Debt within the Consolidated Balance Sheets.

     CSX has a $1.2 billion five-year unsecured revolving credit facility expiring in May 2009 and a $400 million 364-day unsecured revolving credit facility expiring in May 2006. The facilities were entered into in May 2004 and May 2005, respectively, on terms substantially similar to the facilities they replaced: a $1.0 billion unsecured revolving credit facility that would have expired in May 2006 and a $400 million unsecured revolving credit facility that would have expired in May 2005.replaced. Generally, these facilities may be used for general corporate purposes, to support the Company’sCSX’s commercial paper, and for working capital. Neither of the credit facilities was drawn on as of July 1,September 30, 2005. Commitment fees and interest rates payable under the facilities are similar to fees and rates available to comparably rated investment-grade borrowers. These credit facilities allow for borrowings at floating (LIBOR-based) rates, plus a spread, depending upon ourCSX’s senior unsecured debt ratings. At July 1,September 30, 2005, the CompanyCSX was in compliance with all covenant requirements under the facilities.

     As permitted under SFAS 148, the CompanyCSX has adopted the fair value recognition provisions on a prospective basis and, accordingly, recognized expense for stock options granted in May 2003.

     In December 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS 123(R), “Share-Based Payment”, which is a revision of SFAS 123, “Accounting for Stock-Based Compensation”. Currently, the CompanyCSX uses the Black-Scholes-Merton formula to estimate the value of stock options granted to employees and expects to continue to use this acceptable option valuation model upon the required adoption of SFAS 123(R) on January 1, 2006. Compensation cost for unvested awards that were not recognized under SFAS 123 will be recognized under SFAS 123(R). The new rules must be applied to new and existing unvested awards on the effective date. The CompanyCSX adopted SFAS 123 using the prospective transition method (which applied only to awards granted, modified or settled after the adoption date). Had CSX adopted SFAS 123(R) in prior periods, the impact would have estimated the impact of SFAS 123 would have been estimated as described in the disclosure of pro forma net income and earnings per share in Note 5.6. Share-Based Compensation. SFAS 123(R) also requires the benefits of tax deductions in excess of recognized compensation cost to be reported as a financing cash flow, rather than as an operating cash flow as required under current literature. This requirement will reduce net operating cash flows and increase net financing cash flows in periods after adoption. The Company is currently evaluating the impact of SFAS 123(R) on its consolidated financial statements, but does not expect the impact to be material.

     Currently, the Company’sCSX’s stock-based employee compensation expense is recognized over the amortization period which could continue beyond the date an employee is eligible for retirement. Upon adoption of SFAS 123(R), if the CompanyCSX allows vesting beyond retirement eligibility (which is based on age and years of service) for new stock awards granted, the expense recognition period for these awards will not extend beyond the date an employee is eligible for retirement, resulting in the CompanyCSX’s recognizing this expense over a shorter period of time.

     In August 2004, the ownership of portions of the Conrail Inc. (“Conrail”) system already operated by CSX Transportation, Inc. (“CSXT”) and Norfolk Southern Railway Company (“NSR”), were transferred to and therefore directly owned by CSXT and NSR, and the parties consummated an exchange offer of new unsecured securities for unsecured securities of Conrail. Conrail’s secured debt and lease obligations are supported by new leases and subleases which became the direct lease and sublease obligations of CSXT and NSR.

     The CompanyCSX recorded this spin-off transaction at fair value based on the results of an independent valuation. Since September 2004, the impact of the transaction has been included in the Company’sCSX’s Consolidated Balance Sheets and Consolidated Income and Cash Flow Statements.

     As a result of the transaction, the assets and liabilities transferred to CSXT are reflected in their respective line items in CSX’s Consolidated Balance Sheet.

     Additional information about this transaction is included in the Company’sCSX’s annual report on Form 10-K for the year ended December 31, 2004.

     For periods prior to the spin-off transaction, CSX’sthe Company’s rail and intermodal operating revenue included revenue from traffic moving on the Conrail property. Operating expenses included costs incurred to handle such traffic and to operate the Conrail lines. Rail operating expense included an expense category, “Conrail Rents, Fees and Services,” which reflected:

     Conrail will continue to own, manage, and operate the Shared Assets Areas for the joint benefit of CSXT and NSR. However, theThe spin-off transaction, however, effectively decreased rents paid to Conrail after the transaction date, as some assets previously leased from Conrail are now owned by CSXT.CSXT or NSR.

     As listed below, CSXCSXT owes certain amounts to Conrail representing expenses incurred under the operating, equipment and Shared Assets Area agreements with Conrail.

     In March 2005, CSXT executed a long-term promissory note with a subsidiary of Conrail for $23 million, which is included in Long-term Debt in the Company’s Consolidated Balance Sheet as of April 1,September 30, 2005. The note bears interest at 4.52% and matures in March 2035. Interest expense on this promissory note was not material for the quarter or nine months ended September 30, 2005.

     The agreement under which CSXT operated its allocated portion of the Conrail route system was terminated upon consummation of the spin-off transaction as CSXT then became the direct owner of the railroad assets comprising its allocated portion of the Conrail system. Leases and subleases of Conrail equipment operated by CSXT cover varying terms. CSXT is responsible for all costs of operating, maintaining, and improving the equipment under these agreements.

     The Company maintains an allowance for doubtful accounts for the estimated probable losses on uncollectible accounts and other receivables. The allowance is based upon the creditworthiness of customers, historical experience, the age of the receivable and current market and economic conditions. Uncollectible amounts are charged against the allowance account. The allowance for doubtful accounts is maintained against both current and long-term asset accounts. Allowance for doubtful accounts of $123$118 million and $95 million is included in the Consolidated Balance Sheets as of July 1,September 30, 2005 and December 31, 2004.

     Other Income — Net consists of the following:

     CSX uses derivative financial instruments to manage its overall exposure to fluctuations in interest rates and fuel costs.

     CSX has entered into various long-term interest rate swap agreements on the following fixed rate notes:

     In 2003, CSX began a program to hedge a portion of itsCSXT’s future locomotivediesel fuel purchases. This program was established to manage exposure to fuel price fluctuations. In order to minimize this risk, CSX has entered into a series of swaps in order to fix the price of a portion of itsCSXT’s estimated future fuel purchases.

     Following is a summary of outstanding fuel swaps:

     The program limits fuel hedges to a 24-month duration and a maximum of 80% of CSX’sCSXT’s average monthly fuel purchased for any month within the 24-month period, and places the hedges among selected counterparties. Fuel hedging activity favorably impacted fuel expense for the quarter and sixnine months ended July 1,September 30, 2005 by $63$77 million and $114$191 million, respectively. Fuel hedging activity favorably impacted fuel expense for the quarter and sixnine months ended June 25,September 24, 2004 by $4 million.$13 million and $17 million, respectively. Ineffectiveness, or the extent to which changes in the fair values of the fuel swaps did not offset changes in the fair values of the expected fuel purchases, was immaterial.

     These instruments qualify, and are designated by management, as cash-flow hedges of variability in expected future cash flows attributable to fluctuations in fuel prices. The fair values of fuel derivative instruments are determined based upon current fair market values as quoted by third party dealers and are recorded on the Consolidated Balance Sheets with offsetting adjustments to Accumulated Other Comprehensive Loss, a component of Shareholders’ Equity. The fair value of fuel derivative instruments was $142 million and $118 million as of September 30, 2005 and December 31, 2004, respectively. Amounts are reclassified from Accumulated Other Comprehensive Loss as the underlying fuel that was hedged is consumed by rail operations. Fair value adjustments are non-cash transactions and, accordingly, have no cash impact on the Consolidated Cash Flow Statements. See Note 1. Basis of Presentation, for the impact of fuel hedging activity on Accumulated Other Comprehensive Loss.

     Casualty, environmental and other reserves are provided for in the Consolidated Balance Sheets as follows:

     CSX engagedThe Company is party to a number of occupational claims by employees exposed to asbestos in the workplace. According to rail industry statistics, the heaviest exposure for employees was due to work conducted in and around the use of steam locomotive engines that were phased out between the early 1950’s and late 1960’s. However, other types of exposures, including exposure from locomotive component parts and building materials, continued until it was substantially eliminated by 1985.

     The Company retains a third party specialist, who has extensive experience in performing asbestos and other occupational studies, to assist in assessing the unasserted liability exposure. The analysis is performed by the specialist semi-annually. The objective of the analysis is to determine the number of estimated incurred but not reported claims and the estimated average cost per claim to be received over the next seven years. Seven years was determined by management to be the time period in which probable claim filings and claim values could be estimated with more certainty.

     The methodology used by the specialist includes an estimate of future anticipated claims based on the Company’s trends of average historical claim filing rates, future anticipated dismissal rates and settlement rates. CSX’sThe Company’s future liability for incurred but not reported claims is estimated by multiplying the future anticipated claims by the average settlement values.

     In review of asbestos claims, the Company has observed that recent filing rates have declined. A trend in declining filing rates could result in a reduction of the reserve for asbestos related claims. Because the pace of asbestos claim filings have been inconsistent, the Company has not yet determined the decline to be a trend.

     Separation liabilities at July 1,September 30, 2005 and December 31, 2004 provide for the estimated costs of implementing workforce reductions, improvements in productivity and other cost reductions at the Company’s major transportation units since 1991. These liabilities are expected to be paid out over the next 15 to 20 years from general corporate funds.

     CSXThe Company is a party to various proceedings, including administrative and judicial proceedings, involving private parties and regulatory agencies related to environmental issues. CSXThe Company has been identified as a potentially responsible party (“PRP”) at approximately 262 environmentally impaired sites, many of which are, or may be, subject to remedial action under the Federal Comprehensive Environmental Response, Compensation and Liability Act of 1980 (“CERCLA”), also known as the Superfund law, or similar state statutes. A number of these proceedings are based on allegations that CSX,CSXT, or its railroad predecessors, sent hazardous substances to the facilities in question for disposal.

     In addition, some of CSX’sthe Company’s land holdings are and have been used for industrial or transportation-related purposes or leased to commercial or industrial companies whose activities may have resulted in releases of various regulated materials onto the property. Therefore, CSXthe Company is subject to environmental cleanup and enforcement actions under the Superfund law, as well as similar state laws that may impose joint and several liability for cleanup and enforcement costs on current and former owners and operators of a site without regard to fault or the legality of the original conduct, which could be substantial.

     At least once a quarter, CSXthe Company reviews its role with respect to each site identified. Based on the review process, CSXthe Company has recorded reserves to cover estimated contingent future environmental costs with respect to such sites. 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. The recorded liabilities for estimated future environmental costs at July 1, 2005 and December 31, 2004 were $60 million and $59 million, respectively. These liabilities, which are undiscounted and include amounts representing CSX’sthe Company’s estimate of unasserted claims, which CSXthe Company believes to be immaterial. The liability includes future costs for all sites where the Company’s obligation is (1) deemed probable, and (2) where such costs can be reasonably estimated. The liability includes future costs for remediation and restoration of sites as well as any significant ongoing monitoring costs, but excludes any anticipated insurance recoveries.

     The Company does not currently possess sufficient information to reasonably estimate the amounts of additional liabilities, if any, on some sites until completion of future environmental studies. In addition, latent conditions at any given location could result in exposure, the amount and materiality of which cannot presently be reliably estimated. Based upon information currently available, however, the Company believes its environmental reserves are adequate to accomplish remedial actions to comply with present laws and regulations, and that the ultimate liability for these matters, if any, will not materially affect its overall results of operations and financial condition.

     The CompanyCSXT has a commitment under a long-term maintenance program forthat currently covers approximately 40% of CSX’sCSXT’s fleet of locomotives. The agreement expiresis based on the maintenance cycle for each locomotive and is currently predicted to expire in 2026 and the2026. The costs expected to be incurred underthrough the duration of the agreement approximate $5.8total approximately $6.8 billion. The long-term maintenance program is intended to provide CSX access to efficient, high-quality locomotive maintenance servicesCSXT may terminate the agreement at fixed price levels throughits convenience though such action might trigger certain liquidated damages provisions that could result in damages adjusted over the predicted term of the program.agreement. Under the program, CSXCSXT paid $43 million and $84$127 million for the quarter and sixnine months ending July 1,September 30, 2005, respectively. The CompanyCSXT paid $38$39 million and $75$114 million during the quarter and sixnine months ended June 25,September 24, 2004, respectively.

     The Company operates primarily in two business segments: rail and intermodal. The rail segment provides rail freight transportation over a network of more thanapproximately 22,000 route miles in 23 states, the District of Columbia and two Canadian provinces. The intermodal segment provides integrated rail and truck transportation services and operates a network of dedicated intermodal facilities across North America. The Company’s segments are strategic business units that offer different services and are managed separately. The rail and intermodal segments are also viewed on a combined basis as Surface Transportation operations.

     The Company evaluates performance and allocates resources based on several factors, of which the primary financial measure is business segment operating income. The accounting policies of the segments are the same as those described in Nature of Operations and Significant Accounting Policies (Note 1) in the CSX 2004 Annual Report on Form 10-K.

     Prior toConsolidated operating income includes the conveyanceresults of operations of Surface Transportation and other operating income. Other operating income includes the gain amortization on the CSX Lines it was a segment of CSX and was presented with International Terminals on a combined basis as the Marine Services operations of the Company. Results for CSX Lines are now presented in the Other column, which primarily represents the pretax gain amortization of approximately $127 million as a result of the conveyance, being recognized over the 12-year sublease term. The Other column also includes net sublease income from assets formerly included in the Company’s Marine Services segment, and other items.

     The International Terminals business segment has been reclassified to Discontinued Operations. (SeeOperations (see Note 3.4. Discontinued Operations.)Operations).

     Business segment information for the quarters ended July 1,September 30, 2005 and June 25,September 24, 2004 is as follows: