FORM 10-Q

SECURITIES AND EXCHANGE COMMISSION

For the quarter ended SeptemberMarch 26, 20032004

OR

For the transition period fromto

Commission File Number 1-3359

CSX TRANSPORTATION, INC.

(904) 359-3100

(Registrant’s telephone number, including area code)

No Change

(Former name, former address and former fiscal year, if changed since last report.)

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(X) No ¨(   )

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).
Yes ¨(   ) No x

(X)

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

1

CSX TRANSPORTATION INC.

FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED SEPTEMBERMARCH 26, 2003

2004
INDEX

2

CSX TRANSPORTATION INC. AND SUBSIDIARIES

Consolidated Income Statements

CSX TRANSPORTATION INC. AND SUBSIDIARIES

ITEM 1: FINANCIAL STATEMENTS

Consolidated Balance Sheets

(Unaudited)

See accompanying Notes to Consolidated Financial Statements.

4

CSX TRANSPORTATION INC. AND SUBSIDIARIES

ITEM 1: FINANCIAL STATEMENTS

Consolidated Cash Flow Statements

(Unaudited)

See accompanying Notes to Consolidated Financial Statements.

5

CSX TRANSPORTATION INC. AND SUBSIDIARIES

ITEM 1: FINANCIAL STATEMENTS

NOTE 1. BASIS OF PRESENTATION

In the opinion of management, the accompanying consolidated financial statements contain all adjustments necessary to fairly present the financial position of CSX Transportation Inc. and subsidiaries (“CSXT” or the “Company”) at SeptemberMarch 26, 2004 and December 26, 2003, and December 27, 2002, the results of its operations for the quarters and nine months ended September 26, 2003 and September 27, 2002, and its cash flows for the nine monthsquarters ended SeptemberMarch 26, 20032004 and September 27, 2002,March 28, 2003, such adjustments being of a normal recurring nature. Certain prior-year data have been reclassified to conform to the 20032004 presentation. CSXT is a wholly-ownedwholly owned subsidiary of CSX Corporation (“CSX”).

The Company suggests that these financial statements be read in conjunction with the financial statements and the notes included in CSXT’s most recent Form 10-K and 2003 Quarterly Reports on Form 10-Q.10-K.

CSXT follows a 52/53 week fiscal reporting calendar. Fiscal yearsyear 2004 consists of a 53-week year ending on December 31, 2004. Fiscal year 2003 and 2002 consistconsisted of 52 weeks endingended on December 26, 2003 and December 27, 2002, respectively.2003. The financial statements presented are for the 13-week quarters ended SeptemberMarch 26, 20032004 and September 27, 2002, the 39-week periods ended September 26,March 28, 2003, and September 27, 2002, and as of December 27, 2002.26, 2003. In 2004, the fourth quarter ending December 31, 2004, will consist of 14 weeks.

     Other comprehensive income for the first quarter of 2004 was $13 million after tax resulting from the increase in fair value of fuel derivative instruments. (See Note 7, Derivative Financial Instruments) Comprehensive income approximated net earnings for the first quarter of 2003.

NOTE 2. NEW ACCOUNTING PRONOUNCEMENTS AND CUMULATIVE EFFECT OF ACCOUNTING CHANGECHANGES

Statement of Financial Accounting Standard (“SFAS”) 143, “Accounting for Asset Retirement Obligations,”Obligations” was issued in 2001. This statement addresses financial accounting and reporting for legal obligations associated with the retirement of tangible long-lived assets and the associated retirement costs. 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. With the adoption of SFAS 143 in fiscal year 2003, CSXT recorded pretax income of $93 million, $57 million after tax, as a cumulative effect of an accounting change in the first quarter, representing the reversal of the accrued liability for crosstie removal costs. The adoption of SFAS 143 did not have a material effect on prior reporting periods, and the Company does not believe it will have a material effect on future earnings. On an ongoing basis, depreciation expense will

     In 2003, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 46, “Consolidation of Variable Interest Entities,” which requires a variable interest entity (“VIE”) to be reduced, while laborconsolidated by a company that is subject to a majority of the risk of loss from the variable interest entity’s activities or is entitled to receive a majority of the entity’s residual returns, or both. Under the new guidance, CSXT consolidated Four Rivers Transportation, Inc. (“FRT”), a shortline railroad, into its financial statements at the beginning of fiscal 2004. Previously, FRT was accounted for under the equity method of accounting. The first quarter of 2004 includes revenues, operating expenses, and fringeafter-tax income of approximately $14 million, $10 million, and materials, supplies$1 million for FRT, respectively. The quarter ended March 28, 2003, includes net equity earnings of FRT of approximately $1 million (included in other income). Total consolidated assets as of March 26, 2004 include $24 million and other expense will be increased.$145 million of current and long-term assets, respectively, for FRT. Total consolidated liabilities as of March 26, 2004 include $27 million and $60 million of current and long-term liabilities, respectively, for FRT.

6

CSX TRANSPORTATION INC. AND SUBSIDIARIES
ITEM 1: FINANCIAL STATEMENTS
Notes to Consolidated Financial Statements (Unaudited)

NOTE 3. INTEGRATED RAIL OPERATIONS WITH CONRAIL

Background

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

     From time to time, CSX TRANSPORTATION INC. AND SUBSIDIARIES

ITEM 1: FINANCIAL STATEMENTS

Notesand NS, as the indirect owners of Conrail, may have to Consolidated Financial Statements (Unaudited)make capital contributions, loans or advances to Conrail under the terms of the Transaction Agreement among CSX, NS and Conrail in order to satisfy the retained liabilities and other obligations as provided under such transaction agreement.

NOTE 3. INTEGRATED RAIL OPERATIONS WITH CONRAIL, Continued

CSXT and Norfolk Southern Railway Company (“Norfolk Southern Railway”NSR”), the rail subsidiary of Norfolk Southern,NS, each operate separate 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,NSR, for which it is compensated on the basis of usage by the respective railroads.

In June 2003, CSX, Norfolk SouthernNS and Conrail jointly filed a petition with the Surface Transportation Board (STB)(“STB”) to establish direct ownership and control by CSX’s and NS’ respective subsidiaries, CSXT and Norfolk Southern RailwayNSR, of theirCSX’s and NS’ portions of the Conrail system.system already operated by them separately and independently under various agreements. These portions of the Conrail system are currently owned by Conrail’s subsidiaries, New York Central Lines, LLC (“NYC”) and Pennsylvania Lines, LLC (“PRR”). The ownership of NYC and PRR would ultimately be transferred (“spun off”) to CSXT and NSR, respectively. Conrail would continue to own, manage and operate the Shared AssetsAsset Areas as previously approved by the STB. CSX, Norfolk SouthernSTB approval to proceed with the spin-off transaction and Conrail also jointly filed a favorable ruling request withfrom the Internal Revenue Service to qualify(“IRS”) qualifying the transaction as a non-taxable distribution.distribution were received in November 2003. On April 23, 2004, CSXT and NSR each filed a Registration Statement on Form S-4 with the Securities and Exchange Commission (“SEC”) that describes an offer to exchange new unsecured securities of subsidiaries of CSXT and NSR and cash for unsecured securities of Conrail. The proposedfilings initiate the final stage in implementing the restructuring of Conrail’s unsecured indebtedness as described in the parties’ joint petition filed June 4, 2003 with the STB. The transaction isremains subject to a number of conditions, including, among others, STB approval and a favorable IRS ruling.other conditions.

     If all necessary conditions are satisfied, Conrail intends to restructure its existing $800 million of unsecured public debt and seek consents to restructure its operating leases and approximately $348 million of capitalized lease and equipment obligations. It is currently contemplated that guaranteed debt securities of two newly formed subsidiaries of CSXT and Norfolk Southern RailwayNSR would be offered in aan approximate 42%/58% ratio along with cash payments in exchange for Conrail’s unsecured debentures. The debt securities issued by its respective subsidiary would be fully and unconditionally guaranteed by CSXT and Norfolk Southern Railway.or NSR. Upon completion of the proposed transaction, the subsidiaries would be merged into CSXT and NSR, respectively, and the new debt securities thus would become direct unsecured obligations of CSXT and Norfolk Southern Railway.or NSR. Conrail’s secured debt and lease obligations will remain obligations of Conrail and are expected to be supported by new leases and subleases which, upon completion of the proposed transaction, would be the direct lease and sublease obligations, also in an approximate 42%/58% ratio, of CSXT or Norfolk Southern Railway.and NSR. CSXT will record this transaction at fair value based on the results of an independent valuation.

7

CSX TRANSPORTATION INC. AND SUBSIDIARIES
ITEM 1: FINANCIAL STATEMENTS
Notes to Consolidated Financial Statements (Unaudited)

NOTE 3. INTEGRATED RAIL OPERATIONS WITH CONRAIL, Continued

     CSX, NS and Conrail are working to complete all necessary steps to consummate the spin-off transaction in 2004. Upon consummation of the proposed transaction, CSX’s investment in Conrail will no longer include the amounts related to NYC and PRR. Instead the assets and liabilities of NYC will be reflected in their respective line items in CSX’s consolidated balance sheet. Conrail will continue to own, manage and operate the Shared Asset Areas.

Accounting and Financial Reporting Effects

CSXT’sCSX’s rail and intermodal operating revenue includes revenue from traffic moving on Conrail property. Operating expenses include costs incurred to handle such traffic and operate the Conrail lines. OperatingRail operating expense includes an expense category, “Conrail Rents, Fees and Services,” which reflects:

CSX TRANSPORTATION INC. AND SUBSIDIARIES

ITEM 1: FINANCIAL STATEMENTS

Notes to Consolidated Financial Statements (Unaudited)

NOTE 3. INTEGRATED RAIL OPERATIONS WITH CONRAIL, Continued

Transactions with Conrail

As listed below, CSXT has amounts payable to Conrail, representing expenses incurred under the operating, equipment and shared asset areaShared Asset 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. Upon consummation of the spin-off transaction, the agreement covering the NYC portion of the Conrail system will terminate, as CSX will then directly own its allocated portion of the Conrail system.

8

CSX TRANSPORTATION INC. AND SUBSIDIARIES
ITEM 1: FINANCIAL STATEMENTS
Notes to Consolidated Financial Statements (Unaudited)

NOTE 4. ACCOUNTS RECEIVABLE

Sale of Accounts Receivable

As of June 27, 2003, CSXT discontinued the sale ofits accounts receivable securitization program, which resulted in a $898an $869 million increase in accounts receivable and increased commercial paper borrowings from CSX.included in short-term debt. Prior to June 27, 2003, CSXT sold, without recourse, a revolving pool of accounts receivable to CSX Trade Receivables Corporation (“CTRC”), a bankruptcy-remote entity wholly-ownedwholly owned by CSX Corporation.CSX. CTRC transferred the accounts receivable to a master trust and caused the trust to issue twomultiple series of certificates representing undivided interests in the receivables. The certificates issued by the master trust were sold to investors, and the proceeds from those sales were paid to CSXT.

Outstanding accounts receivable sold under this agreement are as follows:

CSX TRANSPORTATION INC. AND SUBSIDIARIES

ITEM 1: FINANCIAL STATEMENTS

Notes to Consolidated Financial Statements (Unaudited)

NOTE 4. ACCOUNTS RECEIVABLE, Continued

There were no net losses associated with the sale of receivables for the first quarter of 2004. Net losses associated with the sale of receivables are as follows:were $18 million for the quarter ended March 28, 2003.

CSXT retained responsibility for servicing accounts receivables held by the master trust. The average servicing period was approximately one month. No servicing asset or liability was recorded since the fees CSXT received approximated its related costs.

Allowance for Doubtful Accounts

The Company maintains an allowance for doubtful accounts based on the expected collectibility of all accounts receivable. The allowance for doubtful accounts is included in the balance sheet as follows:

NOTE 5. OTHER INCOME (EXPENSE)

Other income (expense) consists of the following:

9

CSX TRANSPORTATION INC. AND SUBSIDIARIES

ITEM 1: FINANCIAL STATEMENTS

Notes to Consolidated Financial Statements (Unaudited)

NOTE 6. RELATED PARTIES

At SeptemberMarch 26, 2004 and December 26, 2003, and December 27, 2002, CSXT had deficit balances of $2.6 billion and $1.3$2.5 billion deficit balances, respectively relating to itsCSXT’s participation in the CSX cash management plan. This balance increased approximately $900 million on June 27, 2003 due to the termination of the sales of accounts receivable program. These deficit balances areThe amount is included in Due to Parent Company in the balance sheet.statement of financial position. Under this plan, excess cash is advanced to CSX for investment and CSX makes cash funds available to its subsidiaries as needed for use in their operations. CSXT and CSX are committed to repay all amounts due each other on demand should circumstances require. The companies are charged for borrowings or compensated for investments based on returns earned by the plan portfolio, which was 1.1%1.09% and 2.8%1.33% at SeptemberMarch 26, 20032004 and September 27, 2002,March 28, 2003, respectively. Interest expense related to this plan was $11$13 million and $33$10 million for the quarter and ninethree months ended SeptemberMarch 26, 2004 and March 28, 2003, and $8 million and $25 million for the quarter and nine months ended September 27, 2002.respectively.

Detail of Related Party Service Fees (as included in the Income Statement)

Related Party Service Fees consist of amounts related to:

10

CSX TRANSPORTATION INC. AND SUBSIDIARIES

ITEM 1: FINANCIAL STATEMENTS

Notes to Consolidated Financial Statements (Unaudited)

NOTE 6. RELATED PARTIES, continued

CSXI, CSX Technology, TDSI, and TRANSFLO are wholly-ownedwholly owned subsidiaries of CSX.

Detail of Due to Affiliate (as included in the Balance Sheet)

Due to Affiliates consists of amounts related to:

•		CSXI, CSX Technology, TDSI, and TRANSFLO previously explained.
•		CSX Insurance – CSXT and CSX Insurance Company (“CSX Insurance”), a wholly owned subsidiary of CSX, have entered into a loan agreement whereby CSXT may borrow up to $125 million from CSX Insurance. The loan is payable in full on demand. At both March 26, 2004 and December 26, 2003, $115 million was outstanding under the agreement. Interest on the loan is payable monthly at 0.45% over the LIBOR rate, which was 1.09% and 1.31% at March 26, 2004 and March 28, 2003, respectively.

     CSXT participates with CSX Container Leasing, LLC “CCL”, a wholly-ownedwholly owned subsidiary of CSX, have entered into a loan agreement whereby CSXT may borrow up to $125 million from CSX Insurance. The loan is payable in full on demand. At September 26, 2003 and December 27, 2002, $115 million was outstanding under the agreement. Interest on the loan is payable monthly at 0.45% over the LIBOR rate, which was 1.1% and 1.8% at September 26, 2003 and September 27, 2002, respectively.

CSXT and SL Service Inc. (“SL Service”), a wholly-owned subsidiary of CSX, previously entered into certain sale-leaseback arrangements. Under these arrangements, SL ServiceCCL sold equipment to a third party and CSXT leased the equipment and assigned the lease to SL Service. SL Service currently contemplates terminating its interest in the arrangements and assigning them to CSX Equipment Leasing, LLC (“CSXE”), a wholly-owned subsidiary of CSX. CSXE will becomeCCL. CCL is obligated for all lease payments and other associated equipment expenses. InIf CCL defaults on its obligations under the event of a default on obligations,arrangements, CSXT would assume thesethe asset lease rights and obligations of approximately $24$10 million and $23 million at SeptemberMarch 26, 2003. SL Service previously subleased some of the equipment subject to these sale-leaseback transactions to2004 and December 26, 2003, respectively. These leases were either assumed by Maersk as part of Maersk’s 1999its purchase of the CSX international liner business. In connection with the assignment of the sale-leaseback arrangements from SL Service to CSXE, CSXE hasbusiness or were assumed all of SL Service’s interests and obligations under the subleases to Maersk. The remainder of the equipment was subleased from CSXE toby Horizon Lines LLC (formerly CSX Lines) as part of its ongoing domestic shipping business. CSXT believes that Maersk and Horizon Lines will fulfill their contractual commitments with respect to such leases and that CSXT will have no further liability for those obligations.

11

CSX TRANSPORTATION INC. AND SUBSIDIARIES

ITEM 1: FINANCIAL STATEMENTS

Notes to Consolidated Financial Statements (Unaudited)

NOTE 7. DERIVATIVE FINANCIAL INSTRUMENTS

Fuel Hedging

Fuel Hedging

In the third quarter of 2003, CSXTCSX began a program to hedge a portion of its 2004 and 2005future locomotive fuel purchases. This program was established to manage exposure to fuel price fluctuations. In order to minimize this risk, CSXTCSX has entered into a series of swaps in order to fix the price of a portion of its estimated future fuel purchases.

Following is a summary of outstanding fuel swaps executed during the quarter:swaps:

The program limits fuel hedges to a 24 month duration and a maximum of 80% of CSXT’s average monthly fuel purchased for any month within the 24 month24-month period, and places the hedges among selected counterparties. Fuel hedging activity did not have a material affect on fuel expense for the quarter and nine months ended SeptemberMarch 26, 2003.2004. 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 balance sheet with offsetting adjustments to Accumulated Other Comprehensive Income, a component of Shareholders’ Equity. These amounts are immaterialAccumulated Other Comprehensive Income included approximately $19 million and $6 million as of SeptemberMarch 26, 2003.2004 and December 26, 2003, respectively, related to fuel derivative instruments. Fair value adjustments are noncash transactions and, accordingly, are excluded from the Cash Flow Statement.

The Company is exposed to credit loss in the event of nonperformance by other parties to fuel swap agreements. However, theThe Company does not anticipate nonperformance by the counterparties.

12

CSX TRANSPORTATION INC. AND SUBSIDIARIES

ITEM 1: FINANCIAL STATEMENTS

Notes to Consolidated Financial Statements (Unaudited)

NOTE 8. CASUALTY, ENVIRONMENTAL AND OTHER RESERVES

Casualty, environmental and other reserves are provided for in the balance sheet as follows:

Casualty Reserves

Casualty Reserves

Casualty reserves represent accruals for the uninsured portion of occupational injury and personal injury claims. In the third quarter of 2003, the Company changed itsThe Company’s estimate of casualty reserves to includeincludes an estimate of incurred but not reported claims for asbestos and other occupational injuries to be received over the next seven years. Other occupational claims include allegations of exposure to certain materials in the work place, such as solvents and diesel fuel, or alleged physical injuries, such as carpal tunnel syndrome or hearing loss.

In conjunction with the change in estimate, the Company recorded a charge of $229 million ($143 million after tax) in the third quarter of 2003 to increase its provision for these claims. Approximately $138 million relates to asbestos claims.

Asbestos and Other Occupational Injuries

During the third quarter of 2003, theThe Company retainedis assisted by third party professionals to work with it to project the number of asbestos and other occupational injury claims to be received over the next seven years and the related costs. Based on this analysis the Company established reserves for the probable and reasonably estimable asbestos and other occupational injury liabilities.

The methodology used by the third party to project future occupational injury claims was based largely on CSXT’s recent experience, including claim-filing and settlement rates, injury and disease mix, open claims and claim settlement costs. However, projecting future occupational injury claims and settlements costs is subject to numerous variables that are difficult to predict. In addition to the significant uncertainties surrounding the number of claims that might be received, other variables, including the type and severity of the injury or disease alleged by each claimant, the long latency period associated with exposure, dismissal rates, costs of medical treatment, uncertainties surrounding the litigation process from jurisdiction to jurisdiction and from case to case and the impact of changes in legislative or judicial standards, may cause actual results to differ significantly from estimates. Furthermore, predictions with respect to these variables are subject to greater uncertainty as the projection period lengthens. In light of these uncertainties, CSXT believes that seven years is the most reasonable period for estimating future claims, and that claims received after that period are not reasonably estimable.

CSX TRANSPORTATION INC. AND SUBSIDIARIES

ITEM 1: FINANCIAL STATEMENTS

Notes to Consolidated Financial Statements (Unaudited)

NOTE 8. CASUALTY, ENVIRONMENTAL AND OTHER RESERVES, Continued

Casualty Reserves, Continued

CSXT increased its reserve for asbestos and other occupational claims by a net $203 million to cover the estimate of incurred but not reported claims to be filed during the next seven years. Reflecting the additional provisions, CSXT’s reserve for asbestos and other occupational claims on an undiscounted basis amounted to $337$322 million at SeptemberMarch 26, 2003,2004, compared to $161$331 million at December 27, 2002.26, 2003.

13

During the third quarter of 2003, CSXT retained an independent actuarial firm to assess the value of CSXT’s personal injury portfolio. This firm’s methods and procedures yielded a slightly higher valuation for personal injury claims than previously recognized by CSXT due to a higher estimated cost for adverse development. Utilizing the analysis provided, CSXT increased its reserves for alleged personal injury claims by $26 million.

CSX TRANSPORTATION INC. AND SUBSIDIARIES

ITEM 1: FINANCIAL STATEMENTS

Notes to Consolidated Financial Statements (Unaudited)

NOTE 8. CASUALTY, ENVIRONMENTAL AND OTHER RESERVES, Continued

Casualty Reserves, Continued

       A summary of existing claims activity is as follows:

Separation Liability

       Separation liabilities at March 26, 2004, and December 26, 2003, include productivity charges recorded in 1991 and 1992 to provide for the estimated costs of implementing workforce reductions, improvements in productivity and other cost reductions at the Company’s major transportation units. The remaining separation liabilities are expected to be paid out over the next 15 to 20 years. Separation liabilities also include amounts payable under the Company’s management restructuring programs. (See Note 10, Management Restructuring)

14

CSX TRANSPORTATION INC. AND SUBSIDIARIES
ITEM 1: FINANCIAL STATEMENTS
Notes to Consolidated Financial Statements (Unaudited)

NOTE 8. CASUALTY, ENVIRONMENTAL AND OTHER RESERVES, Continued

Environmental Reserves

CSXT is a party to various proceedings, including administrative and judicial proceedings, involving private parties and regulatory agencies related to environmental issues. CSXT has been identified as a potentially responsible party (“PRP”) at approximately 100230 environmentally impaired sites, thatmany of which are, or may be, subject to remedial action under the Federal Superfund statute (“Superfund”) or similar state statutes. A number of these proceedings are based on allegations that CSXT, or its railroad predecessors, sent hazardous substances to the facilities in question for disposal. SuchSome of the proceedings involve property formerly or currently owned by CSXT or its railroad predecessors. Proceedings arising under Superfund or similar state statutes can involve numerous other companies who generated the waste generatorsor owned or operated the property and disposal companies and seek to allocate or recoverinvolve the allocation of liability for costs associated with site investigation and cleanup, which could be substantial.

CSXT is involved in administrative and judicial proceedings, and other clean-up efforts at approximately 224 sites, which include the 100 Superfund sites noted above, where it is participating in the study or clean-up of alleged environmental contamination.     At least once each quarter, CSXT reviews its role with respect to each such location, giving consideration to a number of factors, including the type of cleanup required, the nature of CSXT’s alleged connection to the location (e.g., generator of waste sent to the site, or owner or operator of the site), the extent of CSXT’s alleged connection (e.g., volume of waste sent to the location and other relevant factors), the accuracy and strength of evidence connecting CSXT to the location, and the number, connection, and financial viability of other named and unnamed PRPsPRP’s at the location.

Based on the review process, CSXT has recorded reserves to cover estimated contingent future environmental costs with respect to such sites. The recorded liabilities for estimated future environmental costs at SeptemberMarch 26, 2004, and December 26, 2003 and December 27, 2002 were $36$47 million and $35$45 million, respectively. These liabilities, which are undiscounted, include amounts representing CSXT’s estimate of unasserted claims, which CSXT 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 majority of the SeptemberMarch 26, 20032004 environmental liability is expected to be paid out over the next seven years, funded by cash generated from operations.years.

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.

15

CSX TRANSPORTATION INC. AND SUBSIDIARIES

ITEM 1: FINANCIAL STATEMENTS

Notes to Consolidated Financial Statements (Unaudited)

NOTE 9. COMMITMENTS AND CONTINGENCIES

Purchase Commitments

The Company has a commitment under a long-term maintenance program for approximately 40% of itsCSXT’s fleet of locomotives. The agreement expires in 2026 and approximates $3.1$2.6 billion. The long-term maintenance program is intended to provide CSXT access to efficient, high-quality locomotive maintenance services at fixed price levels through the term of the program. Under the program, CSXT paid $32$37 million and $98$33 million in the quarterquarters ended March 26, 2004 and nine month periods endedMarch 28, 2003, respectively.

     In September 26, 2003, respectively. In the quarter and nine month periods ended September 27, 2002, $31 million and $93 million, respectively was paid.

The Company has entered into fuel purchase agreements for approximately 14% of its fuel requirements over the next five months. These agreements amountamounted to approximately 3388 million gallons in commitments at a weighted average of 75 cents per gallon. These contracts requirerequired the Company to take monthly delivery of specified quantities of fuel at a fixed price.price through February 2004. These contracts cannotcould not be net settled. As of March 26, 2004, no forward physical purchase commitments were in place.

Self-Insurance

Long-term Operating Agreements

In addition to its contractual arrangement to operate specified portions of Conrail’s rail system, CSXT has various long-term railroad operating agreements that allow for exclusive operating rights over various railroad lines. Under these agreements, CSXT is obligated to pay usage fees of approximately $10 million annually. The terms of these agreements range from 30 to 40 years.

Self-Insurance

The Company obtains substantial amounts of commercial insurance for potential losses for third-party liability and property damages. Specified levels of risk (up to $35 million for property and $25 million for liability per occurrence) are retained on a self-insurance basis. The Company uses a combination of third-party and self-insurance to realize savings on insurance premium costs.in its risk management program.

STB Proceeding

     In 2001 Duke Energy Corporation (“Duke”) filed a complaint before the U.S. Surface Transportation Board (“STB”) alleging that certain CSXT common carrier coal rates are unreasonably high. In February 2004, the STB issued a decision finding that the CSXT common carrier rates were reasonable. While approving the rate levels, the STB also invited Duke to request a phase-in of rate increases over some time period. The nature and amount of any such phase-in is uncertain, and would only apply to billings subsequent to December 2001. CSXT will continue to consider and pursue all available legal defenses in this matter. Administrative and legal appeals are possible, and could take several years to resolve. An unfavorable outcome to this complaint would not have a material effect on the Company’s financial position.

Contract Settlement

     In 2002, the Company received $44 million as the first of two payments to settle a contract dispute. During 2002, the Company recognized approximately $7 million of the first payment in other income as this amount related to prior periods. The remaining $37 million, of which $23 million was received in 2003, will be recognized over the contract period, which ends in 2020. The results of this settlement will provide approximately $3 million in annual pretax earnings through 2020.

16

CSX TRANSPORTATION INC. AND SUBSIDIARIES
ITEM 1: FINANCIAL STATEMENTS
Notes to Consolidated Financial Statements (Unaudited)

NOTE 9. COMMITMENTS AND CONTINGENCIES, continued

Other Legal Proceedings

ACSXT is involved in routine litigation incidental to its business and is a party to a number of legal actions are pending against CSXT in whichand claims, are made in substantial amounts.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 ultimate resultsfinal outcome of these legal actionsmatters 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 does not currently expect that the resolutionnone of these mattersitems will have a material adverse effect on CSXT’s consolidated balance sheet, income statementthe results of operations, financial position or cash flows.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.

NOTE 10. MANAGEMENT RESTRUCTURING

     In the first quarter of 2004, the Company recorded separation expenses for the management restructuring announced in November 2003 of $35 million.

     In November 2003, the Company announced a management restructuring plan to streamline the structure at a number of its companies, eliminate organizational layers and realign certain functions. The initiative will reduce the non-union workforce by approximately 550 positions. As of March 26, 2004, 388 employees have been terminated under this program. The Company recorded an initial pretax charge related to this reduction of $25 million in 2003. In the first quarter of 2004, the Company recorded an additional $35 million of expense related to the management restructuring for separation expense, pension and post-retirement benefit curtailment charges, stock compensation expense and other related expenses.

     The majority of separation benefits will be paid from CSX’s qualified pension plans, with the remainder being paid from general corporate funds. See the table below for a rollforward of significant components of the restructuring charge.

17

CSX TRANSPORTATION INC. AND SUBSIDIARIES

RESULTS OF OPERATIONS

CSXT follows a 52/53-week53 week fiscal reporting calendar. Fiscal yearsyear 2004 consists of a 53-week year ending on December 31, 2004. Fiscal year 2003 and 2002 consistconsisted of 52 weeks endingended on December 26, 2003 and December 27, 2002, respectively.2003. The financial statements presented are for the 13-week quarters ended March 26, 2004 and nine months ended September 26,March 28, 2003, and September 27, 2002, and as of December 27, 2002.26, 2003. In 2004, the fourth quarter ending December 31, 2004, will consist of 14 weeks.

QuarterQuarters ended SeptemberMarch 26, 20032004 Compared to September 27, 2002March 28, 2003

Operating Revenue

The following table provides carload and revenue data by service group and commodity for the quarters ended SeptemberMarch 26, 20032004 and September 27, 2002:March 28, 2003:

18