The Company provides customers with access to an expansive and interconnected transportation network that links ports, production facilities and distribution centers to markets in the Northeast, Midwest and southern states. The Company serves major markets in the eastern United States and has direct access to all Atlantic and Gulf Coast ports, as well as the Mississippi River, the Great Lakes and the St. Lawrence Seaway. The Company also has access to Pacific ports through alliances with western railroads. Overall, the CSXT transportation network encompasses approximately 21,000 route miles of track in 23 states, the District of Columbia and the Canadian provinces of Ontario and Quebec.

The Company transports a broad portfolio of products, ranging from coal to new energy sources such as ethanol, to automobiles, chemicals and consumer electronics. Those goods are transported across the country in a way that minimizes the impact on the environment, takes traffic off an already congested highway system and minimizes fuel consumption and transportation costs.

The Company's transportation network serves some of the largest population centers in the nation. More than two-thirds of Americans live within the Company's service territory, accounting for about three-quarters of the nation's consumption. With a mix of pricing, productivity gains, and prudent investment in train network and rail efficiency, the Company will position itself to take full advantage of an eventual economic recovery.

Over the past five years, the Company has made substantial strides in improving operating performance. In 2004, CSXT implemented the ONE Plan, which is being updated to drive greater network efficiencies. The Company also continues to advance its Total Service Integration ("TSI") initiative, which aims to better align the Company's capabilities with customer demands. TSI aims to optimize train size and increase asset utilization while delivering more reliable service to customers. Increases in train size reduce the overall number of shipments resulting in less network congestion and idle time for locomotives and reduce loading and unloading time for customers. These efforts combined with other efficiencies have resulted in substantial improvements in the Company's operating income, operating ratio/margin and free cash flow.

In 2008, the Company launched the National Gateway, a multi-million dollar public-private infrastructure initiative to create a more efficient freight transportation link between the Mid-Atlantic ports and the Midwest. When completed, the National Gateway will provide greater capacity for product shipments in and out of the Midwest, reduce truck traffic on already crowded highways and create new jobs.

The global recession that intensified in late 2008 will continue to impact CSX's business in 2009, and rail volume will be lower for the year. Beginning in late December, the Company began taking aggressive actions to manage costs and right-size resources to match demand conditions. The Company has made adjustments to the ONE Plan to reduce the size of its scheduled train network in order to conserve resources. As a result, the Company has begun furloughing employees (which is a temporary layoff) who will return to work when business conditions improve. Additionally, the Company has reduced the number of active locomotives on its network and has placed older locomotives in storage to reduce maintenance costs. The Company will continue to modify the ONE Plan and adjust resources accordingly in order to seek to maximize efficiencies in the current business environment.

· Revenue grew $1.2 billion or 12% to $11.3 billion.

· Expenses increased $717 million or 9% to $8.5 billion.

· Operating income increased $508 million or 22% to $2.8 billion.

· Service and safety measurements remained strong.

Despite a challenging economy in the later part of 2008, CSX delivered solid financial results. Revenue and revenue per unit increased 12% and 17%, respectively, from a year ago reflecting yield management initiatives and higher fuel recovery due to higher fuel prices during most of the year. Under CSXT's fuel surcharge program, CSXT bills the customer on a two month lag for fuel. This lag creates higher fuel recovery in a period when fuel prices are declining. Conversely, this lag creates lower fuel recovery in a period when fuel prices are increasing.

These positive results in revenue were achieved despite volume declines in three of the Company's four lines of business. The overall 4% volume decrease versus last year was primarily driven by continued weakness in the merchandise market relating to housing construction and associated markets as well as declines in automotive production.

For additional information, refer to Rail and Intermodal Results of Operations discussed on pages 38 through 40.

Throughout 2008, the Company continued its focus on safety and operating performance. Leadership and high levels of employee commitment to the Company's safety programs delivered solid improvement in both FRA personal injury and train accident frequencies. Personal injury frequency improved to a record 1.14, a 7% improvement compared to 2007. FRA train accident frequency fell to 2.68, an 11% improvement versus the prior year.

The Company's safety and train accident prevention programs rely on broad employee involvement. The programs utilize operating rules training, compliance measurement, root cause analysis, communication, structured competition and leadership to create a safer environment for employees and the public. Continued capital investment in Company assets, including track, bridges, signals, and detection technology, also supports improved safety performance.

Key service metrics remained at historically high levels in 2008. On-time train originations and arrivals, 79% and 70% respectively, were identical over both years. Average dwell rose slightly to 23.3 hours, primarily due to lower demand levels and resulting surpluses in certain equipment types. Average train velocity declined 1%, although the network remained fluid. Cars-on-line rose slightly with cars counts increasing 1%. The Company aims to improve key operating measures to achieve increased efficiency and higher levels of service reliability.

RAIL OPERATING STATISTICS (Estimated)        Fiscal Years       Improvement/
                                             2008     2007         (Decline) %
Service
             FRA Personal Injuries
Measurements Frequency Index                   1.14     1.23               7 %

             FRA Train Accident Rate           2.68     3.01              11

             On-Time Train Originations         79%      79%               -
             On-Time Destination Arrivals       70%      70%               -

             Dwell                             23.3     23.2               -
             Cars-On-Line                   223,574  221,943             (1)

             System Train Velocity             20.5     20.8             (1)

                                                                Increase/
                                                               (Decrease)
Resources    Route Miles                     21,205   21,227               - %
             Locomotives (owned and
             long-term leased)                4,143    4,007               3
             Freight Cars (owned and
             long-term leased)               91,350   94,364             (3) %

Key Performance Measures Definitions

FRA Personal Injuries Frequency Index - Number of FRA-reportable injuries per 200,000 man-hours.

FRA Train Accident Rate - Number of FRA-reportable train accidents per million train-miles.

On-Time Train Originations - Percent of scheduled road trains that depart the origin yard on-time or ahead of schedule.

On-Time Destination Arrivals - Percent of scheduled road trains that arrive at the destination yard on-time to two hours late (30 minutes for intermodal trains).

Dwell - Amount of time in hours between car arrival at and departure from the yard. It does not include cars moving through the yard on the same train.

Cars-On-Line - A count of all cars on the network (does not include locomotives, cabooses, trailers, containers or maintenance equipment).

System Train Velocity - Average train speed between terminals in miles per hour (does not include locals, yard jobs, work trains or passenger trains).

In addition to producing sound financial, safety and service results, CSX continued to focus on investing in its business and creating long-term value for shareholders during 2008. The company has taken a balanced approach in deploying its capital through strategic investment, share repurchases and increased dividends for the benefit of shareholders.

Capital expenditures of $1.7 billion in 2008 were slightly lower than prior year. The Company remains committed to maintaining and improving its existing infrastructure and to positioning itself for long-term growth through expanding network and terminal capacity. As described below, free cash flow before dividends increased $845 million to $1.2 billion. This increase was primarily driven by increased cash from operations which were a result of higher earnings.

CSX also steadily increased the quarterly dividend in 2008. First, CSX increased its quarterly dividend from $0.15 to $0.18 during the second quarter of 2008. It then increased the dividend again during the third quarter of 2008 to $0.22, which represented a 47% increase from the quarterly dividend level at fourth quarter 2007. Additionally, CSX completed $1.25 billion of its $3 billion share repurchase program announced during 2008. See Note 1, Nature of Operations and Significant Accounting Policies.

Non-GAAP Reconciliation

Free cash flow is considered a non-GAAP financial measure under SEC Regulation G, Disclosure of Non-GAAP Measures. Management believes, however, that free cash flow is important in evaluating the Company's financial performance and measures an ability to generate cash without incurring additional external financing. Free cash flow should be considered in addition to, rather than a substitute for, cash provided by operating activities.

Free cash flow is calculated by using net cash from operations and adjusting for property additions and certain other investing activities. Also, added to free cash flow is the Company's 42% economic interest in Conrail's free cash flow which is not consolidated in CSX amounts.

The following table reconciles cash provided by operating activities (GAAP measure) to free cash flow (non-GAAP measure).

                                                      Fiscal Years
                                                     2008     2007     Change
      (Dollars in Millions)
      Net cash provided by operating activities      $2,914   $2,184     $730
      Property additions                            (1,740)  (1,773)       33
      Other investing activities                         36     (41)       77
      Conrail free cash flow                             11        6        5
      Free Cash Flow (before payment of dividends)   $1,221     $376     $845

Certain statements in this report and in other materials filed with the SEC, as well as information included in oral statements or other written statements made by the Company, are forward-looking statements within the meaning of the Securities Act of 1933 and the Securities Exchange Act of 1934. These forward-looking statements include, among others, statements regarding:

· expectations as to results of operations and operational initiatives;

· expectations as to the effect of claims, lawsuits, environmental costs, commitments, contingent liabilities, labor negotiations or agreements on the Company's financial condition, result of operations or liquidity;

· management's plans, goals, strategies and objectives for future operations and other similar expressions concerning matters that are not historical facts, and management's expectations as to future performance and operations and the time by which objectives will be achieved; and

· future economic, industry or market conditions or performance and their effect on the Company's financial condition, results of operations or liquidity.

Forward-looking statements are typically identified by words or phrases such as "believe," "expect," "anticipate," "project," "estimate," "preliminary" and similar expressions. The Company cautions against placing undue reliance on forward-looking statements, which reflect its good faith beliefs with respect to future events and are based on information currently available to it as of the date the forward-looking statement is made. Forward-looking statements should not be read as a guarantee of future performance or results and will not necessarily be accurate indications of the timing when, or by which, such performance or results will be achieved.

Forward-looking statements are subject to a number of risks and uncertainties and actual performance or results could differ materially from those anticipated by these forward-looking statements. The Company undertakes no obligation to update or revise any forward-looking statement. If the Company does update any forward-looking statement, no inference should be drawn that the Company will make additional updates with respect to that statement or any other forward-looking statements. The following important factors, in addition to those discussed in Item 1A (Risk Factors) and elsewhere in this report, may cause actual results to differ materially from those contemplated by these forward-looking statements:

· legislative, regulatory or legal developments involving transportation, including rail or intermodal transportation, the environment, hazardous materials, taxation, including the outcome of tax claims and litigation, the potential enactment of initiatives to re-regulate the rail industry and the ultimate outcome of shipper and rate claims subject to adjudication;

· the outcome of litigation and claims, including, but not limited to, those related to fuel surcharge, environmental contamination, personal injuries and occupational illnesses;

· material changes in domestic or international economic or business conditions, including those affecting the transportation industry such as access to capital markets, ability to revise debt arrangements as contemplated, customer demand, customer acceptance of price increases, effects of adverse economic conditions affecting shippers and adverse economic conditions in the industries and geographic areas that consume and produce freight;

· worsening conditions in the financial markets that may affect timely access to capital markets, as well as the cost of capital;

· availability of insurance coverage at commercially reasonable rates or insufficient insurance coverage to cover claims or damages;

· changes in fuel prices, surcharges for fuel and the availability of fuel;

· the impact of increased passenger activities in capacity-constrained areas or regulatory changes affecting when CSXT can transport freight or service routes;

· natural events such as severe weather conditions, including floods, fire, hurricanes and earthquakes, a pandemic crisis affecting the health of the Company's employees, its shippers or the consumers of goods, or other unforeseen disruptions of the Company's operations, systems, property or equipment;

· noncompliance with applicable laws or regulations;

· the inherent risks associated with safety and security, including the availability and cost of insurance, the availability and vulnerability of information technology, adverse economic or operational effects from actual or threatened war or terrorist activities and any governmental response;

· labor costs and labor difficulties, including stoppages affecting either the Company's operations or the customers' ability to deliver goods to the Company for shipment;

· competition from other modes of freight transportation, such as trucking and competition and consolidation within the transportation industry generally;

· the Company's success in implementing its strategic plans and operational objectives and improving operating efficiency; and

· changes in operating conditions and costs or commodity concentrations.

Other important assumptions and factors that could cause actual results to differ materially from those in the forward-looking statements are specified elsewhere in this report and in CSX's other SEC reports, accessible on the SEC's website at www.sec.gov and the Company's website at www.csx.com.

                      2008 vs. 2007 Results of Operations


                                      (Dollars in Millions)
                                           Fiscal Year

                                                                   CSX
                              Rail (b)        Intermodal    Consolidated (a)
                            2008     2007    2008    2007     2008     2007   $ Change % Change
Revenue                     $9,789   $8,674  $1,466  $1,356  $11,255  $10,030   $1,225       12 %
Operating Expense:
  Labor and Fringe           2,879    2,905      76      81    2,955    2,986       31      (1)
  Materials, Supplies and
  Other (a)                  1,933    1,747     200     178    2,133    1,925    (208)       11
  Fuel (a)                   1,810    1,307       7       5    1,817    1,312    (505)       38
  Depreciation                 879      849      25      34      904      883     (21)        2
  Equipment and Other
  Rents                        317      341     108     110      425      451       26      (6)
  Inland Transportation      (507)    (448)     760     688      253      240     (13)        5
  Gain on Insurance
  Recoveries                     -     (27)       -       -        -     (27)     (27)    (100)
  Total Expense              7,311    6,674   1,176   1,096    8,487    7,770    (717)        9
  Operating Income          $2,478   $2,000    $290    $260   $2,768   $2,260     $508       22

  Other Income (Expense)
  - Net                                                        (103)       89    (192)    (216)
  Interest Expense                                             (519)    (417)    (102)       24
  Income Tax Expense                                           (781)    (706)     (75)       11
  Earnings from
  Continuing Operations                                        1,365    1,226      139       11
  Discontinued Operations                                          -      110    (110)    (100)
  Net Earnings                                                $1,365   $1,336      $29        2

  Earnings Per
  Diluted Share
  From Continuing
  Operations                                                    3.34     2.74     0.60       22
  Discontinued Operations                                          -     0.25   (0.25)    (100)
  Net Earnings                                                  3.34     2.99     0.35       12 %

  Operating Ratio            74.7%    76.9%   80.2%   80.8%    75.4%    77.5%
  Total Assets             $25,343  $24,502    $321    $283

(a) Beginning in 2008, certain items have been reclassified within the income statement. Certain prior-year data have been reclassified to conform to the 2008 presentation.

· The Company reclassified all items within other operating income and certain items within other income into the Rail segment. As a result of this change, CSX consolidated operating income and Surface Transportation operating income are now the same; therefore, the Company will no longer report separate Surface Transportation results. The Rail segment was not materially impacted by these reclassifications.

· The Company reclassified all non-locomotive fuel related costs previously included in materials, supplies and other into fuel on the Company's consolidated income statement so that it now includes all fuel used for operations and maintenance. For 2008 and 2007, these amounts were $150 million and $102 million, respectively.

(b) In addition to CSXT, the Rail segment includes non-railroad subsidiaries such as TDSI, Transflo, CSX Technology and other subsidiaries.

                                        VOLUME AND REVENUE (Unaudited)
           Volume (Thousands of Units); Revenue (Dollars in Millions); Revenue Per Unit (Dollars)
  Table of Contents
                                                Fiscal Years

                                   Volume                      Revenue                  Revenue Per Unit
                            2008   2007  % Change      2008     2007   % Change     2008    2007    % Change
Chemicals                     488    522     (7) %     $1,437   $1,313      9  %    $2,945  $2,515    17 %
Metals                        337    355     (5)          751      702      7        2,228   1,977    13
Total Industrial              825    877     (6)        2,188    2,015      9        2,652   2,298    15

Emerging Markets              429    491    (13)          628      605      4        1,464   1,232    19
Forest Products               316    352    (10)          722      722      -        2,285   2,051    11
Food and Consumer             199    212     (6)          456      441      3        2,291   2,080    10
Total Housing                 944  1,055    (11)        1,806    1,768      2        1,913   1,676    14

Agricultural Products         432    410       5        1,011      786     29        2,340   1,917    22
Phosphates and Fertilizers    335    362     (7)          460      421      9        1,373   1,163    18
Total Agriculture             767    772     (1)        1,471    1,207     22        1,918   1,563    23

Total Merchandise           2,536  2,704     (6)        5,465    4,990     10        2,155   1,845    17

Coal                        1,779  1,771       -        3,110    2,483     25        1,748   1,402    25
Coke and Iron Ore             100     91      10          175      120     46        1,750   1,319    33
Total Coal                  1,879  1,862       1        3,285    2,603     26        1,748   1,398    25

Automotive                    343    439    (22)          784      839    (7)        2,286   1,911    20

Other                           -      -       -          255      242      5            -       -     -
Total Rail                  4,758  5,005     (5)        9,789    8,674     13        2,057   1,733    19

International               1,000  1,132    (12)          509      525    (3)          509     464    10
Domestic                    1,069    979       9          929      807     15          869     824     5
Other                           -      -       -           28       24     17            -       -     -
Total Intermodal            2,069  2,111     (2)        1,466    1,356      8          709     642    10

Total                       6,827  7,116     (4) %    $11,255  $10,030     12  %    $1,649  $1,409    17  %

Prior periods have been reclassified to conform to the current presentation.

2008 vs. 2007 Rail Results of Operations

Rail Operating Revenue

Rail revenue, which excludes Intermodal, is categorized by three main lines of business: merchandise, coal and automotive. Rail revenue increased $1.1 billion, or 13%, to $9.8 billion in 2008 as compared to prior year. CSXT was able to achieve continued pricing gains predominantly due to the overall cost and service advantages that the Company's rail based solutions provide to customers versus other modes of transportation. Higher fuel cost recovery, coupled with favorable pricing, more than offset volume losses driven by the weakening economy.

Merchandise

Chemicals - Revenue and revenue-per-unit improved due to a continued favorable pricing environment and fuel recoveries. Volume was down as a result of declines in plastic and plastic feedstock shipments, driven by weakness in housing, automotive and consumer goods markets.

Emerging Markets - Revenue and revenue-per-unit grew due to continued yield management efforts and favorable fuel recovery. Volume was down as a result of declines in aggregate shipments, such as crushed stone, sand and gravel, caused by a continued weakness in both residential and non-residential construction. These declines more than offset growth in shipments of scrubber limestone and transportation equipment.

Forest Products - Revenue was flat and volume declined as shipments of building products slowed due to the decline in residential housing starts. Further driving volume declines was a reduction in printing paper and newsprint as a combination of electronic media substitution and reduced advertising pages affected demand.

Agricultural Products - Revenue and volume increased due to continued growth in ethanol shipments and strong domestic demand in feed ingredients. Revenue-per-unit grew as a result of continued focus on yield management and increased fuel recovery.

Metals - Revenue and revenue-per-unit increased due to higher fuel recovery and continued pricing actions. Lower demand for steel due to continued weakness in construction and automobile production resulted in volume declines. These declines more than offset growth in shipments of pipe which were driven by increases in drilling activity and pipeline construction.

. . .