Document:

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                                                                     Exhibit 4.2

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                          FIRST SUPPLEMENTAL INDENTURE

                                      among

                                PRR NEWCO, INC.,
                                     Issuer

                        NORFOLK SOUTHERN RAILWAY COMPANY
                                    Guarantor

                                       and

                              THE BANK OF NEW YORK

                           Dated [____________, 2004]

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      FIRST SUPPLEMENTAL INDENTURE, dated as of [ ], 2004 (the "First
Supplemental Indenture"), by and among PRR Newco, Inc. (the "Company"), a
Virginia corporation and wholly-owned subsidiary of Norfolk Southern Railway
Company, as Issuer, Norfolk Southern Railway Company ("NSR" or the "Guarantor"),
a Virginia corporation, as Guarantor, and The Bank of New York, as trustee (the
"Trustee"), under the Indenture, dated as of [_______________, 2004], by and
among the Company, NSR and the Trustee (the "Base Indenture").

            WHEREAS, each of the Company and the Guarantor executed and
delivered the Base Indenture to the Trustee to provide for the future issuance
of the Company's unsecured debt securities (the "Securities") to be issued from
time to time in one or more series as might be determined by the Company and the
Guarantor under the Base Indenture, in an unlimited aggregate principal amount,
which may be authenticated and delivered as provided in the Base Indenture;

            WHEREAS, pursuant to the terms of the Base Indenture, the Company
desires to provide for the establishment, and the Guarantor desires to provide
for the full and unconditional guarantee, of two new separate series of
Securities designated the Company's 9-3/4% Senior Notes due 2020 (the "2020
Notes") and 7-7/8% Senior Notes due 2043 (the "2043 Notes" and, together with
the 2020 Notes, the "Notes"), the form and substance of the Notes and the terms,
provisions and conditions thereof to be set forth as provided in the Base
Indenture and this First Supplemental Indenture;

            WHEREAS, (a) the Company has requested that the Trustee execute and
deliver this First Supplemental Indenture pursuant to Sections 301 and 801 of
the Base Indenture, (b) all requirements necessary to make this First
Supplemental Indenture a valid instrument in accordance with its terms, and to
make the Notes, when executed by the Company and the Guarantor and authenticated
and delivered by the Trustee, the valid obligations of the Company and the
Guarantor, have been performed, and (c) the execution and delivery of this First
Supplemental Indenture have been duly authorized in all respects; and

            WHEREAS, the Company and the Guarantor are each party to a
distribution agreement pursuant to which, among other things, upon the
completion of certain conditions the Company will be merged with and into the
Guarantor, at which time the Guarantor will assume all of the obligations of the
Company under the Base Indenture and this First Supplemental Indenture and the
Guarantee will cease to exist.

            NOW THEREFORE, in consideration of the premises and purchase and
acceptance of the Notes by the Holders thereof, and for the purpose of setting
forth, as provided in the Base Indenture, the form and substance of the Notes
and the terms, provisions and conditions thereof, each of the Company and the
Guarantor mutually covenants and agrees with the Trustee as follows:
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                                    ARTICLE I

                                   DEFINITIONS

Section 101 Definition of Terms.

            Unless the context otherwise requires:

            (a)   a term defined in the Base Indenture has the same meaning when
used in this First Supplemental Indenture;

            (b)   a term defined anywhere in this First Supplemental Indenture
has the same meaning throughout this First Supplemental Indenture;

            (c)   the singular includes the plural and vice versa;

            (d)   a reference to a Section or Article is to a Section or Article
of this First Supplemental Indenture;

            (e)   headings are for convenience of reference only and do not
affect interpretation; and

            (f)   the following terms have the meanings given to them in this
Section 101(f):

            "Capital Lease Obligation" means any obligation arising out of any
lease of property which is required to be classified and accounted for by the
lessee as a capitalized lease on a balance sheet of such lessee under generally
accepted accounting principles.

            "Conrail Spin Off Transactions" means any merger, consolidation,
conveyance, lease, transfer, sublease or other transaction which is described in
or contemplated by the Distribution Agreement or the Form S-4 filed with the
Commission by the Company and Guarantor on [ ], 2004, as the same may be amended
from time to time.

            "Consolidated Net Tangible Assets" means, at any date, the total
assets appearing on the most recent consolidated balance sheet of the Company,
the Guarantor and their respective Restricted Subsidiaries as at the end of the
fiscal quarter of the Company or the Guarantor ending not more than 135 days
prior to such date, prepared in accordance with generally accepted accounting
principles of the United States, less (i) all current liabilities (due within
one year) as shown on such balance sheet, (ii) applicable reserves, (iii)
investments in and advances to Securitization Subsidiaries and Subsidiaries of
Securitization Subsidiaries that are consolidated on the consolidated balance
sheet of the Company, the Guarantor and their respective Subsidiaries, and (iv)
Intangible Assets and liabilities relating thereto.

            "Depositary," with respect to the Notes, means The Depository Trust
Company or any successor thereto.

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            "Funded Debt" means (i) any indebtedness of the Company, the
Guarantor or a Restricted Subsidiary maturing more than 12 months after the time
of computation thereof, (ii) guarantees by the Company, the Guarantor or a
Restricted Subsidiary of Funded Debt or of dividends of others (except
guarantees in connection with the sale or discount of accounts receivable, trade
acceptances and other paper arising in the ordinary course of business), (iii)
all preferred stock of the Company, the Guarantor or such Restricted
Subsidiaries and (iv) all Capital Lease Obligations of the Company, the
Guarantor or a Restricted Subsidiary.

            "Global Note" shall have the meaning set forth in Section 203.

            "Guarantee" shall have the meaning set forth in Section 701.

            "Guaranteed Obligations" shall have the meaning set forth in Section
701.

            "Indebtedness" means, at any date, without duplication, (i) all
obligations for borrowed money of the Company, the Guarantor or a Restricted
Subsidiary or any other indebtedness of the Company, the Guarantor or a
Restricted Subsidiary, evidenced by bonds, debentures, notes or other similar
instruments and (ii) Funded Debt, except such obligations and other indebtedness
of the Company, the Guarantor or a Restricted Subsidiary and Funded Debt, if
any, incurred as part of a Securitization Transaction.

            "Intangible Assets" means at any date, the value (net of any
applicable reserves) as shown on or reflected in the most recent consolidated
balance sheet of the Company, the Guarantor and the Restricted Subsidiaries at
the end of the fiscal quarter of the Company or the Guarantor ending not more
than 135 days prior to such date, prepared in accordance with generally accepted
accounting principles, of: (i) all trade names, trademarks, licenses, patents,
copyrights, service marks, goodwill and other like intangibles; (ii)
organizational and development costs; (iii) deferred charges (other than prepaid
items, such as insurance, taxes, interest, commissions, rents, deferred interest
waiver, compensation and similar items and tangible assets being amortized); and
(iv) unamortized debt discount and expense, less unamortized premium.

            "Liens" means pledges, mortgages, security interests and other
liens, including purchase money liens, on property of the Company, the Guarantor
or any Restricted Subsidiary which secure Funded Debt.

            "Obligation" shall mean any indebtedness for money borrowed or
indebtedness evidenced by a bond, note, debenture or other evidence of
indebtedness.

            "Preferential Payment" shall have the meaning set forth in Section
701.

            "Principal Subsidiary" shall mean The Alabama Great Southern
Railroad Company.

            "Purchase Money Lien" shall mean any mortgage, pledge, lien,
encumbrance, charge or security interest of any kind upon any indebtedness of
any Principal Subsidiary acquired after the date any Notes are first issued if
such Purchase Money Lien is for the

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purpose of financing, and does not exceed, the cost to the Company or any
Subsidiary of acquiring the indebtedness of such Principal Subsidiary and such
financing is effected concurrently with, or within 180 days after, the date of
such acquisition.

            "Receivables" mean any right of payment from or on behalf of any
obligor, whether constituting an account, chattel paper, instrument, general
intangible or otherwise, arising, either directly or indirectly, from the
financing by the Company, the Guarantor or any Subsidiary of the Company or the
Guarantor of property or services, monies due thereunder, security interests in
the property and services financed thereby and any and all other related rights.

            "Restricted Subsidiary" means each Subsidiary of the Company or the
Guarantor other than Securitization Subsidiaries and Subsidiaries of
Securitization Subsidiaries.

            "Securitization Subsidiary" means a Subsidiary of the Company or the
Guarantor (i) which is formed for the purpose of effecting one or more
Securitization Transactions and engaging in other activities reasonably related
thereto and (ii) as to which no portion of the Indebtedness or any other
obligations (a) is guaranteed by any Restricted Subsidiary, or (b) subjects any
property or assets of any Restricted Subsidiary, directly or indirectly,
contingently or otherwise, to any lien, other than pursuant to representations,
warranties and covenants (including those related to servicing) entered into in
the ordinary course of business in connection with a Securitization Transaction
and inter-company notes and other forms of capital or credit support relating to
the transfer or sale of Receivables or asset-backed securities to such
Securitization Subsidiary and customarily necessary or desirable in connection
with such transactions.

            "Securitization Transaction" means any transaction or series of
transactions that have been or may be entered into by the Company, the Guarantor
or any of their respective Subsidiaries in connection with or reasonably related
to a transaction or series of transactions in which the Company, the Guarantor
or any of their respective Subsidiaries may sell, convey or otherwise transfer
to (i) a Securitization Subsidiary or (ii) any other Person, or may grant a
security interest in, any Receivables or asset-backed securities or interest
therein (whether such Receivables or securities are then existing or arising in
the future) of the Company, the Guarantor or any of their respective
Subsidiaries, and any assets related thereto, including, without limitation, all
security interests in the property or services financed thereby, the proceeds of
such Receivables or asset-backed securities and any other assets which are sold
in respect of which security interests are granted in connection with
securitization transactions involving such assets.

            "Subsidiary" means a Person a majority of the outstanding voting
stock of which is owned, directly or indirectly, by the Company, the Guarantor
or by one or more other Subsidiaries, or by the Company, the Guarantor and one
or more other Subsidiaries, but does not include CRR Holdings LLC or its
Subsidiaries.

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                                   ARTICLE II

                    GENERAL TERMS AND CONDITIONS OF THE NOTES

Section 201 Designation and Principal Amount.

            There shall be two new separate series of Securities designated the
Company's 9-3/4% Senior Notes due 2020 and 7-7/8% Senior Notes due 2043. The
aggregate principal amount of the two new separate series of Securities
authorized by this First Supplemental Indenture shall be limited to
$[464,000,000], with the aggregate principal amount of the respective Securities
limited to $[319,000,000] for the 2020 Notes and $[145,000,000] for the 2043
Notes (unless the issue of either series of Securities is "reopened" pursuant to
Section 801(9) of the Base Indenture (as set forth therein) by issuing
additional debt Securities of such series), in an amount or amounts and
registered in the names of such Persons as shall be set forth in any written
order of the Company for the authentication and delivery of Notes pursuant to
Section 303 of the Base Indenture.

Section 202 Place of Payment: Security Register for Notes.

            The Company selects New York, New York as the Place of Payment for
the Notes and hereby appoints the Trustee as Security Registrar for the Notes.

Section 203 Global Note.

            (a)   Each series of the Notes shall be issued in the form of one or
more global Notes in an aggregate principal amount equal to the aggregate
principal amount of all outstanding Notes of that series (each, a "Global Note"
and together, the "Global Notes"), to be registered in the name of the
Depositary, or its nominee, and delivered by the Trustee to or upon the order of
the Depositary for crediting to the accounts of its participants pursuant to the
instructions of the Company. The Company upon any such presentation shall
execute one or more Global Notes in such aggregate principal amount and deliver
the same to the Trustee for authentication and delivery in accordance with the
Base Indenture and this First Supplemental Indenture. Payments on Notes issued
as one or more Global Notes will be made to the Depositary.

            (b)   A Global Note may be transferred, in whole but not in part,
only to another nominee of the Depositary, or to a successor Depositary selected
or approved by the Company or to a nominee of such successor Depositary.

Section 204 Interest.

            (a)   The interest rate in respect of the 2020 Notes will be 9-3/4%
per annum (the "2020 Interest Rate") and the interest rate in respect of the
2043 Notes will be 7-7/8% per annum (the "2043 Interest Rate" and collectively
with the 2020 Interest Rate, the "Interest Rates").

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            (b)   The 2020 Notes will bear interest at the 2020 Interest Rate
from [Closing Date], until the principal thereof becomes due and payable. The
2043 Notes will bear interest at the 2043 Interest Rate from [Closing Date],
until the principal thereof becomes due and payable. Interest on the Notes will
be payable semi-annually in arrears on June 15 and December 15 of each year,
commencing [December 15, 2004], in the case of the 2020 Notes, and on May 15 and
November 15 of each year, commencing [November 15, 2004], in the case of the
2043 Notes, to the Person in whose name any such Note or any predecessor Note is
registered, at the close of business on the regular record date for such
interest installment, which shall be the close of business on the June 1 and
December 1 next preceding such Interest Payment Date in the case of the 2020
Notes, and shall be the close of business on the May 1 and November 1 next
preceding such Interest Payment Date in the case of the 2043 Notes.

            (c)   In the event that any date on which interest is payable on the
Notes is not a Business Day, then payment of interest payable on such date will
be made on the next succeeding day which is a Business Day, with the same force
and effect as if made on such date, and no interest shall accrue on the amount
so payable from the period from and after such Interest Payment Date or Maturity
Date, as the case may be (each date on which interest is actually payable, an
"Interest Payment Date").

                                   ARTICLE III

                                    COVENANTS

Section 301 Company Reports.

            The Company, pursuant to Section 314(a) of the Trust Indenture Act,
shall:

            (a)   file with the Trustee, within 15 days after the Company is
required to file the same with the Commission, copies of the annual reports and
of the information, documents and other reports (or copies of such portions of
any of the foregoing as the Commission may from time to time by rules and
regulations prescribe) which the Company may be required to file with the
Commission pursuant to Section 13 or Section 15(d) of the Securities Exchange
Act of 1934; or, if the Company is not required to file information, documents
or reports pursuant to either of said Sections, then it shall file with the
Trustee audited annual and unaudited quarterly financial statements as would
have been required to be included in an annual report on Form 10-K or a
quarterly report on Form 10-Q, as applicable;

            (b)   file with the Trustee and the Commission, in accordance with
rules and regulations prescribed from time to time by the Commission, such
additional information, documents and reports with respect to compliance by the

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Company with the conditions and covenants of this Indenture as may be required
from time to time by such rules and regulations; and

            (c)   transmit to all Holders of Securities within 30 days after the
filing thereof with the Trustee, in the manner and to the extent provided in
Section 313(c) of the Trust Indenture Act, such summaries of any information,
documents and reports required to be filed by the Company pursuant to paragraphs
(1) and (2) of this Section as may be required by rules and regulations
prescribed from time to time by the Commission.

            Delivery of such documents, reports and information pursuant to this
Section 301 is for information purposes only and the Trustee's receipt of such
shall not constitute constructive notice of any information contained therein or
determinable from information contained therein, including the Company's
compliance with any of its covenants hereunder (as to which the Trustee is
entitled to rely exclusively on an Officers' Certificate).

            The Company shall reasonably promptly notify the Trustee when any
Securities become listed on any national securities exchange and of any
delisting therefrom.

Section 302 Limitations on Liens on Stock or Indebtedness of Principal
            Subsidiaries.

            For so long as any Notes issued pursuant to this First Supplemental
Indenture are Outstanding, other than in connection with the Conrail Spin Off
Transactions, the Company and the Guarantor shall not, nor shall either of them
permit any Subsidiary to, create, assume, incur or suffer to exist any mortgage,
pledge, lien, encumbrance, charge or security interest of any kind, other than a
Purchase Money Lien, upon any stock or indebtedness, whether owned on the date
any Notes are first issued or thereafter acquired, of any Principal Subsidiary,
to secure any Obligation (other than the Notes) of the Company, the Guarantor,
any Subsidiary of the Company or the Guarantor or any other Person, without in
any such case making effective provision whereby all of the outstanding Notes
shall be directly secured equally and ratably with such Obligation. This Section
302 shall not (i) apply to any mortgage, pledge, lien, encumbrance, charge or
security interest on any stock or indebtedness of a Person existing at the time
such Person becomes a Subsidiary, (ii) restrict any other property of the
Company, the Guarantor or their respective Subsidiaries or (iii) restrict the
sale by the Company, the Guarantor or any Subsidiary of any stock or
indebtedness of any Subsidiary.

Section 303 Limitations on Funded Debt.

            For so long as any Notes issued pursuant to this First Supplemental
Indenture are Outstanding, other than in connection with the Conrail Spin Off
Transactions, neither the Company nor the Guarantor shall, nor shall either of
them permit any Restricted Subsidiary to, incur, issue, guarantee or create any
Funded Debt unless, after giving effect thereto, the sum

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of the aggregate amount of all outstanding Funded Debt of the Company, the
Guarantor and the Restricted Subsidiaries would not exceed an amount equal to
15% of Consolidated Net Tangible Assets.

            This Section 303 shall not apply to, and there shall be excluded
from Funded Debt in any computation pursuant hereto, Funded Debt secured by: (i)
Liens on real or physical property of any Person existing at the time such
Person becomes a Subsidiary; (ii) Liens on real or physical property existing at
the time of acquisition thereof incurred within 180 days of the time of
acquisition thereof (including, without limitation, acquisition through merger
or consolidation) by the Company, the Guarantor or any Restricted Subsidiary;
(iii) Liens on real or physical property thereafter acquired (or constructed) by
the Company, the Guarantor or any Restricted Subsidiary and created prior to, at
the time of, or within 270 days after such acquisition (including, without
limitation, acquisition through merger or consolidation) (or the completion of
such construction or commencement of commercial operation of such property,
whichever is later) to secure or provide for the payment of all or any part of
the purchase price (or the construction price) thereof; (iv) Liens in favor of
the Company, the Guarantor or any Restricted Subsidiary; (v) Liens in favor of
the United States of America, any State thereof or the District of Columbia, or
any agency, department or other instrumentality thereof, to secure partial,
progress, advance or other payments pursuant to any contract or the provisions
of any statute, (vi) Liens incurred or assumed in connection with the issuance
of revenue bonds the interest on which is exempt from federal income taxation
pursuant to Section 103(b) of the Internal Revenue Code of 1954, as amended;
(vii) Liens securing the performance of any contract or undertaking not directly
or indirectly in connection with the borrowing of money, the obtaining of
advances or credit or the securing of Funded Debt, if made and continuing in the
ordinary course of business; (viii) Liens incurred (no matter when created) in
connection with the Company, the Guarantor or a Restricted Subsidiary engaging
in a leveraged or single-investor lease transaction; provided, however, that the
instrument creating or evidencing any borrowings secured by such Lien will
provide that such borrowings are payable solely out of the income and proceeds
of the property subject to such Lien and are not a general obligation of the
Company, the Guarantor or such Restricted Subsidiary; (ix) Liens under workers'
compensation laws, unemployment insurance laws or similar legislation, or good
faith deposits in connection with bids, tenders, contracts or deposits to secure
public or statutory obligations of the Company, the Guarantor or any Restricted
Subsidiary, or deposits of cash or obligations of the United States of America
to secure surety, repletion and appeal bonds to which the Company, the Guarantor
or any Restricted Subsidiary is a party or in lieu of such bonds, or pledges or
deposits for similar purposes in the ordinary course of business, or Liens
imposed by law, such as laborers' or other employees', carriers',
warehousemen's, mechanics', materialmen's and vendors' Liens and Liens arising
out of judgments or awards against the Company, the Guarantor or any Restricted
Subsidiary with respect to which the Company, the Guarantor or such Restricted
Subsidiary at the time shall be prosecuting an appeal or proceedings for review
and with respect to which it shall have secured a stay of execution pending such
appeal or proceedings for review, or Liens for taxes not yet subject to
penalties for nonpayment or the amount or validity of which is being in good
faith contested by appropriate proceedings by the Company, the Guarantor or any
Restricted Subsidiary, as the case may be, or minor survey exceptions, minor
encumbrances, easement or reservations of,

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or rights of others for, rights-of-way, sewers, electric lines, telegraph and
telephone lines and other similar purposes, or zoning or other restrictions or
Liens on the use of real properties which Liens, exceptions, encumbrances,
easements, reservations, rights and restrictions do not, in the opinion of the
Company, in the aggregate materially detract from the value of said properties
or materially impair their use in the operation of the business of the Company
and its Subsidiaries; (x) Liens incurred to finance construction, alteration or
repair of any real or physical property and improvements thereto prior to or
within 270 days after completion of such construction, alteration or repair;
(xi) Liens incurred (no matter when created) in connection with a Securitization
Transaction; (xii) Liens on property (or any Receivable arising in connection
with the lease thereof) acquired by the Company, the Guarantor or a Restricted
Subsidiary through repossession, foreclosure or like proceeding and existing at
the time of the repossession, foreclosure, or like proceeding; (xiii) Liens on
deposits of the Company, the Guarantor or a Restricted Subsidiary with banks (in
the aggregate, not exceeding $50 million), in accordance with customary banking
practice, in connection with the providing by the Company, the Guarantor or a
Restricted Subsidiary of financial accommodations to any Person in the ordinary
course of business; or (xiv) any extension, renewal, refunding or replacement of
the foregoing.

Section 304 Waiver of Certain Covenants.

             The Company may omit in any particular instance to comply with any
term, provision or condition set forth in Sections 302 or 303 of this First
Supplemental Indenture with respect to the Notes of any series if before the
time for such compliance the Holders of at least a majority in principal amount
of the Outstanding Notes of such series shall, by Act of such Holders, either
waive such compliance in such instance or generally waive compliance with such
term, provision or condition, but no such waiver shall extend to or affect such
term, provision or condition except to the extent so expressly waived, and,
until such waiver shall become effective, the obligations of the Company and the
duties of the Trustee in respect of any such term, provision or condition shall
remain in full force and effect. The rights of the Company set forth in this
Section 304 shall be in addition to the rights of the Company set forth in
Section 908 of the Base Indenture.

                                   ARTICLE IV

                             REDEMPTION OF THE NOTES

Section 401 No Redemption.

            The Notes will not be subject to redemption of any kind at any time
prior to maturity.

Section 402 No Sinking Fund.

            The Notes are not entitled to the benefit of any sinking fund.

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                                    ARTICLE V

                                 FORMS OF NOTES

Section 501 Form of Notes.

            The 2020 Notes, along with the Trustee's Certificate of
Authentication to be endorsed thereon, are to be substantially in the form
attached hereto as Exhibit A. The 2043 Notes, along with the Trustee's
Certificate of Authentication to be endorsed thereon, are to be substantially in
the form attached hereto as Exhibit B.

                                   ARTICLE VI

                             ORIGINAL ISSUE OF NOTES

Section 601 Original Issue of Notes.

            The 2020 Notes in the aggregate principal amount of $319,000,000
may, upon execution of this First Supplemental Indenture, be executed by the
Company and the Guarantor and delivered to the Trustee for authentication as
provided in Sections 301 and 303 of the Base Indenture, in the maximum principal
amount of $319,000,000.

            The 2043 Notes in the aggregate principal amount of $145,000,000
may, upon execution of this First Supplemental Indenture, be executed by the
Company and the Guarantor and delivered to the Trustee for authentication as
provided in Sections 301 and 303 of the Base Indenture, in the maximum principal
amount of $145,000,000.

                                   ARTICLE VII

                                    GUARANTEE

Section 701 Unconditional Guarantee.

            The Guarantor hereby fully and unconditionally guarantees (such
guarantee to be referred to herein as the "Guarantee") to the Holders of the
Notes and to the Trustee and its successors and assigns that: (i) the principal
of and interest on the Notes will be promptly paid in full when due, subject to
any applicable grace period, whether at maturity, by acceleration or otherwise
and interest on the overdue principal, if any, and interest on any interest on
the Notes and all other obligations of the Company to the Holders or the Trustee
hereunder or thereunder will be promptly paid in full or performed, all in
accordance with the terms hereof and thereof; and (ii) in case of any extension
of time of payment or renewal of any Notes or of any such other obligations, the
same will be promptly paid in full when due or performed in accordance with the
terms of the extension or renewal, subject to an applicable grace period,
whether at stated maturity, by acceleration or otherwise (collectively, the
"Guaranteed Obligations"). The Guarantor hereby agrees that its obligations
hereunder

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shall be full, irrevocable, unconditional and absolute, irrespective of the
validity, regularity or enforceability of the Notes or the Indenture, the
absence of any action to enforce the same, any waiver or consent by any Holder
of Notes with respect to any provisions hereof or thereof, the recovery of any
judgment against the Company, any action to enforce the same or any other
circumstance which might otherwise constitute a legal or equitable discharge or
defense of a guarantor.

            The obligations of the Guarantor hereunder are separate and
independent of the obligations of the Company, and a separate action or actions
may be brought and prosecuted against the Guarantor whether action is brought
against the Company or whether the Company is joined in any action or actions.
The obligations of the Guarantor hereunder shall survive and continue in full
force and effect until the earlier of (i) such time as the Guarantee shall cease
to exist pursuant to the terms of Section 704 hereof, or (ii) payment in full of
the Guaranteed Obligations is actually received by the Holders or the Trustee on
behalf of the Holders and the period of time has expired during which any
payment made by the Company or the Guarantor may be determined to be a
Preferential Payment (defined below), notwithstanding any release or termination
of the Company's liability by express or implied agreement or by operation of
law and notwithstanding that the Guaranteed Obligations or any part thereof are
deemed to have been paid or discharged by operation of law or by some act or
agreement. For purposes of this Guarantee, the Guaranteed Obligations shall be
deemed to be paid only to the extent that the Holders, or the Trustee on behalf
of the Holders, actually receive immediately available funds.

            The Guarantor agrees that to the extent the Company makes any
payment to the Holders, or to the Trustee on behalf of the Holders, in
connection with the Guaranteed Obligations, and all or any part of such payment
is subsequently invalidated, declared to be fraudulent or preferential, set
aside or required to be repaid by the Holders or the Trustee or paid over to a
trustee, receiver or any other entity, whether under any bankruptcy act or
otherwise (any such payment is hereinafter referred to as a "Preferential
Payment"), then this Guarantee shall continue to be effective or shall be
reinstated, as the case may be, and, to the extent of such payment or repayment
by the Holders or Trustee, the Guaranteed Obligations or part thereof intended
to be satisfied by such Preferential Payment shall be revived and continued in
full force and effect as if said Preferential Payment had not been made.

Section 702 Waiver.

            To the fullest extent permitted by applicable law, the Guarantor
waives and agrees not to assert: (a) any right to require the Holders or Trustee
to proceed against the Company, to pursue any other remedy available to the
Holders or Trustee or to pursue any remedy in any particular order or manner;
(b) assert the benefit of any statute of limitations affecting the Guarantor's
liability hereunder or the enforcement hereof; (c) demand, diligence,
presentment for payment, protest and demand, and notice of extension, dishonor,
protest, demand, nonpayment and acceptance of this Guarantee; (d) notice of the
existence, creation or incurring of new or additional indebtedness of the
Company to the Holders; and (e) any defense arising by reason of any disability
or other defense of the Company or by reason of the cessation from any cause
whatsoever (other than payment in full of all amounts demanded

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to be paid by the Guarantor under this Guarantee) of the liability of the
Company for the Guaranteed Obligations. Until payment in full of the Guaranteed
Obligations, the Guarantor shall have no right of subrogation and hereby waives
any right to enforce any remedy which the Holders or the Trustee now have, or
may hereafter have, against the Company, and waives any benefit of, or any right
to participate in, any security now or hereafter held on behalf of the Holders.

Section 703 Execution of Guarantee.

            The Guarantor hereby agrees to execute a notation of Guarantee in
substantially the form attached to the form of Note, and to deliver such
notation to the Trustee.

            The Guarantor hereby agrees that its Guarantee of Securities of a
series to which this Article VII has been made applicable shall remain in full
force and effect notwithstanding any failure to endorse on any such Security a
notation relating to the Guarantee thereof.

            Manual or facsimile signatures of individuals, on this First
Supplemental Indenture and the Base Indenture, who were at any time the proper
officers of the Guarantor, shall bind the Guarantor, notwithstanding that such
individuals or any of them have ceased to hold such offices prior to or at the
time of the authentication and delivery of such Securities by the Trustee or did
not hold such offices at the date of such Securities.

            The delivery by the Trustee of any Security of a series to which
this Article VII has been made applicable, after the authentication thereof
under this Indenture, shall constitute due delivery of the Guarantee set forth
in this Indenture on behalf of the Guarantor.

Section 704 Cessation of Guarantee.

            The Guarantee under this First Supplemental Indenture will
automatically cease to exist upon the merger of the Company with and into the
Guarantor, at which point the Guarantor will succeed to, and be substituted for,
and may exercise every right and power of, the Company under the Base Indenture,
this First Supplemental Indenture and the Notes.

                                  ARTICLE VIII

                                  MISCELLANEOUS

Section 801 Ratification of Base Indenture.

            The Base Indenture, as supplemented by this First Supplemental
Indenture, is in all respects ratified and confirmed, and this First
Supplemental Indenture shall be deemed part of the Base Indenture in the manner
and to the extent herein and therein provided.

                                       12
<PAGE>
Section 802 Trustee Not Responsible for Recitals.

            The recitals herein contained are made by the Company and the
Guarantor and not by the Trustee, and the Trustee assumes no responsibility for
the correctness thereof. The Trustee makes no representation as to the validity
or sufficiency of this First Supplemental Indenture.

Section 803 Governing Law.

            This First Supplemental Indenture, the Guarantee and the Notes shall
be construed in accordance with and governed by the laws of the State of New
York.

Section 804 Separability.

            In case any one or more of the provisions contained in this First
Supplemental Indenture or in the Notes shall for any reason be held to be
invalid, illegal or unenforceable in any respect, such invalidity, illegality or
unenforceability shall not affect any other provisions of this First
Supplemental Indenture or of the Notes, but this First Supplemental Indenture
and the Notes shall be construed as if such invalid or illegal or unenforceable
provision had never been contained herein or therein.

Section 805 Counterparts.

            This First Supplemental Indenture may be executed in any number of
counterparts each of which shall be an original; but such counterparts shall
together constitute but one and the same instrument.

                                       13
<PAGE>
            IN WITNESS WHEREOF, the parties hereto have caused this First
Supplemental Indenture to be duly executed and attested, as of the day and year
first above written.

                                    PRR NEWCO, INC.

                                    By:
                                        --------------------------
                                        Name:
                                        Title:
Attest:

By:
    -----------------------------
    Name:
    Title:
                                    NORFOLK SOUTHERN RAILWAY COMPANY

                                    By:
                                        --------------------------
                                        Name:
                                        Title:
Attest:

By:
    -----------------------------
    Name:
    Title:
                                    THE BANK OF NEW YORK, as Trustee

                                    By:
                                        --------------------------
                                        Name:
                                        Title:
Attest:

By:
    -----------------------------
    Name:
    Title:

                                       14
<PAGE>
                                    EXHIBIT A

                                    FORM ONLY
                                  FACE OF NOTE

            This Note is a Global Note within the meaning of the Base Indenture
hereinafter referred to and is registered in the name of a Depositary or a
nominee of a Depositary. This Note is exchangeable for Notes registered in the
name of a person other than the Depositary or its nominee only in the limited
circumstances described in the Base Indenture, and no transfer of this Note
(other than a transfer of this Note as a whole by the Depositary to a nominee of
the Depositary or by a nominee of the Depositary to the Depositary or another
nominee of the Depositary) may be registered except in limited circumstances.

            Unless this Note is presented by an authorized representative of The
Depository Trust Company, a New York corporation ("DTC"), to the issuer or its
agent for registration of transfer, exchange or payment, and any Note issued is
registered in the name of Cede & Co. or in such other name as is requested by an
authorized representative of DTC (and any payment is made to Cede & Co. or to
such other entity as is requested by an authorized representative of DTC), ANY
TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON
IS WRONGFUL inasmuch as the registered owner hereof, Cede & Co., has an interest
herein.

No.                                                       CUSIP No. [          ]

                                 PRR NEWCO, INC.
                                     Issuer

                        NORFOLK SOUTHERN RAILWAY COMPANY
                                    Guarantor

                                      NOTE
                              DUE DECEMBER 15, 2020

            PRR NEWCO, INC., a corporation organized under the laws of the
Commonwealth of Virginia (herein called the "Company," which term includes any
successor corporation under the Base Indenture hereinafter referred to), for
value received, hereby promises to pay, and Norfolk Southern Railway Company, a
corporation organized under the laws of the Commonwealth of Virginia
(hereinafter called "NSR" or the "Guarantor") hereby promises to fully and
unconditionally guarantee such payment, to Cede & Co., or registered assigns,
the principal sum of [Three-Hundred-Nineteen Million Dollars ($319,000,000)] on
June 15, 2020 and the Company hereby promises to pay, and NSR promises to
guarantee, the payment of interest thereon from [closing date] or from the most
recent interest payment date to which interest has been paid or duly provided
for, semi-annually in arrears on June 15 and December 15 of each year,
commencing June 15, 2004, at a rate of 9-3/4% per annum until the principal
hereof is paid or made available for payment, and on any overdue principal and
premium, if any, at a rate of 9-3/4% per annum and (without duplication and to
the extent that

                                      A-1
<PAGE>
payment of such interest is enforceable under applicable law) on
any overdue installment of interest at a rate of 9-3/4% per annum compounded
semi-annually. The interest so payable, and punctually paid or duly provided
for, on any Interest Payment Date (as defined below) shall be calculated as
provided in the Base Indenture. In the event that any date on which interest is
payable on this Note is not a Business Day, then payment of interest payable on
such date will be made on the next succeeding day that is a Business Day, with
the same force and effect as if made on such date and no interest shall accrue
on the amount so payable from the period from and after such Interest Payment
Date or Maturity Date, as the case may be (each date on which interest is
actually payable, an "Interest Payment Date"). The interest installment so
payable, and punctually paid or duly provided for, on any Interest Payment Date
will, as provided in the Base Indenture, be paid to the Person in whose name
this Note (or one or more Predecessor Security, as defined in said Base
Indenture) is registered at the close of business on the regular record date for
such interest installment, which shall be the close of business on the June 1
and December 1 next preceding such Interest Payment Date. Any such interest
installment not punctually paid or duly provided for shall forthwith cease to be
payable to the registered Holders on such regular record date and may be paid to
the Person in whose name this Note (or one or more Predecessor Security) is
registered at the close of business on a special record date to be fixed by the
Trustee for the payment of such defaulted interest, notice whereof shall be
given to the registered Holders of Notes not less than 10 days prior to such
special record date, or may be paid at any time in any other lawful manner, all
as more fully provided in the Base Indenture. The principal of and premium, if
any, and the interest on this Note shall be payable at the office or agency of
the Trustee maintained for that purpose in any coin or currency of the United
States of America that at the time of payment is legal tender for payment of
public and private debts; provided, however, that payment of interest may be
made, at the option of the Company and upon prior notice to the Trustee, by
check mailed to the registered Holder at such address as shall appear in the
Security Register or by wire transfer to an account designated by a Holder in
writing not less than ten days prior to the date of payment.

            The indebtedness evidenced by this Note is, to the extent provided
in the Base Indenture, equal in right of payment with all other unsecured and
unsubordinated indebtedness of each of the Company and the Guarantor, and this
Note is issued subject to the provisions of the Base Indenture and the First
Supplemental Indenture hereinafter referred to with respect thereto. Each Holder
of this Note, by accepting the same, agrees to and shall be bound by such
provisions, and authorizes and directs the Trustee on his or her behalf to be
bound by such provisions. Each Holder hereof, by his or her acceptance hereof,
hereby waives all notice of the acceptance of the provisions contained herein
and in the Base Indenture and the First Supplemental Indenture by each Holder of
unsecured and unsubordinated indebtedness of the Company, whether now
outstanding or hereafter incurred, and waives reliance by each such Holder or
creditor upon said provisions.

            This Note shall not be entitled to any benefit under the Base
Indenture or the First Supplemental Indenture, or be valid or become obligatory
for any purpose until the Certificate of Authentication hereon shall have been
signed by or on behalf of the Trustee.

                                      A-2
<PAGE>
            The provisions of this Note are continued on the reverse side hereof
and such continued provisions shall for all purposes have the same effect as
though fully set forth at this place.

            IN WITNESS WHEREOF, the Company and the Guarantor have caused this
instrument to be executed.

                                    PRR NEWCO, INC.

                                    By:
                                        --------------------------
                                        Name:
                                        Title:
Attest:

By:
    -----------------------------
    Name:
    Title: Secretary or Assistant Secretary

                                    NORFOLK SOUTHERN RAILWAY COMPANY

                                    By:
                                        --------------------------
                                        Name:
                                        Title:
Attest:

By:
    -----------------------------
    Name:
    Title:

                          CERTIFICATE OF AUTHENTICATION

            This is one of the Securities (as defined below) of the series
designated therein referred to in the within-mentioned Base Indenture.

THE BANK OF NEW YORK
  as Trustee

By:
    -----------------------------
       Authorized Signatory

Dated:
      -----------------------

                                      A-3
<PAGE>
                          (FORM OF REVERSE OF NOTE)

            This Note is one of a duly authorized series of securities of the
Company (herein sometimes referred to as the "Security"), issued or to be issued
in one or more series under and pursuant to an Indenture, dated as of
[__________, 2004] (the "Base Indenture"), duly executed and delivered by and
among the Company, the Guarantor and The Bank of New York (the "Trustee"), as
supplemented by the First Supplemental Indenture, dated as of [__________, 2004]
(the "First Supplemental Indenture"), by and among the Company, the Guarantor
and the Trustee to which Base Indenture and First Supplemental Indenture
reference is hereby made for a description of the rights, limitations of rights,
obligations, duties and immunities thereunder of the Trustee, the Company, the
Guarantor and the Holders of the Security. By the terms of the Base Indenture,
the Securities are issuable in series that may vary as to amount, date of
maturity, rate of interest and in other respects as provided in the Base
Indenture. This Security is the series designated on the face hereof (the
"Notes") and is limited in aggregate principal amount as specified in said First
Supplemental Indenture.

            In case an Event of Default, as defined in the Base Indenture, shall
have occurred and be continuing, the principal of all of the Notes may be
declared due and payable, in the manner, with the effect and subject to the
conditions provided in the Base Indenture.

            The Base Indenture contains provisions permitting the Company and
the Trustee, with the consent of the Holders of not less than a majority in
principal amount of the Outstanding Security of each series affected, to execute
supplemental indentures for the purpose of adding any provisions to the Base
Indenture or of modifying in any manner the rights of the Holders of the
Security; provided, however, that no such supplemental indenture shall (i)
change the Stated Maturity of the principal of, or any installment of principal
of or interest on, any Security, or reduce the principal amount thereof or any
premium payable upon the redemption thereof or the rate of interest thereof to
reduce the amount of principal of an Original Issue Discount Security that would
be due and payable upon a declaration of acceleration of the Maturity thereof
pursuant to Section 502 of the Base Indenture, or change any Place of Payment
where, or the coin or currency in which, any Security (or premium, if any,
thereon) or the interest thereon is payable, or impair the right to institute
suit for the enforcement of any such payment on or after the Stated Maturity
thereof (or, in the case of redemption, on or after the Redemption Date); or
(ii) reduce the percentage in principal amount of the Outstanding Security of
any series, the Holders of which are required to consent to any such
supplemental indenture or to waive certain defaults thereunder and their
consequences provided for in the Base Indenture; or (iii) modify any of the
provisions of the Base Indenture relating to supplemental indentures that
require consent of Holders, the waiver of past defaults or the waiver of certain
covenants, except to increase any such percentage or to provide that certain
other provisions of the Base Indenture cannot be modified or waived, without the
consent of the Holders of each Outstanding Security affected thereby, provided,
however, that the consent of the Holders shall not be required with respect to
changes in the references to "the Trustee" in Sections 802 and 908 of the Base
Indenture or with respect to the deletion of this proviso from the Base
Indenture, in accordance with Sections 608(b) and 801(7) of the Base Indenture.
The Base Indenture also contains provisions permitting the Holders of not less
than a majority in principal amount of the Outstanding Security of any series
affected thereby, on behalf of all of the Holders of the

                                      A-4
<PAGE>
Security of such series, to waive any past Default under the Base Indenture, and
its consequences, except a Default in the payment of the principal of, premium,
if any, or interest on any Security of such series or a Default in respect of a
covenant or provision of the Base Indenture which cannot be modified or amended
without the consent of the Holder of each Outstanding Security of such series
affected. Any such consent or waiver by the registered Holder of this Note
(unless revoked as provided in the Base Indenture) shall be conclusive and
binding upon such Holder and upon all future Holders and owners of this Note and
of any Note issued in exchange therefor or in place hereof (whether by
registration of transfer or otherwise), irrespective of whether or not any
notation of such consent or waiver is made upon this Note.

            No reference herein to the Base Indenture or First Supplemental
Indenture and no provision of this Note or of the Base Indenture or First
Supplemental Indenture shall alter or impair the obligation of the Company,
which is absolute and unconditional, to pay the principal of and premium, if
any, and interest on this Note at the time and place and at the rate and in the
money herein prescribed.

            As provided in the Base Indenture and subject to certain limitations
therein set forth, this Note is transferable by the registered Holder hereof on
the Security Register of the Company, upon surrender of this Note for
registration of transfer at the office or agency of the Trustee in New York, New
York duly endorsed by the registered Holder hereof or accompanied by a written
instrument or instruments of transfer in form satisfactory to the Company and
the Security Registrar duly executed by the registered Holder hereof or his
attorney duly authorized in writing, and thereupon one or more new Notes of this
series of authorized denominations and for the same aggregate principal amount
will be issued to the designated transferee or transferees.

            No service charge will be made for any such transfer, but the
Company may require payment of a sum sufficient to cover any tax or other
governmental charge payable in relation thereto.

            Prior to due presentment of this Note for registration of transfer
of this Note, the Company, the Trustee, and any agent of the Company or the
Trustee may treat the registered Holder hereof as the owner hereof (whether or
not this Note shall be overdue) and neither the Company, the Trustee nor any
such agent shall be affected by notice to the contrary.

            No recourse shall be had for the payment of the principal of or the
interest on this Note, or for any claim based hereon, or otherwise in respect
hereof, or based on or in respect of the Base Indenture, against any
incorporator, stockholder, officer or director, past, present or future, as
such, of the Company, the Guarantor or of any predecessor or successor
corporation of either the Company or the Guarantor, whether by virtue of any
constitution, statute or rule of law, or by the enforcement of any assessment or
penalty or otherwise, all such liability being, by the acceptance hereof and as
part of the consideration for the issuance hereof, expressly waived and
released. Such waiver may not be effective to waive liabilities under the
federal securities laws.

                                      A-5
<PAGE>
            The Notes are issuable only in registered form without coupons in
denominations of $1,000 and any integral multiple thereof. This Global Note is
exchangeable for Notes in definitive form only under certain limited
circumstances set forth in the Base Indenture. Notes so issued are issuable only
in registered form without coupons in denominations of $1,000 and any integral
multiple thereof. As provided in the Base Indenture and subject to certain
limitations herein and therein set forth, Notes of this series so issued are
exchangeable for a like aggregate principal amount of Notes of a different
authorized denomination, as requested by the Holder surrendering the same.

            All terms used in this Note that are defined in the Base Indenture
or the First Supplemental Indenture shall have the meanings assigned to them
therein.

            THE BASE INDENTURE, THE FIRST SUPPLEMENTAL INDENTURE AND THE NOTES
SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF
NEW YORK.

                                      A-6
<PAGE>
               FORM OF NOTATION ON SECURITY RELATING TO GUARANTEE
                                    GUARANTEE

            For value received, the undersigned Guarantor has fully and
unconditionally guaranteed (i) the due and punctual payment of the principal of
and interest on the Notes, whether at maturity, by acceleration or otherwise,
the due and punctual payment of interest on the overdue principal and interest,
if any, on the Notes, to the extent lawful, and the due and punctual performance
of all other obligations of the Company to the Holders or the Trustee all in
accordance with the terms set forth in Article VII of the First Supplemental
Indenture and (ii) in case of any extension of time of payment or renewal of any
Notes or any of such other obligations, that the same will be promptly paid in
full when due or performed in accordance with the terms of the extension or
renewal, whether at stated maturity, by acceleration or otherwise.

            Each Holder of a Note by accepting a Note agrees that the Guarantor
shall have no further liability with respect to its Guarantee if the Guarantor
otherwise ceases to be liable in respect of its Guarantee in accordance with the
terms of the Section 704 of First Supplemental Indenture.

            The Guarantee shall not be valid or obligatory for any purpose until
the certificate of authentication on the Securities upon which the Guarantee is
noted shall have been executed by the Trustee under the First Supplemental
Indenture by the manual signature of one of its authorized officers.

            Captialized terms used but not defined in this Notation of Guarantee
shall have the meanings assigned to them in the Base Indenture or the First
Supplemental Indenture.

            IN WITNESS WHEREOF, the Guarantor has caused this instrument to be
duly executed under its corporate seal.

                                    NORFOLK SOUTHERN RAILWAY COMPANY

                                    By: _________________________
                                        Name:
                                        Title:

                                      A-7

<PAGE>
                                    EXHIBIT B

                                    FORM ONLY
                                  FACE OF NOTE

            This Note is a Global Note within the meaning of the Base Indenture
hereinafter referred to and is registered in the name of a Depositary or a
nominee of a Depositary. This Note is exchangeable for Notes registered in the
name of a person other than the Depositary or its nominee only in the limited
circumstances described in the Base Indenture, and no transfer of this Note
(other than a transfer of this Note as a whole by the Depositary to a nominee of
the Depositary or by a nominee of the Depositary to the Depositary or another
nominee of the Depositary) may be registered except in limited circumstances.

            Unless this Note is presented by an authorized representative of The
Depository Trust Company, a New York corporation ("DTC"), to the issuer or its
agent for registration of transfer, exchange or payment, and any Note issued is
registered in the name of Cede & Co. or in such other name as is requested by an
authorized representative of DTC (and any payment is made to Cede & Co. or to
such other entity as is requested by an authorized representative of DTC), ANY
TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON
IS WRONGFUL inasmuch as the registered owner hereof, Cede & Co., has an interest
herein.

No.                                                       CUSIP No. [          ]

                                 PRR NEWCO, INC.
                                     Issuer

                        NORFOLK SOUTHERN RAILWAY COMPANY
                                    Guarantor

                                      NOTE
                              DUE NOVEMBER 15, 2043

            PRR NEWCO, INC., a corporation organized under the laws of the
Commonwealth of Virginia (herein called the "Company", which term includes any
successor corporation under the Base Indenture hereinafter referred to), for
value received, hereby promises to pay, and Norfolk Southern Railway Company, a
corporation organized under the laws of the Commonwealth of Virginia
(hereinafter called "NSR" or the "Guarantor") hereby promises to fully and
unconditionally guarantee such payment, to Cede & Co., or registered assigns,
the principal sum of [One-Hundred Forty-Five Million Dollars ($145,000,000)] on
May 15, 2043 and the Company hereby promises to pay, and NSR promises to
guarantee, the payment of interest thereon from [closing date] or from the most
recent interest payment date to which interest has been paid or duly provided
for, semi-annually in arrears on May 15 and November 15 of each year, commencing
May 15, 2004, at a rate of 7-7/8% per annum until the principal hereof is paid
or made available for payment, and on any overdue principal and premium, if any,
at a rate of 7-7/8% per annum and (without duplication and to the extent that

                                      B-1
<PAGE>
payment of such interest is enforceable under applicable law) on any overdue
installment of interest at a rate of 7-7/8% per annum compounded semi-annually.
The interest so payable, and punctually paid or duly provided for, on any
Interest Payment Date (as defined below) shall be calculated as provided in the
Base Indenture. In the event that any date on which interest is payable on this
Note is not a Business Day, then payment of interest payable on such date will
be made on the next succeeding day that is a Business Day, with the same force
and effect as if made on such date and no interest shall accrue on the amount so
payable from the period from and after such Interest Payment Date or Maturity
Date, as the case may be (each date on which interest is actually payable, an
"Interest Payment Date"). The interest installment so payable, and punctually
paid or duly provided for, on any Interest Payment Date will, as provided in the
Base Indenture, be paid to the Person in whose name this Note (or one or more
Predecessor Security, as defined in said Base Indenture) is registered at the
close of business on the regular record date for such interest installment,
which shall be the close of business on the May 1 and November 1 next preceding
such Interest Payment Date. Any such interest installment not punctually paid or
duly provided for shall forthwith cease to be payable to the registered Holders
on such regular record date and may be paid to the Person in whose name this
Note (or one or more Predecessor Security) is registered at the close of
business on a special record date to be fixed by the Trustee for the payment of
such defaulted interest, notice whereof shall be given to the registered Holders
of Notes not less than 10 days prior to such special record date, or may be paid
at any time in any other lawful manner, all as more fully provided in the Base
Indenture. The principal of and premium, if any, and the interest on this Note
shall be payable at the office or agency of the Trustee maintained for that
purpose in any coin or currency of the United States of America that at the time
of payment is legal tender for payment of public and private debts; provided,
however, that payment of interest may be made, at the option of the Company and
upon prior notice to the Trustee, by check mailed to the registered Holder at
such address as shall appear in the Security Register or by wire transfer to an
account designated by a Holder in writing not less than ten days prior to the
date of payment.

            The indebtedness evidenced by this Note is, to the extent provided
in the Base Indenture, equal in right of payment with all other unsecured and
unsubordinated indebtedness of each of the Company and the Guarantor, and this
Note is issued subject to the provisions of the Base Indenture and the First
Supplemental Indenture hereinafter referred to with respect thereto. Each Holder
of this Note, by accepting the same, agrees to and shall be bound by such
provisions, and authorizes and directs the Trustee on his or her behalf to be
bound by such provisions. Each Holder hereof, by his or her acceptance hereof,
hereby waives all notice of the acceptance of the provisions contained herein
and in the Base Indenture and the First Supplemental Indenture by each Holder of
unsecured and unsubordinated indebtedness of the Company, whether now
outstanding or hereafter incurred, and waives reliance by each such Holder or
creditor upon said provisions.

            This Note shall not be entitled to any benefit under the Base
Indenture or the First Supplemental Indenture, or be valid or become obligatory
for any purpose until the Certificate of Authentication hereon shall have been
signed by or on behalf of the Trustee.

                                      B-2
<PAGE>
            The provisions of this Note are continued on the reverse side hereof
and such continued provisions shall for all purposes have the same effect as
though fully set forth at this place.

            IN WITNESS WHEREOF, the Company and the Guarantor have caused this
instrument to be executed.

                                    PRR NEWCO, INC.

                                    By:
                                        --------------------------
                                        Name:
                                        Title:
Attest:

By:
    -----------------------------
    Name:
    Title: Secretary or Assistant Secretary

                                    NORFOLK SOUTHERN RAILWAY COMPANY

                                    By:
                                        --------------------------
                                        Name:
                                        Title:
Attest:

By:
    -----------------------------
    Name:
    Title:

                          CERTIFICATE OF AUTHENTICATION

            This is one of the Securities (as defined below) of the series
designated therein referred to in the within-mentioned Base Indenture.

THE BANK OF NEW YORK,
  as Trustee

By:
    -----------------------------
       Authorized Signatory

Dated:
      -----------------------

                                      B-3
<PAGE>
                            (FORM OF REVERSE OF NOTE)

            This Note is one of a duly authorized series of securities of the
Company (herein sometimes referred to as the "Security"), issued or to be issued
in one or more series under and pursuant to an Indenture, dated as of [________,
2004] (the "Base Indenture"), duly executed and delivered by and among the
Company, the Guarantor and The Bank of New York (the "Trustee"), as supplemented
by the First Supplemental Indenture, dated as of [____________, 2004] (the
"First Supplemental Indenture"), by and among the Company, the Guarantor and the
Trustee to which Base Indenture and First Supplemental Indenture reference is
hereby made for a description of the rights, limitations of rights, obligations,
duties and immunities thereunder of the Trustee, the Company, the Guarantor and
the Holders of the Security. By the terms of the Base Indenture, the Securities
are issuable in series that may vary as to amount, date of maturity, rate of
interest and in other respects as provided in the Base Indenture. This Security
is the series designated on the face hereof (the "Notes") and is limited in
aggregate principal amount as specified in said First Supplemental Indenture.

            In case an Event of Default, as defined in the Base Indenture, shall
have occurred and be continuing, the principal of all of the Notes may be
declared due and payable, in the manner, with the effect and subject to the
conditions provided in the Base Indenture.

            The Base Indenture contains provisions permitting the Company and
the Trustee, with the consent of the Holders of not less than a majority in
principal amount of the Outstanding Security of each series affected, to execute
supplemental indentures for the purpose of adding any provisions to the Base
Indenture or of modifying in any manner the rights of the Holders of this
Security; provided, however, that no such supplemental indenture shall (i)
change the Stated Maturity of the principal of, or any installment of principal
of or interest on, this Security, or reduce the principal amount thereof or any
premium payable upon the redemption thereof or the rate of interest thereon, or
to reduce the amount of principal of an Original Issue Discount Security that
would be due and payable upon a declaration of acceleration of the Maturity
thereof pursuant to Section 502 of the Base Indenture, or change any Place of
Payment where, or the coin or currency in which, any Security (or premium, if
any, thereon) or the interest thereon is payable, or impair the right to
institute suit for the enforcement of any such payment on or after the Stated
Maturity thereof (or, in the case of redemption, on or after the Redemption
Date); or (ii) reduce the percentage in principal amount of the Outstanding
Security of any series, the Holders of which are required to consent to any such
supplemental indenture or to waive certain defaults thereunder and their
consequences provided for in the Base Indenture; or (iii) modify any of the
provisions of the Base Indenture relating to supplemental indentures that
require consent of Holders, the waiver of past defaults or the waiver of certain
covenants, except to increase any such percentage or to provide that certain
other provisions of the Base Indenture cannot be modified or waived, without the
consent of the Holders of each Outstanding Security affected thereby, provided,
however, that the consent of the Holders shall not be required with respect to
changes in the references to "the Trustee" in Sections 802 and 908 of the Base
Indenture with respect to the deletion of this proviso from the Base Indenture,
in accordance with Sections 608(b) and 801(7) of the Base Indenture. The Base
Indenture also contains provisions permitting the Holders of not less than a
majority in principal amount of the Outstanding Security of any series affected
thereby, on behalf of all of the Holders of the

                                      B-4
<PAGE>
Security of such series, to waive any past Default under the Base Indenture, and
its consequences, except a Default in the payment of the principal of, premium,
if any, or interest on any Security of such series or a Default in respect of a
covenant or provision of the Base Indenture which cannot be modified or amended
without the consent of the Holder of each Outstanding Security of such series
affected. Any such consent or waiver by the registered Holder of this Note
(unless revoked as provided in the Base Indenture) shall be conclusive and
binding upon such Holder and upon all future Holders and owners of this Note and
of any Note issued in exchange therefor or in place hereof (whether by
registration of transfer or otherwise), irrespective of whether or not any
notation of such consent or waiver is made upon this Note.

            No reference herein to the Base Indenture or First Supplemental
Indenture and no provision of this Note or of the Base Indenture or First
Supplemental Indenture shall alter or impair the obligation of the Company,
which is absolute and unconditional, to pay the principal of and premium, if
any, and interest on this Note at the time and place and at the rate and in the
money herein prescribed.

            As provided in the Base Indenture and subject to certain limitations
therein set forth, this Note is transferable by the registered Holder hereof on
the Security Register of the Company, upon surrender of this Note for
registration of transfer at the office or agency of the Trustee in New York, New
York duly endorsed by the registered Holder hereof or accompanied by a written
instrument or instruments of transfer in form satisfactory to the Company and
the Security Registrar duly executed by the registered Holder hereof or his
attorney duly authorized in writing, and thereupon one or more new Notes of this
series of authorized denominations and for the same aggregate principal amount
will be issued to the designated transferee or transferees.

            No service charge will be made for any such transfer, but the
Company may require payment of a sum sufficient to cover any tax or other
governmental charge payable in relation thereto.

            Prior to due presentment of this Note for registration of transfer
of this Note, the Company, the Trustee, and any agent of the Company or the
Trustee may treat the registered Holder hereof as the owner hereof (whether or
not this Note shall be overdue) and neither the Company, the Trustee nor any
such agent shall be affected by notice to the contrary.

            No recourse shall be had for the payment of the principal of or the
interest on this Note, or for any claim based hereon, or otherwise in respect
hereof, or based on or in respect of the Base Indenture, against any
incorporator, stockholder, officer or director, past, present or future, as
such, of the Company, the Guarantor or of any predecessor or successor
corporation of either the Company or the Guarantor, whether by virtue of any
constitution, statute or rule of law, or by the enforcement of any assessment or
penalty or otherwise, all such liability being, by the acceptance hereof and as
part of the consideration for the issuance hereof, expressly waived and
released. Such waiver may not be effective to waive liabilities under the
federal securities laws.

                                      B-5
<PAGE>
            The Notes are issuable only in registered form without coupons in
denominations of $1,000 and any integral multiple thereof. This Global Note is
exchangeable for Notes in definitive form only under certain limited
circumstances set forth in the Base Indenture. Notes so issued are issuable only
in registered form without coupons in denominations of $1,000 and any integral
multiple thereof. As provided in the Base Indenture and subject to certain
limitations herein and therein set forth, Notes of this series so issued are
exchangeable for a like aggregate principal amount of Notes of a different
authorized denomination, as requested by the Holder surrendering the same.

            All terms used in this Note that are defined in the Base Indenture
or the First Supplemental Indenture shall have the meanings assigned to them
therein.

            THE BASE INDENTURE, THE FIRST SUPPLEMENTAL INDENTURE AND THE NOTES
SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF
NEW YORK.

                                      B-6
<PAGE>
               FORM OF NOTATION ON SECURITY RELATING TO GUARANTEE

            For value received, the undersigned Guarantor has fully and
unconditionally guaranteed (i) the due and punctual payment of the principal of
and interest on the Notes, whether at maturity, by acceleration or otherwise,
the due and punctual payment of interest on the overdue principal and interest,
if any, on the Notes, to the extent lawful, and the due and punctual performance
of all other obligations of the Company to the Holders or the Trustee all in
accordance with the terms set forth in Article VII of the First Supplemental
Indenture and (ii) in case of any extension of time of payment or renewal of any
Notes or any of such other obligations, that the same will be promptly paid in
full when due or performed in accordance with the terms of the extension or
renewal, whether at stated maturity, by acceleration or otherwise.

            Each Holder of a Note by accepting a Note agrees that the Guarantor
shall have no further liability with respect to its Guarantee if the Guarantor
otherwise ceases to be liable in respect of its Guarantee in accordance with the
terms of Section 704 of the First Supplemental Indenture.

            The Guarantee shall not be valid or obligatory for any purpose until
the certificate of authentication on the Securities upon which the Guarantee is
noted shall have been executed by the Trustee under the First Supplemental
Indenture by the manual signature of one of its authorized officers.

            Capitalized terms used but not defied in this Notation of Guarantee
shall have the meanings assigned to them in the Base Indenture or the First
Supplemental Indenture.

            IN WITNESS WHEREOF, the Guarantor has caused this instrument to be
duly executed under its corporate seal.

                                    NORFOLK SOUTHERN RAILWAY COMPANY

                                    By: __________________________
                                        Name:
                                        Title:

                                      B-7
<PAGE>
                                TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                              Page
                                                                              ----
<S>                                                                           <C>
ARTICLE I DEFINITIONS........................................................  2
      Section 101  Definition of Terms.......................................  2

ARTICLE II GENERAL TERMS AND CONDITIONS OF THE NOTES.........................  5
      Section 201  Designation and Principal Amount..........................  5
      Section 202  Place of Payment: Security Register for Notes.............  5
      Section 203  Global Note...............................................  5
      Section 204  Interest..................................................  5

ARTICLE III COVENANTS........................................................  6
      Section 301  Company Reports...........................................  6
      Section 302  Limitations on Liens on Stock or Indebtedness of Principal
                   Subsidiaries .............................................  7
      Section 303  Limitations on Funded Debt................................  7
      Section 304  Waiver of Certain Covenants...............................  9

ARTICLE IV REDEMPTION OF THE NOTES...........................................  9
      Section 401  No Redemption.............................................  9
      Section 402  No Sinking Fund...........................................  9

ARTICLE V FORMS OF NOTES....................................................  10
      Section 501  Form of Notes............................................  10

ARTICLE VI ORIGINAL ISSUE OF NOTES..........................................  10
      Section 601  Original Issue of Notes..................................  10

ARTICLE VII GUARANTEE.......................................................  10
      Section 701  Unconditional Guarantee..................................  10
      Section 702  Waiver...................................................  11
      Section 703  Execution of Guarantee...................................  12
      Section 704  Cessation of Guarantee...................................  12

ARTICLE VIII MISCELLANEOUS..................................................  12
      Section 801  Ratification of Base Indenture...........................  12
      Section 802  Trustee Not Responsible for Recitals.....................  13
      Section 803  Governing Law............................................  13
      Section 804  Separability.............................................  13
      Section 805  Counterparts.............................................  13
</TABLE>

                                        i
<PAGE>
EXHIBIT A    1

EXHIBIT B    1

                                      B-ii<PAGE>
                                                                    EXHIBIT 10.1

                              EMPLOYMENT AGREEMENT

      This Employment Agreement (this "Agreement") is made as of May 5, 2004
between Wayne P. Garten ("Executive") and Hanover Direct, Inc., a Delaware
corporation (the "Company").

            1. Provision of Services. Executive shall serve as the Company's
      President and Chief Executive Officer (the "President/CEO") and as a
      member of the Company's Board of Directors (the "Board of Directors").

            2. Responsibilities. Executive shall act and serve during the term
      of this Agreement as the President and Chief Executive Officer of the
      Company and shall report to the Board of Directors. Executive's employment
      responsibilities will include those normally held by the president and
      chief executive officer of a corporation of a similar size and nature to
      the Company. Executive shall devote his full-time efforts in connection
      with his role as President and Chief Executive Officer and member of the
      Board of Directors.

            3. Term. Subject to Section 6 of this Agreement, the term of this
      Agreement (the "Agreement Term") and the term for the services of
      Executive hereunder shall commence as of May 5, 2004 and shall terminate
      on May 5, 2006.

            4. Compensation. As consideration for Executive's performance of
      services hereunder as the President/CEO, the following compensation shall
      be payable pursuant to this Agreement:

            (a)   Executive shall receive base compensation at the rate of
                  $600,000 per annum (the "Base Compensation"), payable in
                  accordance with the Company's normal payroll policies.

            (b)   The Company shall provide Executive with the employee benefits
                  it provides to its other senior executives, including but not
                  limited to 4 weeks of paid vacation per year, and Executive
                  shall also be entitled to participate in such bonus plans with
                  such targets as the Compensation Committee of the Board of
                  Directors may approve in its sole discretion determined in a
                  manner consistent with bonus opportunities afforded to other
                  senior executives under such plans.

            (c)   The Company shall reimburse Executive for his reasonable
                  out-of-pocket expenses in performing services for the Company
                  as President/CEO (such as travel, meals, communications and
                  lodging) which are incurred during the Agreement Term on
                  Company business. Executive shall submit invoices and
                  documentation for such reimbursable expenses on a monthly
                  basis, and the Company shall process payment of the same
                  promptly and in accordance with its customary procedures. In
                  addition, the Company shall reimburse Executive for up to
                  $12,500 of attorneys' fees incurred by

<PAGE>

                  him in connection with legal advice relating to, and the
                  negotiation of, this Agreement.

            5. Stock Options. Subject to shareholder approval of a one for ten
      reverse stock split of the Company's Common Stock, the Company shall grant
      Executive 2 stock options (the "Executive Options") to purchase an
      aggregate of 2,000,000 prereverse split shares of the Company's Common
      Stock ("Shares"), each with an exercise price of $0.195 per Share. The
      Executive Options shall be comprised of 2 stock options - (i) an option
      for 1,000,000 Shares under the Company's 2000 Management Stock Option
      Plan, and (ii) an additional option for an additional 1,000,000 Shares,
      which option shall not be granted under a Company plan. The Executive
      Options shall be exercisable for 10 years and shall be subject to the
      terms and conditions set forth in the respective Stock Option Agreements
      annexed hereto.

            The Executive Options shall vest over a 2-year period. Upon the
      execution of this Agreement, the Executive Options shall be one-third
      vested. Thereafter, the remaining unvested portion of the Executive
      Options shall vest at the rate of 50% per year; provided that the
      Executive Options shall vest in their entirety and become fully
      exercisable upon the earliest to occur of: (i) Executive's resignation
      "For Good Reason" (as defined below), (ii) the Company's termination of
      Executive's services hereunder, other than "For Cause" (as defined below),
      or (iii) a "Change of Control" (as defined below) of the Company. To the
      extent the Executive Options vest and become exercisable pursuant to this
      Section 5, they shall remain exercisable (x) for the Executive Option
      granted under the Company's 2000 Management Stock Option Plan, for the 90
      day period immediately following the date of the applicable resignation,
      termination or Change of Control, and (y) for the Executive Option not
      granted under a Company plan, for the 180 day period immediately following
      the date of the applicable resignation, termination or Change of Control.
      Any unvested portion of the Executive Options on the date of Executive's
      resignation or termination, as applicable, shall be forfeited. In the
      event of vesting of the Executive Options on account of a Change of
      Control, the Company shall use its reasonable best efforts to ensure that
      such vesting shall take place sufficiently in advance of the Change of
      Control (but subject to its occurrence) to permit Executive to take all
      steps reasonably necessary to exercise the Executive Options and to take
      such action with respect to the Shares purchased under the Executive
      Options so that those Shares may be treated in the same manner in
      connection with the Change of Control transaction as the Shares of other
      Company shareholders.

            To the extent not already covered by a registration statement on
      Form S-8 relating to the Company's 2000 Management Stock Option Plan, all
      Shares underlying the Executive Options shall be registered by the Company
      utilizing a Registration Statement on Form S-8 (or other similar form)
      prior to December 31, 2004.

            5A. Definitions. For purposes of this Agreement, the following terms
      shall have the following meanings:

                                       2
<PAGE>

            (a)   "For Good Reason" shall mean the voluntary resignation by
                  Executive of his employment with the Company on account of any
                  of the following actions: (i) a substantial and material
                  diminution of Executive's duties or responsibilities for the
                  Company; provided, that if, following a Change in Control (as
                  defined below) Executive is appointed to a position as
                  President, Chief Executive Officer or Chief Operating Officer
                  of the Company or its successor, or a subsidiary or affiliate
                  of the Company or its successor, in each case reporting to the
                  Chief Executive Officer of the Company or its successor, such
                  appointment shall not be deemed a substantial and material
                  diminution of his duties or responsibilities, (ii) any
                  reduction of Executive's base salary (as in effect as of the
                  first day of the Agreement Term), or (iii) the Company's (or a
                  successor to the Company pursuant to a Change of Control)
                  requiring Executive to regularly report to work at a facility
                  that is more than 30 miles from Edgewater, New Jersey;
                  provided, however, that in all cases, in order to terminate
                  his employment with the Company For Good Reason, Executive
                  must notify the Company in writing that Good Reason exists
                  within 30 business days ("Business Days") of his knowledge of
                  the event or events constituting Good Reason. The Company
                  shall thereafter have 15 Business Days within which to cure
                  Executive's otherwise Good Reason (the "Good Reason Cure
                  Period"). Unless Executive's Good Reason is cured during the
                  Good Reason Cure Period, his resignation For Good Reason shall
                  become effective on the first Business Day following the
                  conclusion of the Good Reason Cure Period.

            (b)   "For Cause" shall mean the involuntary termination by the
                  Company of Executive's employment with the Company on account
                  of his (i) material breach of any of the material terms of the
                  Agreement, (ii) willful and continued failure to perform his
                  regular duties for the Company, (iii) commission of an act of
                  fraud relating to and adversely affecting the Company, (iv)
                  conviction of, or a plea of guilty or nolo contendere to, a
                  felony, or (v) gross negligence in the performance of his
                  duties which adversely affects the Company. Notwithstanding
                  the foregoing, Executive shall not be terminated For Cause
                  without (A) delivery of a written notice to Executive setting
                  forth the reasons for the Company's intention to terminate
                  Executive's employment hereunder For Cause; (B) the failure of
                  Executive to cure the nonperformance, violation or misconduct
                  described in the notice referred to in clause (A) of this
                  paragraph, if cure thereof is possible, to the reasonable
                  satisfaction of the Board of Directors, within 15 Business
                  Days of Executive's receipt of such notice (the "For Cause
                  Cure Period"); and (C) an opportunity for Executive, together
                  with Executive's counsel, to be heard before the Board of
                  Directors.

            (c)   "Change of Control" shall mean the first to occur of any of
                  the events described in clauses (i) through (iii) below,
                  following the first day of the Agreement Term:

                                       3
<PAGE>

            (i) When any "person" (as such term is used in Sections 13(d) and
      14(d)(2) of the Securities Exchange Act of 1934, as amended) (a "Person")
      becomes, through an acquisition, the beneficial owner of shares of the
      Company having more than 50% of the total number of votes that may be cast
      for the election of directors of the Company (the "Voting Shares");
      provided, however, that the following acquisitions shall not constitute a
      Change of Control:

                  (A) if a Person owns less than 50% of the voting power of the
            Company and that Person's ownership increases above 50% solely by
            virtue of an acquisition of stock by the Company, then no Change of
            Control shall have occurred, unless and until that Person
            subsequently acquires one or more additional shares representing
            voting power of the Company; or

                  (B) any acquisition by a Person who as of the first day of the
            Agreement Term owned at least 33% of the Voting Shares.

            (ii) (A) Notwithstanding the foregoing, a Change of Control will be
      deemed to occur upon the closing of any of the following (each, a
      "Transaction"):

                        (I) any reorganization, merger, consolidation or other
                  business combination of the Company;

                        (II) any sale or any series of sales occurring on or
                  after the date of this Agreement, involving all or
                  substantially all of the Company's assets; or

                        (III) a complete liquidation or dissolution of the
                  Company.

                  (B) Notwithstanding clause (ii)(A) above, neither of the
            following types of Transactions will be deemed to give rise to a
            Change of Control:

                        (I) a Transaction involving only the Company and one or
                  more of its subsidiaries; or

                        (II) a Transaction (other than as described in clause
                  (ii)(A)(II) of this definition) immediately following which
                  the shareholders of the Company immediately prior to the
                  Transaction continue to have a majority of the voting power in
                  the resulting entity.

            (iii) When, within any 24 month period commencing on or after the
      first day of the Agreement Term, persons who were directors of the Company
      (each, a "Director") immediately before the beginning of such period (the
      "Incumbent Directors") shall cease (for any reason other than death or
      disability) to constitute at least a majority of the Board of Directors or
      the board of directors of any successor to the Company. For purposes of
      this clause (iii), any Director who was not a Director as of the first day
      of the Agreement Term shall be deemed to be an Incumbent Director if such
      Director was elected to the Board of Directors by, or on the
      recommendation of, or with the approval of, at least a majority of the
      members of the Board of Directors or its Nominating Committee who, at

                                       4
<PAGE>

      the time of the vote, qualified as Incumbent Directors either actually or
      by prior operation of this clause (iii), and any persons (and their
      successors from time to time) who are designated by a holder which, as of
      the first day of the Agreement Term, held 33% or more of the Voting
      Shares, to stand for election and serve as Directors in lieu of other such
      designees serving as Directors on the first day of the Agreement Term
      shall be considered Incumbent Directors. Notwithstanding the foregoing,
      for purposes of this clause (iii), any director elected to the Board of
      Directors to avoid or settle a threatened or actual proxy contest shall
      not, under any circumstances, be deemed to be an Incumbent Director.

            (d)   "Disability" shall mean the inability of Executive to perform
                  his duties under this Agreement for 3 consecutive months or an
                  aggregate of 180 days within a 2-year period.

            6. Termination and Severance. The following provisions shall govern
      the termination of Executive's employment under this Agreement:

            (a)   The Agreement, the Agreement Term, the term for services of
                  Executive and the employment of Executive hereunder will
                  terminate upon the first to occur of the following:

                  (i)   the third day after written notice by the Company to
                        Executive that Executive's employment under this
                        Agreement has been terminated For Cause following the
                        end of the For Cause Cure Period;

                  (ii)  the tenth day after written notice by Executive to the
                        Company that Executive's employment under this Agreement
                        has been terminated pursuant to his resignation For Good
                        Reason following the end of the Good Reason Cure Period;

                  (iii) the expiration of the Agreement Term;

                  (iv)  the death or Disability of Executive;

                  (v)   the day the Company terminates Executive's employment
                        under this Agreement other than For Cause; or

                  (vi)  the thirtieth day after written notice by Executive to
                        the Company that the Executive's employment under this
                        Agreement has been terminated pursuant to his
                        resignation other than For Good Reason.

            (b)   In the event of the termination of Executive's employment
                  under this Agreement for any of the reasons provided in
                  Section 6(a), Executive shall receive hereunder the Base
                  Compensation through the end of the month in which the date of
                  termination has occurred, plus a termination payment as
                  follows:

                                       5
<PAGE>

                  (i)   If the termination or resignation is pursuant to Section
                        6(a)(i), 6(a)(iv) or 6(a)(vi) above, no additional
                        amount shall be due and owing to Executive;

                  (ii)  If the termination or resignation is pursuant to Section
                        6(a)(ii) or 6(a)(v) and the Executive has not received
                        or become entitled to receive a Change of Control
                        payment under Section 6(b)(iii), Executive shall be
                        entitled to receive, subject to his continued compliance
                        with the requirements of Sections 9 and 10 of this
                        Agreement, the following severance payments (A)
                        continued payments of his monthly Base Compensation for
                        a period equal to 18 months payable in accordance with
                        the Company's normal payroll practices and policies; and
                        (B) the pro rated portion (based upon the number of days
                        in the fiscal year prior to the effective date of
                        termination) of bonuses earned for the fiscal year in
                        which the effective date of termination occurs pursuant
                        to the Company's bonus plans, as applicable (based upon
                        the terms and conditions of the applicable bonus plan),
                        as described in Section 4(b), accrued vacation and
                        continued coverage under the Company's health, life
                        insurance and long-term disability benefit plans for the
                        18-month period immediately following Executive's
                        termination or resignation, as applicable. Any such
                        bonus shall be paid to Executive, subject to his
                        continued compliance with the requirements of Sections 9
                        and 10 of this Agreement, at such time as is consistent
                        with the Company's customary practice.

                  (iii) If a Change of Control occurs within the Agreement Term,
                        then, subject to Section 6(b)(iv), Executive shall be
                        entitled to receive a lump sum payment equal to 200% of
                        his Base Compensation, such payment to be made within
                        thirty days of the closing of the transaction resulting
                        in the Change of Control.

                  (iv)  If a Change of Control occurs within the Agreement Term,
                        then, if the Company so requests, as a condition to his
                        entitlement to the payment under Section 6(b)(iii),
                        Executive shall continue his employment hereunder until
                        the end of the Agreement Term, provided that: (i)
                        Executive continues as President, Chief Executive
                        Officer or Chief Operating Officer of the Company or its
                        successor or the Company's or its successor's subsidiary
                        or affiliate; and (ii) he reports to the Chief Executive
                        Officer of the Company or its successor.

                  (v)   If the termination is pursuant to Section 6(a)(iii) and
                        the Executive has not received or become entitled to
                        receive a payment under Section 6(b)(iii), then, at the
                        end of the Agreement Term, he shall be entitled to
                        receive, subject to Executive's continued compliance
                        with the requirements of Sections 9 and 10 of this
                        Agreement,

                                       6
<PAGE>

                        monthly severance payments at the rate of Executive's
                        Base Compensation for a period of 18 months, payable in
                        accordance with the Company's normal payroll practices
                        and policies and continued coverage under the Company's
                        health, life insurance and long-term disability benefit
                        plans for the 18-month period immediately following the
                        end of the Agreement Term.

            7. Arbitration. Any dispute or other controversy arising under or in
      connection with this Agreement (except that the Company may, at its
      election, seek to enforce Executive's obligations under Section 9 and/or
      10 of this Agreement in a court of competent jurisdiction) shall be
      settled exclusively by binding arbitration in New York, New York, in
      accordance with the Employment Dispute Resolution Rules then in effect
      with the American Arbitration Association. Judgment may be entered on the
      arbitrator's award in any court having jurisdiction. The Company shall pay
      all of Executive's attorneys' fees in connection with any arbitration
      brought by either of the parties hereto pursuant to this Section 7 in
      which Executive prevails.

            8. Indemnity. If Executive is threatened with or made a party to, or
      called as a witness or deposed or subpoenaed in, any action, suit or other
      legal, administrative or governmental proceeding or other legal process by
      reason that Executive is or was deemed a consultant, officer, employee or
      other agent of the Company or any of its affiliates, the Company shall
      defend, indemnify and hold Executive harmless to the maximum extent
      allowed by applicable law and the Company's Certificate of Incorporation
      and By-Laws against all liabilities, obligations, losses, damages,
      penalties, actions, judgments, suits, claims, disbursements and expenses,
      including counsel fees reasonably incurred by Executive in connection
      therewith, to the extent the same are not paid under the Company's D&O
      insurance policies ("Indemnified Liability" or "Indemnified Liabilities");
      provided however, that Executive shall not be entitled to indemnification
      hereunder to the extent any such liability, obligation, loss, damage,
      penalty, action, judgment, suit, claim, disbursement or expense results
      from the gross negligence, willful misconduct or criminal conviction or
      other conduct which bars indemnification under applicable law
      ("Misconduct") of Executive as determined by a court of competent
      jurisdiction. Payments under this indemnity in respect of indemnified
      settlements or judgments shall be paid at the time of final settlement or
      final judgment (from which no appeal may be taken), or, in respect of
      counsel fees or costs of defense, which shall be limited to one counsel,
      shall be paid at the time such fees or costs are incurred.

            The Company may require the Executive to deliver a written
      undertaking to return any amount advanced to him for indemnification
      hereunder if it shall thereafter be determined that indemnification is not
      available to Executive due to his Misconduct.

            This Section 8 shall survive the termination of this Agreement.

            9. Confidentiality. Executive shall at all times both during his
      employment hereunder and after termination thereof regard and preserve as
      confidential all trade secrets and other confidential information
      pertaining to the business of the Company that

                                       7
<PAGE>

      have been or may be obtained by Executive by reason of the performance of
      the terms of this Agreement. Executive agrees that all documents, reports,
      manuals, drawings, designs, tools, equipment, plans, proposals, marketing
      and sales plans, customer lists, or materials made by the Company or
      coming into Executive's possession by reason of his performance under this
      Agreement, are the property of the Company and shall not be used by
      Executive in any way prohibited by this Agreement. Except as expressly
      provided herein, during the Agreement Term and after termination thereof,
      Executive shall not deliver, reproduce, publish or in any way allow, after
      due care, information describing any trade secrets or other confidential
      documents or things to be delivered or used by any third party without
      specific direction or written consent of the Company or in response to
      lawful process. Immediately upon termination of this Agreement, Executive
      shall promptly deliver to the Company all documents, tools, equipment,
      drawings, blueprints, manuals, material and significant or confidential
      letters and notes, reports, price lists, customer lists and copies
      thereof, and all other materials relating to the Company's business and
      which are in the possession of or under the control of Executive.
      Confidential information as defined above shall exclude information or
      materials that become generally available to the public other than through
      disclosure by Executive in violation of this Agreement.

            This Section 9 shall survive the termination of the Agreement.

            10. Nonsolicitation. During the Agreement Term and for a period
      ending on the later of (i) the period during which the Executive receives
      severance payments as provided herein, or (ii) one (1) year after the
      termination of Executive's employment with the Company, Executive and/or
      any person, firm, corporation or other entity which is controlled by
      Executive, shall not, without the prior written consent of the Company,
      personally or as an employee, owner, consultant, manager, associate,
      partner, agent or otherwise, or by means of any corporate or other entity
      solicit for employment or hire any employee of the Company or any of its
      subsidiaries. Executive acknowledges that the restrictions contained in
      this Section 10 are reasonable and necessary to protect the legitimate
      interests of the Company, do not cause the Executive or his affiliates
      undue hardship, and that any violation of any provision of this Section 10
      will result in irreparable injury to the Company and that, therefore, the
      Company shall be entitled to preliminary and permanent injunctive relief
      in any court of competent jurisdiction and to an equitable accounting of
      all earnings, profits and other benefits arising from such violation,
      which right shall be cumulative and in addition to any other rights or
      remedies to which the Company may be entitled.

            This Section 10 shall survive the termination of the Agreement.

            11. Miscellaneous. This Agreement shall be governed by and construed
      in accordance with the internal laws of the state of New York.

            12. Modification. This Agreement may only be modified by mutual
      agreement.

                                       8
<PAGE>

            13. Assignment. This Agreement is a personal service contract and
      may not be assigned by either party, except that the Company may assign
      this Agreement to its successor in interest in connection with a sale of
      assets, merger or similar transaction, or any Change of Control
      transaction, so long as the successor assumes the Company's obligations
      hereunder.

            14. Notices. All notices required or permitted by this Agreement
      shall be in writing and shall be deemed received when personally
      delivered, or the next business day after deposit in overnight mail or
      five days after mailing by registered mail. Notices shall be sent to the
      parties at their addresses set forth below or to such different addresses
      as such parties shall direct by notice sent in accordance with this
      paragraph.

            If to Executive:

                  Wayne P. Garten
                  President and Chief Executive Officer
                  Hanover Direct, Inc.
                  115 River Road, Building 10
                  Edgewater, New Jersey 07020
                  Email: wgarten@hanoverdirect.com

            with copies to:

                  Daniel Pollack, Esq.
                  Pollack & Kamanski
                  114 West 47th Street, 19th Floor
                  New York, New York 10036
                  Fax.: 212-575-6560
                  Email: dapollack@pollacklawfirm.com

            If to the Company:

                  Corporate Counsel
                  Hanover Direct, Inc.
                  1500 Harbor Boulevard
                  Weehawken, New Jersey 07087
                  Fax: 201-272-3498

            and

                  Chief Operating Officer
                  Hanover Direct, Inc.
                  115 River Road, Building 10
                  Edgewater, New Jersey 07020
                  Fax: 201-272-3465

            with copies to:

                                       9
<PAGE>

                  Sarah Hewitt, Esq.
                  Brown Raysman Millstein Felder & Steiner LLP
                  900 Third Avenue, 21st Floor
                  New York, New York 10022
                  Fax: 212-895-2900
                  Email: Shewitt@Brownraysman.com

            15. Counterparts; Telecopy. This Agreement may be signed in two or
      more counterparts, each of which shall be deemed an original, but all of
      which together shall constitute one and the same instrument. This
      Agreement may be executed by telecopy signature which shall be deemed an
      original.

            16. Successors and/or Assigns. Whenever in this Agreement either of
      the parties hereto is referred to, such reference shall be deemed to
      include the successors and/or permitted assigns and/or personal
      representatives of such party, and this Agreement shall inure to the
      benefit of and shall be binding on the parties hereto and the successors
      and/or permitted assigns and/or personal representatives of each such
      party.

            17. Entire Agreement. This Agreement (together with the Stock Option
      Agreements annexed hereto) sets forth the entire agreement of the parties
      hereto in respect of the subject matter contained herein and supersedes
      all prior agreements, promises, covenants, arrangements, communications,
      representations or warranties, whether oral or written, by any officer,
      employee or representative of any party hereto.

            18. No Conflict. Executive represents and warrants to the Company
      that neither the execution of this Agreement nor the performance of his
      obligations hereunder violate any agreement to which he is a party or by
      which he is otherwise bound.

      IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.

                                         HANOVER DIRECT, INC.

                                         By:   /s/ Michael D. Contino
                                               ---------------------------------
                                               Name:  Michael D. Contino
                                               Title: Executive Vice President

                                         /s/ Wayne P. Garten
                                         ---------------------------------------
                                         Wayne P. Garten

                                       10

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