March 1, 1938.

To THE Stockholders of the

HUDSON & MANHATTAN RAILROAD COMPANY:

The following report of your Company's operations for the year ended
December 31, 1937 is respectfully submitted.

The sHght upward trend in railroad traffic which began early in 1936 con¬
tinued until October, 1937, at which time a progressive downward trend in
business and industry generally manifested itself. As a consequence of this
recession, the total number of passengers carried during the year was 478,491
less than the number carried in 1936, a decrease of .6%. The current rate of
decrease which is still accelerating is much higher than is indicated by a com¬
parison between the traffic figures for 1937 and 1936.

The gross rentals of Hudson Terminal Buildings in 1937 were $34,374.68
more than the rentals in 1936. However, because of substantially increased
operating expenses, including taxes as well as certain non-recurring items, the
net income of Hudson Terminal Buildings for the year 1937 was $75,464.39 less
than that of 1936. The trend of gross rentals is still upward, but it is doubtful
whether the peak of taxes and operating expenses has yet been reached.

Full interest on the First Lien & Refunding Bonds was earned and paid.
No dividends were paid on the  Preferred or Common  Stocks of the Company.

For the first six months of 1937, the aggregate surplus income available for
payment of interest on the Adjustment Income Bonds amounted to $615,357.58,
and of this amount, $549,797.50, or $17.50 per $1,000 bond outstanding in the
hands of the public was paid on October 1, 1937. For the full year ended Decem¬
ber 31, 1937, after deducting the payment of $549,797.50 made on October 1,
surplus income available for Interest on these bonds aggregated $492,001.04, and
of this amount, $469,260.00, or $15.00 per $1,000 bond outstanding in the hands of
the public has been authorized to be paid on April 1, 1938, making the total
interest disbursed for the year 1937, 3J^%. Consequently, the unpaid and accu¬
mulated interest on these bonds is now a total of 5J^%, made up as follows: For
the year 1934, l^%; for the year 1935, iy>%; for the year 1936, l>i%, and
for the year 1937, lM%-

Confronted by increasing deficits in net income due to increased wages,
taxes and other operating expenses notwithstanding the consistent practice of rigid
economies, your Board became convinced by the middle of the year that increased
revenue could only be obtained by increasing the fare on the downtown line from
six cents to ten cents, making it uniform with the fare on the uptown line. The
capital investment in our railroad properties fully justifies the return which would
result from such increased fare. A^oreover, a general order of the Interstate
Commerce Commission, efiective June 1, 1936, permitted interstate carriers to
establish a minimum charge of ten cents for all classes of equipment. Accord¬
ingly, on July 31, 1937, we promulgated a local passenger tariff known as I. C.
C. No. 42, establishing a ten cent fare on the downtown line, effective September
1, 1937.

Following protests filed by various New Jersey municipal and civic organiza¬
tions, the Interstate Commerce Commission, on August 17, 1937, suspended the