UNITED STATES SECURITIES AND EXCHANGE COMMISSION

FORM 10-K

x Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 2003, or

o Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from ____ to _____

Commission file number 0-20618

RAILAMERICA, INC.

Delaware		65-0328006
(State or Other Jurisdiction of Incorporation or Organization)		(IRS Employer Identification Number)
5300 Broken Sound Blvd., N.W., Boca Raton, Florida		33487
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code: (561) 994-6015

Securities Registered Pursuant to Section 12(b) of the Act:

Securities Registered Pursuant to Section 12(g) of the Act: None

Check whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-K contained in this form, and no disclosure will be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

Check whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2) Yes x No o

The aggregate market value of the voting stock held by non-affiliates of the registrant as of June 30, 2003 computed by reference to the average bid and asked prices of registrant’s common stock reported on the New York Stock Exchange on such date was $ 262.3 million.

The number of shares outstanding of registrant’s Common Stock, $.001 par value per share, as of March 10, 2004 was 33,317,633.

DOCUMENTS INCORPORATED BY REFERENCE

The information required by Part III (Items 10, 11, 12, 13 and 14) will be incorporated by reference from the registrant’s Definitive Proxy Statement for its 2004 Annual Meeting of Stockholders to be filed with the Commission pursuant to Regulation 14A.

TABLE OF CONTENTS

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     This Form 10-K contains certain “forward-looking” statements within the meaning of The Private Securities Litigation Reform Act of 1995 and information relating to RailAmerica, Inc. and its subsidiaries that are based on the beliefs of our management and that involve known and unknown risks and uncertainties. When used in this report, the terms “anticipate,” “believe,” “estimate,” “expect” and “intend” and words or phrases of similar import, as they relate to us or our subsidiaries or our management, are intended to identify forward-looking statements. These statements reflect the current risks, uncertainties and assumptions related to various factors including, without limitation, currency risk, competitive factors, general economic conditions, customer relations, fuel costs, the interest rate environment, governmental regulation and supervision, the inability to successfully integrate acquired operations, the ability to successfully market and sell non-strategic and non-core properties and assets, the ability to service debt, one-time events and other factors described under the heading “Factors affecting our operating results, business prospects and market price of stock” and elsewhere in this report and in other filings made by us with the Securities and Exchange Commission. Based upon changing conditions, should any one or more of these risks or uncertainties materialize, or should any underlying assumptions prove incorrect, actual results may vary materially from those described in this report as anticipated, believed, estimated or intended. We undertake no obligation to update, and we do not have a policy of updating or revising, these forward-looking statements. Except where the context otherwise requires, the terms “we,” “us,” or “our” refer to the business of RailAmerica, Inc. and its consolidated subsidiaries.

PART I

ITEM 1. BUSINESS

GENERAL

     We are the largest owner and operator of short line freight railroads in North America and a leading owner and operator of a regional freight railroad in Australia. We own, lease or operate a diversified portfolio of 47 railroads with approximately 11,900 miles of track located in the United States, Australia and Canada. Through our diversified portfolio of rail lines, we operate in numerous geographic regions with varying concentrations of commodities hauled.

     We are currently in discussions to sell our Australian railroad, Freight Australia. We have engaged investment advisors and expect to complete the sale during 2004. Accordingly, Freight Australia’s results of operations for the periods presented have been reclassified to discontinued operations in our consolidated financial statements.

     In February 2004, we completed the sale of our 55% equity interest in Ferronor, a Chilean railroad, for $18.1 million, consisting of $10.8 million of cash, a secured instrument for $5.7 million due no later than June 2010 and a secured instrument from Ferronor for $1.7 million due no later than February 2007, both bearing interest at LIBOR plus 3%. Ferronor’s results of operations for the periods presented have been reclassified to discontinued operations in our consolidated financial statements.

     We were incorporated in Delaware on March 31, 1992 as a holding company for two pre-existing railroad companies. Our principal executive office is located at 5300 Broken Sound Blvd, N.W., Boca Raton, Florida 33487, and our telephone number at that location is (561) 994-6015.

     Our Internet website address is www.railamerica.com. We make available free of charge on or through our website our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, and amendments to these reports, as soon as reasonably practicable after we electronically file such material with, or furnish such material to, the Securities and Exchange Commission, or SEC. The SEC maintains an Internet site that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC at http://www.sec.gov. We also make available on our website other reports filed with the SEC under the Securities Exchange Act of 1934, as amended, including proxy statements and reports filed by officers and directors under Section 16(a) of that Act. These reports may be found by selecting the option entitled “SEC FILINGS” in the “INVESTOR RELATIONS” section on our website. Additionally, our corporate governance guidelines, board committee charters, code of business conduct and ethics and code of ethics for principal executive officers and senior financial officers are available on our website and in print to any shareholder who requests them. Information contained in or connected to our website is not part of this report.

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Since 1997, we have grown significantly through the following acquisitions:

BUSINESS STRATEGY

     INCREASE REVENUE THROUGH FOCUSED MARKETING EFFORTS AND RELIABLE RAIL SERVICE. In North America and Australia, we strive to increase our revenue through focused marketing efforts and cost effective and reliable service. In North America, we work with customers, industrial development organizations and our Class I interchange partners to develop transportation solutions to meet the needs of our customers. We specialize in developing customer-driven solutions for logistical issues, with local and regional marketing representatives working directly with customers to ensure that rail transportation services meet their needs. The operating focus of our North American railroads is on meeting and exceeding the customer’s expectations by providing frequent, dependable rail service at reasonable rates. In Australia, we market our services to potential customers across the continent, as the open access rules in that country allow us to operate over the track owned by other companies, although most of our revenue is generated in the State of Victoria.

     REDUCE DEBT TO 50% OF CAPITALIZATION. At December 31, 2003, our net debt (defined as total long-term debt including debt attributable to Australia, less cash) to total capitalization was 58%. Our goal is to reduce this amount to 50% by the end of 2004. We intend to accomplish this through our previously announced $100 million asset rationalization plan, retention of earnings and generation of free cash flow. Our asset rationalization plan includes the sale of our 55% equity interest in Ferronor, which was completed in February 2004, the sale of Freight Australia, our Australian railroad, as well as the sale of other non-strategic and non-core assets in North America.

     CONTINUE TO GROW THROUGH SELECTIVE ACQUISITIONS. Since 1997, we have made ten significant acquisitions of railroad companies, which owned or had equity interests in 53 railroads for total consideration in excess of $650 million. All of these railroads have been successfully integrated into our operations and in total have added in excess of 11,000 miles of track to our operations.

     In North America, we seek acquisition candidates that enable us to form geographic clusters of short lines, thereby affording economies of scale as well as marketing and operating synergies. We also seek properties where operating efficiencies can be realized from professional management techniques and asset rationalization, thereby enabling the target railroad to reduce operating costs and improve service. The resultant competitive pricing and better service, coupled with a focused sales and marketing effort, typically yields customer loyalty and increased carloads.

     Acquisition opportunities in North America generally come from three sources. First, certain Class I railroads have stated an intent to sell certain branch lines during 2004. We believe, based on our strong operating performance and relationships with the Class I railroads, we are a logical choice to acquire some of these properties. Second, as the short line industry itself continues to consolidate, we believe our industry reputation, demonstrated access to capital, breadth of geographic coverage and ability to efficiently evaluate and negotiate prospective transactions place us in a good position to acquire other short lines or groups of short lines. Third, as

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industrial companies divest of their railroad operations we believe our cost-effective and customer oriented approach makes us a strong candidate to acquire some of these railroads.

     In acquiring rail properties, we compete with other railroad operators, some of which have greater financial resources than we do. Competition for rail properties is based primarily upon price, operating history and financing capability. We believe our established reputation as a successful acquirer and operator of short line rail properties, combined with our managerial resources, effectively positions us to take advantage of future acquisition opportunities.

FINANCIAL INFORMATION ABOUT SEGMENTS

     Financial information relating to our segments for each of the three years in the period ended December 31, 2003 appears in Note 17 captioned “Segment Information” of the Notes to Consolidated Financial Statements set forth in Item 8 of this Annual Report at page F-29, and is incorporated herein by specific reference.

NORTH AMERICAN RAILROADS

     We currently own, lease or operate 46 rail properties in North America, of which 45 are short line railroads that provide transportation services for both on-line customers and Class I railroads that interchange with our rail lines. Short line railroads are typically less than 350 miles long, serve a particular class of customers in a small geographic area and interchange with Class I railroads. Short line rail operators primarily serve customers on their line by transporting products to and from the Class I interchanges. Each of our North American rail lines is typically the only rail carrier directly serving its customers. The ability to haul heavy and large quantities of freight as part of a long-distance haul makes our rail services generally a more effective, lower-cost alternative to other modes of transportation, including motor carriers. In addition to our 45 short line railroads, we operate one tourist railroad.

     UNITED STATES. We own, lease or operate 37 short line rail properties and one tourist railroad in the United States with approximately 6,900 miles of track. Our properties are geographically diversified and operate in 26 states. We have clusters of rail properties in the Southeastern, Southwestern, Midwestern, Great Lakes, New England and Pacific Coast regions of the United States. We believe that this cluster strategy provides economies of scale and helps achieve operational synergies.

     CANADA. We own, lease or operate 8 short line rail properties in Canada with approximately 1,800 miles of track. Our Canadian properties are geographically diversified and operate in five provinces and the Northwest territories.

INDUSTRY OVERVIEW

     The U.S. railroad industry is dominated by major Class I railroads, which operated approximately 100,000 miles of track in 2002. In addition to large railroad operators, there were more than 540 short line and regional railroads, which operated approximately 41,000 miles of track in 2002.

     The railroad industry is subject to regulations of various government agencies, primarily the Surface Transportation Board, or STB. For regulatory purposes, the STB classifies railroads into three groups: Class I, Class II and Class III, based on annual operating revenue. For 2002, the Class I railroads had operating revenue of at least $272.0 million, Class II railroads had revenue of $21.8 million to $271.9 million, and Class III railroads had revenue of less than $21.8 million. These thresholds are adjusted annually for inflation.

     In compiling data on the U.S. railroad industry, the Association of American Railroads, or AAR, uses the STB’s revenue threshold for Class I railroads. Regionals are railroads operating at least 350 miles of rail line and/or having revenues between $40 million and the Class I revenue threshold. Locals are railroads falling below the Regional criteria, plus switching and terminal railroads.

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2002 UNITED STATES INDUSTRY OVERVIEW

     As a result of deregulation in 1980, Class I railroads have been able to concentrate on core, long-haul routes, while divesting many of their low-density branch lines to smaller and more cost-efficient freight railroad operators such as our company. Divesting branch lines allows Class I railroads to increase traffic density, improve railcar utilization and avoid rail line abandonment. Because of the focus by short line railroads on increasing traffic volume through increased customer service and more efficient operations, traffic volume on short line railroads frequently increases after divestiture by Class I operators. Consequently, these transactions often result in net increases in the divesting carriers’ freight traffic because much of the business originating or terminating on branch lines feeds into divesting carriers’ core routes.

SALES AND MARKETING

     We focus on providing rail service to our customers that is easily accessible, reliable and cost-effective. In many cases, we believe customer service and sales and marketing at railroads that we have acquired have been neglected by the previous owners. Due to the size of the Class I railroads and their concentration on long-haul traffic, we believe the Class I operators typically have not effectively marketed to customers on these branch line operations.

     Following commencement of operations, our railroads generally have attracted increased rail shipments from existing customers and obtained traffic from new customers who had not previously shipped by rail or had ceased rail shipments. We believe our ability to generate additional traffic is enhanced by our marketing efforts which are aimed at identifying and responding quickly to the individual business needs of customers along our rail lines. As part of our marketing efforts, we often schedule more frequent rail service, help customers negotiate price and service levels with interchange partners and assist customers in obtaining the quantity and type of rail equipment required for their operations. We also provide non-scheduled train service on short notice to accommodate customers’ special or emergency needs.

     Our decentralized management structure is an important element of our marketing strategy. We give significant discretion with respect to sales and marketing activities to our North American regional marketing managers. Each regional marketing manager works closely with personnel of our railroads and with other members of senior management to develop marketing plans to increase shipments from existing customers and to develop business from new customers. We also work with the marketing staffs of the connecting Class I carriers to develop an appropriate array of rail-oriented proposals to meet customers’ needs and with industrial development organizations to locate new rail users. We consider all of our employees to be customer service representatives and encourage them to initiate and maintain regular contact with shippers.

     Rail traffic may be categorized as interline, local or bridge traffic. Interline traffic either originates or terminates with customers located along a rail line and is interchanged with other rail carriers. Local traffic both originates and terminates on the same rail line and does not involve other carriers. Bridge traffic passes over the line from one connecting rail carrier to another.

     Interline and local traffic generated 87%, 87% and 84% of our total freight revenue in 2003, 2002, and 2001, respectively. We believe that high levels of interline and local traffic provide us with greater stability of revenue because this traffic represents shipments to or from customers located along our lines and cannot be easily diverted to other rail carriers, unlike bridge traffic.

     Our railroads compete directly with other modes of transportation, principally motor carriers and, to a lesser extent, ship and barge operators. The extent of this competition varies significantly among our railroads. Competition is based primarily upon the rate charged and the transit time required, as well as the quality and reliability of the service provided, for an origin-

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to-destination package. To the extent other carriers are involved in transporting a shipment, we cannot control the cost and quality of service. Cost reductions achieved by major rail carriers over the past several years have generally improved their ability to compete with alternate modes of transportation.

     The following table summarizes freight revenue by type of traffic carried by our North American railroads in 2003, 2002 and 2001 in dollars and as a percent of total freight revenue.

NORTH AMERICA
FREIGHT REVENUE
(DOLLARS IN THOUSANDS)

     All of our short line properties interchange traffic with Class I railroads. The following table summarizes our significant connecting carriers in 2003, 2002 and 2001 by freight revenue and carloads as a percentage of total interchanged (interline and bridge) traffic.

NORTH AMERICA
INTERCHANGED TRAFFIC

     Charges for interchanged traffic are generally billed to the customers by the connecting carrier and cover the entire transportation cost from origin to destination, including the portion that travels over our lines. Our revenue is generally paid directly to us by the connecting carriers rather than by customers and is payable regardless of whether the connecting carriers are able to collect from the customers. The revenue payable by connecting carriers are set forth in contracts entered into by each of our railroads with their respective connecting carriers and are generally subject to periodic adjustments.

     In 2003, we served approximately 1,600 customers in North America. These customers shipped and/or received a wide variety of products. Although most of our North American railroads have a well-diversified customer base, several of the smaller rail lines have one or two dominant customers. In both 2003 and 2002, our 10 largest North American customers accounted for approximately 27% of North American transportation revenue.

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     The following table sets forth by number and percentage the carloads hauled by our North American railroads during the years ended December 31, 2003, 2002 and 2001.

CARLOADS CARRIED BY COMMODITY GROUP

EMPLOYEES

     Currently, we have approximately 1,650 full-time railroad employees and 125 full-time corporate employees in North America. Approximately 820 of these employees are subject to collective bargaining agreements.

SAFETY

     We endeavor to conduct safe railroad operations for the benefit and protection of employees, customers and the communities served by our railroads. Our safety program, led by the Vice President of Safety and Operating Practices, involves all of our employees and is administered by each Regional Vice President. Operating personnel are trained and certified in train operations, hazardous materials handling, personal safety and all other areas subject to governmental rules and regulations. Each U.S. employee involved in train operations is subject to pre-employment and random drug testing whether or not required by federal regulation. We believe that each of our North American railroads complies in all material respects with federal, state, provincial and local regulations. Additionally, each railroad is given flexibility to develop more stringent safety rules based on local requirements or practices. We also participate in committees of the AAR, governmental and industry sponsored safety programs including Operation Lifesaver (the national grade crossing awareness program) and the American Short Line and Regional Railroad Association Safety Committee. Our reportable injury frequency ratio, measured as reportable injuries per 200,000 man hours worked, decreased to 2.03 in 2003 from 3.05 in 2002 and 3.37 in 2001.

REGULATION

     UNITED STATES. Our subsidiaries in the United States are subject to various safety and other laws and regulations by numerous government agencies, including (1) regulation by the STB, and the Federal Railroad Administration, or FRA, (2) labor related statutes including the Railway Labor Act, Railroad Retirement Act, the Railroad Unemployment Insurance Act, and the Federal Employer’s Liability Act, and (3) some limited regulation by agencies in the states in which we do business.

     The STB, established by the ICC Termination Act of 1995, has jurisdiction over, among other matters, the construction, acquisition, or abandonment of rail lines, the consolidation or merger of railroads, the assumption of control of one railroad by another railroad, the use by one railroad of another railroad’s tracks through lease, joint use or trackage rights, the rates charged for their transportation services, and the service provided by rail carriers.

     As a result of the 1980 Staggers Rail Act, railroads have received considerable rate and market flexibility including the ability to obtain wholesale exemptions from numerous provisions of the Interstate Commerce Act. The Staggers Rail Act allowed the deregulation of all containerized and truck trailer traffic handled by railroads. Requirements for the creation of new

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short line railroads or the expansion of existing short line railroads were substantially expedited and simplified under the exemption process. On regulated traffic, railroads and shippers are permitted to enter into contracts for rates and provision of transportation services without the need to file tariffs. Moreover, on regulated traffic, the Staggers Rail Act allows railroads considerable freedom to raise or lower rates without objection from captive shippers. While the ICC Termination Act retained maximum rate regulation on traffic over which railroads have exclusive control, the new law relieved railroads from the requirements of filing tariffs and rate contracts with the STB on all traffic other than agricultural products.

     The FRA regulates railroad safety and equipment standards, including track maintenance, handling of hazardous shipments, locomotive and rail car inspection and repair requirements, and operating practices and crew qualifications.

     CANADA. Our Canadian railroad subsidiaries are subject to regulation by various governmental departments and regulatory agencies at the federal or provincial level depending on whether the railroad in question falls within federal or provincial jurisdiction. A Canadian railroad generally falls within the jurisdiction of federal regulation if the railroad crosses provincial or international borders or if the Parliament of Canada has declared the railroad to be a federal work or undertaking and in selected other circumstances. Any company which proposes to construct or operate a railway in Canada which falls within federal jurisdiction is required to obtain a certificate of fitness under the Canada Transportation Act, or CTA. Under the CTA, the sale of a federally regulated railroad line is not subject to federal approval, although a process of advertising and negotiating may be required in connection with any proposed discontinuance of a federal railway. Federal railroads are governed by federal labor relations laws.

     Short line railroads located within the boundaries of a single province which do not otherwise fall within the federal jurisdiction are regulated by the laws of the province in question, including laws as to licensing and labor relations. Most of Canada’s ten provinces have enacted new legislation, which is more favorable to the operation of short line railroads than previous provincial laws. Many of the provinces require as a condition of licensing under the short line railroads acts that the licensees comply with federal regulations applicable to safety and other matters and remain subject to inspection by federal railway inspectors. Under some provincial legislation, the sale of a provincially regulated railroad line is not subject to provincial approval, although a process of advertising and negotiating may be required in connection with any proposed discontinuance of a provincial railway.

     Acquisition of additional railroad operations in Canada, whether federally or provincially regulated, may be subject to review under the Investment Canada Act, or ICA, a federal statute which applies to every acquisition of a Canadian business or establishment of a new Canadian business by a non-Canadian. Whether or not an acquisition is subject to review under the ICA is dependent on the book value of the assets of the Canadian business being acquired. Acquisitions that are subject to review must, before their completion, satisfy the Minister responsible for administering the ICA that the acquisition is of net benefit to Canada.

     Any contemplated acquisitions may also be subject to the provisions of the Competition Act federal antitrust legislation of general application. The Competition Act contains merger control provisions which apply to certain acquisitions. As a result, acquisitions exceeding specified asset and/or revenue thresholds may be subject to pre-merger notification and subsequent substantive review prior to their completion.

FREIGHT AUSTRALIA

     We own Freight Australia, a regional freight railroad operating in the State of Victoria, and adjoining states in Australia. Freight Australia was purchased from the Government of the State of Victoria, Australia on April 30, 1999 for total consideration of $103 million. Freight Australia operates over 3,150 miles of track under a prepaid 45 year lease from the State of Victoria. We are currently in discussions to sell our Australian railroad, Freight Australia. We have engaged investment advisors and expect to sell Freight Australia during 2004. Accordingly, Freight Australia’s results of operations for the periods presented have been reclassified to discontinued operations in our consolidated financial statements.

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INDUSTRY OVERVIEW

     The demographics and geography of Australia dictate that the freight transport business is characterized by long distances and low volumes of freight. Industrial flows tend to relate to production cycles and agricultural product flows are seasonal and driven by export shipping schedules. Generally, the pattern of surface freight movement in Australia comprises:

     In recent years, the Australian rail freight sector’s share of the total freight market has been maintained despite growth in road transport, largely because of the growth in Australia’s coal and mineral exports. Over a period of 30 years, rail movements of these commodities have increased almost eightfold.

     Major changes have taken place in the rail industry over the last decade, partly as a result of the privatization of government-owned railways and the entry of private sector participants in accordance with the competitive neutrality provisions of the national Competition Principles Agreement. The private sector has taken an increasingly larger role through outsourcing of non-core activities by railway operators.

     The railway network in Australia contains approximately 25,000 miles of track, of which approximately 21,000 miles are track used for general and bulk freight and passenger services. The remaining 4,000 miles are private sector owned and operated, and principally serve Australia’s mining and primary production industries.

SALES AND MARKETING

     Freight Australia focuses on providing door-to-door rail service to customers that is easily accessible, reliable and cost-effective since truck and other rail operators are the principle competition. Due to improved productivity and use of our rolling stock and the open access to track outside of Victoria, we have been able to market to customers across the Australian continent effectively.

     Following commencement of operations, Freight Australia has attracted increased rail shipments from existing customers and obtained traffic from new customers who had not previously shipped by rail or had ceased rail shipments. We believe that our ability to generate additional traffic is enhanced by our marketing efforts, which are aimed at identifying and responding quickly to the individual business needs of customers along the rail lines. As part of our marketing efforts, we often schedule more frequent rail service. Freight Australia also provides non-scheduled train service on short notice to accommodate customers’ special or emergency needs.

     Our decentralized management structure is an important element of our marketing strategy. We give significant discretion with respect to sales and marketing activities to our marketing managers. Each marketing manager works closely with personnel in other departments to develop marketing plans to increase shipments from existing customers and to develop business from new customers. We consider all of our employees to be customer service representatives and encourage them to initiate and maintain regular contact with shippers.

     Freight Australia’s customers span a variety of industries, with particular emphasis on companies in the Australian agricultural industry for whom we carry bulk grain and other agricultural products. One customer, AWB Limited, represented 11% of Freight Australia’s operating revenue for the year ended 2003, 20% for the year ended 2002 and 30% for the year ended 2001. Additionally, track access fees from V/Line Passenger represented 16% of Freight Australia’s operating revenue in 2003, 15% in 2002, and 13% in 2001.

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     The following table sets forth by dollar amount (in thousands of U.S. dollars) and percentage Freight Australia’s transportation and infrastructure revenue for the years ended December 31, 2003, 2002 and 2001.

     Freight Australia competes directly with other railroads in the open access Australian railway network as well as with other modes of transportation, principally motor carriers and, to a lesser extent, ship operators. Competition is based primarily upon the rate charged and the transit time required, as well as the quality and reliability of the service provided, for an origin-to-destination package. Cost reductions achieved by Freight Australia over the past several years have generally improved its ability to compete with alternate modes of transportation.

EMPLOYEES

     Freight Australia currently has 723 employees. Most of these employees are subject to collective bargaining agreements.

SAFETY

     Freight Australia endeavors to conduct safe railroad operations for the benefit and protection of employees, customers and communities we serve. Operating personnel are trained and certified in train operations, hazardous materials handling, personal safety and all other areas subject to governmental rules and regulations. Each employee involved in train operations is subject to pre-employment and random drug testing whether or not required by federal or state regulation. We believe that Freight Australia complies in all material respects with federal, state and local regulations. Freight Australia holds Rail Safety Accreditation in accordance with Australian Standards Regulations 4292 in Victoria, New South Wales, Queensland and South Australia. We also participate in several governmental and industry sponsored safety programs.

REGULATION

     Freight Australia is subject to regulation in the State of Victoria by the Essential Services Commission (formerly the Office of the Regulator-General). The Essential Services Commission, known as the ESC, was established by the Essential Services Commission Act. The purpose of the ESC is to create a regulatory framework for regulated industries which promotes and safeguards competition and fair and efficient market conduct or, if there is no competitive market, promotes the simulation of competitive market conduct and the prevention of misuse of monopoly power. These objectives were expanded by the Victorian Government in the Rail Corporations Act 1996 to ensure that rail users have fair and reasonable access to declared railway services.

     The Rail Corporations Act 1996, known as RCA, regulates the operation of the State of Victoria’s passenger trains and trams and rail network. Part 2A of the RCA outlines an access regime, which applies to railways and rail infrastructure and gives power to the ESC to arbitrate on terms and conditions of access to declared services.

     The Secretary to the Department of Infrastructure may take disciplinary action against an accredited railroad if the railroad has failed to comply with the requirements of accreditation or has permitted an unsafe practice or acted negligently. Disciplinary action, which the Secretary may take, includes disqualifying the railroad from holding an accreditation for a period specified by the Secretary, suspension of the accreditation, early expiry of the accreditation and immediate or future cancellation of the accreditation.

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     The Transport Act contains detailed provisions authorizing the Secretary of the Department of the Infrastructure to carry out inspections and giving inspectors powers to enter and inspect premises (including testing equipment and seizing property if appropriate). All actions must be reasonably necessary to determine compliance with the Transport Act. A search warrant or prior written consent of the occupier is necessary for entry into premises.

     The Secretary must conduct safety audits of every person accredited at least once every twelve months, to ensure that the accredited person is complying with the requirements of accreditation. The Secretary may charge the accredited person a fee for the safety audit service, subject to the limits set out in the relevant regulations. An accredited person has a duty to inquire into accidents and incidents.

FERRONOR

     Ferronor owns and operates the only north-south railroad in northern Chile, extending from La Calera near Santiago, where it connects with Chile’s southern railway, Ferrocarril del Pacifico, S.A., to its northern terminus at Iquique, approximately 120 miles south of the Peruvian border. It also operates several east-west branch lines that link a number of iron, copper and mineral salt mines and production facilities with several Chilean Pacific port cities. Ferronor also serves Argentina and Bolivia through traffic interchanged with the Belgrano Cargas Railroad and the Antofagasta (Chile)-Bolivia Railway. In addition, commencing in 2002, Ferronor began operating the Porterillos Railway, a customer-owned 57 mile freight railroad. In February 2004, we sold our equity interest in Ferronor for $18.1 million, consisting of $10.8 million of cash, a secured note for $5.7 million due no later than June 2010 and a secured note from Ferronor for $1.7 million due no later than February 2007, both bearing interest at LIBOR plus 3%. Ferronor’s results of operations have been presented as discontinued operations in our financial statements.

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ITEM 2. PROPERTIES

NORTH AMERICAN RAILROAD PROPERTIES

     We operate over 8,745 miles of track in North America. The following map displays all of our North American railroad properties that we operated as of March 10, 2004:

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     The following table sets forth information with respect to the North American railroad properties that we owned as of March 10, 2004:

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AUSTRALIAN RAILROAD PROPERTIES

     On April 30, 1999, through our wholly owned subsidiary Freight Australia, we prepaid a 45-year lease to operate 3,150 miles of track in the State of Victoria, Australia. Freight Australia’s principal commodity is agricultural products for use in southwestern Australia as well as export markets.

NORTH AMERICAN ROLLING STOCK

     The following tables summarize the composition, as of December 31, 2003, of our North American railroad equipment fleet.

AUSTRALIAN ROLLING STOCK

     The following tables summarize the composition, as of December 31, 2003, of our Australian railroad equipment fleet. We own all of our Australian equipment fleet.

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     Based on current and forecasted traffic levels on our railroads, management believes that our present equipment, combined with the availability of other rail cars and/or locomotives for hire, is adequate to support our operations. We believe that our insurance coverage with respect to our property and equipment is adequate.

ADMINISTRATIVE OFFICES AND OTHER

     We own a 59,500 square foot office building, located in Boca Raton, Florida, where our executive offices are located. Of this space, 7,900 square feet are leased to a third party. In addition, we lease approximately 21,000 square feet of office space in San Antonio, Texas for approximately $500,000 annually. The lease expires December 31, 2005.

     Freight Australia’s administrative office is in Melbourne, Australia. Freight Australia leases approximately 20,000 square feet of space from the Victorian Government for $200,000 annually. The lease expires May 31, 2004. We are in the process of negotiating a new long-term lease.

ITEM 3. LEGAL PROCEEDINGS

     In the ordinary course of conducting our business, we become involved in various legal actions and other claims some of which are currently pending. Litigation is subject to many uncertainties and we may be unable to accurately predict the outcome of individual litigated matters. Some of these matters possibly may be decided unfavorably to us. It is the opinion of management that the ultimate liability, if any, with respect to these matters will not be material. Other than ordinary routine litigation incidental to our business, no other litigation exists.

     In 2000, certain parties filed property damage claims totaling approximately $26.3 million against RaiLink Ltd. and RaiLink Canada Ltd., wholly-owned subsidiaries of RailAmerica, Inc., and others in connection with fires that allegedly occurred in 1998. We have vigorously defended these claims and have insurance coverage up to approximately $15.5 million to cover these claims. During January 2004, a settlement was reached with the principal claimants for amounts within the insurance coverage. As a consequence, management has determined that these claims will not have any adverse effect on our financial position, results of operations or cash flows.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

     No matters were submitted to a vote of security holders during the fourth quarter of 2003.

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PART II

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

     Our common stock began trading on the New York Stock Exchange (NYSE) on January 2, 2002 under the symbol “RRA”. Prior to January 2, 2002, our common stock traded on the Nasdaq National Market (Nasdaq) under the symbol “RAIL”. Set forth below is high and low price information for the common stock as reported on the NYSE for each period presented.

     As of March 10, 2004, there were 615 holders of record of our common stock. We have never declared or paid a dividend on our common stock. Our senior credit agreement and the indenture governing our senior subordinated notes limit our ability to pay dividends.

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ITEM 6. SELECTED FINANCIAL DATA

     The results of our continuing operations for the years ended December 31, 2003, 2002, 2001, 2000 and 1999 include the results of certain railroads from the dates they were acquired as follows: San Luis and Rio Grande Railroad effective June 29, 2003; the Mobile Line, effective June 1, 2003; StatesRail, effective January 4, 2002; ParkSierra, effective January 8, 2002; RailTex, effective February 1, 2000; RaiLink, effective August 1, 1999; and Toledo, Peoria and Western Railway, effective September 1, 1999. The income statement data for the years ended December 31, 2003, 2002 and 2001 and the balance sheet data at December 31, 2003 and 2002 are derived from, and are qualified by reference to, audited financial statements included elsewhere in this report and should be read in conjunction with those financial statements and the notes thereto. The income statement data set forth below for the periods ended December 31, 2000 and 1999 and the balance sheet data as of December 31, 2001, 2000 and 1999 are derived from our financial statements not included. Freight Australia and Ferronor have been presented as discontinued operations and thus have been excluded from the income statement data and freight carloads within the operating data.

     FACTORS AFFECTING OUR OPERATING RESULTS, BUSINESS PROSPECTS AND MARKET PRICE OF STOCK

     Substantial Debt and Debt Service. As of December 31, 2003, we had indebtedness of $533.3 million, including debt attributable to Australia, and, as a result, we incur significant interest expense. The degree to which we are leveraged could have important consequences, including the following:

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     A default could result in acceleration of our indebtedness and permit our senior lenders to foreclose on our assets.

     As of December 31, 2003, we had $14.0 million of borrowings under our revolving credit facility. This facility allows us to borrow a total of $100 million for any purpose and we may borrow up to an additional $100 million of term debt in connection with acquisitions if we meet specified conditions. If new debt is added to our current debt levels, the related risks that we face would intensify. As of March 10, 2004, we had $46.7 million of borrowings outstanding under the revolving credit facility. The increase in the revolver balance is primarily due to the acquisition of the Central Michigan Railway in January 2004.

     Covenant Restrictions. Our credit facilities and the indenture governing our senior subordinated notes contain numerous covenants imposing restrictions on our ability to, among other things:

     Our credit facilities also contain financial covenants that require us to meet a number of financial ratios and tests. Our failure to comply with the obligations in our credit facilities and indenture could result in events of default under the credit facilities or the indenture, which, if not cured or waived, could permit acceleration of the indebtedness or our other indebtedness, allowing our senior lenders to foreclose on our assets.

     Fuel Costs. Fuel costs were approximately 7.0% of our revenue for the year ended December 31, 2003, 6.9% for the year ended December 31, 2002 and 8.1% for the year ended December 31, 2001. Fuel prices and supplies are influenced significantly by international, political and economic circumstances. If fuel supply shortages or unusual price volatility were to arise for any reason, the resulting higher fuel prices would significantly increase our operating costs. For 2003, approximately 35% of our fuel costs were subject to fuel hedges which offset some of the rising costs. As of the date of this report, we have not entered into any fuel hedges for fiscal year 2004.

     Acquisitions and Integration. We have acquired many railroads since we commenced operations in 1992 and intend to continue our acquisition program. Acquisitions result in greater administrative burdens and operating costs and, to the extent financed with debt, additional interest costs. The process of integrating our acquired businesses may be disruptive to our business and may cause an interruption of, or a loss of momentum in, our business.

     If these disruptions and difficulties occur, they may cause us to fail to realize the cost savings, revenue enhancements and other benefits that we currently expect to result from an acquisition and may cause material adverse short- and long-term effects on our operating results and financial condition.

     Financing for acquisitions may come from several sources, including cash on hand and proceeds from the incurrence of indebtedness or the issuance of additional common stock, preferred stock, convertible debt or other securities. The issuance of any additional securities could result in dilution to our stockholders.

     Continuing Relationships with Class I Carriers. The railroad industry in the United States and Canada is dominated by a small number of Class I carriers that have substantial market control and negotiating leverage. Almost all of the traffic on our

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North American railroads is interchanged with Class I carriers. Our ability to provide rail service to our customers in North America depends in large part upon our ability to maintain cooperative relationships with Class I carriers with respect to, among other matters, freight rates, car supply, reciprocal switching, interchange and trackage rights. In addition, loss of customers or service interruptions or delays by our Class I interchange partners relating to customers who ship over our track, may decrease our revenue.

     Class I carriers are also sources of potential acquisition candidates as they continue to divest themselves of branch lines to smaller rail operators. Failure to maintain good relationships may adversely affect our ability to negotiate acquisitions of branch lines.

     Foreign Operations. We currently have railroad operations in Australia and Canada. We may, from time to time, consider acquisitions in other foreign countries. The risks of doing business in foreign countries include:

     Environmental and Other Governmental Regulation. Our railroad and real estate ownership are subject to extensive foreign, federal, state and local environmental laws and regulations. We could incur significant costs as a result of any allegations or findings to the effect that we have violated, or are strictly liable under these laws or regulations. We may be required to incur significant expenses to investigate and remediate environmental contamination. We are also subject to governmental regulation by a significant number of foreign, federal, state and local regulatory authorities with respect to our railroad operations and a variety of health, safety, labor, environmental, maintenance and other matters. Our failure to comply with applicable laws and regulations could have a material adverse effect on us.

     Adverse economic conditions. Several of the commodities we transport come from industries with cyclical business operations. As a result, prolonged negative changes in domestic and global economic conditions affecting the producers and consumers of the commodities carried by us may decrease our revenue.

     Natural events. Severe weather conditions and other natural phenomena, including earthquakes, fires and floods, may cause significant business interruptions and result in increased costs, increased liabilities and decreased revenue.

     Reliance on Australian Agriculture. Factors that negatively affect the agricultural industry in the regions in which Freight Australia operates negatively affect our profitability. These factors include drought or other weather conditions, export and domestic demand and fluctuations in agricultural prices. For the year ended December 31, 2003 approximately 26% of Freight Australia’s revenue and for the year ended December 31, 2002 approximately 39% of Freight Australia’s revenues were derived from the agricultural industry. Our 2003 and 2002 results of operations were significantly adversely impacted by a severe drought in Australia.

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     Risks of Our Australian Operations. In addition to the risks described above, our Australian operations are subject to the risks and uncertainties described below. In the event that we do not complete our proposed sale of Freight Australia, the following risks may adversely affect our continuing operations:

     Depending on the harvest, our Australian subsidiary has generated between 11% and 19% of its total revenue under an agreement with AWB, Limited, the sole exporter of Australian wheat. AWB, Limited may terminate the agreement under specified limited circumstances.

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS

GENERAL

     Our growth is derived from increasing carloads and increasing our average rate per carload on our existing railroads and from the acquisition of new lines. Total North American “same railroad” carloads increased by approximately 1.5% from 2002 to 2003, with the average rate per carload increasing from $261 to $276. During 2003 we acquired two branch lines, one of which is contiguous with our existing Alabama and Gulf Coast Railway. In January 2002, we acquired StatesRail and ParkSierra, which included a total of ten freight railroads and one tourist railroad. In January 2004, our wholly-owned subsidiary, the Huron and Eastern Railway, completed the acquisition of the Central Michigan Railway Company, which operates 100 miles of rail line in Michigan, for $25.3 million in cash.

     Our North American rail group operates 46 railroads. Each of these railroads operates independently with their own customer base. While these railroads are spread out geographically and carry diverse commodities, bridge traffic accounted for 16%, coal accounted for 13%, and lumber and forest products accounted for 11% of our carloads in North America during 2003. As a percentage of revenue, which is impacted by several factors including the length of the haul, lumber and forest products generated 16%, agricultural and farm products generated 10% and chemicals generated 10% of our North American freight revenue. Bridge traffic, which neither originates nor terminates on our line, generally has a lower rate per carload and generated 7% of our freight revenue.

     The number of carloads we transport of many of our commodities, including automotives, chemicals, metals and lumber and forest products, is partially dependent on the U.S. economy. The continued weakness in the U.S. economy has impacted our “same railroad” carload growth in 2003. In addition, while many of our costs are relatively fixed, fuel costs, which represent 7% of total revenue, are variable and were significantly impacted by high energy prices in 2003.

     A major focus for us in 2003, which we expect to continue in 2004, is to decrease our leverage through asset sales and the disposition of non-strategic, non-core assets. In 2003, we sold one railroad for $2.6 million in cash and completed an additional $3.3 million in other asset sales. Already in 2004, we have completed the sale of our 55% equity interest in Ferronor, a Chilean railroad. Ferronor’s results of operations have been reclassified to discontinued operations in our consolidated financial statements.

     We are currently in discussions to sell our Australian railroad, Freight Australia. We have engaged investment advisors and expect to complete a sale during 2004. Accordingly, Freight Australia’s results of operations for the periods presented have been reclassified to discontinued operations in our consolidated financial statements.

     Freight Australia has two primary sources of revenue. The first is freight revenue, which comprised 77% of Freight Australia’s total revenue in 2003, with agricultural products comprising 26% of total revenue in 2003. The level of revenue from agricultural products is highly dependent on the annual grain harvest in the State of Victoria. The grain harvest in the fourth quarter of 2002 was very poor due to the worst drought in many years in the grain regions served by Freight Australia. As a result, revenue from transporting grain was 42% lower in 2003 than in 2002 and 2002 revenue was 21% lower than in 2001. The second source of revenue is access fees paid to us by other passenger or freight operators for the right to operate over our railroad. These amounts accounted for 20% of Freight Australia’s revenue in 2003.

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Critical Accounting Estimates

     The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenue and expenses during the reporting periods.

     The critical financial statement accounts that are subject to significant estimation are reserves for litigation, casualty and environmental matters, Australian long service leave, deferred income taxes and property, plant and equipment depreciation methods.

     In accordance with Statement of Financial Accounting Standards, or SFAS, No. 5, “Accounting for Contingencies,” an accrual for a loss contingency is established if information available prior to the issuance of the financial statements indicates that it is probable that a liability has been incurred or an asset has been impaired. These estimates have been developed in consultation with outside counsel handling our defense in these matters and are based upon an analysis of potential results, assuming a combination of litigation and settlement strategies. Subsequent changes to those estimates are reflected in our statements of income in the period of the change.

     Deferred taxes are recognized based on differences between the financial statement carrying amounts and the tax bases of assets and liabilities. We regularly review our deferred tax assets for recoverability and establish a valuation allowance based on historical taxable income, projected future taxable income, and the expected timing of the reversals of existing temporary differences. If we are unable to generate sufficient future taxable income, or if there is a material change in the actual effective tax rates or time period within which the underlying temporary differences become taxable or deductible, we could be required to establish an additional valuation allowance against a portion of our deferred tax asset, resulting in an increase in our effective tax rate and an adverse impact on earnings.

     Property, plant and equipment, including that of Freight Australia, comprised 84% of our total assets as of December 31, 2003. These assets are stated at cost, less accumulated depreciation. We use the group method of depreciation under which a single depreciation rate is applied to the gross investment in our track assets. Upon normal sale or retirement of track assets, cost less net salvage value is charged to accumulated depreciation and no gain or loss is recognized. Expenditures that increase asset values or extend useful lives are capitalized. Repair and maintenance expenditures are charged to operating expense when the work is performed. We periodically review the carrying value of our long-lived assets for impairment. This review is based upon our projections of anticipated future cash flows. While we believe that our estimates of future cash flows are reasonable, different assumptions regarding such cash flows could materially affect our evaluations.

     Freight Australia maintains a long service leave program for its employees. Under the program, an employee is entitled to paid leave of up to 13 weeks after they have performed 10 years of service. Key assumptions in estimating this liability are the discount rate, annual rate of increase in compensation levels, employee turnover and the number of years before employees use the accrued leave.

     For a complete description of our accounting policies, see Note 1 to our consolidated financial statements.

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RESULTS OF OPERATIONS

     The following discussion and analysis should be read in conjunction with the Consolidated Financial Statements and Notes beginning on Page F-1.

CONSOLIDATED 2003 COMPARED TO 2002

     On a consolidated basis, we recorded income from continuing operations and net income for 2003 of $24.7 million, or $0.75 per diluted share, and $14.7 million, or $0.46 per diluted share, respectively, compared with income from continuing operations and net income for 2002 of $2.5 million, or $0.08 per diluted share, and $2.2 million, or $0.07 per diluted share, respectively. Our operating revenue increased $25.1 million, or 8%, to $358.4 million for the year ended December 31, 2003, from $333.3 million for the year ended December 31, 2002. This increase was primarily due to the acquisitions of the Mobile Line and the San Luis and Rio Grande Railroad, the appreciation of the Canadian dollar against the U.S. dollar and a 1.5% increase in same railroad carloads. Operating income increased $9.0 million, or 14%, to $74.9 million for the year ended December 31, 2003 from $65.9 million in the comparable period in 2002. This increase was due to an increase of $7.4 million in North America’s operating income in 2003, $7.5 million of bid and restructuring costs in 2002, partially offset by a decrease in asset sale gains of $5.9 million from 2002.

     Interest expense, including amortization of deferred financing costs, decreased $3.4 million, or 10%, to $32.5 million for the year ended December 31, 2003 from $35.9 million in the comparable period in 2002 primarily due to a general decrease in interest rates and the refinancing of our senior debt in May 2002, which resulted in a lower interest rate to us. For the years ended December 31, 2003 and 2002, $4.9 and $4.6 million of interest expense was allocated to discontinued operations, respectively. Other income (expense) decreased $25.6 million in the year ended December 31, 2003 from 2002 due to the 2002 write-off of our interest rate swaps, unamortized deferred financing costs and other refinancing related costs from the terminated credit facility which was originally entered into in 2000. Our effective tax rate for the year ended December 31, 2003 was 42.0% compared to 44.2% in 2002.

     Loss from discontinued operations increased $9.3 million in the year ended December 31, 2003 to $10.0 million from $0.7 million in 2002 primarily due to the drought in Australia, which resulted in a 42% decline in grain revenue. In May 2002, we sold Texas New Mexico Railroad and recorded a gain from discontinued operations of $0.8 million, after tax. This gain was partially offset by an escrow settlement from the sale of Kalyn Siebert, our previously discontinued trailer manufacturing operations, which resulted in a loss of $0.4 million, after tax.

CONSOLIDATED 2002 COMPARED TO 2001

     On a consolidated basis, we recorded income from continuing operations and net income for 2002 of $2.5 million, or $0.08 per diluted share, and $2.2 million, or $0.07 per diluted share, respectively, compared with income from continuing operations and net income for 2001 of $6.8 million, or $0.29 per diluted share, and $17.0 million, or $0.74 per diluted share, respectively. Our operating revenue increased $87.2 million, or 35%, to $333.3 million in 2002 from $246.1 million in 2001. The acquisitions of ParkSierra and StatesRail contributed $90.3 million to operating revenue for the year. This increase was partially offset by a $3.1 million decrease from the disposal of Georgia Southwestern Railroad. Operating income increased $14.9 million, or 29%, to $65.9 million from $51.0 million in 2001 primarily due to the acquisitions of ParkSierra and StatesRail, which contributed $25.2 million to operating income, partially offset by $6.4 million of failed bid costs, restructuring charges and increased corporate expenses to support the ParkSierra and StatesRail operations.

     Interest expense, including amortization of deferred financing costs, decreased $6.1 million, or 15%, to $35.9 million for the year ended December 31, 2002 from $42.0 million in 2001 primarily due to a general decrease in interest rates and the refinancing of our senior debt in May 2002, which resulted in a lower interest rate to us. For the years ended December 31, 2002 and 2001, $4.6 and $4.9 million of interest expense was allocated to discontinued operations, respectively. In connection with our debt refinancing in May 2002, we recorded a charge to other income (expense) of $25.6 million for the write-off of our interest rate swaps, unamortized deferred loan costs and other refinancing related costs.

     Discontinued operations generated a loss of $0.7 million in 2002 compared to income of $10.2 million in 2001 primarily due to the drought in Australia which reduced the grain tonnage we transported to 3.7 million tons in 2002 compared to 5.0 million tons in 2001.

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NORTH AMERICAN RAILROAD OPERATIONS

     Our historical results of operations for our North American railroads include the operations of our acquired railroads from the dates of acquisition as follows:

     We disposed of certain railroads as follows:

     As a result, the results of operations for the years ended December 31, 2003, 2002 and 2001 are not comparable in various material respects and are not indicative of the results which would have occurred had the acquisitions or dispositions been completed at the beginning of the periods presented.

     COMPARISON OF NORTH AMERICAN RAILROAD OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002

     The following table sets forth the operating revenue and expenses (in thousands) for our North American railroad operations for the periods indicated.

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     OPERATING REVENUE. Operating revenue increased by $25.0 million, or 7.5% to $358.0 million for the year ended December 31, 2003 from $333.0 million for the year ended December 31, 2002 while carloads increased 3.0% to 1,139,538 in 2003 from 1,106,524 in 2002. Excluding revenue of $1.6 million in 2002 from the disposed railroads, Texas New Mexico Railroad, Georgia Southwestern Railroad and San Pedro and Southwestern Railway, and $9.8 million in 2003 from the acquired railroads, San Luis and Rio Grande Railroad and the Mobile Line and the disposed railroad San Pedro and Southwestern Railway, operating revenue increased $16.7 million, or 5.1%, while carloads increased by 16,583, or 1.5%. The increase in “same railroad” revenue was due to a 12% improvement in the Canadian dollar, which positively impacted operating revenue by $8.4 million for the year ended December 31, 2003, and an increase in carloads, where eleven out of fourteen of our commodity groups increased in 2003 compared to 2002.

     In addition, operating revenue in 2003 benefited from two short-term contracts which we do not expect to recur in 2004. These contracts, which were to move logs in Arizona and soil in Illinois, contributed a total of $2.7 million in revenue and 4,763 carloads during the year ended December 31, 2003. The increase in the average rate per carload to $276 in 2003 from $261 in 2002 was primarily due to the improvement in the Canadian dollar.

     The following table compares North American freight revenue, carloads and average freight revenue per carload for the years ended December 31, 2003 and 2002:

     Lumber and forest products revenue was $52.0 million in the year ended December 31, 2003 compared to $48.6 million in the year ended December 31, 2002, an increase of $3.4 million or 7%. This increase was due to a short-term contract to haul logs in Arizona during 2003, a strong housing market, an increase in demand for off-shore lumber and longer hauls of lumber in Alabama as a result of the Mobile Line acquisition.

     Chemicals revenue was $30.9 million in the year ended December 31, 2003 compared to $28.3 million in the year ended December 31, 2002, an increase of $2.6 million or 9%. This increase was primarily due to longer hauls in Alabama as a result of the Mobile Line acquisition and increased carloads with existing customers and new business in South Carolina.

     Agricultural and farm products revenue was $30.8 million in the year ended December 31, 2003 compared to $27.9 million in the year ended December 31, 2002, an increase of $2.9 million or 10%. This increase was due to an improved wheat harvest in Kansas in 2003, partially offset by a poor 2002 harvest in southern Ohio and Indiana, which impacted 2003 carloads and the closure of a grain customer in California.

     Paper products revenue was $29.5 million in the year ended December 31, 2003 compared to $26.2 million in the year ended December 31, 2002, an increase of $3.3 million or 12%. This increase was primarily due to new contracts and longer hauls in Alabama as a result of the Mobile Line acquisition, an increase in paper production in Nova Scotia, and the strengthening of the Canadian dollar, partially offset by a decrease in carloads in Oregon as a result of a paper mill closure.

     Metals revenue was $28.4 million in the year ended December 31, 2003 compared to $24.4 million in the year ended

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December 31, 2002, an increase of $4.0 million or 17%. This increase was due to an increase in carloads from existing customers in Ohio, North Carolina and South Carolina, new hauls in Alabama as a result of the Mobile Line acquisition and the strengthening of the Canadian dollar, partially offset by a decrease in carloads in California as a result of customer production problems.

     Coal revenue was $24.5 million in the year ended December 31, 2003 compared to $22.3 million in the year ended December 31, 2002, an increase of $2.2 million or 10%. This increase was the result of increased carloads with utility companies in Oklahoma, Indiana and Arkansas and new business in Indiana, partially offset by a decrease in carloads from the Powder River Basin due to severe weather in early 2003.

     Bridge traffic revenue was $23.4 million in the year ended December 31, 2003 compared to $22.3 million in the year ended December 31, 2002, an increase of $1.1 million or 5%. This increase was primarily due to an increase in bridge traffic in Canada along with the strengthening of the Canadian dollar, partially offset by a decrease related to a General Motors contract that Canadian National Railway lost to CSX Transportation in Ohio.

     Food products revenue was $20.5 million in the year ended December 31, 2003 compared to $19.8 million in the year ended December 31, 2002, an increase of $0.7 million or 4%. This increase was primarily due to increased hauls in California as a result of a good tomato harvest and new hauls in Alabama as a result of the Mobile Line acquisition partially offset by a decrease in carloads in Kansas due to a poor sunflower seed harvest.

     Petroleum products revenue was $18.4 million in the year ended December 31, 2003 compared to $16.2 million in the year ended December 31, 2002, an increase of $2.2 million or 13%. This increase was primarily due to new petroleum coke moves for a customer in Canada, new business to move liquefied petroleum gas in New England, new business to move asphalt in Kansas and the strengthening of the Canadian dollar.

     Minerals revenue was $17.3 million in the year ended December 31, 2003 compared to $17.0 million in the year ended December 31, 2002, an increase of $0.3 million or 2%. This increase was the result of new hauls on the Mobile Line, an increase in roofing granule moves due to the strong housing market and new calcium carbonate moves in Alabama, partially offset by fewer cement and limestone moves in New England and a reduction in copper concentrate moves in Arizona.

     Metallic and non-metallic ores revenue was $17.2 million in the year ended December 31, 2003 compared to $14.2 million in the year ended December 31, 2002, an increase of $3.0 million or 21%. This increase was due to the acquisitions of the Mobile Line and San Luis and Rio Grande Railroad, a short-term contract to move soil in Illinois and increased traffic with existing customers in Texas, partially offset by lower carloads in Arizona due to customer production problems.

     Other revenue was $9.3 million in the year ended December 31, 2003 compared to $7.7 million in the year ended December 31, 2002, an increase of $1.6 million or 22%. This increase was primarily due to a short-term contract in Illinois, partially offset by a decrease in ammunition moves in Washington.

     Autos revenue was $8.1 million on the year ended December 31, 2003 compared to $9.8 million in the year ended December 31, 2002, a decrease of $1.7 million or 18%. This decrease related primarily to a General Motors contract that Canadian National Railway lost to CSX Transportation in Ohio.

     Intermodal revenue was $4.2 million in the year ended December 31, 2003 compared to $4.1 million in the year ended December 31, 2002, an increase of $0.1million or 4%. This increase was primarily due to a new contract to move solid waste containers in Washington.

     OPERATING EXPENSES. Operating expenses increased $17.6 million to $276.6 million in the year ended December 31, 2003 from $259.0 million in 2002 primarily due to the 12% increase in the Canadian dollar, the acquisitions of the Mobile Line and San Luis and Rio Grande Railroad, higher transportation labor costs associated with the increased carloads, higher fuel prices compared to 2002 and increased casualty and insurance costs. The operating ratio, defined as total operating expenses divided by total operating revenue, was 77.3% in 2003 compared to 77.8% in 2002. Both periods include an allocation of expenses to general and administrative, which had previously been classified as corporate overhead.

     MAINTENANCE OF WAY. Maintenance of way expenses increased as a percentage of revenue to 10.8% in the year ended December 31, 2003 from 10.4% in 2002, due to higher contract labor costs in 2003 related to brush control, bridge repairs and rail testing as a result of increased preventive maintenance initiatives.

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     MAINTENANCE OF EQUIPMENT. Maintenance of equipment expense decreased as a percentage of revenue to 3.8% in the year ended December 31, 2003 from 4.8% in 2002. The decrease is primarily due to the outsourcing of certain car repair activities, which also reduced car repair revenue.

     TRANSPORTATION. Transportation expense increased as a percentage of revenue to 27.0% in the year ended December 31, 2003 from 26.4% in 2002 with higher fuel and casualty costs primarily accounted for the increase in expense. Fuel costs were $1.01 per gallon in 2003 compared to $0.87 per gallon in 2002 resulting in a $3.4 million increase in fuel expense in 2003, net of a $1.6 million benefit in 2003 for our fuel hedge. Casualty and insurance expenses were up $1.8 million in 2003 from 2002. Notwithstanding the increase in casualties and insurance, our personal injury frequency ratio, based upon the industry standard of personal injuries per 200,000 man hours, decreased in 2003 to 2.03 from 3.05 in 2002.

     EQUIPMENT RENTAL. Equipment rental decreased as a percentage of revenue to 9.8% in the year ended December 31, 2003 from 10.0% in 2002 due to improved management of leased cars.

     SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative expense decreased as a percentage of revenue to 19.3% in the year ended December 31, 2003 from 19.7% in 2002. This decrease was primarily due to the increase in revenue while selling, general and administrative expenses remained relatively flat, due to the fixed nature of a majority of these expenses.

     DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense was comparable at 6.6% of revenue in the year ended December 31, 2003 and 6.5% in 2002.

     COMPARISON OF NORTH AMERICAN RAILROAD OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001

     The following table sets forth the operating revenue and expenses (in thousands) for our North American railroad operations for the periods indicated.

     OPERATING REVENUE. Operating revenue increased by $87.6 million, or 36%, to $333.0 million for the year ended December 31, 2002 from $245.4 million for the year ended December 31, 2001 while carloads increased 25% to 1,106,524 in 2002 from 891,318 in 2001. These increases are primarily due to the acquisitions of ParkSierra and StatesRail. Excluding revenue of $91.4 million in 2002 and $5.0 million in 2001 for the acquisitions of ParkSierra and StatesRail and the dispositions of the Texas New Mexico Railroad and Georgia Southwestern Railroad, operating revenue increased $1.1 million or 1% while carloads decreased by 13,696 or 2%. The increase in “same railroad” revenue, while carloads declined, is due to a change in commodity mix. While lower rated bridge traffic declined 20,976 carloads in 2002, certain other commodities, such as metals, increased from 2001. The average rate per carload increased in 2002 to $261 from $243 in 2001. The increase in the average

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rate per carload is due to the acquisitions of ParkSierra and StatesRail which, on average, have a higher rate per carload as well as the change in commodity mix as previously discussed.

     The following table compares North American freight revenue, carloads and average freight revenue per carload for the years ended December 31, 2002 and 2001:

     Lumber and forest products revenue was $48.6 million in the year ended December 31, 2002 compared to $35.9 million in the year ended December 31, 2001, an increase of $12.7 million or 35%. This increase consists of $11.2 million from the acquisitions of ParkSierra and StatesRail and an increase of $1.5 million from the existing North American railroad operations resulting from new business secured from forest product customers in Alberta and Oregon.

     Chemicals revenue was $28.3 million in the year ended December 31, 2002 compared to $22.9 million in the year ended December 31, 2001, an increase of $5.4 million or 24%. This increase is due to the acquisitions of ParkSierra and StatesRail.

     Agricultural and farm products revenue was $27.9 million in the year ended December 31, 2002 compared to $20.5 million in the year ended December 31, 2001, an increase of $7.4 million or 36%. This increase is primarily the result of the acquisitions of ParkSierra and StatesRail.