Railamerica Inc/DE · 10-K · For 12/31/98

Filed On 3/31/99   ·   SEC File 0-20618   ·   Accession Number 950144-99-3732

Annual Report   —   Form 10-K
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Document/Exhibit                   Description                      Pages   Size 

 1: 10-K        Railamerica, Inc. Form 10-K 12-31-98                  78    395K 
 2: EX-4.2      Certificate of Designation                            10     47K 
 3: EX-10.57    First Amendment to Loan Agreement                     24     96K 
 4: EX-27       Financail Data Schedule                                1      6K 

10-K   —   Railamerica, Inc. Form 10-K 12-31-98
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================================================================================

 U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

----------

 FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
 SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 1998 Commission File Number 0-20618

----------

 RAILAMERICA, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)

             DELAWARE                             65-0328006
         ----------------------------              ---------------------
     (State or Other Jurisdiction                  (IRS Employer
                of Incorporation)                   Identification Number)

301 Yamato Road, Suite 1190                         
     Boca Raton, Florida                         33431
   ---------------------------------------         ---------------------
(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: None

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

 Common Stock, $.001 Par Value
Common Stock Purchase Rights

       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 [ ]                                                

     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. ( )                                         

       The aggregate market value of the voting stock held by non-affiliates
of the registrant as of March 24, 1999 computed by reference to the average bid 
and asked prices of registrant's common stock reported on NASDAQ on such date   
was $63,300,000.                                                                

      The number of shares outstanding of registrant's Common Stock, $.001
par value per share, as of March 25, 1999 was 11,144,319.                       

DOCUMENTS INCORPORATED BY REFERENCE                                             

         The registrant's proxy statement for the Annual Meeting of Shareholders
to be held June 24, 1999 (the "Definitive Proxy Statement") to be filed with the
Commission pursuant to Regulation 14A is incorporated by reference into Part III
of this Form 10-K.                                                              

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 TABLE OF CONTENTS

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                                                                           PAGE
                                                                           ----
                                                                               
PART I                                                                         

Item 1.   Business                                                           3 
Item 2.   Properties                                                        19 
Item 3.   Legal Proceedings                                                 23 
Item 4.   Submission of Matters to a Vote of Security Holders               23 

PART II                                                                        

Item 5.   Market for Common Equity and Related Stockholder Matters          24 
Item 6.   Selected Financial Data                                           26 
Item 7.   Management's Discussion and Analysis                              27 
Item 8.   Financial Statements                                              41 
Item 9.   Changes in and Disagreements with Accountants on Accounting and      
                 Financial Disclosure                                       41 

PART III                                                                       

Item 10.  Directors and Executive Officers of the Registrant                42 
Item 11.  Executive Compensation                                            42 
Item 12.  Security Ownership of Certain Beneficial Owners and Management    42 
Item 13.  Certain Relationships and Related Transactions                    42 

PART IV                                                                        

Item 14.  Exhibits and Reports on Form 8-K                                  43 


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PART I                                                                          

ITEM 1.  BUSINESS                                                               

GENERAL                                                                         

     RailAmerica, Inc. (together with its consolidated subsidiaries, the
"Company") is a leading operator of short line freight railroads in the United  
States, based on total track miles, and an operator of a regional freight       
railroad in the Republic of Chile. The Company is also a leading manufacturer of
specialized truck trailers through its wholly-owned subsidiary, Kalyn/Siebert,  
Inc. ("KSI"), with production facilities in Gatesville, Texas and               
Trois-Rivieres, Quebec, Canada. In addition, the Company holds a minority       
interest in the Great Southern Railway Limited consortium, which operates a     
4000-mile transcontinental passenger rail service in Australia. Segment and     
geographic information called for in item 1 is set forth in Note 20 of Notes to 
Consolidated Financial Statements and is incorporated herein by reference.      
RailAmerica's core business is the acquisition and operation of short line and  
regional railroads. The Company has grown rapidly through acquisitions since    
December 31, 1994, at which time it operated only 300 miles of track and        
employed 220 full-time employees. At December 31, 1998, the Company operated    
approximately 2,400 miles of rail line, including approximately 1,000 miles in  
North America and over 1,400 miles in Chile. At December 31, 1998, the Company  
employed 652 full-time employees.                                               

        The Company plans to continue to acquire short line railroads in North
America from Class I railroads as well as from other short line operators. The  
Company also continues to evaluate opportunities to acquire regional railroads  
in foreign markets that are being privatized by foreign governments.            
Additionally, the Company will consider other strategic acquisitions in the     
specialty trailer manufacturing industry.                                       

     Since industry deregulation in 1980, major North American railroads
have streamlined their operations by systematically divesting themselves of     
branch lines to smaller rail operators that have advantageous cost structures.  
The divestiture activity has accelerated in recent years as a result of the     
consolidation of Class I railroads which has led to the disposition of redundant
and light-density routes. Similarly, an increasing number of foreign governments
are seeking to encourage private investment in infrastructure and stimulate     
economic activity by privatizing their national rail systems through sale or by 
concession to qualified operators. The Company's acquisition strategy as        
described above is exemplified by: (i) the purchase, in April 1998, through the 
Company's wholly-owned subsidiary, Saginaw Valley Railway Company ("SGVY"), of a
51-mile rail line in Michigan, (ii) the long term lease/purchase agreement to   
operate a 13-mile rail line in California in August 1998, through the Company's 
new subsidiary, Ventura County Railroad Company, Inc. ("VCRR"), (iii) the       
purchase, in January 1999, through the Company's newly-formed subsidiary,       
Esquimalt and Nanaimo Railway Company, of a 181-mile rail line in British       
Columbia, Canada, and (iv) the selection, in February 1999, of a consortium in  
which the Company is expected to be a majority partner as the successful bidder 
for V/Line Freight Corporation, the rail freight business of Australia's        
Victorian Government. The rail line in Victoria, Australia consists of          
approximately                                                                   

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3,000 miles of track.                                                           

      The Company believes that it is well-positioned to take advantage of
the opportunities emerging in the North American and international rail         
industries. The Company has developed a disciplined evaluation and acquisition  
program, identifying rail properties that can be acquired on attractive terms   
and can be improved by the implementation of RailAmerica's operating practices  
when applied to the rail properties acquired by the Company. These practices    
have had the effect of increasing traffic while reducing expenses through       
introduction of operating efficiencies and customer service programs. The       
Company believes that it has become a desirable partner for Class I railroads as
a result of its ability to pursue and consummate acquisitions swiftly and       
operate the rail lines more efficiently.                                        

       The Company expanded its trailer manufacturing operations through the
purchase, in January 1998, by the Company's wholly-owned subsidiary, KSI, of    
Fabrex, Inc. and its affiliate, Services Remorques Plus, Inc., forming a new    
subsidiary, Kalyn/Siebert Canada, Inc. ("KSC"). KSC is a manufacturer of        
specialty bulk-hauling truck trailers located in Trois-Rivieres, Quebec, Canada.

 In January 1999, the Company completed an $11.6 million private
offering of convertible redeemable preferred stock, and, in March 1999, the     
Company completed a $12.5 million private offering of restricted common stock.  
See details in Liquidity and Capital Resources section.                         

      The Company's business as of December 31, 1998 was conducted through
eighteen wholly-owned consolidated subsidiaries - Huron and Eastern Railway     
Company, Inc. ("HESR"), SGVY, KSI, KSC, Otter Tail Valley Railroad Company      
("OTVR"), South Central Tennessee Railroad Corporation ("SCTR"), Delaware Valley
Railway Company, Inc. ("DVRC"), RailAmerica Intermodal Services, Inc. ("RIS"),  
Dakota Rail, Inc. ("Dakota Rail"), RailAmerica Equipment Corporation ("REC"),   
West Texas and Lubbock Railroad Company, Inc. ("WTLR"), Cascade and Columbia    
River Railroad Company ("CCRR"), Minnesota Northern Railroad ("MNR"),           
RailAmerica de Chile, S.A ("RDC"), Steel City Carriers, Inc. ("Steel City       
Carriers"), St. Croix Valley Railroad Company ("SCXY"), RailAmerica Australia   
Pty. Limited ("RAA"), and VCRR. All references to the operations of the         
"Company" discussed in this Form 10-K describe the operations of its            
subsidiaries.                                                                   

         The Company was incorporated in Delaware on March 31, 1992 as a holding
company for two pre-existing railroad companies - HESR and SGVY. The Company's  
principal executive office is located at 301 Yamato Road, Suite 1190, Boca      
Raton, Florida 33431, and its telephone number at that location is (561)        
994-6015.                                                                       

RAILROAD INDUSTRY OVERVIEW                                                      

    The U.S. railroad industry is dominated by nine Class I railroads,
which operated approximately 122,000 miles of track at December 31, 1997 (the   
most recent year for which data is available) and represented approximately     
$32.3 billion, or approximately 91.4%, of total rail industry                   

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operating revenue of $35.3 billion in 1997. In addition to large railroad       
operators, at year end 1997 there were more than 500 short line and regional    
railroads, which generated approximately $3.0 billion of operating revenue in   
1997 and operated approximately 50,000 miles of track at December 31, 1997.     
Reflecting downsizing of major rail carriers, the proportion of total track     
miles operated by short line and regional railroads in the United States        
increased to 29.0% of total railroad industry track miles in 1997 from          
approximately 17.0% in 1986. The railroad industry in the United States has     
undergone significant change since the passage of the Staggers Rail Act of 1980 
(the "Staggers Rail Act"), which deregulated the pricing and types of services  
provided by railroads. Since 1980, Class I railroads in the United States and   
Canada have systematically divested themselves of branch lines to smaller rail  
operators. As a result, more than 300 short line and regional railroads         
operating approximately 27,000 miles of track have been created since 1980 to   
serve shippers on such lines. The divestiture has accelerated in recent years as
a result of the consolidation and merger activity among Class I railroads, which
has led to the sale of overlapping routes.                                      

As a result of deregulation, major railroads have been able to
concentrate their management and marketing attention on core, long-haul routes, 
while divesting (through sale or lease) many of their low-density branch lines  
to smaller and more cost-efficient freight railroad operators such as the       
Company. The major railroads have derived significant benefits from the         
divesting of branch lines to short line operators. Divesting these branch lines 
allows major railroads to minimize incremental capital expenditures, increase   
traffic density, improve railcar utilization and avoid rail line abandonment.   
Because of the focus of 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. Consequently,   
these transactions often result in net increases in divesting carriers' freight 
traffic because much of the business originating or terminating on branch lines 
feeds into divesting carriers' core routes.                                     

GROWTH STRATEGY                                                                 

-      NORTH AMERICAN ACQUISITIONS. RailAmerica plans to continue to acquire
        short line and regional railroads that become available as a result of
   rationalizations and divestitures in North America, especially in
         geographic regions where the Company can "cluster" a number of acquired
rail lines to achieve economies of scale.                     

-      INTERNATIONAL ACQUISITIONS. RailAmerica plans to acquire additional  
 foreign regional railroads that become available as a result of
         governmental privatization, primarily through joint ventures with local
       partners familiar with market conditions in the region. International
       rail acquisitions often offer the Company better growth opportunities
   due to their lack of historical operating efficiencies typical of
government entities.                                          

  -      EXPANSION OF MANUFACTURING OPERATIONS. RailAmerica plans to investigate
     additional specialized truck trailer manufacturing opportunities as
they become available.                                        

 -      FOCUSED SALES AND MARKETING. RailAmerica continues to increase traffic
from existing,                                                

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        former and new customers in each of its markets through the aggressive
    marketing of its enhanced customer service, renegotiation of rates
      where prudent and implementation of other incentive arrangements for
       shippers. Once RailAmerica reestablishes frequent service for a newly
      acquired railroad, it markets its newly restored service to existing
         customers as well as to customers who may have dropped service when the
former owner had operational control.                         

-      OPERATING EFFICIENCY. The Company improves its operating efficiency  
         through rationalized staffing, incentivized local management and staff,
    centralized purchasing and corporate services, efficient equipment
utilization and outsourced maintenance.                       

      The Company acquires rail properties by purchase of assets, lease or
operating contract. Typically, the Company bids against other short line and    
regional operators for available properties. The structure of each transaction  
is determined by the seller based upon economic and strategic considerations. In
addition to the financial terms of the transaction, the Company believes sellers
consider more subjective criteria such as a prospective acquirer's operating    
experience, its reputation among shippers, and its ability to close a           
transaction and commence operations smoothly. The Company believes it has       
established an excellent record in each of these areas. In addition, by growing 
revenues on its acquired lines and providing improved service to shippers, the  
Company is able to provide increased revenue to the Class I carriers that       
connect with its lines. The Company believes this ability to provide increased  
revenue to Class I carriers is an advantage in bidding for properties.          

RAILROAD OPERATIONS                                                             

GENERAL                                                                         

    The Company provides rail service to on-line customers through the
coordination of the railroad's general manager, marketing manager and customer  
service center. Rail service for the customer is scheduled by the general       
manager with the assistance of customer service personnel. Due to the Company's 
flexibility in providing service, customers can initiate unscheduled rail       
service on short notice by contacting the railroad's customer service center.   
The general manager schedules the days' train service and provides a manifest to
the two-man crew. The crew's manifest contains information regarding the number 
and type of cars to drop off and/or pick up at a customer's siding, customer    
requirements concerning time of pick up and/or delivery and interchange         
schedules. The two-man crew, consisting of transportation specialists, operates 
the locomotive and couples and uncouples railcars along the line. Since crews   
are paid a salary rather than an hourly wage, they are readily available to     
provide service on an as-needed basis. Payment for rail services is coordinated 
with the customer through the Company's customer service center or with the     
Class I interchange partner.                                                    

        The Company provides the locomotive service and, in certain instances,
the rail cars needed to move the customer's product. Maintenance of the rail    
line, including capital improvements,                                           

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normal track and roadbed maintenance, signal maintenance and bridge repair, is  
performed by the Company or, where efficiencies are gained, a maintenance       
contractor. The Company has full-time locomotive mechanics, under the           
supervision of the Company's Chief Mechanical Officer, available to maintain the
locomotive and maintenance equipment, perform car inspections and perform       
running repairs on cars.                                                        

        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 rail 
carriers. Bridge traffic neither originates nor terminates on a rail carrier's  
line, but rather passes over the line from one connecting carrier to another.   
Interline traffic generated over 95% of the Company's total freight revenues in 
1998.                                                                           

      Flexibility with respect to work assignments is a key element of the
Company's operating strategy and contributes significantly to operational       
productivity. All of the Company's railroad personnel are trained in a wide     
range of skills necessary for short line operations. Employees can be assigned  
to tasks on an as-needed basis because the Company is not bound by traditional  
railroad industry craft and work distinctions (pursuant to which railroad       
employees are assigned to tasks based upon narrowly defined job descriptions).  
The Company believes the organization of its railroads into relatively small    
work groups encourages greater team effort and permits more clearly defined     
responsibility and accountability than is obtainable by large, more centrally   
managed railroads.                                                              

Each of the Company's short line railroads maintains a        
performance-based profit-sharing program through which a portion of a railroad's
operating profits is distributed to its employees. Profit-sharing programs are  
administered by corporate headquarters and the general managers and             
distributions are made in part on the basis of meeting railroad operating       
targets and in part on individual performance. The general managers also        
participate in quarterly performance-based profit-sharing programs.             

MARKETING                                                                       

        The Company focuses on providing rail service to its customers that is
easily accessible, reliable and cost-effective. Following commencement of       
operations by RailAmerica, the Company's 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.  
The Company believes its ability to generate additional traffic is enhanced by  
its marketing efforts which are aimed at identifying and responding quickly to  
the individual business needs of customers along its rail lines. As part of its 
marketing efforts, the Company often schedules more frequent rail service, helps
customers negotiate price and service levels with connecting carriers and       
assists customers in obtaining the quantity and type of rail equipment required 
for their operations. The Company also provides non-scheduled train service on  
short notice to accommodate customers' special or emergency needs.              

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    The Company's decentralized management structure is an important
element of its marketing strategy. Significant discretion with respect to sales 
and marketing activities is given to the Company's domestic regional marketing  
managers and its international marketing manager. Each regional marketing       
manager works closely with personnel of the Company's 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. The Company 
also works 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. The     
Company considers all of its employees to be customer service representatives   
and encourages them to initiate and maintain regular contact with shippers.     

CUSTOMERS                                                                       

      In 1998, the Company served more than 200 customers domestically who
shipped and/or received a wide variety of products. The Company's railroads are 
typically the only rail carriers directly serving their customers. Although most
of the Company's domestic railroads have a well-diversified customer base,      
several of the smaller rail lines have one or two dominant customers. In 1998,  
the Company's 10 largest domestic customers accounted for approximately 45% of  
domestic transportation revenue. There is no single customer which represented  
more than 10% of the Company's domestic transportation revenue. The Company had 
four customers who each represented more than 10% of the international          
transportation revenue. The customers represented 22%, 22%, 18% and 14% of      
international transportation revenue.                                           

COMMODITIES                                                                     

     The Company provides its customers with local rail freight services
accessing the nationwide rail systems both domestically and internationally. The
Company hauls products for its customers based upon market demands in its local 
operating areas. The following table sets forth by number and percentage the    
total carloads of each of the principal commodities hauled by the Company's     
railroads during the years ended December 31, 1998, 1997 and 1996.              

 CARLOADS CARRIED BY COMMODITY GROUP

                                                        [Enlarge/Download Table]

                           YEAR ENDED                 YEAR ENDED                  YEAR ENDED       
                        DECEMBER 31, 1998          DECEMBER 31, 1997          DECEMBER 31, 1996    
                   --------------------------  -------------------------  -------------------------
    COMMODITY      CARLOADS        % OF TOTAL  CARLOADS       % OF TOTAL  CARLOADS       % OF TOTAL
-----------------  --------        ----------  --------       ----------  --------       ----------
                                                                                                   
IRON ORE            62,037             53%      19,493            28%           0              0%  
AGRICULTURE         15,423             13%      13,297            19%       9,624             37%  
WOOD PRODUCTS        9,153              8%       9,797            14%       5,021             19%  
FOOD PRODUCTS        7,521              6%       5,425             8%       1,762              7%  
BALLAST/STONE        4,147              4%       3,957             6%         437              2%  


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                                                        [Enlarge/Download Table]

                           YEAR ENDED                 YEAR ENDED                  YEAR ENDED       
                        DECEMBER 31, 1998          DECEMBER 31, 1997          DECEMBER 31, 1996    
                   --------------------------  -------------------------  -------------------------
    COMMODITY      CARLOADS        % OF TOTAL  CARLOADS       % OF TOTAL  CARLOADS       % OF TOTAL
-----------------  --------        ----------  --------       ----------  --------       ----------
                                                                                                   

FERTILIZER           4,308              4%       3,900             6%       2,511             10%  
COAL                 4,898              4%       3,877             6%         832              3%  
COPPER               1,188              1%       2,785             4%           0              0%  
STEEL                1,695              1%       1,732             3%       1,584              6%  
SODIUM SULFATE         732            0.5%       1,290             2%       1,237              5%  
PROPANE              1,161              1%           0             0%           0              0%  
AUTO PARTS             683            0.5%         755             1%         904              3%  
PLASTICS               628            0.5%         574             1%         551              2%  
OTHER                3,961            3.5%       2,258             3%       1,408              5%  
                   -------                      ------                     ------                  
        TOTAL      117,535            100%      69,140           100%      25,871            100%  
                   =======                      ======                     ======                  


EMPLOYEES                                                                       

      As of December 31, 1998, the Company had approximately 104 full-time
rail employees in North America and 210 full-time rail employees in Chile.      
Temporary lay-offs of personnel and hiring of part-time or short-term employees 
are sometimes required to adjust to the Company's somewhat seasonal operations. 
As of December 31, 1998, the Company had 8 employees who were subject to        
contract negotiations with the United Transportation Union. No contract has been
signed to date.                                                                 

SAFETY                                                                          

An important component of the Company's operating strategy is 
conducting safe railroad operations for the benefit and protection of employees,
customers and the communities served by the Company's railroads. The Company's  
safety program, led by the Director of Rules, Safety and Training, involves all 
of the Company's employees and is administered on a daily basis by each Regional
Vice President. Operating personnel are trained and certified in train          
operations, hazardous materials handling, proper radio procedures 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 regulation.                                             

     The Company believes that each of its railroads complies fully with
federal, state and local regulations. Additionally, each railroad is given      
flexibility to develop more stringent safety rules based on local requirements  
or practices. The Company also participates in governmental and industry        
sponsored safety programs including Operation Lifesaver (the national grade     
crossing awareness program) and the American Short Line Railroad Association    
Safety Committee.                                                               

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COMPETITION                                                                     

     In acquiring rail properties, the Company competes with other short
line and regional railroad operators, some of which are larger and have greater 
resources than the Company. Competition for rail properties is based primarily  
upon price, operating history and financing capability. The Company believes its
established reputation as a successful acquirer and operator of short line rail 
properties, in combination with its managerial and financial resources,         
effectively positions it to take advantage of future acquisition opportunities. 

       The Company's railroads are typically the only rail carriers directly
serving their customers; however, the Company's 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 the Company's 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-to-destination package. To   
the extent other carriers are involved in transporting a shipment, the Company  
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.                      

ACQUISITION OF SGVY BROWN CITY SUBDIVISION                                      

        In April 1998, the Company, through its wholly-owned subsidiary, SGVY,
acquired from CSX Transportation, Inc. ("CSXT") a 51 mile rail line located in  
Michigan's "Thumb" region. The line runs from just east of Saginaw to Brown     
City, Michigan and handles traffic such as grain, corn, fertilizer and soybeans.
The line connects with SGVY's sister railroad, HESR, at Vassar, Michigan and    
interchanges with CSXT at Saginaw.                                              

ACQUISITION OF VENTURA COUNTY RAILROAD COMPANY, INC.                            

     In August 1998, the Company, through its newly formed, wholly-owned
subsidiary, VCRR, entered into a long term lease/purchase agreement to operate a
13-mile rail line serving the Port of Hueneme and the Oxnard Harbor District in 
Oxnard, California, located approximately 50 miles north of Los Angeles. VCRR   
handles ship-to-rail port traffic which includes finished autos, chemicals,     
plastic and paper products. Traffic from this line interchanges with the Union  
Pacific Railroad at Oxnard.                                                     

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RAILROAD PROPERTIES                                                             

        The following table sets forth certain information with respect to the
railroad properties that the Company owned as of December 31, 1998:             

                                                        [Enlarge/Download Table]

---------------------------------------------------------------------------------------------------------------------------
                                Date of         Track                                      Principal                       
           Railroad             Acquisition     Miles      Structure     Location          Commodities                     
---------------------------------------------------------------------------------------------------------------------------
                                                                                                                           
Huron and Eastern               March 1986         83      Owned         Michigan          Agricultural products, sugar    
Railway (Huron Division)                                                                   products, fertilizer, scrap     
                                                                                           steel, auto parts, aggregates   
---------------------------------------------------------------------------------------------------------------------------
Huron and Eastern               May 1988           55      Owned         Michigan          Agricultural products, sugar    
Railway (Saginaw                                   45      Leased                          products, fertilizer, scrap     
Division)                                                                                  steel, auto parts, aggregates   
---------------------------------------------------------------------------------------------------------------------------
Saginaw Valley Railway          Jan. 1991          10      Owned         Michigan          Agricultural products,          
                                Apr. 1998          51      Owned                           fertilizer                      
---------------------------------------------------------------------------------------------------------------------------
South Central Tennessee         Feb. 1994          49      Leased        Tennessee         Wood products, frozen           
Railroad                                            3      Trackage                        potatoes, newsprint,            
                                                           rights                          plastics, steel                 
---------------------------------------------------------------------------------------------------------------------------
Delaware Valley Railway         July 1994          45      Easement      Pennsylvania      Agricultural and steel          
                                                   10      Lease         Delaware          products, iron and wood         
                                                                                           products                        
---------------------------------------------------------------------------------------------------------------------------
Dakota Rail                     Sept. 1995         44      Contract      Minnesota         Plastics, lumber, scrap steel,  
                                                           for Deed                        chemicals                       
---------------------------------------------------------------------------------------------------------------------------
West Texas & Lubbock            Nov. 1995         104      Owned         Texas             Fertilizer, sodium sulfate,     
Railroad                                            4      Trackage                        chemical, cotton and cotton     
                                                           rights                          products                        
---------------------------------------------------------------------------------------------------------------------------
Cascade and Columbia            Sept. 1996        131      Owned         Washington        Wood products, limestone,       
River Railroad                                      6      Trackage                        paper products, agricultural    
                                                           rights                          products                        
---------------------------------------------------------------------------------------------------------------------------
Otter Tail Valley Railroad      Oct. 1996          72      Owned         Minnesota         Coal, agricultural products,    
                                                                                           fertilizer                      
---------------------------------------------------------------------------------------------------------------------------
Minnesota Northern              Dec. 1996         174      Owned         Minnesota         Agricultural products, sugar    
Railroad                                           47      Trackage                        products, fertilizer, coal,     
                                                           rights                          aggregates                      
---------------------------------------------------------------------------------------------------------------------------
Ferronor                        Feb. 1997       1,400      Majority      Chile             Iron ore, copper, limestone,    
                                                           owned                           propane, sugar products         
---------------------------------------------------------------------------------------------------------------------------
St. Croix Valley Railroad       Aug. 1997          44      Owned         Minnesota         Agricultural products,          
                                                   16      Trackage                        fertilizer, plastics            
                                                           rights                                                          
---------------------------------------------------------------------------------------------------------------------------
Great Southern Railway          Oct. 1997                  Minority      Southern          Passenger                       
                                                           Interest      Australia                                         
---------------------------------------------------------------------------------------------------------------------------
Ventura County Railroad         Aug. 1988          13      Leased        California        Auto products, wood             
                                                                                           products                        
---------------------------------------------------------------------------------------------------------------------------


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TRAILER MANUFACTURING OPERATIONS                                                

KSI, located in Gatesville, Texas, was established in 1968 and
manufactures a broad range of specialty truck trailers. KSI products are        
marketed to customers in the construction, trucking, agricultural, railroad,    
utility, and oil industries. In addition, a substantial portion of KSI's sales  
are to the military and several other local and federal government agencies.    

    KSI's product mix has shifted towards sales of heavy equipment and
specialty trailers. Previously located in Stockton, California, Siebert         
manufactured a highly specialized detachable goose neck trailer constructed of  
high yield steel. The Siebert products include up to 300-ton capacity units. The
trailer types in the heavy equipment category include specialized trailers (such
as car haulers, truck haulers, and jeep haulers), fixed neck low bed, detachable
low bed, flats and platforms, drops and double drops, folding neck low-bed, and 
used trailers.                                                                  

         In January 1998, the Company, through its wholly-owned subsidiary, KSI,
acquired all of the outstanding stock of Fabrex, Inc. and its affiliate,        
Services Remorques Plus, Inc. Fabrex's operations have been combined into KSC, a
wholly-owned subsidiary of KSI. KSC is a manufacturer of specialty bulk-hauling 
truck trailers located in Trois-Rivieres, Quebec, Canada. KSC's products are    
marketed to the solid waste, agricultural and construction industries.          

       At the date of its acquisition , Fabrex, founded in 1985, employed 50
people in its 45,000 square foot manufacturing facility located in Trios        
Rivieres, Quebec, Canada, midway between Montreal and Quebec City. In April     
1998, KSC purchased an additional 105,000 square-foot manufacturing facility    
located adjacent to KSC's existing plant in Trois-Rivieres, Quebec, Canada. In  
order to meet production requirements in conjunction with the plant expansion,  
KSC hired an additional 70 employees in 1998.                                   

PRODUCTS                                                                        

       The majority of KSI's sales are based on existing KSI trailer designs
which are modified with standard options. However, approximately 20% of trailers
sold must be customized to satisfy customers' specifications. KSI's "Pro        
Engineer" 3-D based solid modeler drafting system and computer aided drafting   
system "CAD" allows its engineers to readily modify trailer component design and
generate new designs, based on customer needs.                                  

       KSI manufactures an extensive variety of light, medium and heavy duty
truck trailers. The                                                             

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Company's products include the following:                                       

-     FLATBED TRAILERS. Flatbed trailers, also known as platform trailers,
         are generally used to carry loads such as steel and building materials.
    The Company produces a wide variety of flatbed trailers, including
   straight frames, drop frames and multi-axle units for specialized
        loads. KSI's leading product in this category is the KDP-80, a 48 foot
      drop deck flatbed trailer which is purchased primarily by commercial
       customers. This trailer has a 10 foot spread on the tandem axle which
allows more weight per axle than narrower tandems.            

-     LOWBED TRAILERS. Lowbed trailers, also known as lowboy trailers or  
      California legals, generally haul heavy equipment such as electrical
         transformers or grain silos. Lowbed trailers are equipped with up to 18
axles and have the capacity to haul up to 300 ton loads. Heavy
       equipment lowbeds are used by heavy haulers, specialized carriers and
riggers, larger construction and engineering firms and        
        highly-specialized members of the aerospace and automotive industries.
         The products constituting this category include the following trailers:
    fixed neck lowbed, folding neck lowbed, detachable lowbed, and the
         mechanical removable gooseneck, which is KSI's leading trailer by sales
in this product line.                                         

-     OTHER PRODUCTS. KSI manufactures a sliding-axle trailer which can be
 used to transport heavy equipment such as forklifts and similar
         equipment. KSI also manufactures a specialty van trailer for the United
        States Tank Automotive Command ("TACOM") which has special dolly-style
     suspensions and removable landing gear so that it can be shipped on
      military transport cargo planes. These specialty van trailers can be
   used for tactical combat purposes or as storage containers. Other
   specialty products include tilt trailers, special event trailers,
protected vans and oil field trailers.                        

  -     PARTS AND ACCESSORIES. Replacement parts and accessories are primarily
sold to dealers.                                              

     From time to time, KSI is also involved in the limited sale of used
trailers, which are supplied primarily by trade-ins from its new trailer        
customers. The Company sells most of its used trailers through its authorized   
dealers.                                                                        

    KSI generally provides customers with a five-year limited warranty
on trailer mainframes and a one-year limited warranty against defects in        
material and workmanship with respect to its products. KSI's warranty costs have
historically been less than one percent of net sales per year.                  

KSC produces specialty bulk-hauling truck trailers used in the
solid-waste, agricultural, and construction industries. Historically,           
approximately 85% of KSC's sales are transfer trailers and 80% of these are made
in aluminum. KSC began producing dump trailers in 1995. In 1997, these trailers 
represented approximately 15% of KSC's sales. The dump trailers consist of      
approximately 70% aluminum and 30% steel. During the second half of 1998, KSC   
began producing KSI flatbed trailers in its newly acquired facility.            

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MANUFACTURING AND ENGINEERING                                                   

KSI considers the engineering expertise, combined with the    
manufacturing experience of its work force, to be key competitive advantages.   
KSI utilizes this experience in its marketing by including manufacturing        
personnel in initial meetings with potential KSI customers to assist in defining
and meeting the customer's objectives. This team approach often results in new  
and unique ways to satisfy customer needs and facilitates effective             
communication throughout the organization.                                      

       Each of KSI's trailers is manufactured from highly customized designs
based on detailed customer specifications of each aspect of the trailer,        
including dimensions, structural requirements, fabrication materials, component 
parts and accessories. KSI's "Pro-Engineer" 3-D solid modeler drafting system   
and CAD allows its engineers to readily modify trailer component designs and    
generate new designs based on customer needs.                                   

      KSI builds all the structural parts of its trailers using steel bars
and plates. The major manufacturing steps include cutting, bending and welding  
of steel and, once assembled, cleaning and painting. The axles and running gears
are purchased as sub-assemblies which are integrated into the KSI trailer       
design. KSI contracts out any necessary machining. KSI exercises strict quality 
control by screening suppliers and conducting inspections throughout the        
production process.                                                             

   KSI's ability to manufacture trailers is dependent upon receiving
supplies or components and raw materials from a limited number of sources. To   
date, KSI has experienced no material difficulties in procuring supplies,       
components or materials. However, if deliveries of such items are delayed, KSI's
production ability may be decreased which could have a negative effect on KSI's 
and the Company's results of operations.                                        

        KSI's manufacturing operations are conducted in thirteen Company owned
buildings, totaling approximately 198,000 square feet on an 25.5 acre site,     
which were constructed between 1969 and 1997. KSI's manufacturing properties    
serve as collateral for the Company's financing with National Bank of Canada.   
The Company expects that this site will be able to meet its manufacturing goals 
for the foreseeable future.                                                     

     At acquisition date, Fabrex, was producing its trailers at a 45,000
square foot manufacturing facility located in Trios Rivieres, Quebec, Canada,   
midway between Montreal and Quebec City. In April 1998, KSC purchased an        
additional 105,000 square-foot manufacturing facility located adjacent to KSC's 
existing plant in Trois-Rivieres, Quebec, Canada.                               

MARKETING AND DISTRIBUTION                                                      

  KSI's marketing strategy is focused on offering a broad range of
high-quality, customized trailers manufactured to the design specifications of  
its customers. These products are marketed and distributed through a network of 
approximately 140 independent dealers throughout North America and through a    
direct sales force. During 1998 approximately 50% of independent dealers        
maintained                                                                      

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inventories of KSI trailers.                                                    

   Presently, up to 75% of all of KSI's commercial sales are made to
dealers, with the balance representing direct retail sales by its sales force.  
KSI's sales staff consists of a vice president, five sales managers, and an     
advertising manager. The sales staff is supported by registered mechanical      
design engineers and draftsmen. Sales leads are generated through literature    
mailings, trade show exhibitions, dealers, repeat customers, and word-of-mouth. 
In addition, KSI places advertisements in trade publications such as MY LITTLE  
SALESMAN, AMERICAN TRUCKER, LIFTING & TRANSPORTATION INTERNATIONAL, TRUCK MARKET
NEWS, MACHINERY TRADER, AMERICAN TOWMAN, TRUCK NEWS (CANADA), TRUCK & TRAILER   
(CANADA) AND CONSTRUCTION PUBLIC WORKS (LATIN AMERICA). In recent years, KSI has
begun shifting resources from advertising to trade shows, which management      
believes is a more cost effective method of maintaining KSI's name and          
reputation and developing sales leads. KSI currently participates in            
approximately five trade shows per year.                                        

   In certain circumstances, KSI will enter into agreements with its
dealers to stimulate and facilitate the sale and financing of its new and used  
trailers. During the first quarter of 1995, KSI entered into a Wholesale and    
Retail Financing Agreement with Associates Commercial Corporation and Associates
Commercial Corporation of Canada, Ltd. to stimulate and facilitate the sale and 
financing of its new and used trailers. In addition, in December 1996, the      
Company entered into an agreement with Newcourt Financial Ltd. in order to      
provide wholesale and retail financing for its dealers located in Canada. Each  
of these agreements provides floor plan financing for eligible dealers and lease
and/or purchase financing for end market purchasers.                            

        KSC sells direct to customers with one salesman in Toronto who handles
Ontario and western Canada and one in Montreal who handles Quebec and maritime  
provinces. In the United States the majority of sales are done through a network
of a dozen distributors. KSC also had access to KSI's extensive dealer base in  
the United Stated starting in 1998.                                             

CUSTOMERS                                                                       

       KSI serves a diversified customer base operating in the construction,
trucking, agricultural, railroad, utility and oil industries. Since 1990,       
commercial sales have accounted for approximately two-thirds of KSI's revenues  
with military or governmental agency sales representing the balance. As a result
of extensive prototype testing by TACOM and the federal government budgetary    
impasse during early 1996, sales to governmental accounts represented a         
disproportionately low percentage of KSI's revenue for 1996. In 1998, sales to  
the federal government accounted for nearly 50% of total net sales as a result  
of new contracts awarded in 1997 and 1998.                                      

    The majority of sales in the government segment are to the General
Services Administration ("GSA"), the purchasing arm of most non-military        
agencies, and to TACOM, which consolidates purchases for various branches of the
military. KSI has been awarded "Blue Ribbon Contractor" status with TACOM. As a 
result of this status, KSI receives a 10% preference on bids for certain        
contracts. Sales to governmental agencies represented 48%, 37% and 20% of KSI's 

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manufacturing revenue for the years ended December 31, 1998, 1997 and 1996. A   
substantial decrease in orders by the GSA and/or TACOM could have a material    
adverse effect on KSI's business and results of operations.                     

       In April 1998, KSI received a new order, valued at approximately $3.6
million, for semi-trailer vans under its existing contract with TACOM.          

  In July 1998, KSI received two new orders from the United States
Government, valued at approximately $8.8 million. The first order, through KSI's
existing requirements contract with the GSA, is valued at approximately $5.3    
million and calls for the production of 101 folding goose neck level deck       
trailers for the United States Army. The second order is valued at approximately
$3.5 million and calls for the production of approximately 111 low-bed trailers 
for TACOM over three years. Production on both orders commenced in the fourth   
quarter of 1998, with delivery starting early in 1999.                          

       In December 1998, KSI received another new order from TACOM valued at
approximately $5.2 million. The contract calls for the production of 71 tactical
van trailers over fifteen months. Production commenced in the fourth quarter of 
1998, with delivery starting early in 1999.                                     

KSC's trailers are used in the solid-waste, agricultural and  
construction industries. Waste disposal companies are KSC's largest market      
segment. In addition, during the second half of 1998 KSC began producing and    
marketing KSI type flatbed trailers.                                            

BACKLOG. As of December 31, 1998, KSI's backlog of orders was 
approximately $18.3 million, compared to $19.7 million as of December 31, 1997. 
As of December 31, 1998, KSC's backlog of orders was approximately $3.7 million.
KSI and KSC include in its backlog only those orders for trailers for which a   
confirmed customer order has been received. KSI manufactures trailers mostly to 
customer or dealer orders and does not typically maintain an inventory of       
"stock" trailers in anticipation of future orders.                              

     COMPETITION. The Company faces significant competition in the truck
trailer manufacturing industry which is highly competitive and has relatively   
low barriers to entry. The Company competes with a number of other trailer      
manufacturers, some of which have greater financial resources and higher sales  
than KSI. Furthermore, the Company's products compete with alternative forms of 
shipping, such as intermodal containers. There can be no assurance that the     
Company will be able to continue to compete effectively with existing or        
potential competitors or alternative forms of shipping containers.              

EMPLOYEES                                                                       

         As of December 31, 1998, KSI had 182 full-time employees in the trailer
manufacturing operation and approximately 17 part-time employees. None of the   
KSI employees are subject to a collective bargaining agreement. As of December  
31, 1998, KSC had 120 full-time employees in                                    

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the trailer manufacturing operation of which 89 are subject to a collective     
bargaining agreement.                                                           

MOTOR CARRIER OPERATIONS                                                        

     On February 10, 1995, the Company acquired substantially all of the
assets of Steel City, a regional motor carrier located in Sault Ste. Marie,     
Ontario, Canada. Since the Company's acquisition of Steel City, its financial   
performance and development have not measured up to the Company's expectations  
for the business. Accordingly, in March 1997 the Company adopted a formal plan  
to discontinue its motor carrier operations and refocus the Company's efforts on
expanding its railroad and manufacturing operations. The Company's Board of     
Directors approved the plan of discontinuance on March 20, 1997.                

  Effective December 1, 1998, the Company ceased all motor carrier
operations and leased substantially all of the operating assets of Steel City   
Carriers, Ltd. to Laidlaw Carriers, Inc., an operating subsidiary of Ontario,   
Canada-based Contrans Corporation. The leases are for a period of 18 to 24      
months. In addition, the Company has entered into an agreement to sell its      
Ontario real estate that was previously used in its motor carrier operations.   

REGULATION                                                                      

     OVERVIEW. In addition to environmental safety and other regulations
applicable to all businesses, the Company's railroad subsidiaries are subject to
regulations of numerous government agencies, including (i) regulation by the    
Surface Transportation Board ("STB") and the Federal Railroad Administration    
("FRA"); (ii) certain labor related statutes including the Railway Labor Act,   
Railroad Retirement Act, the Railroad Unemployment Insurance Act, and the       
Federal Employer's Liability Act, and (iii) regulation by agencies in the states
in which the Company does business. Additionally, the Company is subject to STB 
regulation in its acquisition of new railroad properties. As a result of the    
Staggers Rail Act amendments to the Interstate Commerce Act in 1980 and         
enactment of the ICC Termination Act of 1995, there has been a significant      
relaxation in regulation governing rail carriers, which management believes has 
greatly simplified the purchase and sale of shortline railroad properties and   
expedited the closing of such transactions. The Company believes its operations 
are in material compliance with all such regulations.                           

STB. The STB 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 carrier (including        
railroads and interstate motor and water carriers) by another carrier (or an    
entity controlling another carrier), the use by one railroad of another         
railroad's tracks ("trackage rights"), the rates charged by railroads for their 
transportation services, and the service of rail carriers. Legislation enacted  
in 1995 replaced the Interstate Commerce Commission ("ICC") with the STB and    
abolished labor protective conditions applicable to numerous types of rail      
transactions. Today, most transactions involving shortline railroads are no     
longer subject to protective conditions for adversely affected employees by     
labor agencies. Certain types of transactions involving mid-size "regional      
railroads" (annual revenues between $20 million and $250 million) are still     
subject to                                                                      

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limited labor protective conditions for adversely affected employees (in absence
of any other arrangements negotiated between management and labor, affected     
employees receive one year's severance pay upon consummation of acquisition     
transactions).                                                                  

   While imposition of labor protective conditions on line sales and
transfers does not subject a rail line buyer to the seller's collective         
bargaining agreements, rates of pay, and other labor practices and does not     
unionize the buyer's operating and maintenance employees, it entitles employees 
of buyer or seller who are "adversely affected" by the transaction in terms of  
job loss, pay cuts, loss of overtime, loss of hours, loss of benefits, and      
moving expenses, to receive payments over a period of four years representing   
compensation for those losses. Generally, in a line sale or transfer, only the  
seller's or transferor's employees are affected.                                

    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.   
Under the Staggers Rail Act, all containerized and truck trailer traffic handled
by railroads was deregulated. 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 amendments have allowed railroads considerable freedom to     
raise or lower rates without objection from captive shippers. While the ICC     
termination 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.                                                          

       FUTURE OF THE STB. Under the ICC Termination Act the STB is presently
funded through September 30, 1999. It is unclear whether the STB will be        
reauthorized in its present form.                                               

 FRA. 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.                                                                 

      STATES. Under the ICC Termination Act states lost their jurisdiction
over economic regulation of intrastate transportation. All states retain some   
jurisdiction over safety related matters.                                       

EMPLOYEES; LABOR CONSIDERATIONS                                                 

      As of December 31, 1998, the Company had approximately 444 full-time
employees in North America. Approximately 89 of the Company's employees are     
members of a union and are employed at KSC. Approximately 46 of KSC's employees 
are members of the Federation Inter-Provinciale des Ouvriers en Electricite     
(F.I.P.O.E.), which was accredited in Canada in 1988. The other 43 of KSC's     
union employees are members of the L'Association des employes de production de  
Kalyn Siebert Canada, Inc. (A.E.P.K.), which was accredited in August 1998.     

The Company's railroad operations are somewhat seasonal. Most 
agricultural shipments                                                          

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occur from September through May, and much of the Company's track maintenance is
performed in the summer months. Temporary layoffs of personnel, hiring of       
part-time or short-term employees, or use of independent contractors are        
sometimes required to adjust to the seasonal nature of track maintenance work   
and other business requirements. As of December 31, 1998 the Company had 104    
full-time railroad employees, 302 full-time employees in the trailer            
manufacturing division, one full-time employee in the motor carrier operations  
and 38 corporate and/or support employees.                                      

        Ferronor operated with approximately 350 employees as of the date that
the Company acquired majority ownership. As contemplated by management,         
significant reductions in the work force have been effectuated and the current  
workforce is approximately 210 employees.                                       

ITEM 2. DESCRIPTION OF PROPERTY                                                 

MICHIGAN RAILROAD PROPERTIES                                                    

        The majority of the Company's 199 miles of Michigan rail line consists
of 90 pound or heavier welded and jointed rail. The Company's track standards   
allow for maximum operating speeds ranging from 10 m.p.h. to 25 m.p.h. The      
Company owns approximately 1,260 acres of operating and non-operating real      
estate in Michigan. The Company's Michigan rail properties serve as collateral  
for the Company's $55 million Revolving Loan Agreement with the National Bank of
Canada et al (the "Revolver") (See Note 10 to Notes to Consolidated Financial   
Statements).                                                                    

       The Company built its Eastern regional headquarters office in Vassar,
Michigan during 1997. This office building is 6,800 square feet and houses      
management, dispatching, engineering, real property management, accounting and  
marketing personnel. The Company owns a locomotive shop which was constructed in
1987, and a maintenance-of-way equipment repair building completed in 1989,     
which also serves as a satellite operations center.                             

TENNESSEE RAILROAD PROPERTIES                                                   

       SCTR leases approximately 49 miles of rail line and approximately 450
acres of related real estate from the South Central Tennessee Railroad          
Authority. The lease was extended in February 1997 until 2004 and provides for  
base lease payments of $1,300 per month. The Company has the option to purchase 
the rail line and real estate for one dollar throughout the term of the lease.  

         SCTR owns a locomotive shop and general office facility in Centerville,
Tennessee which houses all of its operating personnel. SCTR also owns related   
maintenance and office equipment. The Company's rights to the lease of the SCTR 
property, as well as all the common stock of SCTR owned by the Company and      
SCTR's other equipment, serve as collateral under the Company's financing       
arrangements with General Electric Capital Corporation obtained in connection   
with the Company's acquisition of SCTR. This financing is being refinanced      
during 1999. (See Note 10 to Notes to Consolidated Financial Statements).       

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DELAWARE AND PENNSYLVANIA RAILROAD PROPERTIES                                   

     DVRC operates approximately 55 miles of rail line, consisting of 45
miles located in southeastern Pennsylvania, and 10 miles of contiguous line     
which extends into the State of Delaware, where the Company interchanges with   
CSX Transportation at Elsmere, Delaware. The Pennsylvania rail line is operated 
pursuant to an agreement between DVRC and the Commonwealth of Pennsylvania. The 
rail line in Delaware was operated by DVRC pursuant to a 10-year lease with the 
Wilmington & Northern Railroad Company. DVRC terminated that lease on June 30,  
1996 and has since been operating over that rail segment on a month-to-month    
basis. DVRC has received grants from the Commonwealth of Pennsylvania for track 
maintenance and improvements from 1994 through 1998 which require local         
matching.                                                                       

MINNESOTA RAILROAD PROPERTIES                                                   

  Dakota Rail operates approximately 44 miles of rail line between
Hutchinson and Wayzata, Minnesota. The rail line is being purchased pursuant to 
a contract for deed from the State of Minnesota. Dakota Rail also owns certain  
non-operating real estate parcels. Total land both operating and non-operating  
owned by Dakota Rail equals approximately 580 acres. In addition to the rail    
line and land, Dakota Rail also owns six buildings, consisting of two depots,   
two diesel houses and two other buildings.                                      

     MNR currently operates over 221 miles of rail line of which it owns
approximately 174 miles and has trackage rights over 47 miles. The rail line    
includes five branch lines, divided into seven segments in northern Minnesota.  
MNR also owns approximately 2,600 acres of operating and non-operating land. MNR
sold approximately 30 miles of rail line in December 1996. MNR's rail properties
serve as collateral for the Revolver (See Note 10 to Notes to Consolidated      
Financial Statements).                                                          

         OTVR owns 72 miles of rail line in Western Minnesota from Fergus Falls,
Minnesota to an interchange with Burlington Northern Santa Fe near Fargo, North 
Dakota. The total land owned by OTVR is approximately 1,080 acres. In addition  
to the rail line and land, OTVR owns a depot building in Fergus Falls. OTVR's   
railroad properties serve as collateral for the Company's Revolver (See Note 10 
to Notes to Consolidated Financial Statements).                                 

        SCXY operates over 60 miles of rail line of which it owns 44 miles and
has trackage rights over 16 miles. The rail line includes two branch lines in   
and around Hinckley, Minnesota.                                                 

TEXAS RAILROAD PROPERTIES                                                       

         WTLR owns approximately 104 miles of rail line, extending from the City
of Lubbock to both Seagraves and Whiteface. The total land owned by WTLR is     
approximately 1,500 acres. In addition to the rail line and land, WTLR owns four
buildings. These buildings consist of an office building in Lubbock used as the 
railroad general offices, a one story storefront office building, and           

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a maintenance building and storage shed, all in Brownfield, Texas. The Company's
Texas railroad properties serve as collateral for the Revolver (See Note 10 to  
Notes to Consolidated Financial Statements).                                    

WASHINGTON RAILROAD PROPERTIES                                                  

  CCRR owns 131 miles of rail line between Oroville and Wenatchee,
Washington. CCRR also has trackage rights over 6 miles of rail line near        
Wenatchee. Total land owned by CCRR is approximately 1,600 acres. In addition to
the rail line and land, CCRR owns three buildings. These buildings consist of an
office building, a maintenance-of-way shop/storage building and a locomotive    
shop, all of which are located in Omak, Washington. The Company's Washington    
railroad properties serve as collateral for the Revolver. (See Note 10 to Notes 
to Consolidated Financial Statements).                                          

CALIFORNIA RAILROAD PROPERTIES                                                  

     In August 1998, the Company, through its newly formed, wholly-owned
subsidiary, Ventura County Railroad Company, Inc. ("VCRR"), entered into a long 
term lease/purchase agreement to operate a 13-mile rail line serving the Port of
Hueneme and the Oxnard Harbor District in Oxnard, California, located           
approximately 50 miles north of Los Angeles. VCRR's general offices are located 
at the Port of Hueneme.                                                         

CHILEAN RAILROAD PROPERTIES                                                     

     In February 1997, the Company, through a newly formed, wholly-owned
subsidiary, RailAmerica de Chile S.A., acquired 55% of the outstanding voting   
stock of Ferronor. Ferronor owns and operates approximately 1,400 miles of rail 
line serving northern Chile. RailAmerica was joined in the purchase of Ferronor 
by APCO, a family-owned Chilean transportation and distribution company.        

    Ferronor 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 limestone mines   
and production facilities with several Chilean Pacific port cities. Ferronor    
also serves Argentina and Bolivia through traffic interchanged with the General 
Belgrano Railroad and the Ferrocarriles Antofagasta Bolivia.                    

TEXAS MANUFACTURING PROPERTIES                                                  

        KSI's manufacturing operations are conducted in thirteen Company owned
buildings, totaling approximately 198,000 square feet on an 25.5-acre site,     
which were constructed over the period from 1969 to 1997. The Company's Texas   
manufacturing properties serve as collateral for the Revolver (See Note 10 to   
Notes to Consolidated Financial Statements).                                    

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QUEBEC, CANADA MANUFACTURING PROPERTIES                                         

   KSC's manufacturing operations are conducted in two Company owned
buildings, totaling approximately 150,000 square feet on a 36.7-acre site. The  
Company's Quebec manufacturing properties serve as collateral for certain term  
financings (See Note 10 to Notes to Consolidated Financial Statements).         

ONTARIO, CANADA MOTOR CARRIER PROPERTIES                                        

    Steel City Carriers operates from a terminal it owns in Sault Ste.
Marie, Ontario, Canada, which includes an office building housing administrative
and dispatch offices, fabricating and service and a shop building. The service  
facility has three bays which provide adequate space for repairs and maintenance
of Steel City Carriers' tractors and trailers as well as some owner-operators'  
tractors. A 5-1/2 acre lot provides adequate space for the normal loading,      
unloading, movement and parking of tractors and trailers as well as for         
temporarily storing and transferring some shipments. The Company has entered    
into an agreement to sell the real estate and anticipates the sale closing in 12
to 24 months. The Company's Ontario properties serve as collateral for the      
Revolver (See Note 10 to Notes to Consolidated Financial Statements).           

ROLLING STOCK                                                                   

        As of December 31, 1998, the Company's domestic railroad rolling stock
consisted of 47 locomotives and 992 freight cars, some of which were owned and  
some of which are leased from third parties. Most of the Company's rail cars are
subject to fixed monthly lease payments which are offset, in part, by fees      
charged by the Company to connecting railroads and shippers. The Company owns   
138 tank cars that it has leased to various shippers. The tank cars serve as    
collateral for term financing agreements. Certain of the Company's locomotives  
are owned by the Company and serve as collateral under various financing        
agreements (See Note 8 to Notes to Consolidated Financial Statements). The      
Company also owns various other equipment used in the maintenance and operation 
of its railroads. The following tables summarize the composition of the         
Company's domestic railroad equipment fleet as of December 31, 1998:            

                            FREIGHT CARS
                             -----------------------------------
TYPE                            OWNED         LEASED          TOTAL   
----                            -----         ------          -----   
Covered hopper cars               --            458            458    
Open top hopper cars               5            184            189    
Tank cars                        138             --            138    
Box cars                          --             59             59    
Wood chip cars                    --             78             78    
Center-beam flat cars             --             60             60    
Flat cars                         10             --             10    
                             ---            ---            ---
                             153            839            992
                             ===            ===            ===

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         LOCOMOTIVES
         ---------------------------------
HORSEPOWER/UNIT          OWNED        LEASED         TOTAL                
---------------          -----         -----         -----                
Over 2000                2             0             2                
1500 to 2000            22            14            36                
Under 1500               9             0             9                
        --            --            --
        33            14            47
        ==            ==            ==

      As of December 31, 1998, Ferronor owned approximately 32 locomotives
and 810 rail cars in Chile.                                                     

 Based on current and forecasted traffic levels on the Company's
railroads, management believes that its present equipment, combined with the    
availability of other rail cars for hire, is adequate to support its operations.
Management believes that the Company's insurance coverage with respect to its   
property and equipment is adequate.                                             

ADMINISTRATIVE OFFICES                                                          

     The Company maintains its principal executive office in Boca Raton,
Florida. This office consists of approximately 7,250 square feet and is leased  
through January 2001. The lease calls for monthly rental payments of            
approximately $13,000 with annual increases. In July 1998, the Company purchased
a 59,500 square foot office building, located in Boca Raton, Florida, for       
approximately $4.6 million. Approximately 17,500 square feet of this building is
to be used as the Company's new corporate headquarters. The Company is expected 
to take occupancy during the second quarter of 1999. The remaining 42,000 square
feet of space is currently leased to a single tenant. In addition, the Company  
subleases a corporate office in San Francisco, California, consisting of        
approximately 1,000 square feet and leased through June 2001, with lease        
payments of approximately $550 per month.                                       

ITEM 3. LEGAL PROCEEDINGS                                                       

        In the ordinary course of conducting its business, the Company becomes
involved in various legal actions and other claims some of which are currently  
pending. Litigation is subject to many uncertainties, the outcome of individual 
litigated matters is not predictable with assurance, and it is reasonably       
possible that some of these matters may be decided unfavorably to the Company.  
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 the Company's business, no other litigation exists.    

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 1998.                                                         

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PART II                                                                         

ITEM 5.  MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS               

      Effective March 6, 1997, the Company's common stock began trading on
the Nasdaq National Market under the symbol "Rail". Prior to March 6, 1997, the 
Company's common stock traded on the Nasdaq SmallCap Market tier of The Nasdaq  
Stock Market. Set forth below is high and low bid information for the common    
stock as reported on the NASDAQ system for each quarter of 1997 and 1998. All   
such quotations reflect inter-dealer prices, without retail mark-up, mark-down  
or commissions and may not reflect actual transactions.                         

                                                        [Enlarge/Download Table]


------------------------------------------------------------------------------------------------
                                                        High Sales Price      Low Sales Price   
------------------------------------------------------------------------------------------------
                                                                                                
1997                                                                                            
------------------------------------------------------------------------------------------------
First Quarter                                               $ 6 1/8              $ 4 5/8        
------------------------------------------------------------------------------------------------
Second Quarter                                                5                    4 1/4        
------------------------------------------------------------------------------------------------
Third Quarter                                                 6 5/16               4 1/8        
------------------------------------------------------------------------------------------------
Fourth Quarter                                                7 3/8                5 3/8        
------------------------------------------------------------------------------------------------


                                                        [Enlarge/Download Table]

------------------------------------------------------------------------------------------------
                                                        High Sales Price      Low Sales Price   
------------------------------------------------------------------------------------------------
                                                                                                
1998                                                                                            

First Quarter                                               $ 7 23/32            $ 6            
------------------------------------------------------------------------------------------------
Second Quarter                                                7 3/16               5 15/16      
------------------------------------------------------------------------------------------------
Third Quarter                                                 6 3/8                5            
------------------------------------------------------------------------------------------------
Fourth Quarter                                                8 3/4                5 5/16       
------------------------------------------------------------------------------------------------

                                                        [Enlarge/Download Table]

------------------------------------------------------------------------------------------------
                                                        High Sales Price      Low Sales Price   
------------------------------------------------------------------------------------------------
                                                                                                
1999                                                                                            
------------------------------------------------------------------------------------------------
First Quarter (through March 25)                            $10 3/4              $ 7 1/4        
------------------------------------------------------------------------------------------------

      As of March 25, 1999, there were 303 holders of record of the common
stock and approximately 3,000 beneficial stockholders. The Company has never    
declared or paid a dividend on its common stock. The ability of the Company to  
pay dividends in the future will depend on, among other things, restrictive     
covenants contained in loan or other agreements to which the Company may be     
subject.                                                                        

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     In December 1998 and January 1999, the Company sold an aggregate of
468,000 shares of its Series A Convertible Redeemable Preferred Stock, $.01 par 
value (the "Series A Preferred Stock"), in a private offering to accredited     
investors for an aggregate purchase price of $11,610,000 pursuant to Section    
4(2) and/or 3(b) of the Securities Act of 1933, as amended (the "Securities     
Act"), and Regulation D promulgated thereunder. The Company paid aggregate      
concessions and fees of $822,700 to the placement agent in connection with the  
offering. The Series A Preferred Stock has a liquidation value of $25.00 per    
share, pays cumulative annual dividends of 7.5% payable in cash, semi-annually  
in arrears and is non-voting. The Series A Preferred Stock is convertible, at   
the option of each holder, into shares of common stock at a conversion price of 
$8.25, subject to adjustment under certain circumstances. The Company is        
required to redeem the outstanding shares of Series A Preferred Stock on        
December 31, 2003, at a redemption price equal to the liquidation value, plus   
accrued and unpaid dividends. The Company has the right to redeem the           
outstanding shares of Series A Preferred Stock under certain circumstances.     

       In March 1999, the Company sold an aggregate of 1.4 million shares of
its common stock and warrants (the "1999 Warrants") to purchase 210,000 shares  
of common stock in a private offering to accredited investors for an aggregate  
purchase price of $12.5 million pursuant to Section 4(2) and/or 3(b) of the     
Securities Act and Regulation D promulgated thereunder. The Company paid        
aggregate concessions and fees of $437,000 to the placement agent in connection 
with the offering. The 1999 Warrants are exercisable during the one-year period 
following consummation at $10.125 per share, subject to adjustment under certain
circumstances.                                                                  

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ITEM 6.  SELECTED FINANCIAL DATA                                                

     The following selected financial data should be read in conjunction
with the financial statements and the notes thereto included elsewhere in this  
Annual Report on Form 10-K. The statement of operations data for the years ended
December 31, 1998, 1997 and 1996 and the balance sheet data at December 31, 1998
and 1997 are derived from, and are qualified by reference to, audited financial 
statements included elsewhere herein and should be read in conjunction with     
those financial statements and the notes thereto. The statement of operations   
data set forth below for the periods ended December 31, 1995 and 1994 and the   
balance sheet data as of December 31, 1996, 1995 and 1994 are derived from the  
audited financial statements of the Company not included herein (In thousands,  
except operating data).                                                         

                                                        [Enlarge/Download Table]

                                                 YEAR ENDED DECEMBER 31,                 
                                   1994      1995          1996          1997      1998  
                                 --------  --------      --------      --------  --------
                                                                                         
INCOME STATEMENT DATA                                                                    

  Operating revenue              $ 14,724  $ 25,078      $ 25,658      $ 47,437  $ 77,144
  Operating income                  2,229     3,188         3,873         7,319    12,642
  Income from                                                                            
    continuing operations             920     1,126         1,080         2,634     4,466
  Basic earnings per                                                                     
    common share from                                                                    
    continuing operations        $   0.30  $   0.10      $   0.22      $   0.32  $   0.47

Diluted earnings per common                                                              
   share from continuing                                                                 
   operations                    $   0.27  $   0.10      $   0.21      $   0.30  $   0.44

Weighted average                                                                         
    common shares                   4,608     4,504         4,966         8,304     9,553

BALANCE SHEET DATA                                                                       

 Total Assets                    $ 24,876  $ 40,064      $ 71,565      $100,835  $145,230
 Long-term debt, including                                                               
     current maturities            10,407    18,151        40,154        47,798    71,815
 Subordinated debt,                                                                      
   including current maturities     2,062     5,569         3,690         3,478       908
 Redeemable convertible                                                                  
    preferred stock                 1,017        --            --            --     6,882
  Stockholders' Equity              6,408     9,149        15,992        26,814    34,760

OPERATING DATA                                                                           

  Freight carloads                 15,614    18,505        25,871        69,140   117,535
  Track mileage                       299       450           930         2,330     2,400
  Trailer units sold                  887       875           547           730     1,129
  Number of full time                                                                    
     employees                        220       265           275           542       652


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ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS                                   

GENERAL                                                                         

      The Company's principal operations include the operation of domestic
short line railroads, international regional railroads and trailer              
manufacturing. The Company hauls various products, which historically have      
consisted primarily of agricultural commodities, for its customers corresponding
to their local operating areas. The Company's trailer manufacturing division,   
located in Texas and Trois-Rivieres, Quebec, Canada, manufactures a broad range 
of specialty truck trailers which are marketed to a customer base from the      
commercial and government sectors.                                              

       The Company's operating revenues increased by $29.7 million, or 62.6%
to $77.1 million for the year ended December 31, 1998 from $47.4 million for the
year ended December 31, 1997. Operating expenses increased by $24.4 million, or 
60.7% to $64.5 million for the year ended December 31, 1998 from $40.1 million  
for the year ended December 31, 1997. Other expenses, net increased by $2.9     
million, or 77.5% to $6.6 million for the year ended December 31, 1998 from $3.7
million for the year ended December 31, 1997. Income from continuing operations 
increased by $1.8 million, or 69.6% to $4.5 million for the year ended December 
31, 1998 from $2.6 million for the year ended December 31, 1997. Increases in   
revenue, operating expenses, other expenses and income were due primarily to the
inclusion of the motor carrier division in continuing operations for nine months
of 1998, the commencement of shipments on several large new contracts at        
Ferronor in 1998, the acquisition of KSC and the growth of the trailer          
manufacturing operations.                                                       

      Set forth below is a discussion of the results of operations for the
Company's railroad operations, trailer manufacturing operations and corporate   
overhead and other.                                                             

RESULTS OF DOMESTIC RAILROAD OPERATIONS                                         

   The discussion of results of operations that follows reflects the
consolidated results of the Company's domestic railroad operations for the years
ended December 31, 1998, 1997 and 1996. The results of operations include the   
operations of Evansville Terminal Company from July 1, 1996 to September 30,    
1997, CCRR from September 6, 1996, OTVR from October 1, 1996, Gettysburg Railway
and Gettysburg Scenic Rail Tours, Inc. ("GSRT") from November 18, 1996 to       
October 31, 1997, MNR from December 28, 1996 , SCXY from September 8, 1997, and 
VCRR from September 1, 1998. As a result, the results of operations for the year
ended December 31, 1998 are not comparable to the prior year periods in certain 
material respects.                                                              

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        The following table sets forth the operating revenues and expenses for
the Company's domestic railroad operations for the periods indicated. All       
results of operations discussed in this section are for the Company's domestic  
railroads only, unless indicated (in thousands).                                

                                                                [Download Table]

                                              YEAR ENDED DECEMBER 31,     
                                           1998        1997          1996 
                                         -------      -------      -------
                                                                          
Operating Revenue:                                                        

    Transportation revenue               $15,388      $14,737      $ 9,783
    Other revenue                            802        1,277        1,921
                                         -------      -------      -------
Total operating revenue                   16,190       16,014       11,704
                                         -------      -------      -------
Operating Expenses:                                                       
    Maintenance of way                     1,974        2,231        1,310
    Maintenance of equipment                 675          678          625
    Transportation                         3,605        3,799        2,075
    Equipment rental                         347          599          388
    Selling, general and administrative    3,095        2,457        1,381
    Depreciation and amortization          1,570        1,337          961
                                         -------      -------      -------
Total operating expenses                  11,266       11,101        6,740
                                         -------      -------      -------
Operating income                           4,924        4,913        4,964
    Interest and other expense             2,852        2,842        1,308
                                         -------      -------      -------
Income before income taxes               $ 2,072      $ 2,071      $ 3,656
                                         =======      =======      =======


COMPARISON OF DOMESTIC RAILROAD OPERATING RESULTS FOR THE YEARS ENDED           
DECEMBER 31, 1998 AND 1997                                                      

        OPERATING REVENUES. Transportation revenues increased $0.7 million, or
4.4%, to $15.4 million for the year ended December 31, 1998 from $14.7 million  
for the year ended December 31, 1997. The domestic transportation revenue per   
carload decreased to $303 from $308 per car primarily due to the difference in  
product mix hauled between 1998 and 1997. Domestic carloads handled totaled     
49,519 for the year ended December 31, 1998, an increase of 3,312, or 7.2%,     
compared to 46,207 for the year ended December 31, 1997.                        

      Other revenues decreased by approximately $0.5 million, or 37.2%, to
$0.8 million for the year ended December 31, 1998 from $1.3 million for the year
ended December 31, 1997. Other revenues for 1998 and 1997 consist of gain on    
sales of railroad assets, easement sales, railroad lease and rental income and  
other miscellaneous income. The decrease was primarily due to certain gains on  
sale of assets during 1997 with no corresponding sales of assets in 1998.       

      OPERATING EXPENSES. Operating expenses increased by $0.2 million, or
1.8%, to $11.3 million for the year ended December 31, 1998 from $11.1 million  
for the year ended December 31, 1997. Operating expenses, as a percentage of    
transportation revenue, were 73.2% and 75.3% for 1998 and 1997, respectively.   
Management anticipates the operating expenses, as a percentage of transportation
revenue to remain fairly constant at the current level for the next twelve      
months exclusive of seasonality.                                                

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      Maintenance of way expenses decreased approximately $0.2 million, or
11.5%, to $2.0 million for the year ended December 31, 1998 from $2.2 million   
for the year ended December 31, 1997 primarily due to increased track work being
performed as part of scheduled maintenance programs at WTLR and HESR during     
1997.                                                                           

    Maintenance of equipment expenses remained fairly constant at $0.7
million for the years ended December 31, 1998 and 1997.                         

       Transportation expense decreased approximately $0.2 million, or 5.1%,
to $3.6 million for the year ended December 31, 1998 from $3.8 million for the  
year ended December 31, 1997 primarily due to the dispositions of ETC,          
Gettysburg Railway and GSRT in 1997.                                            

     Equipment rental decreased approximately $0.3 million, or 42.0%, to
approximately $0.3 million for the year ended December 31, 1998 from $0.6       
million for the year ended December 31, 1997. The decrease is primarily due to  
increased utilization of the Company's leased railcar fleet. CCRR and MNR       
equipment rental expenses decreased by 78.8% and 137.4% respectively due to     
increased earnings offsetting equipment rental expense on their railcar fleets. 

      Selling, general and administrative expenses increased approximately
$0.6 million, or 26.0%, to $3.1 million for the year ended December 31, 1998    
from $2.5 million for the year ended December 31, 1997. MNR had selling, general
and administrative expenses of approximately $0.5 million in 1998 compared to   
$0.3 million for the year ended December 31, 1997, an increase of approximately 
$0.2 million. OTVR had selling, general and administrative expenses of          
approximately $0.3 million in 1998 compared to $0.2 million for the year ended  
December 31, 1997, an increase of approximately $0.1 million. SCXY had selling, 
general and administrative expenses of $0.1 million for the year ended December 
31, 1998, an increase of $0.1 million from $15,000 in 1997.                     

        Depreciation and amortization increased approximately $0.3 million, or
17.4%, to $1.6 million for the year ended December 31, 1998 from $1.3 million   
for the year ended December 31, 1997.                                           

       INTEREST AND OTHER EXPENSES. Interest and other expenses remained
fairly constant at approximately $2.9 million for the years ended December 31,  
1998 and 1997.                                                                  

COMPARISON OF DOMESTIC RAILROAD OPERATING RESULTS FOR THE YEARS ENDED           
DECEMBER 31, 1997 AND 1996                                                      

        OPERATING REVENUES. Transportation revenues increased $5.0 million, or
50.6%, to $14.7 million for the year ended December 31, 1997 from $9.8 million  
for the year ended December 31, 1996. CCRR, which was acquired in September     
1996, had transportation revenue of approximately $2.6 million for 1997 and     
approximately $0.7 million for the four months ended December 31, 1996, an      
increase of $1.9 million. MNR, which was acquired in December 1996, had         
transportation revenue of approximately $2.2 million for the year ended December
31, 1997. OTVR, which was                                                       

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acquired in September 1996, had transportation revenue of approximately $1.8    
million for the year ended December 31, 1997, compared to $0.6 million for the  
four month period ended December 31, 1996, an increase of $1.2 million.         
Gettysburg Railway, which was acquired in November 1996, had transportation     
revenue of approximately $0.4 million for the year ended December 31, 1997.     
These increases in transportation revenue were partially offset by a decrease of
approximately $0.2 million in revenue from HESR resulting from decreased        
agricultural shipments in early 1997 compared to early 1996. Additionally,      
transportation revenue from SCTR decreased approximately $0.4 million due to a  
decrease in demurrage revenue charged to a shipper. The domestic transportation 
revenue per carload decreased to $308 from $378 per car primarily due to the    
acquisitions during 1996 of railroads with lower rates per carload than the     
Company's existing railroads. Domestic carloads handled totaled 46,207 for the  
year ended December 31, 1997, an increase of 20,336, or 78.6%, compared to      
25,871 for the year ended December 31, 1996. The increase was primarily the     
result of the Company's acquisitions of MNR, which handled 10,477 carloads in   
1997, CCRR, which handled 7,631 carloads in 1997, OTVR, which handled 5,776     
carloads in 1997, and Gettysburg Railway, which handled 1,206 carloads in 1997. 
These increased car loadings were partially offset by a decrease of 541 carloads
from HESR.                                                                      

      Other revenues decreased by approximately $0.6 million, or 33.5%, to
$1.3 million for the year ended December 31, 1997 from $1.9 million for the year
ended December 31, 1996. Other revenues for 1997 and 1996 consisted of gain on  
sales of railroad assets, easement sales, railroad lease and rental income and  
other miscellaneous income.                                                     

      OPERATING EXPENSES. Operating expenses increased by $4.4 million, or
64.7%, to $11.1 million for the year ended December 31, 1997 from $6.7 million  
for the year ended December 31, 1996. Operating expenses, as a percentage of    
transportation revenue, were 75.3% and 68.9% for 1997 and 1996, respectively.   
The change was primarily due to higher maintenance of way expenses caused by an 
unusually harsh winter in Minnesota and Michigan in the first quarter of 1997   
and higher operating ratios for certain of the recent acquisitions as compared  
to the Company's existing railroads.                                            

      Maintenance of way expenses increased approximately $0.9 million, or
70.3%, to $2.2 million for the year ended December 31, 1997 from $1.3 million   
for the year ended December 31, 1996 primarily due to certain acquisitions which
occurred in 1996. MNR had maintenance of way expenses of approximately $0.5     
million for the year ended December 31, 1997. CCRR had maintenance of way       
expenses of approximately $0.2 million for 1997, compared to maintenance of way 
expenses of approximately $57,000 for the four months ended December 31, 1996,  
an increase of $0.2 million. Gettysburg Railway had maintenance of way expenses 
of approximately $0.1 million for the year ended December 31, 1997, compared to 
$10,000 for the four months ended December 31, 1996. In addition to the above   
acquisitions, WTLR's and HESR's maintenance of way expenses increased           
approximately $74,000 and $0.1 million, respectively, from 1996 to 1997 due to  
increased track work being performed as part of scheduled maintenance programs. 

       Maintenance of equipment expenses increased by approximately $53,000,
or 8.5%, to $0.68                                                               

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million for the year ended December 31, 1997 from $0.63 million for the year    
ended December 31, 1996 primarily due to certain acquisitions which occurred in 
the second half of 1996.                                                        

        Transportation expense increased approximately $1.7 million, or 83.1%,
to $3.8 million for the year ended December 31, 1997, from $2.1 million for the 
year ended December 31, 1996 primarily due to certain acquisitions in the second
half of 1996. MNR had transportation expenses of approximately $0.7 million in  
1997. CCRR had transportation expenses of approximately $0.5 million for the    
year ended December 31, 1997, compared to $0.1 million for the four months ended
December 31, 1996, an increase of $0.3 million. OTVR had transportation expenses
of approximately $0.3 million for the year ended December 31, 1997, compared to 
$59,000 in the three months ended December 31, 1996, an increase of             
approximately $0.3 million. Gettysburg Railway and GSRT combined had            
transportation expenses of $0.3 million for the year ended December 31, 1997.   

     Equipment rental increased approximately $0.2 million, or 54.4%, to
$0.6 million for the year ended December 31, 1997, from $0.4 million for the    
year ended December 31, 1996.                                                   

      Selling, general and administrative expenses increased approximately
$1.1 million, or 77.9%, to $2.5 million for the year ended December 31, 1997,   
from $1.4 million for the year ended December 31, 1996 primarily due to certain 
acquisitions in the second half of 1996. MNR had selling, general and           
administrative expenses of approximately $0.3 million in 1997. CCRR had selling,
general and administrative expenses of approximately $0.4 million for the year  
ended December 31, 1997, compared to $0.1 million for the four months ended     
December 31, 1996, an increase of $0.3 million. OTVR had selling, general and   
administrative expenses of approximately $0.2 million for the year ended        
December 31, 1997, compared to $44,000 in the three months ended December 31,   
1996, an increase of approximately $0.1 million. Gettysburg Railway had selling,
general and administrative expenses of $0.1 million for the year ended December 
31, 1997.                                                                       

        Depreciation and amortization increased approximately $0.4 million, or
39.1%, to $1.3 million for the year ended December 31, 1997 from $1.0 million   
for the year ended December 31, 1996 primarily due to certain acquisitions in   
the second half of 1996.                                                        

       INTEREST AND OTHER EXPENSES. Interest and other expenses increased by
approximately $1.5 million, or 117.3%, to $2.8 million for the year ended       
December 31, 1997 from $1.3 million for the year ended December 31, 1996. Such  
increase was primarily due to the financing of the acquisitions of CCRR, MNR,   
OTVR and Gettysburg Railway. The increase in interest expense from the year     
ended December 31, 1996 to the year ended December 31, 1997 attributable to     
these four acquisitions was $0.5 million, $0.5 million, $0.4 million and $0.1   
million, respectively.                                                          

RESULTS OF INTERNATIONAL RAILROAD OPERATIONS                                    

   FERRONOR. On February 19, 1997, the Company acquired a 55% equity
interest in Ferronor, a 1,400 mile regional railroad in the Republic of Chile.  
The operations of Ferronor have been                                            

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included in the consolidated operations of the Company from March 1, 1997. As a 
result, the results of operations for the year ended December 31, 1998 are not  
comparable to the corresponding prior year in certain material respects.        

        The following table sets forth the operating revenues and expenses for
the Company's international railroad operations, which consist of Ferronor and  
RDC, for the periods indicated. All results of operations discussed in this     
section are for the Company's international railroads only, unless otherwise    
indicated. (In thousands)                                                       

                            For the Year Ended
                            Ended December 31,
                            1998            1997
                           --------       --------
Revenue:                                                                        
Transportation revenue             $ 14,915       $  7,287        
Other revenue                         1,009            775        
                           --------       --------
Total revenue                               15,924          8,062               
                           --------       --------
Operating Expenses:                                                             
Transportation                        8,982          5,113        
General and administrative            1,724          1,137        
Depreciation and amortization           706            267        
                           --------       --------
Total operating expenses                    11,412          6,517               
                           --------       --------
Operating income                             4,512          1,545               
Other income (expense)                      (1,257)           319               
Minority interest in earnings               (1,672)          (851)              
                           --------       --------
Income before income taxes                $  1,583       $  1,013               
                           ========       ========

COMPARISON OF INTERNATIONAL RAILROAD OPERATING RESULTS FOR THE YEARS ENDED      
DECEMBER 31, 1998 AND 1997.                                                     

OPERATING REVENUES. Transportation revenue increased by $7.6 million, or 104.7%,
to $14.9 million for the year ended December 31, 1998 from $7.3 million for the 
year ended December 31, 1997. Ferronor's carloads handled totaled 68,016 for the
year ended December 31, 1998, an increase of 45,083, or 196.6%, compared to     
22,933 carloads for the year ended December 31, 1997. The increase was partially
due to the prior year period including only ten months of operations. In        
addition, Ferronor began moving iron ore out of the El Algarrabo mine in late   
March 1998 and the Los Colorados mine in July 1998. These moves have            
significantly increased Ferronor's car loadings and operating revenue.          

    OPERATING EXPENSES. Operating expenses increased by approximately $4.9
million, or 75.1%, to $11.4 million for the year ended December 31, 1998 from   
$6.5 million for the year ended December 31, 1997. The increase was partially   
due to the prior year period including only ten months of operations in addition
to Ferronor commencing movement of iron ore out of the El Algarrabo mine in late
March 1998 and the Los Colorados mine in July 1998. Operating expenses, as a    
percentage of transportation revenue, were 76.5% and 89.4% for the years ended  
December 31,                                                                    

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1998 and 1997, respectively. The improvement is primarily due to cost reductions
implemented by the Company including a reduction in employees.                  

       OTHER INCOME (EXPENSE). Other income (expense) decreased by approximately
$1.6 million to $(1.3) million for the year ended December 31, 1998 from $0.3   
million for the year ended December 31, 1997. The primary reasons for the       
decrease are the interest expense on the capital project financings and certain 
gains on sale of assets recognized in 1997 with no corresponding gains in 1998. 

RESULTS OF TRAILER MANUFACTURING OPERATIONS                                     

   The discussion of results of operations that follows reflects the
results of KSI for the periods indicated and KSC from January 1, 1998, the      
effective date of the Company's acquisition of Fabrex, Inc. and its affiliate.  
As a result, the results of operations for the year ended December 31, 1998 are 
not comparable to the corresponding prior years in certain material respects.   

    The following table sets forth the income and expense items of the Company's
trailer manufacturing operations for the years ended December 31, 1998, 1997 and
1996 and the percentage relationship of income and expense items to net sales   
(in thousands):                                                                 

                                                        [Enlarge/Download Table]

                                                    FOR THE YEAR ENDED DECEMBER 31,                     
                                      1998                       1997                        1996       
                               -------------------        -------------------        -------------------
                                                                                                        
Net sales                      $39,887        100%        $22,941        100%        $13,638       100% 
Cost of goods sold              28,583       71.7%         16,544       72.1%         10,448      76.6% 
                               -------                    -------                    -------            

Gross profit                    11,304       28.3%          6,397       27.9%          3,190      23.4% 
Selling, general and                                                                                    
   administrative                3,324        8.3%          1,969        8.6%          1,400      10.3% 
Depreciation and amortization      835        2.1%            473        2.1%            433       3.2% 
                               -------                    -------                    -------            

Income from operations           7,145       17.9%          3,955       17.2%          1,357      10.0% 
Other expenses (net)               222        0.6%            230        1.0%            348       2.6% 
                               -------                    -------                    -------            
Income before income taxes     $ 6,923       17.4%        $ 3,725       16.2%        $ 1,009       7.4% 
                               =======                    =======                    =======            


COMPARISON OF OPERATING RESULTS OF TRAILER MANUFACTURING FOR THE YEARS ENDED    
DECEMBER 31, 1998 AND 1997                                                      

       NET SALES. Net sales increased approximately $17.0 million, or 73.9%,
to $39.9 million for the year ended December 31, 1998 from $22.9 million for the
year ended December 31, 1997. The net sales increase consisted of $10.2 million 
in sales from KSC in 1998 and an increase of $6.8 million in KSI's sales. KSI   
sold 895 trailers for the year ended December 31, 1998 and 730 trailers for the 
year ended December 31, 1997. The increase in KSI's sales volume increased net  
sales by                                                                        

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approximately $5.0 million. KSC sold 234 trailers for the year ended December   
31, 1998. KSI's average price per trailer sold was approximately $34,700 for the
year ended December 31, 1998 and approximately $30,500 for the year ended       
December 31, 1997. The increase in average price per trailer increased KSI's    
sales by approximately $1.8 million. Sales to governmental agencies represented 
48% and 37% of KSI's net sales for 1998 and 1997, respectively. KSI's backlog as
of December 31, 1997 was approximately $18.3 million compared to $19.7 million  
at December 31, 1997. KSC's backlog as of December 31, 1998 was approximately   
$3.7 million.                                                                   

         COST OF GOODS SOLD. Cost of goods sold increased by approximately $12.0
million, or 72.8%, to $28.6 million for the year ended December 31, 1998 from   
$16.6 million for the year ended December 31, 1997. The cost of goods sold      
increase consisted of $8.4 million from KSC in 1998 and an increase of $3.6     
million in KSI's cost of goods sold. Cost of goods sold was 71.7% for the year  
ended December 31, 1998 compared to 72.1% for the year ended December 31, 1997. 
KSI's and KSC's cost of goods sold were 68.2% and 81.7%, respectively, for 1998.
Management anticipates gross profit as a percentage of net revenue to remain    
fairly constant over the next twelve months.                                    

    SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased by approximately $1.3 million, or 68.8%, to   
$3.3 million for the year ended December 31, 1998 from $2.0 million for the year
ended December 31, 1997. KSC's selling, general and administrative expenses were
$0.9 million for 1998, while KSI's selling, general and administrative expenses 
increased $0.4 million for 1998. The increase was primarily related to KSI's    
increased sales during the year as discussed above.                             

COMPARISON OF OPERATING RESULTS OF TRAILER MANUFACTURING FOR THE YEARS ENDED    
DECEMBER 31, 1997 AND 1996                                                      

         NET SALES. Net sales increased approximately $9.3 million, or 68.2%, to
$22.9 million for the year ended December 31, 1997 from $13.6 million for the   
year ended December 31, 1996. Net sales consist of trailer sales, part sales and
repair income. Trailer sales represented approximately 96% of the net sales in  
both 1997 and 1996. KSI sold 730 trailers for the year ended December 31, 1997  
and 547 trailers for the year ended December 31, 1996. The increase in sales    
volume increased net sales by approximately $4.4 million. The average price per 
trailer sold was approximately $30,500 for the year ended December 31, 1997 and 
approximately $24,000 for the year ended December 31, 1996. The increase in     
average price per trailer increased net sales by approximately $4.8 million.    
Sales to governmental agencies represented 37% and 20% of KSI's net sales for   
1997 and 1996, respectively. During the first half of 1996, KSI was in the      
process of building five prototype trailers in connection with the $27 million  
October 1995 TACOM contract. Full production under the contract began during the
first quarter of 1997. The increase in sales for 1997 compared to 1996 was      
principally production under such contract. KSI produced 105 Tactical Vans under
the TACOM contract during 1997. KSI's backlog as of December 31, 1997 was       
approximately $19.7 million compared to $8.6 million at December 31, 1996.      

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        COST OF GOODS SOLD. Cost of goods sold increased by approximately $6.1
million, or 58.2%, to $16.5 million for the year ended December 31, 1997 from   
$10.4 million for the year ended December 31, 1996. Cost of goods sold was 72.1%
for the year ended December 31, 1997 compared to 76.6% for the year ended       
December 31, 1996. The decrease was partially due to certain fixed costs of     
manufacturing being spread over a larger revenue base in 1997. Additionally,    
government orders represented a higher percentage of sales in 1997 than in 1996.
Commercial trailers have more variations in design which generally require      
greater expertise in the manufacturing process. Government contracts are        
typically for larger quantities of similar style trailers. This creates greater 
economies of scale in the production process which translates into a relatively 
lower cost per unit produced. Historically, commercial sales have had a higher  
cost of goods sold and lower gross profit margins than government sales.        

    SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased by approximately $0.6 million, or 40.9%, from 
$1.4 million for the year ended December 31, 1996 to $2.0 million for the year  
ended December 31, 1997. The increase was primarily related to KSI's increased  
sales during the year as discussed above.                                       

RESULTS OF MOTOR CARRIER OPERATIONS                                             

   The discussion of results of operations that follows reflects the
results of Steel City Carriers and RIS for the years ended December 31, 1998,   
1997 and 1996. Since the Company's acquisition of Steel City Carriers in        
February 1995, its performance and development have not met the Company's       
expectations. Accordingly, in March 1997 the Company adopted a formal plan to   
discontinue its motor carrier operations and refocus the Company's efforts on   
expanding its core railroad operations. The Company's Board of Directors        
approved the plan of discontinuance on March 20, 1997. Motor Carrier operations 
are included as discontinued operations for the first quarter of 1998 and for   
all of 1997 and 1996. Motor Carrier operations are included in continuing       
operations from April 1, 1998 to December 31, 1998.                             

  Effective December 1, 1998, the Company ceased all motor carrier
operations and leased substantially all of the operating assets of Steel City   
Carriers, Ltd. to Laidlaw Carriers, Inc., an operating subsidiary of Ontario,   
Canada-based Contrans Corporation. The leases are for a period of 18 to 24      
months. In addition, the Company has entered into an agreement to sell its      
Ontario real estate that was previously used in the motor carrier operations.   

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        The following table sets forth the operating revenues and expenses for
the Company's motor carrier operations for the years ended December 31, 1998 and
1997.                                                                           

                                    For the Year Ended
                                    December 31,
                                    1998          1997
                                   -------       -------
Transportation revenue                         $ 6,080       $ 7,133            
Operating expenses:                                                             
Transportation                            5,279         6,348     
General and administrative                  620           599     
Depreciation and amortization               401         1,120     
                                   -------       -------
Total operating expenses                         6,300         8,067            
                                   -------       -------
Operating income (expense)                        (220)         (934)           
Other expense                                     (317)         (187)           
                                   -------       -------
Loss before income taxes                       ($  537)      ($1,121)           
                                   =======       =======

COMPARISON OF MOTOR CARRIER OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1998 AND
1997                                                                            

      The results of motor carrier operations have been included in continuing
operations commencing April 1, 1998, as disposal of the segment was not         
completed within twelve months. The results of motor carrier operations have    
been included as discontinued operations for the year ended December 31, 1997,  
as previously reported.                                                         

       OPERATING REVENUE. Operating revenue decreased $1.0 million, or 14.8%, to
$6.1 million for the year ended December 31, 1998 from $7.1 million for the year
ended December 31, 1997. The decrease was primarily due to Steel City ceasing   
motor carrier operations effective November 30, 1998 and due to a temporary shut
down at one of Steel City's largest customers during the third quarter of 1998. 

      OPERATING EXPENSES. Operating expenses decreased $1.8 million, or 21.9%,
to $6.3 million for the year ended December 31, 1998 from $8.1 million for the  
year ended December 31, 1997. Operating expenses, as a percentage of operating  
revenue, were 103.6% and 113.1% for the years ended December 31, 1998 and 1997, 
respectively.                                                                   

      Transportation expense decreased $1.0 million, or 16.8%, to $5.3 million
for the year ended December 31, 1998 from $6.3 million for the year ended       
December 31, 1997. The decrease was primarily due to variable costs related to  
the decreased level of operating revenue.                                       

  General and administrative expenses remained fairly constant at $0.6
million for the years ended December 31, 1998 and 1997.                         

     Depreciation and amortization decreased $0.7 million, or 64.2%, to $0.4
million for the year ended December 31, 1998 from $1.1 million for the year     
ended December 31, 1997. During 1997, the Company wrote off goodwill of         
approximately $0.7 million.                                                     

     Other expense increased $0.1 million, or 69.5%, to $0.3 million for the
year ended December 31, 1998 from $0.2 million for the year ended December 31,  
1997.                                                                           

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 Loss from discontinued operations increased by $0.1 million to $0.7
million for the year ended December 31, 1997 from $0.6 million for the year     
ended December 31, 1996.                                                        

CORPORATE OVERHEAD                                                              

Corporate overhead, which benefits all of the Company's business  
segments, has not been allocated to the business segments for this analysis.    
Corporate overhead services performed for the Company's subsidiaries include    
overall strategic planning, marketing, accounting, finance, cash management,    
payroll, engineering and tax return preparation. The Company believes that this 
presentation will facilitate a better understanding of the changes in the       
results of the Company's operations. Corporate overhead, which is included in   
selling, general and administrative expenses in the consolidated statements of  
income, increased $0.9 million, or 28.0%, to $4.1 million for the year ended    
December 31, 1998 from $3.2 million for the year ended December 31, 1997.       
Corporate overhead increased $0.7 million, or 28.2%, to $3.2 million for the    
year ended December 31, 1997 from $2.5 million for the year ended December 31,  
1996. The increases in each of the specified periods were related to the        
additional costs incurred to manage the acquired subsidiaries and to establish a
strong management team to handle the Company's continued growth.                

LIQUIDITY AND CAPITAL RESOURCES - COMBINED OPERATIONS                           

     The discussion of liquidity and capital resources that follows reflects
the consolidated results of the Company, including all subsidiaries.            

      The Company's cash provided by operating activities was $5.7 million for
the year ended December 31, 1998.                                               

    Cash used in investing activities was $30.7 million for the year ended
December 31, 1998. The primary use of cash during 1998 was for the purchase of  
property, plant and equipment with an aggregate cost of approximately $28.1     
million. Over $12.7 million of these purchases were by Ferronor to upgrade its  
track in anticipation of the new contracts which began in the second half of    
1998. The Company also purchased a 59,000 square foot office building for       
approximately $4.6 million to accommodate its growth. KSC has purchased and is  
equipping an additional plant for over $2.8 million. SGVY acquired additional   
track at over $1.1 million, and the acquisition of KSC used $1.7 million in     
cash.                                                                           

Cash provided by financing activities was $26.9 million for 1998, 
consisting of net borrowings of approximately $17.0 million and net proceeds of 
approximately $7.5 million from the sale of convertible preferred stock.        

The Company's long term debt represents financing of property and 
equipment, as well as the acquisition financing for Ferronor, SCTR, KSI, Steel  
City Carriers, WTLR, CCRR, MNR, and OTVR. Certain of this indebtedness was      
refinanced under the Revolver. The Revolver bears interest, at the option of the
Company, at either the bank's prime rate plus 0.25% or the one, three or six    

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month LIBOR plus 2.5%. At December 31, 1998, $44.2 million was outstanding under
the revolver. The Revolver is collateralized by substantially all of the assets 
of the Company, KSI, HESR, SGVY, RIS, CCRR, Steel City Carriers, WTLR, OTVR,    
MNR, SCXY, and VCRR.                                                            

On May 3, 1997, the Revolver was increased from $25 million to $40
million by National Bank of Canada and Comerica Bank N.A., and on June 16, 1998,
the Revolver was increased from $40 million to $55 million by National Bank of  
Canada, Comerica Bank N.A. and Southtrust Bank, N.A. at which time the maturity 
date was extended to May 2001.                                                  

            On September 30, 1998, the Company accepted a proposal by National
Bank of Canada as agent to increase the Revolver to $100 million for purposes of
future acquisitions of transportation related businesses. The Company           
anticipates the increase to be closed in the second quarter of 1999.            

       As of December 31, 1998, the Company had working capital of $14.6 million
compared to working capital of $5.2 million as of December 31, 1997. Cash on    
hand as of December 31, 1998 was $5.8 million compared to $3.7 million as of    
December 31, 1997. The Company's cash flows from operations and borrowings      
historically have been sufficient, and are currently sufficient to meet its     
ongoing operating requirements, capital expenditures for property, plant and    
equipment, and to satisfy the Company's interest requirements.                  

In January 1999, the Company completed a private offering of $11.6
million of its Series A Convertible Redeemable Preferred Stock ("Preferred      
Stock"). The Company sold 464,400 shares of its Preferred Stock at a price of   
$25 per share. The Preferred Stock pays annual dividends of 7.5%, is convertible
into shares of the Company's common stock at a price of $8.25 per share and is  
non-voting. The Preferred Stock is mandatorily redeemable 5 years from its      
issuance. The December 31, 1998 balance sheet includes 300,600 shares which were
issued during 1998. The remainder of the shares were issued in January 1999. The
carrying value of the Preferred Stock is the par value less issuance costs. The 
issuance costs will be amortized on a straight-line basis over the life of the  
Preferred Stock.                                                                

      In March 1999, the Company completed a private offering of approximately
$12.5 million of restricted Common Stock. Pursuant to the offering, the Company 
sold approximately 1.4 million shares of its $.001 par value common stock at a  
price of $8.8125 per share and issued approximately 210,000 warrants to purchase
an equivalent number of shares of common stock at an exercise price of $10.125  
per share within one year of the transaction's closing date. First London acted 
as placement agent and received approximately $0.4 million in fees and cost     
reimbursement and one-year warrants to purchase 141,653 shares of Common Stock  
at an exercise price of $10.125.                                                

    A majority of the proceeds from the two private offerings were used to
fund a $19 million deposit with the government of Victoria, Australia. This     
deposit will be used as part of the purchase price of the V/Line Freight        
Corporation, which is anticipated to close in the second quarter of 1999.       

       The Company expects that its future cash flows will be sufficient for its
current and contemplated operations for at least the next twelve months, and    
will be used for, among other things, anticipated capital expenditures for the  
upgrading of existing rail lines and purchases of locomotives and equipment of  
approximately $2.8 million and capital expenditures at KSI of approximately $0.3
million. In addition, the Company anticipates capital expenditures of           

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approximately $13.2 million over the next three years related to new Ferronor   
contracts received since its acquisition by the Company. Ferronor closed on a   
debt financing in the first quarter of 1999 that will be used to fund certain of
the capital expenditures. Additionally, Ferronor has a commitment letter to fund
the remainder of the expansion and anticipates closing on this financing during 
1999. The Company also is in the process of purchasing and equipping an         
additional facility in Quebec, Canada for its newly purchased specialty trailer 
manufacturer. The costs of this project are estimated at an additional $2.5     
million. The Company anticipates this project will be funded through the        
issuance of additional debt. The Company anticipates spending approximately $1.5
million over the next six months to refurbish the office building that it       
purchased in July 1998. The Company anticipates financing this project through  
its Revolver. The Company does not presently anticipate any other significant   
capital expenditures over the next twelve months. To the extent possible, the   
Company will seek to finance any further acquisitions of property, plant and    
equipment in order to allow its cash flow from operations to be devoted to other
uses, including debt reduction and acquisition requirements.                    

The Company's long-term business strategy includes the selective  
acquisition of additional transportation-related businesses. Accordingly, the   
Company may require additional equity and/or debt capital in order to consummate
acquisitions or undertake major development activities. It is impossible to     
predict the amount of capital that may be required for such acquisitions or     
development, and there is no assurance that sufficient financing for such       
activities will be available on terms acceptable to the Company, if at all. As  
of March 1, 1999, the Company had approximately $0.2 million of availability    
under the Revolver. As noted above, in September 1998, the Company accepted a   
proposal by National Bank of Canada as agent to increase the Revolver to $100   
million for purposes of future acquisitions of transportation related           
businesses.                                                                     

INFLATION                                                                       

Inflation in recent years has not had a significant impact on the 
Company's operations. The Company believes that inflation will not adversely    
affect the Company in the future unless it increases substantially and the      
Company is unable to pass through the increases in its freight rates and trailer
prices.                                                                         

IMPACT OF YEAR 2000                                                             

The "Year 2000 Issue" is the result of computer programs that were
written using two digits rather than four to define the applicable year. If the 
Company's computer programs with date-sensitive functions are not Year 2000     
compliant, they may recognize a date "00" as the Year 1900 rather than the Year 
2000. This could result in a system failure or miscalculations causing          
disruptions of operations, including, among other things, a temporary inability 
to process transactions, inability to interchange information with connecting   
railroads or engage in similar normal business activities.                      

Many of our systems and related software are currently Year 2000  
compliant and we have a                                                         

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program in place designed to bring the remaining software and systems into Year 
2000 compliance in time to minimize any significant detrimental affect on       
operations. We are utilizing internal personnel and outside vendors to identify 
Year 2000 problems, modify and/or update programs and hardware and test the     
modifications.                                                                  

       We rely on third parties, particularly the Class I railroads, for much of
our information in our domestic rail operations. In addition, our trailer       
manufacturing segment relies heavily on third party suppliers for its raw       
materials. We have initiated efforts to evaluate the status of these suppliers' 
efforts and to determine alternatives and contingency plan requirements. An     
inability of a connecting railroad to process information could cause delays in 
services to customers and the inability of the Company to invoice and collect on
shipments. Failure of a third party supplier to deliver materials to our        
manufacturing facilities could cause either a slow down in production and/or a  
temporary shut down of the facility.                                            

   The total costs associated with required modifications to become Year
2000 compliant is not expected to be material to the Company's financial        
position. The estimated total cost of the Year 2000 Project is approximately    
$0.25 million. The total amount expended through December 31, 1998 is           
approximately $0.2 million.                                                     

    The failure to correct a material Year 2000 problem could result in an
interruption in, or failure of, certain normal business activities or           
operations. Such failures could materially and adversely affect the Company's   
results of operations, liquidity and financial condition. Due to the general    
uncertainty inherent in the Year 2000 problem, resulting in part from the       
uncertainty of the Year 2000 readiness of third party suppliers and customers,  
the Company is unable to determine at this time whether the consequences of Year
2000 failures will have a material impact on the Company's results of           
operations, liquidity or financial condition. The Company believes that, with   
the implementation of new business systems and completion of the program as     
scheduled, the possibility of significant interruptions of normal operations    
should be minimized.                                                            

     Readers are cautioned that forward-looking statements contained in this
Impact of Year 2000 discussion should be read in conjunction with the Company's 
disclosures under the heading "Cautionary Statement for Purposes of the "Safe   
Harbor" Provisions of the Private Securities Litigation Reform Act of 1995"     
which follows below in this section.                                            

NEW ACCOUNTING PRONOUNCEMENTS                                                   

    In April 1998, the American Institute of Certified Public Accountants'
Accounting Standards Executive Committee issued Statement of Position No 98-5,  
"Reporting on the Costs of Start-Up Activities" (SOP 98-5). SOP 98-5 requires   
the cost of start-up activities and organization costs to be expensed as        
incurred. SOP 98-5 is effective for financial statements for fiscal years       
beginning after December 15, 1998. The Company anticipates that the adoption of 
this statement will not have a material affect on the Company's results of      
operations or its financial position.                                           

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CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995.                                       

 The foregoing Management's Discussion and Analysis contains various
"forward-looking statements" within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended, which represent the Company's expectations or beliefs concerning    
future events, including: statements regarding further growth in                
transportation-related assets; the acquisition of additional railroads and other
transportation-related companies; the increased usage of the Company's existing 
rail lines; the growth of gross revenues; and the sufficiency of the Company's  
cash flows for the Company's future liquidity and capital resource needs. The   
Company cautions that these statements are further qualified by important       
factors that could cause actual results to differ materially from those in the  
forward-looking statements, including, without limitation, the following:       
decline in demand for transportation services; the effect of economic conditions
generally and particularly in the markets served by the Company; the Company's  
dependence upon obtaining future government contracts; the Company's dependence 
upon the agricultural industry as a significant user of the Company's rail      
services; the Company's dependence upon the availability of financing for       
acquisitions of railroads and other transportation-related companies; a decline 
in the market acceptability of railroad services; an organization or            
unionization of a material segment of the Company's employee base; the effect of
competitive pricing; and the regulation of the Company by federal, state and    
local regulatory authorities. Any material adverse change in the financial      
condition or results of operations of KSI would have a material adverse impact  
on the Company. Results actually achieved thus may differ materially from       
expected results included in these statements.                                  

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA                            

    The Consolidated Financial Statements of the Company, the accompanying
notes thereto and the independent auditor's report are included as part of this 
Form 10-K and immediately follow the signature page of this Form 10-K.          

ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND        
FINANCIAL DISCLOSURE.                                         

None.                                                                           

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PART III                                                                        

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT                    

      Information concerning directors, executive officers and nominees of the
Company is hereby incorporated by reference from the Company's definitive proxy 
statement relating to its 1999 Annual Meeting of Shareholders to be filed with  
the Commission pursuant to Regulation 14A on or before April 30, 1999.          

ITEM 11.  EXECUTIVE COMPENSATION                                                

 Information concerning the executive compensation of the Company is
hereby incorporated by reference from the Company's definitive proxy statement  
relating to its 1999 Annual Meeting of Shareholders to be filed with the        
Commission pursuant to Regulation 14A on or before April 30, 1999.              

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT        

    Information concerning the security ownership of the Company is hereby
incorporated by reference from the Company's definitive proxy statement relating
to its 1999 Annual Meeting of Shareholders to be filed with the Commission      
pursuant to Regulation 14A on or before April 30, 1999.                         

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS                        

      Information concerning certain relationships and related transactions of
the Company is hereby incorporated by reference from the Company's definitive   
proxy statement relating to its 1999 Annual Meeting of Shareholders to be filed 
with the Commission pursuant to Regulation 14A on or before April 30, 1999.     

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PART IV                                                                         

ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K      

(a)      Exhibits                                                               

  3.1   Amended and Restated Articles of Incorporation of Registrant, as
amended(3)                                              

3.2   By-laws of Registrant(1)                                      

     4.1   Form of Common Stock Rights Agreement, dated as of January 6, 1998,
  between the Registrant and American Stock Transfer & Trust
Company(10)                                             

4.2   Certificate of Designation of Series A Convertible Redeemable 
Preferred Stock                                         

10.35   Employment Agreement between Robert B. Coward and Kalyn/Siebert,
Incorporated.(2)                                        

10.40   Asset Purchase Agreement, dated October 11, 1995, by and among  
     Seagraves, Whiteface & Lubbock Railroad Co., American Railway
Corporation, TEMCO Corporation and RailAmerica, Inc.(4) 

10.41   Employment Agreement between Gary O. Marino and RailAmerica,    
Inc.(11)+                                               

10.43   Stock Option Agreement, dated November 11, 1994, between        
RailAmerica, Inc. and Gary O. Marino(11)+               

 10.45   RailAmerica, Inc. 1995 Non-Employee Director Stock Option Plan(3)

10.46   RailAmerica, Inc. 1995 Employee Stock Purchase Plan(3)          

10.47   RailAmerica, Inc. Corporate Senior Executive Bonus Plan(3)+     

10.54   Asset Purchase Agreement, dated August 5, 1996, by and among    
           Burlington Northern Railroad Company and Cascade and Columbia river
Railroad Company, a subsidiary of RailAmerica, Inc.(5)  

10.55   Confidential Private Placement Memorandum dated September 20,   
1996.(6)                                                

10.56   Stock Purchase Agreement, dated as of September 20, 1996, by and
       among Otter Tail Valley Railroad Company, Inc. and Dakota Rail,
Inc.(7)                                                 

   10.57   First Amendment to Loan Agreement relating to $55,000,000 Revolving
      Line of Credit/Term Loan Facility, dated June 16, 1998, by and
          between National Bank of Canada, Comerica Bank, RailAmerica, Inc.,
           Kalyn/Siebert, Incorporated, RailAmerica Intermodal Services, Inc.,
      RailAmerica Carriers, Inc., Steel City Carriers, Inc., Saginaw
        Valley Railway Company, Inc., Huron and Eastern Railway Company,
      Inc., West Texas and Lubbock Railroad Company, Inc., Plainview
            Terminal Company, Cascade and Columbia River Railroad Company, Inc.,
    Otter Tail Valley Railroad Company, Inc., Minnesota Northern
      Railroad Company, Inc., St. Croix Valley Railroad Company, and
Delaware Valley Railway Company, Inc.                   

10.58   Agreement for sale of certain assets, rights and obligations of 
            Burlington Northern Railroad Company to Minnesota Northern Railroad,
Inc.(8)                                                 

10.59   RailAmerica, Inc. Nonqualified Deferred Compensation Trust(8)+  

 10.60   Nonqualified Deferred Compensation Agreement between RailAmerica,
Inc. and Gary O. Marino(8)+                             

10.63   RailAmerica, Inc. 1998 Executive Incentive Compensation Plan(9)+

21      Subsidiaries of Registrant(11)                                  

27      Financial Data Schedule                                         

----------                                                                      

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(1)      Incorporated by reference to the same exhibit number filed as part of  
       the Registrant's Registration Statement on Form S-1, Registration No.
33-49026.                                                     

(2)      Incorporated by reference to the same exhibit number filed as part of  
     the Registrant's Post-Effective Amendment No. 2 on Form SB-2, dated
October 17, 1994, Registration No. 33-49026.                  

(3)      Incorporated by reference to the same exhibit number filed as part of  
     the Company's Form 10-QSB for the quarter ended September 30, 1995,
         filed with the Securities and Exchange Commission on November 12, 1995.

(4)      Incorporated by reference to the same exhibit number filed as part of  
       the Company's Form 10-KSB for the year ended December 31, 1995, filed
with the Securities and Exchange Commission on April 12, 1996.

(5)      Incorporated by reference to the exhibit 2.1 filed as part of the      
       Company's Form 8-K as of September 6, 1996, filed with the Securities
and Exchange Commission on September 12, 1996.                

(6)      Incorporated by reference to the exhibit A filed as part of the        
        Company's Form 8-K as of September 30, 1996, filed with the Securities
and Exchange Commission on October 17, 1996.                  

(7)      Incorporated by reference to the exhibit 2.1 filed as part of the      
      Company's Form 8-K as of October 11, 1996, filed with the Securities
and Exchange Commission on October 25, 1996.                  

(8)      Incorporated by reference to the same exhibit number filed as part of  
        the Company's Form 10-KSB for year ended December 31, 1995, filed with
the Securities and Exchange Commission on March 31, 1997.     

(9)      Incorporated by reference to the Appendix A of the Company's Proxy     
      Statement filed with the Security and Exchange Commission on June 2,
1997.                                                         

(10)     Incorporated by reference to exhibit No. 4.1 filed as part of the      
   Registrant's Statement on Form 8-A, filed with the Securities and
Exchange Commission on January 6, 1998.                       

(11)     Incorporated by reference to the same exhibit number filed as part of  
     the Company's Form 10-Q for the quarter ended March 31, 1998, filed
with the Securities and Exchange Commission on May 14, 1998.  

+        Executive Compensation Plan or Arrangement.                            

(b)      Reports on Form 8-K.                                                   

    No reports on Form 8-K were filed by the Company during the fourth
quarter of 1998.                                                                

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SIGNATURES

       In accordance with Section 13 or 15(d) of the Securities Exchange act
of 1934, the Company has duly caused this Report to be signed on its behalf by  
the undersigned, thereunto duly authorized.                                     

     RAILAMERICA, INC.

           By: /s/  Gary O. Marino
                                   ---------------------------------------
                                   Gary O. Marino, Chief Executive Officer
                         (Principal Financial officer)

          By: /s/  Larry W. Bush
                                   ---------------------------------------
                     Larry W. Bush, Controller
                          (Principal Accounting Officer)
                 Dated  March 26, 1999

         In accordance with the Securities Exchange Act of 1934, this Report has
been signed below by the following persons on behalf of the Company in the      
capacities and on the dates indicated.                                          

                                                        [Enlarge/Download Table]

         SIGNATURES             TITLE                                 DATE           
         ----------             -----                                 ----           
                                                                                     
/s/ Gary O. Marino              Chairman, President, Chief Executive  March 26, 1999 
------------------------------  Officer and Director                                 
Gary O. Marino                                                                       

/s/ Donald D. Redfearn          Executive Vice President, Secretary   March 26, 1999 
------------------------------  and Director                                         
Donald D. Redfearn                                                                   

/s/ John H. Marino              Assistant Secretary and Director      March 26, 1999 
------------------------------                                                       
John H. Marino                                                                       

/s/ Douglas R. Nichols          Director                              March 26, 1999 
------------------------------                                                       
Douglas R. Nichols                                                                   

/s/ Richard Rampell             Director                               March 26, 1999
------------------------------                                                       
Richard Rampell                                                                      

/s/ Charles Swinburn            Director                               March 26, 1999
------------------------------                                                       
Charles Swinburn                                                                     

/s/ John M. Sullivan            Director                               March 26, 1999
------------------------------                                                       
John M. Sullivan                                                                     


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RAILAMERICA, INC. AND SUBSIDIARIES

 INDEX OF FINANCIAL STATEMENTS

 -------

The following consolidated financial statements of RailAmerica, Inc. and        
Subsidiaries are referred to in Item 7:                                         

                                                                [Download Table]

                                                                   PAGES  
                                                                   -----  

                                                                          
Report of Independent Certified Public Accountants                  F-2   

Consolidated Balance Sheets - December 31, 1998 and 1997            F-3   

Consolidated Statements of Income - For the Years Ended                   
       December 31, 1998, 1997 and 1996                             F-4   

Consolidated Statement of Stockholders' Equity - For the Years            
       Ended December 31, 1998, 1997 and 1996                       F-5   

Consolidated Statements of Cash Flows - For the Years Ended               
       December 31, 1998, 1997 and 1996                             F-6   

Notes to Consolidated Financial Statements                      F-7 - F-33


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REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

To the Stockholders of                                                          
RailAmerica, Inc. and Subsidiaries                                              

In our opinion, based upon our audits and the report of other auditors, the     
accompanying consolidated balance sheets and the related consolidated statements
of income, of stockholders' equity and of cash flows present fairly, in all     
material respects, the financial position of RailAmerica, Inc. and its          
subsidiaries (the "Company") at December 31, 1998 and 1997, and the results of  
their operations and their cash flows for each of the three years in the period 
ended December 31, 1998, in conformity with generally accepted accounting       
principles. These financial statements are the responsibility of the Company's  
management; our responsibility is to express an opinion on these financial      
statements based on our audits. We did not audit the financial statements of    
Empresa De Transporte Ferroviario, S.A., a 55% owned subsidiary of the Company, 
which statements reflect total assets of $74,306,000 at December 31, 1998, and  
total revenues of $15,312,000 for the year ended December 31, 1998. Those       
statements were audited by other auditors whose report thereon has been         
furnished to us, and our opinion expressed herein, insofar as it relates to the 
amounts included for Empresa De Transporte Ferroviario S.A., is based solely on 
the report of the other auditors. We conducted our audits of these statements in
accordance with generally accepted auditing standards which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a 
test basis, evidence supporting the amounts and disclosures in the financial    
statements, assessing the accounting principles used and significant estimates  
made by management, and evaluating the overall financial statement presentation.
We believe that our audits and the report of other auditors provide a reasonable
basis for the opinion expressed above.                                          

PricewaterhouseCoopers LLP                                                      

Ft. Lauderdale, Florida                                                         
March 12, 1999                                                                  

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RAILAMERICA, INC. AND SUBSIDIARIES
 CONSOLIDATED BALANCE SHEETS
December 31, 1998 and 1997

                                                        [Enlarge/Download Table]

                                                                                1998           1997      
                                                                           -------------   ------------- 
                                                                                                         
                                     ASSETS                                                              
Current assets:                                                                                          
  Cash                                                                     $   5,760,342   $   3,745,534 
  Accounts receivable                                                         11,047,536       8,388,291 
  Notes receivable                                                               859,378       1,103,409 
  Inventories                                                                 13,579,286       5,013,106 
  Other current assets                                                         1,666,093         497,207 
                                                                           -------------   ------------- 
        Total current assets                                                  32,912,635      18,747,547 

Property, plant and equipment, net                                           101,833,373      74,900,836 

Notes receivable, less current portions                                        1,284,200       1,339,169 
Investment in Great Southern Railway Limited                                   1,938,942       1,789,995 
Deposit on asset purchase agreement                                            1,962,067              -- 
Other assets                                                                   3,056,755       2,021,433 
Excess of cost over net assets of companies acquired, net                      2,241,964       2,036,023 
                                                                           -------------   ------------- 
        Total assets                                                       $ 145,229,936   $ 100,835,003 
                                                                           =============   ============= 

                      LIABILITIES AND STOCKHOLDERS' EQUITY                                               
Current liabilities:                                                                                     
  Current maturities of long-term debt                                     $   3,804,217   $   3,923,036 
  Current maturities of subordinated debt                                        244,542         212,392 
  Accounts payable                                                            10,124,714       6,084,119 
  Accrued expenses                                                             4,132,892       3,327,497 
                                                                           -------------   ------------- 
        Total current liabilities                                             18,306,365      13,547,044 
                                                                           -------------   ------------- 
Long-term debt, less current maturities                                       68,010,338      43,875,163 
Subordinated debt, less current maturities                                       663,948       3,265,490 
Other liabilities - deferred income                                              427,288              -- 
Deferred income taxes                                                          8,242,000       7,067,237 
Minority interest                                                              7,937,992       6,266,243 
Commitments and contingencies                                                                            
Redeemable convertible preferred stock, $.01 par value                                                   
    1,000,000 shares authorized; 300,600 outstanding                                                     
    as of December 31, 1998; $25 liquidation value                             6,881,684              -- 
Stockholders' equity:                                                                                    
  Common stock, $.001 par value, 30,000,000 shares authorized;                                           
    10,207,477 issued and 9,631,188 outstanding at December 31, 1998;                                    
    9,129,564 issued  and 8,858,375 outstanding at December 31, 1997              10,207           9,130 
  Additional paid-in capital                                                  28,277,533      23,350,732 
  Retained earnings                                                            9,285,122       4,883,973 
  Accumulated other comprehensive income                                         470,820          15,373 
  Less treasury stock (576,289 and 271,189 shares, respectively, at cost)     (3,283,361)     (1,445,382)
                                                                           -------------   ------------- 
        Total stockholders' equity                                            34,760,321      26,813,826 
                                                                           -------------   ------------- 
        Total liabilities and stockholders' equity                         $ 145,229,936   $ 100,835,003 
                                                                           =============   ============= 


The accompanying notes are an integral part of the consolidated 
financial statements. 

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RAILAMERICA, INC. AND SUBSIDIARIES
 CONSOLIDATED STATEMENTS OF INCOME
For the years ended December 31, 1998, 1997 and 1996

                                                        [Enlarge/Download Table]

                                                          1998            1997           1996    
                                                      ------------   ------------   ------------ 
                                                                                                 
Operating revenues:                                                                              
  Transportation - railroad                           $ 30,303,562   $ 22,023,717   $  9,783,041 
  Manufacturing                                         39,887,348     22,941,068     13,637,978 
  Other                                                  2,700,421      2,472,188      2,237,222 
  Motor Carrier                                          4,252,329             --             -- 
                                                      ------------   ------------   ------------ 
          Total operating revenue                       77,143,660     47,436,973     25,658,241 
                                                      ------------   ------------   ------------ 
Operating expenses:                                                                              
  Transportation - railroad                             15,702,487     12,502,153      4,397,884 
  Cost of goods sold - manufacturing                    28,582,699     16,544,423     10,447,827 
  Selling, general and administrative                   12,399,427      8,809,547      5,413,153 
  Depreciation and amortization                          3,378,714      2,261,467      1,526,510 
  Motor Carrier                                          4,438,039             --             -- 
                                                      ------------   ------------   ------------ 
          Total operating expenses                      64,501,366     40,117,590     21,785,374 
                                                      ------------   ------------   ------------ 
        Operating income                                12,642,294      7,319,383      3,872,867 

  Interest expense                                      (4,947,209)    (3,533,920)    (2,078,383)
  Other income (expense)                                    13,055        663,128         (8,642)
  Minority interest in income of subsidiary             (1,671,750)      (851,243)            -- 
                                                      ------------   ------------   ------------ 
        Income from continuing operations before                                                 
            income taxes                                 6,036,390      3,597,348      1,785,842 
 Provision for income taxes                              1,570,000        963,382        705,405 
                                                      ------------   ------------   ------------ 
        Income from continuing operations                4,466,390      2,633,966      1,080,437 
Discontinued operations                                                                          
  Estimated loss on disposal of discontinued                                                     
    Motor Carrier segment (net of income tax                                                     
    benefit of $277,000)                                        --       (452,402)            -- 
  Loss from operations of discontinued Motor                                                     
     Carrier segment, three months ended March 31,                                               
     1998 and years ended December 31, 1997 and1996                                              
     (Less applicable income tax benefit of $40,000,                                             
     $149,000 and $322,000, respectively)                  (65,241)      (242,365)      (575,558)
                                                      ------------   ------------   ------------ 
             Net Income                               $  4,401,149   $  1,939,199   $    504,879 
                                                      ============   ============   ============ 

Basic earnings per common share                                                                  
    Continuing operations                             $       0.47   $       0.32   $       0.22 
    Discontinued operations                                  (0.01)         (0.09)         (0.12)
                                                      ------------   ------------   ------------ 
        Net income                                    $       0.46   $       0.23   $       0.10 
                                                      ============   ============   ============ 

Diluted earnings per common share                                                                
    Continuing operations                             $       0.44   $       0.30   $       0.21 
    Discontinued operations                                  (0.00)         (0.08)         (0.11)
                                                      ------------   ------------   ------------ 
        Net income                                    $       0.44   $       0.22   $       0.10 
                                                      ============   ============   ============ 

Weighted average common shares outstanding:                                                      
    Basic                                                9,552,866      8,303,938      4,966,296 
                                                      ============   ============   ============ 
    Diluted                                             10,306,873      9,396,483      5,113,508 
                                                      ============   ============   ============ 


 The accompanying notes are an integral part of the consolidated
financial statements. 

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RAILAMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
For the years ended December 31, 1998, 1997 and 1996

                                                        [Enlarge/Download Table]

                                                             Stockholders' Equity                            
                                 ----------------------------------------------------------------------------

                                  Number of                    Additional        Common                      
                                    Shares         Par           Paid-in          Stock           Retained   
                                   Issued         Value         Capital        Subscribed         Earnings   
                                 ----------      -------      -----------      -----------       ----------  

                                                                                                             
Balance, January 1, 1996          4,848,991      $ 4,849      $ 7,599,313      $        --       $2,439,895  

Net income                               --           --               --               --          504,879  

Issuance of common stock          1,263,919        1,264        4,128,735               --               --  

Purchase of treasury stock               --           --               --               --               --  

Exercise of stock options            12,500           12           44,988               --               --  

Subscription of common stock             --           --               --        2,340,000               --  

Cumulative translation                   --           --               --               --               --  
                                 ----------      -------      -----------      -----------       ----------  

Balance, December 31, 1996        6,125,410        6,125       11,773,036        2,340,000        2,944,774  

Net income                               --           --               --               --        1,939,199  

Issuance of common stock          1,720,627        1,721        7,163,206       (2,340,000)              --  

Treasury stock received for                                                                                  
  sales of subsidiaries                  --           --               --               --               --  

Stock incentive plan issuance            --           --               --               --               --  

Exercise of stock options           202,933          203          747,837               --               --  

Exercise of warrants              1,080,594        1,081        3,666,653               --               --  
                                 ----------      -------      -----------      -----------       ----------  

Balance, December 31, 1997        9,129,564        9,130       23,350,732               --        4,883,973  

Net income                               --           --               --               --        4,401,149  

Other comprehensive income                                                                                   

Cumulative translation                   --           --               --               --               --  

Total comprehensive income                                                                                   

Issuance of common stock            138,786          138          677,039               --               --  

Purchase of treasury stock               --           --               --               --               --  

Exercise of stock options           237,950          238          870,637               --               --  

Tax benefit exercise of options          --           --          178,000               --               --  

Exercise of warrants                167,000          167          934,501               --               --  

Conversion of debt                  534,177          534        2,266,624               --               --  
                                 ----------      -------      -----------      -----------       ----------  

Balance, December 31, 1998       10,207,477      $10,207      $28,277,533      $        --       $9,285,122  
                                 ==========      =======      ===========      ===========       ==========  


                                                                [Download Table]

                                             Stockholders' Equity                
                                 ----------------------------------------------- 
                                  Accumulated                                    
                                     Other                                       
                                 Comprehensive     Treasury                      
                                    Income          Shares               Total   
                                  ---------       -----------       ------------ 

                                                                                 
Balance, January 1, 1996          $  70,355       $  (965,753)      $  9,148,659 

Net income                               --                --            504,879 

Issuance of common stock                 --                --          4,129,999 

Purchase of treasury stock               --          (173,516)          (173,516)

Exercise of stock options                --                --             45,000 

Subscription of common stock             --                --          2,340,000 

Cumulative translation               (2,914)               --             (2,914)
                                  ---------       -----------       ------------ 

Balance, December 31, 1996           67,441        (1,139,269)        15,992,107 

Net income                               --                --          1,939,199 

Issuance of common stock                 --                --          4,824,927 

Treasury stock received for                                                      
  sales of subsidiaries                  --          (479,629)          (479,629)

Stock incentive plan issuance            --           173,516            173,516 

Exercise of stock options                --                --            748,040 

Exercise of warrants                     --                --          3,667,734 

Cumulative translation              (52,068)               --            (52,068)
                                  ---------       -----------       ------------ 

Balance, December 31, 1997           15,373        (1,445,382)        26,813,826 

Net income                               --                --          4,401,149 

Other comprehensive income                                                       

Cumulative translation              455,447                --            455,447 
                                                                    ------------ 
Total comprehensive income                                             4,856,596 
                                                                    ------------ 
Issuance of common stock                 --                --            677,177 

Purchase of treasury stock               --        (1,837,979)        (1,837,979)

Exercise of stock options                --                --            870,875 

Tax benefit exercise of options          --                --            178,000 

Exercise of warrants                     --                --            934,668 

Conversion of debt                       --                --          2,267,158 
                                  ---------       -----------       ------------ 

Balance, December 31, 1998        $ 470,820       $(3,283,361)      $ 34,760,321 
                                  =========       ===========       ============ 


 The accompanying notes are an integral part of the consolidated
 financial statements.

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RAILAMERICA, INC. AND SUBSIDIARIES
 CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31, 1998, 1997 and 1996

                                                        [Enlarge/Download Table]

                                                         1998           1997             1996   
                                                     ------------   ------------   ------------ 
                                                                                                
Cash flows from operating activities:                                                           
  Net income                                         $  4,401,149   $  1,939,199   $    504,879 
  Adjustments to reconcile net income to net                                                    
    cash provided by operating activities:                                                      
      Depreciation and amortization                     4,156,546      3,053,728      2,047,684 
      Minority interest in income of subsidiary         1,671,750        851,243             -- 
      Sale of properties                                  (76,791)      (608,380)       455,932 
      Write-off of excess of costs over net assets             --        729,681             -- 
      Write-off of deferred acquisition costs             176,179         76,292        138,010 
      Deferred income taxes                               912,967        382,122        263,668 
      Employee stock grants                                    --         15,188         48,554 
      Forgiveness of debt                                 (32,809)            --        (20,576)
      Changes in operating assets and liabilities,                                              
        net of acquisitions and dispositions:                                                   
        Accounts receivable                              (885,983)    (3,037,697)    (1,816,862)
        Inventories                                    (6,921,847)    (1,294,501)       291,825 
        Other current assets                           (1,157,666)       124,247        (41,203)
        Accounts payable                                2,410,602       (606,499)     1,031,238 
        Accrued expenses                                  720,498        714,409       (583,557)
        Deposits and other                                368,477        (47,264)      (113,853)
                                                     ------------   ------------   ------------ 
          Net cash provided by operating activities     5,743,071      2,291,768      2,205,739 
                                                     ------------   ------------   ------------ 

Cash flows from investing activities:                                                           
  Purchase of property, plant  and equipment          (28,128,546)    (7,455,848)    (4,487,909)
  Proceeds from sale of properties                      1,806,127        331,654             -- 
  Acquisitions, net of cash acquired                   (1,757,033)    (7,389,903)      (103,908)
  Deposit on purchase agreement                        (1,962,067)            --             -- 
  Investment in Great Southern Railway                         --       (596,665)            -- 
  Loan receivable from Great Southern Railway                  --     (1,193,330)            -- 
  Deferred acquisition costs and other                   (612,956)      (457,168)      (825,026)
                                                     ------------   ------------   ------------ 
          Net cash used in investing activities       (30,654,475)   (16,761,260)    (5,416,843)
                                                     ------------   ------------   ------------ 

Cash flows from financing activities:                                                           
  Proceeds from issuance of long-term debt             56,006,737     31,453,500     10,033,070 
  Principal payments on debt and capital leases       (35,723,969)   (25,449,364)   (12,503,210)
  Sale convertible preferred stock                      7,515,000             --             -- 
  Sale of common stock                                  1,032,168      8,163,962      6,421,445 
  Proceeds from exercise of stock options                 870,875        748,041         45,000 
  Purchase of treasury stock                           (1,837,979)            --       (173,516)
  Decrease in restricted stock                                 --             --        175,000 
  Deferred financing costs paid                          (603,549)      (286,724)       (98,741)
  Deferred loan costs paid                               (333,071)      (294,361)      (296,838)
                                                     ------------   ------------   ------------ 
          Net cash provided by financing activities    26,926,212     14,335,054      3,602,210 
                                                     ------------   ------------   ------------ 

Net increase (decrease) in cash                         2,014,808       (134,438)       391,106 
Cash, beginning of period                               3,745,534      3,879,972      3,488,866 
                                                     ------------   ------------   ------------ 
Cash, end of period                                  $  5,760,342   $  3,745,534   $  3,879,972 
                                                     ============   ============   ============ 


 The accompanying notes are an integral part of the consolidated
financial statements. 

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RAILAMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 -------

1.      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:                           

Organization and Principles of Consolidation                  

         The accompanying consolidated financial statements include the accounts
      of RailAmerica, Inc. and all of its majority-owned subsidiaries (the
 "Company"). All significant intercompany transactions have been
         eliminated in the preparation of the consolidated financial statements.
         During 1998, the Company formed wholly-owned subsidiaries Kalyn/Siebert
         Canada, Inc. ("KSC") and Ventura County Railway Company, Inc. ("VCRR").

    The Company's principal operations include rail transportation and
    manufacturing. The Company hauls varied products for its customers
      corresponding to their local operating areas, primarily agricultural
        commodities in Michigan and Texas and iron ore in Chile. The Company's
       production facilities, in Texas and Quebec, manufacture a broad range
        of specialty truck trailers which are marketed to a customer base from
the private, commercial and government sectors.               

Use of Estimates                                              

      The preparation of financial statements in conformity with generally
      accepted accounting principles 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 revenues
        and expenses during the reporting periods. Actual results could differ
from those estimates.                                         

Inventories                                                   

        Inventories are stated at the lower of cost or market, net of advances
       related to materials acquired, with cost determined using the average
    cost method. Also, included in inventory are replacement or repair
       parts for equipment and track that are charged to property, plant and
equipment when utilized.                                      

Cash and Cash Equivalents                                     

        The Company considers all highly liquid instruments with a maturity of
three months or less when purchased to be cash equivalents.   

Concentration of Credit Risk                                  

    The Company maintains its cash in demand deposit accounts which at
      times may exceed FDIC insurance limits. As of December 31, 1998, the
  Company had approximately $4.7 million of cash in excess of FDIC
insurance limits.                                             

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1.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued                  

Revenue Recognition                                           

      Transportation - The Company recognizes transportation revenue after
        services are provided. For the years ended December 31, 1998, 1997 and
      1996, approximately 62%, 59% and 34%, respectively, of the Company's
         domestic railroad transportation revenue was derived from interchanging
       traffic with BNSF and for the years ended December 31, 1998, 1997 and
        1996, approximately 30%, 32% and 51%, respectively, from interchanging
       traffic with CSX. The Company had four customers who each represented
more than 10% of the international transportation revenue.    

Commercial Trailer Sales                                      

       The Company recognizes revenue from the commercial (non-governmental)
      sale of trailers when title and risk of ownership are transferred to
        the customer, which generally is upon shipment or customer pick-up. In
      certain instances prior to shipment or customer pick-up, the Company
         receives full payment for a trailer. At that time, the Company issues a
         certificate of title or statement of origin to the customer and revenue
       is recognized. In these cases, the customer has made a fixed, written
         commitment to purchase, the trailer has been completed and is available
        for pick-up or delivery, and the customer has requested the Company to
    hold the trailer until the customer determines the most economical
       means of taking possession. In such cases, the Company has no further
    obligation except to segregate the trailer and hold it for a short
      period of time, as is customary in the industry, generally less than
      one month, until pick-up or delivery. Trailers are built to customer
  specifications and no right of return or exchange privileges are
       granted. Accordingly, no provision for sales allowances or returns is
recorded.                                                     

Governmental Trailer Sales                                    

The Company recognizes revenue from the sale of trailers to   
governmental agencies when title and risks of ownership are   
     transferred, which is upon completion, inspection and acceptance of
     trailers by the governmental agency. At that time, the governmental
         agency has made a fixed written commitment to purchase in the form of a
       contract, the trailer has been completed and is available for pick-up
       or delivery, and the governmental agency has requested the Company to
hold the trailer until the governmental agency determines the 
    appropriate means of taking possession. The Company has no further
    obligation except to segregate the trailer and hold it for a short
      period of time, as is customary in the industry, generally less than
     one month, until pick-up or delivery. The trailers are built to the
    government's specifications pursuant to a written contract and are
     inspected and accepted for delivery by the governmental agency. The
       contract terms provide for prepayments by the government of up to 90%
   of the trailer's cost. These prepayments are recorded as advances
        against the inventory. Sales to governmental agencies represented 35%,
        37% and 20% of the Company's manufacturing revenue for the years ended
December 31, 1998, 1997 and 1996, respectively.               

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1.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued                  

Property, Plant and Equipment                                 

      Property, plant and equipment are recorded at historical cost. Costs
       assigned to property purchased as part of an acquisition are based on
        the fair value of such assets on the date of acquisition. Improvements
   are capitalized, and expenditures for maintenance and repairs are
 charged to operations as incurred. Gains or losses on sales and
    retirements of properties are included in the determination of the
results of operations.                                        

   Depreciation has been computed using the straight-line method for
 financial reporting purposes based on estimated useful lives as
follows:                                                      

            Buildings and improvements                         20-33 years
            Railroad track and improvements                     3-40 years
            Locomotives, transportation and other equipment     5-20 years
            Office equipment                                    5-10 years

      The Company re-evaluated the estimated remaining useful lives of its
         property, plant and equipment during 1996 and made an adjustment in the
fourth quarter of $280,000 to reduce depreciation.            

Income Taxes                                                  

      The Company utilizes the liability method of accounting for deferred
       income taxes. This method requires recognition of deferred tax assets
         and liabilities for the expected future tax consequences of events that
     have been included in the financial statement or tax returns. Under
       this method, deferred tax assets and liabilities are determined based
     on the difference between the financial and tax bases of assets and
         liabilities using enacted tax rates in effect for the year in which the
   differences are expected to reverse. Deferred tax assets are also
        established for the future tax benefits of loss and credit carryovers.

Treasury Stock Repurchase Program                             

       On August 24, 1998, the Company announced that its Board of Directors
        authorized management to purchase up to 1,000,000 shares of its common
        stock. Purchases will be made from time to time in the open market and
   will continue until all of such shares are purchased or until the
        Company determines to terminate the repurchase program. As of December
         31, 1998, the Company had purchased 305,100 shares with a total cost of
$1.8 million.                                                 

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1.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued                  

Excess of Cost Over Net Assets of Companies Acquired          

       The acquisitions of Kalyn/Siebert, Inc. ("Kalyn") and KSC resulted in
 purchase price in excess of the fair market value of net assets
         acquired in the amounts of approximately $2.5 million and $0.3 million,
       respectively, which is reflected in the balance sheet at December 31,
      1998, net of accumulated amortization of $0.6 million. These amounts
     are being amortized on a straight-line basis over twenty years. The
      Company periodically evaluates the carrying value and the periods of
         amortization based on the current and expected future cash flows of the
      entities giving rise to the excess of cost over net assets acquired.
      The acquisition of Steel City Carriers resulted in purchase price in
         excess of the fair market value of net assets acquired of approximately
      $0.9 million (see disclosure below). Amortization expense related to
        the excess of cost over net assets of companies acquired for the years
         ended December 31, 1998, 1997 and 1996 were approximately $0.13, $0.20,
and $0.19 million, respectively.                              

Profit Sharing Plan                                           

     The Company maintains a contributory profit sharing plan as defined
     under Section 401(k) of the U.S. Internal Revenue Code. The Company
   made contributions to this plan at a rate of 50% of the employees
         contribution up to a maximum annual contribution of $1,500 per eligible
        employee. An employee becomes 100% vested with respect to the employer
contributions after completing six years of service. Employer 
       contributions during the years ended December 31, 1998, 1997 and 1996
 were approximately $154,000, $90,000 and $61,000, respectively.

Foreign Currency Translation                                  

   The financial position and results of operations of the Company's
        Canadian, Chilean and Australian subsidiaries are measured using local
currency as the functional currency. Assets and liabilities of
       operations denominated in foreign currencies are translated into U.S.
     dollars at exchange rates in effect at year-end, while revenues and
         expenses are translated at average exchange rates prevailing during the
       year. The resulting translation gains and losses are charged directly
         to accumulated other comprehensive income, a component of stockholders'
        equity, and are not included in net income until realized through sale
or liquidation of the investment                              

On January 1, 1998, the Company adopted Statement of Financial
       Accounting Standards No. 130, "Reporting Comprehensive Income", which
         established standards for reporting and display of comprehensive income
         and its components in a full set of financial statements. Comprehensive
         income is defined as the change in stockholders' equity during a period
        from transactions from nonowner sources. Comprehensive income consists
        of net income and other comprehensive income, which includes all other
nonowner changes in stockholders' equity.                     

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1.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued                  

Recent Accounting Pronouncements                              

        In April 1998, the American Institute of Certified Public Accountants'
       Accounting Standards Executive Committee issued Statement of Position
      No 98-5, "Reporting on the Costs of Start-Up Activities" (SOP 98-5).
    SOP 98-5 requires the cost of start-up activities and organization
       costs to be expensed as incurred. SOP 98-5 is effective for financial
    statements for fiscal years beginning after December 15, 1998. The
         Company anticipates that the adoption of this statement will not have a
         material affect on the Company's results of operations or its financial
position.                                                     

Reclassifications                                             

        Certain 1997 and 1996 amounts have been reclassified to conform to the
presentation adopted in 1998.                                 

2.       EARNINGS PER SHARE                                                     

In 1997, the Company adopted Statement of Financial Accounting
Standards No. 128, "Earnings per Share", which requires the   
    presentation of both basic and diluted earnings per share. For the
     years ended December 31, 1998 and 1997, basic earnings per share is
         computed using the weighted average number of common shares outstanding
       during the year. Diluted earnings per share is computed using the sum
         of the weighted average number of common shares outstanding plus common
stock equivalents arising out of stock options, warrants and  
       convertible debt. Earnings per share information for all periods have
been restated to conform to the requirements of the standard. 

       For the year ended December 31, 1996, basic earnings per common share
       are based on the weighted average number of common shares outstanding
during the year. Assumed exercise of stock options and assumed
     conversion of the convertible debt were anti-dilutive and have been
   excluded from the weighted average shares outstanding for diluted
earnings per share.                                           

   The following is a summary of the net income available for common
      stockholders and weighted average shares for the diluted calculation
(in thousands):                                               

                                                                [Download Table]

                                              1998     1997    1996 
                                             -------  ------  ------
                                                                    
Net income from continuing operations        $ 4,466  $2,634  $1,080
Interest from convertible debt                    84     152      --
                                             -------  ------  ------
Net income available to common stockholders  $ 4,550  $2,786  $1,080
                                             =======  ======  ======

Weighted average shares outstanding            9,553   8,304   4,966
Assumed conversion of options and warrants       225     283     148
Assumed conversion of convertible debt           529     809      --
                                             -------  ------  ------
Weighted average shares outstanding           10,307   9,396   5,114
                                             =======  ======  ======

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3.      DISCONTINUED OPERATIONS:                                              

     In March 1997, the Company adopted a formal plan to discontinue its
      motor carrier division. The motor carrier division consists of Steel
      City Carriers and RailAmerica Intermodal Services, both wholly-owned
     subsidiaries of the Company. During the fourth quarter of 1997, the
         Company re-evaluated the carrying amount of Steel City Carriers' assets
   and recorded an impairment charge of approximately $730,000. This
  amount was determined based on what the Company believes it will
recover through the final disposition of the remaining assets.

   Operating results of the discontinued operations, as shown below,
   include the operations of the Motor Carrier segment for the three
       months ended March 31, 1998 and the years ended December 31, 1997 and
     1996. The motor carrier operations have been included in continuing
   operations for the nine months ended December 31, 1998, since the
disposition of the segment was not completed by April 1998.   

  Effective December 1, 1998, the Company ceased all motor carrier
    operations and leased substantially all of the operating assets of
   Steel City Carriers, Ltd. to Laidlaw Carriers, Inc., an operating
      subsidiary of Ontario, Canada-based Contrans Corporation. The leases
   are for a period of 18 to 24 months. In addition, the Company has
    entered into an agreement to sell its Ontario real estate that was
previously used in its motor carrier operations.              

     Total assets in this division as of December 31, 1997 and 1996 were
        $5.1 million and $6.2 million, respectively. Total liabilities in this
      division as of December 31, 1997 and 1996 were $5.2 million and $5.4
million, respectively.                                        

                                                                [Download Table]

                               Nine months  Three Months                      
                                  Ended        Ended                          
                                12/31/98*     3/31/98*        1997      1996  
                                ---------     --------        ----      ----  
                                                    (Thousands)               

                                                                              
Revenues                        $ 4,252       $ 1,827       $ 7,133   $ 7,216 
Depreciation and amortization       306            95         1,121       365 
Operating loss                     (186)          (35)         (934)     (492)
Interest expense                   (241)          (70)         (284)     (276)
Loss before taxes                  (433)         (105)       (1,121)     (898)
Benefit for income taxes            164            40           426       322 
Net loss                        $  (269)      $   (65)      $  (695)  $  (576)


          * - First three months of 1998 results of operations are included in
      discontinued operations. The last nine months of 1998 results of
operations are included in continuing operations.         

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4.   ACQUISITIONS:                                                            

      In January 1998, the Company acquired, through its wholly-owned subsidiary
      Kalyn, all of the outstanding stock of Canadian truck trailer manufacturer
Fabrex, Inc. and its affiliate, Services Remorques Plus, Inc.       
     (collectively "Fabrex") for approximately $1.5 million in cash and 70,000
     shares of RailAmerica common stock, $.001 par value ("Common Stock"), and
assumption of approximately $1.0 million of long-term debt. Fabrex's
operations have been combined into KSC, a wholly-owned subsidiary of
Kalyn. This acquisition has been accounted for as a purchase and its
results have been consolidated since January 1, 1998. Fabrex, a     
   manufacturer of specialty bulk-hauling truck trailers used in the solid
    waste, agricultural and construction industries, was founded in 1985 and
is located in Trois Rivieres, Quebec.                               

In August 1998, the Company, through its newly formed, wholly-owned 
  subsidiary, VCRR, entered into a long term lease/purchase agreement to
  operate a 13-mile rail line serving the Port of Hueneme and the Oxnard
 Harbor District in Oxnard, California, located approximately 50 miles
   north of Los Angeles. VCRR's operations commenced September 1, 1998 and
    are included in the results of domestic rail operations as of that date.

On February 19, 1997, the Company acquired, through its wholly-owned
      subsidiary, RailAmerica de Chile, S.A., a majority interest in Ferronor, a
     1,400 mile railroad serving northern Chile. The Company was joined in the
purchase of Ferronor by Andres Pirrazzoli y Cia, Ltda ("APCO"). The 
      purchase price paid by RailAmerica/APCO for substantially all of the stock
of Ferronor, was approximately $12.3 million and was funded 55% by  
     RailAmerica and 45% by APCO. This acquisition has been accounted for as a
purchase and Ferronor's results have been consolidated since the    
acquisition.                                                        

  In accordance with the Shareholders' Agreement between RailAmerica and
    APCO, RailAmerica controls the appointment of a majority of the Board of
 Directors of Ferronor, including the Chairman. APCO maintains certain
  minority rights under the shareholders Agreement, such as the right to
 request the General Manager's removal under certain circumstances. In
    accordance with EITF 96-16, the Company considered these minority rights
 in determining whether to consolidate Ferronor and has concluded that
     consolidation is appropriate based upon the Company's ownership position,
     and its level of control of the Board of Directors and senior management.

 On October 11, 1996, the Company, through its wholly-owned subsidiary
Dakota Rail, Inc. ("Dakota"), completed the purchase of all of the  
outstanding stock of Otter Tail Valley Railroad, Inc. ("OTVR"). The 
  acquisition was accounted for as a purchase. Accordingly, the purchase
      price, which amounted to approximately $4.25 million, was allocated to the
   assets acquired and liabilities assumed based on the fair values of the
     assets acquired at the date of acquisition. The results of OTVR have been
    consolidated with those of the Company commencing as of October 1, 1996.

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4.   ACQUISITIONS, continued                                                  

The following unaudited pro forma summary presents the consolidated 
   results of operations as if the acquisitions of Ferronor and Fabrex had
    occurred at the beginning of 1997 and do not purport to be indicative of
     what would have occurred had the acquisitions been made as of those dates
 or of results which may occur in the future. (In thousands except net
income per share)                                                   

                                            1997
                                            ----

Transportation and other revenues           $56,720 
Income from continuing operations                   
   before income taxes                     $ 3,690
Net income                                  $ 1,897 
Net income per share                        $   .23 

  The significant adjustments related to the above years represent the
   inclusion of depreciation differences on the revaluation of property,
      plant and equipment, additional interest expense based on an increase in
      long-term obligations, amortization of intangible assets and the related
income tax effects.                                               

5.    GREAT SOUTHERN RAILWAY LIMITED                                          

On October 31, 1997, the Company acquired a minority interest, of 
     approximately 11.4%, in the Great Southern Railway Limited ("GSR"). GSR
 completed the acquisition of the assets and business comprising the
       passenger rail service of the Australian National Railway Commission. The
 Company has invested $0.6 million in equity of GSR, $1.2 million in
   uncollateralized subordinated notes (the "Notes") and received 98,736
     options for stock exercise upon the earlier of three years from closing
    date or the date GSR is admitted to the Australian Stock Exchange. The
       options expire in five years. If all options are exercised, the Company's
     ownership interest would be diluted to approximately 10.6%. The Company
   cannot dispose of its stock investment for a period of two years. The
      Notes bear interest at 21% and mature October 31, 2007. Interest is paid
    quarterly based upon available cash flow, will be recorded as interest
       income as it is received, as it is non-cumulative. Both these amounts are
       included in long term assets on the consolidated balance sheet. The Notes
  approximate fair value as of December 31, 1998 based upon the recent
       nature of the transaction. Due to additional capital contributions during
  1998 by certain of GSR's owners the Company's ownership interest was
reduced to 10.5%.                                                 

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6.    INVENTORIES:                                                            

    Inventories consist of the following as of December 31, 1998 and 1997:

                                                                [Download Table]

                                                1998           1997    
                                            ------------   ----------- 
                                                                       
Raw materials                               $  5,207,154   $ 3,404,234 
Work in process                                2,504,344     1,109,318 
Finished goods                                 2,225,223       300,853 
Replacement or repair parts for equipment                              
    and road property                          3,647,885     1,054,830 
                                            ------------   ----------- 
                                              13,584,606     5,869,235 
Less, advances related to materials               (5,320)     (856,129)
                                            ------------   ----------- 
Inventories in excess of contract advances  $ 13,579,286   $ 5,013,106 
                                            ============   =========== 

7.      PROPERTY, PLANT AND EQUIPMENT:                                        

       Property, plant and equipment consist of the following as of December
31, 1998 and 1997:                                            

                                                                [Download Table]

                                                     1998          1997   
                                                 ------------  -----------
                                                                          
Land                                             $ 19,427,529  $17,360,124
Buildings and improvements                         11,225,554    4,526,069
Railroad track and improvements                    44,700,349   38,997,858
Locomotives, transportation and other equipment    36,582,042   21,255,647
                                                 ------------  -----------
                                                  111,935,474   82,139,698
Less accumulated depreciation                      10,102,101    7,238,862
                                                 ------------  -----------
                                                 $101,833,373  $74,900,836
                                                 ============  ===========

       Depreciation expense was approximately $3.5 million, $2.4 million and
    $1.3 million for the years ended December 31, 1998, 1997 and 1996,
respectively.                                                 

8.      OTHER ASSETS:                                                         

         Other assets consist of the following as of December 31, 1998 and 1997:

                                                                [Download Table]

                                                        1998             1997  
                                                     ----------      ----------
                                                                               
Deferred loan costs, net                             $  636,733      $  949,940
Deferred acquisition costs                              871,422         488,633
Deferred financing costs                                     --          49,377
Immigrant Investor loan (see also Note 10)              955,198              --
Deposits and other                                      593,402         533,483
                                                     ----------      ----------
                                                     $3,056,755      $2,021,433
                                                     ==========      ==========

       Deferred loan costs are being amortized utilizing the interest method
over the term of the respective term loans.                   

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8.      OTHER ASSETS, continued                                               

 Deferred acquisition and financing costs include costs incurred
      associated with the investigation of potential acquisitions and also
        costs related to capital raising. These costs will be allocated to the
         assets acquired and liabilities assumed upon consummation of successful
  acquisitions or financings or against the proceeds received from
      capital raised. Costs related to potential acquisitions or financing
         are charged to operations in the quarter in which the investigation of,
or negotiation is terminated.                                 

       The deposit on asset purchase agreement included on the balance sheet
         is a down payment on the E&N Railroad Company Ltd of $1.9 million as of
December 31, 1998. See Note 21 subsequent events.             

9.      RELATED PARTY TRANSACTIONS:                                           

        First London Securities Corporation ("First London"), of which Douglas
Nichols, a director of the Company, is President and principal
        shareholder, served as the exclusive placement agent for the Company's
         private placement which had a final close in January 1999. A portion of
 the private placement was received by the Company and closed in
      December 1998 (see Note 12 Redeemable Preferred stock). First London
        received a total of $822,700 in placement fees and cost reimbursements
        during December 1998 and the first quarter of 1999 on this transaction
        and one-year warrants to purchase 140,727 shares of Common Stock at an
exercise price of $8.25 per share.                            

         First London also served as exclusive placement agent for the Company's
         private placement which closed September 1996 and the Company's private
       placement which closed in January 1997. First London received as part
   of the September 1996 private placement a $225,000 placement fee,
      $45,000 nonaccountable expense fee and one-year warrants to purchase
         125,000 shares of Common Stock at an exercise price of $4.60 per share.
      First London exercised its option on these warrants on September 30,
 1997. First London received as part of the January 1997 private
        placement a $375,750 placement fee, $75,150 nonaccountable expense fee
        and one-year warrants to purchase 167,000 shares of Common Stock at an
         exercise price of $5.75 per share. First London exercised its option on
these warrants in January 1998.                               

During 1997, the Company sold all the outstanding stock of its
        wholly-owned subsidiary Huron Distribution Services to a company owned
       by its Vice Chairman. The sale price was approximately $50,000, which
   consisted of cash and 10,085 shares of the Company's common stock
      valued at $44,629. A gain of approximately $17,000 was recognized on
  the transaction and is included in other income (expense) in the
consolidated income statement for 1997.                       

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9.      RELATED PARTY TRANSACTIONS, continued                                 

During 1997, the Company sold all the outstanding stock of its
        wholly-owned subsidiary Evansville Terminal Company ("ETC") to a group
        of investors which included a company owned by its Vice Chairman. This
company owns a minority interest in ETC. The sale price was   
       approximately $540,000, which consisted of cash, a short-term note, a
        $450,000 purchase money mortgage with interest at 8% and a maturity of
       October 2002 and 8,502 shares of the Company's common stock valued at
$50,000. A gain of approximately $10,000 was recognized on the
transaction and is included in other income (expense) in the  
consolidated income statement for 1997.                       

During 1997, the Company sold all the outstanding stock of its
      wholly-owned subsidiary Gettysburg Scenic Rail Tours, Inc. ("GSRT"),
certain railroad equipment and substantially all the assets of
         Gettysburg Railway ("GBR") to a company owned by its Vice Chairman. The
    sale price for GSRT and the railroad equipment was $500,000, which
   consisted of cash and 62,602 shares of the Company's common stock
        valued at $385,000. A gain of approximately $240,000 was recognized on
  the transaction and is included in other income (expense) in the
consolidated income statement for 1997. The sale price for    
 substantially all of the assets of GBR was $1.45 million, which
        consisted of cash, an $800,000 promissory note due June 30, 1998 and a
        $350,000 mortgage note, which calls for monthly payments of $3,037, at
      an interest rate of 8.5% with a maturity of June 30, 2003. A gain of
 approximately $170,000 was recognized on the transaction and is
included in other operating income in the consolidated income 
     statement. The $800,000 promissory notes maturity date was extended
until June 1999.                                              

        As of December 31, 1998, $0.8 million of notes receivable from related
  parties is included in current assets and $0.35 million of notes
       receivable from related parties is included in notes receivable, less
current portions on the consolidated balance sheet.           

10 .     LONG-TERM DEBT:                                                        

         Long-term debt consists of the following at December 31, 1998 and 1997:

                                                        [Enlarge/Download Table]
                                                                             1998         1997   
                                                                         -----------  -----------
                                                                                                 
Revolving line of credit.  See below                                     $44,207,128  $34,717,857

Note payable, financial institution, bearing interest at 9.50%, due in                           
     fixed monthly installments of $24,516 (including interest), with a                          
     final payment of $554,076 in February 1999. Certain equipment,                              
     inventory, accounts receivable, capital leases and South Central                            
     Tennessee Railroad Corp. ("SCTR") common stock serve as                                     
     collateral. See refinancing below.                                      574,047      801,815


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10.       LONG-TERM DEBT, continued                                             

                                                        [Enlarge/Download Table]
                                                                                                        
Equipment note, with interest imputed at 9.92%, due in fixed monthly                                    
     installments of $7,055 (including interest), with a final payment                                  
     of $153,177 in March 1998. Certain equipment serves as collateral                     --    170,191

Equipment notes, with interest imputed at 9.06%, due in fixed monthly                                   
     installments of $9,812 (including interest) through October 2003                                   
     Certain locomotives and flat cars serve as collateral                            517,392    584,892

Equipment note, with interest imputed at 8.33%, due in fixed monthly                                    
     installments of $16,441 (including interest) through March 2003                                    
     Certain tank cars serve as collateral                                            952,554  1,065,298

Equipment notes, with interest imputed at rates from 8.76% to 11.63%,                                   
     due in fixed monthly installments of $29,765 (including interest)                                  
     with varying maturities through October 2003. Certain railroad                                     
     equipment serves as collateral                                                   846,561  1,089,853

Equipment note payable, bearing interest at 8.89%, due in fixed monthly                                 
     installments of $27,250 (including interest) through December 2000                                 
     with final payment of $140,026 due January 2001. Certain equipment                                 
     serves as collateral                                                             614,517    958,821

Equipment notes, bearing interest rates from 8.19% to 10.65%, due in                                    
     fixed monthly installments of $22,525 (including interest) with                                    
     varying maturities through April 2002. Certain equipment serves as collateral    556,011    775,252

Equipment notes, with interest imputed at rates from 8.12% to 8.29%,                                    
     due in fixed monthly installments of $16,741 (including interest)                                  
     with varying maturities through November 2004. Certain locomotives                                 
     and tank cars serve as collateral                                                968,757  1,080,809

Equipment note payable, bearing interest at 9.4%, due in fixed monthly                                  
     installments of $2,409 (including interest) through                                                
     October 1998.  Certain equipment serves as collateral                                 --     23,082

Burlington Northern Santa Fe ("BNSF") rail facilities installment                                       
     purchase obligation, annual payments of $250,000, including                                        
     interest at 10%, maturing in October 2116. If car loads at OTVR                                    
     fall below 7,250 in a year, BNSF will credit payments                                              
     on this debt at a rate of $250 per car                                         2,139,105  2,171,914


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10.      LONG-TERM DEBT, continued                                              

                                                        [Enlarge/Download Table]
                                                                                                      
Contract for deed, principal due at the earlier of December 1, 2008 or                                
     180 days following the date that rail service ceases to be                                       
     provided on the Minnesota line operated by Dakota. The Contract                                  
     for deed is non-interest bearing and is discounted to yield 9%                                   
     The unamortized discount at December 31, 1998 and 1997 is $785,670                               
     and $833,699, respectively. Railroad property serves as collateral             575,187    529,136

Note payable to the State of Minnesota, payable in quarterly                                          
     installments of $6,024 through July 1, 2004. The note is                                         
     non-interest bearing and is discounted to yield 9%. The                                          
     unamortized discount at December 31, 1998 and 1997 is $28,895 and                                
     $39,018, respectively. Railroad property and equipment serves as collateral    103,635    117,609

Note payable to the Central Prairie Rail Shippers Corporation, payable                                
     in quarterly installments with final payment due not later than                                  
     September 13, 2000. The note is non-interest bearing and is                                      
     discounted to yield 9%. The unamortized discount at December 31,                                 
     1997 is $305. Railroad property and equipment serve as collateral                   --     12,623

Note payable to the State of Michigan, payable in quarterly                                           
     installments of 2.5% original loan for a period of 10 years                                      
     The non-interest bearing note is for railroad improvements                     680,690         --

Term loan facility with National Bank of Canada and Development Bank                                  
      of Canada, bearing interest ranging from 6.5% to 7.7%,                                          
      payable in fixed monthly installments of $17,633                                                
      (including interest) maturing with a final payment of $1,181,403                                
      due in July 2003. Certain KSC assets serve as collateral                    2,027,781         --

Immigrant investor loan, non-interest bearing, maturing in April 2002,                                
     secured by a long-term investment (see also Note 8) The note is                                  
     discounted to yield 9%. The unamortized discount at December 31, 1998                            
     is $184,227                                                                    955,198         --

Operating credit facility, bearing interest at the Canadian Prime                                     
     rate plus 0.25%, with a maturity of March 2003                               2,131,697         --

Lines of credit, ranging in monthly interest rates from                                               
     0.66% to 1.37%, maturing from 30 to 90 days                                  1,481,000  1,989,000

Lines of credit with Banco de Desarrollo, see below                               7,782,000         --

Note payable to Compania Minera del Pacifico, bearing interest at LIBOR                               
     plus 2.5% due in monthly installments (including interest)maturing                               
     in 2003. Certain Ferronor assets serve as collateral                         2,822,000         --

Capital lease obligations                                                         1,458,895  1,710,046


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10.      LONG-TERM DEBT, continued                                              

                                                                [Download Table]
                                                                           
Other long-term debt                                   420,400           --
                                                   -----------  -----------
                                                    71,814,555   47,798,198
   Less current maturities                           3,804,217    3,923,036
                                                   -----------  -----------
          Long-term debt, less current maturities  $68,010,338  $43,875,162
                                                   ===========  ===========

         Ferronor refinanced certain short-term debt as of January 28, 1999 with
         Banco de Desarrollo. These amounts are included in long-term debt as of
      December 31, 1998. The refinancing consists of two credit lines. The
      first credit line is a $5.0 million facility which bears interest at
       the interbank cost plus 1.75% with interest to be paid over 120 equal
monthly installments and principal to be paid over 96 equal   
      installments beginning two years from the funding. The second credit
    line is a $7.7 million facility which bears interest at LIBOR plus
   2.75% and is payable in 120 equal monthly installments (including
interest).                                                    

     During February 1999, a lump sum payment of $554,000 was due on the
       South Central Tennessee Railroad acquisition financing. The amount is
         being refinanced into a $2.4 million term loan and is expected to close
       in April 1999. The financing is at an interest rate of 7.5% due in 84
        equal monthly installments of principal and interest of $30,876 with a
     lump-sum payment of $590,750 in March 2006. The debt is included as
long-term on the consolidated balance sheet.                  

         On September 29, 1995, the Company entered into a revolving credit loan
        facility ("Revolver") with National Bank of Canada ("NBC"). In October
      1996, May 1997 and June 1998, the Company closed on $10 million, $15
      million and $15 million increases in its Revolver, respectively. The
     Revolver's maturity date was extended to June 2001. The Revolver is
         currently $55 million. The Revolver bears interest at either the bank's
     prime rate (which was 8.25% at December 31, 1998) plus 0.25% or the
        one, three or six month LIBOR plus 2.5%, at the option of the Company.
       The Revolver is collateralized by substantially all the assets of the
Company and certain subsidiaries.                             

        In November 1998, the Company received a commitment letter to increase
       the Revolver up to $100 million. The increase is anticipated to close
in the second quarter of 1999.                                

     The Revolver includes restrictive covenants prohibiting the Company
       from incurring debt, except liabilities incurred in the normal course
   of business, guaranteeing the payment of an obligation of a third
       party, and selling, transferring or otherwise assigning substantially
 all of its assets. The Revolver also contains certain financial
     covenants which include requiring the Company to maintain a maximum
       debt to tangible net worth and interest coverage ratios. The Revolver
     restricts payment of dividends on the Company's Common Stock. As of
   December 31, 1998, the Company's Revolver was substantially fully
        funded based upon the collateral pledged at that time. The Company had
    an additional $7.0 million of availability for future purchases or
acquisitions.                                                 

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10.      LONG-TERM DEBT, continued                                              

     In December 1996, the Company entered into an acquisition financing
        transaction with Comerica Bank N.A. ("Comerica") to acquire rail lines
       in Minnesota from BNSF. The interest rate on the financing was at the
 prime rate (8.5% at December 31, 1996) plus one percent and was
   scheduled to mature in 90 days from closing. During May 1997, the
   Company increased its Revolver from $25 million to $40 million by
  bringing Comerica as an additional lender into the Revolver. The
acquisition loan was rolled into the Revolver.                

         The aggregate annual maturities of long-term debt are as follows net of
discount amortization:                                        

    1999                                  $  3,804,217
    2000                                     3,074,132
    2001                                    46,747,764
    2002                                     2,850,101
    2003                                     5,280,710
    Thereafter                              10,057,631
                                          ------------
                                          $ 71,814,555
                                          ============

     During the years ended December 31, 1998, 1997 and 1996 interest of
approximately $465,000, $69,000 and $41,000, respectively, was
capitalized.                                                  

Capital Leases                                                

         The Company entered into equipment finance leases for certain tractors,
      trailers and other equipment expiring at various times through 2003.
        These leases are accounted for as capital leases. The financing of the
      purchase of the tractors, trailers and equipment under these capital
   leases was capitalized using the interest rate appropriate at the
     inception of the respective leases. The Company also leased certain
      railroad properties under a capital lease which was due to expire in
      1998. The lease was renegotiated and now matures in January 2004 and
       calls for monthly payments of $1,300. The following is an analysis of
 the Company's assets under capital leases at December 31, 1998:

  Transportation equipment  under capital leases       $ 3,046,304
  Less accumulated amortization                            405,744
                                                       -----------
                                                       $ 2,640,560
                                                       ===========

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10.      LONG-TERM DEBT, continued                                              

       Minimum annual lease commitments at December 31, 1998 are as follows:

                                                                [Download Table]

                                          CAPITAL     OPERATING
                                          LEASES        LEASES 
                                        ----------  -----------
                                                               
1999                                    $  548,957  $ 2,839,204
2000                                       372,684    2,055,713
2001                                       391,715    1,648,268
2002                                       188,811    1,260,553
2003                                        53,394      891,553
Thereafter                                      --    1,271,917
                                        ----------  -----------
       Total                             1,555,561  $ 9,967,208
                                                    ===========
    Less amount representing interest       96,666             
                                        ----------             
       Present value of future minimum   1,458,895             
            lease payments                                     

  Less current portion                     490,835             
                                        ----------             
       Noncurrent portion               $  968,060             
                                        ==========             


       Rental expense under operating leases was approximately $2.7 million,
      $0.9 million and $0.8 million for the years ended December 31, 1998,
1997 and 1996, respectively.                                  

11.      SUBORDINATED DEBT:                                                     

      Subordinated debt consists of the following at December 31, 1998 and
1997:                                                         

                                                        [Enlarge/Download Table]

                                                                            1998         1997  
                                                                         ----------  ----------
                                                                                               
Convertible subordinated debentures, bearing interest at the prime rate                        
     (which was 8.5% at December 31, 1998) adjusted annually, payable                          
     semi-annually. Principal payments are due in 20 equal quarterly                           
     installments beginning November 1999. Convertible into common                             
     stock of the Company at $2.25 beginning August 31, 1995. $357,000                         
     were converted during 1998.                                         $  643,000  $1,000,000

Subordinated debentures, bearing interest at the prime                                         
     rate adjusted annually, payable semi-annually.                                            
     Principal payments are due in 20 equal quarterly                                          
     installments beginning May 1995.                                       265,490     477,882

Series A Convertible Subordinated debentures, bearing interest at 8%                           
     payable semi-annually on January 1 and July 1. Convertible into                           
     common stock of the Company at $5.48 per share beginning                                  
     January 1, 1996. The entire balance was converted during 1998.              --   2,000,000
                                                                         ----------  ----------
                                                                            908,490   3,447,882
   Less current maturities                                                  244,542     212,392
                                                                         ----------  ----------
                                                                         $  663,948  $3,265,490
                                                                         ==========  ==========


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11.      SUBORDINATED DEBT, continued                                           

      The aggregate annual maturities of subordinated debt are as follows:
  1999                                     $ 244,542
  2000                                       181,698
  2001                                       128,600
  2002                                       128,600
  2003                                       128,600
  Thereafter                                  96,450
                                           ---------
                                           $ 908,490
                                           =========
12.      REDEEMABLE PREFERRED STOCK:                                            

    In January 1999, the Company completed a private offering of $11.6
million of its Series A Convertible Redeemable Preferred Stock
       ("Preferred Stock"). The Company sold 464,400 shares of its Preferred
    Stock at a price of $25 per share. The Preferred Stock pays annual
       dividends of 7.5%, is convertible into shares of the Company's common
      stock at a price of $8.25 per share and is non-voting. The Preferred
         Stock is mandatorily redeemable 5 years from its issuance. The December
         31, 1998 balance sheet includes 300,600 shares which were issued during
    1998. The remainder of the shares were issued in January 1999. The
      carrying value of the Preferred Stock is the par value less issuance
      costs. The issuance costs will be amortized on a straight-line basis
over the life of the Preferred Stock.                         

13.      OTHER REVENUE:                                                         

       Other revenue as of December 31, 1998, 1997 and 1996 consisted of the
following:                                                                      

                                                                [Download Table]

                                   1998        1997         1996  
                                ----------  ----------  ----------
                                                                  
Gain on sale of properties and                                    
    easements                   $  695,158  $1,250,699  $1,498,738
Rental income                    1,484,390     857,486     577,712
Other                              520,873     364,003     160,772
                                ----------  ----------  ----------
                                $2,700,421  $2,472,188  $2,237,222
                                ==========  ==========  ==========


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14.      INCOME TAX PROVISION:                                                  

       The provision for income taxes for the years ended December 31, 1998,
1997 and 1996 consists of:                                    

                                                                [Download Table]

                               1998         1997         1996   
                            -----------   ---------   --------- 
                                                                
Federal income taxes:                                           
   Current                  $   232,200   $       0   $  45,000 
   Deferred                   1,038,800     708,382     411,405 
                            -----------   ---------   --------- 
                              1,271,000     708,382     456,405 
                            -----------   ---------   --------- 
State income taxes:                                             
   Current                      281,000     161,000      75,000 
   Deferred                     (55,000)    (26,000)      4,000 
                            -----------   ---------   --------- 
                                226,000     135,000      79,000 
                            -----------   ---------   --------- 
Foreign income taxes:                                           
   Current                       33,000          --          -- 
   Deferred                          --    (306,000)   (152,000)
                            -----------   ---------   --------- 
Total income tax provision  $ 1,530,000   $ 537,382   $ 383,405 
                            ===========   =========   ========= 


      The following summarizes the total income tax provisions for each of
the years ended December 31, 1998, 1997 and 1996:             

                                                                [Download Table]
                                                                
Continuing operations       $ 1,570,000   $ 963,382   $ 705,405 
Discontinued operations         (40,000)   (426,000)   (322,000)
                            -----------   ---------   --------- 
Total income tax provision  $ 1,530,000   $ 537,382   $ 383,405 
                            ===========   =========   ========= 

   The Company joins in the filing of a consolidated U.S. income tax
       return with its domestic subsidiaries. For state income tax purposes,
       the Company and each of its domestic subsidiaries generally file on a
    separate return basis in the states in which they do business. The
   Company's Canadian subsidiaries, RailAmerica Carriers, Steel City
        Carriers and KSC, file Canadian and provincial income tax returns. The
     Company's majority owned subsidiary, Ferronor, and its wholly-owned
    subsidiary, RailAmerica de Chile, file Chilean income tax returns.

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14.      INCOME TAX PROVISION, continued                                        

     The differences between the U.S. federal statutory tax rate and the
     Company's effective rate from continuing operations are as follows:

                                                                [Download Table]

                                               1998           1997        1996    
                                            -----------   -----------   --------- 
                                                                                  
Income tax provision, at 35%                $ 2,112,737   $ 1,259,072   $ 625,045 
Statutory federal Surtax exemption              (60,363)      (35,972)    (17,858)
State income tax, net of federal benefit        147,000        90,000      51,350 
Benefit due to Difference between U.S. &                                          
     Chilean tax rates                         (316,000)     (192,000)          0 
Benefit due to Utilization of Chilean Net                                         
     Operating Loss Carryforwards              (306,000)     (152,000)          0 
Provision due to Difference between U.S. &                                        
     Canadian tax rates                          14,000             0           0 
Benefit due to Reduction in Canadian tax                                          
      rate for manufacturing companies          (42,000)            0           0 
Non-deductible expenses, net                     45,000        33,000      45,100 
Other, net                                       93,626        60,282       1,768 
Valuation allowance                            (118,000)      (99,000)         -- 
                                            -----------   -----------   --------- 
                                            $ 1,570,000   $   963,382   $ 705,405 
                                            ===========   ===========   ========= 


    The components of deferred income tax assets and liabilities as of
December 31, 1998 and 1997 are as follows:                    

                                                                [Download Table]

Deferred tax assets:                                1998               1997    
                                                 -----------       ----------- 
                                                                               
     Net operating loss carry forwards           $ 2,798,000       $ 2,240,000 
     Alternative minimum tax credit                  766,000           495,000 
     Other                                           205,000                 0 
                                                 -----------       ----------- 
         Total deferred assets                     3,769,000         2,735,000 
     Less:  valuation allowance                     (491,000)         (609,000)
                                                 -----------       ----------- 
         Total deferred assets, net                3,278,000         2,126,000 
     Deferred tax liabilities:                                                 
     Depreciation and amortization                 8,912,000         6,492,237 
     Land                                          2,427,000         2,427,000 
     Installment Sales                               181,000           226,000 
     Other                                                 0            48,000 
                                                 -----------       ----------- 
     Net deferred tax liability                  $(8,242,000)      $(7,067,237)
                                                 ===========       =========== 


         The liability method of accounting for deferred income taxes requires a
         valuation allowance against deferred tax assets if, based on the weight
       of available evidence, it is more likely than not that some or all of
         the deferred tax assets will not be realized. It is management's belief
    that it is more likely than not that a portion of the deferred tax
      assets will not be realized. The Company has established a valuation
         allowance of $491,000 at December 31, 1998 and $609,000 at December 31,
     1997, respectively. The valuation allowance at December 31, 1998 is
      comprised of $125,000, which relates to prior and current year state
        net operating losses, and $366,000, which relates to prior and current
year Chilean net operating losses from Ferronor.              

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14.      INCOME TAX PROVISION, continued                                        

      No provision was made in 1998 for U.S. income taxes on undistributed
earnings of the Chilean subsidiaries as it is the intention of
       management to utilize those earnings in the Chilean operations for an
indefinite period of time.                                    

     As part of certain acquisitions, the Company acquired net operating
    loss carry forwards for federal and state income tax purposes. The
        utilization of the acquired tax loss carry forwards is further limited
         by the Internal Revenue Code Section 382 to approximately $100,000 each
    year. The tax loss carry forwards expire in the years 2001 through
2010.                                                         

15.      COMPREHENSIVE INCOME                                                   

 For the Company, other comprehensive income consists of foreign
currency translation adjustments that amounted to $455,447 and
         ($52,068) for the years ended December 31, 1998 and 1997, respectively.
     Comprehensive income for the years ended December 31, 1998 and 1997
     amounted to $4,856,596 and $1,887,131, respectively. The cumulative
  adjustment amount previously reported as a separate component of
         stockholders' equity is now included in accumulated other comprehensive
income in the Consolidated Balance Sheets.                    

16.      STOCK OPTIONS:                                                         

      In July 1992, the Company implemented a stock option plan (the "1992
 Plan") for certain officers, consultants, employees and outside
       directors of the Company. The aggregate number of shares which may be
issued pursuant to the 1992 Plan is 250,000 shares which are  
exercisable at date of grant and have a ten year life.        

         Effective January 1, 1995, the Company implemented two new stock option
         plans: the 1995 Stock Incentive Plan and the 1995 Non-Employee Director
      Stock Option Plan. Each plan calls for 250,000 shares to be reserved
         for future issuance. Options granted under the Stock Incentive Plan are
exercisable at the date of grant. Options granted under the   
         Non-Employee Director Stock Option Plan are 1/3 exercisable at the date
      of grant, 1/3 exercisable at the first anniversary of the grant date
      and 1/3 exercisable at the second anniversary of the grant date. All
     the options granted under the Stock Incentive Plan and Non-Employee
         Director Stock Option Plan have a ten year life from the date of grant.
         In June 1997, the Company's stockholders approved a 750,000 increase in
        the number of shares of common stock reserved for issuance pursuant to
         the Company's 1995 Stock Incentive Plan, bringing total shares reserved
under this plan to 1,000,000.                                 

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16.      STOCK OPTIONS, continued                                               

      During June 1998, the Company implemented the 1998 Omnibus Executive
         Incentive Compensation Plan ("1998 Plan"). The 1998 Plan supersedes the
    1992 Plan, the 1995 Stock Incentive Plan and the 1995 Non-Employee
        Director Stock Option Plan. The 1998 Plan provides for grants of stock
       options, stock appreciation rights, restricted stock, deferred stock,
        other stock-related awards and performance or annual incentive awards.
       The aggregate number of shares to be issued pursuant to the 1998 Plan
      are 930,000 shares. Options for 76,000 shares of common stock of the
      Company, at an exercise price of $6.125, were issued pursuant to the
       1998 Plan as of July 1, 1998. These options vest ratably over a three
year period on each anniversary date and mature June 30, 2008.

    During November 1994, the Company's Board of Directors approved an
       employment arrangement with Mr. Gary Marino for him to serve as Chief
     Executive Officer of the Company and its subsidiaries. Mr. Marino's
  arrangement provided that he be granted non-qualified options to
        purchase an aggregate of 350,000 shares of common stock of the Company
   at varying exercise prices and exercise dates. Options for 87,500
    shares at an exercise price of $3.10, the fair market value of the
common stock at the time the Board of Directors approved the  
   arrangement, and 87,500 shares at an exercise price of $3.40 were
    immediately exercisable upon Mr. Marino's execution of his written
   employment agreement. Additional options for 87,500 shares became
         exercisable under the employment agreement on each of March 1, 1996 and
1997 at exercise prices equal to $3.75 and $4.15 per share,   
        respectively. The Company recognized no compensation expense since the
        exercise prices at the date of grant were either equal to or in excess
     of the fair market value. Mr. Marino's options have a ten year life
from the date of grant and expire November 11, 2004.          

     Effective January 1, 1998, Mr. Marino entered into a new employment
   agreement with the Company. The new agreement provides that he is
    granted non-qualified options to purchase 300,000 shares of common
      stock of the Company at exercise prices varying from $7.25 to $9.50.
     All of the options are immediately exercisable and expire ten years
from the grant date.                                          

      Additionally during 1996, the Company issued, options to purchase an
    aggregate of 90,000 shares of common stock to certain employees at
        exercise prices equal to $3.65 per share for 10,000 of the options and
      $5.00 per share for the remaining 80,000 options. All of the options
       are exercisable immediately and have a ten year life from the date of
the grant.                                                    

       In July 1998, the Company issued, options to purchase an aggregate of
        150,000 shares of common stock to certain employees at exercise prices
       equal to $6.125 per share. The options vest ratably over a three year
period on each anniversary date and mature June 30, 2008.     

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16.      STOCK OPTIONS, continued                                               

         The Company has adopted the disclosure-only provisions of Statements of
     Financial Accounting Standards No. 123, "Accounting for Stock-Based
        Compensation". Accordingly, no compensation costs have been recognized
      for the stock options issued during 1998, 1997 and 1996 as all stock
   options were granted with an exercise price at least equal to the
  market price on the date of grant. Had compensation cost for the
        Company's stock options issued been determined based on the fair value
         at the grant date for awards in 1998, 1997 and 1996 consistent with the
         provisions of SFAS No. 123, the Company's net income and net income per
         share would have been reduced to the pro forma amounts indicated below:

                                                        [Enlarge/Download Table]

                                               1998            1997              1996    
                                          --------------  ---------------  --------------
                                                                                         
Net income - as reported                  $    4,401,149  $     1,939,199  $      504,879
                                          ==============  ===============     ===========
Net income - pro forma                    $    3,561,620  $     1,152,411  $       17,005
                                          ==============  ===============     ===========

Basic net income per share - as reported  $         0.47  $          0.23     $      0.10
                                          ==============  ===============     ===========
Basic net income (loss) per share -                                                      
         pro forma                        $         0.37  $          0.14     $      0.00
                                          ==============  ===============     ===========


    These calculations only take into account the options issued since
      January 1, 1995. The fair value of each option grant is estimated on
      the date of grant using the Black-Scholes option- pricing model with
     the following weighted-average assumptions used for grants in 1998,
     1997 and 1996: dividend yield 0.0%; expected volatility of 45%-55%;
         risk-free interest rate of 5.50% -7.8%; and expected lives of 10 years.
       The weighted average fair value of options granted for 1998, 1997 and
1996 were $3.97, $3.08, and $2.65, respectively.              

       Information regarding the above options for 1998, 1997 and 1996 is as
follows:                                                      

                                                                [Download Table]

                                                           WEIGHTED
                                                           AVERAGE 
                                            NUMBER OF      EXERCISE
                                             SHARES         PRICE  
                                           ---------      -------- 
                                                                   
Outstanding at January 1, 1996               848,500      $   3.66 
Granted                                      295,000      $   3.96 
Exercised                                     12,500      $   3.60 
Forfeited                                      7,000      $   3.50 
Outstanding at December 31, 1996           1,124,000      $   3.74 

Granted                                      363,500      $   5.00 
Exercised                                    202,933      $   3.69 
Forfeited                                     33,667      $   4.21 
Outstanding at December 31, 1997           1,250,900      $   4.10 

Granted                                      551,000      $   7.35 
Exercised                                    237,950      $   3.66 
Forfeited                                     78,450      $   3.58 
Outstanding at December 31, 1998           1,485,500      $   5.40 


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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16.      STOCK OPTIONS, continued                                               

The following table summarizes information about stock options
outstanding at December 31, 1998:                             

                                                        [Enlarge/Download Table]

                                OPTIONS OUTSTANDING                     OPTIONS EXERCISABLE      
                --------------------------------------------------    -------------------------  
                                    WEIGHTED                                                     
                                     AVERAGE          WEIGHTED                         WEIGHTED  
RANGE OF                            REMAINING          AVERAGE                          AVERAGE  
EXERCISE           NUMBER          CONTRACTUAL        EXERCISE          NUMBER         EXERCISE  
PRICE            OF OPTIONS           LIFE              PRICE         OF OPTIONS         PRICE   
-------------------------------------------------------------------------------------------------
                                                                                                 
$3.40-$5.00        934,500            6.98              $4.26           934,500          $4.26   
$5.01-$7.00        251,000            9.50              $6.13                --             --   
$7.01-$9.50        300,000            9.00              $8.38           300,000          $8.38   
                 ---------                                            ---------                  
                 1,485,500                                            1,234,500                  
                 =========                                            =========                  


     In January 1995, the Company established an Employee Stock Purchase
      Plan open to all full-time employees. Each employee may have payroll
         deductions as a percentage of their compensation, not to exceed $25,000
       per year. The purchase price equals 85% of the fair market value of a
         share of the Company's Common Stock on January 1 or December 31, of any
        given year, whichever is lower. For the years ended December 31, 1998,
  1997 and 1996, 18,289, 23,433 and 17,897 shares of common stock,
respectively, were sold to employees under this plan.         

17.      NONCASH INVESTING AND FINANCING ACTIVITIES:                            

     The Company issued 4,200 shares of common stock to employees in the
         first quarter of 1996. The Company issued 20,000 shares of common stock
        to the Company's Chief Executive Officer for a $95,000 note receivable
      during 1997. The Company issued 30,000 shares of common stock to the
        Company's Chief Executive Officer for a $97,500 note receivable during
        1998. Additionally, the Company issued 9,719 shares of common stock to
         certain employees in the first quarter of 1996 and the first quarter of
1997 pursuant to employment contracts.                        

        The Company issued 50,000 shares of common stock, 47,000 were treasury
        stock, to employees of Kalyn during 1997 pursuant to a stock incentive
plan.                                                         

         The Company incurred approximately $1.3 million, $2.0 million and $16.1
        million in debt to acquire property, plant and equipment during 1998 ,
      1997 and 1996, respectively. These amounts included acquisition of a
        131 mile rail line in Washington, 234 miles of rail line in Minnesota,
         140 tank cars and other transportation equipment including locomotives,
tractor and trailers.                                         

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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17.      NONCASH INVESTING AND FINANCING ACTIVITIES, continued                  

        The Company assumed $2.2 million of long-term debt and $3.7 million of
      deferred tax liabilities related to the acquisition of OTVR in 1996.
The Company assumed $4.7 million in liabilities related to the
acquisition of Ferronor in 1997.                              

     Cash paid for interest during 1998, 1997 and 1996 was $5.7 million,
         $3.9 million and $2.4 million, respectively. Cash paid for income taxes
    during 1998, 1997 and 1996 was $0.2 million, $0.2 million and $0.6
million, respectively.                                        

18.      FAIR VALUE OF FINANCIAL INSTRUMENTS:                                   

Management believes that the fair value of its long-term debt 
        approximates its carrying value for the revolving line of credit based
     on the variable nature of the financing and for all other long-term
        debt based on current borrowing rates available with similar terms and
maturities.                                                   

19.      COMMITMENTS AND CONTINGENCIES:                                         

        In the ordinary course of conducting its business, the Company becomes
         involved in various legal actions and other claims which are pending or
      could be asserted against the Company. Litigation is subject to many
   uncertainties, the outcome of individual litigated matters is not
        predictable with assurance, and it is reasonably possible that some of
    these matters may be decided unfavorably to the Company. It is the
         opinion of management that the ultimate liability, if any, with respect
 to these matters will not have a material adverse effect on the
    Company's financial position, results of operations or cash flows.

   Effective January 23, 1995, the Company, through its wholly-owned
 subsidiary Kalyn, entered into a Wholesale and Retail Financing
         Agreement with Associates Commercial Corporation. Kalyn entered into an
         additional financing agreement with NewCourt Financial USA, Inc. during
        1996. The agreements provide for dealer and customer financing and for
         the repurchase of products sold in the event of default by the customer
or dealer to the finance company. The Company is obligated to 
     repurchase a maximum of $300,000 and $200,000, respectively, in the
       aggregate on the agreements. Since inception of the Agreements, there
have been no defaults which would have required the Company to
repurchase products sold.                                     

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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20.      SEGMENT INFORMATION:                                                   

   The Company's continuing operations have been classified into two
    business segments: rail transportation and manufacturing. The rail
 transportation segment includes the operations of the Company's
  railroad subsidiaries and the manufacturing segment includes the
        operations of Kalyn, KSC and RailAmerica Equipment Corporation. All of
         the Company's continuing operations for 1996 were in the United States.
     During 1997 the Company acquired operations in Chile and a minority
 interest in Australian operations and during 1998 the Company's
   Canadian operations were reclassified into continuing operations.

         Business segment information for the year ended December 31, 1998, 1997
and 1996 (dollar amounts in thousands):                       

YEAR ENDED DECEMBER 31, 1998:                                 

                                                        [Enlarge/Download Table]

                                            RAIL                       MOTOR    CORPORATE
                         CONSOLIDATED  TRANSPORTATION  MANUFACTURING  CARRIER    OVERHEAD
                         ------------  --------------  -------------  -------    --------
                                                                                         
Revenue                     $ 77,144        $32,402       $40,490     $ 4,252   $     -- 
Operating income (loss)     $ 12,642        $ 9,436       $ 7,389     $  (186)  $ (3,997)
Identifiable assets         $145,230        $93,473       $24,890     $ 3,017   $ 23,850 
Depreciation and                                                                         
    amortization            $  3,685        $ 2,276       $   964     $   306   $    139 
Capital expenditures        $ 29,382        $19,280       $ 3,584     $ 1,354   $  5,164 
Interest expense            $  4,947        $ 3,611       $   619     $   241   $    476 


YEAR ENDED DECEMBER 31, 1997:                                 

                                                                [Download Table]

                                            RAIL                      CORPORATE
                         CONSOLIDATED  TRANSPORTATION  MANUFACTURING   OVERHEAD
                         ------------  --------------  -------------  -------- 
                                                                               
Revenue                     $47,437          $24,076      $23,361     $    --  
Operating income (loss)     $ 7,319          $ 6,458      $ 4,119     $(3,258) 
Identifiable assets         $96,800          $76,249      $14,653     $ 5,898  
Depreciation and                                                               
    amortization            $ 2,261          $ 1,604      $   567     $    90  
Capital expenditures        $ 9,443          $ 7,597      $ 1,696     $   150  
Interest expense            $ 3,534          $ 3,081      $   372     $    81  


YEAR ENDED DECEMBER 31, 1996:                                 

                                                                [Download Table]

                                            RAIL                      CORPORATE
                         CONSOLIDATED  TRANSPORTATION  MANUFACTURING   OVERHEAD
                         ------------  --------------  -------------  -------- 
                                                                               
Revenue                     $25,658          $11,704      $13,954     $    --  
Operating income (loss)     $ 3,873          $ 4,978      $ 1,473     $(2,578) 
Identifiable assets         $66,152          $46,129      $12,932     $ 7,091  
Depreciation and                                                               
    amortization            $ 1,527          $   991      $   490     $    46  
Capital expenditures        $29,766          $26,849      $ 2,809     $   108  
Interest expense            $ 2,078          $ 1,318      $   476     $   284  


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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20.      SEGMENT INFORMATION, Continued                                         

        Geographical segment information for the years ended December 31, 1998
and 1997 (dollar amounts in thousands):                       

YEAR ENDED DECEMBER 31, 1998:                                 

                                                                [Download Table]

                      CONSOLIDATED  UNITED STATES   CANADA   CHILE   AUSTRALIA
                      ------------  -------------   ------   -----   ---------
                                                                              
Revenue                 $ 77,144       $46,722     $14,498  $15,924    $   -- 
Operating income        $ 12,642       $ 7,474     $   657  $ 4,512    $   -- 
Identifiable assets     $145,230       $91,577     $13,873  $37,786    $1,995 
Depreciation and                                                              
    amortization        $  3,685       $ 2,382     $   597  $   706    $   -- 
Capital expenditures    $ 29,382       $12,400     $ 4,225  $12,757    $   -- 


YEAR ENDED DECEMBER 31, 1997:                                 

                                                                [Download Table]

                      CONSOLIDATED  UNITED STATES   CHILE   AUSTRALIA
                      ------------  -------------  -------  ---------
                                                                     
Revenue                  $47,437       $39,375     $ 8,062    $   -- 
Operating income         $ 7,319       $ 5,774     $ 1,545    $   -- 
Identifiable assets      $96,800       $73,685     $21,261    $1,854 
Depreciation and                                                     
    amortization         $ 2,261       $ 1,994     $   267    $   -- 
Capital expenditures     $ 9,443       $ 7,493     $ 1,950    $   -- 


         Identifiable assets consist of $96.8 million from continuing operations
      and $4.0 million from discontinued operations (not included in above
amounts).                                                     

21.      SUBSEQUENT EVENTS:                                                     

    In January 1999, the Company through a newly formed subsidiary E&N
        Railway Company LTD. acquired the 290 km Esquimalt and Nanaimo Railway
    ("E&N") from the Canadian Pacific Railway ("CPR"). The transaction
       includes the sale of 109-km section of rail line between Port Alberni
         and Nanaimo. In addition, CPR is leasing to the Company the Victoria to
       Nanaimo and Parksville to Courtenay segments, about 181 km, to enable
  E&N to continue to provide freight and passenger rail service to
Vancouver Island.                                             

 E&N provides freight and passenger service between Victoria and
     Courtenay, and freight service between Port Alberni and Nanaimo, on
British Columbia's Vancouver Island.                          

       In February 1999, Freight Victoria, a consortium in which the Company
         is a majority partner, was selected as the successful bidder for V/Line
  Freight Corporation ("V/Line Freight"). V/Line Freight, the rail
         freight business of Australia's Victorian government, provides services
       across southeastern Australia over 2,793 miles of track. This sale by
         the Victorian government is a continuation of Australia's privatization
   process of its rail system. The Company has made a non-refundable
         deposit of approximately $19 million for V/Line Freight and anticipates
closing on the transaction during the second quarter of 1999. 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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21.      SUBSEQUENT EVENTS, continued                                           

In March 1999, the Company completed a private offering of    
         approximately $12.5 million of restricted Common Stock. Pursuant to the
    offering, the Company sold approximately 1.4 million shares of its
       common stock at a price of $8.8125 per share and issued approximately
       210,000 warrants to purchase an equivalent number of shares of common
        stock at an exercise price of $10.125 per share within one year of the
       transaction's closing date. First London acted as placement agent and
        received approximately $0.4 million in fees and cost reimbursement and
    one-year warrants to purchase 141,653 shares of Common Stock at an
exercise price of $10.125.                                    

22.      UNAUDITED QUARTERLY FINANCIAL DATA:                                    

      Quarterly financial data for 1998 in as follows (in thousands except
per share amounts)                                            

                                                                [Download Table]

                                    FIRST     SECOND     THIRD    FOURTH  
                                   QUARTER   QUARTER    QUARTER   QUARTER 
                                   -------    -------   -------   ------- 
                                                                          
Operating revenue                   $14,436    $20,192   $20,974   $21,542
Operating income                    $ 2,018    $ 3,258   $ 3,656   $ 3,710
Income from                                                               
  continuing operations             $   668    $ 1,398   $ 1,426   $   974
Basic net income from                                                     
  continuing operations per share   $  0.07    $  0.15   $  0.15   $  0.10
Diluted net income from                                                   
  continuing operations per share   $  0.07    $  0.14   $  0.14   $  0.09


      Quarterly financial data for 1997 in as follows (in thousands except
per share amounts)                                            

                                                                [Download Table]

                                    FIRST   SECOND    THIRD   FOURTH 
                                   QUARTER  QUARTER  QUARTER  QUARTER
                                   ------   -------  -------  -------
                                                                     
Operating revenue                  $8,734   $11,596  $13,134  $13,973
Operating income                   $  992   $ 1,451  $ 1,957  $ 2,920
Net income from                                                      
  continuing operations            $  113   $   364  $   937  $ 1,220
Basic net income from                                                
  continuing operations per share  $ 0.02   $  0.04  $  0.11  $  0.14
Diluted net income from                                              
  continuing operations per share  $ 0.01   $  0.04  $  0.10  $  0.13


F-33

Dates Referenced Herein   and   Documents Incorporated By Reference

				Referenced-On Page
This 10-K Filing		Date		First		Last			Other Filings
		3/31/92		4
		10/17/94		44
		11/11/94		43
		12/31/94		3		26
		1/1/95		71		73
		1/23/95		75
		2/10/95		17
		8/31/95		67
		9/29/95		65
		9/30/95		44
		10/11/95		43
		11/12/95		44
		12/31/95		26		44
		1/1/96		50		67
		3/1/96		72
		4/12/96		44
		6/30/96		20					10QSB
		7/1/96		27
		8/5/96		43
		9/6/96		27		44			8-K
		9/12/96		44					8-K
		9/20/96		43
		9/30/96		44					10-C, 10QSB, 8-K
		10/1/96		27		58
		10/11/96		44		58			8-K, 8-K/A
		10/17/96		44					10-C, 8-K
		10/25/96		44					8-K
		11/18/96		27
		12/28/96		27
		12/31/96		8		76			10KSB, 10KSB/A
		2/19/97		31		58			8-K, S-8
		3/1/97		32		72
		3/6/97		24					8-K
		3/20/97		17		35
		3/31/97		44					10-Q, 10-Q/A, 10KSB, NT 10-Q
		5/3/97		38
		6/2/97		44					DEF 14A
		9/8/97		27
		9/30/97		27		61			10-Q
		10/31/97		27		59
		12/31/97		4		77			10-K
		1/1/98		33		72
		1/6/98		43		44
		3/31/98		44		57			10-K, 10-Q
		4/1/98		35		36
		5/14/98		44					10-Q
		6/16/98		38		43
		6/30/98		62					10-Q
		7/1/98		72
		8/24/98		54
		9/1/98		27		58
		9/30/98		38					10-Q
		11/30/98		36
		12/1/98		17		57
		12/15/98		40		56
For The Period Ended		12/31/98		1		77
		1/28/99		65
		3/1/99		39
		3/12/99		47
		3/24/99		1
		3/25/99		1		24
		3/26/99		45
Filed On / Filed As Of		3/31/99							10-Q, 10-Q/A
		4/30/99		42					8-K, 8-K/A, DEF 14A
		6/24/99		1					DEF 14A
		9/30/99		18					10-Q
		9/13/00		64
		6/30/03		62					10-Q
		12/31/03		25					10-K, 5
		7/1/04		64					4, 8-K
		11/11/04		72
		10/31/07		59
		6/30/08		72
		12/1/08		64
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