Railamerica Inc/DE · 10-K · For 12/31/97

Filed On 3/31/98   ·   SEC File 0-20618   ·   Accession Number 950144-98-3765

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

 1: 10-K        Railamerica, Inc. Form 10-K 12/31/97                  76    381K 
 2: EX-27       Financial Data Schedule                                1      6K 

10-K   —   Railamerica, Inc. Form 10-K 12/31/97
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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, 1997      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

       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, 1998 computed by reference to the average bid 
and asked prices of registrant's common stock reported on NASDAQ on such date   
was $43,657,000.                                                                

      The number of shares outstanding of registrant's Common Stock, $.001
par value per share, as of March 28, 1998 was 9,337,630.                        

DOCUMENTS INCORPORATED BY REFERENCE                                             

         The registrant's proxy statement for the Annual Meeting of Shareholders
to be held June 18, 1998 (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                                           25 
Item 7.    Management's Discussion and Analysis                              26 
Item 8.    Financial Statements                                              38 
Item 9.    Changes in and Disagreements with Accountants on Accounting and      
             Financial Disclosure                                            38 

PART III                                                                        

Item 10.  Directors and Executive Officers of the Registrant                 39 
Item 11.  Executive Compensation                                             39 
Item 12.  Security Ownership of Certain Beneficial Owners and Management     39 
Item 13.  Certain Relationships and Related Transactions                     39 

PART IV                                                                         

Item 14.  Exhibits and Reports on Form 8-K                                   40 


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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. ("Kalyn"). 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            
acquisitions of short line and regional railroads. The Company has grown rapidly
through acquisition since December 31, 1994, at which time it operated only 300 
miles of track. At December 31, 1997, the Company operated approximately 2,350  
miles of rail line, including approximately 950 miles in the United States and  
over 1,400 miles in Chile.                                                      

        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 February 1997, of a     
majority interest in the stock of Empresa de Transporte Ferrovario S.A.         
("Ferronor"), a railroad serving northern Chile with approximately 1,400 miles  
of rail line, (ii) the purchase, in September 1997, of a 60 mile rail line in   
and around Hinckley, Minnesota, and (iii) the purchase, in October 1997, of a   
minority interest in the Great Southern Railway Limited, a passenger rail       
service based in Southern Australia.                                            

      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               

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I railroads as a result of its ability to pursue and consummate acquisitions    
swiftly and increase traffic on lines that interchange with those of the seller.

The Company's business presently is conducted through sixteen 
wholly-owned consolidated subsidiaries - Huron and Eastern Railway Company, Inc.
("HESR"), Saginaw Valley Railway Company, Inc. ("SGVY"), Kalyn, 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, Steel City Carriers, Inc. ("Steel  
City Carriers"), St. Croix Valley Railroad Company ("SCXY") and RailAmerica     
Australia Pty. Limited ("RAA"). 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 OPERATIONS                                                             

INDUSTRY OVERVIEW                                                               

         The U.S. railroad industry is dominated by ten Class I railroads, which
operated approximately 127,000 miles of track at December 31, 1996 (the most    
recent year for which data is available) and represented approximately $32      
billion, or approximately 91.4%, of total rail industry operating revenue of    
$34.9 billion in 1996. In addition to large railroad operators, at year end 1996
there were more than 500 short line and regional railroads, which generated     
approximately $3.0 billion of operating revenue in 1996 and operated            
approximately 47,000 miles of track at December 31, 1996. 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 27.2% of total    
railroad industry track miles in 1996 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           

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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.                                          

-        FOCUSED SALES AND MARKETING. RailAmerica continues to increase traffic 
        from existing, former and new customers in each of its markets through
        the aggressive marketing of its enhanced customer service, negotiating
       rates where prudent and implementing 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                                             

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sees this ability to provide increased revenue to Class I carriers as an        
advantage in bidding for properties.                                            

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/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 of 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, 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 approximately 99% of the Company's total freight    
revenues in 1997.                                                               

      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.                                                              

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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.              

    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 1997, the Company served more than 130 customers 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 1997, the         
Company's 10 largest domestic customers accounted for approximately 42% of      
domestic transportation revenue. There is no single customer which represented  
more than 10% of the Company's domestic transportation revenue.                 

     Certain customers have recently made or announced capital expansion
plans at facilities                                                             

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served by the Company's railroads, including Triangle Pacific Corp. on the SCTR,
Strata Corp. and Polaris Industries on the MNR and Birdsong Peanut on the WTLR. 
The Company believes it is well positioned to realize an increase in freight    
revenues from these plant expansions, although there can be no assurance that   
these expansions or the Company's marketing efforts will result in increased    
freight revenues.                                                               

COMMODITIES                                                                     

    The Company provides it 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, 1997, 1996 and 1995.              

                                                        [Enlarge/Download Table]

                    CARLOADS CARRIED BY COMMODITY GROUP                              
                      YEAR ENDED             YEAR ENDED              YEAR ENDED      
                  DECEMBER 31, 1995       DECEMBER 31, 1996       DECEMBER 31, 1997  
                ---------------------   ---------------------  ----------------------
COMMODITY       CARLOADS   % OF TOTAL   CARLOADS   % OF TOTAL  CARLOADS    % OF TOTAL
--------------  -------    ----------   --------   ----------  --------    ----------
                                                                                     
Iron Ore              0           0%           0           0%    19,493          28% 
Agriculture       8,985          49%       9,624          37%    13,297          19% 
Wood Products     3,243          18%       5,021          19%     9,797          14% 
Food Products     2,093          11%       1,762           7%     5,425           8% 
Ballast/Stone       159           1%         437           2%     3,957           6% 
Fertilizer        1,339           7%       2,511          10%     3,900           6% 
Coal                  0           0%         832           3%     3,877           6% 
Copper                0           0%           0           0%     2,785           4% 
Steel             1,072           6%       1,584           6%     1,732           3% 
Sodium Sulfate        0           0%       1,237           5%     1,290           2% 
Auto Parts          794           4%         904           3%       755           1% 
Plastics            342           2%         551           2%       574           1% 
Other               478           3%       1,408           5%     2,258           3% 
                -------      ------      -------      ------    -------      ------  
        TOTAL    18,505         100%      25,871         100%    69,140         100% 
                =======      ======      =======      ======    =======      ======  


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EMPLOYEES                                                                       

     As of December 31, 1997, the Company had approximately 97 full-time
rail employees in North America. None of the Company's employees are subject to 
a collective bargaining agreement. 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.                                         

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.                                                               

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.                      

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ACQUISITION OF FERRONOR                                                         

     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 Andres Pirazzoli y Cia, Ltda. ("APCO"), a 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.                    

       Ferronor currently operates approximately 30 locomotives and 700 rail
cars. Ferronor employed approximately 350 employees as of the date of           
acquisition. As contemplated by management, significant reductions in the work  
force have been effectuated and the current workforce is approximately 170      
employees.                                                                      

ACQUISITION OF ST. CROIX VALLEY RAILROAD                                        

        In September 1997, the Company acquired from Burlington Northern Santa
Fe Railway Company ("BNSF") a rail line in and around Hinckley, Minnesota       
through its newly-formed subsidiary St. Croix Valley Railroad Company. The 60   
mile rail line (including 16 miles of trackage rights) interchanges with BNSF at
Hinckley, Minnesota. Rail traffic handled on this line consists of grain, wheat 
and flour, as well as intermodal traffic.                                       

ACQUISITION OF MINORITY INTEREST IN AUSTRALIAN PASSENGER RAIL SERVICE           

         In October 1997, the Company was a member of the Great Southern Railway
Passenger Ltd. Consortium, which was awarded the passenger concession of        
Australian National. The Company owns an approximately 11% interest in the      
Consortium.                                                                     

     The luxury rail passenger service operates three premier interstate
lines -- the INDIAN PACIFIC, which runs a 2,700 mile transcontinental service   
from Sydney to Perth, THE GHAN, which runs 1,000 miles between Adelaide and     
Alice Springs, and THE OVERLAND, which runs overnight service between Melbourne 
and Adelaide.                                                                   

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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, 1997:             

                                                        [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         

South Central Tennessee     Feb. 1994       49    Leased     Tennessee     Wood products, frozen         
Railroad                                     3    Trackage                 potatoes, newsprint           
                                                  rights                                                 

Delaware Valley Railway     July 1994       45    Easement   Pennsylvania  Agricultural products, iron   
                                            10    Lease      Delaware      and steel 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                
                                                  rights                                                 

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                                                  

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                                   


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TRAILER MANUFACTURING OPERATIONS                                                

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

      Kalyn'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.                                                                  

PRODUCTS                                                                        

   The majority of Kalyn's sales are based on existing Kalyn trailer
designs which are modified with standard options. However, approximately 20% of 
trailers sold must be customized to satisfy customers' specifications. Kalyn'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.                       

         Kalyn manufactures an extensive variety of light, medium and heavy duty
truck trailers. The 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. Kalyn'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 Kalyn's leading trailer by
sales in this product line.                                   

-    OTHER PRODUCTS. Kalyn manufactures a sliding-axle trailer which can
    be used to transport heavy equipment such as forklifts and similar
equipment. Kalyn also manufactures a                          

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     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, Kalyn 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.                                                                        

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

MANUFACTURING AND ENGINEERING                                                   

Kalyn considers the engineering expertise, combined with the  
manufacturing experience of its work force to be key competitive advantages.    
Kalyn utilizes this experience in its marketing by including manufacturing      
personnel in initial meetings with potential Kalyn 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 Kalyn'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. Kalyn'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.                                   

        Kalyn 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 Kalyn trailer     
design. Kalyn contracts out any necessary machining. Kalyn exercises strict     
quality control by screening suppliers and conducting inspections throughout the
production process.                                                             

         As a consequence of significant increases in sales order volume, during
1995 Kalyn expanded its manufacturing facility to partially address this        
increased demand by building additional manufacturing space upon land that Kalyn
owns. The expansion also accommodated increased production resulting from the   
1995 TACOM contract. During 1996, Kalyn also built a new paint booth building to
accommodate the additional volume of trailer orders. Kalyn's plant is currently 
operating one shift, although Kalyn believes manufacturing capacity can be      
increased by adding a partial second shift.                                     

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

    Kalyn'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. Kalyn'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.                                 

MARKETING AND DISTRIBUTION                                                      

    Kalyn'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 170 independent dealers throughout North America and through a    
direct sales force. Traditionally, Kalyn's dealers have not inventoried trailers
due to their highly customized nature. During 1995, however, certain dealers    
began maintaining inventories of Kalyn trailers.                                

        Historically, up to 50% of all of Kalyn's commercial sales are made to
dealers, with the balance representing direct retail sales by its sales force.  
Kalyn'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, Kalyn 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, Kalyn  
has begun shifting resources from advertising to trade shows, which management  
believes is a more cost effective method of maintaining Kalyn's name and        
reputation and developing sales leads. Kalyn currently participates in          
approximately five trade shows per year.                                        

     In certain circumstances, Kalyn 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, Kalyn 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 of 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.                            

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CUSTOMERS                                                                       

         Kalyn 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 Kalyn'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 Kalyn's revenue for 1996.                  

    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 consolidate purchases for various branches of the 
military. Kalyn has been awarded "Blue Ribbon Contractor" status with TACOM. As 
a result of this status, Kalyn receives a 10% preference on bids for certain    
contracts. Sales to governmental agencies represented 37%, 20% and 29% of the   
Company's manufacturing revenue for the years ended December 31, 1997, 1996 and 
1995. A substantial decrease in orders by the GSA and/or TACOM could have a     
material adverse effect on Kalyn's business and results of operations.          

        In October 1997, Kalyn received an order from the United States Marine
Corp., valued at approximately $12 million, on an existing contract. The        
contract calls for Kalyn to produce 256 of the M870A2 semi-trailers, a          
mechanical folding goose neck trailer, to be used by the Marine Corps for the   
transportation of heavy equipment                                               

       BACKLOG. As of December 31, 1997, the Company's backlog of orders was
approximately $19.7 million, compared to $8.6 million as of December 31, 1996.  
Kalyn includes in its backlog only those orders for trailers for which a        
confirmed customer order has been received. Kalyn 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. Kalyn competes with a number of other trailer            
manufacturers, some of which have greater financial resources and higher sales  
than Kalyn. Furthermore, Kalyn's products compete with alternative forms of     
shipping, such as intermodal containers. There can be no assurance that Kalyn   
will be able to continue to compete effectively with existing or potential      
competitors or alternative forms of shipping containers.                        

EMPLOYEES                                                                       

   As of December 31, 1997, Kalyn had 168 full-time employees in the
trailer manufacturing operation and approximately 20 part-time employees. None  
of the Company's employees are subject to a collective bargaining agreement.    

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ACQUISITION OF CANADIAN TRAILER MANUFACTURER                                    

 In January 1998, Kalyn acquired all of the outstanding stock of
Canadian trailer manufacturer Fabrex, Inc. and its affiliate Services Remorques 
Plus, Inc. (collectively "Fabrex"). Fabrex is a manufacturer of lightweight     
aluminum specialty bulk-handling truck trailers used in the solid waste,        
agricultural and construction industries. Fabrex, which was founded in 1985,    
employs 50 people in its 45,000 square foot manufacturing facility located in   
Trois Rivieres, Quebec.                                                         

MOTOR CARRIER OPERATIONS (DISCONTINUED 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. Steel City operates a fleet of approximately 120 tractors and  
trailers, and currently serves more than 50 customers in the steel, paper and   
lumber industries by transporting a broad variety of products within Canada and 
between Canada and the United States, particularly Michigan, Ohio, Indiana, New 
York, and Wisconsin. Steel City Carriers currently has 52 full-time employees,  
as well as 25 independent contract drivers who own and operate their own        
vehicles.                                                                       

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. Thus, 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 operations. The Company's Board of Directors approved the
plan of discontinuance on March 20, 1997. Management is committed to selling    
either substantially all of the assets or the stock of the Company's motor      
carrier subsidiaries during 1998. If such transaction is not consummated during 
the second quarter of 1998 the results of operations will be reflected in       
continuing operations beginning in that quarter and until a sale is completed.  

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                                                   

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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 imposed by labor agencies. Certain types of transactions  
involving mid-size "regional railroads" (annual revenues between $20 million and
$250 million) are still subject to 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
authorized through September 30, 1998. It is unclear whether the STB will be    
reauthorized in its present form, whether its functions will be expanded to     
include regulation of ocean shipping presently under the jurisdiction of the    
Federal Maritime Commission and to prescribe "open access" for captive rail     
shippers such as utility companies, or whether the STB will be disbanded and its
functions split between the U.S. Departments of Transportation and Justice.     

 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. The FRA recently abolished regulations allowing it to impose    
user fees on rail carriers subject to its jurisdiction.                         

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      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.                                       

         TRUCKING. Steel City Carriers is a for-hire motor carrier that operates
under licenses previously granted by the ICC, authorizing it to engage in the   
interstate transportation of goods. It is regulated by the STB, the Federal     
Highway Administration ("FHWA") of the U.S. Department of Transportation        
("DOT"), and various state agencies in the United States and provinces in       
Canada. These regulatory authorities have powers, generally governing highway   
safety, vehicle size and weight and handling hazardous cargo, periodic financial
reporting, driver licensing, hours of service and to a limited extent, rates and
charges. The ICC's jurisdiction over motor carriers was transferred to the DOT  
(carrier registration and insurance) and to the STB.                            

 Motor carrier operations are also subject to safety regulations
governing interstate operations prescribed by the DOT. Such matters as gross    
weight and dimension of equipment are also subject to federal and state         
regulations. The failure of the Company to comply with the rules and regulations
of the STB, DOT, FHWA or state agencies could result in substantial fines or    
revocation of the Company's operating licenses. The trucking industry is also   
subject to regulatory and legislative changes which can affect the economics of 
the industry by requiring changes in operating practices or influencing the     
demand for, and the cost of providing, services to shippers. Previously, the    
Motor Carrier Act of 1980 and the Trucking Industry Reform Act of 1994          
materially reduced federal regulation of interstate motor freight carriers.     

EMPLOYEES; LABOR CONSIDERATIONS                                                 

      As of December 31, 1997, the Company had approximately 340 full-time
employees in North America and approximately 25 independent contract drivers.   
None of the Company's employees are members of a union. The Company's railroad  
operations are somewhat seasonal. Most agricultural shipments 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, 1997 the Company had 97 full-time railroad     
employees, 168 full-time employees at Kalyn, 52 full-time employees in the motor
carrier operations and 23 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 170 employees.                                       

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ITEM 2. DESCRIPTION OF PROPERTY                                                 

MICHIGAN PROPERTIES                                                             

        The majority of the Company's 185 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 $40 million Revolving Loan Agreement with the National Bank of
Canada and Comerica (the "Revolver") (See Note 8 to Notes to Consolidated       
Financial Statements).                                                          

       The Company built its Midwest 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 also maintains an operations center in a       
building it owns in Bad Axe, Michigan, which includes equipment repair and track
maintenance The Company owns a locomotive shop which was constructed in 1987, a 
maintenance-of-way equipment repair building completed in 1989 and a warehouse  
facility now used as a maintenance headquarters.                                

TENNESSEE 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 (See Note 8 to Notes to Consolidated     
Financial Statements).                                                          

DELAWARE AND PENNSYLVANIA PROPERTIES                                            

      DVRC operates approximately 55 miles of rail line, of which 45 miles
are located in southeastern Pennsylvania, and 10 miles of contiguous line extend
into the State of Delaware, where the Company interchanges with CSX             
Transportation at Elsmere, Delaware. The Pennsylvania rail line was 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                                          

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through 1997 which require local matching. In 1996, DVRC entered into a purchase
agreement to purchase a segment of the rail line owned by the Commonwealth of   
Pennsylvania subject to a satisfactory appraised value.                         

MINNESOTA 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 8 to Notes to Consolidated       
Financial Statements).                                                          

   OTVR owns 72 miles of rail line, in Western Minnesota from Fergus
Falls, MN 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 8  
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. WTLR sold approximately 9 miles of  
rail line during 1996. The total land owned by WTLR is approximately 1,500      
acres. In addition to the rail line and land, WTLR owns five buildings. These   
buildings consist of an office building in Lubbock used as the railroad general 
offices, a one story storefront office building in Brownfield, Texas, as well as
a maintenance building and a storage shed in Brownfield and a polebarn in       
Lubbock. The Company's Texas railroad properties serve as collateral for the    
Revolver (See Note 8 to Notes to Consolidated Financial Statements).            

WASHINGTON RAILROAD PROPERTIES                                                  

   CCRR owns 131 miles of rail line, between Oroville and Wenatchee,
Washington. CCRR                                                                

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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 two buildings. These buildings consist of an office building and
a storage building in Omak, Washington. The Company's Washington railroad       
properties serve as collateral for the Revolver (See Note 8 to Notes to         
Consolidated Financial Statements).                                             

CHILEAN PROPERTY                                                                

     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                                                  

    Kalyn'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 8 
to Notes to Consolidated Financial Statements).                                 

ONTARIO 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's Ontario      
properties serve as collateral for the Revolver (See Note 8 to Notes to         
Consolidated Financial Statements).                                             

ROLLING STOCK                                                                   

        As of December 31, 1997, the Company's domestic railroad rolling stock
consisted of 33 locomotives and 535 freight cars, some of which were owned and  
some of which are leased from                                                   

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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 140 tank cars that it has   
leased to various shippers. The tank cars serve as collateral for term financing
agreements. All 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, 1997:                                                  

                                  FREIGHT CARS
                                  ------------
 TYPE                            OWNED        LEASED       TOTAL
 ----                            -----        ------       -----
Covered hopper cars               --            223        223
Tank cars                        140             --        140
Box cars                          --             24         24
Wood chip cars                    --             78         78
Center-beam flat cars             --             60         60
Flat cars                         10             --         10
                                ----          -----       ----
                                 150            385        535
                                ====          =====       ====

HORSEPOWER/UNIT                           LOCOMOTIVES         
---------------                           -----------         

over 2000                                       2             
1500 to 2000                                   26             
Under 1500                                      5             
                                ----
                                  33
                                ====

        As of December 31, 1997 Ferronor operated approximately 30 locomotives
and 700 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 6,600 square feet and is leased  
through January 2001. The lease calls for monthly rental payments of            
approximately $11,000 with annual increases. The Company signed an amendment to 
the lease in the fourth quarter of 1997 which calls for the rental of           
approximately 650 additional square feet at such facility. The increased space  
was available for occupancy in January 1998. 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             

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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 1997.                                                         

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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 1996 and 1997. All   
such quotations reflect inter-dealer prices, without retail mark-up, mark-down  
or commissions and may not reflect actual transactions.                         

                                                                [Download Table]


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

1996                                                               

First Quarter                      $    4 1/16        $    3 1/8   
                                   ------------       -----------  
Second Quarter                          4 3/16             3 3/16  
                                   ------------       -----------  
Third Quarter                           4 3/8              3 3/8   
                                   ------------       -----------  
Fourth Quarter                          5 3/4              4 1/8   
                                   ------------       -----------  

1997                              High Sales Price  Low Sales Price
                                  ----------------  ---------------

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   
                                   ------------       -----------  

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

First Quarter (through March 27)   $    7 11/16       $    6 1/16  
                                   ------------       -----------  


    As of March 27, 1998, there were 314 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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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, 1995, 1996 and 1997 and the balance sheet data at December 31, 1996
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, 1993 and 1994 and the   
balance sheet data as of December 31, 1993, 1994 and 1995 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,                     
                                 -----------------------------------------------------------------
                                   1993           1994          1995          1996          1997  
                                 --------       --------      --------      --------      --------
                                                                                                  
INCOME STATEMENT                                                                                  
  Operating revenue              $  3,507       $ 14,724      $ 25,078      $ 25,658      $ 47,437
  Operating income                    156          2,229         3,188         3,873         7,319
  Income (loss) from                                                                              
    continuing operations             (99)           920         1,126         1,080         2,634
  Basic earnings per                                                                              
    common share from                                                                             
    continuing operations        $  (0.04)      $   0.29      $   0.10      $   0.22      $   0.32
Diluted earnings per common                                                                       
   share from continuing                                                                          
   operations                    $  (0.04)      $   0.27      $   0.10      $   0.21      $   0.30
Weighted average                                                                                  
    common shares                   2,709          4,608         4,504         4,966         8,304
BALANCE SHEET DATA                                                                                
 Total assets                    $ 11,659       $ 24,876      $ 40,064      $ 71,565      $100,835
 Long-term debt, including                                                                        
     current maturities             5,421         10,407        18,151        40,154        47,798
 Subordinated debt,                                                                               
   including current maturities        --          2,062         5,569         3,690         3,478
 Redeemable convertible                                                                           
    preferred stock                    --             --            --            --         1,017
  Stockholders' equity              4,079          6,408         9,149        15,992        26,814
OPERATING DATA                                                                                    
  Freight Carloads                 10,375         15,614        18,505        25,871        69,140
  Track Mileage                       244            299           450           930         1,330
  Trailer units sold                  559            887           875           547           730
  Number of full time                                                                             
     employees                         33            220           265           275           550


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ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS                                   

GENERAL                                                                         

        The Company's principal operations include the operation of short line
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   
production facility, located in Texas, manufactures a broad range of specialty  
truck trailers which are marketed to a customer base from the commercial and    
government sectors.                                                             

 The Company's historical growth has resulted primarily from the
execution of its acquisition strategy and internal growth in its trailer        
manufacturing business. In accordance with the acquisition strategy, in February
1997, the Company purchased a majority interest in the stock of Ferronor, a     
railroad serving northern Chile with approximately 1,400 miles of rail line.    
Additionally, the Company acquired a 60 mile rail line in and around Hinckley,  
Minnesota. The Company began operation of this rail line on September 8, 1997,  
through its wholly-owned subsidiary SCXY. The number of miles of track operated 
by RailAmerica has grown from 299 miles at December 31, 1994 to approximately   
950 miles in the United States and 2,350 miles worldwide as of December 31,     
1997.                                                                           

       The Company's operating revenues increased by $21.8 million, or 84.9%
from $25.7 million for the year ended December 31, 1996 to $47.4 million for the
year ended December 31, 1997. Operating expenses increased by $18.3 million, or 
84% from $21.8 million for the year ended December 31, 1996 to $40.1 million for
the year ended December 31, 1997. Other expenses, net increased by $1.6 million,
or 78.3% from $2.1 million for the year ended December 31, 1996 to $3.7 million 
for the year ended December 31, 1997. Income from continuing operations         
increased by $1.6 million, or 143.8% from $1.1 million for the year ended       
December 31, 1996 to $2.6 million for the year ended December 3, 1997. Increases
in revenue, operating expenses, other expenses and income were due primarily to 
the acquisitions of additional rail lines and related operations in 1996 and    
1997 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 RAILROAD OPERATIONS                                                  

   The discussion of results of operations that follows reflects the
consolidated results of the Company's railroad operations for the years ended   
December 31, 1997, 1996 and 1995. The results of operations include the         
operations of Dakota Rail from September 1, 1995, WTLR and Plainview Terminal   
Company ("PTC") from November 1, 1995, 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                                                            

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October 31, 1997, MNR from December 28, 1996 and SCXY from September 8, 1997. As
a result, the results of operations for the year ended December 31, 1997 are not
comparable to the prior year periods in certain material respects. The          
discussion below does not reference "same store" results due to the recent      
nature of the above acquisitions, which represent a significant portion of the  
Company's railroad operations. The Company anticipates expanding the discussion 
in the future to encompass same store results once it has owned the above       
entities for an appropriate period of time.                                     

        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,     
                                         ---------------------------------
                                           1997         1996         1995 
                                         ---------------------------------
                                                                          
Operating Revenue:                                                        
    Transportation revenue               $14,737      $ 9,783      $ 6,768
    Other revenue                          1,277        1,921          436
                                         -------      -------      -------
Total operating revenue                   16,014       11,704        7,204
                                         -------      -------      -------
Operating Expenses:                                                       
    Maintenance of way                     2,231        1,310          787
    Maintenance of equipment                 678          625          470
    Transportation                         3,799        2,075        1,548
    Equipment rental                         599          388          229
    Selling, general and administrative    2,457        1,381          801
    Depreciation and amortization          1,337          961          798
                                         -------      -------      -------
Total operating expenses                  11,101        6,740        4,633
                                         -------      -------      -------
Operating income                           4,913        4,964        2,571
    Interest and other expense             2,842        1,308          457
                                         -------      -------      -------
Income before income taxes               $ 2,071      $ 3,656      $ 2,114
                                         =======      =======      =======


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

OPERATING REVENUES.                                                             

     Transportation revenues increased $5.0 million, or 50.6%, from $9.8
million for the year ended December 31, 1996 to $14.7 million for the year ended
December 31, 1997. CCRR, which was acquired in September 1996, had              
transportation revenue of approximately $0.7 million for the four months ended  
December 31, 1996 and approximately $2.6 million for 1997, an increase of $1.9  
million. MNR, which was acquired in December 1996, had transportation revenue of
approximately $2.2 million for year ended December 31, 1997. OTVR, which was    
acquired in September 1996, had transportation revenue of approximately $0.6    
million for the four month period ended December 31, 1996 compared to $1.8      
million for the year ended December 31, 1997, 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 Huron and Eastern Railway Company    
("HESR") resulting from decreased agricultural shipments in the early 1997      
compared to early 1996. Additionally, transportation revenue from South Central 
Tennessee Railroad ("SCTR") decreased approximately $0.4 million due to a       
decrease in demurrage revenue charged to a shipper. The domestic transportation 
revenue per carload decreased from $378 to $308 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 1996, 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. Ferronor handled 22,933 carloads during the period from February 20  
to December 31, 1997.                                                           

        Other revenues decreased by approximately $0.6 million, or 33.5%, from
$1.9 million for the year ended December 31, 1996 to $1.3 million for the year  
ended December 31, 1997. Other revenues for 1997 and 1996 consist 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 65.7%, from $6.7
million for the year ended December 31, 1996 to $11.1 million for the year ended
December 31, 1997. Operating expenses, as a percentage of transportation        
revenue, were 68.9% and 75.3% for 1996 and 1997, 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.                                                   

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      Maintenance of way expenses increased approximately $0.9 million, or
70.3%, from $1.3 million for the year ended December 31, 1996 to $2.2 million   
for the year ended December 31, 1997 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 $57,000 for the four months ended December 31, 1996   
compared to maintenance of way expenses of approximately $0.2 million for 1997, 
an increase of $0.2 million. Gettysburg Railway had maintenance of way expenses 
of approximately $10,000 for the four months ended December 31, 1996 compared to
$0.1 million for the year ended December 31, 1997. 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%, from $0.63 million for the year ended December 31, 1996 to $0.68       
million for the year ended December 31, 1997 primarily due to certain           
acquisitions which occurred in the second half of 1996.                         

        Transportation expense increased approximately $1.7 million, or 83.1%,
from $2.1 million for the year ended December 31, 1996 to $3.8 million for the  
year ended December 31, 1997 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 $0.1 million for the    
four months ended December 31, 1996 compared to $0.5 million for the year ended 
December 31, 1997 an increase of $0.3 million. OTVR had transportation expenses 
of approximately $59,000 in the three months ended December 31, 1996 compared to
$0.3 million for the year ended December 31, 1997 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 54.5%, from
approximately $0.4 million for the year ended December 31, 1996 to $0.6 million 
for the year ended December 31, 1997.                                           

      Selling, general and administrative expenses increased approximately
$1.1 million, or 77.9%, from $1.4 million for the year ended December 31, 1996  
to $2.5 million for the year ended December 31, 1997 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 $0.1 million for the four  
months ended December 31, 1996 compared to $0.4 million for the year ended      
December 31, 1997 an increase of $0.3 million. OTVR had transportation expenses 
of approximately $44,000 in the three months ended December 31, 1996 compared to
$0.2 million for the year ended December 31, 1997 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
39.0%, from $1.0 million for the year ended December 31, 1996 to $1.3 million   
for the year ended December 31, 1997                                            

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primarily due to certain acquisitions in the second half of 1996.               

  Other Income (Expense). Interest and other expenses increased by
approximately $1.5 million, or 115.4%, from $1.3 million for the year ended     
December 31, 1996 to $2.8 million for the year ended December 31, 1997. 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.                                                          

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 included in the consolidated operations of the 
Company effective February 20, 1997. Ferronor had operating revenue of $8.1     
million, operating expenses (including depreciation) of $6.5 million and        
operating income of $1.6 million for the period from February 20, 1997 to       
December 31, 1997. Ferronor had other income of $0.6 million and interest       
expense of $0.3 million. The minority interest in income of Ferronor recognized 
by the Company was $0.9 million.                                                

COMPARISON OF RAILROAD OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 1996  
AND 1995                                                                        

OPERATING REVENUES.                                                             

        Transportation revenues increased by $3.0 million, or 44.6%, from $6.8
million for the year ended December 31, 1995 to $9.8 million primarily due to   
the acquisitions which occurred during 1996 and the second half of 1995. WTLR,  
which was acquired November 1, 1995, had revenue of approximately $255,000 for  
the two months ended December 31, 1995 and approximately $1.8 million for 1996, 
an increase of $1.5 million. Dakota Rail, which was acquired September 1, 1995, 
had revenue of approximately $230,000 for the four months ended December 31,    
1995 and approximately $590,000 for 1996, an increase of $360,000. CCRR, which  
was acquired in September 1996, had revenue of approximately $750,000 in 1996.  
OTVR, which was acquired October 1, 1996, had revenue of approximately $560,000 
in 1996. In addition to the foregoing acquisitions, SCTR's revenue increased by 
approximately $400,000 due to increased carloads and demurrage earned from      
certain shippers offset by a decrease in HESR's revenue of approximately        
$796,000 due to a decrease in carloads in the second half of 1996 compared to   
1995. The transportation revenue per carload increased from $366 in 1995 to $378
in 1996 due primarily to increased rates and divisions of revenue with          
connecting carriers. Carloads handled by the Company's domestic railroads       
totaled 25,871 for the year ended December 31, 1996, an increase of 7,366, or   
39.8%, compared to 18,505 for the year ended December 31, 1995. The increase was
primarily the result of the Company's acquisitions of WTLR, whose carloads      
increased 3,630 from the two months ended December 31, 1995 to the year ended   
December 31, 1996, Dakota Rail, whose carloads increased 550 from the four      
months ended December 31, 1995 to the year ended December 31, 1996, CCRR, which 
handled 1,892 carloads in 1996, OTVR, which handled 1,730 carloads in           

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1996, and ETC, which handled 715 carloads in 1996. These increases were         
partially offset by a decrease in HESR's carloads of 1,408 resulting from a poor
grain harvest in Michigan in late 1996 compared to 1995.                        

     Other revenues were $0.4 million for the year December 31, 1995 and
$1.9 million for the year ended December 31, 1996. Other revenues for 1996      
included gains on sales of certain operating assets, rental income and other    
miscellaneous income. The increase was primarily due to the gain of (i)         
approximately $582,000 from the sale of 22 miles of track and a rail car repair 
shop in Indiana, (ii) approximately $579,000 from the sale of 30 miles of track 
in Minnesota, and (iii) approximately $230,000 from the sale of 9 miles of track
in Texas. Additionally, during 1996 the Company sold a permanent easement in    
Michigan for $106,000. Rental income increased as a result of assets acquired in
1995 and 1996. The Company intends to continue its plan to rationalize certain  
assets in its rail operations and expects future years to include sales of      
assets such as discussed above.                                                 

OPERATING EXPENSES.                                                             

  Operating expenses increased by $2.1 million, or 45.5% from $4.6
million for the year ended December 31, 1995 to $6.7 million for the year ended 
December 31, 1996. Operating expenses, as a percentage of transportation        
revenue, were 68.5% and 68.9% for 1995 and 1996, respectively. The change was   
primarily due to higher maintenance of way expenses and equipment rental costs  
as a percentage of total revenue for certain of the acquisitions.               

         Maintenance of way expenses increased approximately $520,000, or 66.5%,
for the year ended December 31, 1996 primarily due to certain acquisitions which
occurred in 1996 and the second half of 1995. WTLR had maintenance of way       
expenses of approximately $53,000 for the two months ended December 31, 1995    
compared to maintenance of way expenses of approximately $370,000 in 1996, an   
increase of $317,000. Dakota Rail had maintenance of way expenses of            
approximately $40,000 for the four months ended December 31, 1995 compared to   
maintenance of way expenses of approximately $150,000 in 1996, an increase of   
$110,000. CCRR had maintenance of way expenses of approximately $57,000 in 1996.
OTVR had maintenance of way expenses of approximately $49,000 in 1996. ETC had  
maintenance of way expenses of approximately $47,000 in 1996.                   

        Maintenance of equipment expenses increased approximately $155,000, or
33.0%, primarily due to certain acquisitions which occurred in the second half  
of 1995. WTLR had maintenance of equipment expenses of approximately $18,000 for
the two months ended December 31, 1995 compared to maintenance of equipment     
expenses of approximately $132,000 in 1996, an increase of $114,000.            

    Transportation expense increased approximately $530,000, or 34.0%,
primarily due to certain acquisitions which occurred in 1996 and the second half
of 1995. WTLR had transportation expenses of approximately $71,000 for the two  
months ended December 31, 1995 compared to transportation expenses of           
approximately $322,000 in 1996, an increase of $251,000. CCRR had               

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transportation expenses of approximately $144,000 in 1996. Dakota Rail had      
transportation expenses of approximately $34,000 for the four months ended      
December 31, 1995 compared to transportation expenses of approximately $91,000  
in 1996, an increase of $57,000. OTVR had transportation expenses of            
approximately $59,000 in 1996. ETC had transportation expenses of approximately 
$42,000 in 1996. These increases in transportation expenses were partially      
offset by a decrease in transportation costs of approximately $28,000 at the    
Company's railroads in Pennsylvania related to decreased carloads from 1995 to  
1996.                                                                           

      Equipment rental increased approximately $160,000, or 69.2%, for the
year primarily as a result of approximately $157,000 in costs associated with   
increased carloads from the acquisitions in 1996 and late 1995 and increased car
hire expense at SCTR of approximately $82,000 partially offset by decreased     
costs at HESR of approximately $75,000 due to decreased car loads from 1995 to  
1996.                                                                           

      Selling, general and administrative expenses increased approximately
$580,000, or 72.4%, compared to the year ended December 31, 1995. Such an       
increase was due primarily to additional costs of approximately $515,000 related
to the acquisitions in 1996 and the second half of 1995.                        

  Other Income (Expense). Interest and other expenses increased by
approximately $695,000, or 111.7%, from $605,000 for the year ended December 31,
1995 to $1.3 million for the year ended December 31, 1996. The increase is      
primarily due to the interest expense related to the acquisitions of CCRR       
(interest of $254,432), OTVR (interest of $77,756), and WTLR (interest of       
$326,332).                                                                      

RESULTS OF TRAILER MANUFACTURING OPERATIONS                                     

   The discussion of results of operations that follows reflects the
results of Kalyn/Siebert, Inc. for the years ended December 31, 1997, 1996 and  
1995. The following table sets forth the income and expense items of Kalyn for  
the years ended December 31, 1997, 1996 and 1995 and the percentage relationship
of income and expense items to net sales (in thousands):                        

                                                        [Enlarge/Download Table]

                                                   FOR THE YEAR ENDED DECEMBER 31,                    
                                        1997                   1996                      1995         
                               --------------------     --------------------     -------------------- 
                                                                                                      
Net sales                      $22,941          100%    $13,638          100%    $17,873        100%  
Cost of goods sold              16,544         72.1%     10,448         76.6%     13,399         75.0%
                               -------                  -------                  -------              
Gross profit                     6,397         27.9%      3,190         23.4%      4,474         25.0%
Selling, general and                                                                                  
   administrative                1,969          8.6%      1,400         10.3%      1,384          7.7%
Depreciation and amortization      473          2.1%        433          3.2%        408          2.3%
                               -------                  -------                  -------              
Income from operations           3,955         17.2%      1,357         10.0%      2,682         15.0%
Other expenses (net)               230          1.0%        348          2.6%        531          3.0%
                               -------                  -------                  -------              
Income before income taxes     $ 3,725         16.2%    $ 1,009          7.4%    $ 2,151         12.0%
                               =======                  =======                  =======              


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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%,
from $13.6 million for the year ended December 31, 1996 to $22.9 million for the
year ended December 31, 1997. Net sales consist of trailer sales, part sales and
repair income. Trailer sales represent approximately 96% of the net sales in    
both 1997 and 1996. Kalyn sold 547 trailers for the year ended December 31, 1996
and 730 trailers for the year ended December 31, 1997. The increase in sales    
volume increased net sales by approximately $4.4 million. The average price per 
trailer sold was approximately $24,000 for the year ended December 31, 1996 and 
approximately $30,500 for the year ended December 31, 1997. The increase in     
average price per trailer increased net sales by approximately $4.8 million.    
Sales to governmental agencies represented 19% and 37% of Kalyn's net sales for 
1996 and 1997, respectively. During the first half of 1996, Kalyn 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. Kalyn produced 105 Tactical Vans    
under the TACOM contract during 1997. Kalyn's backlog as of December 31, 1997   
was approximately $19.7 million compared to $8.6 million at December 31, 1996.  

        COST OF GOODS SOLD. Cost of goods sold increased by approximately $6.1
million, or 58.2%, from $10.4 million for the year ended December 31, 1996 to   
$16.5 million for the year ended December 31, 1997. Cost of goods sold was 76.6%
for the year ended December 31, 1996 compared to 72.1% for the year ended       
December 31, 1997. 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.        
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 $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 Kalyn's increased
sales and income during the year as discussed above.                            

COMPARISON OF OPERATING RESULTS OF KALYN FOR THE YEARS ENDED DECEMBER 31, 1996  
AND 1995.                                                                       

      NET SALES. Net sales decreased by $4.2 million, or 23.7%, from $17.9
million for the year ended December 31, 1995 to $13.6 million for the year ended
December 31, 1996. Trailer sales represent approximately 96% of the net sales in
both 1996 and 1995. Kalyn sold 875 trailers for the                             

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year ended December 31, 1995 and 547 trailers for the year ended December 31,   
1996. The average price per trailer sold was approximately $20,000 for the year 
ended December 31, 1995 and approximately $24,000 for the year ended December   
31, 1996. Sales to governmental agencies represented 29% and 20% of Kalyn's net 
sales for 1995 and 1996, respectively. During the first half of 1996, Kalyn was 
in the process of building five prototype trailers in connection with the       
October 1995 TACOM contract. Full production under the contract began           
immediately after acceptance by TACOM of the prototypes. The decrease in sales  
for 1996 compared to 1995 was partially due to the above contract work as well  
as the federal government budget impasse during the fourth quarter of 1995 and  
early 1996, which resulted in a suspension of new trailer orders from the       
government.                                                                     

        COST OF GOODS SOLD. Cost of goods sold decreased by approximately $3.0
million, or 22.0%, from $13.4 million for the year ended December 31, 1995 to   
$10.4 million for the year ended December 31, 1996. Cost of goods sold          
represented 75.0% for the year ended December 31, 1995 compared to 76.6% for the
year ended December 31, 1996. The increase was partially due to certain fixed   
costs of manufacturing being spread over a smaller revenue base in 1996.        
Additionally, commercial orders represented a higher percentage of sales in 1996
than in 1995. 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 costs remained fairly constant during 1996 compared to 1995.     

CORPORATE OVERHEAD, OTHER AND EARNINGS PER SHARE                                

   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 $0.7 million, or 28.2%, from $2.5 million for   
the year ended December 31, 1996 to $3.2 million for the year ended December 31,
1997. Corporate overhead increased $0.5 million, or 24.1%, from $2.0 million for
the year ended December 31, 1995 to $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 anticipated growth.              

     RAILAMERICA EQUIPMENT CORPORATION ("REC"). REC leases railroad tank
cars, flat cars and locomotives to various railroads and shippers. Operating    
revenue increased $0.2 million from $0.3                                        

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million for the year ended December 31, 1996 to $0.5 million for the year ended 
December 31, 1997. Operating income increased slightly from $0.1 for the year   
ended December 31, 1996 to $0.2 million for the year ended December 31, 1997.   
The increase in both operating revenue and income were a result of tank car     
leases entered into in March 1996 and October 1997. Operating revenue increased 
$0.3 million from $0 for the year ended December 31, 1995 to $0.3 million for   
the year ended December 31, 1996. Operating income increased $0.1 million from  
$0 for the year ended December 31, 1995 to $0.1 for the year ended December 31, 
1996.                                                                           

      MOTOR CARRIER OPERATIONS (DISCONTINUED OPERATION). The discussion of
results of operations that follows reflects the results of Steel City and       
RailAmerica Intermodal Services from February 10, 1995 through December 31,     
1997. Since the Company's acquisition of Steel City, its financial 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 and 
trailer manufacturing operations. The Company's Board of Directors approved the 
plan of discontinuance on March 20, 1997.                                       

       Loss from discontinued operations increased by $0.1 million from $0.6
million for the year ended December 31, 1996 to $0.7 million for the year ended 
December 31, 1997. Loss from discontinued operations increased by $0.3 million  
from $0.3 million for the year ended December 31, 1995 to $0.6 million for the  
year ended December 31, 1996.                                                   

       EARNINGS PER SHARE. Basic earnings per share was $0.04 in 1995 versus
$0.10 in 1996. Earnings per share in 1995 reflects a reduction of $666,665 to   
net income available to common shareholders. Such reduction relates to a        
non-recurring deemed dividend associated with the redemption of the Company's   
redeemable convertible preferred stock. On October 1, 1995, the Company was     
notified by the shareholders of its redeemable convertible preferred stock of   
their intent to convert such stock. The Company redeemed the convertible        
preferred stock at 97.5% of the then market value of the underlying common stock
for an aggregate redemption price of $1,666,665. The excess of the redemption   
price over the book value of the preferred stock was considered a non-recurring 
deemed dividend which reduced net income available to common shareholders by    
$666,665 or $0.14 per share.                                                    

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 $2.3 million
for the year ended December 31, 1997.                                           

        Cash used in investing activities was $16.8 million for the year ended
December 31, 1997. The main uses of cash during 1996 was for the purchase of a  
55% equity interest in Ferronor, which cost $7.4 million. In addition, property,
plant and equipment increased $7.5 million during 1997                          

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primarily due to the purchase of locomotives and improvements made to the       
Company's various rail lines. In addition, the Company built its Midwestern     
regional office in Vassar, Michigan in 1997 and was in the process of completing
construction of engine houses in both Washington and Minnesota.                 

       Cash provided by financing activities was $14.3 million for 1997. The
primary components consisted of the net proceeds of approximately $4.6 million  
from the issuance of 1,670,000 shares of the Company's common stock in a private
placement transaction completed in January 1997, net proceeds of approximately  
$3.1 million from the conversion of substantially all of the Company's Class B  
Warrants and $0.7 million from exercise of stock options. In addition, the      
Company's net borrowings increased by $6.0 million.                             

   The Company's long term debt represents financing of property and
equipment, as well as the acquisition financing for Ferronor, SCTR, Kalyn, Steel
City, Dakota Rail, WTLR, CCRR, MNR, OTVR and Gettysburg Railway. Certain of this
indebtedness was refinanced the Revolver. The Revolver bears interest, at the   
option of the Company, at either the bank's prime rate plus 0.5% or the one,    
three or six month LIBOR plus 2.5%. The Revolver is collateralized by           
substantially all of the assets of the Company, Kalyn, HESR, SGVY, RIS, CCRR,   
Steel City Carriers, WTLR and OTVR.                                             

    On May 3, 1997, the Revolver was increased from $25 million to $40
million by National Bank of Canada and Comerica Bank N.A. at which time the     
maturity date was extended to May 2000. Further, the Company accepted a         
commitment letter from National Bank of Canada as agent for Comerica Bank and   
Southtrust Bank, N.A. in March 1998 to increase the Revolver to $55 million. It 
increase is anticipated to close in April 1998.                                 

  As of December 31, 1997, the Company had working capital of $5.2
million compared to working capital of $5.1 million as of December 31, 1996.    
Cash on hand as of December 31, 1997 was $3.7 million compared to $3.9 million  
as of December 31, 1996. The Company's cash flows from operations 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.                                    

       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 $2.5 million and capital expenditures at Kalyn of approximately   
$0.3 million. In addition, the Company anticipates capital expenditures of      
approximately $23.6 million over the next three years related to Ferronor's new 
20 year take-or-pay contract with CMH. The Company anticipates paying for this  
project expansion with debt financing. The Company also anticipates purchasing  
and equipping an additional facility in Quebec, Canada for its newly purchased  
specialty trailer manufacturer. The costs of this project are estimated at $2.5 

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million. The Company anticipates this project will be financed with debt. 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
an acquisition 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. The 
Company's Revolver allows acquisition loan advances of up to $35 million for    
such acquisitions. As of March 1, 1998, the Company had approximately $3.5      
million of availability under the Revolver. As noted above, it is anticipated   
that the increase in availability under the Revolver to $55 million will occur  
in April 1998, allowing additional availability for potential future            
acquisitions.                                                                   

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.                                                                         

YEAR 2000                                                                       

         The Company has reviewed its critical information systems for Year 2000
compliance and has initiated plans to remedy any deficiencies in a timely       
manner. As a result of the review and action plan, the Company believes the cost
of such remedial corrective actions are not material to the Company's financial 
position, results of operations or cash flows.                                  

NEW ACCOUNTING PRONOUNCEMENTS                                                   

         In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 130 "Reporting Comprehensive     
Income" that establishes standards for reporting and display of an alternative  
measurement and its components in a full set of general-purpose financial       
statements. This statement is effective for fiscal years beginning after        
December 15, 1997. The Company will adopt SFAS No. 130 in 1998.                 

        In June 1997, the Financial Accounting Standards Board issued SFAS No.
131 "Disclosures about Segments of an Enterprise and Related Information" that  
establishes standards for the reporting of information about operating segments 
in annual financial statements. Additionally, it requires that enterprises      
report selected information about operating segments in interim financial       

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reports issued to stockholders. This statement is effective for periods         
beginning after December 15, 1997 and the Company will adopt SFAS No. 131 for   
the fiscal year 1998.                                                           

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 1993, 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 the following: statements regarding the further growth 
in transportation-related assets; the acquisition of additional railroads and   
other transportation-related companies; the development of additional           
transportation-related businesses; the increased usage of the Company's existing
rail lines; the development of synergy among the consolidated group; 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; orders under the TACOM       
agreements; 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 and the development of additional              
transportation-related businesses; a decline in the market acceptability of     
trucking or railroad services; an organization or unionization of a material    
segment of the Company's employee base; the effect of competitive pricing; 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 Kalyn 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 and nominees of the Company is hereby
incorporated by reference from the Company's definitive proxy statement relating
to its Annual Meeting of Shareholders to be filed with the Commission pursuant  
to Regulation 14A on or before April 30, 1998.                                  

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 Annual Meeting of Shareholders to be filed with the Commission  
pursuant to Regulation 14A on or before April 30, 1998.                         

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 Annual Meeting of Shareholders to be filed with the Commission pursuant  
to Regulation 14A on or before April 30, 1998.                                  

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 the Annual Meeting of Shareholders to be filed with 
the Commission pursuant to Regulation 14A on or before April 30, 1998.          

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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(9)                                                    

3.2    By-laws of Registrant(1)                                             

4.2    Class B Warrant(2)                                                   

4.3    Unit Purchase Warrant(2)                                             

4.4    Series A Convertible Subordinated Debentures(7)                      

10.14    RailAmerica, Inc. 1992 Stock Option Plan(1)+                           

10.23    Loan Agreement among RailAmerica, Inc., South Central Tennessee        
      Railroad Corporation, South Central Tennessee Railroad Company, Inc.
and Charter Financial, Inc., dated as of December 31, 1993.(5)

10.32    Stock Purchase Agreement between Steel City Truck Lines Limited, Josef 
Bichler and RailAmerica, Inc. dated December 19, 1994.(10)    

10.33    Stock Purchase Agreement between 823215 Ontario, Inc. and RailAmerica, 
Inc. dated February 6, 1995.(10)                              

10.35    Employment Agreement between Robert B. Coward and Kalyn Siebert,       
Incorporated.(6)                                              

10.37    Stock Purchase Agreement, dated July 11, 1995, among RailAmerica, Inc.,
     Brian E. Muir, Elli M.A. Mills and Kimberly Hughes, Prairie Holding
Corporation and Dakota Rail, Inc.(7)                          

10.38    Settlement Agreement, entered into March 15, 1995, by Eric D. Gerst and
         RailAmerica, Inc., RailAmerica Services Corporation and Huron & Eastern
Railway Company, Inc.(7)                                      

10.39    Loan Agreement, dated September 29, 1995, by and between RailAmerica,  
    Inc., Kalyn/Siebert Incorporated, RailAmerica Intermodal Services,
      Inc., RailAmerica Carriers, Inc., Steel City Carriers, Inc., Saginaw
         Valley Railway Company, Inc., Huron & Eastern Railway Company, Inc. and
National Bank of Canada(9)                                    

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.(8)       

10.41    Employment Agreement between Gary O. Marino and RailAmerica, Inc.(9)+  

10.42    Employment Agreement between John H. Marino and RailAmerica, Inc.(9)+  

10.43    Stock Option Agreement, dated November 11, 1994, between RailAmerica,  
Inc. and Gary O. Marino(9)+                                   

10.44    RailAmerica, Inc. 1995 Stock Incentive Plan(16)+                       

10.45    RailAmerica, Inc. 1995 Non-Employee Director Stock Option Plan(9)      

10.46    RailAmerica, Inc. 1995 Employee Stock Purchase Plan(9)                 

10.47    RailAmerica, Inc. Corporate Senior Executive Bonus Plan(9)+            

10.50    Stock Repurchase Agreement dated October 1, 1995 by and between        
     RailAmerica, Inc. and the holders of all the issued and outstanding
shares of the Company's                                       

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Preferred Stock.(10)                                          

10.51    Asset Purchase Agreement dated January 26, 1996 by and between Temco   
Corporation and RailAmerica Equipment Corporation(10)         

10.52    Agreement of Sale dated July 18, 1996 by and between the Commonwealth's
         Department of Transportation and Delaware Valley Railway Company, Inc.,
a wholly-owned subsidiary of RailAmerica, Inc.(11)            

10.53    Agreement entered into by and between R. Frank Unger, Trustee of       
Sagamore National Corporation, Indiana HiRail Corporation and 
RailAmerica, Inc.(11)                                         

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.(12)                

10.55    Confidential Private Placement Memorandum dated September 20, 1996.(13)

10.56    Stock Purchase Agreement, dated as of September 20, 1996, by and       
 among Otter Tail Valley Railroad Company, Inc. and Dakota Rail,
Inc.(14)                                                      

10.57    Commitment letter relating to $40,000,000 Revolving Line of Credit/Term
     Loan Facility, dated March 3, 1997, 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., Minnesota Northern Railroad Company, Inc. and
Delaware Valley Railway Company, Inc.(15)                     

10.58    Agreement for sale of certain assets, rights and obligations of        
      Burlington Northern Railroad Company to Minnesota Northern Railroad,
Inc.(15)                                                      

10.59    RailAmerica, Inc. Nonqualified Deferred Compensation Trust(15)+        

10.60    Nonqualified Deferred Compensation Agreement between RailAmerica, Inc. 
and Gary O. Marino(15)+                                       

10.61    Nonqualified Deferred Compensation Agreement between RailAmerica, Inc. 
and John H. Marino(15)+                                       

10.62    Agreement for Purchase of Railroad Assets of Delaware Valley Railway   
Company, Inc.(16)                                             

21       Subsidiaries of Registrant(17)                                         

27       Financial Data Schedule (for S.E.C. use only)                          

----------                                                                      
(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. 3 on Form SB-2, dated
November 25, 1994, Registration No. 33-49026.                 

(3)      Incorporated by reference to the same exhibit number filed as part of  
       the Company's annual report on Form 10-KSB, filed with the Securities
and Exchange Commission on March 31, 1993.                    

(4)      Incorporated by reference to the same exhibit number filed as part of  
the Registrant's                                              

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       Post-Effective Amendment No. 4 on Form SB-2, dated December 14, 1994,
Registration No. 33-49026.                                    

(5)      Incorporated by reference to the same exhibit number filed as part of  
       the Company's Form 10-KSB for the year ended December 31, 1993, filed
with the Securities and Exchange Commission on April 15, 1994.

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

(7)      Incorporated by reference to the same exhibit number filed as part of  
      the Company's Form 10-QSB for the quarter ended June 30, 1995, filed
with the Securities and Exchange Commission on August 9, 1995.

(8)      Incorporated by reference to the exhibit number 2.1 filed as part of   
the Company's Form 8-K as of November 1, 1995, filed with the 
Securities and Exchange Commission on November 3, 1995.       

(9)      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.

(10)     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.

(11)     Incorporated by reference to the same exhibit number filed as part of  
      the Company's Form 10-QSB for the quarter ended July 30, 1996, filed
with the Securities and Exchange Commission on August 12, 1996

(12)     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.                

(13)     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.                  

(14)     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.                  

(15)     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.     

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

(17)     Incorporated by reference to the same exhibit number filed as part of  
         the Company's Form 10-Q for the quarter ended September 30, 1997, filed
   with the Securities and Exchange Commission on November 14, 1997.

+        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 1997.                                                                

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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 31, 1998

         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.                                          

                                                                [Download Table]

         SIGNATURES          TITLE                                 DATE           
         ----------          -----                                 ----           
                                                                                  
/s/ Gary O. Marino           Chairman, President, Chief Executive  March 31, 1998 
---------------------------  Officer and Director                                 
Gary O. Marino                                                                    

/s/ Donald D. Redfearn       Executive Vice President, Secretary   March 31, 1998 
---------------------------  and Director                                         
Donald D. Redfearn                                                                

/s/ John H. Marino           Vice Chairman and Director            March 31, 1998 
---------------------------                                                       
John H. Marino                                                                    

/s/ Douglas R. Nichols       Director                              March 31, 1998 
---------------------------                                                       
Douglas R. Nichols                                                                

/s/ Richard Rampell          Director                               March 31, 1998
---------------------------                                                       
Richard Rampell                                                                   

/s/ Charles Swinburn         Director                               March 31, 1998
---------------------------                                                       
Charles Swinburn                                                                  

/s/ John M. Sullivan         Director                               March 31, 1998
---------------------------                                                       
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 Accountants                                   F-2   

Consolidated Balance Sheets - December 31, 1997 and 1996            F-3   

Consolidated Statements of Income - For the Years Ended                   
       December 31, 1997, 1996 and 1995                             F-4   

Consolidated Statement of Stockholders' Equity - For the Years            
       Ended December 31, 1997, 1996 and 1995                       F-5   

Consolidated Statements of Cash Flows - For the Years Ended               
       December 31, 1997, 1996 and 1995                             F-6   

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


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 REPORT OF INDEPENDENT ACCOUNTANTS

To the Stockholders of                                                          
RailAmerica, Inc. and Subsidiaries                                              

We have audited the accompanying consolidated balance sheets of RailAmerica,    
Inc. and Subsidiaries (the "Company") as of December 31, 1997 and 1996, and the 
related consolidated statements of income, stockholders' equity and cash flows  
for each of the three years in the period ended December 31, 1997. 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 conducted our audits in accordance with generally accepted auditing          
standards. Those standards 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. An audit also includes 
assessing the accounting principles used and significant estimates made by      
management, as well as evaluating the overall financial statement presentation. 
We believe that our audits provide a reasonable basis for our opinion.          

In our opinion, the financial statements referred to above present fairly, in   
all material respects, the consolidated financial position of RailAmerica, Inc. 
and Subsidiaries as of December 31, 1997 and 1996, and the consolidated results 
of their operations and their cash flows for each of the three years in the     
period ended December 31, 1997 in conformity with generally accepted accounting 
principles.                                                                     

Coopers & Lybrand L.L.P.                                                        

West Palm Beach, Florida                                                        
March 25, 1998                                                                  

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RAILAMERICA, INC. AND SUBSIDIARIES
 CONSOLIDATED BALANCE SHEETS
December 31, 1997 and 1996

                                                        [Enlarge/Download Table]


                                                                               1997              1996   
                                                                          -------------   ------------- 
                                     ASSETS                                                             
                                                                                                        
Current assets:                                                                                         
  Cash                                                                    $   3,745,534   $   3,879,972 
  Accounts receivable                                                         8,388,291       4,558,948 
  Notes receivable                                                            1,103,409          17,010 
  Inventories                                                                 5,013,106       3,104,555 
  Other current assets                                                          497,207         462,867 
                                                                          -------------   ------------- 
        Total current assets                                                 18,747,547      12,023,352 

Property, plant and equipment, net                                           74,900,836      54,148,966 

Notes receivable, less current portions                                       1,339,169         263,567 
Investment in Great Southern Railway Limited                                    596,665              -- 
Loan receivable from Great Southern Railway Limited                           1,193,330              -- 
Other assets                                                                  2,021,433       2,163,048 
Excess of cost over net assets of companies acquired, net                     2,036,023       2,965,853 
                                                                          -------------   ------------- 
        Total assets                                                      $ 100,835,003   $  71,564,786 
                                                                          =============   ============= 

                      LIABILITIES AND STOCKHOLDERS' EQUITY                                              
Current liabilities:                                                                                    
  Current maturities of long-term debt                                    $   3,923,036   $   1,752,926 
  Current maturities of subordinated debt                                       212,392         212,392 
  Accounts payable                                                            6,084,119       3,162,953 
  Accrued expenses and income taxes payable                                   3,327,497       1,811,739 
                                                                          -------------   ------------- 
        Total current liabilities                                            13,547,044       6,940,010 
                                                                          -------------   ------------- 
Long-term debt, less current maturities                                      43,875,163      38,401,119 
Subordinated debt, less current maturities                                    3,265,490       3,477,882 
Deferred income taxes                                                         7,067,237       6,753,668 
Minority interest                                                             6,266,243              -- 
Commitments and Contingencies                                                        --              -- 
Stockholders' equity:                                                                                   
  Common stock, $.001 par value, 30,000,000 shares authorized;                                          
     9,129,564 issued and 8,858,375 outstanding at December 31, 1997;                                   
     6,125,410 issued  and 5,888,410 outstanding at December 31, 1996             9,130           6,125 
  Additional paid-in capital                                                 23,350,732      11,773,036 
  Common stock subscribed                                                            --       2,340,000 
  Retained earnings                                                           4,883,973       2,944,774 
  Cumulative translation adjustment                                              15,373          67,441 
  Less treasury stock (271,189 and 237,000 shares at cost, respectively)     (1,445,382)     (1,139,269)
                                                                          -------------   ------------- 
        Total stockholders' equity                                           26,813,826      15,992,107 
                                                                          -------------   ------------- 
        Total liabilities and stockholders' equity                        $ 100,835,003   $  71,564,786 
                                                                          =============   ============= 


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, 1997, 1996 and 1995

                                                        [Enlarge/Download Table]

                                                     1997            1996            1995    
                                                  ------------   ------------   ------------ 
                                                                                             
Operating revenues:                                                                          
  Transportation - railroad                       $ 22,023,717   $  9,783,041   $  6,767,530 
  Manufacturing                                     22,941,068     13,637,978     17,872,777 
  Other                                              2,472,188      2,237,222        437,797 
                                                  ------------   ------------   ------------ 
          Total operating revenue                   47,436,973     25,658,241     25,078,104 
                                                  ------------   ------------   ------------ 
Operating expenses:                                                                          
  Transportation - railroad                         12,502,153      4,397,884      3,034,068 
  Cost of goods sold - manufacturing                16,544,423     10,447,827     13,398,740 
  Selling, general and administrative                8,809,547      5,413,153      4,225,949 
  Depreciation and amortization                      2,261,467      1,526,510      1,231,622 
                                                  ------------   ------------   ------------ 
          Total operating expenses                  40,117,590     21,785,374     21,890,379 
                                                  ------------   ------------   ------------ 
        Operating income                             7,319,383      3,872,867      3,187,725 

  Interest expense                                  (3,533,920)    (2,078,383)    (1,277,837)
  Other income (expense)                               663,128         (8,642)       166,654 
  Minority interest in income of subsidiary           (851,243)            --             -- 
                                                  ------------   ------------   ------------ 
        Income from continuing operations before                                             
            income taxes                             3,597,348      1,785,842      2,076,542 
 Provision for income taxes                            963,382        705,405        950,299 
                                                  ------------   ------------   ------------ 
        Income from continuing operations            2,633,966      1,080,437      1,126,243 
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 (less applicable income tax                                             
     benefit of $149,000, 322,000 and $172,000,                                              
     respectively)                                    (242,365)      (575,558)      (257,910)
                                                  ------------   ------------   ------------ 
             Net Income                           $  1,939,199   $    504,879   $    868,333 
                                                  ============   ============   ============ 

Net income attributable to common stock           $  1,939,199   $    504,879   $    201,668 
                                                  ============   ============   ============ 
Basic earnings per common share                                                              
    Continuing operations                         $       0.32   $       0.22   $       0.10 
    Discontinued operations                              (0.09)         (0.12)         (0.06)
                                                  ------------   ------------   ------------ 
        Net income                                $       0.23   $       0.10   $       0.04 
                                                  ============   ============   ============ 

Diluted earnings per common share                                                            
    Continuing operations                         $       0.30   $       0.21   $       0.10 
    Discontinued operations                              (0.08)         (0.11)         (0.06)
                                                  ------------   ------------   ------------ 
        Net income                                $       0.22   $       0.10   $       0.04 
                                                  ============   ============   ============ 

Weighted average common shares and common                                                    
    share equivalents outstanding:                                                           
    Basic                                            8,303,938      4,966,296      4,504,285 
                                                  ============   ============   ============ 
    Diluted                                          9,396,483      5,113,508      4,750,219 
                                                  ============   ============   ============ 


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, 1997, 1996 and 1995

                                                        [Enlarge/Download Table]

                                                                    Stockholders' Equity                         
                               ----------------------------------------------------------------------------------
                                Number of                       Additional        Common                         
                                  Shares           Par           Paid-in          Stock           Retained       
                                  Issued          Value          Capital        Subscribed        Earnings       
                               ------------    ------------    ------------    ------------     ------------     
                                                                                                                 
Balance, January 1, 1995          3,679,046    $      3,679    $  4,132,325    $         --     $  2,271,560     

Net Income                               --              --              --              --          868,333     

Issuance of common stock          1,169,945           1,170       3,466,988              --               --     

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

Preferred stock dividends                --              --              --              --          (33,333)    

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

Redemption of preferred stock            --              --              --              --         (666,665)    

                               ------------    ------------    ------------    ------------     ------------     
Balance, December 31, 1995        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              --               --     

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

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


                                              Stockholders' Equity                                               
                               ----------------------------------------------                                    
                                Cumulative                                                                       
                                Translation       Treasury                                                       
                                Adjustment         Shares           Total                                        
                               ------------     ------------     ------------                                    
                                                                                                                 
Balance, January 1, 1995       $         --     $         --     $  6,407,564                                    

Net Income                               --               --          868,333                                    

Issuance of common stock                 --               --        3,468,158                                    

Purchase of treasury stock               --         (965,753)        (965,753)                                   

Preferred stock dividends                --               --          (33,333)                                   

Cumulative translation               70,355               --           70,355                                    

Redemption of preferred stock            --               --         (666,665)                                   

                               ------------     ------------     ------------                                    
Balance, December 31, 1995           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                                    
                               ============     ============     ============                                    


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RAILAMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS 
For the years ended December 31, 1997, 1996 and 1995

                                                        [Enlarge/Download Table]

                                                        1997            1996           1995     
                                                     ------------   ------------   ------------ 
                                                                                                
Cash flows from operating activities:                                                           
  Net income                                         $  1,939,199   $    504,879   $    868,333 
  Adjustments to reconcile net income to net                                                    
    cash provided by operating activities:                                                      
      Depreciation and amortization                     3,053,728      2,047,684      1,840,298 
      Minority interest in income of subsidiary           851,243             --             -- 
      Write-off of excess of cost over net assets         729,681             --             -- 
      Write-off of deferred acquisition costs              76,292        138,010         92,526 
      Sale of properties                                 (608,380)       455,932        185,755 
      Employee stock grants                                15,188         48,554        109,571 
      Deferred income taxes                               382,122        263,668         61,533 
      Forgiveness of debt                                      --        (20,576)            -- 
      Changes in operating assets and liabilities,                                              
        net of acquisitions and dispositions:                                                   
        Accounts receivable                            (3,037,697)    (1,816,862)       668,086 
        Inventories                                    (1,294,501)       291,825       (678,959)
        Other current assets                              124,247        (41,203)      (151,486)
        Accounts payable                                 (606,499)     1,031,238        459,616 
        Income taxes payable                             (105,538)      (455,250)       444,788 
        Accrued expenses                                  819,947       (128,307)       (68,859)
        Deposits and other                                (47,264)      (113,853)       (76,064)
                                                     ------------   ------------   ------------ 
          Net cash provided by operating activities     2,291,768      2,205,739      3,755,138 
                                                     ------------   ------------   ------------ 

Cash flows from investing activities:                                                           
  Purchase of property, plant  and equipment           (7,455,848)    (4,487,909)    (2,549,199)
  Acquisitions, net of cash acquired                   (7,389,903)      (103,908)    (2,797,677)
  Investment in Great Southern Railway                   (596,665)            --             -- 
  Loan receivable from Great Southern Railway          (1,193,330)            --             -- 
  Proceeds from sales of subsidiaries                     331,654             --             -- 
  Deferred acquisition costs and other                   (457,168)      (825,026)      (188,156)
                                                     ------------   ------------   ------------ 
          Net cash used in investing activities       (16,761,260)    (5,416,843)    (5,535,032)
                                                     ------------   ------------   ------------ 

Cash flows from financing activities:                                                           
  Proceeds from issuance of long-term debt             31,453,500     10,033,070     34,533,216 
  Principal payments on debt and capital leases       (25,449,364)   (12,503,210)   (30,842,067)
  Sale of common stock                                  8,163,962      6,421,445      2,383,209 
  Proceeds from exercise of stock options                 748,041         45,000             -- 
  Purchase of treasury stock                                   --       (173,516)      (965,753)
  Preferred stock dividends paid                               --             --        (50,000)
  Decrease in restricted stock                                 --        175,000        290,000 
  Deferred financing costs paid                          (286,724)       (98,741)      (106,704)
  Deferred loan costs paid                               (294,361)      (296,838)      (443,355)
                                                     ------------   ------------   ------------ 
          Net cash provided by financing activities    14,335,054      3,602,210      4,798,546 
                                                     ------------   ------------   ------------ 

Net (decrease) increase in cash                          (134,438)       391,106      3,018,652 
Cash, beginning of period                               3,879,972      3,488,866        470,214 
                                                     ------------   ------------   ------------ 
Cash, end of period                                  $  3,745,534   $  3,879,972   $  3,488,866 
                                                     ============   ============   ============ 


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 1997, the Company sold all the outstanding stock of its
     subsidiaries Huron Distribution Services, Inc., Evansville Terminal
         Company and Gettysburg Scenic Rail Tours, Inc. During 1997, the Company
     formed wholly-owned subsidiaries St. Croix Valley Railroad Company,
  RailAmerica de Chile S.A. and RailAmerica Australia, Inc. During
  February 1997, the Company acquired a 55% interest in Empresa de
Transporte Ferroviario S.A. ("Ferronor").                     

    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 and copper in Chile. The
        Company's production facility, in Texas, manufactures 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.                                                  

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.   

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RAILAMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

------- 

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, 1997, 1996 and 1995,
         approximately 32%, 51% and 80%, respectively, of the Company's domestic
        railroad transportation revenue was derived from interchanging traffic
with CSX and for the years ended December 31, 1997 and 1996,  
     approximately 59% and 34%, respectively, from interchanging traffic
with Burlington Northern Santa Fe.                            

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 37%,
        20% and 29% of the Company's manufacturing revenue for the years ended
December 31, 1997, 1996 and 1995, respectively.               

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RAILAMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

------- 

1.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued                  

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, 1997, the
  Company had approximately $3.3 million of cash in excess of FDIC
insurance limits.                                             

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.

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RAILAMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

------- 

1.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued                  

Excess of Cost Over Net Assets of Companies Acquired          

The acquisition of Kalyn/Siebert, Inc. ("Kalyn") resulted in a
 purchase price in excess of the fair market value of net assets
acquired in the amount of approximately $2.5 million, which is
         reflected in the balance sheet at December 31, 1997, net of accumulated
   amortization of $0.4 million. This amount is 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,
        1997, 1996 and 1995 was approximately $200,000, $190,000 and $156,000.

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 $1,000 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, 1997, 1996 and 1995
were approximately $90,000, $61,000 and $48,000, respectively.

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RAILAMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

------- 

1.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued                  

Foreign Currency Translation                                  

   The financial position and results of operations of the Company's
        Canadian and Chilean 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
         cumulative translation adjustment, a component of stockholders' equity,
   and are not included in net income until realized through sale or
liquidation of the investment.                                

Recent Accounting Pronouncements                              

      SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets to
   be Disposed of" is applicable to the Company in fiscal 1996. This
      statement requires that long-lived assets and certain intangibles to
  be held and used by the Company be reviewed for impairment. This
pronouncement did not have a material impact on the Financial 
Statements of the Company.                                    

        In June 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 130 "Reporting Comprehensive Income" that establishes
       standards for reporting and display of an alternative measurement and
       its components in a full set of general-purpose financial statements.
       This statement is effective for fiscal years beginning after December
15, 1997. The Company will adopt SFAS No. 130 in 1998.        

        In June 1997, the FASB issued SFAS No. 131 "Disclosures about Segments
      of an Enterprise and Related Information" that establishes standards
     for the reporting of information about operating segments in annual
         financial statements. Additionally, it requires that enterprises report
    selected information about operating segments in interim financial
         reports issued to shareholders. This statement is effective for periods
       beginning after December 15, 1997 and the Company will adopt SFAS No.
131 for the fiscal year 1998.                                 

Reclassifications                                             

        Certain 1995 and 1996 amounts have been reclassified to conform to the
presentation adopted in 1997.                                 

2.       EARNINGS PER SHARE                                                     

        In 1997, the Company adopted SFAS No. 128, "Earnings per Share", which
         requires the presentation of both basic and diluted earnings per share.
         For the year ended December 31, 1997, basic earnings per share is based
        on the weighted average number of common shares outstanding during the
      year. Diluted earnings per share is based on 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.               

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2.      EARNINGS PER SHARE, continued                                         

    For the years ended December 31, 1996 and 1995, 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. On October 1, 1995, the Company was notified by the
     shareholders of its redeemable convertible preferred stock of their
         intent to convert such stock. As part of an overall plan to acquire its
        common stock at favorable prices, the Company redeemed the convertible
     preferred stock at 97.5% of the then market value of the underlying
        common stock ($1,666,665). The excess of the redemption price over the
         book value of the preferred stock was considered a non-recurring deemed
         dividend which reduced 1995 net income available to common shareholders
by $666,665 or $0.14 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]

                                                 1997       1996       1995  
                                               -------    -------    ------- 
                                                                             
Net income from continuing operations          $ 2,634    $ 1,080    $ 1,126 
Interest from convertible debt                     152         --         -- 
Deemed dividend                                     --         --       (667)
                                               -------    -------    ------- 
Net income available to common stockholders    $ 2,786    $ 1,080    $   459 
                                               =======    =======    ======= 

Weighted average shares outstanding              8,304      4,966      4,504 
Assumed conversion of options and warrants         283        148        246 
Assumed conversion of convertible debt             809         --         -- 
                                               -------    -------    ------- 
Weighted average shares outstanding              9,396      5,114      4,750 
                                               =======    =======    ======= 


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. As part of the plan, the Company intends
         to sell the stock or assets of the subsidiaries. Revenues for the motor
       carrier division for the years ended December 31, 1997, 1996 and 1995
 were $7.1 million, $7.2 million and $5.1 million, respectively.
    Management is committed to selling either substantially all of the
        assets or the stock of the Company's motor carrier subsidiaries during
        1998. If such transaction is not consummated during the second quarter
   of 1998 the results of operations will be reflected in continuing
     operations beginning in that quarter and until a sale is completed.
 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 sale of this subsidiary.                                  

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3.       DISCONTINUED OPERATIONS, continued                                     

      The assets and liabilities of the discontinued operations consist of
the following as of December 31, 1997 (in thousands $):       

Accounts receivable                   $  670        
Inventory                                134        
Other current assets                      30        
Property, plant and equipment, net     3,936        
Other assets                             301        
                              ------
Total assets                  $5,071
                              ======

Accounts payable                      $  309        
Accrued liabilities                      491        
Long-term debt                         2,926        
Deferred income taxes                    476        
                              ------
Total liabilities             $4,202
                              ======
4.      ACQUISITIONS:                                                         

      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.                              

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4.      ACQUISITIONS, continued                                               

       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.                                              

         On February 10, 1995, the Company, through its subsidiaries RailAmerica
         Intermodal Services, Inc. and RailAmerica Carriers, Inc., completed the
        purchase of substantially all of the assets and business of Steel City
      Truck Lines Limited ("SCTL"). The acquisition was accounted for as a
purchase. Accordingly, the purchase price, which amounted to  
     approximately $2.3 million was allocated to the assets acquired and
         liabilities assumed, based on the fair values of the assets acquired at
   the date of acquisition (see Note 1 of the Consolidated Financial
     Statements). The results of SCTL have been included in discontinued
operations in the consolidated statements of income.          

        Effective August 31, 1995, the Company acquired all of the outstanding
     stock of Prairie Holding Corporation ("PHC") which owns Dakota. The
 purchase price was approximately $1.6 million paid in cash. The
        acquisition was accounted for as a purchase. Accordingly, the purchase
    price 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 PHC and Dakota have been consolidated with
those of the Company commencing as of the date of acquisition.

    On November 1, 1995, the Company acquired substantially all of the
         assets of the Seagraves, Whiteface and Lubbock Railroad Company and the
Floydada and Plainview Railroad Company from American Railway 
       Corporation. The Company, in connection with the purchase, formed two
         new wholly-owned subsidiaries, West Texas and Lubbock Railroad Company,
        Inc. ("WTLR") and Plainview Terminal Company ("PTC"). The acquisitions
         were accounted for as purchases. Accordingly, the purchase price, which
       amounted to approximately $4.6 million including costs, was allocated
        to the assets acquired based on the fair values of the assets acquired
   at the date of acquisition. The results of WTLR and PTC have been
         consolidated with those of the Company commencing as of the date of the
acquisitions.                                                 

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4.     ACQUISITIONS, continued                                                  

 The following unaudited pro forma summary presents the consolidated
results of operations as if the acquisitions had occurred at the  
    beginning of the periods presented 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       1996
                                                -------    -------
       Transportation and other revenues        $48,669    $38,862
Income from continuing operations                   
           before income taxes                  $ 3,866    $ 2,135
       Net income                               $ 2,207    $   772
       Net income per share                     $   .27    $   .16

  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, and interest 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, 1997 based
upon the recent nature of the transaction.                        

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6.    INVENTORIES:                                                            

    Inventories consist of the following as of December 31, 1997 and 1996:

                                                                [Download Table]

                                                  1997               1996     
                                                -----------       ----------- 
                                                                              
Raw materials                                   $ 3,404,234       $ 2,284,683 
Work in process                                   1,109,318           635,780 
Finished goods                                      300,853           881,817 
Replacement or repair parts for equipment                                     
    and road property                             1,054,830           381,309 
                                                -----------       ----------- 
                                                  5,869,235         4,183,589 
Less, advances related to materials                (856,129)       (1,079,034)
                                                -----------       ----------- 
Inventories in excess of contract advances      $ 5,013,106       $ 3,104,555 
                                                ===========       =========== 


7.      PROPERTY, PLANT AND EQUIPMENT:                                        

Property, plant and equipment consist of the following as of  
December 31, 1997 and 1996:                                   

                                                                [Download Table]

                                                     1997        1996    
                                                 -----------  -----------
                                                                         
Land                                             $17,360,124  $14,881,734
Buildings and improvements                         4,526,069    3,344,128
Railroad track and improvements                   38,997,858   27,369,412
Locomotives, transportation and other equipment   21,255,647   13,671,118
                                                 -----------  -----------
                                                  82,139,698   59,266,392
Less accumulated depreciation                      7,238,862    5,117,426
                                                 -----------  -----------
                                                 $74,900,836  $54,148,966
                                                 ===========  ===========


       Depreciation expense was approximately $2.4 million, $1.3 million and
    $1.0 million for the years ended December 31, 1997, 1996 and 1995,
respectively.                                                 

8.      OTHER ASSETS:                                                         

         Other assets consist of the following as of December 31, 1997 and 1996:

                                                                [Download Table]

                                       1997             1996  
                                    ----------      ----------
                                                              
Deferred loan costs, net            $  949,940      $1,052,365
Deferred acquisition costs             488,633         462,535
Deferred financing costs                49,377         146,001
Deposits and other                     533,483         502,147
                                    ----------      ----------
                                    $2,021,433      $2,163,048
                                    ==========      ==========


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8.       OTHER ASSETS, continued                                                

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

 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.                                 

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 closed in September 1996 and also 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.                                

During 1997, the Company sold all the outstanding stock of its
   wholly-owned subsidiary Evansville Terminal Company to a group of
         investors which included a company owned by its Vice Chairman. 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.                                

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9.      RELATED PARTY TRANSACTIONS, continued                                 

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 $0.5 million, 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. 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.        

        As of December 31, 1997, $1.1 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, 1997 and 1996:

                                                                [Download Table]

                                                              1997         1996   
                                                          -----------  -----------
                                                                                  
Revolving line of credit.  See below                      $34,717,857  $24,991,465

Acquisition loan. See below                                        --    3,650,000

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                         801,815    1,009,018

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      234,130

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                        584,892      646,567


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10.       LONG-TERM DEBT, continued                                             

                                                        [Enlarge/Download Table]
                                                                                             
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                               1,065,298  1,169,056

Equipment notes, with interest imputed at 8.83%, due in fixed monthly                        
     installments of $9,033 (including interest) through December 2001                       
     Certain railroad equipment serves as collateral                       357,824    434,723

Equipment notes, with interest imputed at 8.76%, due in fixed monthly                        
     installments of $8,988 (including interest) through October 2003                        
     Certain locomotives serve as collateral                               541,636    603,830

Equipment notes, with interest imputed at rates from 9.28% to 11.63%,                        
     due in fixed monthly installments of $11,744 (including interest)                       
     with varying maturities through February 2000. Certain equipment                        
     serves as collateral                                                  190,393    351,619

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 January 2001. Certain equipment                          
     serves as collateral                                                  958,821  1,194,791

Equipment note payable, bearing interest at 10.06%, due in fixed                             
     monthly installments of $16,434 (including interest) through                            
     July 2001. Certain equipment serves as collateral                     590,662    721,172

Equipment notes, bearing interest rates from 8.19% to 10.65%, due in                         
     fixed monthly installments of $6,091 (including interest) with                          
     varying maturities through April 2002. Certain vehicles                                 
     serve as collateral                                                   184,590     26,784

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                                   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     48,505

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 6,500 in a year, BNSF will credit payments                                   
     on this debt at a rate of $250 per car                              2,171,914  2,181,164


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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, 1997 and 1996 is $833,699                               
      and $878,169, respectively.  Railroad property serves as collateral.       529,136        486,146

 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, 1997 and 1996 is $39,018 and                                
      $50,330, respectively. Railroad property and equipment                                           
      serves as collateral.                                                      117,609        130,394

 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 and 1996 is $305 and $680, respectively. Railroad property                                  
      and equipment serves as collateral                                         12,623         39,868 

 Lines of credit, totaling $2.0 million ranging in monthly interest                                    
      rates from 0.79% to 1.37%, maturing from 30 to 90 days.                  1,989,000              -

Capital lease obligation                                                       1,710,046      2,234,813
                                                                           -------------   ------------
                                                                              47,798,198     40,154,045
    Less current maturities                                                    3,923,036      1,752,926
                                                                           -------------   ------------

           Long-term debt, less current maturities                         $  43,875,162  $ 38,401,119 
                                                                           =============  ============ 


         On September 29, 1995, the Company entered into a revolving credit loan
        facility ("Revolver") with National Bank of Canada ("NBC"). In October
      1996 and May 1997, the Company closed on $10 million and $15 million
       increases in its Revolver, respectively. The Revolver's maturity date
 was extended to May 2000. In March 1998, the Company accepted a
     commitment letter to increase the Revolver to $55 million (see Note
         21). The Revolver bears interest at either the bank's prime rate (which
    was 8.25% at December 31, 1997) plus 0.5% 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.                                         

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10.      LONG-TERM DEBT, continued                                              

     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, 1997, the Company's Revolver was substantially fully
        funded based upon the collateral pledged at that time. The Company had
    an additional $5.3 million of availability for future purchases or
acquisitions.                                                 

     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:                                        

      1998                                    $  3,923,036
      1999                                       2,312,284
      2000                                      36,185,509
      2001                                       1,128,997
      2002                                         635,666
      Thereafter                                 3,612,706
                                              ------------
                                              $ 47,798,198
                                              ============

     During the years ended December 31, 1997, 1996 and 1995 interest of
approximately $69,000, $41,000 and $42,000, respectively, was 
capitalized.                                                  

Capital Leases                                                

The Company entered into equipment finance leases for certain 
         locomotives, tractors, trailers and other equipment expiring at various
       times through 2001. These leases are accounted for as capital leases.
      The financing of the purchase of the locomotives, 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 leases 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.

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10.      LONG-TERM DEBT, continued                                              

    The following is an analysis of the Company's assets under capital
leases at December 31, 1997:                                  

                                                                [Download Table]
                                                                              
Locomotives and transportation equipment  under capital leases      $3,001,849
Less accumulated amortization                                          453,694
                                                                    ----------
                                                                    $2,548,155
                                                                    ==========


       Minimum annual lease commitments at December 31, 1997 are as follows:

                                                                [Download Table]

                                            CAPITAL      OPERATING 
                                            LEASES         LEASES  
                                        -------------  ------------
                                                                   
1998                                     $    660,196  $  2,120,025
1999                                          597,184     2,088,167
2000                                          366,101     1,320,773
2001                                          264,857       968,995
2002                                               --       892,660
                                        -------------  ------------
       Total                                1,888,338  $  7,390,620
                                                       ============
  Less amount representing interest           178,292              
                                        -------------              
       Present value of future minimum                             
            lease payments                  1,710,046              
  Less current portion                        552,619              
                                        -------------              
       Noncurrent portion               $   1,157,427              
                                        =============              


      During 1995, due to the passage of time and other factors management
         determined that a contingent liability from the SCTR acquisition in the
     amount of approximately $337,000 no longer existed. The reversal of
this contingent liability is included in other income in the  
  accompanying consolidated statement of income for the year ended
December 31, 1995.                                            

   Rental expense under operating leases was approximately $853,000,
       $780,000 and $193,000 for the years ended December 31, 1997, 1996 and
1995, respectively.                                           

11.      SUBORDINATED DEBT:                                                     

      Subordinated debt consists of the following at December 31, 1997 and
1996:                                                         

                                                        [Enlarge/Download Table]

                                                                             1997          1996 
                                                                         -----------  ----------
                                                                                                
Convertible subordinated debentures, bearing interest at the prime rate                         
     (which was 8.25% at December 31, 1997) 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.            $ 1,000,000  $1,000,000
                                                                         -----------  ----------


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11.      SUBORDINATED DEBT, continued                                           

                                                        [Enlarge/Download Table]
                                                                                                   
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.                                         477,882       690,274

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.  Maturing June 30, 2005.                              2,000,000     2,000,000
                                                                      ---------------  ------------
                                                                            3,447,882     3,690,274
   Less current maturities                                                    212,392       212.392
                                                                      ---------------  ------------
                                                                      $     3,265,490  $  3,477,882
                                                                      ===============  ============


      The aggregate annual maturities of subordinated debt are as follows:

      1998                                        $  212,392
      1999                                           212,392
      2000                                           253,098
      2001                                           200,000
      2002                                           200,000
      Thereafter                                   2,400,000
                                                  ----------
                                                  $3,477,882
                                                  ==========

12.      OTHER REVENUE:                                                         

       Other revenue as of December 31, 1997, 1996 and 1995 consisted of the
following:                                                    

                                                                [Download Table]

                                       1997            1996            1995   
                                    ----------      ----------      ----------
                                                                              
Gain on sale of properties and                                                
    easements                       $1,250,699      $1,498,738      $  243,078
Rental income                          857,486         577,712         136,262
Other                                  364,003         160,772          58,457
                                    ----------      ----------      ----------
                                    $2,472,188      $2,237,222      $  437,797
                                    ==========      ==========      ==========


13.      REDEEMABLE CONVERTIBLE PREFERRED STOCK:                                

     On August 31, 1994, the Company issued 100,000 Series A Convertible
    Preferred Shares ("Series A Shares") to the former shareholders of
       Kalyn. The Series A Shares were convertible into the Company's common
     stock at a price of $2.25 per share at any time commencing one year
         after the date of issuance. The Series A Shares paid a nonparticipating
       cumulative annual dividend at the rate of $.50 per share. The Company
        redeemed all Series A Shares as of October 1, 1995 at a price of $3.75
         per share ($1,666,665) with subordinated promissory notes which matured
in January 1996.                                              

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14.      INCOME TAX PROVISION:                                                  

       The provision for income taxes for the years ended December 31, 1997,
1996 and 1995 consists of:                                    

                                                                [Download Table]
                                   1997           1996             1995   
                                ---------       ---------       --------- 
                                                                          
Federal income taxes:                                                     
   Current                      $       0       $  45,000       $ 400,000 
   Deferred                       708,382         411,405         250,643 
                                ---------       ---------       --------- 
                                  708,382         456,405         650,643 
                                ---------       ---------       --------- 
State income taxes:                                                       
   Current                        161,000          75,000         160,788 
   Deferred                       (26,000)          4,000          62,560 
                                ---------       ---------       --------- 
                                  135,000          79,000         223,348 
                                ---------       ---------       --------- 
Foreign income taxes:                                                     
   Current                             --              --              -- 
   Deferred                      (306,000)       (152,000)        (95,692)
                                ---------       ---------       --------- 
Total income tax provision      $ 537,382       $ 383,405       $ 778,299 
                                =========       =========       ========= 


      The following summarizes the total income tax provisions for each of
the years ended December 31, 1997, 1996 and 1995:             

                                                                [Download Table]
                                                                          
Continuing operations           $ 963,382       $ 705,405       $ 950,299 
Discontinued operations          (426,000)       (322,000)       (172,000)
                                ---------       ---------       --------- 
Total income tax provision      $ 537,382       $ 383,405       $ 778,299 
                                =========       =========       ========= 


   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 and Steel City
    Carriers, file Canadian income tax returns. The Company's majority
owned subsidiary Ferronor files Chilean income tax returns.   

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

                                                                [Download Table]

                                              1997          1996           1995    
                                           -----------   -----------   ----------- 
                                                                                   
Income tax provision, at 35%               $ 1,259,072   $   625,045   $   726,790 
Statutory federal Surtax exemption             (35,972)      (17,858)      (20,765)
State income tax, net of federal benefit        90,000        51,350       145,176 
Benefit due to Difference between U.S. &                                           
     Chilean tax rates                        (192,000)            0             0 
Benefit due to Utilization of Chilean Net                                          
     Operating Loss Carryforwards             (152,000)            0             0 
Non-deductible expenses, net                    33,000        45,100        41,000 
Other, net                                      60,282         1,768        28,098 
Valuation allowance                            (99,000)           --        30,000 
                                           -----------   -----------   ----------- 
                                           $   963,382   $   705,405   $   950,299 
                                           ===========   ===========   =========== 


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14.      INCOME TAX PROVISION, continued                                        

    The components of deferred income tax assets and liabilities as of
December 31, 1997 and 1996 are as follows:                    

                                                                [Download Table]

Deferred tax assets:                      1997              1996     
                                       -----------       ----------- 
                                                                     
Net operating loss carry forwards      $ 2,240,000       $   864,000 
Alternative minimum tax credit             495,000           557,000 
                                       -----------       ----------- 
    Total deferred assets                2,735,000         1,421,000 
Less: valuation allowance                 (609,000)         (183,000)
                                       -----------       ----------- 
    Total deferred assets, net           2,126,000         1,238,000 
Deferred tax liabilities:                                            
Depreciation and amortization            6,492,237         5,508,668 
Land                                     2,427,000         2,427,000 
Installment Sales                          226,000            56,000 
Other                                       48,000                 0 
                                       -----------       ----------- 
Net deferred tax liability             $(7,067,237)      $(6,753,668)
                                       ===========       =========== 


         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 $609,000 at December 31, 1997 and $183,000 at December 31,
     1996, respectively. The valuation allowance at December 31, 1997 is
       comprised of $84,000, which relates to prior year state net operating
  losses, and $525,000, which relates to current year acquired net
operating losses from Ferronor.                               

      No provision was made in 1997 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.                                                         

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15.      WARRANTS:                                                              

      In conjunction with the Company's initial public offering there were
576,886 Class A warrants, 576,886 Class B warrants and 55,000 
         underwriter unit purchase warrants issued. At the time of the issuance,
   each Class A warrant entitled its holder to purchase one share of
  common stock at a price of $3.85 per share. Each Class B warrant
         entitled its holder to purchase one share of common stock at a price of
      $4.55 per share. Each underwriter unit purchase warrant entitled its
         holder to two shares of the Company's Common Stock, one Class A warrant
         and one Class B warrant at a price of $11.55. Such exercise prices have
been adjusted, as described below.                            

         Under Statement of Rights, Terms and Conditions for Class A and Class B
       Callable Stock Purchase Warrants the exercise price and the number of
         shares exercisable per Warrant is subject to adjustment in the event of
      certain occurrences. The Class A, Class B and Unit Purchase Warrants
        were adjusted as of September 2, 1994 based on a series of events that
primarily involved the sale and issuance of common stock, and 
        securities convertible into common stock, which occurred in connection
      with the Company's acquisition of Kalyn. The adjusted exercise price
        for the Class A and Class B Warrants became $3.09 and $3.50 per share,
    respectively, and the adjusted exercise price of the Unit Purchase
     Warrants became $8.32. The Unit Purchase Warrants were subsequently
      adjusted to $7.97. The adjusted number of shares exercisable for the
    Class B Warrants and the Unit Purchase Warrants became 749,951 and
79,704, respectively.                                         

         In the first quarter of 1995, all of the Class A warrants except 10,445
       were exercised. The remaining shares expired as of March 31, 1995. In
 addition, during the first quarter of 1995 one half of the unit
         purchase warrants were exercised. The Class B warrants were exercisable
       and subject to being called by the Company beginning November 9, 1993
        (until November 9, 1997). The Company exercised its option to call the
 Class B warrants in February 1997. After the call provision was
         exercised the Class B warrants expired March 31, 1997. All but 3,759 of
      the Class B warrants were exercised. All the remaining Unit Purchase
Warrants were exercised during 1997.                          

         In June 1995, the Company granted 127,500 warrants exercisable into the
     Company's common stock at $4.25 per share, subsequently adjusted to
    $4.09 per share, in settlement of certain litigation. All of these
warrants were exercised in May 1997.                          

16.      STOCK OPTIONS:                                                         

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

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16.      STOCK OPTIONS, continued                                               

         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.                                 

    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. Under this
   employment arrangement Mr. Marino was issued 50,000 shares of the
   Company's common stock as a signing bonus. The Company recognized
       compensation expense equal to the number of shares issued at the fair
     market value at the time of issuance. This compensation expense was
recognized in the third quarter of 1995.                      

         Mr. Marino's arrangement also 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. Mr. Marino is also entitled to receive 30,000
   shares of the Company's common stock subject to certain terms and
conditions.                                                   

      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.                                                    

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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 1997, 1996 and 1995 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 1997, 1996 and 1995 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:

                                                                [Download Table]

                                             1997          1996          1995    
                                          -----------  ------------  ----------- 
                                                                                 
Net income - as reported                  $ 1,939,199  $    504,879  $   868,333 
                                          ===========  ============  =========== 
Net income - pro forma                    $ 1,152,411  $     17,005  $   546,946 
                                          ===========  ============  =========== 

Basic net income per share - as reported  $      0.23  $       0.10  $      0.04 
                                          ===========  ============  =========== 
Basic net income (loss) per share -                                              
         pro forma                        $      0.14  $       0.00  $     (0.03)
                                          ===========  ============  =========== 


    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 1997,
     1996 and 1995: dividend yield 0.0%; expected volatility of 45%-55%;
         risk-free interest rate of 6.36% -7.8%; and expected lives of 10 years.
       The weighted average fair value of options granted for 1997, 1996 and
1995 were $3.08, $2.65, and $2.68, respectively.              

       Information regarding the above options for 1997, 1996 and 1995 is as
follows:                                                      

                                                                [Download Table]

                                                             WEIGHTED
                                                             AVERAGE 
                                              NUMBER OF      EXERCISE
                                                SHARES        PRICE  
                                              ---------      --------
                                                                     
Outstanding at January 1, 1995                  875,000      $   3.38
Granted                                         251,000      $   3.90
Exercised                                            --            --
Forfeited                                       277,500      $   3.00
Outstanding at December 31, 1995                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


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16.      STOCK OPTIONS, continued                                               

                                                                [Download Table]

                                                             WEIGHTED    
                                                             AVERAGE     
                                              NUMBER OF      EXERCISE    
                                               SHARES         PRICE      
                                              ---------      --------    
                                                                         
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    

Options exercisable at December 31, 1997      1,234,233      $   4.11    

Option price range at December 31, 1997                $3.10 to $5.00    

Weighted average remaining contractual life at                           
  December 31, 1997                                            7.27 years


     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, 1997
        and 1996, 23,433 and 17,897 shares of common stock, respectively, were
sold to employees under this plan.                            

17.      NONCASH INVESTING AND FINANCING ACTIVITIES:                            

     On August 31, 1994, the Company issued 100,000 Series A Convertible
    Preferred Shares ("Series A Shares") to the former shareholders of
        Kalyn as part of the acquisition. The Series A Shares were redeemed on
      October 1, 1995, for $1,666,665 of 5% subordinated promissory notes,
which matured January 1996.                                   

        The Company issued 5,000 and 4,200 shares of common stock to employees
in the first quarter of 1995 and the first quarter of 1996,   
        respectively, and 50,000 shares of common stock to the Company's Chief
    Executive Officer in the third quarter of 1995. The Company issued
        20,000 shares of common stock to the Company's Chief Executive Officer
      for a $95,000 note receivable during 1997. 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.                                                         

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17.      NONCASH INVESTING AND FINANCING ACTIVITIES, continued                  

      The Company incurred approximately $16.1 million and $2.0 million in
     debt to acquire property, plant and equipment during 1996 and 1997,
     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.                                                     

        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.                              

      Capital lease obligations of $516,746 were incurred when the Company
entered into leases for tractors and trailers during 1995.    

     Cash paid for interest during 1997, 1996 and 1995 was $3.9 million,
         $2.4 million and $1.4 million, respectively. Cash paid for income taxes
    during 1997, 1996 and 1995 was $0.2 million, $0.6 million and $0.2
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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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 and RailAmerica Equipment Corporation. All of the
      Company's continuing operations for 1995 and 1996 were in the United
    States. During 1997 the Company acquired operations in Chile and a
minority interest in Australian operations.                   

         Business segment information for the year ended December 31, 1997, 1996
and 1995 (dollar amounts in thousands):                       

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 


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 


YEAR ENDED DECEMBER 31, 1995:                                 

                                                                [Download Table]

                                          RAIL                       CORPORATE 
                        CONSOLIDATED  TRANSPORTATION  MANUFACTURING   OVERHEAD 
                        ------------  --------------  -------------   -------- 

                                                                               
Revenue                     $25,078        $ 7,205       $17,873       $    -- 
Operating income(loss)      $ 3,188        $ 2,670       $ 2,646       $(2,128)
Identifiable assets         $35,058        $18,856       $10,706       $ 5,496 
Depreciation and                                                               
    amortization            $ 1,232        $   824       $   408               
Capital expenditures        $ 2,300        $ 1,724       $   576               


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

                                                                [Download Table]

                              CONSOLIDATED  UNITED STATES   CHILE      AUSTRALIA
                              ------------  -------------   -----      ---------
                                                                                
Revenue                           $47,437      $39,375      $ 8,062      $    --
Operating income(loss)            $ 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      $    --


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20.      SEGMENT INFORMATION, continued                                         

         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 1998, Kalyn acquired all of the outstanding stock of
     Canadian truck trailer manufacturer Fabrex, Inc. and its affiliate,
      Services Remorques Plus, Inc. for approximately $2.0 million is cash
   and RailAmerica common stock and assumption of approximately $1.0
         million of long-term debt. Fabrex, located in Trois Rivieres, Quebec, a
         manufacturer of specialty bulk-hauling truck trailers used in the solid
      waste, agricultural and construction industries was founded in 1985.

      In January 1998, the Company declared a dividend distribution of one
      Common Stock Purchase Right (a "Right") on each outstanding share of
       the Company's Common Stock pursuant to a Common Stock Purchase Rights
Plan (the "Plan") designed to prevent partial tender offers,  
      squeeze-outs, open market accumulations and other coercive or unfair
        tactics to gain control of the Company. The Plan works by diluting the
        Common Stock of the Company held by a potential acquirer or the common
  stock of an acquiring company. Under the Plan, the Rights become
      exercisable ten business days following the acquisition of or tender
        offer for 15% or more of the Company's Common Stock (or 10% in certain
         circumstances). The Board of Directors of the Company may then exchange
      the Rights, (except any Rights held by the acquiring party or group)
         into Common Stock of the Company at a one-for-one ratio. The Rights are
   redeemable by the Company's Board of Directors. While the Company
       believes that the Plan will protect the rights of its stockholders by
         enabling them to realize the long-term value of their investment in the
 Company, the Plan may have the effect of discouraging potential
  acquisitions of the Company or large blocks of its Common Stock.

  In March 1998, the Company accepted a commitment letter from the
         National Bank of Canada as agent for Comerica Bank and Southtrust Bank,
   N.A. to increase its Revolver from $40 million to $55 million and
     extend the maturity date until 2001. The increase is anticipated to
close in April 1998.                                          

F-32

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RAILAMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

------- 

22.      UNAUDITED QUARTERLY FINANCIAL DATA:                                    

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

                                                                [Download Table]

                                    FIRST       SECOND      THIRD    FOURTH  
                                   QUARTER(A)  QUARTER(B)  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


      Quarterly financial data for 1996 in as follows (in thousands except
per share amounts)                                            

                                                                [Download Table]

                                    FIRST       SECOND      THIRD    FOURTH  
                                   QUARTER(A)  QUARTER(B)  QUARTER   QUARTER 
                                   ----------  ----------  -------   ------- 
                                                                             
Operating revenue                   $ 6,144     $ 7,024     $ 5,912   $ 6,578
Operating income                    $   940     $ 1,156     $   557   $ 1,220
Net income from                                                              
  continuing operations             $   325     $   429     $    63   $   263
Basic net income from                                                        
  continuing operations per share   $  0.07     $  0.09     $  0.01   $  0.04
Diluted net income from                                                      
  continuing operations per share   $  0.07     $  0.09     $  0.01   $  0.04


         (a)  The first quarter of 1997 has been restated to include Ferronor in
              as a consolidated subsidiary and also to adjust for an increase in
       operating expenses. The previously reported net income from
      continuing operations was $350 and the previously reported
         earnings per share adjusted for the adoption of SFAS No. 128,
was $0.05.                                          

(b)  The second quarter of 1997 has been restated to reduce   
         transportation revenue. The previously stated net income from
      continuing operations was $663 and the previously reported
         earnings per share adjusted for the adoption of SFAS No. 128,
was $0.08.                                          

         (c)  The second quarter 1996 operating revenue is restated to eliminate
            intercompany sales between Kalyn and Steel City Carriers with no
effect on operating income.                         

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
		3/31/93		41
		11/9/93		69
		12/31/93		25		42
		4/15/94		42
		8/31/94		66		72
		9/2/94		69
		10/17/94		42
		11/11/94		40
		11/25/94		41
		12/14/94		42
		12/19/94		40
		12/31/94		3		26
		1/1/95		48		71
		1/23/95		73
		2/6/95		40
		2/10/95		16		57
		3/15/95		40
		3/31/95		69
		6/30/95		42
		7/11/95		40
		8/9/95		42
		8/31/95		57		65
		9/1/95		26		30
		9/29/95		40		63
		9/30/95		42
		10/1/95		35		72
		10/11/95		40
		11/1/95		26		57
		11/3/95		42
		11/12/95		42
		12/31/95		8		74
		1/1/96		66
		1/26/96		41
		3/1/96		70
		4/12/96		42
		6/30/96		19					10QSB
		7/1/96		26
		7/18/96		41					SC 13D
		7/30/96		42
		8/5/96		41
		8/12/96		42
		9/6/96		26		42			8-K
		9/12/96		42					8-K
		9/20/96		41
		9/30/96		42					10QSB, 8-K, 10-C
		10/1/96		26		57
		10/11/96		42		57			8-K/A, 8-K
		10/17/96		42					8-K, 10-C
		10/25/96		42					8-K
		11/18/96		26
		12/28/96		27
		12/31/96		4		74			10KSB/A, 10KSB
		2/19/97		30		56			8-K, S-8
		2/20/97		30
		3/1/97		70
		3/3/97		41
		3/6/97		24					8-K
		3/20/97		16		35
		3/31/97		42		69			10-Q/A, 10KSB, NT 10-Q, 10-Q
		5/3/97		36
		6/2/97		42					DEF 14A
		9/8/97		26		27
		9/30/97		26		60			10-Q
		10/31/97		27		58
		11/9/97		69
		11/14/97		42					10-Q, 10-Q/A
		12/3/97		26					SC 13D
		12/15/97		37		54
For The Period Ended		12/31/97		1		74
		1/1/98		70
		3/1/98		37
		3/24/98		1
		3/25/98		45
		3/27/98		24
		3/28/98		1
Filed On / Filed As Of		3/31/98		43					10-Q
		4/30/98		39					DEF 14A
		6/18/98		1					DEF 14A
		6/30/98		61					10-Q
		9/30/98		17					10-Q
		9/13/00		63
		6/30/03		61					10-Q
		7/1/04		63					8-K, 4
		11/11/04		70
		6/30/05		66					10-Q
		10/31/07		58
		12/1/08		63
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