UNITED STATES SECURITIES AND EXCHANGE COMMISSION

FORM 10-K

þ Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

o Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Commission file number 0-20618

RAILAMERICA, INC.

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

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

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

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

Indicate by check mark 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 þ No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2) Yes þ No o

The aggregate market value of the voting stock held by non-affiliates of the registrant as of June 30, 2004 computed by reference to the average bid and asked prices of registrant’s common stock reported on the New York Stock Exchange on such date was $541.6 million.

The number of shares outstanding of registrant’s Common Stock, $.001 par value per share, as of March 11, 2005 was 37,754,199.

DOCUMENTS INCORPORATED BY REFERENCE

The information required by Part III (Items 10, 11, 12, 13 and 14) will be incorporated by reference from the registrant’s Definitive Proxy Statement for its 2005 Annual Meeting of Stockholders to be filed with the Commission pursuant to Regulation 14A.

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TABLE OF CONTENTS

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

PART I

ITEM 1. BUSINESS

GENERAL

     We are the largest owner and operator of short line freight railroads in North America. We own, lease or operate a diversified portfolio of 44 railroads with approximately 8,800 miles of track located in the United States and Canada. Through our diversified portfolio of rail lines, we operate in numerous geographic regions with varying concentrations of commodities hauled. Our business strategy is to focus on our North American railroad operations. Accordingly, during 2004, we sold our Australian and Chilean railroads. We seek to grow both through the expansion of the traffic base on our existing railroads and acquisitions of additional North American railroads.

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

     In August 2004, we completed the sale of Freight Australia to Pacific National for AUD $285 million (US $204 million). In December 2004, we recorded an additional payment of AUD $7 million (US $5 million) based on the changes in the net assets of Freight Australia from September 30, 2003 through August 31, 2004. The Share Sale Agreement also provides various representations and warranties by RailAmerica to the buyer. Freight Australia’s results of operations for the periods presented have been reclassified to discontinued operations in our consolidated financial statements.

     Since 2000, we have grown significantly through the following:

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

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

BUSINESS STRATEGY

     PROVIDING SUPERIOR CUSTOMER SERVICE. We strive to increase our revenue by providing consistent, innovative, cost-efficient and reliable service to our customers. We work with customers, potential customers, industrial development organizations and our Class I interchange partners to develop creative transportation solutions. Our decentralized management structure is an important element of our marketing strategy. We give significant discretion with respect to sales and marketing activities to our local marketing managers and the General Managers of each railroad. As part of our marketing efforts, we often schedule more frequent rail service, help customers negotiate price and service levels with interchange partners and assist customers in obtaining the quantity and type of rail equipment required for their operations. We also provide non-scheduled train service on short notice to accommodate customers’ special or emergency needs. We consider all of our employees to be customer service representatives and encourage them to initiate and maintain regular contact with shippers.

     OPERATING SAFELY AND EFFICIENTLY. We are focused on operating safe railroads in an efficient manner. Through training, supervision and safety programs, we have reduced our FRA frequency ratio from 5.83 in 1999 to 2.75 in 2004. FRA frequency ratio is measured as reportable injuries per 200,000 man hours worked. In addition, we manage each of our railroads as an individual profit center allowing local management to make decisions on how to operate the railroad efficiently and profitably. We support the individual railroad operations with centralized purchasing, accounting, human resources, information technology and legal services, allowing us to realize synergies and economies of scale based on our size.

     CONTINUE TO GROW THROUGH SELECTIVE ACQUISITIONS. Over the last eleven years, we have completed twenty-eight acquisitions of railroad companies which owned or had equity interests in 61 railroads, for total consideration in excess of $700 million.

     We seek acquisition candidates that enable us to form geographic clusters of short lines, thereby affording management economies of scale as well as marketing and operating synergies. To be considered by us, acquisition candidates must typically be profitable, generate strong cash flows, have potential for further growth and possess well-maintained infrastructures.

     Acquisition opportunities in North America generally come from three sources. First, certain of the Class I railroads have been selling/leasing branch lines over the past year. We acquired/leased two branch lines from CSX during 2004. We believe, based on our strong operating performance and relationships with the Class I railroads, we are a logical choice to acquire additional properties in the future. Second, as the short line industry itself continues to consolidate, we believe our industry reputation, demonstrated access to capital, breadth of geographic coverage and ability to efficiently evaluate and negotiate prospective transactions place us in a good position to acquire other independent short lines or short line holding companies. Third, as industrial companies sell their railroad operations, we believe our cost-effective and customer oriented approach makes us a strong candidate to acquire these railroads.

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

INDUSTRY OVERVIEW

     The U.S. railroad industry is dominated by major Class I railroads, which operated approximately 99,000 miles of track in 2003. In addition to large railroad operators, there were more than 540 short line and regional railroads, which operated approximately 42,000 miles of track in 2003.

     The railroad industry is subject to regulation by various government agencies, primarily the Surface Transportation Board, or STB. For regulatory purposes, the STB classifies railroads into three groups: Class I, Class II and Class III, based on annual operating revenue. For 2003, the Class I railroads each had operating revenue of at least $277.7 million, Class II railroads each had revenue of $22.2 million to $277.6 million, and Class III railroads each had revenue of less than $22.2 million. These thresholds are adjusted annually for inflation.

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

2003 UNITED STATES INDUSTRY OVERVIEW

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

     In 2004 the majority of the Class I railroad short line spin-offs were created by CSX Transportation and BNSF Railway Company. The other Class I railroads had a limited number of short line railroad opportunities. Class I railroads have been divesting short line candidates via a variety of means: (a) outright sale for cash consideration, (b) a lease of the railroad right-of-way for a period ranging from 10 to 25 years, or (c) a lease of the land and a sale of the track and track-related structures. The current trend of the Class I railroads appears to favor leases over sales.

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NORTH AMERICAN OPERATIONS

     We currently own, lease or operate 44 rail properties in North America, of which 43 are short line freight railroads that provide transportation services for both on-line customers and Class I railroads that interchange with our rail lines. Short line railroads are typically less than 350 miles long, serve a particular class of customers in a small geographic area and interchange with Class I railroads. Short line rail operators primarily serve customers on their line by transporting products to and from the Class I interchanges. Each of our North American rail lines is typically the only rail carrier directly serving its customers. The ability to haul heavy and large quantities of freight as part of a long-distance haul makes our rail services generally a more effective, lower-cost alternative to other modes of transportation, including motor carriers. In addition to our 43 short line railroads, we operate a tourist railroad in Hawaii.

     UNITED STATES. We own, lease or operate 35 short line rail properties and one tourist railroad in the United States with approximately 7,000 miles of track. Our railroads are geographically diversified and operate in 26 states. We have clusters of rail properties in the Southeastern, Southwestern, Midwestern, Great Lakes, New England and Pacific Coast regions of the United States. We believe that this cluster strategy provides economies of scale and helps achieve marketing and operational synergies.

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

RAIL TRAFFIC

     Rail traffic may be categorized as interline, local or bridge traffic. Interline traffic either originates or terminates with customers located along a rail line and is interchanged with other rail carriers. Local traffic both originates and terminates on the same rail line and does not involve other carriers. Bridge traffic passes over the line from one connecting rail carrier to another without the carload being originated or terminated on the line.

     Interline and local traffic generated 88%, 87% and 87% of our total freight revenue in 2004, 2003 and 2002, respectively. We believe that high levels of interline and local traffic provide us with greater stability of revenue because this traffic represents shipments to or from customers located along our lines and cannot be easily diverted to other rail carriers, unlike bridge traffic.

     In addition to competition with other rail carriers, our railroads compete directly with other modes of transportation, principally motor carriers and, to a lesser extent, ship and barge operators. The extent of this competition varies significantly among our railroads. Competition is based primarily upon the rate charged and the transit time required, as well as the quality and reliability of the service provided for an origin-to-destination package. To the extent other carriers are involved in transporting a shipment, we cannot unilaterally control the rate and quality of service. Cost reductions achieved by major rail carriers over the past several years have generally improved their ability to compete with alternate modes of transportation.

     The following table summarizes freight revenue by type of traffic carried by our North American railroads in 2004, 2003 and 2002 in dollars and as a percentage of total freight revenue.

FREIGHT REVENUE
(DOLLARS IN THOUSANDS)

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     All of our short line properties interchange traffic with Class I railroads. The following table summarizes our significant connecting carriers in 2004, 2003 and 2002 by freight revenue and carloads as a percentage of total interchanged (interline and bridge) traffic.

INTERCHANGED TRAFFIC

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

     In 2004, we served approximately 1,800 customers in North America. These customers shipped and/or received a wide variety of products. Although most of our North American railroads have a well-diversified customer base, several of the smaller rail lines have one or two dominant customers. In 2004 and 2003, our 10 largest North American customers accounted for approximately 21% and 27% of our North American transportation revenue, respectively. No individual customer accounted for more than 10% of our revenue for the years ended 2004 and 2003.

     The following table sets forth, by number and percentage, the carloads hauled by our North American railroads during the years ended December 31, 2004, 2003 and 2002.

CARLOADS CARRIED BY COMMODITY GROUP

EMPLOYEES

     Currently, we have approximately 1,740 full-time railroad employees and 120 full-time corporate employees. Approximately 850 of our railroad employees are subject to collective bargaining agreements.

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SAFETY

     We endeavor to conduct safe railroad operations for the benefit and protection of employees, customers and the communities served by our railroads. Our safety program, led by the Vice President of Safety and Operating Practices, involves all of our employees and is administered by each Regional Vice President. Operating personnel are trained and certified in train operations, hazardous materials handling, personal safety and all other areas subject to governmental rules and regulations. Each U.S. employee involved in train operations is subject to pre-employment and random drug testing whether or not required by federal regulation. We believe that each of our North American railroads complies in all material respects with federal, state, provincial and local regulations. Additionally, each railroad is given flexibility to develop more stringent safety rules based on local requirements or practices. We also participate in committees of the AAR, governmental and industry sponsored safety programs including Operation Lifesaver (the national grade crossing awareness program) and the American Short Line and Regional Railroad Association Safety Committee. Our reportable injury frequency ratio, measured as reportable injuries per 200,000 man hours worked, was 2.75 in 2004 as compared to 2.05 in 2003 and 3.05 in 2002.

REGULATION

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

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

     As a result of the 1980 Staggers Rail Act, railroads have received considerable rate and market flexibility including the ability to obtain wholesale exemptions from numerous provisions of the Interstate Commerce Act. The Staggers Rail Act allowed the deregulation of all containerized and truck trailer traffic handled by railroads. Requirements for the creation of new short line railroads or the expansion of existing short line railroads were substantially expedited and simplified under the exemption process. On regulated traffic, railroads and shippers are permitted to enter into contracts for rates and provision of transportation services without the need to file tariffs. Moreover, on regulated traffic, the Staggers Rail Act allows railroads considerable freedom to raise or lower rates without objection from captive shippers. While the ICC Termination Act retained maximum rate regulation on traffic over which railroads have exclusive control, the new law relieved railroads from the requirements of filing tariffs and rate contracts with the STB on all traffic other than agricultural products.

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

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

     Short line railroads located within the boundaries of a single province which do not otherwise fall within the federal jurisdiction are regulated by the laws of the province in question, including laws as to licensing and labor relations. Most of Canada’s ten provinces have enacted new legislation, which is more favorable to the operation of short line railroads than previous provincial laws. Many of the provinces require as a condition of licensing under the short line railroads acts that the

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licensees comply with federal regulations applicable to safety and other matters and remain subject to inspection by federal railway inspectors. Under some provincial legislation, the sale of a provincially regulated railroad line is not subject to provincial approval, although a process of advertising and negotiating may be required in connection with any proposed discontinuance of a provincial railway.

     Acquisition of additional railroad operations in Canada, whether federally or provincially regulated, may be subject to review under the Investment Canada Act, or ICA, a federal statute which applies to the acquisition of a Canadian business or establishment of a new Canadian business by a non-Canadian. In the case of an acquisition that is subject to review, the non-Canadian investor must observe a statutory waiting period prior to completion and satisfy the Minister responsible for the administration of the ICA that the investment will be of net benefit to Canada, having regard to certain evaluative factors set out in the legislation.

     Any contemplated acquisitions may also be subject to the provisions of the Competition Act (Canada), or CA. The CA contains provisions relating to premerger notification as well as substantive merger provisions. An Acquisition that exceeds certain financial thresholds set out in the CA may be subject to notification and observance of statutory waiting period prior to completion, during which time the Commissioner of Competition (the “Commissioner”) will evaluate the impact of the acquisition upon competition. In addition, the Commissioner has the jurisdiction under the CA to review an acquisition that is a “merger” within the meaning of the CA in certain circumstances even where notification is not filed.

FREIGHT AUSTRALIA

     In August 2004, we completed the sale of Freight Australia to Pacific National for AUD $285 million (US $204 million). In addition, the Share Sale Agreement provided for an additional payment to RailAmerica of AUD $7 million (US $5 million) based on the changes in the net assets of Freight Australia from September 30, 2003 through August 31, 2004, which was received in December 2004, and also provided various representations and warranties by RailAmerica to the buyer. Freight Australia’s results of operations for the periods presented have been reclassified to discontinued operations in our consolidated financial statements.

FERRONOR

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

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ITEM 2. PROPERTIES

NORTH AMERICAN RAILROAD PROPERTIES

We operate over 8,800 miles of track in North America. The following map displays all of our North American railroad properties as of March 11, 2005:

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The following table sets forth information with respect to the North American railroad properties that we owned or leased as of March 11, 2005:

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NORTH AMERICAN ROLLING STOCK

     The following tables summarize the composition, as of December 31, 2004, of our railroad equipment fleet.

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

ADMINISTRATIVE OFFICES AND OTHER

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

ITEM 3. LEGAL PROCEEDINGS

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

     On February 7, 2005, the Surface Transportation Board entered an Order setting the terms for sale of our Toledo, Peoria & Western Railway’s 76 mile La Harpe – Hollis Line in western central Illinois to Keokuk Junction Railway Company, or KJRY, as a result of KJRY’s application under the Feeder Line Statute, 49 USC sec. 10907. We believe that the STB-ordered sale of the line at the mandated price of $4.2 million was not in accordance with the rules and regulations governing such STB action and did not reflect the line’s value or adequately compensate us as required by these rules and regulations. As a result, we intend to appeal the Order to the U.S. Circuit Court of Appeals. We are unable to predict the outcome of this appeal, however, we do not believe the final outcome of this matter will materially affect our financial position, results of operations or cash flows.

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

     No matters were submitted to a vote of security holders during the fourth quarter of 2004.

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PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY , RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

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

     As of March 11, 2005, there were approximately 548 holders of record and we believe at least 5,300 beneficial owners of our common stock. We have never declared or paid a dividend on our common stock. Our senior credit agreement limits our ability to pay dividends.

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ITEM 6. SELECTED FINANCIAL DATA

     The results of our continuing operations for the years ended December 31, 2004, 2003, 2002, 2001 and 2000 include the results of certain railroads from the dates they were acquired by purchase or lease as follows: Midland Subdivision effective October 15, 2004; Chicago, Fort Wayne & Eastern Railroad effective July 31, 2004; Central Michigan Railway effective January 25, 2004; San Luis and Rio Grande Railroad effective June 29, 2003; the Mobile Line, effective June 1, 2003; StatesRail, effective January 4, 2002; ParkSierra, effective January 8, 2002; and RailTex, effective February 1, 2000. The income statement data for the years ended December 31, 2004, 2003 and 2002 and the balance sheet data at December 31, 2004 and 2003 are derived from, and are qualified by reference to, audited financial statements included elsewhere in this report and should be read in conjunction with those financial statements and the notes thereto. The income statement data set forth below for the periods ended December 31, 2001 and 2000 and the balance sheet data as of December 31, 2002, 2001 and 2000 are derived from our financial statements not included. Freight Australia, Ferronor, the Arizona Eastern Railway Company and West Texas and Lubbock Railroad, all sold in 2004, have been presented as discontinued operations and thus have been excluded from the income statement data and freight carloads within the operating data.

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

     Substantial Debt and Debt Service. As of December 31, 2004, we had indebtedness of $367.4 million and, as a result, we incur significant interest expense. The degree to which we are leveraged could have important consequences, including the following:

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

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     As of December 31, 2004, we had no outstanding borrowings under our revolving credit facility. This facility allows us to borrow a total of $100 million for any purpose and we may borrow up to an additional $100 million of term debt in connection with acquisitions if we meet specified conditions. If new debt is added to our current debt levels, the related risks that we face would intensify. As of March 11, 2005, we had no borrowings outstanding under the revolving credit facility.

     Covenant Restrictions. Our credit facilities contain numerous covenants imposing restrictions on our ability to, among other things:

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

     Fuel Costs. Fuel costs were approximately 9.2% of our revenue for the year ended December 31, 2004, 7.0% for the year ended December 31, 2003 and 6.9% for the year ended December 31, 2002. Fuel prices and supplies are influenced significantly by international, political and economic circumstances. If fuel supply shortages or unusual price volatility were to arise for any reason, the resulting higher fuel prices would significantly increase our operating costs. We did not have any fuel hedges in place for 2004. For 2005, approximately 30% of our fuel costs are subject to fuel hedges which will partially offset any increases in fuel costs.

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

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

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

     Continuing Relationships with Class I Carriers. The railroad industry in the United States and Canada is dominated by a small number of Class I carriers that have substantial market control and negotiating leverage. Almost all of the traffic on our North American railroads is interchanged with Class I carriers. Our ability to provide rail service to our customers in North America depends in large part upon our ability to maintain cooperative relationships with Class I carriers with respect to, among other matters, freight rates, car supply, reciprocal switching, interchange and trackage rights. In addition, loss of

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customers or service interruptions or delays by our Class I interchange partners relating to customers who ship over our track, may decrease our revenue.

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

     Foreign Operations. We currently have railroad operations in Canada. The risks of doing business in foreign countries include:

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

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

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

     Casualties and Insurance expenditures. We have obtained insurance coverage for losses sustained by our railroads arising from personal injury and for property damage in the event of derailments or other incidents. However, we are responsible for the first $750,000 of expenditures per each incident under our general liability insurance policy and $1,000,000 of expenditures per each incident under our property insurance policy. In addition, in each policy period, we are responsible for the first $1 million of expenditures, in the aggregate, in a policy period on any incidents excess of $750,000 under our general liability insurance policy. Severe accidents or personal injuries could cause our liability to exceed our insurance limits which might have a material adverse effect on our business and financial condition. Our annual insurance limits are $100 million and $10 million on liability and property, respectively. In addition, adverse events directly and indirectly applicable to us, including such things as derailments, accidents, discharge of toxic waste, or other like occurrences in the industry, may result in additional increases in our insurance premiums and/or our self insured retentions and could result in limitations to the coverage under our existing policies.

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

GENERAL

     We pursue growth by seeking to increase the number of our carloads and our average rate per carload and by continuing our selective acquisition program of seeking railroads that we believe will provide operating efficiencies, strategic advantages and/or profit improvement opportunities. Our operating costs include labor, equipment rents (locomotives and railcars), purchased services (contract labor and professional services), diesel fuel, casualties and insurance, materials and other expenses. Each of these costs is included in one of the following functional departments: maintenance of way, maintenance of equipment, transportation, equipment rental, and selling, general & administrative. In addition, depreciation of our fixed assets and asset sale gains and losses are significant components of our operating income.

     Carload Growth and Acquisitions

     Total North American carloads increased by 8.9%, including 3.2% on a “same railroad” basis, during the year ended 2004 compared to the year ended 2003, with the average rate per carload increasing from $274 to $288. “Same railroad” amounts exclude amounts associated with railroads, or portions of railroads, sold or acquired by the Company after January 1, 2004.

     During the second quarter of 2003, we acquired two branch lines, the 154 mile San Luis & Rio Grande Railroad in Colorado and the 288 mile Mobile Line, which is contiguous with our existing Alabama & Gulf Coast Railway.

     On January 25, 2004, we acquired the assets of the Central Michigan Railway Company, which operates 100 miles of rail line in Michigan. The results of operations of this acquisition have been included in our consolidated financial statements since this date.

     In July 2004, we executed an agreement with CSX Transportation, Inc. to lease 276 miles of railroad known as the Chicago, Fort Wayne & Eastern Railroad for twenty years. We assumed control of the operations on August 1, 2004. The results of operations of this railroad have been included in our consolidated financial statements since this date.

     On June 28, 2004, we commenced operations of Mockingbird Yard in Dallas and 11 miles of track through a 10 year agreement with the Union Pacific Railroad. Under terms of the agreement with Union Pacific, the Dallas Garland & Northeastern Railroad will serve customers on the line, with the intention of growing the business and creating a more efficient interchange with the Union Pacific.

     On October 15, 2004, we executed an agreement with CSX Transportation, Inc. to purchase 107 miles of railroad from Cincinnati, Ohio to Columbus, Ohio, known as the Midland Subdivision. We also entered into a 25 year lease of related real estate. The results of operations of this acquisition have been included in our consolidated financial statements since this date.

     Divestitures and debt reduction

     A major focus for us in 2004 was to continue to decrease our leverage and focus exclusively on our North American operations. Accordingly, during 2004 we completed the sale of our 55% equity interest in Ferronor, a Chilean railroad, and Freight Australia, our Australian railroad. The proceeds from these two sales have been used to reduce our long-term debt and repurchase a majority of our senior subordinated notes. At December 31, 2004, we had reduced our net debt to total capitalization ratio to 47.4% from 59.2% at December 31, 2003.

     In February 2004, we completed the sale of our 55% equity interest in Ferronor, a Chilean railroad, for $18.1 million, consisting of $10.8 million in cash, a secured instrument for $5.7 million due no later than June 2010 and a secured instrument from Ferronor for $1.7 million due no later than February 2007, both bearing interest at 90 day LIBOR plus 3%. During the year ended December 31, 2004, we recognized a $4.0 million tax charge resulting from the sale of our interest in Ferronor and the repatriation of the cash to the U.S. Ferronor’s results of operations have been presented in discontinued operations on our consolidated financial statements.

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     In August 2004, we completed the sale of Freight Australia to Pacific National for AUD $285 million (US $204 million). The U.S. dollar proceeds include approximately $4.3 million as a result of foreign exchange hedges that were entered into during the third quarter of 2004. In addition, the Share Sale Agreement provided for an additional payment to RailAmerica of AUD $7 million (US $5 million) based on the changes in the net assets of Freight Australia from September 30, 2003 through August 31, 2004, which was received in December 2004, and also provides various representations and warranties by RailAmerica to the buyer. Potential claims against RailAmerica for violations of most of the representations and warranties are capped at AUD $50 million (US $39.5 million). We believe the ultimate impact of the representations and warranties will not have a material impact on our future results of operations. However, they could have a material impact on future cash flows. During the year ended December 31, 2004, we recognized a pre-tax gain of $20.2 million, or $2.0 million, net of income taxes as a result of this sale. The $18.2 million tax provision on the sale of Freight Australia includes a provision of $11.4 million for the previously unremitted earnings of Freight Australia. The proceeds from the sale of Freight Australia were used to repay senior debt and repurchase our senior subordinated notes. Freight Australia’s results of operations have been reclassified to discontinued operations on our consolidated financial statements.

     On September 29, 2004, we completed the purchase of $125.7 million of our $130 million principal amount of senior subordinated notes due 2010. At the same time, we amended our credit agreement to extend the maturity by two years, reduce the margin rate by 0.5%, borrow $350 million in term loans and increase the availability of the U.S. dollar denominated revolving loans by $10 million. We recorded a charge of $31.8 million during the year ended December 31, 2004, associated with these financing activities.

     During the second quarter of 2004, we committed to a plan to dispose of the Arizona Eastern Railway Company. Subsequent to committing to the disposal plan, we determined that the expected proceeds from the sale would be lower than anticipated and accordingly recorded an impairment charge of $4 million during the third quarter of 2004. We completed the sale of the Arizona Eastern Railway Company in December 2004 for $2.8 million in cash, resulting in a pretax gain on the sale of $0.3 million, or $0.2 million after tax. The results of operations for the Arizona Eastern Railway Company have been reclassified to discontinued operations for the periods presented.

     During December 2004, we also completed the sale of our West Texas and Lubbock Railroad for $1.8 million in cash and a long-term note of $3.6 million, resulting in a gain of $0.1 million before and after tax. The results of operations for the West Texas and Lubbock Railroad have been reclassified to discontinued operations for the periods presented.

     Commodity Mix

     Our railroads operate independently with their own management, employees and customer base. They are spread out geographically and carry a diverse mix of commodities. For the year ended December 31, 2004, bridge traffic accounted for 16%, coal accounted for 12%, and lumber and forest products accounted for 11% of our carloads in North America. As a percentage of revenue, which is impacted by several factors including the length of the haul, lumber and forest products generated 15%, chemicals generated 12% and paper products generated 10% of our North American freight revenue for the year ended December 31, 2004. Bridge traffic, which neither originates nor terminates on our line, generally has a lower rate per carload and generated 7% of our freight revenue during the year ended December 31, 2004.

Critical Accounting Estimates

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

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

     In accordance with Statement of Financial Accounting Standards, or SFAS, No. 5, “Accounting for Contingencies,” an accrual for a loss contingency is established if information available prior to the issuance of the financial statements indicates that it is probable that a liability has been incurred or an asset has been impaired and can be reasonably estimated. These estimates have been developed in consultation with outside counsel handling our defense in these matters and are based upon

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an analysis of potential results, assuming a combination of litigation and settlement strategies. Subsequent changes to those estimates are reflected in our statements of income in the period of the change.

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

     Property, plant and equipment comprised 86% of our total assets as of December 31, 2004. These assets are stated at cost, less accumulated depreciation. We use the group method of depreciation under which a single depreciation rate is applied to the gross investment in our track assets. Upon normal sale or retirement of track assets, cost less net salvage value is charged to accumulated depreciation and no gain or loss is recognized. Expenditures that increase asset values or extend useful lives are capitalized. Repair and maintenance expenditures are charged to operating expense when the work is performed. We periodically review the carrying value of our long-lived assets for impairment. This review is based upon our projections of anticipated future cash flows. While we believe that our estimates of future cash flows are reasonable, different assumptions regarding such cash flows could materially affect our evaluations.

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

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RESULTS OF OPERATIONS

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

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

     We disposed of certain railroads as follows:

     As a result, the results of operations for the years ended December 31, 2004, 2003 and 2002 are not comparable in various material respects and are not indicative of the results which would have occurred had the acquisitions or dispositions been completed at the beginning of the periods presented.

COMPARISON OF CONSOLIDATED OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003

     The following table sets forth the operating revenue and expenses by functional category for our consolidated operations for the periods indicated (in thousands).

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     The following table sets forth the operating revenue and expenses by natural category for our consolidated operations for the periods indicated (in thousands).

     OPERATING REVENUE. Operating revenue increased by $43.2 million, or 12%, to $395.6 million in the year ended 2004, from $352.3 million in the year ended 2003. Total carloads increased by 100,293, or 9%, to 1,231,435 in 2004 from 1,131,142 in 2003. Excluding revenue of $0.3 million in 2003 from the disposed San Pedro & Southwestern Railway, and $23.4 million in 2004 for the acquired Mobile Line, San Luis & Rio Grande Railroad, Central Michigan Railway, Chicago Fort Wayne & Eastern Railroad and Midland Subdivision, operating revenue increased $20.1 million or 6%, while carloads increased by 36,392 or 3%. The increase in “same railroad” revenue is primarily due to the increase in carloads, the strengthening of the Canadian dollar compared to the U.S. Dollar, which positively impacted operating revenue by $5.6 million for the year ended December 31, 2004, as well as changes in commodity mix and fuel surcharges. Non-freight revenue for the year ended December 31, 2003 included $1.0 million from the sale of easements along several of our railroad properties.

     The increase in the average rate per carload to $288 in the year ended December 31, 2004, from $274 in 2003, was primarily due to the improvement in the Canadian dollar, the acquisition of the Mobile Line and the Central Michigan Railway, which resulted in higher rates per carload due to increased lengths of haul, changes in commodity mix and the fuel surcharges.

     The following table compares North American freight revenue, carloads and average freight revenue per carload for the years ended December 31, 2004 and 2003:

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     Lumber and forest product revenue was $54.1 million in the year ended December 31, 2004, compared to $51.4 million in the year ended December 31, 2003, an increase of $2.7 million or 5%. This increase is primarily due to a strong demand for lumber as a result of new construction.

     Chemical revenue was $41.4 million in the year ended December 31, 2004, compared to $31.0 million in the year ended December 31, 2003, an increase of $10.4 million or 34%. This increase is primarily due to the Mobile Line, Central Michigan Railway and Chicago, Fort Wayne & Eastern Railroad acquisitions.

     Paper products revenue was $34.2 million in the year ended December 31, 2004, compared to $29.6 million in the year ended December 31, 2003, an increase of $4.6 million or 16%. This increase is due to the Mobile Line, Central Michigan Railway and the Chicago, Fort Wayne & Eastern Railroad acquisitions, an increase in paper production in Nova Scotia, increased business with existing customers in Oklahoma and New England and the strengthening of the Canadian dollar, partially offset by a decrease in carloads in Oregon as a result of a paper mill closure and Alabama as a result of Hurricane Ivan.

     Agricultural and farm products revenue was $33.9 million in the year ended December 31, 2004, compared to $30.7 million in the year ended December 31, 2003, an increase of $3.2 million or 10%. This increase is primarily due to the improved wheat crop in Kansas compared to prior year and service to a new business in northwest Canada, partially offset bumper crop of corn and soybeans in the Midwest as a result of a drought in the region.

     Metals revenue was $31.9 million in the year ended December 31, 2004, compared to $26.8 million in the year ended December 31, 2003, an increase of $5.1 million or 19%. This increase is primarily due to a customer’s plant expansion in North Carolina, a pipeline project in Kansas and the Mobile Line and Chicago, Fort Wayne & Eastern Railroad acquisitions.

     Coal revenue was $28.1 million in the year ended December 31, 2004, compared to $24.5 million in the year ended December 31, 2003, an increase of $3.6 million or 15%. This increase is a result of increased production at an existing customer in Arkansas, the acquisition of the Central Michigan Railway, new business in Nova Scotia and Indiana and the strengthening of the Canadian dollar.

     Food products revenue was $26.7 million in the year ended December 31, 2004, compared to $20.5 million in the year ended December 31, 2003, an increase of $6.2 million or 30%. This increase is due to new business moving soybeans and other products in Washington, increased business with existing customers in California and Texas and the acquisition of the Chicago, Fort Wayne & Eastern Railway.

     Railroad equipment and bridge traffic revenue was $24.5 million in the year ended December 31, 2004, compared to $23.4 million in the year ended December 31, 2003, an increase of $1.1 million or 5%. This increase is due to carload moves for a utility company in Arkansas returning to historical levels in 2004 from an abnormally low level in 2003 and additional haulage by Class I carriers.

     Petroleum products revenue was $21.1 million in the year ended December 31, 2004, compared to $18.3 million in the year ended December 31, 2003, an increase of $2.8 million or 15%. This increase is primarily due to an increase in the demand for petroleum products in Southern Ontario and Colorado, new business in Indiana, a strong propane market and the Chicago, Fort Wayne & Eastern Railroad acquisition.

     Minerals revenue was $19.3 million in the year ended December 31, 2004, compared to $17.3 million in the year ended December 31, 2003, an increase of $2.0 million or 11%. This increase is due to new fertilizer business in Indiana, new contracts in Alabama as a result of the Mobile Line acquisition, a strong demand for asphalt in Colorado and increased business with customers in Texas and Arizona.

     Metallic and non-metallic ores revenue was $18.8 million in the year ended December 31, 2004, compared to $15.2 million in the year ended December 31, 2003, an increase of $3.6 million or 24%. This increase is due to the acquisitions of the Mobile Line, San Luis & Rio Grande Railroad and Chicago, Fort Wayne & Eastern Railroad, increased carloads with existing customers in Texas, North Carolina and Alabama and new customer business in Oklahoma.

     Other revenue was $10.4 million in the year ended December 31, 2004, compared to $9.3 million in the year ended December 31, 2003, an increase of $1.1 million or 12%. This increase is primarily due to the Central Michigan Railway

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acquisition, a strong market for steel scrap and increased carloads with new and existing customers in Connecticut to move debris.

     Autos revenue was $6.7 million in the year ended December 31, 2004, compared to $8.1 million in the year ended December 31, 2003, a decrease of $1.4 million or 17%. This decrease is primarily due to the loss of business to another form of transportation in Michigan and customers losing contracts with the large automotive producers.

     Intermodal revenue was $3.8 million in the year ended December 31, 2004, compared to $4.2 million in the year ended December 31, 2003, a decrease of $0.4 million or 11%. This decrease is due to the closure of an intermodal facility in Indiana.

     OPERATING EXPENSES. Operating expenses increased to $353.3 million in the year ended December 31, 2004, from $278.3 million in the year ended 2003. The operating ratio, defined as total operating expenses divided by total operating revenue, was 89.3% in 2004 compared to 79.0% in 2003. The increase in the operating ratio is primarily due to an impairment charge of $12.6 million on the E&N Railway, the charge of $6.7 million for the retirement of our former CEO and higher fuel and casualty costs in 2004. Both periods include corporate general and administrative, which had previously been classified as corporate overhead.

     MAINTENANCE OF WAY. Maintenance of way expenses increased $12.8 million, or 34%, to $50.3 million in 2004 from $37.5 million in 2003 primarily due to the acquisitions in 2004 of the Midland Subdivision, the Chicago, Fort Wayne & Eastern and the Central Michigan Railroad, and the impact of a full year from the 2003 acquisitions of the Mobile Line and the San Luis and Rio Grande Railway as well as higher casualty costs in 2004 and the strengthening of the Canadian Dollar. As a percentage of revenue, maintenance of way increased to 12.7% in 2004, from 10.6% in 2003, primarily due to higher casualty costs in the year ended 2004. The increase in casualty costs is due to both a greater number of FRA reportable train incidents as well as FRA reportable personal injuries in 2004 compared to 2003. During 2004, we experienced 66 FRA reportable train incidents compared to 52 in 2003. Our injury frequency ratio in 2004 was 2.75 compared to 2.05 in 2003.

     MAINTENANCE OF EQUIPMENT. Maintenance of equipment expense increased $1.4 million, or 10%, to $14.3 million in 2004 from $12.9 million in 2003 primarily due to the acquisitions in 2004 of the Midland Subdivision, the Chicago, Fort Wayne & Eastern and the Central Michigan Railroad, and the impact of a full year from the 2003 acquisitions of the Mobile Line and the San Luis and Rio Grande Railway as well as the strengthening of the Canadian Dollar. Maintenance of equipment decreased as a percentage of revenue to 3.6% in 2004, from 3.7% in 2003.

     TRANSPORTATION. Transportation expense increased $26.5 million, or 28% to $121.7 million in 2004 from $95.2 million in 2003 due to the increase in carloads for both “same railroad” and acquisitions, as well as higher fuel prices and the strengthening of the Canadian Dollar. As a percentage of revenue, transportation expense increased to 30.8% in 2004 from 27.0% in 2003. This increase is primarily due to higher fuel costs, which accounted for a 2.3 percentage point increase, and higher joint facility costs, which accounted for a 0.6 percentage point increase. Joint facility costs increased as a result of trackage rights and switching fees associated with the Mobile Line and Central Michigan Railway acquisitions. Fuel costs averaged $1.37 per gallon in 2004 compared to $1.00 per gallon in 2003, resulting in a $9.5 million increase in fuel expense in 2004.

     EQUIPMENT RENTAL. Equipment rental increased $6.4 million, or 19%, to $40.6 million in 2004 from $34.2 million in 2003 primarily due to the acquisitions in 2004 of the Midland Subdivision, the Chicago, Fort Wayne & Eastern and the Central Michigan Railroad, and the impact of a full year from the 2003 acquisitions of the Mobile Line and the San Luis and Rio Grande Railway as well as the strengthening of the Canadian Dollar. As a percentage of revenue, equipment rental increased to 10.2% in 2004, compared to 9.7% in 2003, due to higher car hire expense resulting from Class I congestion and additional railcar leases to support increased lumber traffic in California.

     SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative expense increased $10.7 million, or 14%, to $88.6 million in 2004 from $77.9 million in 2003 primarily due to the $6.7 million charge related to the retirement of our former CEO. In accordance with the terms of the severance agreement, $3.1 million was paid into a deferred compensation account and is maintained as a long-term asset and liability on our balance sheet. In addition, 0.1 million stock options were vested, 1.2 million stock options were extended for three years and 24,918 restricted shares were vested, resulting in a non-cash charge of $3.6 million. Our former CEO continues to be eligible for future payments under our Long Term Incentive Plan through 2007. No amount has been accrued for any future payments which he may receive. Selling, general and administrative expense increased as a percentage of revenue to 22.4% in 2004, from 22.1% in 2003 or $10.7 million primarily

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due to the charge for our former CEO’s retirement. Excluding this charge, which accounted for a 1.3 percentage point increase, selling, general and administrative expense decreased as a percentage of revenue to 21.1% in 2004 from 22.1% in 2003 due to the increase in revenue while the absolute amount spent on selling, general, and administrative expenses remained relatively flat.

     ASSET SALES. Net gains on sales of assets were comparable at $4.0 million and $3.3 million for the years ended December 31, 2004 and 2003, respectively.

     IMPAIRMENT OF ASSETS. During the third quarter of 2004, we committed to a plan to dispose of the E&N Railway. As a result of several factors, including the expectation of minimal future operating cash flows and potential limitations on the use of certain of the real estate, we do not expect significant proceeds from this disposal and accordingly, recorded an impairment charge of $12.6 million during 2004.

     DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense increased $5.4 million, or 23%, to $29.2 million in 2004 from $23.8 million in 2003 primarily due to the acquisitions in 2004 of the Midland Subdivision, the Chicago, Fort Wayne & Eastern and the Central Michigan Railroad, and the impact of a full year from the 2003 acquisitions of the Mobile Line and the San Luis and Rio Grande Railway. As a percentage of revenue, depreciation and amortization increased to 7.4% in 2004, from 6.8% in 2003.

     INTEREST AND OTHER EXPENSE. Interest and other expense, including amortization of deferred financing costs, decreased $3.8 million to $28.6 million in 2004 from $32.4 million in 2003. This decrease is primarily due to the conversion and redemption of the Junior Convertible Debentures at July 31, 2004, the repurchase of our senior subordinated notes and the refinancing of our senior credit facility in September 2004. Interest expense of $3.3 million and $4.9 million for the years ended December 31, 2004 and 2003, respectively, has been allocated to discontinued operations.

     FINANCING COSTS. In September 2004, we incurred costs to refinance our senior credit facility and to repurchase for our senior subordinated notes. The $39.5 million of costs consist of $7.7 million for the write-off of deferred loan costs associated with the original senior credit facility, $19.2 million for the purchase of the senior subordinated notes and $12.6 million for the write-off of deferred loan costs, original issue discount and bank fees related to the senior subordinated notes.

     INCOME TAXES. Our effective tax rates in 2004 and 2003 for continuing operations were 17.4% and 41.9%, respectively. The 2004 tax provision was impacted by the refinancing, CEO severance and E&N impairment charges. The tax benefit on the refinancing charges was 33%, due to the recognition of a foreign exchange gain for tax purposes; the tax benefit on the CEO severance charge was 16%, due to the non-deductibility of the non-cash component of the charge; and the tax benefit on the E&N impairment charge was 31%, due to management’s assessment as to the expected utilization of the deferred tax asset created by the charge. The effective tax rate in 2003 was impacted by recording a provision of $1.5 million from an increase in the Ontario, Canada provincial tax rates.

     DISCONTINUED OPERATIONS. During the second quarter of 2004, we committed to a plan to dispose of the Arizona Eastern Railway Company. Subsequent to committing to the disposal plan, we determined that the expected proceeds from the sale would be lower than anticipated and accordingly recorded an impairment charge of $4 million during the third quarter of 2004. We completed the sale of the Arizona Eastern Railway Company during December 2004, for $2.8 million in cash, resulting in a gain on the sale of $0.3 million, or $0.2 million after tax. The results of operations for the Arizona Eastern Railway Company have been reclassified to discontinued operations for the periods presented. For the year ended December 31, 2004 and 2003, the Arizona Eastern Railway Company contributed a loss of $2.5 million and income of $0.5 million to the loss from discontinued operations, respectively. The year ended 2004 results from operations includes an impairment charge of $4.0 million, pre-tax, as discussed above.

     During the fourth quarter of 2004, we committed to a plan to dispose of the West Texas and Lubbock Railroad. We completed the sale of the West Texas and Lubbock Railroad during December 2004, for $1.8 million in cash and a long term note for $3.8 million, resulting in a gain on the sale of $0.1 million, before and after tax. The results of operations for the West Texas and Lubbock Railroad have been reclassified to discontinued operations for the periods presented. For the years ended December 31, 2004 and 2003, the West Texas and Lubbock Railroad contributed income of $0.5 million and a loss of $0.02 million to the loss from discontinued operations, respectively.

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     In August 2004, we completed the sale of Freight Australia to Pacific National for AUD $285 million (US $204 million). The U.S. dollar proceeds include approximately $4.3 million as a result of foreign exchange hedges that were entered into during the third quarter of 2004. In addition, the Share Sale Agreement provided for an additional payment to RailAmerica of AUD $7 million (US $5 million) based on the changes in the net assets of Freight Australia from September 30, 2003 through August 31, 2004, which was received in December 2004, and also provides various representations and warranties by RailAmerica to the buyer. Potential claims against RailAmerica for violations of most of the representations and warranties are capped at AUD $50 million (US $39.5 million). During the year ended December 31, 2004, we recognized a gain of $20.2 million, pre-tax and $2.0 million, net of income taxes on the sale. The $18.2 million tax provision on the sale of Freight Australia includes a provision of $11.4 million for the previously unremitted earnings of Freight Australia. The proceeds from sale of Freight Australia were used to repay senior debt and repurchase our high yield senior notes. Freight Australia’s results of operations have been presented in discontinued operations on our consolidated financial statements. The results of Freight Australia have been included in the financial statements through the date of sale of the entity, August 31, 2004. For the years ended December 31, 2004 and 2003, Freight Australia contributed losses of $0.9 million, and $10.0 million, respectively, to the losses from discontinued operations.

     In February 2004, we completed the sale of our 55% equity interest in Ferronor, a Chilean railroad. Accordingly, we have presented the operating results and loss on sale of Ferronor in discontinued operations for the periods presented. During the year ended December 31, 2004, we recognized a $4.0 million tax charge resulting from the sale of our interest in Ferronor and the repatriation of the cash to the U.S. For the year ended 2003, $0.02 million (net of tax) of income is included in the loss from discontinued operations for Ferronor. No income or expense was recognized from operations for 2004.

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     COMPARISON OF CONSOLIDATED OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002

     The following table sets forth the operating revenue and expenses by functional category for our consolidated operations for the periods indicated (in thousands).

     The following table sets forth the operating revenue and expenses by natural category for our consolidated operations for the periods indicated (in thousands).

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     OPERATING REVENUE. Operating revenue increased by $25.7 million, or 7.9% to $352.3 million for the year ended December 31, 2003 from $326.7 million for the year ended December 31, 2002, while carloads increased 3.2% to 1,131,142 in 2003 from 1,096,403 in 2002. Excluding revenue of $1.6 million in 2002 from the disposed railroads, Texas New Mexico Railroad, Georgia Southwestern Railroad and San Pedro and Southwestern Railway, and $9.8 million in 2003 from the acquired railroads, San Luis and Rio Grande Railroad and the Mobile Line and the disposed railroad San Pedro and Southwestern Railway, operating revenue increased $17.4 million, or 5.4%, while carloads increased by 19,377, or 1.8%. The increase in “same railroad” revenue was due to a 12% improvement in the Canadian dollar, which positively impacted operating revenue by $8.4 million for the year ended December 31, 2003, and an increase in carloads, where eleven out of fourteen of our commodity groups increased in 2003 compared to 2002.

     In addition, operating revenue in 2003 benefited from two short-term contracts which did not recur in 2004. These contracts, which were to move logs in Arizona and soil in Illinois, contributed a total of $2.7 million in revenue and 4,763 carloads during the year ended December 31, 2003. The increase in the average rate per carload to $274 in 2003 from $259 in 2002 was primarily due to the improvement in the Canadian dollar.

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

     Lumber and forest products revenue was $51.4 million in the year ended December 31, 2003 compared to $48.5 million in the year ended December 31, 2002, an increase of $2.9 million or 6%. This increase was due to a short-term contract to haul logs in Arizona during 2003, a strong housing market, an increase in demand for off-shore lumber and longer hauls of lumber in Alabama as a result of the Mobile Line acquisition.

     Chemicals revenue was $31.0 million in the year ended December 31, 2003 compared to $27.8 million in the year ended December 31, 2002, an increase of $3.2 million or 11%. This increase was primarily due to longer hauls in Alabama as a result of the Mobile Line acquisition, increased carloads with existing customers and new business in South Carolina.

     Agricultural and farm products revenue was $30.7 million in the year ended December 31, 2003 compared to $27.8 million in the year ended December 31, 2002, an increase of $2.9 million or 10%. This increase was due to an improved wheat harvest in Kansas in 2003, partially offset by a poor 2002 harvest in southern Ohio and Indiana, which impacted 2003 carloads and the closure of a grain customer in California.

     Paper products revenue was $29.6 million in the year ended December 31, 2003 compared to $26.2 million in the year ended December 31, 2002, an increase of $3.4 million or 13%. This increase was primarily due to new contracts and longer hauls in Alabama as a result of the Mobile Line acquisition, an increase in paper production in Nova Scotia, and the strengthening of the Canadian dollar, partially offset by a decrease in carloads in Oregon as a result of a paper mill closure.

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     Metals revenue was $26.8 million in the year ended December 31, 2003 compared to $22.9 million in the year ended December 31, 2002, an increase of $3.9 million or 17%. This increase was due to an increase in carloads from existing customers in Ohio, North Carolina and South Carolina, new hauls in Alabama as a result of the Mobile Line acquisition and the strengthening of the Canadian dollar, partially offset by a decrease in carloads in California as a result of customer production problems.

     Coal revenue was $24.5 million in the year ended December 31, 2003 compared to $22.9 million in the year ended December 31, 2002, an increase of $1.6 million or 7%. This increase was the result of increased carloads with utility companies in Oklahoma, Indiana and Arkansas and new business in Indiana, partially offset by a decrease in carloads from the Powder River Basin due to severe weather in early 2003.

     Bridge traffic revenue was $23.4 million in the year ended December 31, 2003 compared to $22.2 million in the year ended December 31, 2002, an increase of $1.2 million or 5%. This increase was primarily due to an increase in bridge traffic in Canada along with the strengthening of the Canadian dollar, partially offset by a decrease related to a General Motors contract that Canadian National Railway lost to CSX Transportation in Ohio.

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

     Petroleum products revenue was $18.3 million in the year ended December 31, 2003 compared to $15.3 million in the year ended December 31, 2002, an increase of $3.0 million or 19%. This increase was primarily due to new petroleum coke moves for a customer in Canada, new business to move liquefied petroleum gas in New England, new business to move asphalt in Kansas and the strengthening of the Canadian dollar.

     Minerals revenue was $17.3 million in the year ended December 31, 2003 compared to $16.9 million in the year ended December 31, 2002, an increase of $0.4 million or 2%. This increase was the result of new hauls on the Mobile Line, an increase in roofing granule moves due to a strong housing market and new calcium carbonate moves in Alabama, partially offset by fewer cement and limestone moves in New England and a reduction in copper concentrate moves in Arizona.

     Metallic and non-metallic ores revenue was $15.2 million in the year ended December 31, 2003 compared to $11.7 million in the year ended December 31, 2002, an increase of $3.5 million or 30%. This increase was due to the acquisitions of the Mobile Line and San Luis and Rio Grande Railroad, a short-term contract to move soil in Illinois and increased traffic with existing customers in Texas.

     Other revenue was $9.3 million in the year ended December 31, 2003 compared to $7.6 million in the year ended December 31, 2002, an increase of $1.7 million or 23%. This increase was primarily due to a short-term contract in Illinois, partially offset by a decrease in ammunition moves in Washington.

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

     Intermodal revenue was $4.2 million in the year ended December 31, 2003 compared to $4.5 million in the year ended December 31, 2002, a decrease of $0.3 million or 6%. This decrease was primarily due to the loss of intermodal business in the Midwest, partially offset by a new contract to move solid waste containers in Washington.

     OPERATING EXPENSES. Operating expenses increased $16.6 million to $278.3 million in the year ended December 31, 2003 from $261.7 million in 2002 primarily due to the 12% increase in the Canadian dollar, the acquisitions of the Mobile Line and San Luis and Rio Grande Railroad, higher transportation labor costs associated with the increased carloads, higher fuel prices compared to 2002 and increased casualty and insurance costs. The operating ratio, defined as total operating expenses divided by total operating revenue, was 79.0% in 2003 compared to 80.1% in 2002. Both periods include the addition of expenses to selling, general and administrative, which had previously been classified as corporate overhead.