MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

GENERAL
The Company  conducts its business  through  three  operating  groups within the
transportation  industry:  truck components and assemblies operations, a leading
manufacturer  of  wheel-end  components,  seating,  steerable  drive  axles  and
gearboxes for the heavy-duty truck industry;  iron castings operations,  a major
producer of complex iron  castings for a wide range of  industries;  and freight
car  operations,  a leading  manufacturer  and lessor of new and rebuilt freight
cars  used  for  hauling  coal,   intermodal   containers,   highway   trailers,
agricultural  and mining  products.  During 1997, the Company's truck components
and assemblies,  iron castings and freight car operations generated net sales of
$284.7 million,  $130.9 million and $234.7 million,  respectively.  During 1996,
the Company's  truck  components and  assemblies,  iron castings and freight car
operations  generated  net sales of $237.0  million,  $125.1  million and $197.9
million, respectively. The significant decline in demand experienced in 1996 and
early 1997 in freight car operations produced significant operating losses that,
coupled with the Company's significant debt service requirements,  offset strong
operating  income from its truck  components  and  assemblies  and iron castings
operations.  Although  demand for freight cars has improved,  the market remains
subject to pricing  competitiveness  in a freight  car market  characterized  by
uneven demand and production overcapacity.

The Company's sales are affected to a significant  degree by the freight car and
Class 8 truck  markets.  Both the freight car and the Class 8 truck  markets are
subject to significant  fluctuations due to economic conditions,  changes in the
alternative  methods  of  transportation  and  other  factors.  There  can be no
assurance  that  fluctuations  in such markets will not have a material  adverse
effect on the results of operations or financial condition of the Company.

Freight car  operations  sales are driven  principally by the number and type of
freight cars  delivered in any given  period.  Due to the large size of customer
orders,  the  specific  time frame for  delivery  of freight  cars  ordered  and
variations in the mix of cars  ordered,  the number and type of cars produced in
any given period may fluctuate greatly.  As a result, the Company's revenues and
results of operations and cash flows from operations may fluctuate as well.

The Company completed the acquisition of Truck Components Inc. ("TCI") on August
23, 1995,  and Bostrom  Seating,  Inc.  ("Bostrom")  on January 13,  1995.  Both
acquisitions  were  accounted for under the purchase  method of accounting  and,
accordingly,  their  operating  results were included in the Company's  reported
results from their respective acquisition dates. Such results have a significant
impact on the comparative discussions below. Additionally,  the Company, through
its wholly owned subsidiary  Freight Car Services,  Inc. ("FCS"),  completed the
purchase of the  Danville,  Illinois  facility and began  operations  in October
1995.

The Company  and its  subsidiaries  utilize  software  and related  technologies
throughout its  businesses  that will be affected by the date change in the year
2000. In 1997 the Company  initiated a comprehensive  program to ensure that its
various  business  systems  continue to function  properly in the year 2000. The
cost of  becoming  "Year  2000"  compliant  is not  expected  to be  material in
relation to the consolidated financial statements.


                                       1


<PAGE>



RESULTS OF OPERATIONS YEARS ENDED DECEMBER 31, 1997 and 1996

TOTAL REVENUE
Total revenue in 1997  increased  16.1% to $650.3 million from $560.0 million in
1996.  The  revenue  increase  of $90.3  million was due to an increase in truck
component  revenues of $47.7 million,  an increase in iron castings  revenues of
$5.8 million and an increase in freight car revenues of $36.8  million.  For the
year 1997,  shipments of freight cars were 4,507 (including 290 cars sold to the
Company's  lease fleet),  compared to 3,470 freight cars (including 98 cars sold
to the Company's  lease fleet) in 1996.  As of December 31, 1997,  the Company's
backlog of new and  rebuilt  cars was 4,201  compared  with 774 new and  rebuilt
freight cars at December 31, 1996.

At December  31,  1997,  the Company had 1,673  freight  cars on lease,  and the
leasing  business for the year 1997  generated  $7.6 million in revenue and $3.6
million in  operating  income  before a $0.8  million gain on the sale of leased
freight cars.  The leasing  business  generated $4.5 million in revenue and $2.4
million in  operating  income  before a $1.4  million gain on the sale of leased
freight cars in the prior year.

COST OF SALES-MANUFACTURING AND GROSS PROFIT
Cost of  sales-manufacturing  for 1997 as a percent of  manufacturing  sales was
85.9%,  compared with 85.0% in 1996. Related gross profits were 14.1% and 15.0%,
respectively.  The decrease in gross profit margin resulted primarily from lower
gross  profit  margins in freight car  operations  due to reduced  volume in the
first half of the year and pricing pressure throughout the year offset partially
by increased profit margins in the truck component  operations and iron castings
business.

SELLING, GENERAL, ADMINISTRATIVE AND AMORTIZATION EXPENSES
Selling,  general and  administrative  expenses as a percentage of total revenue
were 7.1% and 8.3% in 1997 and 1996,  respectively.  Actual selling, general and
administrative  expenses  declined  $0.4 million from 1996 levels as a result of
cost  reduction  measures  undertaken at the Company's  freight car  operations.
Amortization  expense as a percentage of total revenue was 1.3% and 1.8% for the
years 1997 and 1996. Actual amortization  expense decreased by $1.6 million from
1996 levels due primarily to a decrease in  amortization  expense at freight car
operations of $1.5 million due to certain intangible items being fully amortized
in late 1996.

OPERATING INCOME
Operating income was $54.4 million in 1997, compared with $30.4 million in 1996,
an increase of $24.0  million.  The company  increased its  operating  income by
improving  gross  profits by $8.2 million,  a reduction in selling,  general and
administrative  expenses of $0.4 million, a reduction in amortization expense of
$1.6 million, a reduction of environmental reserves of $14.3 million offset by a
decline in gain on sale of leased freight cars of $0.5 million.

During the third  quarter of 1997,  the company  settled  two  pending  lawsuits
related to indemnification of environmental cleanup costs from a former owner of
Gunite, which reduced outstanding environmental liabilities by $14.3 million.

OTHER
Interest  expense,  net,  was $35.4  million in 1997  compared to $35.8 in 1996.
Interest expense in 1997 and 1996 resulted from borrowings under the Senior Bank
Facilities and the Senior  Subordinated  Notes, as well as from the JAIX Leasing
loans  which were used to finance  the  addition  of freight  cars for the lease
fleet.

In  conjunction  with the issuance of $80.0 million of Senior Notes to refinance
$80.0  million of Tranche A term debt,  the Company  recorded  an  extraordinary
charge of $2.0 million  after tax,  primarily  related to the  write-off of $3.4
million of unamortized deferred financing costs.

Net income and diluted  earnings per share for 1997 were $7.5 million and $0.76,
respectively,  compared to net loss and diluted  loss per share of $5.4  million
and $0.55, respectively, for 1996.


                                       2


<PAGE>



RESULTS OF OPERATIONS-YEARS ENDED DECEMBER 31, 1996 AND 1995

TOTAL REVENUE
Total revenue in 1996  decreased  16.2% to $560.0 million from $668.6 million in
1995.  The revenue  decrease of $108.6 million was primarily due to the decrease
in freight car sales of $294.7  million  (3,470 new and rebuilt  cars in 1996 vs
9,157 new and rebuilt cars in 1995) and a $9.6 million decrease in truck-related
sales volume at Bostrom.  The decreases  were offset in part by the inclusion of
TCI for all of 1996 versus  inclusion  for the partial year of 1995, an increase
of $195.7  million.  As of December 31, 1996,  the Company's  backlog of new and
rebuilt  freight cars was 774,  compared with 1,204 new and rebuilt freight cars
at December 31, 1995.

At  December  31,  1996,  the Company  had 1,067  freight  cars on lease and the
leasing business generated $4.5 million in revenue and $2.4 million in operating
income  before a $1.4  million  gain on the sale of leased  freight cars for the
year 1996 compared with $2.6 million revenue and $1.9 million  operating  income
in the prior year.

COST OF SALES - MANUFACTURING AND GROSS PROFIT
Cost of  sales-manufacturing  for 1996 as a percent of  manufacturing  sales was
85.0%,  compared with 91.3% in 1995.  Related gross profits were 15.0% and 8.7%,
respectively.  The  improvement  in gross  profit  resulted  primarily  from the
acquisition of TCI in August 1995. TCI has  historically  generated higher gross
profits than the freight car business.  Partially  offsetting  this increase was
the decrease of gross profit at JAC. JAC's gross profit  percentage for 1996 was
down from the prior year  approximately  1 percentage  point,  and the aggregate
dollar  gross  profit was down due to the  significant  decrease  in freight car
revenues mentioned above.

SELLING, GENERAL, ADMINISTRATIVE AND AMORTIZATION EXPENSES
Selling,  general and  administrative  expenses as a percentage of total revenue
were 8.3% and 4.2% in 1996 and 1995,  respectively.  The  increase  in  selling,
general  and  administrative  expenses  is  related to the  acquisition  and the
integration of TCI which has higher selling,  general and administrative expense
levels as a percent  of  revenue  compared  to freight  car  operations,  and to
increased  MIS and product  development  costs at the  freight  car  operations.
Amortization  expense as a percentage of total revenue was 1.8% and 1.0% for the
years 1996 and 1995,  respectively.  The increase in  amortization  expense as a
percentage of total  revenue is related to  amortization  of certain  intangible
assets and the excess cost over net assets acquired in the TCI acquisition.

OPERATING INCOME
Operating income was $30.4 million in 1996, compared with $25.0 million in 1995.
The increase was primarily due to including the operating  income of TCI for all
of 1996 versus  inclusion for the partial year of 1995 more than  offsetting the
drop in operating income at JAC.

OTHER
Interest expense,  net, was $35.8 million in 1996 compared with $14.7 million in
1995.  Higher interest expense in 1996 resulted from borrowings under the Senior
Bank  Facilities  and the issuance of Notes to finance the  acquisition  of TCI,
which were  outstanding for all of 1996 versus four months in 1995. In addition,
JAIX Leasing had increased  debt levels to finance  additional  freight cars for
the lease fleet.

Net loss and  diluted  loss per  share for 1996 were  $5.4  million  and  $0.55,
respectively,  compared  to net income and  diluted  earnings  per share of $5.6
million and $0.57, respectively, for 1995.

LIQUIDITY AND CAPITAL RESOURCES
For the year ended December 31, 1997, the Company  provided cash from operations
of $26.7 million  compared  with $36.4 million for 1996.  The Company used $25.1
million of net cash in investing  activities during 1997, primarily $8.2 million
used for capital  expenditures  and $17.5  million used for net additions to the
leased fleet.  Cash provided by financing  activities was $4.7 million for 1997,
which included $82.8 million in proceeds from the issuance of additional  Senior
Subordinated  Notes on August 12, 1997, and an increase in the JAIX Leasing debt
of $15.6 million to fund the leasing fleet  additions.  Offsetting this increase
is the  refinancing  of $80.0 million of Tranche A senior-term  debt,  scheduled
payments  of $10.2  million  of debt and  payment of $3.6  million  of  deferred
financing costs.

                                       3

<PAGE>



The Company's freight car sales are characterized by large order sizes, specific
customer delivery  schedules and related vendor receipts and payment  schedules,
all of which can combine to create  significant  fluctuations in working capital
when comparing end of period  balances.  Such  fluctuations  tend to be of short
duration,  and the Company  considers  this to be a normal part of its operating
cycle  which  does  not  significantly  impact  its  financial  flexibility  and
liquidity.

On  August  23,  1995,  in  conjunction  with  the  acquisition  of TCI  and the
refinancing  of the existing debt of the Company,  the Company and the Guarantor
Subsidiaries  entered into the $300 million  Senior Bank  Facilities  and issued
$100  million  of  Notes.  See  Notes  6 and  7 of  the  Consolidated  Financial
Statements  for a description of the Senior Bank  Facilities  and the Notes.  On
August 12,  1997 the  Company  issued  $80  million of  additional  Notes,  with
substantially  the same terms as the  original  Notes.  As of December 31, 1997,
there was $93.3 million of Tranche B term loan outstanding under the Senior Bank
Facilities,  $182.7 million of Notes outstanding and no borrowings under the $75
million  revolving  credit line under the Senior Bank  Facilities.  Availability
under the revolving credit line after  consideration  of outstanding  letters of
credit of $17.0 million, was $58.0 million.

Interest  payments on the Notes and interest and  principal  payments  under the
Senior Bank Facilities represent significant near-term cash requirements for the
Company.  The Notes require semiannual  interest payments of approximately $10.6
million.  Borrowings  under the Senior Bank Facilities bear interest at floating
rates and require interest payments on varying dates depending upon the interest
rate option selected by the Company.  The $93.3 million of outstanding Tranche B
term loans requires periodic  principal  payments through their maturities.  See
Note 6 of the Consolidated Financial Statements.

At December 31, 1997,  JAIX Leasing  owned or leased 1,673  freight  cars.  JAIX
Leasing  financed its 643 owned freight cars with a 10-year term loan  facility,
which as of December 31, 1997, had a balance of $29.2 million  outstanding.  See
Note 6 of the  Consolidated  Financial  Statements  for a  description  of  this
facility.

The Company believes that the cash flow generated from its operations,  together
with amounts  available under the revolving credit line, should be sufficient to
fund its debt service requirements,  working capital needs,  anticipated capital
expenditures and other operating expenses  (including  expenditures  required by
applicable  environmental laws and regulations).  The Company's future operating
performance  and  ability  to service  or  refinance  the Notes and to extend or
refinance  the  Senior  Bank  Facilities  will be  subject  to  future  economic
conditions  and to  financial,  business  and other  factors,  many of which are
beyond the Company's control.

As of December 31, 1997,  the  Company's  balance  sheet  included cash of $30.9
million.

ENVIRONMENTAL MATTERS
The Company is subject to comprehensive and frequently  changing federal,  state
and local environmental laws and regulations,  and will incur additional capital
and  operating  costs in the future to comply with  currently  existing laws and
regulations,  new regulatory requirements arising from recently enacted statutes
and possible new statutory  enactments.  In addition to environmental  laws that
regulate the Company's  subsidiaries' ongoing operations,  the subsidiaries also
are  subject  to  environmental   remediation   liability.   Under  the  federal
Comprehensive  Environmental  Response,  Compensation and Liability Act (CERCLA)
and analogous state laws, the Company's  subsidiaries  may be liable as a result
of  the  release  or  threatened  release  of  hazardous   substances  into  the
environment.  The  Company's  subsidiaries  are  currently  involved  in several
matters relating to the investigation  and/or remediation of locations where the
subsidiaries have arranged for the disposal of foundry and other wastes.

Such matters  include  five  situations  in which the  Company,  through its TCI
subsidiaries  and their  predecessors,  have been  named or are  believed  to be
Potentially  Responsible  Parties  (PRPs)  in the  contamination  of the  sites.
Additionally,  environmental  remediation  may be  required  at  two of the  TCI
facilities at which soil and groundwater contamination has been identified.


                                       4

<PAGE>



The Company  believes that it has valid claims for  contractual  indemnification
against prior owners for certain of the investigatory and remedial costs at each
of the above  mentioned  sites.  As a result of a private  party  settlement  of
certain pending litigation with a prior owner of Gunite, TCI and Gunite will not
be  responsible  (through a  contractual  undertaking  by the former  owner) for
certain  liabilities  and costs  resulting from Gunite's waste disposal prior to
the acquisition of Gunite by TCI in September 1987 at certain of such sites. The
Company has been notified,  however,  by certain other  contractual  indemnitors
that they will not honor future  claims for  indemnification.  Accordingly,  the
Company is litigating indemnification claims and there is no assurance that even
if successful in any such claims,  any judgments  against the  indemnitors  will
ultimately be recoverable.  In addition,  the Company believes it is likely that
it has incurred  some  liability at various  sites for  activities  and disposal
following acquisition which would not in any event be covered by indemnification
by prior owners.

As of December 31, 1997, the Company has a $11.3 million environmental  reserve.
This reserve is based on current cost  estimates  and does not reduce  estimated
expenditures to net present value. The Company  currently  anticipates  spending
approximately  $0.4  million  per year in 1998 and 1999 and  approximately  $0.5
million per year in 2000, 2001 and 2002 for monitoring the various environmental
sites  associated  with  the  environmental  reserve,   including  attorney  and
consultant  costs for strategic  planning and  negotiations  with regulators and
other  PRPs,  and  payment of  remedial  investigation  costs.  These  sites are
generally in the early investigatory  stages of the remediation process and thus
it is anticipated  that  significant  cash payments for remediation  will not be
incurred for at least several  years.  After the  evaluation  and  investigation
period, the investigation and remediation costs will likely increase because the
actual  remediation  of the  various  environmental  sites  associated  with the
environmental  reserve will likely be under way. Any cash expenditures  required
by the Company or its subsidiaries to comply with applicable  environmental laws
and/or to pay for any  remediation  efforts  will not be  reduced  or  otherwise
affected by the existence of the environmental  reserve.  Due to the early stage
of  investigation  of many of the sites and potential  remediations  referred to
above, there are significant  uncertainties as to waste quantities involved, the
extent  and  timing of the  remediation  which  will be  required,  the range of
acceptable  solutions,  costs of remediation and the number of PRPs contributing
to such costs.  Based on all of the information  presently  available to it, the
Company  believes that the  environmental  reserve will be adequate to cover its
future costs related to the sites associated with the environmental reserve, and
that any  additional  costs  will  not have a  material  adverse  effect  on the
financial  condition  or results of  operations  of the  Company.  However,  the
discovery of additional sites, the modification of existing laws or regulations,
the imposition of joint and several  liability under CERCLA or the uncertainties
referred to above could result in such a material adverse effect.

EFFECTS OF INFLATION
General price inflation has not had a material  impact on the Company's  results
of operations.

                                       5

<PAGE>

<TABLE>
<S>                                                      <C>        <C>      <C>


CONSOLIDATED STATEMENTS OF INCOME


(IN THOUSANDS, EXCEPT PER SHARE DATA)

Years Ended December 31,                                       1997      1996       1995
------------------------                                       ----      ----       ----
Net manufacturing sales                                   $ 642,764 $ 555,510  $ 666,028
Leasing revenue                                               7,583     4,462      2,573
Total revenue                                               650,347   559,972    668,601
Cost of sales - manufacturing                               552,360   472,054    608,328
Cost of leasing                                               4,005     2,104        654
Gross profit                                                 93,982    85,814     59,619

Selling, general and administrative expenses                 46,187    46,605     28,117
Amortization expense                                          8,554    10,174      6,478
Gain on sale of leased freight cars                            (824)   (1,354)        --
Reduction of environmental reserves                         (14,300)       --         --
Operating income                                             54,365    30,389     25,024

Interest expense, net                                        32,991    33,015     13,782
Interest expense - leasing                                    2,389     2,821        920
Income (loss) before income taxes and extraordinary item     18,985    (5,447)    10,322
Provision (benefit) for income taxes                          9,511       (76)     4,737
Net income (loss) before extraordinary item                   9,474    (5,371)     5,585
Extraordinary item, net of income tax                        (2,008)       --         --
--------------------------------------------------------- --------- ---------   --------
Net income (loss)                                         $   7,466 $  (5,371)  $  5,585
--------------------------------------------------------- --------- ---------   --------
Diluted and basic earnings per share:
Income (loss) before extraordinary item                   $    0.96 $   (0.55)  $   0.57
Extraordinary item                                            (0.20)       --         --
--------------------------------------------------------- --------- ---------   --------
Net income (loss)                                         $    0.76 $   (0.55)  $   0.57
--------------------------------------------------------- --------- ---------   --------
Weighted average equivalents and shares outstanding           9,856     9,794      9,799
--------------------------------------------------------- --------- ---------   --------

</TABLE>

                                       6

<PAGE>



CONSOLIDATED BALANCE SHEETS


(IN THOUSANDS)

As of December 31,                                              1997      1996
------------------                                              ----      ----
ASSETS:
Cash and cash equivalents                                   $ 30,875 $  24,535
Accounts receivable, net                                      60,484    49,346
Inventories                                                   58,674    49,589
Deferred income tax assets                                    13,521    16,143
Prepaid expenses and other current assets                      4,047     3,217
Total current assets                                         167,601   142,830
Property, plant and equipment, net                           118,063   123,859
Leasing business assets, net                                  38,430    23,255
Restricted cash                                                   --       578
Deferred financing costs, net                                 11,594    13,099
Intangible assets, net                                       243,150   251,662
Total assets                                               $ 578,838 $ 555,283
---------------------------------------------------------- --------- ---------
LIABILITIES:
Accounts payable                                           $ 55,246  $  43,325
Accrued payroll and employee benefits                        22,666     20,220
Other current liabilities                                    35,967     34,830
Current maturities of long-term debt and capital lease        4,783     17,236
Total current liabilities                                   118,662    115,611
Long-term debt and capital lease, less current maturities   124,799    186,939
Senior subordinated notes                                   182,691    100,000
Deferred income tax liabilities                              36,373     29,214
Other long-term liabilities                                  45,293     59,982
Total liabilities                                           507,818    491,746

SHAREHOLDERS' EQUITY:
Preferred stock, par $.01,  20,000 shares  authorized,  
  none outstanding  
Commonstock, par $.01, 201,000 shares 
  authorized, 9,768 and 9,754 issued and outstanding 
  as of December 31, 1997 and 1996, respectively                 98         98
Paid-in capital                                              55,066     55,049
Retained earnings                                            15,886      8,420
Employee receivables for stock purchase                         (30)       (30)
Total shareholders' equity                                   71,020     63,537
Total liabilities and shareholders' equity                $ 578,838  $ 555,283
--------------------------------------------------------- ---------  ---------



                                       7

<PAGE>


<TABLE>
<S>                                                        <C>          <C>         <C>

CONSOLIDATED STATEMENTS OF CASH FLOWS


(IN THOUSANDS)

Years Ended December 31,                                       1997         1996         1995
------------------------                                       ----         ----         ----
OPERATING ACTIVITIES:
Net income (loss)                                           $ 7,466     $ (5,371)    $ 5,585
Adjustments to reconcile net income (loss) to net cash
   provided by operating activities
Depreciation                                                 15,009       14,772       7,656
Amortization                                                 11,617       14,498       8,235
Deferred income tax expense                                   5,937           58       2,563
Provision for postretirement benefits                         2,169        1,671       1,987
Gain on sale of leased freight cars                            (824)      (1,354)         --
Reduction of environmental reserves                         (14,300)          --          --
Extraordinary item, net of income tax                         2,008           --          --
Change in operating assets and liabilities, net of 
  effect of acquired businesses:
    Accounts receivable                                     (11,137)      10,613      26,689
    Inventories                                              (9,085)      (5,689)     34,101
    Prepaid expenses and other current assets                  (829)      14,091       4,481
    Accounts payable                                         11,921        3,677     (29,447)
    Accrued payroll and employee benefits                       758       (5,177)     18,066
    Other assets and liabilities                              6,038       (5,411)    (27,784)
---------------------------------------------------------------------------------------------
Net cash provided by operating activities                    26,748       36,378      52,132

INVESTING ACTIVITIES:
Capital expenditures                                         (8,246)      (9,919)    (14,954)
Leasing business asset additions                            (27,639)      (5,438)    (31,377)
Proceeds from sale of leased freight cars                    10,182       18,113          --
Acquisition of TCI, less cash acquired                           --           --    (266,081)
Acquisition of Bostrom, less cash acquired                       --           --     (32,444)
Change in restricted cash/other                                 631          786      (1,354)
---------------------------------------------------------------------------------------------
Net cash provided by (used for) investing activities        (25,072)       3,542    (346,210)

FINANCING ACTIVITIES:
Payments of term loans and capital lease                    (90,170)     (16,812)        (46)
Net (payments) borrowings of JAIX Leasing debt               15,577       (8,799)     22,381
Net (payments) borrowings under revolving loans                  --           --      (7,600)
Issuance of long-term debt                                   82,823           --     305,300
Payment of deferred financing costs and other                (3,566)      (1,413)    (16,072)
---------------------------------------------------------------------------------------------
Net cash provided by (used for) financing activities          4,664      (27,024)    303,963
---------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents                     6,340       12,896       9,885
Cash and cash equivalents, beginning of year                 24,535       11,639       1,754
---------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year                    $  30,875   $   24,535  $   11,639

</TABLE>


                                       8

<PAGE>



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 1.  ORGANIZATION

Johnstown America Industries,  Inc. (JAII) has three operating groups within the
transportation  industry:  truck components and assemblies operations, a leading
manufacturer  of wheel  end  components,  seating,  steerable  drive  axles  and
gearboxes for the heavy-duty truck industry;  iron castings operations,  a major
producer of complex iron  castings for a wide range of  industries;  and freight
car  operations,  a leading  manufacturer  and lessor of new and rebuilt freight
cars  used  for  hauling  coal,   intermodal   containers,   highway   trailers,
agricultural and mining products.

On October 28,  1991,  Johnstown  America  Corporation,  (JAC),  wholly owned by
Johnstown America  Industries,  Inc. , a Delaware  corporation,  consummated the
purchase of the former Freight Car Division of Bethlehem Steel Corporation.

JAII  completed  the  acquisition  of  Truck   Components  Inc.  (TCI)  and  its
subsidiaries (Gunite Corporation, Brillion Iron Works, Inc. and Fabco Automotive
Corporation) on August 23, 1995, and Bostrom Seating,  Inc. (Bostrom) on January
13, 1995.  Both  acquisitions  were  accounted for under the purchase  method of
accounting, and, accordingly, the operating results of these acquired businesses
are  included  herein  from  their  respective  acquisition  dates.   Operations
commenced on October 2, 1995, at the Freight Car Services, Inc. facility.


NOTE 2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The accompanying  consolidated  financial  statements reflect the application of
the following significant accounting policies:

PRINCIPLES OF CONSOLIDATION
The  consolidated  financial  statements  include  the  accounts of JAII and its
wholly  owned  subsidiaries.   All  significant  intercompany  transactions  and
accounts  have  been  eliminated  in  the  accompanying  consolidated  financial
statements.

CASH EQUIVALENTS
The Company  considers all short-term  investments  with original  maturities of
three months or less when acquired to be cash equivalents.

INVENTORIES
Inventories are stated at the lower of cost or market.  The cost of 60% and 53%
of the Company's inventories as of December 31, 1997 and 1996, respectively, was
determined  on the  first-in,  first-out  (FIFO)  method,  with  the cost of the
remaining  inventories,  representing  certain  inventories  at TCI and Bostrom,
determined on the last-in,  first-out  method (LIFO).  Had all inventories  been
determined on the FIFO method at December 31, 1997 and 1996,  the reported value
of such  inventories  would  have  been  increased  by $0.7  and  $1.0  million,
respectively.

PROPERTY, PLANT AND EQUIPMENT
Property,  plant and equipment is stated at cost less accumulated  depreciation.
The  cost of  property,  plant  and  equipment  acquired  as part of a  business
acquisition  represents the fair market value of such assets at the  acquisition
date typically as determined by independent appraisal.  Depreciation is provided
using the  straight-line  method by making  periodic  charges to income over the
estimated useful lives of the assets, which are as follows:

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

Buildings and improvements                                          10-40 years
Machinery and equipment                                              3-12 years
------------------------------------------------------------------------------


Property,  plant and  equipment  under  capital  leases are  amortized  over the
shorter of the estimated useful life of the asset

                                        9

<PAGE>



or the term of the lease.

Maintenance  and  repairs  are  charged  to  expense as  incurred,  while  major
replacements  and  improvements  are  capitalized.   The  cost  and  accumulated
depreciation of items sold or retired are removed from the property accounts and
any gain or loss is recorded currently in the consolidated statements of income.

RESEARCH AND DEVELOPMENT
Costs associated with research and development are expensed as incurred.

LEASING BUSINESS ASSETS
Leasing business assets,  which primarily consist of freight cars, are stated at
cost,  which is fully  absorbed  cost for those assets  self-constructed  by the
Company, less accumulated depreciation. Freight cars are being depreciated using
the straight-line method over the estimated useful life of 20-30 years.

INTANGIBLE ASSETS
The excess of purchase costs over amounts  allocated to identifiable  assets and
liabilities of businesses  acquired (goodwill) is amortized on the straight-line
method over 40 years.  Should events or  circumstances  occur  subsequent to the
acquisition  of a business  which bring into  question the  realizable  value or
impairment  of the related  goodwill,  the Company will  evaluate the  remaining
useful life and balance of goodwill,  and should an  impairment  be identified a
loss would be recognized to the extent that the carrying  value exceeds the fair
value. The Company's principle  considerations in determining impairment include
the strategic  benefit to the Company of the particular  business as measured by
undiscounted current and expected future operating cash flows of that particular
business.

Other  intangible  assets are amortized on the  straight-line  method over their
estimated useful lives, which are as follows:
------------------------------------------------------------------------------

   Trademarks                                                         40 years
   Technologies                                                    13-40 years
   Patents                                                             8 years
   Organization costs                                                  5 years
------------------------------------------------------------------------------


ENVIRONMENTAL RESERVES
The Company is subject to comprehensive and frequently  changing federal,  state
and local environmental laws and regulations,  and will incur additional capital
and  operating  costs in the future to comply with  currently  existing laws and
regulations,  new regulatory requirements arising from recently enacted statutes
and possible new statutory  enactments.  In addition to environmental  laws that
regulate  the  Company's  ongoing  operations,  the  Company is also  subject to
environmental  remediation liability.  It is the Company's policy to provide and
accrue for the  estimated  cost of  environmental  matters,  on a  nondiscounted
basis,  when it is probable that a liability has been incurred and the amount of
the liability can be reasonably estimated.  Such provisions and accruals exclude
claims for recoveries from insurance carriers or other third parties.


                                       10

<PAGE>



Statement of Position (SOP) 96-1,  "Environmental  Remediation  Liabilities" was
issued in October 1996 and adopted by the Company  with minimal  impact in 1997.
This SOP provides  authoritative guidance on specific accounting issues that are
present  in  the  recognition,   measurement  and  disclosure  of  environmental
remediation liabilities.

INCOME TAXES
The Company  provides for deferred  income taxes on differences  that arise when
items are reported for  financial  statement  purposes in years  different  from
those for income  tax  reporting  purposes  in  conformance  with  Statement  of
Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes."

REVENUE RECOGNITION
Revenues on new and rebuilt freight cars are recognized when individual cars are
completed  and  accepted by the  customer's  inspector.  Revenue from leasing is
recognized  ratably during the lease term. All other revenue is recognized  when
the products are shipped.

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 date of the financial  statements and
the  reported  amounts of revenues  and expenses  during the  reporting  period.
Actual results could differ from those estimates.

NEW ACCOUNTING PRONOUNCEMENTS
SFAS No. 128,  "Earnings  Per Share" was issued in February  1997 and adopted by
the  Company  in 1997.  This new  pronouncement  established  revised  reporting
standards  for  earnings  per share and has been  retroactively  applied  to all
periods presented herein.  Previously  reported earnings per share for each such
period were not materially  different than currently  reported  diluted earnings
per  share.  Additionally,  application  of the new  standard  for  1997 did not
materially  impact the  calculation  of diluted  earnings  per share versus what
would have been reported under the prior  standard.  Diluted  earnings per share
for the Company  includes the impact of the assumed  exercise of dilutive  stock
options.

SFAS No. 130, "Reporting  Comprehensive Income" was issued in July 1997 and will
be adopted by the  Company  effective  January 1, 1998.  This new  pronouncement
establishes  standards for reporting and display of comprehensive income and its
components.  Adoption of this standard  will not impact the Company's  financial
position or results of operations.

SFAS  No.  131,  "Disclosures  about  Segments  of  an  Enterprise  and  Related
Information"   introduces  a  new  model  for  segment  reporting,   called  the
"management  approach."  The  management  approach  is based on the way that the
chief operating  decision maker organizes segments within the company for making
operating  decisions  and  assessing  performance.  Management of the Company is
evaluating  this  new   pronouncement  to  determine  its  impact  upon  current
reporting. Adoption of this new standard is scheduled for late 1998.

RECLASSIFICATIONS
Certain  reclassifications  have been made to prior  year  amounts to conform to
current year presentation.

NOTE 3.  ACQUISITIONS

BOSTROM SEATING INC.
On January 13, 1995, the Company acquired Bostrom.  The total purchase price was
approximately  $32.4 million and was funded by the Company's  previous borrowing
facility.

TRUCK COMPONENTS, INC.
On August 23, 1995, the Company  completed the  acquisition of TCI,  whereby the
Company acquired all outstanding shares of common stock of TCI (including shares
subject to options) for a cash purchase price of approximately $166 million. The
Company also made a tender offer for the $82 million of TCI's outstanding senior
notes and  purchased  such notes for $94  million.  The  acquisition  and tender
offer,  as well as the repayment of the  Company's and TCI's  existing bank debt
(excluding  the JAIX Leasing  facility)  and the payment of various  transaction
fees and expenses were

                                       11

<PAGE>



financed by borrowings  under the Senior Bank Facilities and the proceeds of the
issuance of the Notes (see Notes 6 and 7).

The Bostrom and TCI  acquisitions  were accounted for as purchases for financial
reporting purposes. Accordingly,  certain assets and liabilities of the acquired
companies  were recorded at estimated  fair values as of the  acquisition  date,
based on  management's  best  judgement and available  information  at the time.
Changes to the  original  estimates,  some of which were made in 1996,  were not
material.

The  operating  results of the  acquired  companies  have been  included  in the
Company's  reported  results of  operations  from their  respective  acquisition
dates.

The Company's pro forma unaudited  consolidated statement of income for the year
ended December 31, 1995, was prepared as though the  acquisitions of Bostrom and
TCI and the related  financing  transactions  occurred  on January 1, 1995.  Pro
forma data are as follows:

(IN THOUSANDS, EXCEPT PER SHARE DATA)
-------------------------------------
                                                1995
-----------------------------------------  ---------
Total revenues                            $  900,924
Gross profit                                 108,976
Net income                                    10,068
Diluted earnings per share                $     1.03
------------------------------------------ ---------

The pro forma operating results include each acquiree's  pre-acquisition results
of operations with  adjustments to reflect  amortization of excess cost over net
assets acquired and other identified intangible assets,  additional depreciation
on the increase to fair market value of fixed  assets,  interest  expense on the
acquisition  borrowings  and the effect of income taxes  thereon.  The pro forma
information  given above does not purport to be  indicative  of the results that
actually  would have been obtained if the  operations  were combined  during the
periods  presented and is not intended to be a projection  of future  results or
trends.

NOTE 4.  DETAIL OF CERTAIN ASSETS AND LIABILITIES

ALLOWANCE FOR DOUBTFUL ACCOUNTS

(IN THOUSANDS)

Year Ended December 31,                    1997        1996       1995
-----------------------                    ----        ----       ----
Balance at beginning of year          $   1,883    $  1,690   $     --
Provision for doubtful accounts           1,904         538         60
Allowances for doubtful accounts from
  acquired businesses                        --          --      1,630
Net write-offs                           (1,493)       (345)        --
------------------------------------   --------     -------    -------
Balance at end of year                $   2,294    $  1,883   $  1,690




                                       12

<PAGE>





INVENTORIES
(IN THOUSANDS)
As of December 31,                            1997        1996
------------------                            ----        ----
Raw materials and purchased components    $ 10,894   $  10,289
Work in progress and finished goods         47,780      39,300
Inventories                               $ 58,674   $  49,589
---------------------------------------   --------   ---------

PROPERTY, PLANT AND EQUIPMENT
(IN THOUSANDS)
As of December 31,                            1997        1996
------------------                            ----        ----
Land                                     $   4,683   $   4,466
Buildings and improvements                  28,615      26,310
Machinery and equipment                    121,081     114,820
Construction in progress                     3,969       4,722
                                           158,348     150,318
Accumulated depreciation                    40,285      26,459
Property, plant and equipment, net       $ 118,063   $ 123,859
---------------------------------------  ---------   ---------

LEASING BUSINESS ASSETS
(IN THOUSANDS)
As of December 31,                            1997        1996
------------------                            ----        ----
Leasing business assets                  $  39,763  $   23,884
Accumulated depreciation                     1,333         629
Leasing business assets, net             $  38,430  $   23,255
---------------------------------------  ---------  ----------




                                       13

<PAGE>




INTANGIBLE ASSETS
(IN THOUSANDS)
                                       Original   Accumulated       NET BALANCE
As of December 31,                         Cost  Amortization      1997    1996
------------------                         ----   -----------      ----    ---- 
Excess cost over net assets acquired   $204,520      $ 13,116  $191,404 $196,565
Trademarks                               26,988         1,628    25,360   26,057
Technologies                             20,722         1,915    18,807   19,628
Patents                                  17,278         9,958     7,320    9,061
Organization costs                          742           483       259      351
------------------------               --------      --------  -------- --------
Intangible assets                      $270,250      $ 27,100  $243,150 $251,662
------------------------               --------      --------  -------- --------


OTHER CURRENT LIABILITIES

(IN THOUSANDS)

As of December 31,                                                1997      1996
------------------                                                ----      ----
Accrued interest                                             $   9,336  $  7,039
Accrued workers' compensation                                    5,281     5,456
Current portion of postretirement
  and pension benefit reserves                                   3,655     3,536
Accrued warranty                                                 3,847     4,090
Other                                                           13,848    14,709
------------------------------------------                    --------  --------
Other current liabilities                                     $ 35,967  $ 34,830
------------------------------------------                    --------  --------

OTHER LONG-TERM LIABILITIES
 
(IN THOUSANDS)
As of December 31,                                                1997      1996
------------------                                                ----      ----
Postretirement and pension benefit reserves                  $  29,880  $ 29,414
Environmental reserves                                          10,402    25,568
Other                                                            5,011     5,000
------------------------------------------                   ---------  --------
Other long-term liabilities                                  $  45,293  $ 59,982
------------------------------------------                   ---------  --------



                                       14

<PAGE>



NOTE 5.  SHAREHOLDERS' EQUITY

(IN THOUSANDS)
<TABLE>
<S>                                   <C>        <C>       <C>        <C>          <C>

                                        Common    Paid-in    Retained     Employee
                                         Stock    Capital    Earnings   Receivables    Total
----------------------------------- --------------------------------------------------------
Balance-December 31, 1994             $     98   $ 55,020   $  8,206    $    (90)   $ 63,234
Collection of employee receivables          --         --         --          10          10
Options exercised                           --         45         --          --          45
Stock subscription cancellation             --        (50)        --          50          --
Net income for year                         --        --       5,585          --       5,585
----------------------------------    --------   --------   --------    --------    --------
Balance-December 31, 1995                   98     55,015     13,791         (30)     68,874
Options exercised                           --         34         --          --          34
Net loss for year                           --         --     (5,371)         --      (5,371)
----------------------------------    --------   --------   --------    --------    --------
Balance-December 31, 1996                   98     55,049      8,420         (30)     63,537
Options exercised                           --         17         --          --          17
Net Income for year                         --         --      7,466          --       7,466
----------------------------------    --------   --------   --------    --------    --------
Balance-December 31, 1997             $     98   $ 55,066   $ 15,886    $    (30)   $ 71,020
----------------------------------    --------   --------   --------    --------    --------
</TABLE>


COMMON AND PREFERRED STOCK
The Company authorized  200,000,000  shares of Common Stock (voting),  1,000,000
shares of Class B Common Stock  (non-voting) and 20,000,000  shares of preferred
stock. No Class B Common Stock or preferred stock has been issued.

In October  1995,  the Board of Directors of the Company  adopted a  Shareholder
Rights Plan and declared a dividend of one right ("Right") for each  outstanding
share of the Company's  common stock held by  shareholders  of record on October
16,  1995.  When  exercisable,  each Right  entitles  shareholders  of record to
purchase  from the  Company  one  one-thousandth  of a share of  Series A Junior
Participating Preferred Stock at an exercise price of $32.00, subject to certain
adjustments. The Company authorized 20,000 shares of such stock pursuant to this
plan. The Rights will become  exercisable,  and will trade  separately  from the
common  stock,  only if a person or group  acquires 15% or more of the Company's
outstanding  common  stock or  commences a tender or  exchange  offer that would
result in that person or group owning 15% or more of the  Company's  outstanding
common stock.  Subsequently,  upon the occurrence of certain events,  holders of
Rights will be entitled to purchase common stock of the Company or a third-party
acquiror  at an amount  equal to twice the  Right's  exercise  price.  Until the
Rights become  exercisable,  they may be redeemed at the  Company's  option at a
price of one cent per Right. The Rights expire on October 4, 2005.



                                       15

<PAGE>



NOTE 6.  LONG-TERM DEBT

Long-term debt consisted of the following:

(IN THOUSANDS)

AS OF DECEMBER 31,                                              1997      1996
-----------------                                               ----      ----
Revolving credit line                                      $      --  $     --
Tranche A term loan                                               --    86,670
Tranche B term loan                                           93,340    96,670
Total senior bank facilities                                  93,340   183,340
Industrial revenue bond                                        5,300     5,300
Capital lease                                                  1,783     1,953
JAIX leasing debt                                             29,159    13,582
------------------------------------------------           ---------  --------
Total debt                                                   129,582   204,175
Current maturities                                            (4,783)  (17,236)
------------------------------------------------           ---------  --------
Long-term debt                                             $ 124,799  $186,939
------------------------------------------------           ---------  --------

Maturities of long-term debt are as follows:

(IN THOUSANDS)
------------------------------------------------------------------------------
As of December 31, 1997
------------------------------------------------------------------------------
    1999                                         $   4,920
    2000                                            21,741
    2001                                            25,235
    2002                                            28,642
    Thereafter                                      44,261
------------------------------------------------------------------------------




                                       16

<PAGE>



SENIOR BANK FACILITIES
The Company entered into a credit  facility ( Senior Bank  Facilities) on August
23,  1995,  in  conjunction   with  the  acquisition  of  TCI  and  the  related
transactions  described  in Note 3. The  revolving  credit  line  portion of the
Senior Bank Facilities provides for up to $75 of million outstanding  borrowings
and letters of credit,  limited by the level of eligible accounts receivable and
inventories.  As of December 31, 1997,  availability  under the revolving credit
line, after consideration of outstanding letters of credit of $17.0 million, was
$58.0 million.

At the Company's  election,  interest  rates per annum for the revolving  credit
line are  fluctuating  rates of interest  measured by reference to either (a) an
adjusted London  inter-bank  offered rate (LIBOR) plus a borrowing margin or (b)
an alternate base rate (ABR) plus a borrowing  margin.  Such  borrowing  margins
range between 1.50% and 2.50% for LIBOR loans and between .50% and 1.50% for ABR
loans,  fluctuating  within each range in 0.25%  increments based on the Company
achieving  certain  financial  results.  Interest rates per annum  applicable to
Tranche B term loan are  either (a) LIBOR plus a margin of 3.00% or (b) ABR plus
2.00%.  Additionally,  various  fees related to unused  commitments,  letters of
credit and  administration  of the facility  are incurred by the Company.  As of
December  31,  1997  and  1996,  the  weighted  average  interest  rate  of  all
outstanding  loans  under the  Senior  Bank  Facilities  was  9.01%  and  9.21%,
respectively. Borrowings under the Senior Bank Facilities are guaranteed by each
of  the  Company's   subsidiaries   other  than  JAIX  Leasing  (the   Guarantor
Subsidiaries)  and are  secured by the assets and stock of the  Company  and its
Guarantor  Subsidiaries.  The Tranche A term loan was repaid in full during 1997
in  conjunction  with the  issuance of debt  described in Note 7. Upon the early
retirement  of this loan,  the Company  recorded a $ 3.3 million  ($2.0  million
after-tax)  extraordinary charge primarily  representing the noncash writeoff of
unamortized  deferred financing costs related to the retired debt. The revolving
credit line  matures on March 31,  2002 and the  Tranche B Term Loan  matures on
March 31, 2003.

The Senior Bank Facilities contain various financial covenants including capital
expenditure  limitations,  minimum leverage and interest  coverage  ratios,  and
minimum  net  worth,  and also  restrict  the  Company  from  paying  dividends,
repurchasing   common   stock  and  making   other   distributions   in  certain
circumstances.

INDUSTRIAL REVENUE BOND
The Company,  through its wholly owned subsidiary,  Freight Car Services,  Inc.,
issued an  Industrial  Revenue Bond for $5.3 million  which bears  interest at a
variable rate (4.25% as of December 31, 1997) and can be redeemed by the Company
at any time.  The bonds are  secured by a letter of credit  issued by  Johnstown
America  Industries,  Inc. The bonds have no amortization and mature on December
1, 2010.  The bonds are also subject to a weekly "put"  provision by the holders
of the bonds.  In the event that any or all of the bonds are put to the  Company
under the  provision,  the Company would  effectively  refinance such bonds with
additional borrowings under the revolving credit line portion of the Senior Bank
Facilities.

JAIX LEASING DEBT
On June 14, 1996, JAIX Leasing refinanced its then existing debt with a new ten-
year term loan which bears  interest at an average  interest  rate of 8.78%.  At
December  31,  1997,  the  balance  of  this  debt  after  scheduled  and  other
prepayments was $29.2 million. This debt is secured by JAIX Leasing's underlying
leases and assets,  and contains  various  covenants.  On February 2, 1998, JAIX
Leasing sold 380 of its owned  freight cars and used the proceeds to repay $19.5
million of the outstanding term loan.

OTHER
During 1997 and 1996, the Company  entered into various  interest rate contracts
to fix a portion of the cost of its variable rate Senior Bank Facilities.  These
contracts  limit the  effect  of market  fluctuations  on the  interest  cost of
floating rate debt.  The notional  principal  amounts  outstanding  covering the
current  period on the interest rate contracts were $75 million and $140 million
as of December 31, 1997 and 1996,  respectively.  The fixed rates of interest on
these contracts ranged from 5.98% to 6.32% as of December 31, 1997 and 1996. The
maturities on these  contracts  range through  August 1998.  The impact of fixed
versus  variable  interest  rates is recorded  as  incurred,  as a component  of
interest  expense.  Costs  associated with obtaining the Senior Bank Facilities,
the Senior Subordinated Notes described in Note 7

                                       17

<PAGE>



and other indebtedness  aggregated to $12.7 million as of December 31, 1997, and
costs associated with obtaining the $80 million  additional Senior  Subordinated
Notes were $2.9 million.  Such costs are amortized  over the term of the related
debt.  Amortization of deferred  financing costs amounted to $2.2 million,  $3.2
million and $0.9 million for the years ended December 31, 1997,  1996, and 1995,
respectively. As of December 31, 1997 and 1996, accumulated amortization of such
costs was $4.0 million, and $4.1 million, respectively.


NOTE 7.  SENIOR SUBORDINATED NOTES

In conjunction  with the  acquisition of TCI, the Company issued $100 million of
Senior  Subordinated  Notes which are due August 15, 2005. In 1997,  the Company
issued $80 million of additional  notes due August 15, 2005  (collectively,  the
Notes) with substantially  identical terms to the already outstanding notes at a
$3.6  million  premium,  for an  effective  rate of 10.8%.  These  Notes have an
interest  rate of 11.75% per annum and are  guaranteed  on a  unsecured,  senior
subordinated  joint and  several  basis by each of the  Guarantor  Subsidiaries.
Pursuant to the  settlement of separate  interest rate  contracts in effect when
each portion of the Notes was issued,  the Company  realized a $0.8 million loss
and a $2.6 million gain upon the 1997 and 1995 issuances, respectively. The gain
and the loss are being amortized as an offset to interest  expense over the term
of  the  Notes.  The  Notes  have  customary   restrictive  covenants  including
restrictions on incurrence of additional indebtedness,  payment of dividends and
redemption of capital  stock.  The Notes are  subordinated  to all  indebtedness
under the Senior Bank Facilities and cross-default  provisions do exist.  Except
in  certain  limited  circumstances,  the  Notes  are not  subject  to  optional
redemption by the Company prior to August 15, 2000,  and  thereafter are subject
to optional redemption by the Company at declining redemption premiums. Upon the
occurrence of a change in control (as defined), the Company is required to offer
to repurchase the Notes at a price equal to 101% of the principal amount thereof
plus accrued interest.

The Company's future  operating  performance and ability to service or refinance
the Notes and to extend or refinance the Senior Bank  Facilities will be subject
to future economic conditions and to financial, business and other factors, many
of which are beyond the Company's control.


NOTE 8.  EMPLOYEE BENEFIT PLANS

PENSIONS BENEFITS
Certain of the Company's  subsidiaries  have  qualified,  defined  benefit plans
covering  substantially  all of their  employees.  Company  contributions to the
plans were made based  upon the  minimum  amounts  required  under the  Employee
Retirement  Income  Security  Act.  The plans'  assets  are held by  independent
trustees and consist primarily of equity and fixed income securities.

In  conjunction  with the  purchase  of the freight  car  business,  the accrued
pension benefits for employees of the freight car business for service up to the
acquisition  date remain the  responsibility  of  Bethlehem  Steel.  The Company
initiated new pension plans for service subsequent to the acquisition date which
essentially  provide  benefits  similar  to  the  former  plans.  Following  the
acquisition  of TCI,  a certain  TCI plan was  frozen  and was  replaced  with a
defined contribution plan.

The following table summarizes pension expense:

(IN THOUSANDS)

Years ended December 31,                             1997      1996       1995
------------------------                             ----      ----       ----
Current service cost                            $   1,744  $  2,189   $  1,681
Interest cost on projected benefit obligation       2,371     2,173      1,714
Expected return on assets                          (3,725)   (2,143)    (1,896)
Amortization of unrecognized gains and losses       2,213     1,208      1,571
Net pension cost                                $   2,603  $  3,427   $  3,070
---------------------------------------------   ---------  --------   --------



                                       18

<PAGE>



The following table sets forth the plans' funded status:

(IN THOUSANDS)

AS OF DECEMBER 31,                                               1997      1996
-----------------                                               ----      ----
Vested benefits                                            $  26,839  $ 20,508
Non-vested benefits                                            6,146     3,380
Accumulated benefits obligation                               32,985    23,888
Effect of projected future compensation levels                 6,835     8,256
------------------------------------------------------     ---------  --------
Projected benefits obligation                                 39,820    32,144
Plan assets at fair value                                     27,352    20,311
------------------------------------------------------     ---------  --------
Projected benefits obligation in excess of plan assets        12,468    11,833
Unrecognized net gain                                             50     2,569
Unrecognized prior service cost                               (4,924)   (5,298)
------------------------------------------------------     ---------  --------
Net Pension reserves                                       $   7,594  $  9,104
------------------------------------------------------     ---------  --------
Actuarial assumptions used in developing the above data were:
------------------------------------------------------------------------------
                                                               1997       1996
------------------------------------------------------------------------------
Discount rate                                                 7.00%       7.75%
Rate of expected return on plan assets                        9.00%       9.00%
Rate of increases in compensation                        3.00-4.00%  3.00-4.00%
------------------------------------------------------------------------------


Pursuant to the union agreement  ratified in January 1998, for JAC's freight car
business,  the Company has offered  early  retirement  benefits to certain union
employees  who meet certain  criteria and elect such  benefits by the end of the
current agreement term (October 31, 2001). In addition, the Company also offered
additional early retirement  benefits to a limited number of eligible  employees
who elect to retire by June 30,  1998.  The cost of the  benefits  for the first
program will be recognized over the  actuarially  determined  estimated  service
life  of the  eligible  employees.  The  cost  of the  second  program  will  be
recognized at the time the employee makes the election.

DEFINED CONTRIBUTION PLANS
Certain  of  the  Company's   subsidiaries  also  maintain  qualified,   defined
contribution  plans which provide  benefits to their employees based on employee
contributions,  years  of  service,  employee  earnings  or  certain  subsidiary
earnings, with discretionary  contributions allowed.  Expenses relating to these
plans were $3.2 million,  $3.1 million and $2.4 million for the years 1997, 1996
and 1995, respectively.



                                       19

<PAGE>



POSTRETIREMENT BENEFITS
The Company  provides  health care  benefits  for  certain  salaried  and hourly
retired  employees.  Employees  may become  eligible for health care benefits if
they  retire  after  attaining  specified  age and service  requirements.  These
benefits  are  subject  to   deductibles,   co-payment   provisions   and  other
limitations.

In  connection  with the  purchase  of the  freight  car  business,  the cost of
postretirement  benefits of employees  over age 43 at the purchase date remained
the  responsibility  of Bethlehem Steel.  Costs of benefits  relating to current
service are expensed currently.


The following table summarized postretirement benefit expense:

(IN THOUSANDS)

Years ended December 31,                              1997      1996      1995
------------------------                              ----      ----      ----
Current service cost                               $   725   $   854  $  1,043
Interest cost on accumulated benefit obligation      1,660     1,340     1,001
Amortization of unrecognized gains                     (98)     (183)      (57)
    Net postretirement benefit costs               $ 2,287   $ 2,011  $  1,987
------------------------------------------------   -------   -------  --------


The following table sets forth the plans' funded status:

(IN THOUSANDS)

AS OF DECEMBER 31,                                              1997      1996
------------------                                              ----      ----
Retirees                                                    $  7,589  $  6,308
Other fully eligible plan participants                         2,016     4,828
Other active plan participants                                15,523     7,712
Accumulated benefits obligation                               25,128    18,848
Unrecognized net gain                                            813     4,998
------------------------------------------------            --------  --------
Net postretirement benefits reserve                         $ 25,941  $ 23,846
------------------------------------------------            --------  ---------

The discount  rates used in developing the above data ranged from 7.00% to 7.25%
in 1997, from 7.50% to 8.00% in 1996 and from 7.25% to 7.75% in 1995.

Medical trend rate  assumptions were 4.50% to 4.75% for 1997, 5.25% to 9.00% for
1996 and 8.00% to 9.50% for 1995.  Were the  assumed  medical  trend rates to be
increased  by 1% for each future  year,  the effect of this  change  would be to
increase the accumulated  postretirement  benefit obligation by $5.4 million and
$4.0  million at December  31, 1997 and 1996,  respectively,  and the  aggregate
service and interest  cost  components  by $0.7  million,  $0.6 million and $0.7
million for the years 1997, 1996 and 1995, respectively.

The Company does not offer any other significant postretirement benefits.


                                       20

<PAGE>



NOTE 9.  INCOME TAXES

The  provision  (benefit)  for income taxes before  extraordinary  item includes
current and deferred components as follows:

(IN THOUSANDS)

YEARS ENDED DECEMBER 31,                   1997      1996       1995
------------------------                   ----      ----       ----
Current taxes:
Federal                               $   2,741   $    --   $  1,853
State                                       833      (134)       321
                                          3,574      (134)     2,174
---------------------------------     ---------   -------   --------
Deferred taxes:
Federal                                   4,969      (444)     2,227
State                                       968       502        336
--------------------------------------------------------------------
                                          5,937       58       2,563
Provision (benefit) for income taxes
  before extraordinary item           $   9,511  $   (76)   $  4,737
---------------------------------     ---------  --------   --------

The provision (benefit) for income taxes before  extraordinary item differs from
the amounts computed by applying the federal statutory rate as follows:

(IN THOUSANDS)
------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31,                    1997      1996      1995
------------------------------------------------------------------------------
Income taxes at federal statutory rate      35.0%    (34.0)%    34.0%
State income taxes, net of federal benefit   6.3      (0.1)      4.2
Nondeductible amortization expense           9.5      32.7       7.2
Other, net                                  (0.7)       --       0.5
------------------------------------------------------------------------------
Effective income tax rate                   50.1%     (1.4)%    45.9%
------------------------------------------------------------------------------



                                       21

<PAGE>



Components of deferred tax benefits (obligations) consist of the follows:

(IN THOUSANDS)
<TABLE>
<S>                                           <C>         <C>             <C>        <C>

                                                         1997                       1996
                                               -----------------------     ------------------------
    Description                                Benefits    Obligations     Benefits   Obligations
Postretirement and pension benefit reserves    $ 12,042    $        --     $ 13,257   $        --
Environmental reserve                             4,388             --       10,299            --
Deferred employee compensation                       --             --        3,787            --
Accrued workers' compensation reserve             1,721             --        2,128            --
Warranty reserve                                  1,500             --        1,595            --
Alternative minimum tax credit carryforward       2,110             --        4,042            --
Property, plant and equipment                        --        (27,674)          --       (28,104)
Trademarks and technologies                          --        (19,061)          --       (19,776)
Inventories                                          --         (2,818)          --        (2,973)
Other                                             7,487         (2,547)       4,182        (1,508)
------------------------------------------     --------       --------     --------      --------
Deferred tax benefits (obligations)            $ 29,248    $   (52,100)    $ 39,290   $   (52,361)
--------------------------------- ---------    --------       --------     --------      --------
</TABLE>

In the  consolidated  balance  sheets,  these  deferred  benefits  and  deferred
obligations  are classified as deferred income tax assets or deferred income tax
liabilities,  based on the  classification of the related asset or liability for
financial reporting. A deferred tax liability or asset that is not related to an
asset or  liability  for  financial  reporting,  including  deferred  tax assets
related to carryforwards, are classified according to the expected reversal date
of the temporary  difference as of the end of the year. Tax credit carryforwards
primarily  consist of alternative  minimum taxes,  which can be carried  forward
indefinitely,  and certain  state tax net  operating  losses  subject to various
limitations  which expire, if unused, in 1998 through 2000 under the current tax
laws.

A valuation  allowance  of $0.3 million and $2.1 million as of December 31, 1997
and 1996, has been recorded to offset these state tax credit  carryforwards.  As
of  December  31,  1997 and  1996,  no other  valuation  allowances  are  deemed
necessary as management expects to realize all other deferred benefits as future
tax deductions.

NOTE 10.  STOCK OPTION PLANS

The Company  maintains a Stock Option Plan (The Option Plan) for  management and
nonaffiliated directors of the Company and has reserved 989,000 shares of common
stock for issuance  under such plan.  Options are granted to  management  at the
discretion  of the  Company's  directors  and pursuant to an option  program for
nonaffiliated company directors. Options granted under the Option Plan generally
have an exercise price equal to the closing market value of the Company's common
stock as of the date of grant,  and become  exercisable  under  various  vesting
periods of up to three years.

                                       22

<PAGE>



Certain information  regarding stock options issued by the Company is summarized
below:

(IN THOUSANDS EXCEPT WEIGHTED AVERAGE PRICES)

                                    OUTSTANDING                EXERCISABLE
                                    -----------                -----------
                                           Wtd. Avg.                  Wtd. Avg.
                                Shares   Exer. Price     Shares    Exer. Price
December 31, 1994                  227   $    11.89         210    $    10.07
Issued                             399        10.88
Exercised                          (18)        2.50
Canceled                           (25)        4.90
December 31, 1995                  583        11.79         277         11.18
Issued                             178         4.82
Exercised                          (14)        2.50
Canceled                           (74)       12.17
------------------------------------------------------------------------------
December 31, 1996                  673   $    10.10         472    $    10.82
Issued                             209         6.54
Exercised                         (10)         2.79
Canceled                          (50)        15.40
------------------------------------------------------------------------------
December 31, 1997                  822   $     8.94         651    $     9.74
------------------------------------------------------------------------------


<TABLE>
<S>                          <C>       <C>              <C>                   <C>         <C>

(IN THOUSANDS, EXCEPT WEIGHTED AVERAGE PRICES)
------------------------------------------------------------------------------
                                      OUTSTANDING - DECEMBER 31, 1997         EXERCISABLE - DECEMBER 31, 1997
                                      -------------------------------         -------------------------------
                                       Wtd. Avg.           Wtd. Avg.                        Wtd. Avg.
Range of Exercise Prices     Shares    Remaining Yrs.    Exer. Price            Shares    Exer. Price
-------------------------------------------------------------------------------------------------------------
$2.50 - $12.00                  624         8.15          $   6.28                 453       $   6.42
$12.00 - $25.63                 198         6.85             17.31                 198          17.31
-------------------------------------------------------------------------------------------------------------

</TABLE>

The Company measures  compensation cost under the intrinsic  value-based method.
Had compensation cost been determined on the fair market value-based  accounting
method  for  options  granted  in 1997 and 1996,  pro forma net  income  and the
diluted  earnings  per share for 1997  would have been $6.9  million  and $0.70,
respectively,  and pro  forma net loss and the  diluted  loss per share for 1996
would have been $6.1 million and $0.62, respectively.  The weighted average fair
value of options  granted in 1997 and 1996 was $5.11 and $2.64 for  December 31,
1997 and 1996,  respectively.  The fair value of each option is estimated on the
date of grant using the  Black-Scholes  option  pricing model with the following
assumptions: weighted average risk-free interest rate of 6.3% and 7.1%; weighted
average  volatility  of 64.9%  and  56.6%;  expected  lives of 10 years and zero
dividend yield for 1997 and 1996, respectively.

NOTE 11.  ENVIRONMENTAL MATTERS

The Company is subject to comprehensive and frequently  changing federal,  state
and local environmental laws and regulations,  and will incur additional capital
and  operating  costs in the future to comply with  currently  existing laws and
regulations,  new regulatory requirements arising from recently enacted statutes
and possible new statutory  enactments.  In addition to environmental  laws that
regulate the Company's  subsidiaries' ongoing operations,  the subsidiaries also
are  subject  to  environmental   remediation   liability.   Under  the  federal
Comprehensive Environmental Response,

                                       23

<PAGE>



Compensation  and Liability Act (CERCLA) and analogous state laws, the Company's
subsidiaries  may be liable as a result of the release or threatened  release of
hazardous  substances  into the  environment.  The  Company's  subsidiaries  are
currently  involved  in several  matters  relating to the  investigation  and/or
remediation of locations where the  subsidiaries  have arranged for the disposal
of foundry and other wastes.

Such matters  include  five  situations  in which the  Company,  through its TCI
subsidiaries  and their  predecessors,  have been  named or are  believed  to be
Potentially  Responsible  Parties  (PRPs)  in the  contamination  of the  sites.
Additionally,  environmental  remediation  may be  required  at  two of the  TCI
facilities at which soil and groundwater contamination has been identified.

The Company  believes that it has valid claims for  contractual  indemnification
against prior owners for certain of the investigatory and remedial costs at each
of the above  mentioned  sites.  As a result of a private  party  settlement  of
certain pending litigation with a prior owner of Gunite, TCI and Gunite will not
be  responsible  (through a  contractual  undertaking  by the former  owner) for
certain  liabilities  and costs  resulting from Gunite's waste disposal prior to
the acquisition of Gunite by TCI in September 1987 at certain of such sites. The
Company has been notified,  however,  by certain other  contractual  indemnitors
that they will not honor future  claims for  indemnification.  Accordingly,  the
Company is litigating indemnification claims and there is no assurance that even
if successful in any such claims,  any judgments  against the  indemnitors  will
ultimately be recoverable.  In addition,  the Company believes it is likely that
it has incurred  some  liability at various  sites for  activities  and disposal
following acquisition which would not in any event be covered by indemnification
by prior owners.

As of December 31, 1997, the Company has a $11.3 million environmental  reserve.
This reserve is based on current cost  estimates  and does not reduce  estimated
expenditures to net present value. The Company  currently  anticipates  spending
approximately  $0.4  million  per year in 1998 and 1999 and  approximately  $0.5
million  per  year in year  2000,  2001  and 2002  for  monitoring  the  various
environmental  sites  associated  with  the  environmental  reserve,   including
attorney and  consultant  costs for  strategic  planning and  negotiations  with
regulators and other PRPs, and payment of remedial  investigation  costs.  These
sites are generally in the early investigatory stages of the remediation process
and thus it is anticipated  that  significant cash payments for remediation will
not  be  incurred  for  at  least  several  years.   After  the  evaluation  and
investigation  period,  the  investigation  and  remediation  costs will  likely
increase  because  the actual  remediation  of the various  environmental  sites
associated  with the  environmental  reserve  will likely be under way. Any cash
expenditures  required  by  the  Company  or its  subsidiaries  to  comply  with
applicable environmental laws and/or to pay for any remediation efforts will not
be reduced or otherwise affected by the existence of the environmental  reserve.
Due to the early  stage of  investigation  of many of the  sites  and  potential
remediations referred to above, there are significant  uncertainties as to waste
quantities  involved,  the extent and  timing of the  remediation  which will be
required, the range of acceptable solutions, costs of remediation and the number
of PRPs  contributing to such costs.  Based on all of the information  presently
available to it, the Company  believes  that the  environmental  reserve will be
adequate  to cover its future  costs  related to the sites  associated  with the
environmental  reserve,  and that any additional  costs will not have a material
adverse  effect on the  financial  condition  or  results of  operations  of the
Company.  However,  the  discovery of  additional  sites,  the  modification  of
existing laws or  regulations,  the  imposition  of joint and several  liability
under  CERCLA or the  uncertainties  referred  to above  could  result in such a
material adverse effect.

NOTE 12.  CONTINGENCIES

The Company is  involved in certain  threatened  and pending  legal  proceedings
including  workers'  compensation  claims  arising  out  of the  conduct  of its
businesses.  In the opinion of  management,  the ultimate  outcome of such legal
proceedings will not have a material adverse effect on the financial position or
results of operations of the Company.


                                       24
<PAGE>


In  December  1992,  Johnstown  America  Corporation  (JAC)  commenced  a patent
infringement  lawsuit against Trinity  Industries,  Inc. (Trinity) in the United
States  District  Court  for  the  Western  District  of  Pennsylvania  alleging
infringement of JAC's patent for its BethGon Coalporter(R) freight car. The suit
involved Trinity's manufacture,  sale and offering for sale of its Aluminator II
coal freight car in competition  with JAC's BethGon  Coalporter(R)  freight car,
the tubs of which are covered by JAC's patent.  In such suit, JAC seeks monetary
damages and an  injunction  against  Trinity to prohibit  Trinity  from  making,
using,  selling or offering for sale of the Aluminator II. The lawsuit was tried
in 1996 with the  United  States  District  Court for the  Western  District  of
Pennsylvania  entering an order upholding a jury verdict that the patent, though
valid,  was not  infringed by Trinity's  Aluminator II freight car. In addition,
JAC was not held to be liable for any of the  counterclaims  alleged by Trinity.
JAC  appealed  the case to the United  States  Court of Appeals  for the Federal
Circuit.  Following oral argument,  the Court of Appeals for the Federal Circuit
issued its  opinion  dated May 28,  1997 in which the Court held that  Trinity's
Aluminator II literally  infringed  JAC's patent,  reversed the 1996 trial court
judgment of noninfringement  and remanded the case back to the trial court for a
determination  as to damages  and for  consideration  of JAC's  contention  that
Trinity's infringement was willful.  Following receipt of such opinion, JAC made
a motion to the trial court for a permanent  injunction to prohibit Trinity from
making,  selling or offering to sell its  infringing  Aluminator  II until JAC's
patent  expires in November  1999.  Trinity  thereafter  petitioned the Court of
Appeals for a rehearing.  The trial court temporarily  denied JAC's motion for a
permanent  injunction until the Court of Appeals decided Trinity's  petition for
rehearing.  The Court of Appeals  issued its opinion  dated July 30,  1997,  and
Order dated August 11,  1997,  denying  Trinity's  petition  for  rehearing  and
Trinity's  suggestion for a rehearing in banc.  Trinity thereafter made a motion
to the court of Appeals to stay the  issuance  of its  mandate  pending  Trinity
filing a petition for certiorari to the United States  Supreme Court,  which was
denied by the Court of Appeals on September 2, 1997,  at which time the Court of
Appeals issued its mandate.  In October 1997,  Trinity made a motion for partial
summary  judgment on damages to the  District  Court and filed its  petition for
certiorari  to the United States  Supreme  Court.  In January  1998,  the United
States Supreme Court denied Trinity's  petition for certiorari.  Also in January
1998,  the  District  Court  granted JAC a  preliminary  injunction  prohibiting
Trinity from marketing,  manufacturing, using, selling or leasing its infringing
Aluminator II coal gondola freight car or any imitation thereof. JAC expects the
damage trial to occur in mid-1998 and at this time cannot  predict the amount of
damages that may be awarded.

Additionally, the Company is involved in various warranty and repair claims with
its  customers  as a normal  course of business.  In the opinion of  management,
accrued warranty costs relating to these obligations are adequate.



                                       25

<PAGE>



NOTE 13.  COMMITMENTS

The Company leases certain real property and equipment  under  long-term  leases
expiring at various dates through 2032. The leases  generally  contain  specific
renewal or purchase options at the then fair market value.

Future minimum lease payments at December 31, 1997, are as follows:

(IN THOUSANDS)

                                       Capital Lease    Operating Leases
                                       -------------    ----------------
1998                                      $     395       $     6,648
1999                                            395             5,066
2000                                            395             4,602
2001                                            395             3,627
2002                                            281             2,416
Thereafter                                    2,127            24,504
Total minimum lease payments                  3,988       $    46,863
Less: Amount representing interest            2,205
Present value of minimum lease payments       1,783
Less: Current portion of obligation under 
 capital lease                                  190 
Noncurrent obligation under capital lease  $  1,593


While the Company is liable for  maintenance,  insurance and similar costs under
most of its  leases,  such costs are not  included in the future  minimum  lease
payments.

The Company  assumed the capital  lease in its  acquisition  of TCI. The related
asset  balance of $1.9  million is  included  as a component  of  buildings  and
improvements.  Accumulated  depreciation of this asset was $0.3 million and $0.2
million as of December 31, 1997 and 1996, respectively.

Total rental expense for the years 1997, 1996 and 1995 amounted to $6.5 million,
$3.7 million and $2.0 million, respectively.

NOTE 14.  MAJOR CUSTOMERS AND CONCENTRATION OF CREDIT

In each of 1997, 1996 and 1995, a different customer accounted for 12%, 13%, and
17% of the Company's total revenue. No other customer accounted for greater than
10% of the company's total revenue during these periods.




                                       26

<PAGE>



NOTE 15.  UNAUDITED QUARTERLY INFORMATION

(IN MILLIONS, EXCEPT PER SHARE DATA)

1997                                     First    Second     Third    Fourth
                                       Quarter   Quarter   Quarter   Quarter
-----------------------------------------------------------------------------
Total revenue                         $  115.7   $  158.2   $ 186.8  $  189.6
Gross profit                              19.0       22.4      24.7      27.8
Net income (loss)                         (1.9)      (.05)      8.1       1.8
Net diluted income (loss) per share   $  (0.19)  $  (0.05)  $  0.83  $   0.18
-----------------------------------------------------------------------------
1996
-----------------------------------------------------------------------------
Total revenue                         $  152.4   $  133.3   $ 140.8  $  133.5
Gross profit                              23.2       21.5      20.5      20.6
Net loss                                  (0.7)      (1.2)     (1.6)     (1.9)
Net diluted loss per share            $  (0.07)  $  (0.13)  $ (0.16) $  (0.19)
-----------------------------------------------------------------------------

The diluted earnings per share amounts reported above and computed in accordance
with SFAS No. 128 are not materially different than previously reported amounts.


NOTE 16.  GUARANTOR SUBSIDIARIES

The Notes and the  obligations  under the Senior Bank  Facilities  are fully and
unconditionally  guaranteed  on an  unsecured,  senior  subordinated,  joint and
several basis by each of the  Guarantor  Subsidiaries.  The following  condensed
consolidating  financial data  illustrate the composition of the Parent Company,
Guarantor Subsidiaries, and JAIX Leasing. Separate complete financial statements
of  the  respective   Guarantors   Subsidiaries  would  not  provide  additional
information which would be useful in assessing the financial  composition of the
Guarantor Subsidiaries and thus are not presented.

Investments  in  subsidiaries  are  accounted  for by the Parent  Company on the
equity  method for  purposes  of the  supplemental  consolidating  presentation.
Earnings of  subsidiaries  are,  therefore,  reflected  in the Parent  Company's
investment  accounts and earnings.  The principal  elimination entries eliminate
the Parent Company's  investment in subsidiaries  and intercompany  balances and
transactions.



                                       27

<PAGE>

Condensed Consolidating Balance Sheet

<TABLE>
<S>                                                   <C>           <C>             <C>              <C>              <C>



(IN MILLIONS)                                              Parent      Guarantor
as of December 31, 1997                                   Company   Subsidiaries     JAIX Leasing     Eliminations     Consolidated
-----------------------                                   -------   ------------     ------------     ------------     ------------
Cash and cash equivalents                              $     25.1    $       3.8     $        2.0     $         --     $       30.9
Accounts receivable, net                                       --           60.5               --               --             60.5
Inventories                                                    --           58.7               --               --             58.7
Prepaid expenses and other                                    2.6           13.9              1.0               --             17.5
Total current assets                                         27.7          136.9              3.0               --            167.6
Property, plant and equipment, net                            2.6          117.3             36.9             (0.3)           156.5
Other assets                                                124.7          242.8              0.8           (113.6)           254.7
Total assets                                           $    155.0    $     497.0     $       40.7     $     (113.9)    $     578.8
--------------------------------------------------- ------------- --------------  ---------------  --------------- ----------------
Accounts payable                                       $      0.5    $      54.7     $         --     $         --     $       55.2
Other current liabilities                                     2.7           60.2              0.5               --             63.4
Total current liabilities                                     3.2          114.9              0.5               --            118.6
Noncurrent liabilities                                         --           78.2              3.5               --             81.7
Long-term debt, less current
   maturities and intercompany
   advances (receivables)                                    80.8          198.8             27.9               --            307.5
Total shareholders' equity                                   71.0          105.1              8.8           (113.9)            71.0
Total liabilities and
   shareholders equity                                 $    155.0    $     497.0     $       40.7     $     (113.9)    $      578.8
--------------------------------------------------- ------------- --------------  ---------------  --------------- ----------------



Condensed Consolidating Statement of Income



(IN MILLIONS)                                              Parent      Guarantor
as of December 31, 1997                                   Company   Subsidiaries     JAIX Leasing     Eliminations     Consolidated
-----------------------                                   -------   ------------     ------------     ------------     ------------
Total revenue                                           $     0.2    $     642.8     $        7.4     $         --     $      650.4
Cost of sales                                                  --          552.4              4.0               --            556.4
Gross profit                                                  0.2           90.4              3.4               --             94.0
Selling, general, administrative
  and amortization expenses                                   1.1           53.5              0.1               --             54.7
Gain on sale of leased freight cars                          (0.4)            --             (0.4)              --            (0.8)
Reduction of environmental  reserves                           --          (14.3)              --               --            (14.3)
--------------------------------------------------- ------------- --------------  ---------------  --------------- ----------------
Operating income (loss)                                      (0.5)          51.2              3.7               --             54.4
Interest expense, net                                        12.3           20.9              2.2               --             35.4
Equity (earnings) of subsidiaries                           (17.0)            --               --             17.0               --
Provision (benefit) for income taxes                         (5.3)          14.2              0.6               --              9.5
Net income (loss) before
  extraordinary item                                          9.5           16.1              0.9            (17.0)             9.5
Extraordinary item, net of tax                                2.0             --               --               --              2.0
--------------------------------------------------- ------------- --------------  ---------------  --------------- ----------------
Net income (loss)                                       $     7.5    $      16.1     $        0.9      $     (17.0)    $        7.5
=================================================== ============= ==============  ===============  =============== ================


                                       28
<PAGE>




Condensed Consolidating Statement of Cash Flows



(IN MILLIONS)                                              Parent      Guarantor
as of December 31, 1997                                   Company   Subsidiaries     JAIX Leasing     Eliminations     Consolidated
-----------------------                                   -------   ------------     ------------     ------------     ------------
Cash flows from
   operating activities                                $     (5.2)    $     29.5       $      2.4        $      --      $      26.7
Cash flows from investing activities:
Capital expenditures                                         (0.1)          (8.2)              --               --             (8.3)
Leased assets and investments                                  --             --           (27.6)               --            (27.6)
Proceeds from sale of leased assets                           3.1             --              7.1               --             10.2
Changes in restricted
   cash/ other                                                 --            0.6               --               --              0.6
--------------------------------------------------- ------------- --------------  ---------------  --------------- ----------------
Cash flows from
   investing activities                                       3.0           (7.6)           (20.5)              --            (25.1)
Cash flows from financing activities:
Issuance of long-term debt                                   82.8             --               --               --             82.8
Payments of term loans and
   capital lease                                            (90.0)          (0.1)              --               --            (90.1)
Net borrowings of JAIX
   leasing debt                                                --             --             15.6               --             15.6
Intercompany advances                                        19.4          (19.4)              --               --               --
Payment of deferred financing
   costs and other                                           (3.0)            --             (0.5)              --             (3.5)
--------------------------------------------------- ------------- --------------  ---------------  --------------- ----------------
Cash flows from (used for)
   financing activities                                       9.2          (19.5)            15.1               --              4.8
Net increase (decrease) in cash
   and cash equivalents                                       7.0            2.4             (3.0)              --              6.4
--------------------------------------------------- ------------- --------------  ---------------  --------------- ----------------
Cash and cash equivalents,
   beginning of year                                         18.1            1.4              5.0               --             24.5
--------------------------------------------------- ------------- --------------  ---------------  --------------- ----------------
Cash and cash equivalents,
   end of year                                           $   25.1       $    3.8         $    2.0        $      --        $    30.9
--------------------------------------------------- ------------- --------------  ---------------  --------------- ----------------



                                       29
<PAGE>




Condensed Consolidating Balance Sheet



(IN MILLIONS)                                              Parent      Guarantor
as of December 31, 1996                                   Company   Subsidiaries     JAIX Leasing     Eliminations     Consolidated
-----------------------                                   -------   ------------     ------------     ------------     ------------
Cash and cash equivalents                              $     18.1    $       1.4     $        5.0     $         --      $      24.5
Accounts receivable, net                                       --           49.2              0.1               --             49.3
Inventories                                                    --           49.6               --               --             49.6
Prepaid expenses and other                                    3.0           16.0              0.4               --             19.4
Total current assets                                         21.1          116.2              5.5               --            142.8
Property, plant and equipment, net                            7.5          123.1             17.0             (0.5)           147.1
Restricted cash                                                --            0.6               --               --              0.6
Other assets                                                108.9          255.3              0.4            (99.8)           264.8
Total assets                                           $    137.5    $     495.2     $       22.9     $     (100.3)     $     555.3
--------------------------------------------------- ------------- --------------  ---------------  --------------- ----------------

Accounts payable                                       $      0.2    $      43.0     $        0.1     $         --      $      43.3
Other current liabilities                                    18.4           55.8             (2.1)            (0.2)            71.9
                                                             
Total current liabilities                                    18.6           98.8             (2.0)            (0.2)           115.2
Noncurrent liabilities                                         --           85.7              3.5               --             89.2
Long-term debt, less current
   maturities and intercompany
   advances (receivables)                                    55.4          218.4             13.6               --            287.4
Total shareholders' equity                                   63.5           92.3              7.8           (100.1)            63.5
Total liabilities and
   shareholders' equity                                $    137.5    $     495.2     $       22.9      $    (100.3)     $     555.3
--------------------------------------------------- ------------- --------------  ---------------  --------------- ----------------


Condensed Consolidating Statement of Income



(IN MILLIONS)                                              Parent      Guarantor
as of December 31, 1996                                   Company   Subsidiaries     JAIX Leasing     Eliminations     Consolidated
-----------------------                                   -------   ------------     ------------     ------------     ------------
Total revenue                                          $      0.1    $     555.5     $        4.4     $         --     $      560.0
Cost of sales                                                  --          472.1              2.1               --            474.2
Gross profit                                                  0.1           83.4              2.3               --             85.8
Selling, general, administrative
   and amortization expenses                                  1.1           55.6               --               --             56.7
Gain on sale of lease freight cars                             --             --             (1.4)              --             (1.4)
--------------------------------------------------- ------------- --------------  ---------------  --------------- ----------------
Operating income (loss)                                      (1.0)          27.8              3.7               --             30.5
Interest expense, net                                        11.5           21.7              2.7               --             35.9
Equity (earnings) of subsidiaries                            (1.9)            --               --              1.9               --
Provision (benefit) for income taxes                         (5.2)           4.8              0.4               --               --
Net income (loss)                                     $      (5.4)   $       1.3     $        0.6     $       (1.9)    $       (5.4)
--------------------------------------------------- ------------- --------------  ---------------  --------------- ----------------


                                       30
<PAGE>




Condensed Consolidating Statement of Cash Flows



(IN MILLIONS)                                              Parent      Guarantor
as of December 31, 1996                                   Company   Subsidiaries     JAIX Leasing     Eliminations     Consolidated
-----------------------                                   -------   ------------     ------------     ------------     ------------
Cash flows from
   operating activities                                $     (5.0)    $     40.1       $      1.3     $         --     $       36.4
Cash flows from investing activities:
Capital expenditures                                         (0.2)          (9.7)              --               --             (9.9)
Leased assets and investments                                (4.9)           0.3             (0.8)              --             (5.4)
Proceeds from sale of leased
   freight cars                                                --             --             18.1               --             18.1
Changes in restricted
   cash/other                                                  --            0.8               --               --              0.8
--------------------------------------------------- ------------- --------------  ---------------  --------------- ----------------
Cash flows from
   investing activities                                      (5.1)          (8.6)            17.3               --              3.6
Cash flows from financing activities:
Payments of term loans
   and capital lease                                        (16.6)          (0.2)              --               --            (16.8)
Net payments of JAIX Leasing
   debt                                                        --             --             (8.8)              --             (8.8)
Change in intercompany
   advances                                                  27.1          (23.7)            (3.4)              --               --
Dividends received/ (paid)                                    1.6             --             (1.6)              --               --
Payment of deferred financing
   costs                                                     (0.8)            --             (0.7)              --             (1.5)
--------------------------------------------------- ------------- --------------  ---------------  --------------- ----------------
Cash flows from financing activities                         11.3          (23.9)           (14.5)              --            (27.1)
Net increase (decrease) in cash
   and cash equivalents                                       1.2            7.6              4.1               --             12.9
--------------------------------------------------- ------------- --------------  ---------------  --------------- ----------------
Cash and cash equivalents,
   beginning of year                                         16.9           (6.2)             0.9               --             11.6
--------------------------------------------------- ------------- --------------  ---------------  --------------- ----------------
Cash and cash equivalents,
   end of year                                         $     18.1    $       1.4     $        5.0     $         --    $        24.5
--------------------------------------------------- ------------- --------------  ---------------  --------------- ----------------


                                       31

<PAGE>




Condensed Consolidating Statement of Income



(IN MILLIONS)                                              Parent      Guarantor
as of December 31, 1995                                   Company   Subsidiaries     JAIX Leasing     Eliminations     Consolidated
-----------------------                                   -------   ------------     ------------     ------------     ------------
Total revenue                                          $      0.1   $      666.7     $        1.8     $         --     $      668.6
Cost of sales                                                  --          608.5              0.5               --            609.0
Gross profit                                                  0.1           58.2              1.3               --             59.6
Selling, general, administrative
   and amortization expenses                                  4.2           30.4               --               --             34.6
--------------------------------------------------- ------------- --------------  ---------------  --------------- ----------------
Operating income (loss)                                      (4.1)          27.8              1.3               --             25.0
Interest expense, net                                         2.2           11.6              0.9               --             14.7
Equity (earnings) of subsidiaries                           (10.1)            --               --             10.1               --
Provision (benefit) for income taxes                         (1.8)           6.4              0.1               --              4.7
Net income (loss)                                      $      5.6    $       9.8     $        0.3     $      (10.1)    $        5.6
--------------------------------------------------- ------------- --------------  ---------------  --------------- ----------------



                                       32

<PAGE>




Condensed Consolidating Statement of Cash Flows



(IN MILLIONS)                                              Parent      Guarantor
as of December 31, 1995                                   Company   Subsidiaries     JAIX Leasing     Eliminations     Consolidated
-----------------------                                   -------   ------------     ------------     ------------     ------------
Cash flows from
   operating activities                                $      1.5     $     49.4     $        1.2     $         --     $       52.1
Cash flows from investing activities:
Capital expenditures                                           --         (14.9)               --               --            (14.9)
Leased assets and investments                                (1.9)          4.6             (34.0)              --            (31.3)
Acquisition of TCI, less cash acquired                         --        (266.1)               --               --           (266.1)
Acquisition of Bostrom, less cash acquired                     --         (32.5)               --               --            (32.5)
Changes in restricted
   cash/other                                                  --          (1.4)               --               --             (1.4)
--------------------------------------------------- ------------- --------------  ---------------  --------------- ----------------
Cash flows from investing activities                         (1.9)        (310.3)           (34.0)              --           (346.2)
Cash flows from financing activities:
Revolving loan, net                                          (7.6)            --               --               --             (7.6)
Issuance of long-term debt                                  300.0            5.3               --               --            305.3
Issuance of JAIX leasing debt                                  --             --             22.4               --             22.4
Changes in intercompany advances                           (259.4)          247.8            11.6               --               --
Deferred financing costs paid/other                         (15.7)          (0.2)            (0.3)              --            (16.2)
--------------------------------------------------- ------------- --------------  ---------------  --------------- ----------------
Cash flows from  financing activities                        17.3          252.9             33.7               --            303.9
net increase (decrease) in cash
   and cash equivalents                                      16.9           (8.0)             0.9               --              9.8
--------------------------------------------------- ------------- --------------  ---------------  --------------- ----------------
Cash and cash equivalents,
   beginning of year                                           --            1.8               --               --              1.8
--------------------------------------------------- ------------- --------------  ---------------  --------------- ----------------
Cash and cash equivalents,
   end of year                                         $     16.9    $      (6.2)    $        0.9     $         --    $        11.6
--------------------------------------------------- ------------- --------------  ---------------  --------------- ----------------
</TABLE>



                                       33

<PAGE>



NOTE 17.  FAIR VALUE OF FINANCIAL INSTRUMENTS

Based on borrowing rates currently  available to the Company for borrowings with
similar  terms and  maturities,  the fair  value of the  Company's  total  debt,
including JAIX Leasing,  was  approximately  $327 million and $297 million as of
December 31, 1997 and 1996,  respectively.  No quoted  market value is available
except for the $182.6  million  Notes which had a market value of  approximately
$196 million as of December 31, 1997,  and $97.5 million for the $100 million of
Notes outstanding as of December 31, 1996.  Outstanding interest rate contracts,
based on current market pricing models, have an estimated discounted fair market
value of negative $0.2 million and negative $0.6 million as of December 31, 1997
and 1996, respectively. JAIX Leasing's debt has approximate fair market value of
$30.1 million and $13.6 million as of December 31, 1997 and 1996,  respectively.
All other  financial  instruments  of the Company have fair market  values which
approximate carrying value as of December 31, 1997 and 1996.

NOTE 18.  SUPPLEMENTAL CASH FLOWS AND NONCASH TRANSACTIONS DISCLOSURE

(IN THOUSANDS)
<TABLE>
<S>                                                                                     <C>           <C>           <C> 

Years Ended December 31,                                                                       1997          1996           1995
------------------------                                                                       ----          ----           ----
Cash paid for:
Interest                                                                                 $   30,157    $   31,487    $     7,718
Income taxes                                                                                    952         1,382          6,011
Business acquisitions:
Cash paid                                                                                $       --    $       --    $   300,624
Assets received                                                                                  --            --        412,634
------------------------------------------------------------------------------------ -------------- -------------  -------------
Liabilities assumed                                                                      $       --    $       --    $   112,010
------------------------------------------------------------------------------------ -------------- -------------  -------------

</TABLE>


                                       34

<PAGE>

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF JOHNSTOWN AMERICA INDUSTRIES,INC.:

We have  audited  the  accompanying  consolidated  balance  sheets of  Johnstown
America Industries,  Inc. and Subsidiaries as of December 31, 1997 and 1996, and
the  related  consolidated  statements  of income and cash flows for each of the
three years in the period ended December 31, 1997. These consolidated  financial
statements   are  the   responsibility   of  the   Company's   management.   Our
responsibility  is  to  express  an  opinion  on  these  consolidated  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 consolidated  financial statements referred to above present
fairly, in all material  respects,  the financial  position of Johnstown America
Industries,  Inc. and  Subsidiaries  as of December  31, 1997 and 1996,  and the
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.


/S/ARTHUR ANDERSEN LLP
---------------------------------
ARTHUR ANDERSEN LLP

Chicago, Illinois
January 28, 1998


                                       35

<PAGE>


REPORT OF MANAGEMENT


The management of Johnstown  America  Industries,  Inc. is  responsible  for the
fairness and accuracy of the consolidated financial statements. The consolidated
financial  statements have been prepared in accordance with generally  accepted
accounting  principles,  using  management's best estimates and judgements where
appropriate. The financial information throughout this report is consistent with
our consolidated financial statements.

Management  has  established  a  system  of  internal   controls  that  provides
reasonable assurance that assets are adequately safeguarded and transactions are
recorded accurately,  in all material respects,  in accordance with management's
authorization.  Our internal  controls  provide for  appropriate  separation  of
duties  and  responsibilities,  and  there  are  documented  policies  regarding
utilization of company  assets and proper  financial  reporting.  These formally
stated and regularly  communicated  policies  demand highly ethical conduct from
all employees.

The Audit  Committee of the Board of Directors meets regularly to determine that
managment  and  independent  auditors  are  properly  discharging  their  duties
regarding interal control and financial reporting. The independent auditors and
employees have full and free access to the Audit Committee at any time.

Arthur Andersen LLP,  independent public accountants,  are retained to audit the
consoidated financial statments.


/s/THOMAS M. BEGEL                           /S/ANDREW M. WELLER
------------------------                    -------------------------
Thomas M. Begel                             Andrew M. Weller
Chairman, President                         Executive Vice President
and Chief Executive Officer                 and Chief Financial Officer



January 28, 1998

                                       36