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                          UNITED STATES SECURITIES AND
                               EXCHANGE COMMISSION
                             Washington, D.C. 20549

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


                                    FORM 10-K

                [X] Annual report pursuant to Section 13 or 15(d)
           of the Securities Exchange Act of 1934 for the fiscal year
                             ended December 31, 1996

                                       or

              [ ] Transition report pursuant to Section 13 or 15(d)
                 of the Securities Exchange Act of 1934 for the
                                transition period
                  from _________________ to ___________________

                         Commission File Number 0-19150
                                                -------

                        WISCONSIN CENTRAL TRANSPORTATION
                                   CORPORATION
                        --------------------------------
             (Exact name of registrant as specified in its charter)


                      Delaware                        36-3541743
                      --------                        ----------
                                                             
           (State or other jurisdiction of         (I.R.S. Employer
           incorporation or organization)        Identification Number)
                                                    

          6250 N. River Road, Suite 9000   
                Rosemont, Illinois                      60018
                ------------------                      -----
         (Address of principal executive             (Zip Code)
                     offices)          

           Registrant's telephone number,
                including area code:             (847) 318-4600
                                                 --------------

Securities registered pursuant to Section 12(b) of the Act:    None

Securities registered pursuant to Section 12(g) of the Act:

                              Common Stock, $0.01 par value
                              -----------------------------

     Indicate  by check [X]  whether  the  Registrant  (1) has filed all reports
required to be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of
1934  during  the  preceding  12 months  (or for such  shorter  period  that the
registrant was required to file such reports),  and (2) has been subject to such
filing requirements for the past 90 days.

                 X  YES                 NO
                ---                 ---

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


<PAGE>



The  aggregate  market value (based on the closing sales price on March 19, 1997
as reported by NASDAQ) of the voting stock of the registrant  beneficially  held
by non-affiliates of the registrant was  approximately  $1.641 billion.  For the
sole  purpose of making  this  calculation,  the term  "non-affiliate"  has been
interpreted to exclude directors and executive officers of the registrant.  Such
interpretation  is not  intended  to be, and should not be  construed  to be, an
admission by the  registrant or such  directors or executive  officers that such
directors and executive  officers are  "affiliates" of the  registrant,  as that
term is defined under the Securities Exchange Act of 1934.

Indicate the number of shares outstanding of the
Registrant's Common Stock as of March 19, 1997:              50,829,979 shares


                       DOCUMENT INCORPORATED BY REFERENCE

Certain  information in the registrant's  Proxy Statement for its Annual Meeting
to be held May 15, 1997, to be filed pursuant to Regulation 14A, is incorporated
by reference in Part III hereof.


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<PAGE>





                                TABLE OF CONTENTS


                                                                          Page
                                                                          ----

       Disclaimer Regarding Forward-Looking Statements.................    1


                                     PART I

Item

    1. Business........................................................    1
    2. Properties......................................................   11
    3. Legal Proceedings...............................................   13
    4. Submission of Matters to a Vote of Security Holders.............   13
       Executive Officers of the Registrant............................   14


                                     PART II


    5. Market for the Registrant's Common Equity and Related Stockholder
       Matters.........................................................   16
    6. Selected Financial Data.........................................   17
    7. Management's Discussion and Analysis of Financial Condition and
       Results of Operations...........................................   19
    8. Financial Statements and Supplementary Data.....................   28
    9. Changes in and Disagreements with Accountants on Accounting and 
       Financial Disclosure............................................   50


                                    PART III


   10. Directors and Executive Officers of the Registrant..............   50
   11. Executive Compensation..........................................   50
   12. Security Ownership of Certain Beneficial Owners and Management..   50
   13. Certain Relationships and Related Transactions..................   50


                                     PART IV


   14. Exhibits, Financial Statement Schedules and Reports on 
       Form 8-K........................................................   51


<PAGE>



DISCLAIMER REGARDING FORWARD-LOOKING STATEMENTS

     This report contains certain statements that are "forward-looking",  within
the meaning of Section 21E of the  Securities  Exchange  Act of 1934,  including
statements regarding, among other matters, the belief, expectations,  plans, and
estimates of the Company with respect to certain  future  events,  the impact of
governmental regulation,  the cost of compliance with environmental  regulations
and the actions to be taken by others and similar expressions concerning matters
that  are  not  historical  facts.  Such  forward-looking   statements  are  not
guarantees  of  future   performance   and  involve  known  and  unknown  risks,
uncertainties  and  other  factors  that  could  cause  actual  events to differ
materially from those expressed in those statements.


                                     PART I

ITEM 1. BUSINESS

     Wisconsin Central Transportation Corporation ("WCTC") is incorporated under
the laws of the State of Delaware.  The principal offices of WCTC are located at
One O'Hare Centre,  Suite 9000,  6250 N. River Road,  Rosemont,  Illinois 60018,
telephone (847)  318-4600.  All dollar amounts in this report are stated in U.S.
dollars unless otherwise indicated.

     WCTC  is  a  holding  company  doing  business  through  its  wholly  owned
consolidated subsidiaries,  Wisconsin Central Ltd. ("WCL"), Fox Valley & Western
Ltd.  ("FV&W"),  WCL Railcars,  Inc.,  Sault Ste. Marie Bridge Company  ("SSM"),
Wisconsin  Central  International,  Inc. ("WCI"),  WC Canada Holdings,  Inc. and
Algoma Central Railway Inc. ("ACRI").  WCTC and its subsidiaries are referred to
together as the "Company".

     The Company operates the largest regional railroad in the United States and
the largest  railroad in the State of Wisconsin.  In addition to Wisconsin,  the
Company  provides  service  to the Upper  Peninsula  of  Michigan,  northeastern
Illinois,  eastern  Minnesota  and Ontario.  The  Company's  operations  utilize
approximately  3,000 route miles of track and trackage  rights,  235 locomotives
and  approximately  12,800  railcars.  The  railroad's  principal  gateways  are
Chicago, Duluth/Superior,  Green Bay, Milwaukee,  Minneapolis/St. Paul and Sault
Ste.  Marie,  Ontario.  These gateways  permit the Company to connect with other
railroads serving these locations.

     The Company,  through WCL,  acquired its original 2,015 route mile railroad
system from the Soo Line Railroad Company ("Soo") in October 1987 (the "Original
Acquisition").  In December 1991,  the Company  purchased from Soo an additional
line of  railroad  running  approximately  102  route  miles  from  Superior  to
Ladysmith, Wisconsin (the "Ladysmith Line"). In July 1992, the Company purchased
from the  Chicago and North  Western  Transportation  Company  ("CNW") a line of
railroad  that  runs  generally  parallel  to the  Ladysmith  Line  and  extends
approximately  98 route miles from Superior to Cameron,  Wisconsin (the "Cameron
Line"). The Company combined the best portions of these lines into a single line
and upgraded the resulting  line. The  acquisition of the Ladysmith Line and the
Cameron  Line  are   collectively   referred  to  as  the  "Head  of  the  Lakes
Acquisitions".  WCL's current  operations utilize 2,021 route miles of track and
trackage rights.

     In August 1993,  the Company,  through  FV&W,  purchased the rail assets of
three railroads in Wisconsin  including Fox River Valley  Railroad  Corporation,
Green Bay and  Western  Railroad  Company  and The  Ahnapee  &  Western  Railway
Company.   These  acquisitions  are  collectively   referred  to  as  the  "FV&W
Acquisition".  FV&W's rail assets currently  consist of approximately  456 route
miles of track and trackage rights.

     The Company,  through WCI,  has an equity  interest in Tranz Rail  Holdings
Limited  ("Tranz  Rail"),  formerly  named New Zealand  Rail  Limited,  which is
discussed in detail below under "Investment in Tranz Rail Holdings Limited".


                                        1

<PAGE>



     On January 31, 1995, the Company consummated the acquisition of the railway
assets  of  Algoma  Central  Corporation  ("ACC")  through  the  Company's  ACRI
subsidiary.  This  acquisition is referred to as the "ACRI  Acquisition"  and is
described in detail below under "ACRI Acquisition". ACRI's rail assets currently
consist of approximately 322 route miles of track and trackage rights.

     In 1995 and early 1996, the Company,  through WCI, was part of a consortium
that acquired  various rail assets of British Rail. This investment is discussed
in detail below under  "Investments in English Welsh & Scottish Railway Holdings
Limited".


RECENT DEVELOPMENT - DUCK CREEK NORTH ACQUISITION

     On January  27,  1997,  SSM  completed  the  purchase of 207 route miles of
railroad  track and  trackage  rights in  Wisconsin  and the Upper  Peninsula of
Michigan from the Union Pacific  Railroad  Company ("Union  Pacific").  The rail
lines,  commonly known as the "Duck Creek North" lines,  extend from North Green
Bay, Wisconsin to Ishpeming,  Michigan;  from Powers to Antoine,  Michigan; from
Quinnesec, Michigan to Niagara, Wisconsin; and from Cascade to Palmer, Michigan.
Freight shipments over the lines consist of materials for the paper industry and
high  volumes  of iron ore  used in  steel-making  which  are  shipped  from the
Marquette ore range to Escanaba, Michigan for transshipment to vessels. The rail
lines,  together  with  contiguous  property  and  associated  facilities,  were
purchased  for  approximately  $85.0  million of cash.  The  purchase was funded
through borrowings under existing revolving credit facilities.  This acquisition
is referred to herein as the "Duck Creek North Acquisition."


INVESTMENTS IN ENGLISH WELSH & SCOTTISH RAILWAY HOLDINGS LIMITED

     In the fourth quarter of 1995, a consortium of investors, including WCI and
an  affiliate  of  Berkshire   Partners,   an  American   private   equity  firm
("Berkshire") of which one of the Company's  directors is an executive  officer,
director and beneficial owner of shares,  established a holding  company,  North
and South Railways Limited,  now named English Welsh & Scottish Railway Holdings
Limited  ("EW&S"),  to acquire  various  rail  assets of  British  Rail from the
British  government as a part of its  privatization of British Rail. On December
9, 1995,  EW&S  acquired Rail express  systems  Limited  ("Res").  The principal
activity of Res is the carriage of letters for the Royal Mail, a division of the
British Post Office.  On February 24, 1996,  EW&S acquired  British Rail's three
trainload freight companies ("TLFs"), Loadhaul Limited, Mainline Freight Limited
and Transrail Freight Limited.  EW&S employs approximately 6,600 staff utilizing
910 locomotives and 19,300 freight cars to haul primarily bulk  commodities such
as coal, ore, steel and aggregates throughout Great Britain.

     WCI had invested  approximately  $45.0  million in EW&S for a 31% ownership
interest as of December 31, 1996. The Company has been granted performance-based
options to acquire additional shares in EW&S to compensate it for its leadership
of the  consortium,  and has entered into a management  service  agreement  with
EW&S,  under which the Company earned  compensation  of $1.6 million in 1996. In
addition, EW&S has issued options to certain of its officers and directors,  and
warrants to the  investment  banking firm that  facilitated  the  acquisition of
EW&S. On February 21, 1997, the Company  invested an additional  $8.4 million to
exercise a portion of these options, increasing its equity ownership position to
approximately  34%.  

     The  Company  accounts  for its  investment  in EW&S under  U.S.  generally
accepted   accounting   principles  ("GAAP")  utilizing  the  equity  method  of
accounting. The Company's 1996 results included equity in the net income of EW&S
of $22.8 million.

     EW&S has  entered  into an  agreement  with  British  Rail to  purchase  an
additional  freight operating  company,  Railfreight  Distribution,  the primary
business of which is the operation of freight trains through the English Channel
tunnel.  Railfreight Distribution has not been profitable, and the consideration
for the purchase will be nominal. The transaction will be consummated  following
regulatory clearance from the European Union, which is expected in April 1997.


                                        2

<PAGE>



ACRI ACQUISITION

     On January 31, 1995, the Company consummated the acquisition of the railway
assets of ACC that are  operated by ACRI.  ACRI  consists of  approximately  322
route miles of track and trackage rights between Sault Ste.  Marie,  Ontario and
Hearst,  Ontario.  The rail lines were purchased for approximately $8.2 million,
financed  in part by the  Province  of Ontario,  through  the  Northern  Ontario
Heritage Fund  Corporation.  In related  transactions,  the Company acquired 879
railcars and 23 locomotives from ACC for  approximately  $11.1 million and ACC's
communications   system,   maintenance   and  shop   equipment,   inventory  and
miscellaneous assets for $5.0 million.

     The  principal  commodities  shipped  over ACRI lines are iron ore,  paper,
forest products and steel  products.  Principal  customers  include Algoma Steel
Inc. and St. Marys Paper Ltd. ACRI has  connections  with Canadian  Pacific Rail
System,  Canadian National Railways ("CN"), Ontario Northland Railway and WCL in
Sault Ste. Marie,  Ontario.  ACRI also provides passenger services between Sault
Ste. Marie and Hearst, Ontario and operates the Agawa Canyon tour trains.

     In 1996,  ACRI  operated  with an average of  approximately  229  employees
compared with the approximately 450 employees  previously used by ACC in running
the rail  operations.  Most of the ACRI employees  work in train  operations and
maintenance.  Although operating as a separate company, ACRI has contracted with
WCL for certain administrative functions such as marketing and customer service.
WCL's data system has been extended to link all ACRI  customers with WCL and the
North American rail computer network.


METRA

     In 1995, the Company  reached  agreement with the commuter rail division of
the Regional  Transportation  Authority ("Metra"),  the commuter rail system for
northeastern Illinois, to permit Metra's use of WCL's tracks between Chicago and
Antioch,  Illinois for commuter  service,  which  commenced in August 1996.  The
commuter  service is operated by Metra using its own  equipment  and  personnel.
Metra  currently   operates  ten  trains  per  day  over  the  route,  which  is
approximately  40 miles long. The trackage  rights  agreement that permits Metra
access to WCL's tracks  provides  that Metra may operate up to 20 trains per day
over the route,  after  additional  capital  improvements are made by Metra. WCL
receives $2.5 million  annually as compensation for permitting use of the route.
In addition,  performance incentives could increase WCL's annual compensation by
$0.5 million per year. Metra has agreed to indemnify the Company with respect to
personal  injury and  property  damages  incurred  in  connection  with  Metra's
operations, except in certain limited circumstances.

     As part of the  arrangement,  Metra has  funded  the  capital  improvements
necessary to upgrade WCL's line between Chicago and Antioch to speeds of over 50
m.p.h.  In  addition,   four  additional   passing  sidings  and  other  capital
improvements were funded by Metra,  increasing the overall capacity of the line.
Through  1996,  track  improvements  funded by Metra in this  corridor  included
65,600 ties,  5.8 miles of  continuous  welded rail,  89,800 tons of ballast and
resurfacing the line.


INVESTMENT IN TRANZ RAIL HOLDINGS LIMITED

     On July 20, 1993, a consortium of investors,  including WCI, entered into a
purchase  agreement  with the government of New Zealand to acquire all the stock
of  Tranz  Rail.  WCI's  equity  investment   approximated   $16.0  million  for
approximately  27% of the  common  stock of Tranz  Rail.  In 1994 and 1995,  the
Company paid $3.3 million and $2.9 million,  respectively,  to exercise  options
that  increased  its equity  ownership to  approximately  30%. On June 26, 1995,
Tranz Rail returned  capital to  shareholders  through a pro rata  repurchase of
shares.  WCTC's  share of the  capital  returned  was $21.0  million,  which the
Company has used to retire debt. The capital returned was derived primarily from
proceeds of the 1994 sale of Tranz  Rail's  investment  in a  telecommunications
company.

     Tranz  Rail  is a  2,500  route  mile  railroad  which  operates  the  only
commercial  rail  service  in New  Zealand.  Prior  to July 20,  1993,  it was a
state-owned enterprise operating under a special charter from the New Zealand

                                        3

<PAGE>



     government.  As of December  31, 1996,  the  railroad  had 4,506  full-time
employees,  341 locomotives and approximately 7,000 freight cars. In addition to
freight and passenger rail service, Tranz Rail also operates regularly scheduled
general commercial ferry service linking New Zealand's north and south islands.

     Tranz Rail completed an initial public offering of its common stock on June
18, 1996 and is listed on the NASDAQ  stock  market in the United  States and on
the New Zealand stock exchange in New Zealand. As a result of this offering, the
Company's  ownership position declined to 23% from 30%. As of December 31, 1996,
the Company owned the equivalent of 9,561,639 American Depository Shares ("ADS")
of Tranz Rail with a quoted  closing price on NASDAQ of $17.69 per ADS. Each ADS
represents  three  issued and fully paid  ordinary  shares of Tranz Rail.  Total
market value of the Company's holdings in Tranz Rail as of December 31, 1996 was
approximately $169.1 million.

     In connection with becoming a public company,  Tranz Rail adopted a general
policy of paying cash  dividends,  initially at the rate of NZ$0.17 per ordinary
share per year. The Company received its first dividend on March 11, 1997 in the
amount of U.S.$3.4 million.

     The  Company  accounts  for its  investment  in Tranz Rail under U.S.  GAAP
utilizing the equity method of accounting.  The Company's 1996 results  included
equity in the net income of Tranz Rail of $9.9 million.

     Tranz Rail is  subject  to the  reporting  requirements  of the  Securities
Exchange Act of 1934 applicable to a foreign private  issuer,  and  accordingly,
files certain  reports and other  information  with the  Securities and Exchange
Commission.


WEYAUWEGA ACCIDENT

     On March 4, 1996,  the Company had a  derailment  in  Weyauwega,  Wisconsin
involving  thirty-five  cars,  fourteen of which contained  propane or liquified
petroleum gas and two of which contained sodium hydroxide solution.  Although no
one was injured in the  derailment,  all residents  within two miles of the site
were  evacuated for  approximately  sixteen days. In addition,  many  structures
received  water  damage  as a result  of frozen  pipes.  The total  cost for the
derailment is currently  estimated at $27.3 million.  The Company  believes that
its insurance  policies will cover  substantially  all these costs, in excess of
the $2.5 million of  deductibles,  due to the derailment.  Through  December 31,
1996, the Company had funded $24.8 million in costs incurred as a result of this
derailment  and  received  $17.4  million  in   reimbursements   from  insurance
companies.  The  Company's  Consolidated  Balance  Sheet  includes an  insurance
receivable of $7.4 million as of December 31, 1996.  During the first quarter of
1996, the Company  recorded a pretax  provision of $2.5 million for the combined
deductibles  under its property  damage and liability  insurance  policies.  The
Company has been  successful in resolving  the vast majority of claims  directly
with the claimants.  Through  December 31, 1996,  approximately  98% of affected
residents and 97% of affected  businesses  had resolved their claims against the
Company. See also "Legal Proceedings".


BOCT ARBITRATION

     On June 10,  1996,  an  arbitration  panel  ruled  against the Company in a
dispute with the Baltimore and Ohio Chicago  Terminal  Railroad Company ("BOCT")
regarding intermediate switching and car hire reclaim charges allegedly incurred
from July 1988 through  February 1993. The arbitration  panel awarded BOCT $16.8
million  plus $2.5  million  of  interest.  Based upon the  arbitration  panel's
ruling,  the Company recorded pretax  provisions of $15.8 million,  representing
amounts awarded in excess of previously  recorded accruals.  For a discussion of
the history and status of this arbitration proceeding, see "Legal Proceedings".


                                        4

<PAGE>



OPERATIONS

     Prior to 1991,  the  Company  operated  over the 2,015 route miles of track
acquired by WCL at the  inception of the Company in 1987.  In December  1991 and
1992,  the  Company's  system  and  opportunities  were  expanded  when it added
approximately 100 miles of trackage in the Head of the Lakes Acquisitions, which
created better access to Canadian markets.  In August 1993, the Company acquired
trackage in Wisconsin in the FV&W  Acquisition  that  currently  consists of 456
miles. In January 1995, the Company acquired the 322 miles of trackage  involved
in the ACRI Acquisition.  In January 1997, the Company acquired the 207 miles of
trackage involved in the Duck Creek North Acquisition.

     These  acquisitions  have contributed to the Company's growth over the past
five years as is shown in the following table.

<TABLE>
<CAPTION>

                                                     1996             1995              1994            1993             1992
                                                 ------------     ----------         ----------      ----------       ---------
<S>                                            <C>                <C>                <C>             <C>             <C>       
Operating revenues (in thousands) ............ $  275,438<F1>     $  263,427         $  211,139      $  151,691      $  124,364
   Annual growth .............................        4.6%              24.8%              39.2%           22.0%            9.4%
Total carloads (number) ......................    464,149            436,286            358,825         257,326         205,512
   Annual growth .............................        6.4%              21.6%              39.4%           25.2%           14.3%
Average number of employees ..................      2,086              1,970              1,575           1,185           1,011
   Annual growth .............................        5.9%              25.1%              32.9%           17.2%            5.0%
Operating ratio <F2>..........................       81.3%<F3>          74.8%<F4>          74.1%           77.0%           78.8%

<FN>
----------------
<F1> Excludes the disputed  switching charges of $13.3 million discussed in Note
     15 to the Consolidated Financial Statements.
<F2> Operating ratio represents operating expenses as a percentage of operating
     revenues.
<F3> Excludes the disputed  switching  charges and the $2.5 million of insurance
     deductibles  for  the  Weyauwega  derailment  discussed  in  Note 15 to the
     Consolidated Financial Statements.
<F4> Excludes the $3.0 million retroactive property tax assessment for the years
     1990 to 1993 from the Wisconsin  Department of Revenue discussed in Note 15
     to the Consolidated Financial Statements.
</FN>
</TABLE>

     The Company's operating philosophy emphasizes rapid movement of traffic and
high productivity  from its employees.  The Company uses primarily two and three
person train crews, with an average crew size of 2.2 persons. Employees are paid
on a salaried  basis.  The Company has  structured its operations so that it can
assign  its  employees  to  tasks  on  an  as-needed  basis  without  regard  to
traditional  rail industry  crafts,  which increases  productivity.  The Company
follows a program of cross-training its employees to perform a number of related
functions.

     The  following  table  sets forth  various  measurements  of the  Company's
productivity over the past five years:

<TABLE>
<CAPTION>
                                       Productivity Data

                                                         Year Ended December 31,
                                            1996          1995       1994      1993        1992
                                         ---------      --------   ---------  --------    -------

<S>                                         <C>           <C>        <C>        <C>        <C>  
Total employees (average) .............     2,086         1,970      1,575      1,185      1,011
Total employee hours worked (thousands)     4,617         4,369      3,642      2,878      2,433
Labor ratio<F1>........................      32.7%<F2>     31.3%      32.1%      32.9%      33.7%
Revenue ton miles per
   employee hour worked<F3>............     2,120         2,169      1,980      1,795      1,598

<FN>
-----------------
<F1> Labor ratio equals total labor  expense  charged to operating  expenses as
     a percentage of operating  revenues.  
<F2> Excludes  the  disputed  switching  charges  discussed  in  Note  15 to the
     Consolidated Financial Statements.
<F3> A revenue ton mile equals the product of weight in tons of freight carried
     for hire and the distance in miles between the origin and destination.
</FN>
</TABLE>


                                        5

<PAGE>



     The following table summarizes the work force by function:

<TABLE>
<CAPTION>
    
                                        Average Number of Employees

                                                                        Year Ended December 31,
                                                        1996        1995         1994        1993        1992
                                                       ------      ------      -------      ------      -----

<S>                                                    <C>          <C>         <C>         <C>          <C>
General and administrative........................       136          136         115          95          91
Marketing.........................................        39           40          35          30          26
Engineering (maintenance of way)..................       640          580         463         352         302
Mechanical (maintenance of equipment).............       411          414         332         253         212
Transportation....................................       860          800         630         455         380
                                                       -----       ------      ------       -----        ----
     Total........................................     2,086        1,970       1,575       1,185        1,011
                                                       =====       ======      ======       =====        =====
</TABLE>

     The Company  serves a competitive  market area which  dictates the need for
consistent,  high quality train  service.  The Company's rail network is divided
into 14 main  lines and 17  secondary  lines.  Main  lines  are  those  with the
heaviest use, while secondary lines provide service to on-line customers.  Train
service is  provided  seven days per week on main lines and five or six days per
week on secondary  lines.  The Company's  train service is designed to provide a
flow of cars from key origination points at least once every 24 hours. This flow
moves on scheduled trains between specified locations, exchanging or adding cars
at each stop.

     Under the current regulatory  framework,  shipments by rail can move either
under a tariff or under a  transportation  contract.  Shipments  performed under
contract,  generally one year in duration,  make up approximately  two-thirds of
the Company's  business.  These contracts generally have cost escalation clauses
based on various  indices  that are  representative  of the related  costs.  The
Company's  transportation  contracts  also  typically  provide  that a specified
percentage of a customer's  particular commodity must be shipped pursuant to the
contract.  Payments are due from customers upon receipt of billing.  In general,
where a shipment involves more than one railroad,  the carrier delivering to the
final  destination  receives  and  then  distributes  payment  for  all  of  the
participating carriers. Payments due to and from other railroads are netted on a
monthly basis.

CUSTOMERS AND TRAFFIC

     Volume, as measured by carloads handled (including as a carload each loaded
trailer or container), was 464,149 carloads in 1996 generating $273.8 million in
gross  revenues.  Of these  carloads,  78.3% were  generated by  originating  or
terminating business (i.e.,  business to or from a point on the Company's lines)
or local business  (i.e.,  business which both  originates and terminates on the
Company's lines). The Company's volume in 1995 and 1994 was similar,  with 76.5%
and  79.2%,  respectively,  of the  carloads  being  generated  by  originating,
terminating and local business.  The Company  believes that this high percentage
of originating, terminating and local business gives its volume added stability,
due to the  Company's  marketing-oriented  approach and its ability to customize
service for  customers  within its  territory.  The  remainder of the  Company's
business was overhead.  Overhead  business is received  from other  railroads at
interchange points in the Company's  territory and moved to another point in the
territory for interchange to another  railroad.  The Company's ability to handle
certain overhead business is restricted by contract. See Item 2. "Properties".


                                        6

<PAGE>



     The following  table shows the composition of the Company's 1996 traffic by
class:


<TABLE>
<CAPTION>
                                                   1996 Volume by Class

                                                                Carloads                    Gross Revenues
                                                                --------                    --------------
                                                                         % of             Dollars in      % of
                                                           Number        Total            millions        Total
                                                           ------        -----            --------        -----

<S>                                                        <C>           <C>             <C>             <C>  
Local  .............................................       100,005        21.5%          $    48.2        17.6%
Originating.........................................       103,422        22.3                69.5        25.4
Terminating.........................................       160,345        34.5               112.8        41.2
Overhead............................................       100,377        21.7                43.3        15.8
                                                           -------      ------           ---------      ------
    Total...........................................       464,149       100.0%          $   273.8       100.0%
                                                           =======      ======           =========      ======
</TABLE>


     The Company's 25 largest  customers  accounted for approximately 60% of its
volume  and  approximately  64% of its  gross  revenues  in 1996.  Ten  shippers
(Consolidated  Papers,  Inc., The Mead  Corporation,  Algoma Steel Inc.,  Geneva
Steel,  Quad/Graphics,  Wisconsin  Public Service  Corporation,  Georgia Pacific
Corp.,  Noranda,  Inc., Kimberly Clark Corp., and Champion  International Corp.)
accounted for  approximately  39% of the Company's  gross  revenues in 1996. The
Company's  volume  is  subject  to  general  economic  conditions  and  specific
situations within customers'  respective  industries as well as generally to the
effects of competition.

COMMODITIES BASE

   The Company  transports a wide variety of commodities for its customers.  The
following table summarizes the Company's  traffic for 1996 by commodity group. A
detailed discussion of the individual commodity groups follows the table.

<TABLE>
<CAPTION>

                                                  1996 Commodity Group Mix

                                                                Carloads                    Gross Revenues
                                                                --------                    --------------
                                                                         % of             Dollars in   % of
                                                           Number        Total            millions     Total
                                                           ------        -----            --------     -----

<S>                                                       <C>           <C>              <C>             <C>  
Paper...............................................       41,389         8.9%           $   37.5         13.7%
Woodpulp............................................       39,382         8.5                35.8         13.1
Pulpboard...........................................       20,071         4.3                11.6          4.2
Lumber products.....................................       20,890         4.5                16.6          6.1
Wood fibers.........................................       22,304         4.8                11.6          4.2
Chemicals and petroleum products....................       39,326         8.5                32.7         12.0
Intermodal..........................................       62,533        13.5                12.1          4.4
Sand, stone and minerals............................       32,468         7.0                13.8          5.0
Metallic ore........................................       73,699        15.9                28.1         10.3
Clay products and granules..........................       21,536         4.6                20.5          7.5
Coal................................................       28,578         6.2                11.6          4.2
Food and grain......................................       26,707         5.8                17.6          6.4
Waste and scrap.....................................       18,184         3.9                11.8          4.3
Steel...............................................       14,263         3.1                10.5          3.9
Miscellaneous.......................................        2,819         0.5                 2.0          0.7
                                                        ---------      ------            --------      -------
    Total...........................................      464,149       100.0%           $  273.8        100.0%
                                                        =========      ======            ========      =======
</TABLE>


     Paper,  Woodpulp and  Pulpboard.  Paper and related  products are among the
principal  commodities  transported by the Company.  The Company provides direct
rail  service  to  major  woodpulp  and  paper   manufacturers  in  central  and
northeastern  Wisconsin,  the Upper Peninsula of Michigan and Ontario.  In 1996,
paper,  woodpulp and pulpboard (a packaging  material)  represented 21.7% of the
Company's volume and 31.0% of its gross revenues. In addition to these products,
the Company transports a number of commodities  related to paper-making (such as
chemicals and clay),  which are described  separately  below.  The paper related
products  volume is primarily  inbound raw  materials for paper  producers.  The
Company's paper producing  customers are diverse,  producing many types of paper
and related products, including

                                        7

<PAGE>



magazine stock,  writing papers,  packaging  papers and sanitary  products.  The
distribution and marketing patterns for the different types of products vary, as
do the  seasonality  and  cyclicality  of the markets.  Outbound  paper products
transported by the Company consist of finished or heavy paper products,  such as
printing  paper,  kraft  (brown)  paper  and  pulpboard.   Sanitary  papers  are
transported  predominantly  by truck  due to their  relatively  low  weight  and
off-line delivery requirements.

     Lumber Products and Wood Fibers. Lumber products and wood fibers, including
pulpwood and wood chips,  accounted  for 9.3% of the  Company's  1996 volume and
10.3% of its 1996 gross revenues.  Lumber  shipments are generally  dependent on
construction  activity,  while  wood  fiber  shipments  are  dependent  on paper
production activity.

     Chemical  and  Petroleum  Products.  Chemical  and  petroleum  products are
primarily moved inbound to the Company's customers,  principally paper companies
and fertilizer distributors.  These products accounted for 8.5% of the Company's
1996 volume and 12.0% of its 1996 gross revenues.  Major chemicals in this group
include sodium alkalides, potassium compounds and plastic materials.

     Intermodal.  Intermodal  volume  consists  of  over-the-road  trailers  and
shipping  containers  hauled on railroad  flat cars.  The trailer and  container
business handles truck-competitive,  time-sensitive  commodities.  This business
represented  13.5% of the  Company's  1996  volume  and  4.4% of its 1996  gross
revenues.  The Company  has  intermodal  facilities  in  Chicago,  Illinois  and
Arcadia, Green Bay, Neenah and Stevens Point,  Wisconsin.  On April 1, 1996, the
Company joined with CN to create a new joint rate intermodal  service  agreement
that  provides  U.S.  and  Canadian  customers  with transit time savings in the
Chicago/Western Canada corridor by utilizing the Company's lines which offer the
shortest mileage from Chicago to Superior.

     Sand, Stone and Minerals. Sand, stone and mineral products represented 7.0%
of the Company's  volume and 5.0% of its gross revenues in 1996.  Volume in this
classification  consists  primarily of sand and stone  quarried in the Company's
service territory.

     Metallic  Ore.  Metallic ore volume  accounted  for 15.9% of the  Company's
volume and 10.3% of its gross  revenues  in 1996.  The  Company's  metallic  ore
volume is seasonal and subject to competitive  bidding.  On August 19, 1994, the
Company, together with Southern Pacific Lines (now part of Union Pacific), began
to handle iron ore from the upper  Midwest to Geneva  Steel's  mill in Utah.  In
1996,  volume for this five-year move  approximated  32,200  carloads.  With the
acquisition of Southern Pacific Lines by Union Pacific,  the Company believes it
is doubtful that this move will  continue  after its current term. A significant
portion of the SSM volume  consists of metallic ore shipments from the Marquette
ore range to Escanaba, Michigan for transshipment to vessels.

     Clay Products and Granules.  Clay products and granules represented 4.6% of
the Company's  volume and 7.5% of its gross revenues in 1996.  Roofing  granules
originating at manufacturing facilities located in Wausau and Kremlin, Wisconsin
constituted 45% of these carloads.  Kaolin clay, which is a primary raw material
used in paper production, makes up most of the other 55% of these carloads.

     Coal. Coal accounted for 6.2% of the Company's volume and 4.2% of its gross
revenues in 1996. The Company  handles two categories of coal traffic:  (1) unit
trainloads of low sulfur, low BTU coal from the Powder River Basin of Wyoming to
electric  utility  plants in Green Bay and Weston,  Wisconsin,  and (2) multiple
carload  lots of low to high  sulfur,  high BTU  coal  originating  in  Indiana,
Kentucky  and  Illinois  and  moving  to  Wisconsin  paper  companies  and other
industrial users.

     Food and  Grain.  Food and grain  products  totaled  5.8% of the  Company's
volume and 6.4% of its gross revenues in 1996. Corn, barley, malt and canned and
frozen vegetables make up the bulk of this group.

     Other.  The  Company's  remaining  volume  is  composed  of waste and scrap
(3.9%), steel products (3.1%) and miscellaneous freight (0.5%).


COMPETITION

     The Company's  railroad  operations are subject to competition from trucks,
other rail  carriers and lake vessels.  Competition  with rail carriers and lake
vessels is usually based on price, while competition with trucks can be based on
price, service or both. Trucks are the dominant competition to the Company,

                                        8

<PAGE>



competing  actively  for  shipments  of nearly  all  commodities  handled by the
Company,  especially  intermodal  traffic and paper products.  Rail  competition
exists  principally in the  Duluth/Superior  to Chicago  corridor.  Lake vessels
generally  compete  for bulk  commodities  such as coal and ore.  The  Company's
pricing  and  service  decisions  are also  impacted  by  competition  among the
Company's  customers and their competitors,  as the Company must provide pricing
and service that keep its customers competitive in the market.

MARKETING

     The Company emphasizes  superior service to its customers and has created a
marketing  organization  designed to identify and quickly  respond to customers'
needs. The Company's  marketing  strategy includes the creation of an atmosphere
of decentralized  pricing authority to enable marketing  personnel with specific
market  knowledge and direct customer  contact to make pricing  decisions within
established   guidelines.   This  quick  and  independent   reaction  to  market
opportunities,  together with clear delegation of authority and  responsibility,
has improved  customer  relations and enabled the Company to retain and increase
its base of business.  In recognition of the Company's  excellent service during
the years 1988  through  1995,  Distribution,  a  respected  trade  publication,
presented  the  Company  with its  "Quest for  Quality"  award for each of those
years.  The  award  for 1996 has not yet been  presented.  The award is based on
customer surveys encompassing service, equipment,  convenience,  price and sales
criteria.  The Company has received many awards from its  customers  recognizing
its excellent service.

EMPLOYEE RELATIONS

     At December 31,  1996,  the Company  employed  2,047  full-time  employees,
including 46 on  temporary  assignments.  Except for ACRI and a minor  hold-over
representation  of certain  FV&W  employees,  the  Company's  employees  are not
represented by collective  bargaining  organizations.  The collective bargaining
agreements  in effect on ACRI are  designed  to reflect WCL  practices.  In past
years,  there have been  various  unsuccessful  attempts  by  various  unions to
represent   those   employees   not   represented   by   collective   bargaining
organizations.  The most  recent  attempt  was in late  1996  when the  National
Mediation  Board conducted  elections to determine if the Company's  engineering
employees  would choose to be represented  by a labor union.  In early 1997, the
Company was notified that only 13.6% of such  employees  voted to be represented
by a union,  falling  short of the simple 50%  majority  required by the Railway
Labor Act to effect union representation.

     The Company's  employees,  after meeting certain eligibility  requirements,
are able to participate in the Company's employee stock purchase plans,  savings
plans and bonus plans.

ENVIRONMENTAL MATTERS

     The Company's  operations are subject to various  federal,  state and local
laws and  regulations  relating  to the  protection  of the  environment.  These
environmental  laws and  regulations,  which are implemented  principally by the
Environmental  Protection  Agency  and  comparable  state  agencies,  govern the
management of hazardous  wastes,  the  discharge of pollutants  into the air and
into  surface  and   underground   waters,   and  the   manufacture,   handling,
transportation,  storage and disposal of certain  substances.  One such law, the
federal  Comprehensive  Environmental  Response,  Compensation and Liability Act
("CERCLA"),  which is also known as the "Superfund" law, generally imposes joint
and several  liability for clean-up and  enforcement  costs,  without  regard to
fault or the legality of the original conduct, on current and predecessor owners
and operators of a site.  Much of the Company's  real property has been used for
industrial  purposes or leased to  commercial  and  industrial  companies  whose
activities may have resulted in discharges onto the property.  Consequently, the
Company may be responsible  under CERCLA and other applicable  federal and state
statutes  for all or a part of the costs to clean up sites at which  wastes have
been  released by the  Company,  its lessees,  predecessor  owners or lessees of
properties,  or other third parties. Prior owners of a majority of the Company's
rail operating  properties  have agreed to indemnify the Company with respect to
contamination or  non-compliances  with  environmental laws arising prior to the
Company's  acquisition of the subject sites. In addition,  several of the states
in which the Company operates make available reimbursement programs for clean-up
of contamination.

                                        9

<PAGE>



     The  Company  has been  named as a  "potentially  responsible  party"  with
respect to  contamination at a number of sites on its properties.  However,  the
Company  believes that any expense it may incur in connection  with the clean-up
of such sites will not have a material adverse effect on the financial condition
of the  Company.  As part  of its  normal  operations,  the  Company  transports
hazardous  materials  from time to time,  which may expose the Company to claims
and potential liability for injuries to employees,  other persons,  property and
the environment.

     The Company has received  requests  for  documents  from the United  States
Department  of  Justice  ("DOJ")  in  an  investigation  involving  a  potential
violation of federal laws  governing the  inspection and removal of asbestos and
the provision of notice  relating to those  activities in connection with a 1993
demolition project in Waukesha,  Wisconsin on property owned by the Company. The
Company  is  cooperating  with the  DOJ's  investigation  and has  provided  all
requested   documents.   The  penalty  for  such  violation   includes  criminal
prosecution  with a fine of up to $500,000 per  violation  or civil  enforcement
with a fine of up to $25,000 per day for each violation.

     The Company  believes that the  operations of its railroads are in material
compliance  with current laws and  regulations.  The Company  estimates that any
expense  incurred in maintaining  compliance  with current laws and  regulations
will  not  have  a  material  effect  on  the  Company's   earnings  or  capital
expenditures.  However,  there can be no assurance  that the current  regulatory
requirements  will  not  change,  or  that  currently  unforeseen  environmental
incidents will not occur, or that past  non-compliance  with  environmental laws
will not be discovered on the  Company's  properties  that may not be subject to
indemnification or reimbursement.


REGULATION

     In addition to environmental, safety and other regulation applicable to all
businesses,  railroads are subject to regulation by federal agencies,  primarily
the Service Transportation Board ("STB") and the Federal Railroad Administration
("FRA"),  and by state  departments of  transportation  and some other state and
local  regulatory  agencies.  (ACRI's  operations  are subject to Canadian  rail
regulations which are generally  similar,  but differ in certain respects,  from
their U.S.  counterparts.  Only U.S. regulation is described below.) The STB has
jurisdiction  over, among other things,  prices charged for services and service
levels. It also has jurisdiction  over acquisition,  extension or abandonment of
rail lines,  consolidation,  merger,  or  acquisition  of control of rail common
carriers,  and the imposition of labor protection  conditions in connection with
some of the foregoing.  The FRA has jurisdiction over railroad track,  equipment
and operating  safety  standards.  State agencies  regulate certain local safety
issues, such as adequacy of grade crossings.

     Generally, a railroad is free to adjust the level of prices on its business
freely.  In those  instances in which a railroad is found not to face  effective
competition  and  found to have  prices  which  yield  revenue  in  excess  of a
prescribed  revenue-to-variable cost ratio, the STB has authority to investigate
the price reasonableness. In addition to maximum price regulation, an individual
railroad's  ability to adjust its prices is  constrained  by the  regulation  of
prices that apply to business interchanged between railroads.

     For purposes of rail regulation,  the STB classifies railroads by revenues,
with the largest,  most heavily regulated  railroads being referred to as "Class
I" railroads  and smaller  railroads  being  referred to as "Class II" or "Class
III" railroads. WCL and FV&W are classified as Class II railroads,  while SSM is
classified as a Class III railroad.

     On  February 7, 1997,  WCL and FV&W  entered  into a voluntary  cooperative
Safety  Compliance  Agreement with the FRA pursuant to the Safety  Assurance and
Compliance  Program  ("SACP").  The SACP is a program,  initiated  by the FRA in
March of 1995,  to permit  railroads  and the FRA to develop and monitor  agreed
upon programs to improve safety  conditions on a systematic  basis  throughout a
railroad.  The  WCL  and  FV&W  program,  which  is  expected  to  continue  for
approximately  one year,  will focus on improving track  conditions,  inspection
procedures and training for railroad employees.


                                       10

<PAGE>



INSURANCE

     The Company  maintains  $125.0 million in third party  liability  insurance
coverage for  personal  injuries,  including  death,  property  damage and other
specified risks of its operations in excess of a self-insured  retention of $2.0
million per occurrence  (except for ACRI which has a  self-insured  retention of
$0.5 million per  occurrence).  The Company also maintains  $20.0 million in all
risks property damage  coverage,  including  property of shippers,  in excess of
retentions of $750,000 per occurrence with respect to rail accidents and $50,000
per  occurrence  with respect to non-rail  incidents.  In addition,  the Company
maintains $25.0 million in directors' and officers'  liability  insurance with a
Company  retention of $350,000.  The Company believes its insurance is proper in
light of its experience and the  experience of the rail industry.  However,  the
Company  can  give no  assurance  as to the  adequacy,  availability  or cost of
insurance in the future.


ITEM 2. PROPERTIES

     The Company's principal  properties are 2,798 route miles of operating rail
lines (1,856 route miles of main lines and 942 route miles of secondary  lines),
208 route miles of trackage rights  (contractual rights to operate over lines of
railroad owned by others),  associated yards,  terminals,  repair facilities and
contiguous real estate.  The following table sets forth the Company's  operating
rail lines:

                                          Owned
                               ---------------------------
                                Main    Secondary    Total    Trackage   Total
                               Lines      Lines      Owned     Rights   Operated
                               -----      -----      -----     ------   --------

WCL ....................       1,074       758       1,832       189     2,021
FV&W ...................         338       102         440        16       456
ACRI ...................         295        26         321         1       322
SSM ....................         149        56         205         2       207
                               -----       ---       -----       ---     -----
     Total .............       1,856       942       2,798       208     3,006
                               =====       ===       =====       ===     =====



     The Company also owns 34 route miles of abandoned rail lines and rail lines
not currently operated.

     The  majority of the  Company's  main line from  Chicago to Stevens  Point,
Wisconsin (238.3 route miles) is in FRA Class IV condition,  permitting up to 50
m.p.h.  speeds for freight trains.  The Company's other main lines are primarily
FRA  Class  III  lines,  permitting  up to 40  m.p.h.  speeds,  and the  Company
considers  them  appropriate  to handle  current and  expected  traffic on those
lines.  Secondary  lines are primarily  FRA Class II lines,  permitting up to 25
m.p.h.  speeds,  which the Company also  considers  appropriate  for current and
expected  traffic volume.  Class  designations of rail lines are made or revised
based on annual track inspections. Additionally, all of the main lines have been
inspected  with an  electronic  rail defect  detector car at least once annually
over the last five years. The Company's  maintenance and track improvement plans
are designed to preserve class designations at least at their present levels.

     The  Company has  trackage  rights  that  provide  the Company  access into
Chicago,  Duluth/Superior,  Milwaukee and  Minneapolis/St.  Paul.  The Company's
trackage  rights  over Soo include  restrictions  on the use of Soo's rail lines
into Milwaukee and  Minneapolis/St.  Paul. The effect of these  restrictions  is
that the Company cannot use Soo's lines to access those locations to handle most
overhead  business  (i.e.,  business  routed  through the  Company's  system for
delivery from one carrier to another).

     The Company owns and operates car and locomotive repair facilities  located
in Fond du Lac, Stevens Point and Green Bay, Wisconsin,  Gladstone and Escanaba,
Michigan and Sault Ste. Marie,  Ontario.  These facilities service the Company's
locomotives and railcars and offer  equipment  repair services to other carriers
and the Company's customers.

     The  Company  also  owns a large  iron  ore dock and  storage  facility  in
Escanaba,  Michigan.  The ore dock site includes a pier approximately 2,800 feet
long used to transport  iron ore to and from cargo ships which are docked at the
pier. The pier is capable of docking four ships at a time.

     The Company also has rights under various leases, joint facility agreements
and transportation contracts. The Company is lessee of locomotives, railcars and
maintenance  equipment.  The Company's joint facility agreements include various
operating and maintenance

                                       11

<PAGE>



agreements with other railroads under which certain railroad properties (such as
track,  switches,  crossings,  interchanges  and  bridges)  are jointly used and
maintained.

     The Company  owns  various  parcels of  non-operating  real estate that are
contiguous  to its rail  lines.  Some of this  real  estate  is  leased to third
parties, on varying terms, generating lease income of $2.0 million, $1.3 million
and $1.2 million in 1996, 1995 and 1994, respectively.

     In  addition,  the  Company  has sold  certain of its excess  assets  since
inception. The proceeds and pre-tax gains recognized with respect to these sales
from 1992 through 1996 are as follows:

<TABLE>
<CAPTION>

                                                                        Year Ended December 31,
                                                         1996        1995         1994        1993        1992
                                                      ---------   ---------     --------    --------    ------
                                                                                (in thousands)

<S>                                                   <C>         <C>           <C>         <C>         <C>     
Proceeds from sales of excess assets..............    $   1,210   $   2,109     $  1,236    $  1,909    $  2,911
Pre-tax gain from sales of excess assets..........        1,015         794        1,036       1,735       2,383
</TABLE>


     The  Company's  strategy  is to sell  excess  assets,  but  there can be no
assurance as to the Company's  ability to sell its remaining excess assets or as
to the prices the Company will receive if and when it sells excess assets.

     At December  31,  1996,  the  Company's  equipment  fleet  consisted of 235
locomotives  (169 owned and 66 leased) and 12,831  freight cars (4,734 owned and
8,097  leased).  The average  age of the  locomotives  and  freight  cars in the
Company's fleet is 31 years and 21 years,  respectively.  Despite their age, the
Company's   locomotives  and  freight  cars  have  achieved  good  availability,
primarily as a result of the Company's  preventive  maintenance  program. Of the
Company's   current  fleet  of  locomotives  and  freight  cars,  50%  and  52%,
respectively,  were  acquired  new or have  been  rebuilt  or  received  a major
overhaul  since  1987.  The  Company's  availability  rates with  respect to its
locomotive and railcar fleet were 89.7% and 98.1%, respectively, in 1996.

     The quality of the Company's title to its owned  rights-of-way  varies. The
Company's  properties were acquired by its predecessors over extended periods of
time  and  by  different  companies.   Accordingly,  the  original  conveyancing
documents were not standardized and are subject to judicial interpretation as to
the interest  conveyed to the original  acquiring  railroad.  In cases involving
other  railroads,  deeds  have  sometimes  been  construed  to create  either an
easement for railroad purposes or an ownership interest that terminated upon the
cessation of use for railroad purposes. At the time of the Original Acquisition,
the Company obtained both a  representation  from Soo and title insurance to the
effect that the Company  would have  sufficient  interest in its  properties  to
operate a railroad.  The Company  received  similar  assurances  with respect to
properties acquired in subsequent  acquisitions.  However, if the Company ceases
to operate its  railroad  over a parcel,  the  Company's  interest in the parcel
could  revert  to  adjacent  landowners  or to  others  holding  a  reversionary
interest. In Wisconsin, the Company's right to dispose of property is limited by
a Wisconsin statute that gives the state the right of first refusal with respect
to any property to be sold by a railroad.  Because of their age,  buildings  and
structures on the Company's rail properties are also often subject to historical
preservation review prior to disposition.

     As part of the Original  Acquisition,  Soo retained the rights to all gross
revenues from fiber optic cables and equipment which, under agreements  existing
at the time of the Original Acquisition, were located on the properties acquired
by the Company.  Soo also  retained  the rights to 50% of net  revenues  derived
under  easements,  licenses  or leases  pertaining  to fiber  optic  cables  and
equipment which may be located on those properties under agreements entered into
after the Original Acquisition.  Soo retained similar rights as to the Ladysmith
Line,  and CNW retained  similar  rights as to the Cameron  Line.  The Company's
share  of  the  revenues  from  fiber  optic   easement   agreements   has  been
insignificant.  In addition,  Soo, CNW and Union Pacific retained mineral rights
with  respect to the  Ladysmith  Line,  the Cameron  Line and Duck Creek  North,
respectively.


                                       12

<PAGE>



ITEM 3. LEGAL PROCEEDINGS

     The Company's employees are covered by the Federal Employers' Liability Act
("FELA"), as opposed to state workers' compensation systems.  Under FELA, damage
awards for injuries and deaths of railroad  employees are settled by negotiation
or  litigation  based on the  comparative  negligence  of the  employee  and the
employer  and are not  subject  to  limitations  on the amount of  recovery  (as
recoveries are under workers' compensation systems).

     The Company is  currently  subject to a number of claims and legal  actions
that arose in the  ordinary  course of  business,  including  FELA claims by its
employees and personal injury claims (including  wrongful death claims) by third
parties.  The Company  believes these claims,  taking into account  reserves and
applicable  insurance,  will not have a material  adverse effect on the Company.
Adverse judgments in these claims,  individually or in the aggregate,  in excess
of related  reserves and  applicable  insurance,  could have a material  adverse
effect on the Company's financial position.

     In connection with the March 4, 1996 derailment in Weyauwega,  Wisconsin, a
complaint  was filed  against the Company on March 26, 1996 by nine  individuals
seeking to represent  the class of persons who  suffered  damages as a result of
this derailment.  The complaint seeks punitive and treble damages.  Any punitive
damages and treble  damages may not be covered by the Company's  insurance.  The
Company  does not believe  there is any basis for an award of such  damages.  On
July 9, 1996, the court  declined to certify a class action lawsuit  against the
Company.  The court did, however,  indicate it would appoint a guardian ad litem
to review all settlements made on behalf of affected minors and would notify all
claimants  who had not settled  their  claims of the  existence of the action so
that these  claimants  would have the option of joining the lawsuit  should they
desire.  Since that date,  the court has  decided  not to appoint a guardian  ad
litem.  All potential  claimants  were notified,  and thirteen  families and two
businesses joined the lawsuit.  Discovery is ongoing. In addition,  one business
has filed a separate suit for damages in the District  Court of Waupaca  County.
It is the opinion of  management  that the  resolution of these matters will not
have a material adverse effect on the Company's financial position.

     On June 4, 1993,  WCL was served with a complaint  filed by the BOCT in the
United  States  District  Court for the Northern  District of Illinois,  Eastern
Division. In its complaint, the BOCT claimed that WCL owed BOCT for intermediate
switching and car hire reclaim charges allegedly incurred from July 1988 through
February 1993.  Arbitration  hearings were held in Chicago from October 24, 1995
to November 9, 1995. On June 10, 1996, the  arbitration  panel ruled in favor of
BOCT.  The  arbitration  panel's  ruling  awarded BOCT $16.8 million of disputed
switching and car hire reclaim charges, and $2.5 million of interest relating to
such charges.  Based upon the arbitration  panel's ruling,  the Company recorded
pretax  provisions of $15.8 million,  representing  amounts awarded in excess of
previously  recorded  accruals.  The  litigation  between  BOCT and the  Company
continues.  The U.S.  District Court has affirmed the arbitration award and also
authorized  WCL to pursue the  defenses  that were not  subject to  arbitration,
including claims to be brought before the STB.

     In October  1995,  the  Circuit  Court of Dane  County  ruled in favor of a
Wisconsin  Department  of Revenue  ("WDR")  retroactive  assessment  of personal
property  taxes  for the tax years  1990  through  1993  against  all  Wisconsin
railroads,  including WCL and FV&W.  WCTC and the other  railroads  involved are
considering  an appeal of the statutory law rulings.  As a result of the ruling,
the Company  recognized  the $3.0  million  retroactive  assessment,  as well as
accrued interest of $727,000, in its 1995 consolidated  statement of income. The
railroads,  including WCL and FV&W,  have also filed suits in state courts which
allege  discrimination  in the assessment of taxes. WCL and FV&W have separately
filed suit challenging  other WDR tax valuation  practices with respect to their
1994, 1995 and 1996 tax bills.


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

None.


                                       13

<PAGE>



EXECUTIVE OFFICERS OF THE REGISTRANT

     The following table sets forth  information about each person who serves as
one of the Company's executive officers:

<TABLE>
<CAPTION>

                               Age as of
       Name                  March 1, 1997                        Position with Company
       ----                  -------------                        ---------------------

<S>                               <C>        <C>                                               
Edward A. Burkhardt               58         Chairman, President and Chief Executive Officer
Thomas F. Power, Jr.              56         Executive Vice President and Chief Financial Officer
J. Reilly McCarren                40         Executive Vice President and Chief Operating Officer, WCL,
                                                 FV&W, ACRI and SSM
Walter C. Kelly                   53         Vice President, Finance
Glenn J. Kerbs                    56         Vice President, Engineering, WCL, FV&W, ACRI and SSM
William R. Schauer                52         Vice President, Marketing, WCL, FV&W, ACRI and SSM
J. Edward Terbell                 44         Vice President and General Manager, WCL,  FV&W, ACRI and SSM
Robert F. Nadrowski               50         Vice President, Mechanical, WCL, FV&W, ACRI and SSM
Earl J. Currie                    57         Vice President, Planning
Richard P. White                  51         Vice President, Human Resources
Marty J. Mickey                   34         Treasurer
</TABLE>


     Mr.  Burkhardt  has served as a  director,  President  and Chief  Executive
Officer  of the  Company  since its  formation  in 1987.  He was  elected to the
additional position of Chairman in January 1996. He serves as a director and the
President and Chief Executive Officer of each of the Company's subsidiaries. Mr.
Burkhardt  is also a  director  and  Chairman  of the Board of Tranz  Rail and a
director and Chairman and Chief  Executive  Officer of EW&S.  From 1967 to 1987,
Mr.   Burkhardt  was  employed  by  CNW,   most  recently  as  Vice   President,
Transportation. Mr. Burkhardt has 36 years of railroad management experience.

     Mr.  Power has served as a director,  Executive  Vice  President  and Chief
Financial  Officer of the  Company  since its  formation  in 1987.  He serves as
Executive  Vice President and Chief  Financial  Officer of each of the Company's
subsidiaries and as a director of each of the Company's  subsidiaries other than
ACRI.  Mr.  Power is also a director of Tranz Rail and EW&S.  From 1985 to 1987,
Mr. Power was a private consultant. From 1970 to 1985, Mr. Power was employed by
the Chicago,  Milwaukee, St. Paul and Pacific Railroad Company, most recently as
Chief  Financial  Officer.  Mr.  Power has over 29 years of railroad  management
experience.

     Mr.  McCarren has served as Executive  Vice  President and Chief  Operating
Officer of the Company's operating subsidiaries since July 8, 1996. From 1990 to
1996, Mr. McCarren served as President of Gateway Western Railway Company.  From
1988 to 1990, Mr. McCarren served as the General Superintendent - Transportation
for the Chicago,  Missouri and Western Railway.  From 1978 to 1988, Mr. McCarren
held various  operating  positions  with Conrail.  Mr.  McCarren has 18 years of
railroad management experience.

     Mr. Kelly has served as Vice  President,  Finance,  of WCTC since September
1988. He serves in the same  capacity  with each of the Company's  subsidiaries.
Prior to joining the  Company,  Mr. Kelly  served as  Corporate  Controller  for
Spiegel,  Inc.  (a  catalog  retailer)  from  1987 to  1988,  as an  independent
consultant during 1986, and as Vice President,  Finance for Wilton  Enterprises,
Inc. (a  distributor of  housewares)  during 1985.  From 1969 to 1985, Mr. Kelly
held various  positions with Arthur Andersen & Co., United  Stationers,  Inc. (a
wholesaler of office products) and McKesson  Corporation (a supplier of drug and
health care products).

     Mr.  Kerbs has  served as Vice  President,  Engineering,  of the  Company's
operating  subsidiaries since 1987. From 1974 until 1987, Mr. Kerbs was employed
by CNW, most recently as Director of  Maintenance  Operations.  Mr. Kerbs has 32
years of railroad management experience.

     Mr.  Schauer  has served as Vice  President,  Marketing,  of the  Company's
operating  subsidiaries  since  October  1988,  and  served  as  Assistant  Vice
President,  Marketing,  of WCL from the Original Acquisition until October 1988.
From 1986 until

                                       14

<PAGE>



1987, Mr. Schauer was employed by CNW as General Marketing Manager. From 1963 to
1985, Mr. Schauer was employed by the Chicago,  Milwaukee,  St. Paul and Pacific
Railroad  Company in various  positions,  most recently as Director of Marketing
and Pricing. Mr. Schauer has 22 years of railroad management experience.

     Mr. Terbell has been employed as Vice President and General  Manager of the
Company's  operating  subsidiaries  since November 1993. Prior to that time, Mr.
Terbell  served  as WCL's  Eastern  Division  Transportation  Manager  since the
Original  Acquisition.  From 1973 until 1987,  Mr.  Terbell was employed by CNW,
most recently as Assistant  Division  Manager - Engineering.  Mr. Terbell has 22
years of railroad management experience.

     Mr.  Nadrowski  has been  employed as Vice  President,  Mechanical,  of the
Company's operating subsidiaries since 1987. From 1985 until 1987, Mr. Nadrowski
was  involved  in the  ownership  and  operation  of a  marina  and a  motel  in
Wisconsin.  From  1966 to 1985,  Mr.  Nadrowski  was  employed  by the  Chicago,
Milwaukee,  St. Paul and Pacific  Railroad  Company,  most recently as Assistant
Vice  President  and Chief  Mechanical  Officer.  Mr.  Nadrowski has 26 years of
railroad management experience.

     Mr.  Currie has  served as Vice  President,  Planning  of WCTC since May 1,
1996.  From 1989 to 1995, Mr. Currie served as Vice President - Engineering  and
Vice President and Chief Transportation Officer at CSX Transportation. From 1985
to 1989,  Mr. Currie served as Executive  Vice  President - Operations  for Soo.
Prior  thereto,  Mr.  Currie was employed by the  Burlington  Northern  Railroad
Company (now Burlington  Northern Sante Fe) and its  predecessor  companies from
1961 to  1985,  most  recently  as  Senior  Vice  President  -  Maintenance  and
Transportation. Mr. Currie has 36 years of railroad management experience.

     Mr. White has served as Vice President,  Human  Resources,  of WCTC and its
operating  subsidiaries  since March 4, 1996. Prior to joining the Company,  Mr.
White held a variety of  positions  with  Tranz Rail and its  predecessors  from
1962-1996, most recently as Executive Manager, Personnel.

     Mr. Mickey has served as Treasurer of WCTC and its  subsidiaries  since May
1996. Prior to that time, Mr. Mickey served as Assistant  Controller of WCL from
1990-1996.  From 1984 to 1990, Mr. Mickey was employed by Arthur Andersen & Co.,
most recently as audit manager.

     The executive  officers of the Company are elected annually by and serve at
the discretion of the Company's Board of Directors.


                                       15

<PAGE>



                                     PART II


ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS

     The Company's  Common Stock is available  for quotation  through the NASDAQ
National  Market System under the symbol "WCLX".  On March 19, 1997,  there were
approximately  1,450 record holders of the Company's Common Stock. The following
table sets forth, for the periods  indicated,  the high and low sales prices per
share,  after adjusting for a three-for-one  stock split effective May 31, 1996,
of the  Company's  Common  Stock as quoted  through the NASDAQ  National  Market
System:

                                                              Price Per Share
                                                              ---------------
 Calendar Period                                             High          Low
 ---------------                                             ----          ---

 1995:
   First Quarter........................................   $ 17.00      $ 13.17
   Second Quarter.......................................     19.13        15.63
   Third Quarter........................................     22.92        16.08
   Fourth Quarter.......................................     22.50        18.58

 1996:
   First Quarter........................................   $ 27.58      $ 20.46
   Second Quarter.......................................     38.75        21.83
   Third Quarter........................................     40.00        29.25
   Fourth Quarter.......................................     42.50        34.50


       The Company has not paid and has no current plans to pay dividends on its
Common Stock.  The Company  currently  intends to retain all earnings for use in
the Company's  business.  The payment of any future dividends will be determined
by the  Board  of  Directors  in  light  of the  future  prevailing  conditions,
including  the  Company's   earnings,   financial  condition  and  requirements,
restrictions in financing agreements, business conditions and other factors.



                                       16

<PAGE>



ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>

                                                                       Year Ended December 31,
                                                -------------------------------------------------------------
                                                   1996          1995 <F1>        1994      1993 <F2>   1992
                                                ----------     ----------     ----------   ---------   ------
                                                             (in thousands, except per share amounts)
<S>                                             <C>            <C>            <C>         <C>          <C>     
Income Statement Data:
Operating revenues:
   Operating revenues before disputed
     switching charges.......................   $ 275,438      $ 263,427      $ 211,139   $ 151,691    $124,364
   Disputed switching charges................     (13,278)<F3>       ---            ---         ---         ---
                                                ---------      ---------      ---------   ---------    --------
   Total operating revenues..................     262,160        263,427        211,139     151,691     124,364
Operating expenses:
   Weyauwega derailment and retroactive
     property tax assessment.................       2,500 <F4>     3,030 <F5>        ---         ---         ---
   Other.....................................     223,888        196,938         156,514     116,843      98,008
                                                ---------       --------      ----------  ----------   ---------
   Total operating expenses..................     226,388        199,968         156,514     116,843      98,008
                                                ---------       --------      ----------  ----------   ---------
Income from operations.......................      35,772         63,459          54,625      34,848      26,356

Gains on sales of excess assets..............       1,015            794           1,036       1,735       2,383
Rental income................................       2,039          1,323           1,241         847         955
Other income (expense), net..................       1,717            382             771        (342)     (1,972)
Interest on disputed switching charges and
   retroactive property tax assessment.......      (2,493)<F3>      (727)<F5>        ---         ---         ---
Interest expense.............................      (9,315)        (9,084)         (9,901)     (7,798)     (9,886)
                                                ---------       --------      ----------  ----------   ---------
Income before income taxes,
   equity in net income of affiliates,
   extraordinary items and cumulative
   effect of accounting change...............      28,735         56,147          47,772      29,290      17,836

Provision for income taxes...................      11,378         22,170          19,068      11,944       6,955
                                                ---------       --------      ----------  ----------   ---------
Income before equity in net income of
   affiliates, extraordinary items and
   cumulative effect of accounting change....      17,357         33,977          28,704      17,346      10,881

Equity in net income of affiliates...........      32,677 <F6>    10,655           9,578       1,490         ---
                                                ---------       --------      ----------  ----------   ---------
Income before extraordinary items and
   cumulative effect of accounting change....      50,034         44,632          38,282      18,836      10,881

   Extraordinary items.......................      (1,602)        (2,123)         (1,587)     (1,398)        ---
   Cumulative effect of change in
     accounting for income taxes.............         ---            ---             ---      (2,067)        ---
                                                ---------       --------      ----------  ----------   ---------
Net income...................................   $  48,432       $ 42,509      $   36,695  $   15,371   $  10,881
                                                =========       ========      ==========  ==========   =========

Earnings per common share outstanding<F7> :
   Income before extraordinary items
     and cumulative effect of
     accounting change.......................   $    0.99      $    0.89      $     0.77  $     0.38   $    0.28
   Extraordinary items.......................       (0.03)         (0.04)          (0.03)      (0.03)        ---
   Cumulative effect of accounting change....         ---            ---             ---       (0.04)        ---
                                                ---------      ---------      ----------  ----------   ---------
   Net income................................   $    0.96      $    0.85      $     0.74  $     0.31   $    0.28
                                                =========      =========      ==========  ==========   =========

Average common shares outstanding............      50,647         50,242          49,787      49,572      38,904
                                                =========      =========      ==========  ==========   =========

Cash dividends per common share..............   $     ---      $     ---      $      ---  $      ---   $     ---
                                                =========      =========      ==========  ==========   =========
<FN>
-----------------
<F1> Includes partial year (11 months) results of ACRI.
<F2> Includes partial year results of FV&W (4 months) and Tranz Rail (6 months).
<F3> Represents  disputed  switching  charges and related  interest for the June
     1996  arbitration  ruling in favor of BOCT. See Note 15 to the Consolidated
     Financial Statements.
<F4> Represents  a charge to cover  insurance  deductibles  associated  with the
     Weyauwega  derailment  discussed in Note 15 to the  Consolidated  Financial
     Statements.
<F5> Represents  a charge and accrued  interest for a  retroactive  property tax
     assessment  for the years  1990 to 1993 from the  Wisconsin  Department  of
     Revenue. See Note 15 to the Consolidated Financial Statements.
<F6> Includes  partial year  results of the TLFs from  February 24, 1996 through
     December 31, 1996.
<F7> All per share data have been restated to reflect a two-for-one  stock split
     in the form of a stock dividend on July 5, 1994, and a three-for-one  stock
     split in the form of a stock dividend on May 31, 1996.
</FN>
</TABLE>

                                       17

<PAGE>
<TABLE>
<CAPTION>



                                                                    Year Ended December 31,
                                             -----------------------------------------------------------------
                                                 1996        1995<F1>        1994         1993<F2>       1992
                                             ----------     ----------    ----------    ----------     -------
                                                                       ($ in thousands)

<S>                                        <C>              <C>           <C>           <C>            <C>      
Balance Sheet Data:
Total assets.............................  $ 691,275        $ 550,530     $ 434,538     $ 390,367      $ 283,805
Investment in affiliates.................    114,652<F3>       41,416        33,612        17,532            ---
Total debt...............................    165,034          137,340       102,500       134,155         81,574
Stockholders' equity.....................    299,146          237,695       190,478       149,674        133,685
Debt to total capitalization.............       35.6%            36.6%         35.0%         47.3%          37.9%

Operating Data:
Revenue ton miles of freight traffic
    (millions) <F4>......................      9,786            9,478         7,210         5,166          3,887
Revenue per ton mile (cents) <F5>........        2.6              2.6           2.8           2.8            3.1
Operating ratio <F6>.....................       81.3%            74.8%         74.1%         77.0%          78.8%
Revenue ton miles per freight
     train hour (thousands) <F4>.........         44               39            40            37             33
Revenue ton miles per locomotive
    in service (millions) <F4>...........         47               45            45            42             39
Fuel consumption (thousand gallons)......     28,537           28,432        21,646        15,789         12,607
Fuel cost per gallon (average, in cents).         75               66            66            66             66
Revenue ton miles per gallon of fuel<F4>.        343              333           333           327            308
Total carloads...........................    464,149          436,286       358,825       257,326        205,512
Carloads from originating, terminating
    and local traffic....................       78.3%            76.5%         79.2%         79.1%          79.5%
Gross revenues from originating,
    terminating and local traffic........       84.2%            84.3%         85.1%         82.1%          83.8%
Net freight loss and damage as a percent
     of gross freight revenues <F7>......       0.23%            0.41%         0.38%         0.43%          0.34%


<FN>
----------------
<F1> Includes partial year (11 months) results of ACRI.
<F2> Includes partial year results of FV&W (4 months) and Tranz Rail (6 months).
<F3> Includes  partial year  results of the TLFs from  February 24, 1996 through
     December 31, 1996.
<F4> A revenue ton mile equals the product of weight in tons of freight  carried
     for hire and the distance in miles between origin and destination.
<F5> Revenue  per ton mile  equals net  freight  revenue  divided by revenue ton
     miles of freight volume.
<F6> Operating ratio represents  operating expenses as a percentage of operating
     revenues.  The 1996 percentage  excludes the disputed  switching charges of
     $13.3  million  and the  $2.5  million  of  insurance  deductibles  for the
     Weyauwega  derailment  discussed in Note 15 to the  Consolidated  Financial
     Statements.  The 1995  percentage  excludes  the $3.0  million  retroactive
     property tax assessment discussed in Note 15 to the Consolidated  Financial
     Statements.
<F7> Net  freight  loss and damage is the cost to the  Company  of  damaged  and
     destroyed customer freight,  net of salvage and insurance  recoveries.  The
     1996 percentage excludes the effects of the Weyauwega  derailment discussed
     in Note 15 to the Consolidated Financial Statements.

</FN>
</TABLE>


                                       18

<PAGE>



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

     The following  discussion  should be read in conjunction with the Company's
consolidated financial statements, related notes and other financial information
included elsewhere in Item 8. "Financial Statements and Supplementary Data".

RESULTS OF OPERATIONS:  1996 COMPARED TO 1995

     The  Company's  net income for 1996 was $48.4  million  compared with $42.5
million for 1995. Net income for 1996 was reduced by $9.5 million, net of income
taxes,  due to the BOCT  arbitration  award  and  associated  interest,  by $1.5
million,  net of  income  taxes,  due to the  Weyauwega  derailment  and by $1.6
million,  net of income taxes, due to an extraordinary  item associated with the
early  retirement of debt.  Net income for 1995 was  unfavorably  affected by an
extraordinary charge associated with early retirement of debt which totaled $2.1
million,  net of income  taxes,  and a charge  for a  retroactive  property  tax
assessment,  plus accrued  interest,  which totaled $2.3 million,  net of income
taxes.  These items are discussed in further detail in the Notes to Consolidated
Financial  Statements.  The Company's income,  exclusive of the effects of these
items was $61.1 million for 1996 compared to $46.9 million for 1995, an increase
of 30.2%.

      Operating  Revenues.  Revenues for 1996 were $262.2 million  compared with
$263.4 million for 1995. Operating revenues for the year of 1996 were negatively
affected by the switching  charges  awarded in the BOCT  arbitration.  Excluding
these switching  charges,  operating revenue for 1996 increased by $12.0 million
or 4.6% to $275.4 million. Volume, as measured by carloads handled (including as
a carload  each loaded  trailer or  container),  for 1996 was  464,149  carloads
compared with 436,286 carloads in 1995, an increase of 27,863 carloads or 6.4%.

      The following table compares the Company's 1996 and 1995 revenues.

<TABLE>
<CAPTION>
                                           Operating Revenue Comparison
                                                   1996 vs. 1995

                                                         1996     % of Gross    1995       % of Gross     %
                                                       Revenues    Revenues    Revenues     Revenues   Change
                                                       --------    --------    --------     --------   ------
                                                                            (in thousands)

<S>                                                  <C>            <C>       <C>            <C>         <C>  
Gross revenues.....................................  $   273,793    100.0 %   $   260,679    100.0 %      5.0 %
Allowances, absorptions and adjustments............      (15,752)    (5.8)        (14,174)    (5.4)     (11.1)
                                                     -----------   ------     -----------   ------
Net freight revenues...............................      258,041     94.2         246,505     94.6        4.7
Switching, demurrage, passenger
     and other revenues............................       17,397      6.4          16,922      6.5        2.8
                                                     -----------   ------     -----------   ------
Operating revenues before disputed
     switching charges.............................      275,438    100.6         263,427    101.1        4.6
Disputed switching charges.........................      (13,278)    (4.8)            ---      ---        <F1>
                                                     -----------   ------     -----------   ------
Operating revenues.................................  $   262,160     95.8 %   $   263,427    101.1 %     (0.5) %
                                                     ===========   =======    ===========   =======
<FN>
-------------
<F1>   Not meaningful.
</FN>
</TABLE>


                                       19

<PAGE>



      Gross  revenues for 1996  increased in 9 of 15 commodity  groups  compared
with 1995, with an overall increase of 5.0%. Carload volume increased in 9 of 15
commodity groups compared to 1995 for an overall increase of 6.4%. The following
table  compares  volume (in carloads),  gross  revenues and average  revenue per
carload by commodity group for the years 1996 and 1995:

<TABLE>
<CAPTION>
                              Carload and Gross Revenue Comparison By Commodity Group
                                                   1996 vs. 1995
                                                                                                     Average
                                                                                                     Revenue
                                                     Carloads             Gross Revenues           Per Carload
                                               -------------------   ------------------------   -----------------
               Commodity Group                   1996        1995       1996           1995       1996      1995
------------------------------------------     --------     ------   ---------     ----------   --------  -------
                                                              (in thousands, except carload amounts)

<S>                                             <C>        <C>       <C>           <C>          <C>      <C>  
Paper......................................      41,389     39,085   $  37,519     $   35,430   $ 906    $ 906
Woodpulp...................................      39,382     37,806      35,824         33,265     910      880
Pulpboard..................................      20,071     19,999      11,561         11,275     576      564
Lumber products............................      20,890     18,228      16,618         12,251     795      672
Wood fibers................................      22,304     21,218      11,589         10,901     520      514
Chemicals and petroleum products...........      39,326     42,523      32,743         34,113     833      802
Intermodal.................................      62,533     41,987      12,054          7,559     193      180
Sand, stone and minerals...................      32,468     24,924      13,767         10,503     424      421
Metallic ore...............................      73,699     79,129      28,100         30,262     381      382
Clay products and granules.................      21,536     22,963      20,474         22,089     951      962
Coal.......................................      28,578     23,511      11,606         10,241     406      436
Food and grain.............................      26,707     30,208      17,550         19,538     657      647
Waste and scrap............................      18,184     18,905      11,818         12,190     650      645
Steel products.............................      14,263     12,390      10,549          8,909     740      719
Miscellaneous..............................       2,819      3,410       2,021          2,153     717      631
                                                -------    -------   ---------     ----------
Total......................................     464,149    436,286   $ 273,793     $  260,679     590      597
                                                =======    =======   =========     ==========
</TABLE>

      Intermodal  volume  increased  by more than 20,500  carloads or 48.9% over
1995 primarily due to market share  increases in trucking  company  business and
the new joint rate intermodal service which the Company started with CN on April
1, 1996.  Other large increases in volume and gross revenues  occurred in paper,
woodpulp, lumber, sand, stone and minerals, coal and steel.

      Paper  and   woodpulp   gross   revenues   increased  by  5.9%  and  7.7%,
respectively,  primarily due to an increased  market share for shipments by rail
versus truck. Volume and gross revenues for lumber increased by 14.6% and 35.6%,
respectively,  primarily due to increased  market share and higher  revenues per
carload due to longer hauls.

      Volume and gross revenues for sand, stone and minerals  increased by 30.3%
and 31.1%, respectively,  primarily due to increased market shares in cement and
aggregates  as  well  as an  increase  in  sand  shipments  for  the oil and gas
industry.  Volume  and gross  revenues  for coal  increased  by 21.6% and 13.3%,
respectively,  primarily  due to  increased  market  share of  inbound  coal for
Wisconsin utilities.  Volume and gross revenues for steel increased by 15.1% and
18.4%, respectively,  primarily due to increased demand from a major customer of
ACRI.

     Volume and gross  revenues  for clay  products  decreased by 6.2% and 7.3%,
respectively,  primarily due to a slowdown in shipments of roofing  granules and
coating  clays for the paper  industry.  Metallic ore revenues  declined by 7.1%
primarily  due to sourcing  changes and more limited use of winter rail programs
by certain steel companies. Food and grain volume and gross revenues declined by
11.6% and 10.2%, respectively, primarily due to a slowdown in starch traffic for
the  paper  industry  and a  reduction  in  corn  shipments  due  to  poor  crop
conditions.

      Operating  Expenses.  Operating  expenses were $226.4 million for 1996, an
increase  of  $26.4  million,  or  13.2%,  compared  with  1995.  The  Weyauwega
derailment described in Note 15 to the Consolidated  Financial Statements led to
a $2.5  million  increase  in  operating  expenses  in 1996 to  account  for the
combined deductible under the Company's two insurance policies.  The 1995 amount
was impacted by the $3.0 million

                                       20

<PAGE>



property  tax  assessment  discussed  in Note 15 to the  Consolidated  Financial
Statements.  Excluding  these  items,  operating  expenses  for 1996 were $223.9
million,  compared  with $196.9  million in 1995,  an  increase of 13.7%.  Other
increases  in  operating  expenses  occurred in labor,  fuel,  equipment  rents,
materials,  joint  facilities,  depreciation  and casualties and insurance.  The
Company's  operating  ratio  (operating  expenses as a  percentage  of operating
revenues) was 86.4% for 1996,  including  the accrual for the switching  charges
awarded in the BOCT  arbitration  and the  insurance  deductible  related to the
Weyauwega derailment. Excluding these items in 1996 and the retroactive property
tax  assessment in 1995,  the Company's  operating  ratio was 81.3%  compared to
74.8% for 1995.  The  following  table sets forth a comparison  of the Company's
operating expenses during 1996 and 1995:

<TABLE>
<CAPTION>
                                            Operating Expense Comparison
                                                   1996 vs. 1995

                                                                      1996                1995          % Change
                                                                  -----------         -----------       --------
                                                                                   (in thousands)
<S>                                                               <C>                 <C>                  <C> 
Labor expense (including payroll taxes
   and fringe benefits)........................................   $    90,144         $    82,499           9.3%
Diesel fuel....................................................        21,497              18,598          15.6
Materials......................................................        23,374              20,209          15.7
Equipment rents, net...........................................        28,360              25,421          11.6
Joint facilities, net..........................................         3,788               1,942          95.1
Depreciation...................................................        13,132              11,318          16.0
Casualty and insurance.........................................         6,862               6,167          11.3
Weyauwega insurance deductible.................................         2,500                 ---           <F1>
Property taxes.................................................         5,975               5,722           4.4
Retroactive property tax assessment............................           ---               3,030           <F1>
Other operating................................................        30,756              25,062          22.7
                                                                  -----------         -----------
Operating expenses.............................................   $   226,388         $   199,968          13.2%
                                                                  ===========         ===========
<FN>
-------------
<F1>  Not meaningful.
</FN>
</TABLE>

      Labor expense for 1996  increased 9.3% compared with 1995 primarily due to
an  average  4.5%  increase  in wage rates at the  beginning  of 1996 and a 5.9%
increase in the average work force to handle the increased volume. Labor expense
as a percentage of operating  revenues  increased to 32.7% in 1996 compared with
31.3% in 1995.

     Diesel fuel  expense  for 1996  increased  $2.9  million or 15.6% over 1995
levels,  as fuel prices increased by 14.8%. As of March 5, 1997, the Company has
hedge  arrangements for  approximately  51% of its expected fuel consumption for
the first half of 1997,  approximately  75% of its expected fuel consumption for
the balance of 1997 and  approximately  25% of its expected fuel consumption for
1998. The Company enters into hedge arrangements to reduce its exposure to price
volatility  and can give no assurance that the hedge  arrangements  will yield a
lower cost than spot market purchases.

      Materials  expense rose for 1996 primarily as a result of increased  costs
associated  with  maintenance  of the Company's  railcar and  locomotive  fleet,
largely due to unusually  severe weather  during winter and spring  months.  Net
equipment  rents for 1996  increased  $2.9  million  or 11.6%  over 1995  levels
primarily  due to additional  equipment  under  operating  leases as a result of
sale-leaseback  transactions  in 1995  and  traffic  congestion  in the  Chicago
corridor.  Net joint facilities expense increased $1.8 million in 1996 primarily
due to congestion  through the Chicago corridor as well as costs associated with
the CN intermodal service which started on April 1, 1996.  Depreciation  expense
increased  primarily  as a result  of the  additional  1996  and  1995  property
improvements.  Casualty and insurance expense increased by $0.7 million or 11.3%
primarily  due to  derailments.  Included  in the  increase  in other  operating
expenses are increases in utility  expenses,  business  expenses,  rail testing,
freight  claims and general  expense  increases  associated  with the  increased
volume.

                                       21

<PAGE>



      Other Income, Interest Expense and Income Taxes. Other income for 1996 was
$4.8  million,  $2.3  million  higher  than  1995.  This  change  was  primarily
attributable to $1.6 million in incremental  management fees related to the EW&S
investment.

     Included in interest  expense for 1996 is $2.5 million of interest  related
to the BOCT arbitration  award, while 1995 interest expense includes interest of
$0.7 million  associated  with the retroactive  property tax  assessment.  Other
interest expense  increased $0.2 million in 1996 to $9.3 million,  primarily due
to  increased  borrowings  used to  fund  the  EW&S  investment,  offset  by the
restructuring  of  debt  which  occurred  in  late  1995,  resulting  in a lower
effective  interest rate. The income tax provision for 1996 was $11.4 million, a
decrease of $10.8  million over 1995,  primarily  due to the reduction of pretax
income as a result of the disputed switching charges and interest awarded in the
BOCT arbitration.

      Equity  in Net  Income  of  Affiliates.  The  Company's  results  for 1996
included  equity in net income of its affiliates of $32.7 million as compared to
$10.7 million for 1995.

      EW&S  contributed  $22.8 million to the Company's  equity in net income of
affiliates in 1996.  EW&S's results for 1996 reflect a partial year of operation
of the TLFs (beginning  February 24, 1996) and a full year of operation for Res,
a  relatively  small  portion of EW&S's total  operations.  Because the acquired
companies  had separate  existence for only a brief period of time and purchased
many of their services from affiliates prior to the acquisition,  comparisons to
earlier periods would not be meaningful. EW&S is in the process of restructuring
its  operations  as  part  of a plan  to  reduce  operating  costs,  but  due to
regulatory  requirements  the  restructuring  of its  train  operations  did not
commence   until  October  1996.   Results  for  1996  reflect   revenues  under
transportation  contracts negotiated prior to the acquisition which provided for
higher prices than are expected in subsequent periods.

      The contribution  from Tranz Rail to the Company's equity in net income of
affiliates in 1996 was $9.9 million, versus $10.7 million from Tranz Rail a year
ago. Tranz Rail's 1996 contribution was affected by the decline in the Company's
ownership  position as a result of Tranz  Rail's 1996 initial  public  offering.
Tranz Rail's 1996 results reflect a 1.3% increase in its operating  revenues.

RESULTS OF OPERATIONS:  1995 COMPARED TO 1994

      The Company's  net income for 1995 was $42.5  million  compared with $36.7
million  for 1994,  an  increase  of 15.8%.  Both 1995 and 1994 net income  were
affected by unusual charges.  Net income for 1995 was reduced by a total of $4.4
million (net of income  taxes),  by the  combination  of an  extraordinary  item
related  to  the  prepayment  of  debt  and  the  recognition  of a  retroactive
assessment of personal  property taxes.  Net income for 1994 was reduced by $1.6
million  (net of  income  taxes)  for the  effects  of an  extraordinary  charge
associated  with debt  restructuring.  These items are described in the Notes to
Consolidated  Financial  Statements.  Income before these unusual items for 1995
was $46.9 million, an increase of $8.6 million or 22.5% over 1994.

      Operating  Revenues.  Revenues for 1995 were $263.4 million  compared with
$211.1  million  for 1994,  an increase of $52.3  million or 24.8%.  Volume,  as
measured by carloads  handled  (including  as a carload  each loaded  trailer or
container),  for 1995 was 436,286  carloads  compared  with 358,825  carloads in
1994, an increase of 77,461 carloads or 21.6%.


                                       22

<PAGE>



      The following table compares the Company's 1995 and 1994 revenues.

<TABLE>
<CAPTION>
                                           Operating Revenue Comparison
                                                   1995 vs. 1994

                                                         1995     % of Gross    1994       % of Gross    %
                                                       Revenues    Revenues    Revenues     Revenues   Change
                                                       --------    --------    --------     --------   ------
                                                                            (in thousands)

<S>                                                  <C>            <C>       <C>            <C>         <C>  
Gross revenues.....................................  $   260,679    100.0%    $   216,393    100.0%      20.5%
Allowances, absorptions and adjustments............      (14,174)    (5.4)        (15,342)    (7.1)       7.6
                                                       ----------   ------      ----------   ------
Net freight revenues...............................      246,505     94.6         201,051     92.9       22.6
Switching, demurrage, passenger
    and other revenues.............................       16,922      6.5          10,088      4.7       67.7
                                                       ----------   ------      ----------   ------
Operating revenues.................................  $   263,427    101.1%    $   211,139     97.6%      24.8
                                                       ==========   ======      ==========   ======
</TABLE>

      Gross  revenues for 1995 increased in 14 of 15 commodity  groups  compared
with 1994, with an overall increase of 20.5%.  Carload volume increased in 12 of
15  commodity  groups  compared to 1994 for an overall  increase  of 21.6%.  The
following  table  compares  volume (in  carloads),  gross  revenues  and average
revenue per carload by commodity group for the years 1995 and 1994:

<TABLE>
<CAPTION>
                              Carload and Gross Revenue Comparison By Commodity Group
                                                   1995 vs. 1994
                                                                                                    Average
                                                                                                    Revenue
                                                    Carloads              Gross Revenues          Per Carload
                                               -------------------   -----------------------    ---------------
               Commodity Group                   1995        1994      1995          1994        1995     1994
------------------------------------------     --------     ------   ---------     ---------    ------   ------
                                                               (in thousands, except carload amounts)

<S>                                             <C>        <C>       <C>           <C>          <C>      <C>  
Paper......................................      39,085     35,872   $  35,430     $  29,791    $ 906    $ 830
Woodpulp...................................      37,806     36,229      33,265        28,745      880      793
Pulpboard..................................      19,999     19,519      11,275        10,254      564      525
Lumber products............................      18,228     17,580      12,251        11,040      672      628
Wood fibers................................      21,218     20,636      10,901        10,264      514      497
Chemicals and petroleum products...........      42,523     34,731      34,113        28,788      802      829
Intermodal.................................      41,987     42,595       7,559         6,757      180      159
Sand, stone and minerals...................      24,924     18,931      10,503         8,500      421      449
Metallic ore...............................      79,129     34,738      30,262        14,664      382      422
Clay products and granules.................      22,963     23,730      22,089        21,459      962      904
Coal.......................................      23,511     18,472      10,241         8,442      436      457
Food and grain.............................      30,208     28,069      19,538        18,156      647      647
Waste and scrap............................      18,905     17,137      12,190        10,590      645      618
Steel products.............................      12,390      5,127       8,909         5,386      719    1,051
Miscellaneous..............................       3,410      5,459       2,153         3,557      631      652
                                               --------    -------   ---------     ---------
Total......................................     436,286    358,825   $ 260,679     $ 216,393      597      603
                                                =======    =======   =========     =========
</TABLE>

      The business added by ACRI's operations  contributed  significantly to the
Company's  overall  increases  in  volume  and  gross  revenues.  ACRI's  volume
contributed  over 30,000  additional  carloads to the Company's  totals for 1995
over 1994.  Commodity groups with the largest percentage increases were metallic
ore,  sand,  stone and minerals,  chemicals and  petroleum  products,  woodpulp,
paper,  steel  products  and  coal.  Variances  in these  commodity  groups  are
discussed below.

      Volume for metallic  ore  increased by 44,391  carloads  primarily  due to
Geneva Steel movements as well as seasonal  movements for steel producers during
the first  quarter of 1995.  Since August 1994,  WCL and Southern  Pacific Lines
have been handling metallic ore from the Upper Midwest to Geneva Steel's mill in
Utah. Volume in 1995 for this five-year move exceeded 30,600 carloads,  compared
with approximately 10,400 carloads in 1994.


                                       23

<PAGE>



      Volume and gross revenues for sand, stone and minerals  increased by 31.7%
and 23.6%,  respectively,  primarily due to new markets  developed for Wisconsin
construction  aggregates.  Traffic  volume and gross  revenues for chemicals and
petroleum products increased by 22.4% and 18.5%, respectively,  due to increased
asphalt and petroleum coke movements and increased  potash  shipments  resulting
from market share increases.

      Woodpulp  and  paper  gross   revenues   increased  by  15.7%  and  18.9%,
respectively, primarily due to market growth and longer movements as a result of
the ACRI Acquisition.  Steel volume increased by 7,263 carloads primarily as the
result of the ACRI  Acquisition.  Coal volume and gross  revenues  increased  by
27.3% and 21.3%, respectively, primarily due to an increased market share.

      Operating  Expenses.  Operating  expenses were $200.0 million for 1995, an
increase of $43.5  million,  or 27.8%,  compared  with 1994.  This  increase was
primarily a result of the growth  from the ACRI  Acquisition  and the  Company's
increased business.  Additionally,  the Company's operating income and operating
expenses were  unfavorably  affected by the retroactive  property tax assessment
described in Note 15 to the  Consolidated  Financial  Statements.  Excluding the
assessment,  WCTC's  operating  income for the year was $66.5 million,  or 21.7%
over the $54.6  million  recorded in 1994.  WCTC's  operating  ratio  (operating
expenses as a  percentage  of  operating  revenues)  prior to the  property  tax
assessment  was  74.8%,  compared  with the  74.1%  recorded  during  1994.  The
following  table sets forth a comparison  of the  Company's  operating  expenses
during 1995 and 1994:

<TABLE>
<CAPTION>
                                            Operating Expense Comparison
                                                   1995 vs. 1994

                                                                      1995                1994          % Change
                                                                  -----------         -----------       --------
                                                                                    (in thousands)
<S>                                                               <C>                 <C>                <C>   
Labor expense (including payroll taxes
   and fringe benefits)........................................   $    82,499         $    67,843         21.6%
Diesel fuel....................................................        18,598              14,139         31.5
Materials......................................................        20,209              14,919         35.4
Equipment rents, net...........................................        25,421              19,281         31.8
Joint facilities, net..........................................         1,942               2,488        (21.9)
Depreciation...................................................        11,318               9,437         19.9
Casualty and insurance.........................................         6,167               4,449         38.6
Property taxes.................................................         5,722               5,634          1.6
Retroactive property tax assessment............................         3,030                 ---          <F1>
Other operating................................................        25,062              18,324         36.8
                                                                  -----------         -----------
Operating expenses.............................................   $   199,968         $   156,514         27.8
                                                                  ===========         ===========
<FN>
-------------
<F1>  Not meaningful.
</FN>
</TABLE>

      Labor expense for 1995 increased 21.6% compared with 1994 primarily due to
an average  4.5%  increase  in wage rates at the  beginning  of 1995 and a 25.1%
increase in the average work force to handle the increased volume. These factors
were  offset by a decrease of $2.3  million or 45.1% from 1994 in  expenses  for
employee  bonus plans  (including  related  payroll  taxes).  Labor expense as a
percentage of operating  revenues  improved to 31.3% in 1995 compared with 32.1%
in 1994.

      Diesel fuel  expense for 1995  increased  $4.5  million or 31.5% over 1994
levels,  as  consumption  increased  by 31.4%.  Materials  expense rose for 1995
primarily as a result of growth in the Company's  railcar and locomotive  fleet,
the increased  trackage  associated  with the  Company's  ACRI  Acquisition  and
increases in base business.  Net equipment rents for 1995 increased $6.1 million
or 31.8% over 1994 levels primarily due to additional  equipment under operating
leases  as a  result  of  sale-leaseback  transactions  in 1994 and 1995 and new
leases entered into because of the Company's  increased traffic,  offset in part
by  favorable  variances in car hire  earnings  from such  equipment.  Net joint
facilities  expense  decreased in 1995  primarily  as a result of the  increased
billings to other  railroads for use of the Company's  trackage  acquired in the
Head

                                       24

<PAGE>



of the Lakes Acquisitions.  Depreciation expense increased primarily as a result
of the additional 1995 and 1994 property  improvements and the ACRI Acquisition.
Casualty and insurance  expense increased by $1.7 million or 38.6% primarily due
to  derailments.  Included  in the  increase  in other  operating  expenses  are
increases in utility expenses, business expenses, advertising and other expenses
associated  with  the ACRI  passenger  service  and  general  expense  increases
associated with the increased volume.

      Other Income, Interest Expense and Income Taxes. Other income for 1995 was
$2.5  million,   $0.5  million  lower  than  1994.  This  change  was  primarily
attributable  to a $1.3 million decline in rentals of  non-operating  equipment.
Such equipment was under per diem leases for most of 1994; however,  such leases
expired  during 1995 and the cars were added to the Company's  operations.  This
was offset by a $0.7 million  reduction in the amortization  expense  associated
with  financing  costs,  as the majority of the Company's  financing  costs were
written  off as part of an  extraordinary  charge in the fourth  quarter of 1994
associated with a debt restructuring.

      The strong 1995 results of Tranz Rail reflect the Company's  philosophy of
providing  transportation  services at  competitive  pricing to  customers.  The
Company's  30% equity  investment  in Tranz  Rail  resulted  in a $10.7  million
contribution to net income for 1995,  compared to the $9.6 million  contribution
for 1994.  Included in the Company's 1994 equity in the net income of Tranz Rail
was a  nonrecurring  capital  gain of $2.1  million on the sale of Tranz  Rail's
investment in a telecommunications  company. Tranz Rail's 1995 results reflect a
6.9% increase in its operating  revenues and a 1.8 percentage point  improvement
in its operating ratio from 1994.

      Interest expense was also adversely  affected by the retroactive  property
tax assessment  discussed in Note 15 to the Consolidated  Financial  Statements.
Other interest expense  decreased by $0.8 million or 8.3% for 1995 compared with
1994 primarily due to reductions in the average amount of debt outstanding.  The
income tax  provision  for 1995 was $22.2  million,  an increase of $3.1 million
over 1994 primarily due to higher pre-tax income.

LIQUIDITY AND CAPITAL RESOURCES

     Cash generated from operations is the Company's primary source of liquidity
and is used  principally  for  capital  expenditures,  debt  service and working
capital requirements.  The Company also generates cash from asset sales and from
financing activities.  From 1992 through 1996, the Company generated cash in the
amounts  of $243.5  million  from  operations,  $46.2  million  from the sale of
assets,  $62.2  million  from  increased  debt and  $57.6  million  from  equity
issuances.  The Company has also  received  cash of $21.0 million in a return of
capital from Tranz Rail.  These cash amounts were  primarily used to fund $266.2
million of capital  expenditures,  $95.0 million of asset acquisitions and $67.3
million in  investments  in  affiliates.  At December 31, 1996,  the Company had
$165.0 million of total debt  outstanding,  which constituted 35.6% of its total
capitalization.

      The Company maintains an unsecured  revolving long-term debt facility with
a syndicate of banks with a capacity of $325.0 million. This facility allows the
Company to choose from various  floating rate options and is scheduled to expire
at the end of 2000. In the fourth quarter of 1996, the  availability  under this
facility was increased  from $200.0 million to $325.0  million.  At December 31,
1996,  the Company's  aggregate  unused  borrowing  availability  under its loan
facilities  was $178.5  million.  On January 27, 1997,  this amount  declined by
$85.0  million  upon  the  consummation  of the  Duck  Creek  North  Acquisition
discussed in Note 14 to the Consolidated Financial Statements.

                                       25

<PAGE>



      The Company's liquidity to date has been significantly enhanced because it
has not had to pay current income taxes (other than the Alternative Minimum Tax)
as a  result  of net  operating  loss  carryforwards  ("NOLs")  for  income  tax
purposes.  These NOLs are largely  the result of  temporary  differences  in the
recognition  of certain  revenues  and  expenses  for  financial  and income tax
purposes.  The  Company  has  recorded a deferred  liability  for the  temporary
differences  on its  Consolidated  Balance  Sheets.  At December 31,  1996,  the
Company's NOLs for tax purposes were  approximately  $39.7  million,  which will
begin to  expire  in 2004.  However,  the  Company  expects  to be able to fully
utilize these NOLs to offset future tax liabilities.

     The  financing  arrangements  of  the  Company  limit  its  ability  to pay
dividends on its capital stock, incur additional  indebtedness,  create liens on
its  assets,  repurchase  shares  of  capital  stock,  and make  certain  loans,
investments or guarantees.  In addition,  EW&S's borrowing  arrangements contain
provisions  which  substantially  restrict its ability to transfer  funds to the
Company  in the form of cash  dividends,  loans or  advances.  Tranz  Rail's net
assets are not similarly restricted.

     Capital  expenditures  totaled  $68.8  million in 1996,  a decrease of $3.8
million over 1995.  Variances in capital  expenditures in 1996 from 1995 consist
of a $6.9 million  increase in roadway and  structure  improvements  and a $10.6
million  decrease in  expenditures  for  equipment.  The  roadway and  structure
increase  includes  expenditures  for rail and tie  replacements  to improve the
Company's track  structure to support  increasing  traffic  levels.  The Company
expects its roadway and structures capital expenditures to increase further as a
result of the Safety Compliance  Agreement with the FRA, as discussed in Item 1.
"Business -  Regulation".  The decrease in equipment  expenditures  reflects the
reduction in the acquisition of freight cars and  locomotives  compared to 1995.
During 1996,  1995 and 1994, the Company also obtained the use of  approximately
$1.5  million,  $53.5  million and $25.1  million,  respectively,  of additional
equipment under long-term operating leases.

      The following table sets forth the Company's capital  expenditures for the
periods indicated:

<TABLE>
<CAPTION>
                                               Capital Expenditures

                                                                      Year Ended December 31,
                                                ---------------------------------------------------------------
                                                   1996          1995         1994          1993         1992
                                                ----------    ---------    ----------    ---------    ---------
                                                                         (in thousands)

<S>                                             <C>           <C>          <C>           <C>          <C>      
Roadway and structures <F1>..................   $   56,304    $  49,416    $   35,347    $  27,033    $  17,115
Locomotive, railcar and other
    transportation equipment.................       12,454       23,098        17,025       24,930        3,461
                                                ----------    ---------    ----------    ---------    ---------
       Total <F2>............................   $   68,758    $  72,514    $   52,372    $  51,963    $  20,576
                                                ==========    =========    ==========    =========    =========
<FN>
------------------
<F1>  Includes communications and signals, bridges and other improvements.
<F2>  Excludes  $19.4 million,  $0.5 million,  $69.2 million and $6.0 million in
      1995, 1994, 1993 and 1992,  respectively,  expended to acquire  additional
      rail lines and pay related transaction costs.

</FN>
</TABLE>

                                       26

<PAGE>



      The following table presents a summary of the Company's  improvements  for
roadway and structures for the periods indicated:

<TABLE>
<CAPTION>
                                        Roadway and Structure Improvements

                                                                              Year Ended December 31,
                                                    -------------------------------------------------------------
                                                     1996<F1>     1995<F1>       1994<F1>     1993          1992
                                                    --------     --------       --------     ------        ------

<S>                                                   <C>          <C>           <C>          <C>           <C>
Track miles surfaced <F2>.....................          949          884           754          749           592
Track miles of rail installed.................         50.7         45.3          32.8         24.5          27.2
Tons of ballast applied (in thousands)........        416.6        369.3         326.1        311.3         219.2
Ties installed (in thousands).................        280.4        236.0         214.8        149.4         122.5

<FN>
------------------
<F1> 1994 includes 46 miles of surfacing, 11,500 tons of ballast and 47,800 ties
     funded by Metra. 1995 includes 4 miles of surfacing,  7,200 tons of ballast
     and 4,600 ties funded by Metra. 1996 includes 96 miles of surfacing, 71,100
     tons of ballast, 5.8 miles of rail and 13,200 ties funded by Metra.
<F2> Surfacing  is the process by which track is aligned  and  cross-leveled  in
     conjunction with the application of ballast and the installation of ties.
</FN>
</TABLE>

     The Company  believes  that its cash flow from  operations,  together  with
available  amounts  under its bank loan  facilities,  will  allow it to meet its
liquidity and capital expenditure  requirements  through the expiration of those
facilities.  The  Company  expects  to  extend  or  replace  its  existing  loan
facilities  prior to their  expiration.  In  addition,  the  Company  intends to
continue to pursue sales of certain excess real estate, rail and other materials
and  locomotives.  Although  the Company  will  continue to pursue such sales of
excess  assets,  it believes  that its ability to make  principal  and  interest
payments on its outstanding  indebtedness and to meet its consolidated liquidity
and capital expenditure requirements will not be dependent on such sales.

INFLATION

      The  Company  has  experienced  moderately  adverse  effects of  inflation
through increases in labor costs,  fringe benefit costs,  payroll taxes,  diesel
fuel  costs,  prices of  materials  and  other  purchased  items  and  services,
equipment and costs of capital. The Company's transportation contracts typically
include escalation clauses that increase the Company's revenues based on various
measures of  inflation.  Overall,  however,  freight rates have not kept up with
inflation  and also  have been held  down and at times  reduced  by  competitive
market  pressures.  The  impact of  inflation  on future  performance  cannot be
discerned  due to  factors  beyond the  Company's  control,  such as  government
policy, world-wide economic conditions and competition.

SEASONALITY

      The Company's  gross revenues from quarter to quarter during the course of
a year have not historically been subject to significant  seasonal changes.  The
Company's  operating  expenses  for the  first  quarter  historically  have been
somewhat  higher than for any other  quarter,  primarily due to adverse  weather
conditions.


                                       27

<PAGE>



ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA


                          INDEX TO FINANCIAL STATEMENTS
                                  AND SCHEDULES



                                                                 PAGE
                                                                 ----

INDEPENDENT AUDITORS' REPORT ...............................      29

FINANCIAL STATEMENTS

  Consolidated Balance Sheets ..............................   30-31
  Consolidated Statements of Income ........................      32
  Consolidated Statements of Changes in Stockholders' Equity      33
  Consolidated Statements of Cash Flows ....................      34
  Notes to Consolidated Financial Statements ...............   35-49


                                       28

<PAGE>











                          Independent Auditors' Report



The Board of Directors and Stockholders
Wisconsin Central Transportation Corporation:

We  have  audited  the   consolidated   balance  sheets  of  Wisconsin   Central
Transportation  Corporation  and  subsidiaries as of December 31, 1996 and 1995,
and the related  consolidated  statements  of income,  changes in  stockholders'
equity  and cash  flows for each of the  years in the  three-year  period  ended
December  31,   1996.   These   consolidated   financial   statements   are  the
responsibility of the Company's management.  Our responsibility is to express an
opinion on these financial statements based on our audits.

We  conducted  our  audits  in  accordance  with  generally   accepted  auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated  financial statements referred to above present
fairly, in all material  respects,  the financial  position of Wisconsin Central
Transportation  Corporation  and  subsidiaries as of December 31, 1996 and 1995,
and the results of their  operations  and their cash flows for each of the years
in the three-year  period ended December 31, 1996, in conformity  with generally
accepted accounting principles.





                                               KPMG Peat Marwick LLP


Chicago, Illinois
January 27, 1997


                                       29

<PAGE>

<TABLE>
<CAPTION>


                           WISCONSIN CENTRAL TRANSPORTATION CORPORATION AND SUBSIDIARIES

                                            Consolidated Balance Sheets

                                                  (in thousands)

                                                      Assets

                                                                                             December 31,
                                                                                  -------------------------------
                                                                                     1996                 1995
                                                                                  -----------          ----------

<S>                                                                              <C>                   <C>       
Current assets:
   Cash and cash equivalents.................................................    $     5,637           $    5,303
   Receivables, net of allowance for doubtful accounts of
      $2,256 and $2,096 at December 31, 1996 and 1995........................         74,118               56,737
   Receivables from insurance companies......................................          7,425                  ---
   Income taxes receivable...................................................          2,804                  900
   Note receivable...........................................................            ---               13,213
   Materials and supplies....................................................         17,530               17,245
   Deferred income taxes.....................................................          1,475                1,400
   Other current assets......................................................          2,641                2,821
                                                                                 -----------           ----------
      Total current assets...................................................        111,630               97,619

Investment in affiliates.....................................................        114,652               41,416

Properties:
   Roadway and structures....................................................        438,101              383,905
   Equipment.................................................................         90,683               78,764
                                                                                 -----------           ----------
      Total properties.......................................................        528,784              462,669
   Less accumulated depreciation.............................................        (63,791)             (51,174)
                                                                                 -----------           ----------
      Net properties.........................................................        464,993              411,495
                                                                                 -----------           ----------

      Total assets...........................................................    $   691,275           $  550,530
                                                                                 ===========           ==========


                            The accompanying notes to consolidated financial statements
                                are an integral part of these financial statements.
</TABLE>

                                       30

<PAGE>

<TABLE>
<CAPTION>


                           WISCONSIN CENTRAL TRANSPORTATION CORPORATION AND SUBSIDIARIES

                                            Consolidated Balance Sheets

                                       (in thousands, except share amounts)

                                       Liabilities and Stockholders' Equity


                                                                                            December 31,
                                                                                 --------------------------------
                                                                                    1996                   1995
                                                                                 ----------             ---------

<S>                                                                              <C>                    <C>       
Current liabilities:
   Short-term debt...........................................................    $       731            $   13,619
   Accounts payable..........................................................         44,428                40,155
   Accrued expenses..........................................................         74,442                54,228
   Accrued disputed switching charges and associated interest................         19,271                 3,500
   Interest payable..........................................................            731                   746
                                                                                 -----------            ----------
      Total current liabilities..............................................        139,603               112,248

Long-term debt...............................................................        164,303               123,721

Other liabilities............................................................          4,028                 3,693

Deferred income taxes........................................................         73,244                60,772

Deferred income..............................................................         10,951                12,401
                                                                                 -----------            ----------

      Total liabilities......................................................        392,129               312,835

Stockholders' equity:
   Preferred stock, par value $1.00; authorized
      1,000,000 shares; none issued or outstanding...........................            ---                   ---
   Common stock, par value $.01; authorized 150,000,000
      shares; issued and outstanding, 50,778,867 shares
      and 50,459,418 shares in 1996 and 1995, respectively...................            508                   505
   Paid in capital...........................................................        108,405               104,801
   Cumulative translation adjustment.........................................         14,012                 4,600
   Retained earnings.........................................................        176,221               127,789
                                                                                 -----------            ----------
      Total stockholders' equity.............................................        299,146               237,695
                                                                                 -----------            ----------

      Total liabilities and stockholders' equity.............................    $   691,275            $  550,530
                                                                                 ===========            ==========


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

</TABLE>

                                       31

<PAGE>


<TABLE>
<CAPTION>

                           WISCONSIN CENTRAL TRANSPORTATION CORPORATION AND SUBSIDIARIES

                                          Consolidated Statements of Income

                                      (in thousands, except per share amounts)



                                                                                 Year ended December 31,
                                                                      -------------------------------------------
                                                                         1996             1995            1994
                                                                      ----------       ----------      ----------
<S>                                                                   <C>              <C>             <C>       
Revenues:
   Freight......................................................      $  258,041       $  246,505      $  201,051
   Other........................................................          17,397           16,922          10,088
   Disputed switching charges...................................         (13,278)             ---             ---
                                                                      ----------       ----------      ----------
      Operating revenues........................................         262,160          263,427         211,139

Expenses:
   Roadway and structures.......................................          37,069           32,867          25,821
   Equipment....................................................          63,037           58,072          42,664
   Transportation...............................................          93,145           74,769          60,786
   General and administrative...................................          33,137           31,230          27,243
   Retroactive property tax assessment..........................             ---            3,030             ---
                                                                      ----------       ----------      ----------
      Operating expenses........................................         226,388          199,968         156,514
                                                                      ----------       ----------      ----------

Income from operations..........................................          35,772           63,459          54,625

Other income (expense):
   Interest on disputed switching charges.......................          (2,493)             ---             ---
   Interest on retroactive property tax assessment..............             ---             (727)            ---
   Other interest expense.......................................          (9,315)          (9,084)         (9,901)
   Other income.................................................           4,771            2,499           3,048
                                                                      ----------       ----------      ----------
      Total other income (expense), net.........................          (7,037)          (7,312)         (6,853)
                                                                      ----------       ----------      ---------- 

Income before income taxes, equity in net income
   of affiliates and extraordinary items........................          28,735           56,147          47,772
Provision for income taxes......................................          11,378           22,170          19,068
                                                                      ----------       ----------      ----------

Income before equity in net income of affiliates
   and extraordinary items......................................          17,357           33,977          28,704
Equity in net income of affiliates..............................          32,677           10,655           9,578
                                                                      ----------       ----------      ----------

Income before extraordinary items...............................          50,034           44,632          38,282
Extraordinary items.............................................          (1,602)          (2,123)         (1,587)
                                                                      ----------       ----------      ---------- 
Net income......................................................      $   48,432       $   42,509      $   36,695
                                                                      ==========       ==========      ==========

Earnings per common share outstanding:
   Income before extraordinary items............................      $     0.99       $     0.89      $     0.77
   Extraordinary items..........................................           (0.03)           (0.04)          (0.03)
                                                                      ----------       ----------      ---------- 
   Net income...................................................      $     0.96       $     0.85      $     0.74
                                                                      ==========       ==========      ==========

Average shares outstanding......................................          50,647           50,242          49,787
                                                                      ==========       ==========      ==========


                            The accompanying notes to consolidated financial statements
                                are an integral part of these financial statements.
</TABLE>

                                       32

<PAGE>


<TABLE>
<CAPTION>

                           WISCONSIN CENTRAL TRANSPORTATION CORPORATION AND SUBSIDIARIES

                            Consolidated Statements of Changes in Stockholders' Equity

                                                  (in thousands)

                                                                                                 
                                                                 Common Stock                    Cumulative
                                                             --------------------     Paid in    Translation   Retained
                                                             Shares        Amount     Capital    Adjustment    Earnings       Total
                                                             ------        ------     -------    ----------    --------       -----

<S>                                                          <C>        <C>          <C>          <C>          <C>          <C>     
Balance at December 31, 1993 .........................       49,662     $    497     $100,592     $   --       $ 48,585     $149,674

   Common stock issued --
     Employee Stock Purchase Plan ....................          119            1          670         --           --            671

   Common stock issued --
     Key Management Stock Option Plan ................          160            1          279         --           --            280

   Foreign currency translation adjustment ...........         --           --           --          3,158         --          3,158

   Net income ........................................         --           --           --           --         36,695       36,695
                                                           --------     --------     --------     --------     --------     --------

Balance at December 31, 1994 .........................       49,941          499      101,541        3,158       85,280      190,478

   Common stock issued --
     Employee Stock Purchase Plan ....................          109            2          997         --           --            999

   Common stock issued --
     Key Management Stock Option Plan ................          409            4        2,263         --           --          2,267

   Foreign currency translation adjustment ...........         --           --           --          1,442         --          1,442

   Net income ........................................         --           --           --           --         42,509       42,509
                                                           --------     --------     --------     --------     --------     --------

Balance at December 31, 1995 .........................       50,459          505      104,801        4,600      127,789      237,695

   Common stock issued --
     Employee Stock Purchase Plan ....................           94            1        1,301         --           --          1,302

   Common stock issued --
     Key Management Stock Option Plan ................          226            2        2,303         --           --          2,305

   Foreign currency translation adjustment ...........         --           --           --          9,412         --          9,412

   Net income ........................................         --           --           --           --         48,432       48,432
                                                           --------     --------     --------     --------     --------     --------

Balance at December 31, 1996 .........................       50,779     $    508     $108,405     $ 14,012     $176,221     $299,146
                                                           ========     ========     ========     ========     ========     ========


                            The accompanying notes to consolidated financial statements
                                are an integral part of these financial statements.
</TABLE>


                                       33

<PAGE>
<TABLE>
<CAPTION>



                           WISCONSIN CENTRAL TRANSPORTATION CORPORATION AND SUBSIDIARIES

                                       Consolidated Statements of Cash Flows

                                                  (in thousands)

                                                                                  Year ended December 31,
                                                                        -----------------------------------------
                                                                           1996            1995            1994
                                                                        ----------      ----------      ---------
<S>                                                                     <C>             <C>             <C>      
Cash flows from operating activities:
     Net income....................................................     $  48,432       $  42,509       $  36,695
     Reconciliation of net income to net cash
         provided by operating activities:
         Extraordinary items.......................................         1,602           2,123           1,587
         Depreciation and amortization.............................        13,591          11,830          10,506
         Deferred income taxes.....................................        12,397          18,244          13,420
         Equity in net income of affiliates........................       (32,677)        (10,655)         (9,578)
         Gains on property sales...................................        (1,015)           (794)         (1,036)
         Deferred gain on sale-leaseback of equipment,
              net of amortization..................................        (1,450)         (1,030)          6,869
         Changes in working capital:
              Note receivable......................................        13,213         (13,213)            ---
              Receivables from insurance companies.................        (7,425)            ---             ---
              Other receivables....................................       (17,381)        (18,074)         (4,046)
              Materials and supplies...............................          (285)         (1,507)         (2,892)
              Other current assets, excluding
                  deferred income taxes............................        (2,183)           (509)            369
              Accrued disputed switching charges and
                  associated interest..............................        15,771           3,500             ---
              Other current liabilities, excluding debt............        24,472           9,990          18,162
         Other, net................................................           335            (394)         (2,327)
                                                                        ---------       ---------       --------- 
Net cash provided by operating activities..........................        67,397          42,020          67,729
                                                                        ---------       ---------       ---------

Cash flows from investing activities:
     Property additions............................................       (68,758)        (72,514)        (52,372)
     Property acquisitions.........................................           ---         (19,381)           (518)
     Property sales and other transactions.........................         3,143           8,730          19,835
     Investments in affiliates.....................................       (31,147)        (16,752)         (3,344)
     Return of capital from affiliates.............................           ---          21,045             ---
                                                                        ---------       ---------       ---------
Net cash used for investing activities.............................       (96,762)        (78,872)        (36,399)
                                                                        ---------       ---------       --------- 

Cash flows from financing activities:
     Debt issued...................................................        60,907         109,840          42,500
     Repayment of debt.............................................       (33,213)        (75,000)        (74,155)
     Debt prepayment penalty.......................................        (1,602)         (2,123)           (316)
     Issuance of common stock, net.................................         3,607           3,266             951
                                                                        ---------       ---------       ---------
Net cash provided by (used for) financing activities...............        29,699          35,983         (31,020)
                                                                        ---------       ---------       --------- 

Net increase (decrease) in cash and cash equivalents...............           334            (869)            310
Cash and cash equivalents, beginning of year.......................         5,303           6,172           5,862
                                                                        ---------       ---------       ---------
Cash and cash equivalents, end of year.............................     $   5,637       $   5,303       $   6,172
                                                                        =========       =========       =========

Supplemental cash flow information: 
     Cash paid (received) during the year for:
         Interest .................................................     $  10,093       $  10,852       $  11,212
         Income taxes..............................................          (165)          6,235           3,124


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

</TABLE>
                                       34

<PAGE>


          WISCONSIN CENTRAL TRANSPORTATION CORPORATION AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements



(1)    Basis of Presentation - Stock Split

       On  May  16,  1996,  the  Company's   Board  of  Directors   announced  a
       three-for-one split of the Company's common stock in the form of a common
       stock dividend  payable on May 31, 1996 to  shareholders  of record as of
       May 17,  1996.  The stated par value of each share was not  changed  from
       $.01.  All share and per share amounts have been restated to reflect this
       common stock split.

(2)    Summary of Significant Accounting Policies

       Nature of Business

       Wisconsin   Central   Transportation    Corporation   ("WCTC")   operates
       approximately  3,000 route miles of railway serving Wisconsin,  Illinois,
       Minnesota,  Michigan's  Upper Peninsula and Ontario through its principal
       operating  subsidiaries,  Wisconsin  Central Ltd.  ("WCL"),  Fox Valley &
       Western Ltd. ("FV&W"), Sault Ste. Marie Bridge Company ("SSM") and Algoma
       Central  Railway  Inc.  ("ACRI").  WCTC,  through its  Wisconsin  Central
       International,  Inc. ("WCI") subsidiary, also holds a 23% equity interest
       in Tranz Rail Holdings Limited ("Tranz Rail"), which operates 2,500 route
       miles of railway nationwide in New Zealand,  and a 31% equity interest in
       English  Welsh and Scottish  Railway Holdings  Limited  ("EW&S"),  whose
       subsidiaries operate railways in Great Britain.

       Principles of Consolidation

       The  consolidated  financial  statements  presented  herein  include  the
       results  of  operations  of  WCTC  and  its  wholly  owned  subsidiaries.
       Wisconsin  Central  Transportation  Corporation and its  subsidiaries are
       hereinafter  referred to as the Company.  All  intercompany  balances and
       transactions have been eliminated in consolidation.

       Cash and Cash Equivalents

       Cash equivalents  consist of investments in money market instruments with
       original  maturities  of less than 30 days and are  stated at cost  which
       equals redemption value. Checks that have been issued but haven't cleared
       the bank are included in accounts payable.

       Materials and Supplies

       Materials  and  supplies  consist  mainly  of  fuel  oil  and  items  for
       improvement and maintenance of roadway, structures and equipment, and are
       stated at the  lower of cost or  market  utilizing  average  costs  which
       approximate  FIFO. As of December 31, 1996,  the Company had entered into
       hedging  positions for approximately 34% of its expected fuel consumption
       through the first half of 1997 and approximately 19% of its expected fuel
       consumption   for  the  balance  of  1997.   Gains  and  losses  on  such
       transactions are deferred and matched to specific fuel purchases.

       Investment in Affiliates/Currency Translation

       The  Company's 23% ownership of Tranz Rail and 31% ownership of EW&S (See
       Note  13 -  Investment  in  Affiliates)  are  accounted  for  under  U.S.
       generally accepted accounting  principles  utilizing the equity method of
       accounting.  Under this method,  the Company's share of the net income of
       these investments is reflected in the Company's financial statements when
       earned and  dividends are credited  against the  investment in affiliates
       when received.

       The translation of the applicable foreign currencies into U.S. dollars is
       performed for balance sheet  accounts using period end exchange rates and
       for revenue and expense  accounts  using an average  exchange rate during
       the period.  Gains or losses  resulting from  translation are included in
       stockholders'  equity.  All dollar amounts  included herein are stated in
       U.S. dollars.

                                       35

<PAGE>


          WISCONSIN CENTRAL TRANSPORTATION CORPORATION AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements



       Properties

       Properties are recorded at cost.  Depreciation  is  principally  computed
       using composite group  straight-line  rates.  Average  depreciable  lives
       utilized by the Company are summarized as follows:

           Asset Class                                                 Years
           -----------                                                 -----

         Roadway Properties..........................................    40
         Bridges.....................................................    51
         Signals and Communication Systems...........................    24
         Locomotives and Freight Cars................................    33

       Additions and improvements to track  structures are  capitalized.  Repair
       and maintenance costs are charged to expense. When roadway property other
       than land is sold,  the costs of the assets less the sales  proceeds  are
       charged to accumulated depreciation. Gains or losses resulting from sales
       of land not  required  for  railroad  operations  are  included in "other
       income" in the consolidated  statements of income. Overhead costs related
       to track additions and  improvements are also  capitalized.  During 1996,
       1995 and  1994,  approximately  $763  thousand,  $870  thousand  and $684
       thousand,     respectively,    of    interest    was    capitalized    on
       construction-in-progress.

       Revenues

       Revenues are recognized as shipments  progress.  Other  revenues  consist
       primarily of demurrage, switching and passenger revenues.

       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,
       the  disclosure of contingent  assets and  liabilities at the date of the
       financial  statements  and the  reported  amount of revenues and expenses
       during the  reporting  period.  Actual  results  could  differ from those
       estimates.

       Reclassifications

       Certain  amounts  in  the  prior  year  financial  statements  have  been
       reclassified to conform with the 1996 presentation.

(3)    Extraordinary Items

       As  discussed  in Note 5 -  Long-term  Debt,  the Company  prepaid  $20.0
       million of 10.20%  fixed-rate  senior term notes using a  combination  of
       increased   borrowings   under  its  revolving   credit   agreement  (the
       "Revolver")  and  cash on hand in  1996.  In  connection  therewith,  the
       Company paid a prepayment  penalty of $2.7  million.  This resulted in an
       extraordinary  charge of $1.6 million, net of income taxes, in the fourth
       quarter of 1996.

       In 1995, the Company prepaid $40.0 million of 11.625%  fixed-rate  senior
       term notes using a combination of increased borrowings under its Revolver
       and cash on hand. In connection therewith,  the Company paid a prepayment
       penalty of $3.5 million. This resulted in an extraordinary charge of $2.1
       million, net of income taxes, in the third quarter of 1995.


                                       36

<PAGE>


          WISCONSIN CENTRAL TRANSPORTATION CORPORATION AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements



       In 1994, the Company paid  prepayment  penalties and incurred other costs
       of $316  thousand,  and  wrote  off $2.3  million  of  non-cash  deferred
       financing  costs in connection with a debt  refinancing,  resulting in an
       extraordinary  charge of $1.6 million, net of income taxes, in the fourth
       quarter of 1994.

(4)    Related Party Transactions

       Legal Services

       Oppenheimer,  Wolff & Donnelly  ("OW&D")  provides the Company with legal
       services in connection with various labor matters, litigation, regulatory
       issues and  corporate  matters.  The amounts paid OW&D by the Company for
       services during 1996,  1995 and 1994 were $1.2 million,  $1.0 million and
       $0.7  million,  respectively.  A director and  stockholder  of WCTC was a
       member of OW&D until August 1994 and presently is of counsel to OW&D.

       McLachlan,  Rissman & Doll  ("MR&D")  provides  the  Company  with  legal
       services in connection with various corporate and financing matters.  The
       amounts paid MR&D by the Company for services  during 1996, 1995 and 1994
       were $61 thousand,  $320 thousand and $319  thousand,  respectively.  One
       member of MR&D is a director and stockholder of WCTC.

       Consulting Services

       In 1995 and 1994,  the Company  used the  services of Railroad  Financial
       Corporation  ("RFC") to assist in the  negotiation of various  purchases,
       sales and  leases of  freight  cars.  In 1995 and 1994,  the cost of such
       services amounted to $196 thousand and $237 thousand,  respectively,  and
       is included in the  payments  under the  long-term  operating  leases RFC
       helped  negotiate.  Two  directors  of the Company are  stockholders  and
       directors of RFC.

       Investment in Affiliates

       Information regarding other related party transactions appears in Note 13
       - Investment in Affiliates.

(5)    Long-term Debt

       Long-term debt consists of the following:

                                                           December 31,
                                                    ------------------------
                                                      1996             1995
                                                    -------           ------
                                                          (in thousands)

       10.20% senior term notes ..............     $   --           $ 20,000
       WCTC revolving credit agreement .......      146,500           94,787
       Other .................................       17,803            8,934
                                                   --------         --------
       Total long-term debt ..................     $164,303         $123,721
                                                   ========         ========

       The Company  maintains  an unsecured  Revolver  with a syndicate of banks
       with a capacity of $325.0 million, increased in 1996 from $200.0 million.
       The Revolver  allows the Company to choose various  floating rate options
       and  is  scheduled  to  expire  at the  end of  2000.  The  Company  pays
       commitment  fees on the unused  amount of the Revolver and a facility fee
       based on the  Revolver's  total  capacity.  Such fees  vary  based on the
       Company's stock rating and leverage ratio.  Principal  reductions are not
       required under the Revolver  prior to its expiration  date. The effective
       interest rate on  outstanding  borrowings  under the Revolver at December
       31, 1996 was 5.9%.


                                       37

<PAGE>


          WISCONSIN CENTRAL TRANSPORTATION CORPORATION AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements



       Other  long-term  debt  consists of $8.8  million in  borrowings  under a
       separate  Canadian dollar  revolving  credit  agreement held by ACRI (the
       "ACRI Revolver") plus $9.0 million in  government-financed  interest free
       loans  supporting  railroad  infrastructure  improvements  which  promote
       economic  development  in the  jurisdictions  served  by such  government
       entities.  The ACRI  Revolver  has a capacity of $8.8 million with terms,
       covenants and margins similar to the WCTC Revolver.

       In 1996, the Company  prepaid $20.0 million in 10.20%  fixed-rate  senior
       term notes outstanding using a combination of increased  borrowings under
       the Revolver and cash on hand.  In connection  with the note  prepayment,
       the  Company  paid a  prepayment  penalty of $2.7  million  (See Note 3 -
       Extraordinary Items).

       In December 1995,  the Company  borrowed $13.2 million under its Revolver
       to  specifically  fund  the  note  receivable  described  in  Note  13  -
       Investment in Affiliates.  This borrowing,  which was repaid in the first
       quarter of 1996, was included with  short-term  debt in the  consolidated
       balance sheet as of December 31, 1995.

       Maturities  of debt at  December  31,  1996  for each of the  years  1997
       through 2001 and thereafter were as follows:

          Year                                                       Amount
          ----                                                       ------
                                                                 (in thousands)

          1997...............................................    $        731
          1998...............................................             731
          1999...............................................             731
          2000...............................................         155,987
          2001...............................................             731
          Thereafter.........................................           6,123
                                                                 ------------
          Total..............................................    $    165,034
                                                                 ============

       The  financing  arrangements  of the  Company  limit its  ability  to pay
       dividends on its capital stock,  incur  additional  indebtedness,  create
       liens on its assets,  repurchase  shares of its capital  stock,  and make
       certain loans, investments or guarantees.

(6)    Fair Value of Financial Instruments

       At December 31, 1996,  the  Company's  financial  instruments  consist of
       cash, receivables,  other current assets, fuel hedging positions, current
       liabilities and debt. The carrying amounts of these financial instruments
       approximate their fair values at December 31, 1996.

(7)    Income Taxes

       The Company files  consolidated  federal income tax returns which include
       all of its U.S.  subsidiaries and a provincial Canadian income tax return
       for ACRI.

       Deferred  income taxes are accounted for in accordance with the asset and
       liability  method by applying  current  statutory  tax rates to temporary
       differences  between the financial  statement carrying amount and the tax
       bases of assets and  liabilities.  The effect on deferred  tax assets and
       liabilities  of a change  in tax  rates is  recognized  in  income in the
       period of the enactment date.

       No provision is made for U.S.  income taxes  applicable to  undistributed
       earnings  of ACRI  and  the  foreign  affiliates  that  are  indefinitely
       reinvested.  However, when dividends are received, applicable U.S. income
       taxes are accrued.


                                       38

<PAGE>


          WISCONSIN CENTRAL TRANSPORTATION CORPORATION AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements



       The provision for income taxes consists of the following:

                                                      Year ended December 31,
                                                    ---------------------------
                                                    1996       1995        1994
                                                    ----       ----        ----
                                                          (in thousands)
                       Current:
                           Federal ...........   $ (1,148)   $  3,115   $  5,539
                           State .............        129         811        109
                                                 --------    --------   --------
                                Total current      (1,019)      3,926      5,648
                                                 --------    --------   --------

                       Deferred:
                           Federal ...........     10,746      15,494     11,169
                           State .............      1,651       2,750      2,251
                                                 --------    --------   --------
                                Total deferred     12,397      18,244     13,420
                                                 --------    --------   --------
                       Total .................   $ 11,378    $ 22,170   $ 19,068
                                                 ========    ========   ========

       The components of deferred income tax expense were as follows:

                                                     Year ended December 31,
                                                  ----------------------------
                                                  1996        1995        1994
                                                  ----        ----        ----
                                                          (in thousands)

            Depreciation and amortization ..   $ 17,077    $ 18,749    $ 15,284
            Sale-leaseback transactions ....        613        (731)     (2,620)
            Alternative minimum tax ........      2,234      (1,643)     (5,816)
            Net operating loss carryforwards     (7,534)      1,707       5,587
            Provisions for bad debts,
                casualties, claims and other
                expenses ...................          7         162         985
                                               --------    --------    --------
            Total ..........................   $ 12,397    $ 18,244    $ 13,420
                                               ========    ========    ========

       The tax effects of temporary  differences  that give rise to  significant
       portions of the deferred tax liabilities (assets) are presented below:

                                                               December 31,
                                                            -----------------
                                                            1996         1995
                                                            ----         ----
                                                              (in thousands)
      Deferred tax liabilities principally due to
          differences in depreciation on properties ..   $ 103,195    $  86,118

      Deferred tax assets:
          Net operating loss carryforwards ...........     (15,195)      (7,661)
          Alternative minimum tax credit carryforwards      (8,869)     (11,103)
          Sale-leaseback transactions ................      (5,378)      (5,991)
          Accruals and allowances for bad debts,
               casualties, claims and other
               expenses ..............................      (1,984)      (1,991)
                                                         ---------    ---------
               Total deferred tax assets .............     (31,426)     (26,746)
                                                         ---------    ---------

               Net deferred tax liability ............   $  71,769    $  59,372
                                                         =========    =========



                                       39

<PAGE>


          WISCONSIN CENTRAL TRANSPORTATION CORPORATION AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements



       The net deferred tax liability is classified in the consolidated  balance
       sheets as follows:

                                                           December 31,
                                                       --------------------
                                                       1996            1995
                                                       ----            ----
                                                          (in thousands)

       Non-current deferred tax liability........  $   73,244       $   60,772
       Current deferred tax asset................      (1,475)          (1,400)
                                                   ----------       ----------

           Net deferred tax liability............  $   71,769       $   59,372
                                                   ==========       ==========

       The  reconciliation of the statutory tax rate to the effective income tax
       rate is as follows:

                                                         Year ended December 31,
                                                         ----------------------
                                                         1996     1995     1994
                                                         ----     ----     ----

                   Statutory rate ...................     35.0%   35.0%   35.0%
                   State income taxes, net of federal
                      tax benefit ...................      4.0     4.1     4.3
                   Other ............................      0.6     0.4     0.6
                                                          ----    ----    ----
                   Effective rate ...................     39.6%   39.5%   39.9%
                                                          ====    ====    ====

       As a result of temporary differences,  the Company had net operating loss
       carryforwards  ("NOLs")  at  December  31,  1996 for income tax  purposes
       totaling $39.7  million,  which will begin to expire in 2004. The Company
       expects  to  be  able  to  utilize   these  NOLs  to  offset  future  tax
       liabilities.

(8)    Benefit Plans

       The Company has profit-based  incentive plans for all employees.  Amounts
       accrued under these plans were based  primarily  upon targeted  operating
       results set at the  beginning  of the plan year.  During  1996,  1995 and
       1994,  $3.3 million,  $3.3 million and $6.3 million,  respectively,  were
       accrued under provisions of these incentive plans.

       In 1991,  the Company  adopted a Key  Management  Stock Option Plan ("Key
       Option Plan") under which certain key management employees may be granted
       options to purchase  shares of the Company's  common  stock.  Options may
       have a duration of up to 10 years and an exercise price not less than the
       fair  market  value of the  common  stock at the time of the  grant.  The
       exercise  prices for options  granted  through  1996 under the Key Option
       Plan were equal to fair market  value as of the grant  date.  Information
       regarding the Key Option Plan is summarized below:

                                                  Average        Number
                                                  Option           of
                                                   Price         Shares
                                                   -----         ------

       Options outstanding at December 31, 1993   $ 2.84        512,280
           Granted in 1994 ....................    13.42      1,140,000
           Exercised in 1994 ..................     2.80       (176,085)
                                                               --------
       Options outstanding at December 31, 1994    11.02      1,476,195
           Exercised in 1995 ..................     6.22       (436,083)
                                                               --------
       Options outstanding at December 31, 1995    13.02      1,040,112
           Granted in 1996 ....................    29.68        150,000
           Exercised in 1996 ..................    11.69       (238,412)
                                                               --------
       Options outstanding at December 31, 1996    15.98        951,700
                                                               ========
       Options available for grant at
          December 31, 1996 ...................       --         79,560
                                                               ========
       Total options exercised through
          December 31, 1996 ...................   $ 6.86        888,740
                                                               ========

                                       40

<PAGE>


          WISCONSIN CENTRAL TRANSPORTATION CORPORATION AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements



       Of the  options  outstanding  at  December  31, 1996 under the Key Option
       Plan,  763,480  were  vested and fully  exercisable,  68,220 will vest in
       1997,  30,000 will vest in 1998 and 90,000 will vest in 1999. At December
       31, 1996, the range of exercise prices and the weighted-average remaining
       contractual  life of  outstanding  options  under the Key Option Plan was
       $13.42 to $31.50 and 7.9 years, respectively.

       In 1991,  the  Company  also  adopted an  Employee  Stock  Purchase  Plan
       ("Purchase  Plan").  Under the Purchase Plan, all eligible  employees who
       elect  to  participate  are  granted  an  option  to  purchase,  one year
       following  the date of  grant,  a number of common  stock  shares  not to
       exceed 7.5% of their annual base salary divided by the purchase price per
       share. The purchase price per share under the Purchase Plan is the lesser
       of 85% of the market  value of the  common  stock as of the grant date or
       85% of the market  value on the  exercise  date.  In December  1995,  the
       Company  established  a  plan  similar  to the  Purchase  Plan  for  ACRI
       (collectively, the two plans are referred to as the "Purchase Plans").
       Information regarding the Purchase Plans is summarized below:

                                                    Average        Number
                                                    Option           of
                                                    Price          Shares
                                                    -----          ------

       Shares authorized for purchase ..........                 2,625,000
           Purchased through December 31, 1993..   $ 3.08         (338,142)
           Purchased in 1994 ...................     5.67         (118,998)
           Purchased in 1995 ...................     9.17         (108,924)
           Purchased in 1996 ...................    13.88          (93,824)
                                                                ----------
       Total shares available to be purchased...                 1,965,112
                                                                ==========

       At December 31,  1996,  participating  employees  have  accumulated  $1.2
       million under the Purchase Plans through  payroll  deductions that can be
       used to purchase shares of common stock in 1997.

       In 1994,  the Company  adopted a Director  Stock  Option Plan  ("Director
       Plan") which  provides for the  automatic  annual grant to members of the
       Board of Directors of options to purchase a specified number of shares of
       common stock at a price equal to the fair market value of those shares as
       of the date of the  grant.  Options  to  acquire  up to an  aggregate  of
       900,000 shares of common stock may be granted under the Director Plan, of
       which  138,000  have been  granted and were fully  vested at December 31,
       1996.  Options  granted  under the  Director  Plan vest and become  fully
       exercisable  after six  months  from the date of the  grant.  Information
       regarding the Director Plan is summarized below:

                                                            Average     Number
                                                            Option        of
                                                             Price      Shares
                                                             -----      ------

       Options outstanding at December 31, 1993......... $     ---         ---
           Granted in 1994..............................     12.00      60,000
                                                                      --------
       Options outstanding at December 31, 1994.........     12.00      60,000
           Granted in 1995..............................     17.09      42,000
                                                                      --------
       Options outstanding at December 31, 1995.........     14.10     102,000
           Granted in 1996..............................     30.84      36,000
                                                                      --------
       Options outstanding at December 31, 1996.........     18.46     138,000
                                                                      ========
       Options available for grant at 
         December 31, 1996..............................       ---     762,000
                                                                      ========

       At  December   31,   1996,   the  range  of   exercise   prices  and  the
       weighted-average  remaining contractual life of outstanding options under
       the Director Plan was $12.00 to $30.84 and 6.6 years, respectively.


                                       41

<PAGE>


          WISCONSIN CENTRAL TRANSPORTATION CORPORATION AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements



       In October 1995, the Financial Accounting Standard Board issued Statement
       of Financial  Accounting  Standards No. 123,  "Accounting for Stock-Based
       Compensation" ("SFAS 123"). SFAS 123 establishes financial accounting and
       reporting standards for stock-based  compensation plans. SFAS 123 defines
       a fair value based method of accounting  for an employee  stock option or
       similar  equity  instrument,  and gives  entities a choice of recognizing
       related  compensation  expense by adopting  the new fair value  method or
       continuing to account for  stock-based  compensation  using the intrinsic
       value method  prescribed in Accounting  Principles  Board Opinion No. 25,
       "Accounting for Stock Issued to Employees,"  ("APBO 25"). The Company has
       elected to  continue to account for  stock-based  compensation  using the
       method prescribed in APBO 25. Accordingly,  no compensation cost has been
       recognized for the Company's stock-based employee compensation plans. Had
       compensation  cost for the Company's  stock-based  employee  compensation
       plans been  recorded  based on the fair value method  prescribed  by SFAS
       123,  the  Company's  net income and earnings per common share would have
       been reduced to the pro forma amounts indicated below:

                                                        1996          1995
                                                     ---------     ---------

       Net income - as reported (in thousands)...   $   48,432   $   42,509
       Net income - pro forma (in thousands) ....       47,044       42,249
       Earnings per common share - as reported...         0.96         0.85
       Earnings per common share - pro forma ....         0.93         0.84

       For purposes of the above pro-forma calculations,  the fair value of each
       option grant is  estimated  on the date of grant using the  Black-Scholes
       option-pricing  model with the  following  assumptions  used for  various
       grants:  expected  volatility  of 33% for  options  granted  in 1995  and
       ranging from 34% to 36% for options granted in 1996;  risk-free  interest
       rate ranging  from 5.4% to 6.7% based upon the date of the option  grant;
       and  expected  lives of four years.  Pro forma net income  reflects  only
       options  granted  in  1996  and  1995.  Therefore,  the  full  impact  of
       calculating  compensation  cost for stock  options  under SFAS 123 is not
       reflected in the pro forma net income  amounts  presented  above  because
       compensation  cost for  options  granted  prior to January 1, 1995 is not
       considered.

       All  U.S.  employees  of the  Company  are  covered  under  the  Railroad
       Retirement   Act.  All   Canadian   employees   are  covered   under  the
       government-sponsored   Canadian   Pension  Plan  and  the  ACRI  Employee
       Retirement  Savings  Plan  ("Savings  Plan").  Under  the  Savings  Plan,
       employees  may elect to  contribute up to 5% of their income on a pre-tax
       basis  to  the  Savings  Plan.  The  Company  matches  twice  the  amount
       contributed  by each  employee  up to a maximum of 10%. In 1996 and 1995,
       such matching  contributions by the Company amounted to $882 thousand and
       $552 thousand, respectively.

(9)    Sale-Leaseback Transactions

       During  1995  and  1994,   the  Company   entered   into   sale-leaseback
       transactions   predominantly   relating  to  equipment  with  third-party
       financing  institutions  which resulted in net gains of $110 thousand and
       $7.5 million,  respectively.  For accounting  purposes these amounts,  as
       well as similar  deferred gains from prior years,  have been reflected as
       deferred  income  on  the  consolidated  balance  sheets.  The  gains  on
       sale-leaseback  transactions  are amortized over the terms of the related
       operating leases.



                                       42

<PAGE>


          WISCONSIN CENTRAL TRANSPORTATION CORPORATION AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements



       The following table  indicates the future  amortization of these deferred
       gains on sale-leaseback transactions:

           Year                                                      Amount
           ----                                                      ------
                                                                 (in thousands)

           1997...............................................     $   1,121
           1998...............................................         1,121
           1999...............................................         1,121
           2000...............................................         1,121
           2001...............................................         1,121
           Thereafter.........................................         5,346
                                                                   ---------
           Total..............................................     $  10,951
                                                                   =========

(10)   Leases

       Total  operating  lease  expense  (predominantly  relating to  equipment)
       amounted to $30.4 million,  $28.1 million and $20.8 million in 1996, 1995
       and 1994, respectively.

       Minimum future lease payments under operating  leases that have remaining
       noncancelable lease terms in excess of one year are as follows:

         Year                                                      Amount
         ----                                                      ------
                                                               (in thousands)

         1997...............................................    $     27,423
         1998...............................................          26,623
         1999...............................................          25,293
         2000...............................................          24,095
         2001...............................................          24,275
         Thereafter.........................................         196,256
                                                                ------------
         Total..............................................    $    323,965
                                                                ============

(11)   Other Income

       The components of other income include the following:

                                                      Year ended December 31,
                                                  -----------------------------
                                                  1996         1995        1994
                                                  ----         ----        ----
                                                          (in thousands)

       Management fees from affiliates......  $   2,285   $     700   $     700
       Rental income........................      2,039       1,323       1,241
       Gains on property sales..............      1,015         794       1,036
       Financing and organization
           cost amortization................       (459)       (512)     (1,069)
       Rentals of non-operating equipment...        ---         237       1,501
       Other, net...........................       (109)        (43)       (361)
                                              ---------   ---------   ---------
           Total............................  $   4,771   $   2,499   $   3,048
                                              =========   =========   =========

       Information  regarding  management  fees from  affiliates is discussed in
       Note 13 - Investment in Affiliates.


                                       43

<PAGE>


          WISCONSIN CENTRAL TRANSPORTATION CORPORATION AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements



(12)   Significant Customers

       In 1996, 1995 and 1994, freight  transportation  services provided by the
       Company  to  two  customers   accounted  for  14.6%,   14.4%  and  15.0%,
       respectively, of the Company's gross freight revenues.

(13)   Investment in Affiliates

       Tranz Rail Holdings Limited

       On July 20, 1993, a consortium of investors,  including WCI, entered into
       a purchase  agreement  with the  government of New Zealand to acquire all
       the stock of Tranz Rail, a 2,500 route mile railroad  which  provides the
       only rail service in New Zealand.  WCI's equity  investment  approximated
       $16.0 million for approximately 27% of the common stock of Tranz Rail. In
       1994  and  1995,   the  Company  paid  $3.3  million  and  $2.9  million,
       respectively,  to exercise  options that  increased its equity  ownership
       position to approximately 30%.

       On June 26, 1995, Tranz Rail returned  capital to shareholders  through a
       pro rata repurchase of shares.  WCTC's share of the capital  returned was
       $21.0 million which the Company used to retire debt. The capital returned
       was derived  primarily  from  proceeds  of the 1994 sale of Tranz  Rail's
       investment in a telecommunications company.

       Tranz Rail  completed an initial  public  offering of its common stock on
       June 18,  1996 and is listed on the  NASDAQ  stock  market in the  United
       States and on the New Zealand stock exchange in New Zealand.  As a result
       of this offering,  the Company's  ownership position declined to 23% from
       30%.  As of  December  31,  1996,  the Company  owned the  equivalent  of
       9,561,639 American  Depository Shares ("ADS") of Tranz Rail with a quoted
       closing  price on NASDAQ of $17.69  per ADS.  Each ADS  represents  three
       issued and fully paid ordinary  shares of Tranz Rail.  Total market value
       of the  Company's  holdings  in Tranz Rail as of  December  31,  1996 was
       approximately $169.1 million.

       The Company is party to a Management  Services  Agreement with Tranz Rail
       under  which the  Company  provides  management  services  to Tranz Rail,
       including  principally  making  available  the  services  of two  Company
       executives for full time employment by Tranz Rail, training of Tranz Rail
       personnel  by  the  Company  and  making   available  the  expertise  and
       consulting  services of the President of the Company.  Amounts  earned by
       the Company from Tranz Rail for services  under the  Management  Services
       Agreement (not  including the services of the two Company  executives who
       are paid  directly by Tranz Rail) were $0.7 million for each of the years
       in the three-year period ended December 31, 1996. The Management Services
       Agreement  has a current  term  ending  December  31,  1997,  subject  to
       extensions by agreement on a year to year basis.

       Six of the  directors of the Company are directors of, and hold shares or
       options (or both) of Tranz Rail.



                                       44

<PAGE>


          WISCONSIN CENTRAL TRANSPORTATION CORPORATION AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements



       English Welsh & Scottish Railway Holdings Limited

       In the fourth  quarter of 1995, a consortium of investors,  including the
       Company and an  affiliate  of  Berkshire  Partners,  an American  private
       equity firm  ("Berkshire") of which one of the Company's  directors is an
       executive office, director and beneficial owner of shares,  established a
       holding  company,  EW&S,  to acquire  various rail assets of British Rail
       from the British  government  as a part of its  privatization  of British
       Rail. On December 9, 1995,  EW&S acquired  Rail express  systems  Limited
       ("Res"). The principal activity of Res is the carriage of letters for the
       Royal Mail, a division of the British Post Office.  On February 24, 1996,
       EW&S acquired British Rail's three trainload freight companies  ("TLFs"),
       Loadhaul Limited, Mainline Freight Limited and Transrail Freight Limited,
       the principal  activity of which is the hauling of bulk  commodities such
       as coal, iron, steel and aggregates throughout Great Britain.

       The Company  invested  approximately  $45 million for an approximate  32%
       ownership   interest  in  EW&S.   Of  this   amount,   WCI  had  invested
       approximately  $13.2 million through December 31, 1995 in connection with
       EW&S's  acquisition of Res.  During 1996,  EW&S sold shares to certain of
       its officers and directors  (including  certain officers and directors of
       the Company),  with the effect of reducing the Company's  equity interest
       to  approximately  31% as of  December  31,  1996.  The  Company has been
       granted performance-based options to acquire additional shares in EW&S to
       compensate it for its leadership of the consortium. In addition, EW&S has
       issued options to certain of its officers and directors,  and warrants to
       the investment  banking firm that  facilitated  the  acquisition of EW&S.
       Assuming  that all options and  warrants  are  exercised,  the  Company's
       equity interest in EW&S will be approximately 34%.

       In connection with the EW&S investment,  the Company loaned $13.2 million
       to Berkshire in December 1995 to  temporarily  finance its portion of the
       purchase price.  This loan earned interest at approximately  9.0% and was
       repaid on February 22, 1996, prior to the consummation of the purchase of
       the three TLFs.

       The Company is party to a Management  Services  Agreement with EW&S under
       which  the  Company  provides  management  services  to  EW&S,  including
       principally making available the services of three Company executives for
       full time  employment by EW&S,  training of EW&S personnel by the Company
       and  making  available  the  expertise  and  consulting  services  of the
       President  of the  Company.  Amounts  earned by the Company from EW&S for
       services  under the  Management  Services  Agreement  (not  including the
       services of the three Company  executives  who are paid directly by EW&S)
       were $1.6  million  in 1996.  The  Management  Services  Agreement  has a
       current term ending February 23, 1998, subject to extensions by agreement
       on a year to year basis.

       Four of the  directors of the Company are  directors  of, and hold shares
       and options of, EW&S.


                                       45

<PAGE>


          WISCONSIN CENTRAL TRANSPORTATION CORPORATION AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements



       Summary Financial Information

       The results of operations  and financial  position of Tranz Rail and EW&S
       prepared in conformity with U.S. generally accepted accounting principles
       are summarized below for the year ended December 31, 1996 (except for the
       TLFs which are for the period from February 24, 1996 through December 31,
       1996):

                                                   Tranz Rail        EW&S
                                                   ----------        ----
                                                        (in thousands)
       Condensed Income Statement Information:
            Operating revenues...................  $ 395,690    $   742,440
            Operating income.....................     76,279        135,051
            Net income...........................     37,384         71,810

       Condensed Balance Sheet Information:
            Current assets.......................  $  98,076    $   272,639
            Total assets.........................    455,475      1,012,794
            Current liabilities..................     58,506        242,459
            Total liabilities....................    182,303        772,499
            Total equity.........................    273,172        240,295


       EW&S's borrowing  arrangements  contain  provisions  which  substantially
       restrict its ability to transfer funds to the Company in the form of cash
       dividends,  loans and advances. Tranz Rail's net assets are not similarly
       restricted.

       The following  table  presents the Company's  investment in affiliates at
       December 31, 1996 and its equity in net income of affiliates for the year
       ended  December  31,  1996  (except for the TLFs which are for the period
       from February 24, 1996 through December 31, 1996):

                                                     Tranz Rail       EW&S
                                                     ----------       ----
                                                          (in thousands)

           Equity in net income of affiliates......   $  9,850      $ 22,827
           Investment in affiliates................   $ 39,991      $ 74,661


       The  Company's  retained  earnings  included  undistributed  earnings  of
       affiliates  of $54.4  million and $21.7  million at December 31, 1996 and
       1995, respectively.

(14)   Acquisitions

       Algoma Central

       On January 31,  1995,  the Company  consummated  the  acquisition  of the
       railway assets of Algoma Central  Corporation  ("ACC") which are operated
       by ACRI. ACRI consists of approximately  322 route miles of track between
       Sault  Ste.  Marie,  Ontario  and  Hearst,  Ontario.  The rail lines were
       purchased  for  approximately  $8.2  million,  financed  in  part  by the
       Province  of  Ontario,   through  the  Northern   Ontario  Heritage  Fund
       Corporation  ("Heritage  Fund"). The Heritage Fund's financing included a
       $0.7 million non-voting  preferred stock investment in ACRI. The Heritage
       Fund is not entitled to any dividends  for at least 10 years.  In related
       transactions,  the Company  acquired 879 railcars and 23 locomotives from
       ACC for approximately  $11.1 million,  and ACC's existing  communications
       system,  maintenance  and shop  equipment,  inventory  and  miscellaneous
       assets for $5.0 million. In connection with this acquisition, the Company
       incurred $0.9 million and $0.6 million of  acquisition  and  organization
       costs,  respectively.  The pro forma  effects on the  Company's  reported
       results assuming the ACRI acquisition was consummated at the beginning of
       1995 are not material.


                                       46

<PAGE>


          WISCONSIN CENTRAL TRANSPORTATION CORPORATION AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements



       Duck Creek North

       On January 27,  1997,  SSM  completed  the purchase of 207 route miles of
       railroad track and trackage  rights in Wisconsin and the Upper  Peninsula
       of Michigan  from the Union  Pacific  Railroad  Company.  The rail lines,
       commonly  known as the  "Duck  Creek  North"  lines,  include  contiguous
       property and  associated  facilities  from North Green Bay,  Wisconsin to
       Ishpeming,  Michigan;  from Powers to Antoine,  Michigan; from Quinnesec,
       Michigan to Niagara,  Wisconsin;  and from  Cascade to Palmer,  Michigan.
       Freight  shipments  over the lines  consist  of  materials  for the paper
       industry  and high  volumes  of iron ore used in  steel-making  which are
       shipped  from  the  Marquette   ore  range  to  Escanaba,   Michigan  for
       transshipment  to  vessels.  SSM will  continue  such  operations  in the
       future.  The purchase  price of the rail lines,  subject to certain final
       adjustments,  was approximately  $85.0 million,  which was funded through
       borrowings under the Revolver.

(15)   Contingencies

       Weyauwega Derailment

       On March 4, 1996,  the Company had a derailment in  Weyauwega,  Wisconsin
       involving  thirty-five  cars,  fourteen  of which  contained  propane  or
       liquified  petroleum  gas and two of  which  contained  sodium  hydroxide
       solution.  The total cost for the  derailment  is currently  estimated at
       $27.3  million.  The Company  believes that its  insurance  policies will
       cover  substantially  all these  costs,  in excess of the $2.5 million of
       deductibles,  due to the  derailment.  Through  December  31,  1996,  the
       Company had funded  $24.8  million in costs  incurred as a result of this
       derailment  and received $17.4 million in  reimbursements  from insurance
       companies. The Company's consolidated balance sheet includes an insurance
       receivable  of $7.4  million as of December  31,  1996.  During the first
       quarter of 1996, the Company  recorded a pretax provision of $2.5 million
       for the  combined  deductibles  under its property  damage and  liability
       insurance  policies.  A complaint  was filed against the Company on March
       26, 1996 by nine  individuals  seeking to represent  the class of persons
       who suffered damages as a result of this derailment.  The complaint seeks
       punitive and treble damages.  Any punitive damages and treble damages may
       not be covered by the Company's  insurance.  The Company does not believe
       there is any basis for an award of such damages.  All potential claimants
       were  notified,  and  thirteen  families  and two  businesses  joined the
       lawsuit.  Discovery  is ongoing.  In  addition,  one business has filed a
       separate suit for damages in the District Court of Waupaca County.  It is
       the opinion of management  that the  resolution of these matters will not
       have a material adverse effect on the Company's financial position.

       BOCT Complaint

       On June 4, 1993,  WCL was served with a complaint  filed by the Baltimore
       and Ohio Chicago Terminal  Railroad Company ("BOCT") in the United States
       District Court for the Northern  District of Illinois,  Eastern Division.
       In its  complaint,  the BOCT claimed that WCL owed BOCT for  intermediate
       switching and car hire reclaim charges allegedly  incurred from July 1988
       through  February  1993.  Arbitration  hearings were held in Chicago from
       October 24, 1995 to November 9, 1995. On June 10, 1996,  the  arbitration
       panel ruled in favor of BOCT. The arbitration panel's ruling awarded BOCT
       $16.8  million of disputed  switching and car hire reclaim  charges,  and
       $2.5 million of interest relating to such charges.

                                       47

<PAGE>


          WISCONSIN CENTRAL TRANSPORTATION CORPORATION AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements



       Based upon the arbitration  panel's ruling,  the Company  recorded pretax
       provisions  of $15.8  million in 1996,  representing  amounts  awarded in
       excess of  previously  recorded  accruals.  Additional  interest  through
       December  31, 1996 of $417  thousand has been accrued on the unpaid award
       amount and is included in other interest expense in the 1996 consolidated
       statement of income.

       The litigation between BOCT and the Company continues.  The U.S. District
       Court has  affirmed  the  arbitration  award and also  authorized  WCL to
       pursue  the  defenses  that were not  subject to  arbitration,  including
       claims to be brought before the Surface Transportation Board.

       Waukesha

       On April 2, 1996,  WCL  received a request  for  documents  from the U.S.
       Department  of  Justice  ("DOJ")  requesting  documents  relating  to the
       demolition  of a foundry  and  roundhouse  on the  Company's  property in
       Waukesha, Wisconsin,  performed by contractors for WCL in 1993. A request
       for  additional  documents  was received on November  21,  1996.  WCL has
       complied with the requests. Previously, in March 1994, WCL had received a
       notice of  violation  of the Clean Air Act (the  "Act") and the  National
       Emission  Standard  for  Asbestos  (the  "Asbestos  NESHAP")  promulgated
       thereunder from the U.S.  Environmental  Protection  Agency  ("USEPA") in
       connection with the  demolition.  The USEPA held a conference with WCL on
       April 11,  1994 to discuss  the notice  prior to a  determination  of any
       enforcement  action to be taken under  section 113 of the Act. If the DOJ
       or the USEPA  determines  that an action  should be brought  against  the
       Company,  the Company will  vigorously  defend  itself.  If it were to be
       determined that WCL violated the Asbestos NESHAP, WCL could be subject to
       criminal  prosecution  with fines of up to $500 thousand per violation or
       civil  enforcement  with  fines  of up to $25  thousand  per day for each
       violation.

       Property Tax Dispute

       In October  1995,  the Circuit  Court of Dane County  ruled in favor of a
       Wisconsin  Department  of  Revenue  ("WDR")  retroactive   assessment  of
       personal  property  taxes for the tax years 1990 through 1993 against all
       Wisconsin railroads, including WCL and FV&W. WCTC and the other railroads
       involved  are  pursuing  the  remaining  issues in the case and intend to
       appeal the statutory law rulings.  As a result of the ruling, the Company
       recognized the $3.0 million  retroactive  assessment,  as well as accrued
       interest of $0.7 million,  in its 1995 consolidated  statement of income.
       The  railroads,  including  WCL and FV&W,  have also filed suits in state
       courts which allege  discrimination  in the assessment of taxes.  WCL and
       FV&W have  separately  filed  suit  challenging  other WDR tax  valuation
       practices with respect to their 1994, 1995 and 1996 tax bills.

       Other

       The  Company  is  involved  in various  other  legal  actions,  including
       personal injury,  property damage and environmental clean up matters. The
       Company has also been  identified as a potentially  responsible  party by
       various  Federal and state  authorities  for remediation of various waste
       disposal  sites.  While the final  outcome with respect to these  matters
       cannot be predicted with certainty,  it is the opinion of management that
       their resolution will not have a material adverse effect on the Company's
       financial position.


                                       48

<PAGE>


          WISCONSIN CENTRAL TRANSPORTATION CORPORATION AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements



(16)   Unaudited Quarterly Financial Data

<TABLE>
<CAPTION>

                                        First        Second            Third         Fourth
                                       Quarter       Quarter          Quarter        Quarter        Year
                                       -------       -------          -------        -------        ----
                                                (in thousands, except per share amounts)
<S>                                   <C>            <C>              <C>            <C>            <C>       
       1996:
         Operating revenues.........  $  65,028      $  56,204 <F1>   $ 71,825       $  69,103      $  262,160
         Operating income...........      4,415<F2>      1,570 <F1>     16,922          12,865          35,772
         Income before
           extraordinary item.......      8,066<F2>      7,528 <F1>     17,071          17,369          50,034
         Net income.................      8,066<F2>      7,528 <F1>     17,071          15,767<F3>      48,432
         Earnings per common
           share....................       0.16<F2>       0.15 <F1>       0.34            0.31<F3>        0.96
       1995:
         Operating revenues.........  $  62,897      $  64,254        $ 69,890       $  66,386      $  263,427
         Operating income...........     13,917         16,225          17,845          15,472          63,459
         Income before
           extraordinary item.......      9,865         12,165          11,036          11,566          44,632
         Net income.................      9,865         12,165           8,913 <F4>     11,566          42,509
         Earnings per common
           share....................       0.20           0.24            0.18 <F4>       0.23            0.85

<FN>
----------------
       <F1>   Includes a reduction of operating  revenues of $13,278  related to
              the June 10, 1996 arbitration ruling in favor of BOCT for disputed
              switching  charges.  Interest  charges  of $2,493 on the  disputed
              charges were also recognized at this time. Combined, the effect of
              the disputed  switching  charges and related  interest reduced net
              income by $9,526,  or $0.19 per common share in the second quarter
              (See Note 15 - Contingencies).
       <F2>   Includes a pretax  provision  of  $2,500,  or a  reduction  of net
              income of $1,510 or $0.03 per  common  share,  to cover  insurance
              policy  deductibles  related  to the March 4, 1996  derailment  at
              Weyauwega, Wisconsin (See Note 15 - Contingencies).
       <F3>   Includes an  extraordinary  charge of $1,602,  or $0.03 per common
              share (net of income  taxes),  in  connection  with the  Company's
              early repayment of debt (See Note 3 - Extraordinary Items).
       <F4>   Includes  an  extraordinary  charge of $2,123 or $0.04 per  common
              share (net of income taxes) in connection with the Company's early
              repayment   of  debt   (See   Note  3  -   Extraordinary   Items).
              Additionally,  operating  income  is net of a  $3,030  retroactive
              property  tax  assessment  for  the  years  1990 - 1993  from  the
              Wisconsin   Department  of  Revenue.   Interest  of  $727  on  the
              assessment  was  also  recognized.  Combined,  the  effect  of the
              property tax assessment and related interest reduced net income by
              $2,273 (See Note 15 - Contingencies).
</FN>
</TABLE>


                                       49

<PAGE>



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

     None.


                                    PART III


ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

     See "Executive  Officers of the Registrant" in Part I above for information
regarding  executive  officers of the Company.  The remainder of the information
required  by  Item  10 is  incorporated  by  reference  to the  Company's  proxy
statement to be filed pursuant to Regulation 14A.


ITEM 11. EXECUTIVE COMPENSATION

     Incorporated  by reference  to the  Company's  proxy  statement to be filed
pursuant to Regulation 14A.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     Incorporated  by reference  to the  Company's  proxy  statement to be filed
pursuant to Regulation 14A.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     Incorporated  by reference  to the  Company's  proxy  statement to be filed
pursuant to Regulation 14A.



                                       50

<PAGE>



                                     PART IV


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

     The following documents are filed as a part of this Report:


                                                                       Location
                                                                       --------
         (a)  (1) Financial Statements

            Consolidated Balance Sheets................................. 30-31
            Consolidated Statements of Income...........................    32
            Consolidated Statements of Changes in Stockholders' Equity..    33
            Consolidated Statements of Cash Flows.......................    34
            Notes to Consolidated Financial Statements.................. 35-49


              (2) Schedules

                      All schedules  have been omitted as not  applicable or not
                      required or because the  information  required to be shown
                      therein is included in the  financial  statements or notes
                      thereto.


              (3) Exhibits

                      The  exhibits  set  forth  in the  accompanying  Index  to
                      Exhibits are filed as a part of this report.


         (b) Reports on Form 8-K filed  during the quarter  ended  December  31,
             1996.

                      The  Company  filed  no  reports  on Form 8-K  during  the
                      quarter ended December 31, 1996.

                                       51

<PAGE>



                                   SIGNATURES

     Pursuant to the requirements of Section 13 or 15(d) the Securities Exchange
Act of 1934,  the  registrant  has duly  caused  this report to be signed on its
behalf by the undersigned, thereunto duly authorized.


                                      WISCONSIN CENTRAL TRANSPORTATION
                                      CORPORATION
                                      (Registrant)


                                      By:     /s/ Edward A. Burkhardt 
                                              Edward A. Burkhardt, President
                                               and Chief Executive Officer

                                      Date:   March 21, 1997

     Pursuant to the  requirements of the Securities  Exchange Act of 1934, this
report has been signed by the following  persons on behalf of the registrant and
in the capacities and on the dates indicated.


                  Signature                                  Title



By:     /s/ Edward A. Burkhardt           President, Chief Executive Officer 
        (Edward A. Burkhardt)               and Director
                                          (Principal Executive Officer)

Date:   March 21, 1997



By:     /s/ Thomas F. Power, Jr.          Executive Vice President, 
        (Thomas F. Power, Jr.)              Chief Financial Officer and Director
                                          (Principal Financial Officer)

Date:   March 21, 1997



By:     /s/ Walter C. Kelly                Vice President, Finance 
        (Walter C. Kelly)                  (Principal Accounting Officer)

Date:   March 21, 1997



By:     /s/ Thomas W. Rissman              Director
        (Thomas W. Rissman)

Date:   March 21, 1997



By:     /s/ Carl Ferenbach                 Director
        (Carl Ferenbach)

Date:   March 21, 1997



                                       52

<PAGE>






                                INDEX TO EXHIBITS


   Exhibit No.                            Description
   -----------                            -----------

       3            ARTICLES OF INCORPORATION AND BY-LAWS

       3(a)         Restated Certificate of Incorporation of the registrant,  as
                    amended   (Incorporated   by   reference  to  Exhibit  3  to
                    registrant's  Quarterly  Report on Form 10-Q for the quarter
                    ended June 30, 1996)

       3(b)         By-laws of the registrant,  as amended to date (Incorporated
                    by reference to Exhibit 3(a) to  registrant's  Annual Report
                    on Form 10-K for the fiscal year ended December 31, 1991)

       4            INSTRUMENTS   DEFINING  THE  RIGHTS  OF  SECURITY   HOLDERS,
                    INCLUDING INDENTURES

       4(a)         Credit  Agreement  dated  as  of  November  21,  1994  among
                    registrant,  Bank of  America  National  Trust  and  Savings
                    Association and the Banks signatory thereto (Incorporated by
                    reference to Exhibit 4(a) to  Registrant's  Annual Report on
                    Form 10-K for the fiscal year ended  December 31, 1994) (see
                    Exhibits 4(b) and (c) for subsequent amendment)

       4(b)         Amendment No. 1, dated as of October 23, 1995, to the Credit
                    Agreement filed as Exhibit 4(a)  (Incorporated  by reference
                    to Exhibit 4(c) to  registrant's  Annual Report on Form 10-K
                    for the fiscal year ended December 31, 1995)

       4(c)         Second  Amendment,  dated as of December  17,  1996,  to the
                    Credit Agreement filed as Exhibit 4(a)

                    Pursuant  to  Item   601(b)(4)(iii)(A)  of  Regulation  S-K,
                    registrant  is not filing  any  instrument  with  respect to
                    long-term  debt  in  cases  in  which  the  amount  of  debt
                    securities  authorized  under the instrument does not exceed
                    10 percent  of the total  assets of  registrant.  Registrant
                    agrees  to  furnish a copy of each  such  instrument  to the
                    Commission upon request.


       10           MATERIAL CONTRACTS

       10(a)        Director Stock Option Plan (compensatory plan or arrangement
                    identified  as such  pursuant to Item 14(a)(3) of Form 10-K)
                    (Incorporated  by reference  to Exhibit 4.1 to  registrant's
                    Registration   Statement  on  Form  S-8   (Registration  No.
                    33-84088)  filed under the  Securities  Act on September 19,
                    1994)

       10(b)        Supplement to Director Stock Option Plan  (compensatory plan
                    or arrangement  identified as such pursuant to Item 14(a)(3)
                    of Form 10-K)  (Incorporated  by reference to Exhibit 4.2 to
                    registrant's    Registration    Statement    on   Form   S-8
                    (Registration  No.  33-84088) filed under the Securities Act
                    on September 19, 1994)

       10(c)        Long Term Deferred Compensation Plan of the registrant dated
                    December   9,  1993   (compensatory   plan  or   arrangement
                    identified  as such  pursuant to Item 14(a)(3) of Form 10-K)
                    (Incorporated by reference to Exhibit 10(jj) to registrant's
                    Annual  Report  on Form  10-K  for  the  fiscal  year  ended
                    December 31, 1993)

       10(d)        Key   Management   Stock  Option  Plan  of  the   registrant
                    (compensatory   plan  or  arrangement   identified  as  such
                    pursuant  to Item  14(a)(3) of Form 10-K)  (Incorporated  by
                    reference  to  Exhibit  10(s) to  registrant's  Registration
                    Statement  on Form S-1  (Registration  No.  33-39939)  filed
                    under  the  Securities  Act and  declared  effective  by the
                    Securities  and  Exchange  Commission  on May 21, 1991) (see
                    Exhibit 10 (e) for subsequent amendment)

       10(e)        Amendment No. 1, dated May 20, 1993, to Key Management Stock
                    Option Plan (amending Key Management Stock Option Plan filed
                    as  Exhibit   10(d))   (compensatory   plan  or  arrangement
                    identified  as such  pursuant to Item 14(a)(3) of Form 10-K)
                    (Incorporated by reference to Exhibit 10(ii) to registrant's
                    Annual  Report  on Form  10-K  for  the  fiscal  year  ended
                    December 31, 1993)

       10(f)        Management  Incentive  Compensation  Plan of the  registrant
                    (compensatory   plan  or  arrangement   identified  as  such
                    pursuant  to Item  14(a)(3) of Form 10-K)  (Incorporated  by
                    reference to Exhibit 10(t) to registrant's  Annual Report on
                    Form 10-K for the fiscal year ended December 31, 1993)


                                       53

<PAGE>




    Exhibit No.                           Description
    -----------                           -----------

       10(g)        Stockholders  Agreement of the registrant  dated October 11,
                    1987 as amended April 1, 1991  (Incorporated by reference to
                    Exhibit 10(q) to registrant's Registration Statement on Form
                    S-1  (Registration  No. 33-39939) filed under the Securities
                    Act and declared  effective by the  Securities  and Exchange
                    Commission on May 21, 1991)(see Exhibit 10(h) for subsequent
                    amendment)

       10(h)        Amendment No. 2 to Stockholders  Agreement dated as of April
                    1, 1992 (amending  Stockholders  Agreement  filed as Exhibit
                    10(g))  (Incorporated  by  reference  to  Exhibit  10(aa) to
                    registrant's    Registration    Statement    on   Form   S-1
                    (Registration  No.  33-52022) filed under the Securities Act
                    and  declared  effective by the  Commission  on December 14,
                    1992)

       10(i)        Asset  Purchase  Agreement  dated as of  November  30,  1996
                    between Union Pacific  Railroad Company and Sault Ste. Marie
                    Bridge Company


       11           STATEMENT RE COMPUTATION OF PER SHARE EARNINGS

       11           Statement re Computation of per Share Earnings


       21           SUBSIDIARIES OF THE REGISTRANT

       21           Subsidiaries of Wisconsin Central Transportation Corporation
                    (Incorporated  by  reference  to Exhibit 21 to  registrant's
                    Annual  Report  on Form  10-K  for  the  fiscal  year  ended
                    December 31, 1995)

       23           CONSENTS OF EXPERTS AND COUNSEL

       23           Consent of KPMG Peat Marwick LLP

       27           FINANCIAL DATA SCHEDULE

       27           Financial Data Schedule




                                       54