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

                                   ----------

                                   FORM 10-KSB

                 ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE
                         SECURITIES EXCHANGE ACT OF 1934

   For the fiscal year ended December 31, 1996   Commission File Number 0-20618
                                   ----------

                                RAILAMERICA, INC.
                                -----------------
                 (Name of small business issuer in its charter)

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

       301 Yamato Road, Suite 1190
           Boca Raton, Florida                                33431
       ---------------------------                            -----
(Address of principal executive offices)                   (Zip Code)

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

        Securities Registered Pursuant to Section 12(b) of the Act: None
           Securities Registered Pursuant to Section 12(g) of the Act:
                          Common Stock, $.001 Par Value
                    Class B Callable Stock Purchase Warrants

         Check whether the issuer (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.
Yes  X    No
    ---      ---

         Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. ( )

         The registrant's revenues for the fiscal year ended December 31, 1996
were $25,658,241.

         The aggregate market value of the voting stock held by non-affiliates
of the registrant as of March 28, 1997 computed by reference to the high/ask and
low/bid prices of registrant's common stock reported on NASDAQ on such date was
$31,451,000.

         The number of shares outstanding of registrant's Common Stock, $.001
par value per share, as of March 28, 1997 was 7,958,417

DOCUMENTS INCORPORATED BY REFERENCE

 None.


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PART I

ITEM 1.  DESCRIPTION OF BUSINESS

GENERAL

         RailAmerica, Inc. (together with its consolidated subsidiaries, the
"Company") is a multi- modal transportation company that acquires, develops and
operates shortline railroads formed primarily through the acquisition of light
density rail lines from larger railroads. The Company has expanded its
operations in the transportation industry through its acquisition of
Kalyn/Siebert, Inc. ("Kalyn"), a manufacturer of a broad range of truck
trailers, located in Gatesville, Texas. Through Kalyn, the Company has
established trailer manufacturing operations and substantially increased the
Company's assets, liabilities, revenue, expenses and income.

         The Company's objectives are to create a diversified transportation
company by acquiring additional railroads and other transportation-related
companies. In accordance with this strategy, in June 1996, the Company acquired
approximately 40 miles of rail line in the state of Indiana; in September 1996,
the Company acquired 131 miles of rail line in north central Washington; in
October 1996, the Company acquired all of the issued and outstanding stock of
Otter Tail Valley Railroad Inc. ("OTVR"), a short line railroad headquartered in
Fergus Falls, Minnesota; in November 1996, the Company acquired substantially
all of the assets and business of the Gettysburg Railroad in southern
Pennsylvania; and in December 1996 the Company acquired approximately 204 miles
of rail line in northern Minnesota. In addition, in February 1997, the Company
purchased a majority interest in the stock of Empressa de Transporte Ferrovario
S.A. ("Ferronor"), a railroad serving northern Chile with approximately 1,400
miles of rail line.

         The Company's business presently is conducted through twenty
wholly-owned consolidated subsidiaries - Huron and Eastern Railway Company, Inc.
("HESR"), Saginaw Valley Railway Company, Inc. ("SGVY"), Kalyn, OTVR, South
Central Tennessee Railroad Corporation ("SCTR"), Huron Distribution Services,
Inc. ("HDS"), Delaware Valley Railway Company, Inc. ("DVRC"), RailAmerica
Intermodal Services, Inc. ("RIS"), RailAmerica Carriers, Inc. ("RAC"), Prairie
Holding Corporation ("PHC"), Dakota Rail, Inc. ("Dakota Rail"), RailAmerica
Equipment Corporation ("REC"), West Texas and Lubbock Railroad Company, Inc.
("WTLR"), Plainview Terminal Company ("PTC"), Cascade and Columbia River
Railroad, Inc. ("CCRR"), Gettysburg Scenic Rail Tours, Inc., Evansville Terminal
Company ("ETC"), Minnesota Northern Railroad, Inc. ("MNR"), RailAmerica de
Chile, S.A and Steel City Carriers, Inc. ("Steel City Carriers"). All references
to the operations of the "Company" discussed in this Form 10-KSB describe the
operations of its subsidiaries. All of the Company's revenue from continuing
operations for 1995 was derived from the operations of HESR, SGVY, Kalyn, DVRC,
SCTR, Dakota Rail, WTLR, PTC.

         The Company was incorporated in Delaware on March 31, 1992 to acquire
all of the outstanding capital stock of two pre-existing railroad companies -
HESR and SGVY. Over the last two and a half years, the Company has completed 13
acquisitions, including numerous short line railroads and other

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transportation related companies. These acquisitions have been integrated into
the Company's current operations and serve as a platform for the historical
growth experienced by the Company. The Company's principal executive office is
located at 301 Yamato Road, Suite 1190, Boca Raton, Florida 33431, and its
telephone number at that location is (561) 994-6015.

RAILROAD OPERATIONS

         The Company's railroad subsidiaries operated approximately 930 miles
and 450 miles of rail line as of December 31, 1996 and 1995, respectively.
Currently, the Company's rail lines consist of: (i) 136 miles of rail line which
it owns in Michigan; (ii) 4 miles of trackage rights and 45 miles of rail line
which are owned by the State of Michigan and operated pursuant to an agreement
with Michigan Department of Transportation; (iii) 49 miles of rail line leased
from the South Central Tennessee Railroad Authority near Nashville, Tennessee
and 3 miles of trackage rights; (iv) 45 miles of rail line in Pennsylvania, 18
miles of which the Company has agreed to purchase from the Commonwealth of
Pennsylvania for a price to be determined and 27 miles of which are operated
under a freight easement with the Commonwealth of Pennsylvania; (v) 10 miles of
rail line in Delaware made available to Company pursuant to a ten-year lease
with the Wilmington & Northern Railroad Company; (vi) 44 miles of rail line
which the Company is operating pursuant to a contract with the State of
Minnesota; (vii) 104 miles of rail line and 4 miles of trackage rights in West
Texas; (viii) 51 miles of rail line in the state of Indiana, 18 miles of which
it owns and 33 miles of which it operates under an operating agreement; (ix) 131
miles of rail line which it owns in the state of Washington; (x) 23 miles of
rail line which it owns in southern Pennsylvania; (xi) 72 miles of rail line
which it owns in central Minnesota; and (xii) 174 miles of rail line it owns in
northern Minnesota and 37 miles of trackage rights.

         In February 1997, the Company acquired a majority interest in the stock
of Ferronor, which operates approximately 1,400 miles of rail line in northern
Chile.

         The Company provides it customers with local rail freight services with
access to the nation's rail system for delivery of products both domestically
and internationally. The Company hauls products for its customers based upon
market demands in its local operating areas. The Company's haulage of products
in Michigan include agricultural commodities, automotive parts, chemicals and
fertilizer, ballast and other stone products. The Company's haulage of products
in Tennessee includes wood chips, paper, chemicals and processed food products.
The Company's haulage of products in Pennsylvania and Delaware includes iron and
steel products, chemicals, agricultural products, lumber and processed food
products. The Company's haulage of products in Minnesota includes plastics,
lumber, denatured alcohol, coal, scrap iron and steel. The Company's haulage of
products in Texas consists of cotton, sodium sulfate, chemicals, fertilizer,
scrap iron and steel. The Company's haulage of products in Indiana consists of
agricultural commodities and plastics. The Company's haulage of products in
Washington consist of woodchips, lumber, minerals, cement and various
agricultural products.

         In keeping with the general nature of business in the Michigan, Texas
and Minnesota market areas, agricultural commodities have represented a
significant portion of the Company's

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annual carloadings. Although the acquisition of SCTR, DVRC, Dakota Rail, WTLR,
PTC, and CCRR have helped to diversify the Company's traffic base and mitigate
seasonal fluctuations, the Company believes that, absent additional acquisitions
in industrial areas, agricultural commodities will continue to represent the
primary component of the Company's rail traffic base. As a result, the Company's
operations could be materially and adversely affected by factors such as adverse
weather conditions and fluctuations in grain prices. Additionally, sellers of
commodities tend to hold shipments if they anticipate price increases for their
commodities. Such actions could cause the Company's results of operations to
fluctuate from period to period as a result of fluctuations in the prices of
those commodities. Moreover, agricultural commodities are generally shipped from
September to May and the Company handles most of its traffic during such
periods. The Company anticipates that in the future the acquisition of Ferronor
will help insulate it from its dependence on agricultural commodities.

         ACQUISITION OF EVANSVILLE TERMINAL COMPANY. On June 30, 1996, the
Company acquired 40 miles of rail line in the state of Indiana. The Company
simultaneously sold approximately 22 miles of the rail line to an unrelated
party and sold a railcar repair shop which was located along the rail line to
another unrelated party. The Company continues to own the remaining 18 miles of
rail line and operates the 22 miles pursuant to an operating agreement through a
newly formed subsidiary ETC. Such rail lines are used to haul primarily
agricultural products and plastics.

         ACQUISITION OF CASCADE AND COLUMBIA RIVER RAILROAD. On September 6,
1996, the Company, through its newly formed subsidiary CCRR, completed the
purchase of a 131 mile rail line in north central Washington from Burlington
Northern Sante Fe ("BNSF"). The line extends from Oroville to Wenatchee,
Washington, were it interchanges with BNSF. Such rail line is used to carry
primarily woodchips, lumber, minerals, cement and agricultural products.

         ACQUISITION OF OTTER TAIL VALLEY RAILROAD, INC. Effective October 1,
1996 the Company, through its wholly-owned subsidiary Dakota Rail, Inc.,
acquired all of the outstanding stock of OTVR. OTVR operates a 72 mile freight
rail line in western Minnesota from Fergus Falls, MN to an interchange with BNSF
near Fargo, North Dakota. Such rail line is used to carry primarily coal, grain
and fertilizer.

         ACQUISITION OF GETTYSBURG RAILROAD. In November 1996, the Company,
through its wholly owned subsidiary DVRC, acquired substantially all of the
assets and business of the Gettysburg Railroad Company. The new Gettysburg
Railway operates 23 miles of rail line in south central Pennsylvania between
Gettysburg and Mount Holly Springs, and interchanges freight traffic with both
Conrail and CSX Transportation. Such line is used to carry primarily
agricultural commodities, canned goods, food and paper products and chemicals.

         As part of the transaction, the Company has also acquired an existing
scenic rail tour business, which will be managed by the Company's newly-formed
subsidiary, Gettysburg Scenic Rail Tours ("Scenic"). It is anticipated that
Scenic will commence the proposed rail tour excursions in the Spring of 1997.

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         ACQUISITION OF MINNESOTA NORTHERN RAILROAD. In December 1996, the
Company, through its newly formed subsidiary MNR, completed the purchase of a
cluster of rail lines in and around Crookston, Minnesota from BNSF. MNR operates
over 241 miles of track (including 37 miles of trackage rights), with traffic
from these lines interchanged with BNSF at Crookston.

         These lines, which serve northwestern Minnesota, extend north to
Warroad, near the Canadian border and as far south as Perley, near Fargo, North
Dakota. Rail traffic handled on these lines consists of agricultural products,
primarily grains and fertilizer, as well as aggregates, and coal.

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

         Ferronor operates the only north-south railroad in northern Chile,
extending from La Calera near Santiago, where it connects with Chile's southern
railway, Ferrocarril del Pacifico, S.A., to its northern terminus at Iquique,
approximately 120 miles south of the Peruvian border. It also operates several
east-west branch lines that link a number of iron, copper and limestone mines
and production facilities with several Chilean Pacific port cities. Ferronor
also serves Argentina and Bolivia through traffic interchanged with the General
Belgrano Railroad and the Ferrocarriles Antofagasta Bolivia.

         Ferronor currently operates approximately 30 locomotives and 700 rail
cars. Ferronor employed approximately 350 people as of the date of acquisition.
As contemplated by management, significant reductions in the work force are
being effectuated.

         COMPETITION. The Company's primary source of competition in its rail
operations comes from over-the-road trucks. While the Company must build or
acquire and maintain its rail system, trucks are able to use public roadways.
Any future expenditures materially increasing the roadway system in the
Company's present or proposed areas of operation (or legislation granting
materially greater latitude for trucks with respect to size or weight
limitations) could have a significant adverse effect on the Company's
competitiveness and results of operations.

TRAILER MANUFACTURING OPERATIONS

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

         Kalyn currently offers over 40 standard trailer models in approximately
100 different variations. The light and medium trailer category consists of a
diverse group of products. The

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trailer types in this category, ranked by sales volume, include mini-platform,
utility, gooseneck, agricultural, hydraulic dump, specialized concession
trailers and vans, and tilt and fork lift trailers.

         Since Kalyn's acquisition of Siebert Trailers, Inc. ("Siebert") in
1991, Kalyn's product mix has shifted towards sales of heavy equipment and
specialty trailers. Previously located in Stockton, California, Siebert
manufactured a highly specialized detachable gooseneck trailer constructed of
high yield steel. The Siebert products include up to 300-ton capacity units. The
trailer types in the heavy equipment category, ranked by historical sales
volume, include specialized trailers (such as car haulers, truck haulers, and
jeep haulers), fixed neck lowbed, detachable lowbed, flats and platforms, drops
and double drops, folding neck low-bed, and used trailers.

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

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

         As a consequence of significant increases in sales order volume, during
1995 Kalyn expanded its manufacturing facility to partially address this
increased demand by building additional manufacturing space upon land that Kalyn
owns. The expansion was also completed to accommodate the receipt of a contract
with the U.S. Army Tank Automotive Command ("TACOM") pursuant to which Kalyn has
agreed to exclusively produce over a three-year period all of TACOM's
requirements for twelve-ton, tactical semi-trailer vans ("Tactical Vans"). TACOM
has advised Kalyn that over the term of this agreement, orders could be placed
for up to approximately 345 Tactical Vans, which could generate sales of up to
approximately $27 million. In February 1996, Kalyn was awarded an additional
requirements contract by TACOM. Pursuant to the terms of such agreements, TACOM
is not required to purchase a minimum number of Tactical Vans or other trailers.
During 1996, Kalyn also built a new paint booth building to accommodate the
additional volume of trailer orders. Kalyn's plant is currently operating one
shift, although Kalyn believes manufacturing capacity can be increased by adding
a partial second shift.

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


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         CUSTOMERS. Kalyn serves a variety of customers in a range of
industries. Since 1990, commercial accounts have represented approximately 60%
to 70% of sales, with military or governmental agency sales representing the
balance. During 1995 and 1996, sales to governmental agencies, including TACOM,
represented 29% and 20% of Kalyn's revenue, respectively while sales to
commercial accounts represented 71% and 80%, respectively, of Kalyn's revenues.

         The majority of sales in the government segment are to the General
Services Administration ("GSA"), the purchasing arm of most non-military
agencies, and to TACOM, a Department of Defense unit established to consolidate
purchases for various branches of the military. Kalyn has been awarded "Blue
Ribbon Contractor" status which provides Kalyn with a 10% preference on bids for
certain contracts.

         BACKLOG. As of December 31, 1996 and March 27, 1997, the Company's
backlog of orders was approximately $8.6 million and $13.0 million,
respectively, compared to $3.4 million and $10.7 million as of December 31, 1995
and March 1, 1996, respectively. Substantially all of the backlog at March 27,
1997 represented orders under the TACOM agreements. Kalyn includes in its
backlog only those orders for trailers for which a confirmed customer order has
been received. Kalyn manufactures trailers mostly to customer or dealer orders
and does not typically maintain an inventory of "stock" trailers in anticipation
of future orders.

         DISTRIBUTION AND MARKETING. Kalyn sells through a dealer base
consisting of approximately 170 independent dealers in 49 states, Canada and
Mexico. Historically, as much as 50% of all of Kalyn's commercial sales are to
dealers, with the balance representing direct retail sales by its sales force.
Kalyn's sales staff consists of a vice president, four sales managers, an
advertising manager and three additional employees. The sales staff is supported
by two registered mechanical design engineers and five draftsmen. Historically,
Kalyn's dealers have not inventoried Kalyn trailers due to the broad variety of
specific options and trailer types. During 1995, certain dealers began
maintaining some inventory of Kalyn trailers.

         Sales leads are generated through publication advertising, literature
mailings, trade show exhibitions, dealers, repeat customers, and word-of-mouth.
Kalyn exhibits at approximately five trade shows per year. Kalyn's management
believes that these trade shows are effective in maintaining Kalyn's name and
reputation and developing sales leads.

         Additionally, Kalyn places advertisements in trade publications such as
Truck, Truckers USA, Texas Agriculture, Heavy Duty Trucks, Lifting and
Transportation, Overdrive, Equipment World and Truck Market News. In recent
years, Kalyn has shifted resources from advertising to
trade shows, which are more cost effective.

         During the first quarter of 1995, Kalyn entered into a Wholesale and
Retail Financing Agreement with Associates Commercial Corporation and Associates
Commercial Corporation of Canada, Ltd. to stimulate and facilitate the sale and
financing of its new and used trailers. Additionally, in December of 1996, the
Company entered into an Operating Agreement with NewCourt Financial Ltd. in
order to provide wholesale and retail financing for its dealers located in
Canada. Each of these agreements provides floor plan financing for eligible
dealers and lease

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and/or purchase financing for endmarket purchasers. Under certain circumstances,
these agreements also provide for the repurchase of products sold to customers
by Kalyn and contingent responsibility for certain expenses. To date, the
Company has not experienced any losses or been required to advance funds in
connection with these agreements.

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

MOTOR CARRIER OPERATIONS (DISCONTINUED OPERATIONS)

         On February 10, 1995, the Company acquired substantially all of the
assets of Steel City, a regional motor carrier located in Sault Ste. Marie,
Ontario, Canada. Steel City operates a fleet of approximately 120 tractors and
trailers, and currently serves more than 50 customers in the steel, paper and
lumber industries by transporting a broad variety of products within Canada and
between Canada and the United States, particularly Michigan, Ohio, Indiana, New
York, and Wisconsin. Steel City Carriers currently has 50 full-time employees,
as well as 32 independent contract drivers who own and operate their own
vehicles.

         For the years ended December 31, 1996 and 1995, one customer in the
Company's motor carrier division accounted for approximately 31% and 18%,
respectively, of the Company's motor carrier transportation revenue. For the
year ended December 31, 1996, a second customer accounted for approximately 14%
of the Company's motor carrier transportation revenue.

         Since the Company's acquisition of Steel City, its financial
performance and development have not met the Company's expectations.
Accordingly, in March 1997 the Company adopted a formal plan to dispose of its
motor carrier operations and refocus the Company's efforts on expanding its core
railroad business. The Company's Board of Directors approved this plan on March
20, 1997.

REGULATION

         OVERVIEW. In addition to environmental safety and other regulations
applicable to all businesses, the Company's railroad subsidiaries are subject to
regulation by various government agencies and regulations, including, among
others, (i) regulation by the Surface Transportation Board ("STB") and the
Federal Railroad Administration ("FRA"); (ii) certain labor related statutes
including the Railway Labor Act, Railroad Retirement Act, the Railroad
Unemployment Insurance Act, and the Federal Employer's Liability Act, and (iii)
regulation by agencies in the states in which the Company

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does business. Additionally, the Company is subject to STB regulation in
connection with the acquisition of new railroad properties. As a result of the
Staggers Rail Act amendments to the Interstate Commerce Act in 1980 and the
enactment of the ICC Termination Act of 1995, there has been a significant
relaxation in regulation governing rail carriers which management believes has
greatly simplified the purchase and sale of shortline railroad properties and
expedited the consummation of such transactions. The Company believes its
operations are in material compliance with all applicable regulations.

         STB. The STB has jurisdiction over, among other matters, the
construction, acquisition, or abandonment of rail lines, the consolidation or
merger of railroads, the assumption of control of one carrier (including
railroads and interstate motor and water carriers) by another carrier (or entity
controlling another carrier), the use by one railroad of another railroad's
tracks ("trackage rights"), the rates charged by railroads for their
transportation services, and the service of rail carriers. Legislation enacted
in 1995 replaced the Interstate Commerce Commission ("ICC") with the STB and
abolished labor protective conditions applicable to numerous types of rail
transactions. Today, most transactions involving shortline railroads are no
longer subject to protective conditions imposed by labor agencies. Certain types
of transactions involving mid-size "regional railroads" (annual revenues between
$20 million and $250 million) are still subject to limited labor protective
conditions for adversely affected employees (in absence of any other
arrangements negotiated between management and labor, affected employees receive
one year's severance pay for acquisition transactions).

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

         As a result of the 1980 Staggers Rail Act amendments, railroads
received considerable rate and market flexibility including the ability to
obtain wholesale exemptions from numerous provisions of the Interstate Commerce
Act. Under the Staggers Rail Act, all containerized and truck trailer traffic
handled by railroads was deregulated. On regulated traffic, railroads and
shippers are permitted to enter into contracts for rates and provision of
transportation services without the need to file tariffs. Moreover, on regulated
traffic, the Staggers Rail Act amendments have allowed railroads considerable
freedom to raise or lower rates without objection from captive shippers. While
the ICC termination retained maximum rate regulation on traffic over which
railroads have exclusive control, the new law relieved railroads from the
requirements of filing tariffs and rate contracts with the STB on all traffic
other than agricultural products.

         FUTURE OF THE STB. Under the ICC Termination Act the STB is presently
authorized through September 30, 1998. It is unclear whether the STB will be
reauthorized in its present form, whether its functions will be expanded to
include regulation of ocean shipping presently

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under the jurisdiction of the Federal Maritime Commission and to prescribe "open
access" for captive rail shippers such as utility companies, or whether the STB
will be disbanded and its functions split between the U.S. Departments of
Transportation and Justice.

         FRA. The FRA regulates railroad safety and equipment standards,
including track maintenance, handling of hazardous shipments, locomotive and
rail car inspection and repair requirements, and operating practices and crew
qualifications. The FRA recently abolished regulations allowing it to impose
user fees on rail carriers subject to its jurisdiction.

         STATES. Under the ICC Termination Act states lost their jurisdiction
over economic regulation of intrastate transportation. All states retain some
jurisdiction over safety related matters, including such matters as grade
crossings, bridges and track conditions. Local governments may have ordinances
regulating train speeds, noise and environmental issues.

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

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

         In August 1994, the Federal Aviation Administration Authorization Act
of 1994 (the "1994 FAA Act") became law. Effective January 1, 1995, the 1994 FAA
Act preempts certain state and local laws regulating the prices, routes or
services of motor carriers. The 1994 FAA Act does not limit the authority of a
state or other political subdivision to impose safety regulations or highway
route limitations or controls based on the size or weight of the motor vehicle,
the hazardous nature of cargo being transported by motor vehicles or financial
responsibility requirements relating to insurance and self-insurance
authorization. Although it is too early to evaluate fully the effect of the ICC
Termination Act and the 1994 FAA Act on the motor carrier industry or the
Company, it may ease the regulatory burden on certain aspects of the Company's
business and may increase price competition within inter and intrastate markets.


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EMPLOYEES; LABOR CONSIDERATIONS

         The Company currently has approximately 275 full-time employees in
North America and approximately 32 independent contract drivers. None of the
Company's employees are members of a union. The Company's railroad operations
are somewhat seasonal. Most agricultural shipments occur from September through
May, and much of the Company's track maintenance is performed in the summer
months. Temporary layoffs of personnel, hiring of part-time or short-term
employees, or use of independent contractors are sometimes required to adjust to
the seasonal nature of track maintenance work and other business requirements.
The Company currently has approximately 90 full-time employees in its railroad
operations.

         Kalyn currently has 120 full-time employees consisting of 28
administrative and sales personnel and 92 production workers. Kalyn's
administrative staff includes its four in-house salesmen and eight-person
engineering department.

         Steel City Carriers currently has approximately 50 full-time employees
consisting of 9 administrative staff, 15 mechanics, shop and yard workers and 26
drivers. Steel City Carriers also uses approximately 32 independent contract
drivers.

         Ferronor operated with approximately 350 employees as of the date that
the Company acquired majority ownership. As contemplated by management,
significant reductions in the work force are being effectuated. It is
anticipated that the work force will be reduced to between 150 and 200 full-time
employees by the end of the first year of operations.

ITEM 2. DESCRIPTION OF PROPERTY

MICHIGAN PROPERTIES

         The majority of the Company's 185 miles of Michigan rail line consists
of 90 pound or heavier welded and jointed rail. In 1995, the Company retired 10
miles of rail line that had been abandoned. In addition, a two mile segment of
85 pound jointed rail was replaced with heavier rail in connection with the
Company's 1996 capital improvement program. The Company anticipates that it will
replace an additional 2 miles of rail during 1997. The Company's track standards
allow for maximum operating speeds ranging from 10 m.p.h. to 25 m.p.h. The
Company owns approximately 1,260 acres of operating and non-operating real
estate in Michigan. The Company's Michigan rail properties serve as collateral
for the Company's financing with National Bank of Canada. (See Note 8 to Notes
to Consolidated Financial Statements)

         The Company maintains its Midwest regional headquarters office in a
building it leases in Saginaw, Michigan. The monthly payments under the lease
are $1,267 through December 1998. This facility houses management, staff,
engineering, accounting and marketing personnel. The Company also maintains an
operations center in a building it owns in Bad Axe, Michigan, which includes
equipment repair, track maintenance and real property management. The Company
owns a locomotive shop which was constructed in 1987, a maintenance-of-way

                                       11

<PAGE>   12



equipment repair building completed in 1989 and a warehouse facility now used as
a maintenance headquarters.

TENNESSEE PROPERTIES

         SCTR leases approximately 49 miles of rail line and approximately 450
acres of related real estate from the South Central Tennessee Railroad
Authority. The lease provides for base lease payments of $2,083 per month, plus
10% of taxable income of SCTR up to $100,000, and 15% of taxable income of SCTR
in excess of $100,000. The lease expires in October 1998 and upon expiration of
the lease term SCTR will acquire the leased property without further payment.
SCTR also has an option to acquire the property prior to expiration of the lease
term for $350,000 with a full credit allowed for rents paid under the lease.

         SCTR owns a locomotive shop and general office facility which houses
all of its operating personnel in Centerville, Tennessee. SCTR also owns related
maintenance and office equipment. The Company's rights to the lease of the SCTR
property, as well as the common stock of SCTR owned by the Company and SCTR's
other equipment, serve as collateral under the Company's financing with General
Electric Capital Corporation obtained in connection with the Company's
acquisition of SCTR. (See Note 8 to Notes to Consolidated Financial Statements).

DELAWARE AND PENNSYLVANIA PROPERTIES

         DVRC operates approximately 55 miles of rail line, of which 45 miles
are located in southeastern Pennsylvania, and 10 miles of contiguous line
extending into the State of Delaware, where the Company interchanges with CSX
Transportation at Elsmere, Delaware. The Pennsylvania rail line was operated
pursuant to an agreement between DVRC and the Commonwealth of Pennsylvania. The
rail line in Delaware was operated by DVRC pursuant to a 10-year lease with the
Wilmington & Northern Railroad Company. DVRC terminated that lease on June 30,
1996 and has since been operating over that rail segment on a month-to-month
basis. DVRC continues to receive grants from the Commonwealth for track
maintenance and improvements which require local matching. Such funds were
provided by DVRC in 1994 through 1996. In 1996, DVRC entered into a purchase
agreement to purchase a segment of the rail line owned by the Commonwealth of
Pennsylvania subject to a satisfactory appraised value.

         The Company owns approximately 23 miles of rail line, between
Gettysburg and Mt. Holly Springs, Pennsylvania. The total land owned is
approximately 169 acres. In addition to the rail line and land, the Company owns
two buildings in Gettysburg.

MINNESOTA PROPERTIES

         Dakota Rail operates approximately 44 miles of rail line, between
Hutchinson and Wayzata, Minnesota. The rail line is being purchased pursuant to
a contract for deed from the State of Minnesota. Dakota Rail also owns certain
non-operating real estate parcels. The total land owned by Dakota Rail both
operating and non-operating equals approximately 580 acres.

                                       12

<PAGE>   13



In addition to the rail line and land, Dakota Rail also owns six buildings
including two depots, two diesel houses and two other buildings.

         MNR currently owns approximately 174 miles of rail. The rail line
includes five branch lines, divided into seven segments in northern Minnesota.
MNR also owns approximately 2,600 acres of operating and non-operating land. MNR
sold approximately 30 miles of rail line in December 1996.

TEXAS RAILROAD PROPERTIES

         WTLR owns approximately 104 miles of rail line, extending from the City
of Lubbock to both Seagraves and Whiteface. WTLR sold approximately 9 miles of
rail line during 1996. The total land owned by WTLR is approximately 1,500
acres. PTC has operating rights over 4 miles of track owned by the Burlington
Northern and Santa Fe Railroad in Plainview, Texas. In addition to the rail line
and land, WTLR owns four buildings. These buildings consist of a one story
storefront office building used as the railroad general offices in Brownfield,
Texas, as well as a maintenance building and a storage shed, in Brownfield and a
polebarn in Lubbock. The Company's Texas railroad properties serve as collateral
for the Company's financing with National Bank of Canada. (See Note 8 to Notes
to Consolidated Financial Statements).

WASHINGTON RAILROAD PROPERTIES

         CCRR owns 131 miles of rail line, between Oroville and Wenatchee,
Washington. The total land owned by CCRR is approximately 1,600 acres. In
addition to the rail line and land, CCRR owns two buildings. These buildings
consist of an office building in Omak, Washington and a storage building in
Omak. The Company's Washington railroad properties serve as collateral for the
Company's financing with National Bank of Canada. (See Note 8 to Notes to
Consolidated Financial Statements).

INDIANA RAILROAD PROPERTY

         ETC owns approximately 18 miles of rail line in southern Indiana. ETC
operates an additional 33 miles of rail line pursuant to an operating agreement.

CHILEAN PROPERTY

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

         Ferronor operates the only north-south railroad in northern Chile,
extending from La Calera near Santiago, where it connects with Chile's southern
railway, Ferrocarril del Pacifico,

                                       13

<PAGE>   14



S.A., to its northern terminus at Iquique, approximately 120 miles south of the
Peruvian border. It also operates several east-west branch lines that link a
number of iron, copper and limestone mines and production facilities with
several Chilean Pacific port cities. Ferronor also serves Argentina and Bolivia
through traffic interchanged with the General Belgrano Railroad and the
Ferrocarriles Antofagasta Bolivia.


TEXAS MANUFACTURING PROPERTIES

         Kalyn's manufacturing operations are conducted in thirteen Company
owned buildings, totaling approximately 198,000 square feet on an 25.5-acre
site, which were constructed over the period from 1969 to 1996. Kalyn expanded
its manufacturing facility during 1995 and 1996. The Company's Texas
manufacturing properties serve as collateral for the Company's financing with
National Bank of Canada. (See Note 8 to Notes to Consolidated Financial
Statements). The Company expects that this site will be able to meet its
manufacturing goals in the foreseeable future.

ONTARIO PROPERTIES

         Steel City Carriers operates from a terminal it owns located in Sault
Ste. Marie, Ontario, Canada, which includes an office building housing
administrative and dispatch offices, fabricating and service and a shop
building. The service facility has three bays which provide adequate space for
repairs and maintenance of Steel City Carriers' tractors and trailers as well as
some owner-operators' tractors. A 5-1/2 acre lot provides adequate space for the
normal loading, unloading, movement and parking of tractors and trailers as well
as for temporarily storing and transferring some shipments. The Company's
Ontario properties serve as collateral for the Company's financing with National
Bank of Canada. (See Note 8 to Notes to Consolidated Financial Statements).

ROLLING STOCK

         As of December 31, 1996, the Company's domestic railroad rolling stock
consisted of 34 locomotives and 495 freight cars, some of which were owned and
some of which are leased from third parties. For most rail cars, the Company
pays no rental fees for their use and may retain such cars as long as the
Company demonstrates adequate utilization of the cars with connecting railroads
who must pay standard car hire charges for their use. The remainder of the cars
are subject to fixed monthly lease payments which are offset, in part, by fees
charged by the Company to connecting railroads and shippers. All of the
Company's locomotives are owned and serve as collateral under financing
agreements. (See Note 8 to Notes to Consolidated Financial Statements) The
Company also owns various other equipment used in the maintenance and operation
of its railroads. The following tables summarize the composition of the
Company's domestic railroad equipment fleet as of December 31, 1996:


                                       14

<PAGE>   15




<TABLE>
<CAPTION>
                              Freight Cars
                              ------------
Type                              Owned       Leased    Total
----                              -----       ------    -----
<S>                            <C>            <C>      <C>
Covered hopper cars                --          229      229
Tank cars                           98         --        98
Box cars                           --           80       80
Wood chip cars                     --           78       78
Flat cars                           10         --        10
                                   ---         ---      ---
                                   108         387      495
                                   ===         ===      ===
<CAPTION>
Horsepower/Unit                            Locomotives
---------------                            -----------
3000 and over                                   2
1500 to 2000                                   27
Under 1500                                      5
                                              ---
                                               34
                                              ===
</TABLE>

         As of March, 1, 1997 Ferronor operated approximately 30 locomotives and
700 rail cars in Chile.

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

ADMINISTRATIVE OFFICES

         The Company maintains its principal executive office in Boca Raton,
Florida. This office consists of approximately 3,600 square feet and is leased
through January 2001. The lease calls for monthly rental payments of
approximately $3,300 with annual increases. The Company signed an amendment to
the lease in the first quarter of 1997 which calls for the rental of an
additional approximately 3,000 square feet at such facility. It is anticipated
that this increased space will be ready for occupancy in May of 1997. In
addition, the Company maintains a corporate office in Alexandria, Virginia,
consisting of approximately 1,000 square feet and leased through March 1998,
with monthly rental payments of $1,459. The Company subleases a corporate office
in San Francisco, California, consisting of approximately 1,000 square feet and
leased through June 2001, with lease payments of approximately $550 per month.

ITEM 3. LEGAL PROCEEDINGS

         In the ordinary course of conducting its business, the Company becomes
involved in various legal actions and other claims some of which are currently
pending. Litigation is subject to many uncertainties, the outcome of individual
litigated matters is not predictable with

                                       15

<PAGE>   16



assurance, and it is reasonably possible that some of these matters may be
decided unfavorably to the Company. It is possible that the Company's financial
position, results of operations or cash flows could be materially affected by an
ultimate unfavorable outcome, if any, of such pending litigation. Other than
ordinary routine litigation incidental to the Company's business, no other
litigation exists, except as described below.

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

         No matters were submitted to a vote of security holders during the
fourth quarter of 1996.

                                       16

<PAGE>   17



PART II

ITEM 5.  MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

         Effective March 6, 1997 the Company's common stock began trading on the
Nasdaq National Market under the symbol "Rail". Prior to March 6, 1997, the
Company's common stock traded on the Nasdaq SmallCap Market tier of The Nasdaq
Stock Market. Set forth below is high and low bid information for the common
stock as reported on the NASDAQ system for each quarter of 1995 and 1996. All
such quotations reflect inter-dealer prices, without retail mark-up, mark-down
or commissions and may not reflect actual transactions.

<TABLE>
<CAPTION>
1995                                High Bid Price          Low Bid Price
----                                --------------          -------------
<S>                                   <C>                     <C>
First Quarter                         $  4 3/8                $ 2 15/16
Second Quarter                           5 1/4                  3 13/16
Third Quarter                            5 1/16                 3 1/2
Fourth Quarter                           4 5/32                 3 3/8

<CAPTION>
1996                                 High Bid Price         Low Bid Price
----                                 --------------         -------------
First Quarter                         $  4 1/16               $ 3 1/8
Second Quarter                           4 3/16                 3 3/16
Third Quarter                            4 3/8                  3 3/8
Fourth Quarter                           5 3/4                  4 1/8

<CAPTION>
1997                                 High Bid Price         Low Bid Price
----                                 --------------         -------------
First Quarter (through March 27)      $  6 1/8                $ 4 5/8


</TABLE>


     As of March 28, 1997, there were 290 holders of record of the common stock
and approximately 3,000 beneficial shareholders. The Company has never declared
or paid a dividend on its common stock. The ability of the Company to pay
dividends in the future will depend on, among other things, restrictive
covenants contained in loan or other agreements to which the Company may be
subject.


                                       17

<PAGE>   18



ITEM 6.  MANAGEMENT'S DISCUSSION AND ANALYSIS

GENERAL

         The results of operations of the Company for the year ended December
31, 1996 include the operations of ETC from July 1, 1996, CCRR from September 6,
1996, OTVR from October 1, 1996, Gettysburg Railway from November 18, 1996 and
MNR from December 28, 1996. The results of operations of the Company for the
year ended December 31, 1995 include the operations of Dakota Rail from
September 1, 1995 and WTLR and PTC from November 1, 1995. As a result, the
Company's financial position as of December 31, 1996 and its results of
operations for the years ended December 31, 1996 and 1995 are not comparable to
the prior year in certain material respects. In March 1997, the Company adopted
a formal plan to discontinue the operations of its motor carrier division. The
revenue and expenses for this division are not included in the consolidated
results of continuing operations of the Company for either 1996 or 1995. The
results of operations for the motor carrier division have been presented as
discontinued operations in the Company's 1996 and 1995 statements of income.

         The Company's revenues increased by $0.6 million, or 2.3%, from $25.1
million for the year ended December 31, 1995 to $25.7 million for the year ended
December 31, 1996. Operating expenses decreased by $0.1 million, or less than
one percent, from $21.9 million for the year ended December 31, 1995 to $21.8
million for the year ended December 31, 1996. Other expenses, net increased by
$1.0 million, or 87.8%, from $1.1 million for the year ended December 31, 1995
to $2.1 million for the year ended December 31, 1996. Income from continuing
operations remained fairly constant at $1.1 million from 1995 to 1996. Increases
in revenue, operating expenses, and other expenses were primarily due to the
acquisition of additional rail lines and related operations in 1995 and 1996.

         Primary earnings per share was $0.04 in 1995 compared to $0.10 in 1996.
Earnings per share in 1995 reflects a reduction of $666,665 to net income
available to common shareholders. Such reduction relates to a non-recurring
charge in connection with a deemed preferred stock dividend on the retirement of
such stock. On October 1, 1995, the Company was notified by the shareholders of
its redeemable convertible preferred stock of their intention to convert such
stock into shares of Common Stock. The Company redeemed the convertible
preferred stock at 97.5% of the then market value of the underlying common stock
for an aggregate redemption price of $1,666,665. The excess of the redemption
price over the book value of the preferred stock was deemed a non-recurring
dividend which reduced net income available to common shareholders by $666,665
or $0.14 per share.

         Set forth below is a discussion of the results of operations for the
Company's railroad operations, trailer manufacturing operations and motor
carrier operations (discontinued operations). The corporate overhead, which
benefits all of the Company's segments, has not been allocated to the business
segments for the purposes of this analysis. The Company believes that this
presentation facilitates a better understanding of the relevant changes in the
results of the Company's operations. Corporate overhead, which is included in
selling, general and administrative expenses in the consolidated statements of
income, increased by $483,000, or 24.1%, to $2.5 million in 1996 compared to
$2.0 million for

                                       18

<PAGE>   19



1995. The increase was related to the additional costs incurred to manage the
assets and businesses acquired during 1995 and 1996 including Dakota Rail, OTVR,
WTLR, PTC, ETC, CCRR, Gettysburg Railway and MNR. Certain corporate overhead was
also included in depreciation and amortization in the consolidated statements of
income. This depreciation and amortization increased by $51,000, or 213.9%, to
$75,000 in 1996 compared to $24,000 in 1995.

RESULTS OF RAILROAD OPERATIONS

         The following discussion reflects the consolidated results of the
Company's railroad operations for the years ended December 31, 1996 and 1995. As
a result of the acquisitions discussed above, the results of operations for the
years ended December 31, 1996 and 1995 are not comparable to the prior years in
certain material respects.

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

         The table below compares the components of the Company's revenues from
its railroad operations for the periods shown.

<TABLE>
<CAPTION>
                                                         For the Year Ended
                                  --------------------------------------------------------
                                       December 31, 1996              December 31, 1995
                                  ------------------------        ------------------------
                                      Gross       % Change           Gross        % Change
                                     Revenues    From 1995          Revenues     From 1994
                                  ------------   ---------        -----------    ---------
<S>                               <C>              <C>            <C>              <C>
Transportation revenues           $  9,783,041     44.6%          $ 6,767,530      34.5%

Other revenues                       1,921,160    340.0%              436,586     272.1%
                                  ------------                    -----------

Total revenues                    $ 11,704,201     62.5%          $ 7,204,116      39.9%
                                  ============                    ===========

</TABLE>



         TRANSPORTATION REVENUES. Transportation revenues for the year ended
December 31, 1996 increased by $3.0 million, or 44.6%, compared to the prior
year primarily due the acquisitions which occurred during 1996 and the second
half of 1995. WTLR, which was acquired in November 1995, had revenue of
approximately $255,000 for the two months ended December 31, 1995 and
approximately $1.8 million for 1996, an increase of $1.5 million. Dakota Rail,
which was acquired in September 1995, had revenue of approximately $230,000 for
the four months ended December 31, 1995 and $590,000 in 1996, an increase of
$360,000. CCRR, which was acquired in September 1996, had revenue of
approximately $750,000 in 1996. OTVR, which was acquired in October 1996, had
revenue of approximately $560,000 in 1996. In addition to the foregoing
acquisitions, SCTR's revenue increased by approximately $400,000 due to
increased carloads and demurrage earned from certain shippers, offset by a
decrease in HESR's revenue of approximately $796,000 due to a reduction in
carloads in the second half of 1996 compared to 1995. The transportation revenue
per carload increased from $366 in 1995 to $378 in 1996 due primarily to
increased rates and divisions of revenue with

                                       19

<PAGE>   20



connecting carriers. Carloads handled by the Company's railroads totaled 25,871
for the year ended December 31, 1996, an increase of 7,366, or 39.8%, compared
to 18,505 for the year ended December 31, 1995. The increase was primarily the
result of acquisitions of WTLR, whose carloads increased by 3,630 from 1995 to
1996, Dakota Rail, whose carloads increased by 550 from 1995 to 1996, CCRR,
whose carloads totalled 1,892 in 1996, OTVR, whose carloads totalled 1,730 in
1996 and ETC, whose carloads totalled 715 carloads in 1996. Additionally, SCTR's
carloads increased by 242 in 1996 as compared to 1995. These increases were
partially offset by a decrease in HESR's carloads of 1,408 resulting from a
decrease in agricultural shipments in the second half of 1996.

         OTHER REVENUES. Other revenues increased by approximately $1.5 million,
or 340.0%, from $436,586 for the year ended December 31, 1995 to $1.9 million
for the year ended December 31, 1996. Other revenues for 1996 included gains on
sales of certain operating assets, rental income and other miscellaneous items
of income. The increase was primarily due to the gain of (i) approximately
$582,000 from the sale of 22 miles of track and a rail car repair shop in
Indiana, (ii) approximately $579,000 from the sale of 30 miles of track in
Minnesota, and (iii) approximately $230,000 from the sale of 9 miles of track in
Texas. Additionally, during 1996 the Company sold a permanent easement in
Michigan for $106,000. Rental income increased as a result of assets acquired in
1995 and 1996.

         OPERATING EXPENSES. The table below is a comparison of operating
expenses (which do not include interest expense and other income) for the
periods shown.

<TABLE>
<CAPTION>
                                                                    For The Year Ended
                                                               --------------------------
                                                   December 31, 1996             December 31, 1995
                                                 ---------------------         -------------------
                                                               % Change                        % Change
                                                   Expenses    From 1995          Expenses     From 1994
                                                 -----------   ---------         ----------    ---------
<S>                                              <C>             <C>            <C>             <C>
Maintenance of way                               $ 1,309,976     66.5%          $   786,708     136.3%

Maintenance of equipment                             625,177     33.0%              470,058      36.9%

Transportation                                     2,074,897     34.0%            1,548,084      25.5%

Equipment rental                                     387,834     69.2%              229,218     (24.4%)

Selling, general and administrative                1,381,169     72.4%              801,187       0.0%

Depreciation and amortization                    $   961,383     20.5%          $   797,614      41.0%
                                                 -----------                    -----------

Total operating expenses                         $ 6,740,436     45.5%          $ 4,632,869      29.4%
                                                 ===========                    ===========
</TABLE>

         Operating expenses increased by $2.1 million, or 45.5%, from $4.6
million for the year ended December 31, 1995 to $6.7 million for the year ended
December 31, 1996. Maintenance of way expenses increased by approximately
$520,000, or 66.5%,

                                       20

<PAGE>   21



from $786,708 for the year ended December 31, 1995 to approximately $1.3 million
for the year ended December 31, 1996 primarily due to certain acquisitions which
occurred in 1996 and the second half of 1995. WTLR, which was acquired November
1, 1995, had maintenance of way expenses of approximately $53,000 for the two
months ended December 31, 1995 compared to maintenance of way expenses of
approximately $370,000 in 1996, an increase of $317,000. Dakota Rail, which was
acquired September 1, 1995, had maintenance of way expenses of approximately
$40,000 for the four months ended December 31, 1995 compared to maintenance of
way expenses of approximately $150,000 in 1996, an increase of $110,000. CCRR,
which was acquired in September 1996, had maintenance of way expenses of
approximately $57,000 in 1996. OTVR, which was acquired October 1, 1996, had
maintenance of way expenses of approximately $49,000 in 1996. ETC, which was
acquired in June 1996, had maintenance of way expenses of approximately $47,000
in 1996. Maintenance of equipment expenses increased by approximately $155,000,
or 33.0%, primarily due to certain acquisitions which occurred in the second
half of 1995. WTLR, which was acquired November 1, 1995, had maintenance of
equipment expenses of approximately $18,000 for the two months ended December
31, 1995 compared to maintenance of equipment expenses of approximately $132,000
in 1996, an increase of $114,000. Transportation expenses increased by
approximately $530,000, or 34.0%, primarily due to certain acquisitions which
occurred in 1996 and the second half of 1995. WTLR, which was acquired November
1, 1995, had transportation expenses of approximately $71,000 for the two months
ended December 31, 1995 compared to transportation expenses of approximately
$322,000 in 1996, an increase of $251,000. CCRR, which was acquired in September
1996, had transportation expenses of approximately $144,000 in 1996. Dakota
Rail, which was acquired September 1, 1995, had transportation expenses of
approximately $34,000 for the four months ended December 31, 1995 compared to
transportation expenses of approximately $98,000 in 1996, an increase of
$64,000. OTVR, which was acquired October 1, 1996, had transportation expenses
of approximately $59,000 in 1996. ETC, which was acquired in June 1996, had
transportation expenses of approximately $42,000 in 1996. These increases in
transportation expenses were partially offset by a decrease in transportation
costs of approximately $28,000 at the Company's railroads in Pennsylvania
related to decreased carloads from 1995 to 1996. Equipment rental increased
approximately $160,000, or 69.2%, for the period primarily due to an increase of
approximately $157,000 in the costs associated with increased carloads from the
acquisitions in 1996 and late 1995 and increased car hire expense at SCTR of
approximately $82,000, partially offset by decreased costs at HESR of
approximately $75,000 due to decreased car loads from 1995 to 1996. Selling,
general and administrative expenses increased approximately $580,000, or 72.4%,
compared to the prior period. Such increase was due primarily to additional
costs of approximately $515,000 related to the acquisitions in 1996 and the
second half of 1995.

         Operating expenses, as a percentage of transportation revenue, were
68.9% and 68.5% for 1996 and 1995, respectively. The change was primarily due to
higher maintenance of way expenses and equipment rental costs as a percentage of
total revenue for certain of the acquisitions. Management anticipates that
operating expenses as a percentage of revenue will remain fairly constant over
the next twelve months.

         OTHER INCOME (EXPENSE). Interest expense

                                       21

<PAGE>   22



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

RESULTS OF TRAILER MANUFACTURING OPERATIONS

         The discussion of the results of operations that follows reflects the
results of Kalyn, REC and RailAmerica Financial Services ("RFS") for the years
ended December 31, 1996 and 1995. REC and RFS are leasing companies. REC
currently leases railroad tank cars, flat cars and locomotives to various
railroads and shippers. RFS was merged into REC in November 1996.

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

         The following table sets forth the income and expense items of Kalyn
for the years ended December 31, 1996 and 1995 and the percentage relationship
of income and expense items to net sales:

<TABLE>
<CAPTION>
                                                 For the Year Ended                For the Year Ended
                                                  December 31, 1996                 December 31, 1995
                                              ------------------------          -------------------
<S>                                           <C>               <C>            <C>              <C>
Net Sales                                     $  13,637,978     100.0%         $17,872,777      100.0%

Cost of Goods Sold                               10,447,827      76.6%          13,398,740       75.0%
                                               ------------                    -----------

Gross Profit                                      3,190,151      23.4%           4,474,037       25.0%

Selling, General and
Administrative expenses                           1,399,646      10.3%           1,383,812        7.7%

Depreciation and amortization                       433,353       3.2%             408,139        2.3%
                                              -------------                    -----------

Income from Operations                            1,357,152       9.9%           2,682,086       15.0%

Other Expenses (net)                                348,430       2.5%             530,789        3.0%
                                              -------------                    -----------

Income Before Taxes                           $   1,008,722       7.4%         $ 2,151,297       12.0%
                                              =============                    ===========
</TABLE>

         NET SALES. Net sales consist of trailer sales, part sales and repair
income. Net sales decreased by approximately $4.3 million, or 31.6%, from $17.9
million for the year ended December 31, 1995 to $13.6 million for the year ended
December 31, 1996. Trailer sales represented approximately 96% of the net sales
in both 1996 and 1995. Kalyn sold 547 trailers

                                       22

<PAGE>   23



during 1996 and 875 trailers during 1995. The average price per trailer sold was
approximately $24,000 for the year ended December 31, 1996 and approximately
$20,000 for the year ended December 31, 1995. Sales to governmental agencies
represented 20% and 29% of Kalyn's net sales for 1996 and 1995, respectively.
During the first half of 1996, Kalyn was in the process of building 5 prototype
trailers in connection with the October 1995 TACOM contract. Full production
under the contract began immediately after acceptance by TACOM of the
prototypes.  The decrease in sales for 1996 compared to 1995 was partially due
to the above contract work as well as the federal government budget impasse
during the fourth quarter of 1995 and early 1996, which resulted in a suspension
of new trailer orders from the government.

         COST OF GOODS SOLD. Cost of goods sold decreased by approximately $3.0
million, or 28.8%, from $13.4 million for the year ended December 31, 1995 to
$10.4 million for the year ended December 31, 1996. Cost of goods sold
represented 76.6% of net sales for the year ended December 31, 1996 compared to
75.0% for the comparable period. The increase was partially due to certain fixed
costs of manufacturing being spread over a smaller revenue base in 1996.
Additionally, commercial orders represented a higher percentage of sales in 1996
than in 1995. Commercial trailers have more variations in design which generally
require greater expertise in the manufacturing process. Government contracts are
typically for larger quantities of similar style trailers creating greater
economies of scale in the production process which results in a relatively lower
cost per unit produced. Historically, commercial sales have had a higher cost of
goods sold and lower gross profit margins than government sales. Management
anticipates gross profit as a percentage of net revenue to increase over the
next twelve months as a relatively larger percentage of sales will be
attributable to government agencies as orders are received and processed under
the TACOM agreements that were entered into during the fourth quarter of 1995
and first quarter of 1996.

         SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative costs remained fairly constant during 1996 compared to 1995.

         REC AND RFS. Revenue for REC and RFS for the year ended December 31,
1996 increased by $316,037 compared to the prior year as a result of tank car
leases and locomotive leases entered into during 1996. Selling, general and
administrative expense increased by $108,641 from $35,443 in the year ended
December 31, 1995 to $144,084 for the year ended December 31, 1996. The increase
was primarily due to costs associated with the management and operation of the
tank car leases. Depreciation and amortization expenses also increased to
$56,557 in 1996 from $1,907 in the prior period due to the addition of the tank
cars and locomotives. Interest expense of $83,570 in 1996 represented interest
from financing the purchase of tank cars and locomotives.

RESULTS OF MOTOR CARRIER OPERATIONS (DISCONTINUED OPERATIONS)

         The discussion of results of operations that follows reflects the
results of Steel City Carriers and RIS from February 10, 1995 through December
31, 1996.

         Since the Company's acquisition of Steel City, its financial
performance and development have not met the Company's expectations.
Accordingly, in March 1997 the

                                       23

<PAGE>   24



Company adopted a formal plan to discontinue its motor carrier operations and
refocus the Company's efforts on expanding its core railroad business. The
Company's Board of Directors approved the plan of discontinuance on March 20,
1997. Management anticipates selling either substantially all of the assets or
the stock of the Company's motor carrier subsidiaries during 1997.

<TABLE>
<CAPTION>
                                                                                 For the Period from
                                                For the Year Ended               February 10, 1995 to
                                                December 31, 1996                 December 31, 1995
                                              ------------------------         ------------------------
<S>                                            <C>              <C>            <C>               <C>
Transportation revenue                         $  7,216,301     100.0%         $ 5,083,238       100.0%
                                               ------------                    -----------

Direct operating expenses                         6,541,528      90.6%           4,468,306        87.9%

Selling, General and
Administrative expenses                             801,201      11.1%             520,881        10.2%

Depreciation and amortization                       365,088       5.1%             243,755         4.8%
                                               ------------                    -----------

Total operating expenses                          7,707,817     106.8%           5,232,942       102.9%
                                               ------------                    -----------

Operating loss                                      491,516       6.8%             149,704         2.9%

Other expenses (net)                                406,158       5.6%             203,014         4.0%
                                               ------------                    -----------

Net loss before taxes                          $    897,674      12.4%         $   352,718         6.9%
                                               ============                    ===========
</TABLE>

         TRANSPORTATION REVENUE - Transportation revenue increased by
approximately $2.1 million, or 41.2%, from $5.1 million for the year ended
December 31, 1995 to $7.2 million for the year ended December 31, 1996. The
increase was primarily due to the increase in miles driven by Steel City
carriers during 1996 and the inclusion of RIS operations in 1996. RIS had
transportation revenue of $230,266 for 1996 compared to $27,556 for the prior
year.

         DIRECT OPERATING EXPENSES - Direct operating expenses increased by
approximately $2.0 million, or 44.4%, from $4.5 million for the year ended
December 31, 1995 to $6.5 million for the year ended December 31, 1996. Direct
operating expenses represented 90.6% of transportation revenue for the year
ended December 31, 1996 compared to 87.9% for the period ended December 31,
1995. The increase was due to increased equipment maintenance and repairs, a
significant increase in fuel costs from 1995 to 1996 and the unusually extreme
winter weather in early 1996. The extreme winter weather caused many roads in
Ontario and the northern United States to be closed for extended periods of
time, resulting in lost revenue and increased costs.

         GENERAL AND ADMINISTRATIVE - General and administrative expenses
decreased slightly as a percentage of transportation revenue for the year ended
December 31, 1996 compared to the period ended December 31, 1995. This decrease
was due to economies of scale achieved due to

                                       24

<PAGE>   25



increased revenue in 1996.

         OTHER EXPENSE (NET) - Other expenses, net increased by approximately
$200,000, or 100%, due primarily to losses from the disposal of certain old
equipment of approximately $125,000 and increased interest expense of
approximately $100,000.

LIQUIDITY AND CAPITAL RESOURCES - COMBINED OPERATIONS

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

         The Company's cash provided by operating activities was $2.2 million
for the year ended December 31, 1996. However approximately $1.8 million of cash
provided by operating activities, net of acquisitions during the period, is
attributable to an increase in accounts receivable. The Company's accounts
receivable increased from $2.2 million as of December 31, 1995 to $4.6 million
as of December 31, 1996 primarily as a result of orders placed by TACOM under
requirements contracts with Kalyn, which accounts receivable were collected in
early 1997, and accounts receivable related to acquisitions.

         Cash used in investing activities was $5.4 million for the year ended
December 31, 1996. One of the Company's main uses of cash during 1996 was for
the purchase of property, plant and equipment. Property, plant and equipment
increased $28.3 million during 1996 primarily due to the purchase of 131 miles
of rail line in the state of Washington, the purchase of 276 miles of rail line
in central and northern Minnesota, the purchase of 23 miles of rail line in
Pennsylvania, improvements made to the Company's various other rail lines,
Kalyn's new plant construction and the acquisition of transportation equipment
for the motor carrier and railroad segments, less current depreciation. During
late 1995, Kalyn began construction of additional space at its manufacturing
facility upon land that it owns to accommodate production under the TACOM
agreement. The expansion was completed in 1996. This expansion cost
approximately $300,000 and was funded through operating cash flow and advance
payments from TACOM.

         The Company's cash provided by financing activities for 1996 was $3.6
million and consisted of the net proceeds from borrowings under the Company's
revolving line of credit with the National Bank of Canada, net proceeds of
approximately $4.0 million from the issuance of 1,250,000 shares of the
Company's common stock in a private placement transaction and $2.34 million
received in December 1996 as part of a private placement transaction which was
completed in January 1997.


                                       25

<PAGE>   26



         The Company's long term debt represents financing of property and
equipment, as well as the acquisition financing for SCTR, Kalyn, Steel City
Carriers, Dakota Rail, WTLR, PTC, ETC, CCRR, MNR, OTVR and Gettysburg Railway.
Certain of this indebtedness was refinanced through a $15 million revolving line
of credit (the "Revolver") with National Bank of Canada. The Revolver bears
interest, at the option of the Company, at either the bank's prime rate plus
0.5% or the one, three or six month LIBOR plus 2.5%. The Revolver is
collateralized by substantially all of the assets of the Company, Kalyn, HESR,
SGVY, RIS, CCRR, Steel City Carriers, WTLR and OTVR.

         In October 1996, the Company increased the Revolver by $10.0 million.
The increased facility bears interest at the rate of 0.5% above prime. The
maturity date of the entire $25 million revolver was extended to October 1999.

         On March 3, 1997, the Company received a loan commitment from National
Bank of Canada and Comerica Bank N.A. to further increase the Revolver to $40
million. It is anticipated that this additional increase will be finalized in
April 1997.

         As of December 31, 1996, the Company had working capital of $5.1
million compared to working capital of $3.0 million as of December 31, 1995.
Cash on hand as of December 31, 1996 was $3.9 million compared to $3.5 million
as of December 31, 1995. The increase in cash from December 31, 1995 to December
31, 1996 is due primarily to cash received in December 1996 as part of a private
placement that was completed in January 1997 and cash received from the sale of
track assets in December 1996. The Company's cash flows from operations have
historically been sufficient to meet its ongoing operating requirements, capital
expenditures for property, plant and equipment, and to satisfy the Company's
interest requirements.

         The Company expects that its future cash flow will be sufficient for
its current and contemplated operations for at least the next twelve months and
will be used for, among other things, anticipated capital expenditures for the
upgrading of existing rail lines and purchases of locomotives and equipment of
approximately $1.5 million and capital expenditures at Kalyn of approximately
$100,000. The Company does not presently anticipate any other significant
capital expenditures over the next twelve months. To the extent possible, the
Company will seek to finance any further acquisitions of property, plant and
equipment in order to allow its cash flow from operations to be devoted to other
uses, including debt reduction and acquisition requirements.

         The Company's long-term business strategy includes the selective
acquisition of additional transportation-related businesses. Accordingly,
Company may require additional equity and/or debt capital in order to consummate
an acquisition or undertake major development activities. It is impossible to
predict the amount of capital that may be required for such acquisitions or
development, and there is no assurance that sufficient financing for such
activities will be available on terms acceptable to the Company, if at all. The
Company's $25 million revolving line of credit allows acquisition loan advances
of up to $20 million for such acquisitions. The Company borrowed $8.9 million
under the Revolver in order to fund its acquisition of

                                       26

<PAGE>   27



ETC and CCRR. In addition, the Company borrowed $4.5 million from Comerica Bank
to acquire MNR. It is anticipated that the balance of this loan will be rolled
into the increased $40 million Revolver. Upon the closing of the increase in the
Revolver, the Company will have approximately $13.5 million available for future
acquisitions. As of March 1, 1997, the Company had approximately $3.0 million
of availability under the $25 million Revolver.

RECENT ACCOUNTING PRONOUNCEMENTS

        In February 1997, Statements of Financial Accounting Standards ("SFAS"_
No. 128 "Earnings Per Share" was issued. SFAS No. 128 established new standards
for computing and presenting earnings per share ("EPS"). This statement
replaces the presentation of primary EPS and will require a duel presentation
of basic and diluted EPS. SFAS No. 128 is effective for financial statements
issued for periods ended after December 15, 1997 and requires restatement of
all prior-period EPS data presented. The Company has not yet determined the
impact, if any, the adoption of SFAS No. 128 will have on the Company's
financial statements.

INFLATION

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

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

         The foregoing Management's Discussion and Analysis contains various
"forward-looking statements" within the meaning of Section 27A of the Securities
Act of 1993, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended, which represent the Company's expectations or beliefs concerning
future events, including the following: statements regarding the further growth
in transportation-related assets; the acquisition of additional railroads and
other transportation-related companies; the development of additional
transportation-related businesses; the increased usage of the Company's existing
rail lines; the development of synergy among the consolidated group; the growth
of gross revenues; and the sufficiency of the Company's cash flow for the
Company's future liquidity and capital resource needs. The Company cautions that
these statements are further qualified by important factors that could cause
actual results to differ materially from those in the forward-looking
statements, including, without limitations, the following: decline in demand for
transportation services; the effect of economic conditions generally and
particularly in the markets served by the Company; orders under the TACOM
agreements; the Company's dependence upon the agricultural industry as a
significant user of the Company's rail services; the Company's dependence upon
the availability of financing for acquisitions of railroads and other
transportation-related companies and the development of additional
transportation-related businesses; a decline in the market acceptability of
trucking or railroad services; the effect of competitive pricing; the
regulation of the Company by federal, state and local regulatory authorities.
Any material adverse change in the financial condition or results of operations
of Kalyn would have a material adverse impact on the Company. Results actually
achieved thus may differ materially from expected results included in these
statements.

ITEM 7.  FINANCIAL STATEMENTS

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

                                       27

<PAGE>   28




ITEM 8.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
         FINANCIAL DISCLOSURE. - None.


PART III

ITEM 9.  DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
         COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.

         The Board of Directors of the Company (sometimes referred to herein as
the "Board") is divided into three classes. The directors are elected by the
stockholders of the Company for staggered three-year terms, or until their
successors are elected and qualified. The current term of the Class I director
terminates on the date of the Company's 1999 annual meeting of stockholders; the
current term of the Class II directors terminates on the date of the 1997 annual
meeting of stockholders; and the current term of the Class III directors
terminates on the date of the 1998 annual meeting of stockholders. At each
annual meeting of stockholders, successors to the class of directors whose term
expires at that annual meeting are elected for a three-year term. Messrs. Donald
Redfearn and Charles Swinburn currently serve as Class I directors. Messrs. John
Marino, John Sullivan and Robert Toia currently serve as Class II directors, and
Messrs. Gary Marino, Richard Rampell and Douglas Nichols currently serve as
Class III directors.

         At the July 1996 meeting of the Company's Board of Directors, the Board
voted to expand the size of the board. Robert Toia and Douglas Nichols were
elected at the Annual Meeting of Shareholders in July 1996 to fill such
vacancies.

         The following table sets forth information with respect to the
directors and executive officers of the Company.

<TABLE>
<CAPTION>
NAME                          AGE                 POSITION
----                          ---                 --------
<S>                          <C>       <C>
Gary O. Marino(1)             52    Chairman of the Board, Chief Executive Officer, President,
                                    Treasurer

John H. Marino(1)             57    Vice Chairman of the Board, Senior Transportation Officer,
                                    Assistant Secretary

Donald D. Redfearn            44    Executive Vice President,  Secretary,
                                    Director

W. Graham Claytor, III        46    Senior Vice President - Rail Group

Robert B. Coward              51    Senior Vice President - Manufacturing Group

John M. Sullivan              72    Director

</TABLE>

                                       28

<PAGE>   29
<TABLE>
<CAPTION>
NAME                          AGE              POSITION
----                          ---              --------
<S>                          <C>       <C>


Charles Swinburn                 54    Director

Richard Rampell                  44    Director

Douglas  Nichols                 44    Director

Robert F. Toia                   67    Director

----------------------
</TABLE>

(1)  John H. Marino and Gary O. Marino are brothers.

         Pursuant to the terms of the Underwriting Agreement relating to the
Company's November 1992 initial public offering, the Representatives of the
Underwriters of such offering have the right, until September 1997, to have a
designee attend all meetings of the Board of Directors of the Company and to
cause the Company to nominate and use its best efforts to obtain election to the
Board of Directors of a person designated by the Representatives. Mr. Sullivan
was elected to the Board after designation by the Underwriters.

         The executive officers of the Company are elected annually and hold
office until their respective successors have been elected and qualified or
until death, resignation or removal by the Board of Directors. Information
concerning the principal occupations and employment of the directors and
executive officers of the Company for, at least, the past five years is set
forth below.

         GARY O. MARINO - Mr. Marino has been Chairman, a director and Treasurer
of the Company since its inception in April 1992, Chief Executive Officer since
March 1, 1994 and President since July 1996, and has been Chairman, a director
and Treasurer of HESR since 1986. Mr. Marino joined the Company on a full-time
basis in March 1994. Mr. Marino was also the Chairman of Huron Transportation
Group, Inc. ("HTG") from its inception in 1987 until HTG merged with RailAmerica
Services Corporation in December 1993 (the "HTG Merger"). From 1984 until
October 1993 Mr. Marino was the Chairman, President and Chief Executive Officer
of Boca Raton Capital Corporation ("BRCC"), a publicly-traded venture capital
firm. He received his B.A. from Colgate University in 1966 and an M.B.A. from
Fordham University in 1973. From 1966 to 1969 Mr. Marino served as an officer
with the United States Army Ordnance Corps.

         JOHN H. MARINO - Mr. Marino has been Vice Chairman of the Company since
July 1996 and a director of the Company since its inception in April 1992 and
has been President and a director of HESR since 1986. Mr. Marino was President
and Chief Operating Officer from the Company's inception until July 1996. Mr.
Marino was also the President of HTG from its formation in January 1987 until
the HTG Merger in December 1993. Prior to founding HESR in 1985, Mr. Marino
served as President and Chief Executive Officer of several shortline railroads,
as an officer of the Reading Railroad, and with the United States Railway
Association, Washington D.C. Mr. Marino received his B.S. in civil engineering
from Princeton University

                                       29

<PAGE>   30



in 1961 and his M.S. in transportation engineering from Purdue University in
1963. From 1963 to 1965, Mr. Marino served as an officer with the United States
Army Corps of Engineers.

         DONALD D. REDFEARN - Mr. Redfearn has been Executive Vice President,
Administration and Secretary of the Company since December 1994. Mr. Redfearn
has been an officer and director since the Company's inception in April 1992 and
HESR since 1986. Mr. Redfearn joined the Company on a full-time basis in January
1996. Mr. Redfearn was president of Jenex Financial Services, Inc., a financial
consulting firm from September 1993 until September 1995. From 1984 until
September 1993 Mr. Redfearn served in various capacities at BRCC where he served
as Senior Vice President, Assistant Secretary and Treasurer. Mr. Redfearn was
also a Vice President of HTG until the HTG merger. He received his B.A. in
Business Administration from the University of Miami in Florida and graduated
from the School of Banking of the South at Louisiana State University, Baton
Rouge, Louisiana.

         W. GRAHAM CLAYTOR, III - Mr. Claytor serves as the Company's Senior
Vice President, Rail Group. Mr. Claytor joined the Company in March 1996. Mr.
Claytor was Managing Director of Southern Pacific ("SP")'s Plant Rationalization
function, charged with selling, leasing and abandoning surplus branch and
mainline trackage. Prior to his six-year tenure at Southern Pacific in short
line sales, Mr. Claytor served as Superintendent of the Buffalo & Pittsburgh
Railroad and as Trainmaster for Norfolk Southern Corporation, and supervised
marine terminal operations of the Virginia Maryland Railroad. He received a B.S.
degree from Boston University.

         ROBERT B. COWARD - Mr. Coward serves as the Company's Senior Vice
President, Manufacturing Group. Mr. Coward served as President and General
Manager of Kalyn from 1981, when he arranged the management buyout of the
company from its prior stockholders, until the acquisition of Kalyn by
RailAmerica. Mr. Coward continued with Kalyn as Vice President and General
Manager after RailAmerica acquired Kalyn in 1994. Mr. Coward started with Kalyn
as Production Manager in 1968. He was promoted to General Manager in 1969, and
has performed all functions related to the Company's government contracting
business. Mr. Coward earned his B.S. degree in Industrial Arts from Tarleton
State University in 1967.

         JOHN M. SULLIVAN - Mr. Sullivan was elected a director in January 1993.
From 1977 until 1981 Mr. Sullivan served, upon appointment by President Carter,
as head of the United States Federal Railroad Administration. From 1982 until
1990, Mr. Sullivan was President and Chief Executive Officer of Haug Die
Casting, Inc., where he remains as a director. Mr. Sullivan received his B.S. in
engineering from the United States Naval Academy and served with the United
States Navy as an officer, and ultimately as a carrier aviator, from 1946 until
1954.

         CHARLES SWINBURN - Mr. Swinburn joined the Board of Directors of the
Company effective February 1, 1995. Mr. Swinburn is currently a practicing
attorney in the Washington, D.C. office of Morgan, Lewis & Bockius, where he
specializes in environmental law. From April 1990 through August 1993, Mr.
Swinburn served as a consultant to private industry and the government. Prior to
that time, Mr. Swinburn served as Vice President of Rollins Environmental
Services, Inc. Mr. Swinburn served in various capacities at the U.S. Department
of

                                       30

<PAGE>   31



Transportation, most recently as Deputy Assistant Secretary for Policy and
International Affairs. Mr. Swinburn received his B.A. from Princeton University
in 1969, his M.B.A. from Harvard Business School in 1971 and his J.D. from the
University of Pennsylvania in 1993.

         RICHARD RAMPELL - Mr. Rampell joined the Board of Directors of the
Company effective, July 27, 1995. Mr. Rampell, a certified public accountant, is
currently the Chief Executive of Rampell and Rampell, P.A., of Palm Beach,
Florida. Mr. Rampell is past president of the Palm Beach Tax Institute and a
past president of the Florida Institute of CPA's, East Coast Chapter. Mr.
Rampell graduated with honors from Princeton University with an AB degree and
received his M.B.A. from the Wharton School at the University of Pennsylvania.

         ROBERT TOIA - Mr. Toia was elected a director in July 1996. Mr. Toia
was the former President of the Brandywine Valley Railroad, the Upper Merion &
Plymouth Railroad and the South Central Florida Railroad. Mr. Toia served as a
transportation consultant to the Lukens Steel Company from 1957 until he joined
the company as a Supervisor, Traffic and Transportation. From 1967 to 1992, Mr,
Toia served in various capacities with Lukens Steel Company, including from 1982
to 1992, as the company's Corporate General Manager, Rail Division where he was
responsible for managing Lukens' in-plant railroads. In all, Mr. Toia has over
forty years experience in the transportation industry. Mr. Toia completed
executive management programs at the University of Michigan and Columbia
University. From 1951 to 1953, Mr. Toia served in the Judge Advocate Corps of
the United States Army.

         DOUGLAS R. NICHOLS - Mr. Nichols was elected a director in July 1996.
Mr. Nichols is a certified public accountant and the founder, President and
principal stockholder of First London Securities Corporation, a securities
broker-dealer specializing in equity trading and investment banking. From 1989
to 1991, Mr. Nichols was a Vice President with the Dallas, Texas office of Smith
Barney and, from 1986 to 1989, was a broker with the Dallas branch of Shearson
Lehman Brothers. Mr. Nichols is a member of the National Railway Historical
Society. Mr. Nichols received his B.A. from Allegheny College, Meadville
Pennsylvania in 1974.

COMPLIANCE WITH SECTION 16 OF THE SECURITIES EXCHANGE ACT OF 1934

         Section 16(a) of the Securities Exchange Act of 1934, as amended,
requires the Company's officers and directors, and persons who own more than ten
percent (10%) of a registered class of the Company's equity securities, to file
reports of ownership and changes in ownership in common stock of the Company
with the Securities and Exchange Commission ("SEC"). Officers, directors and
greater than 10% shareholders are required by SEC regulation to furnish the
Company with copies of all Section 16(a) forms they file.

         Based solely on its review of the copies of such forms received by it,
the Company believes that, during the year ended December 31, 1996 and with
respect thereto, all filing requirements applicable to its officers, directors
and greater than 10% beneficial owners were complied with except a Form 3,
covering one transaction, was filed late by Douglas Nichols, a Form 4, covering
one transaction, was filed late by W. Graham Clayton, III and a Form 3 and

                                       31

<PAGE>   32



Form 4, covering two separate transactions, were filed late by Robert Toia.

ITEM 10.  EXECUTIVE COMPENSATION

BOARD OF DIRECTORS COMPENSATION

         During 1995, each director of the Company who was not an employee of
the Company received a retainer of $1,000 per month and was paid $500 per Board
meeting attended and $400 for each additional day spent on Company business. All
directors are reimbursed for reasonable out-of-pocket expenses associated with
travel to Board meetings and other Company business.

         Effective March 1, 1996, the compensation for directors that are not
employees of the Company changed to a retainer of $2,000 per month, and will be
paid $500 for each Board meeting attended and $400 for each committee meeting
attended ($600 for the Chairman).

         1995 NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN. The Board of Directors of
the Company has adopted, effective January 1, 1995, the 1995 Non-Employee
Director Stock Option Plan (the "Directors Plan"), under which 250,000 shares of
common stock have been reserved for issuance. Pursuant to the Directors Plan,
directors of the Company who are not also employees of the Company
("Non-Employee Directors") are granted options to purchase Common Stock. The
Directors Plan is administered by the Compensation Committee, the members of
which are also participants therein. Subject to the provisions of the Directors
Plan, the Compensation Committee has sole discretionary authority to construe,
interpret and apply the terms of the Directors Plan, to determine all questions
thereunder, and to adopt and amend rules and regulations for the administration
thereof as it may deem desirable.

         Under the terms of the Directors Plan, each Non-Employee Director will
be granted an option to purchase 50,000 shares of common stock on the date such
person is first elected to become a director of the Company. The term of the
Directors Plan is ten years from the effective date, after which no further
options will be granted thereunder. Options granted under the Directors Plan
expire ten years from the date of grant. The exercise price per share of each
option granted under the Directors Plan will be the fair market value of the
Common Stock on the date prior to the date the option is granted. Options
granted under the Directors Plan vest over a period of three years at the rate
of one-third annually on each anniversary date of the grant, provided the
Non-Employee Director to whom the options are granted continues to serve as a
director on each such vesting date.

         As of the date hereof, options to purchase 10,000 shares of the
Company's Common Stock have been granted to Donald D. Redfearn under the
Directors Plan, at an exercise price of $3.50 per share, options to purchase
50,000 shares of the Company's Common Stock have been granted to Charles
Swinburn under the Directors Plan at an exercise price of $4.19 per share,
options to purchase 50,000 shares of the Company's Common Stock have been
granted to Richard Rampell under the Directors Plan at an exercise price of
$4.81 per share and options to purchase 50,000 shares of the Company's Common
Stock each have been granted to Robert Toia and Douglas

                                       32

<PAGE>   33



Nichols at an exercise price of $3.50 per share.

EXECUTIVE COMPENSATION

         The Company entered into employment agreements with each of Messrs.
Gary O. Marino and John H. Marino effective as of March 1, 1994. Under Gary
Marino's employment arrangement, which provided that he serve as Chief Executive
Officer of the Company, he received a base salary of $150,000 from March 1, 1994
through August 31, 1994, $175,000 from September 1, 1994 through December 31,
1994 and $200,000 per year as of January 1, 1995. Mr. Marino's base salary is
subject to increase in accordance with the Consumer Price Index, as well as any
additional increases in the discretion of the Board of Directors. Commencing
January 1, 1996 and January 1, 1997, Gary Marino's base salary was increased to
$210,000 and $250,000, respectively. Mr. Marino is also entitled to a $642
monthly car allowance, subject to annual increase in accordance with the
Consumer Price Index. Under the arrangement, Gary Marino is entitled to such
benefits (including medical, dental, disability and life insurance) as the
Company typically provided to its senior executive officers. The arrangement
also provides that Mr. Marino receive an annual cash payment in lieu of
participating in a retirement benefits plan.

         In addition, Gary Marino's employment arrangement provides that he be
issued an aggregate of 50,000 shares of the Company's Common Stock upon the
execution of a formal employment agreement. All of these shares were issued to
Mr. Marino in July 1995 upon his execution of a written employment agreement.
Pursuant to Mr. Marino's employment agreement, Mr. Marino was also granted
non-qualified options to purchase an aggregate of 350,000 shares of Common Stock
of the Company at varying exercise prices and exercise dates. Options for 87,500
shares of Common Stock at an exercise price of $3.10 and 87,500 shares of Common
Stock at an exercise price of $3.40 were immediately exercisable by Mr. Marino
upon execution of his written employment agreement. Additional options for
87,500 shares of Common Stock became exercisable under the agreement on March 1,
1996 at an exercise price of $3.75 and options for 87,500 shares of Common Stock
became exercisable under the agreement on March 1, 1997 at an exercise price
equal of $4.15 per share. All such options have ten year terms from the date
they become exercisable. The agreement has an initial term expiring on March 1,
1998, and is subject to automatic one year renewal terms, unless either party
notifies the other of non-renewal 180 days prior to the expiration of the
current term. In the event Mr. Marino's employment is terminated without cause
pursuant to a change in control of the Company, Mr. Marino is entitled to
receive as of the date of termination a lump sum equal to 150% of his total
compensation in the 12 months prior to the date of termination. The agreement
contains certain non-competition provisions applicable to Mr. Marino should he
resign from the Company or be terminated with cause.

         John Marino's employment agreement provided for him to serve as
President of the Company and its transportation and distribution subsidiaries.
Under this agreement, Mr. Marino received a base salary of $120,000 per year for
March 1, 1994 through August 31, 1994, $135,000 from September 1, 1994 through
December 31, 1994 and $150,000 per year commencing January 1, 1995. Mr. Marino's
base salary is subject to increase in accordance with

                                       33

<PAGE>   34



the Consumer Price Index, as well as any additional increases in the discretion
of the Board of Directors. Commencing January 1, 1996 and January 1, 1997, John
Marino's base salary was increased to $154,200 and $158,828, respectively. Mr.
Marino is also entitled to a $642 per month car allowance, subject to annual
increase in accordance with the Consumer Price Index. Under the agreement, John
Marino is entitled to such benefits (including medical, dental, disability and
life insurance) as the Company typically provide for its senior executive
officers. The agreement also provides that Mr. Marino receive annual cash
payments in lieu of participating in a retirement benefits plan. The agreement
has an initial term ending March 1, 1998, and is subject to automatic one year
renewal terms, unless either party notifies the other of non-renewal 180 days
prior to the expiration of the current term. In the event that Mr. Marino's
employment is terminated without cause pursuant to a change in control of the
Company, he is entitled to receive as of the date of termination a lump sum
equal to 150% of his total compensation in the 12 months prior to the date of
termination. The agreement contains certain non-competition provisions
applicable to Mr. Marino should he resign from the Company or be terminated with
cause.

         The following table sets forth compensation awarded to the Chief
Executive Officer of the Company and other executive officers (the "Executive
Officers") who, for the fiscal year ended December 31, 1996, received total
salary and bonus payments in excess of $100,000. Except as set forth below, no
executive officer of the Company had a salary and bonus during the year ended
December 31, 1996 that exceeded $100,000 for services rendered in all capacities
to the Company.

<TABLE>
<CAPTION>
                                            SUMMARY COMPENSATION TABLE

                                                              Other
Name &                                                        Annual           Long-Term Compensation
Principal Position            Year     Salary     Bonus       Compensation        Award        Payments
------------------            ----     ------     -----       ------------    --------------   --------
<S>                           <C>    <C>          <C>           <C>            <C>              <C>
Gary O. Marino
Chairman                      1996   $230,000(1)     -          $30,567(2)         N/A            N/A
(Chief Executive Officer)
                              1995   $200,000     $124,034(4)     N/A              N/A            N/A

                              1994   $169,379     $140,000        N/A              N/A            N/A

John H. Marino
(Vice Chairman)               1996   $154,200        -          $31,561(3)         N/A            N/A

                              1995   $150,000      $37,650(5)    15,000            N/A            N/A

                              1994   $137,584     $ 30,000        N/A              N/A            N/A

Donald D. Redfearn            1996   $113,750        -            N/A              N/A            N/A
(Executive Vice President)

</TABLE>

----------
                                       34

<PAGE>   35



(1)  Includes $20,000 payment in lieu of his participation in a retirement
benefits plan.

(2)  Includes payment of medical, dental, disability and life insurance benefits
of $20,857, car allowance of $7,710 and group 401(k) plan contributions of
$1,000.

(3)  Includes payment of medical, dental, disability and life insurance benefits
of $7,431, car allowance of $7,710 and group 401(k) plan contributions of
$1,000, as well as $15,420 pursuant to a deferred compensation plan.

(4)  Includes a bonus of 50,000 shares of the Company's Common Stock granted
pursuant to Mr. Marino's employment agreement, which bonus was valued at $93,750
as of the date of execution of the agreement in July 1995. Also includes a bonus
of $30,284 which was paid to Mr. Marino in 1996 based upon the performance of
the Company for the year ended December 31, 1995.

(5)  Represents a bonus paid to Mr. John Marino in 1996 based upon the
performance of the Company and its transportation subsidiaries for the year
ended December 31, 1995.


NONQUALIFIED DEFERRED COMPENSATION TRUST

         Effective January 3, 1997, the Company adopted certain nonqualified
deferred compensation plans and established a trust to which the Company will
make contributions under the Plans (the "Trust"). In connection with the
foregoing, the Company, executed Nonqualified Deferred Compensation Agreements
(the "Deferred Compensation Agreement") with Gary O. Marino, the Company's
Chairman of the Board, President and Chief Executive Officer and John Marino,
the Company's Vice Chairman of the Board, pursuant to which such individuals may
defer a percentage of their respective compensation and contribute such amount
to their retirement pay. Any amount of compensation or bonus deferred by the
employee shall be transferred to the Trust and thereafter be invested and
reinvested by trustee and paid to the employee in accordance with the Trust and
the Deferred Compensation Agreement. In addition to each employee's requested
deferral, the Company shall transfer to the Trust for the employee's benefit
each calendar year at least $20,000, which amounts shall be invested and
reinvested by the trustee in accordance with the Trust and the Deferral
Compensation Agreements. In January 1997, the Company contributed an aggregate
of $21,000 to the Trust on behalf of Gary O. Marino which represented amounts
deferred by Mr. Marino under his employment agreement for 1995 and 1996. In
addition, in January 1997, the Company contributed an aggregate of $30,420 to
the Trust on behalf of John H. Marino which represented amounts deferred by Mr.
Marino under his employment agreement for 1995 and 1996.

         Information regarding certain options granted to Executive Officers of
the Company, is set forth below:

<TABLE>
<CAPTION>
                                       OPTION/SAR GRANTS IN LAST FISCAL YEAR
                                                 INDIVIDUAL GRANTS

                                    NUMBER OF           PERCENT OF
                                   SECURITIES              TOTAL
                                   UNDERLYING          OPTIONS/SARS
                                  OPTIONS/SARS         TO EMPLOYEES          EXERCISE ($/SH)       EXPIRATION
NAME                     YEAR        GRANTED          IN FISCAL YEAR              PRICE               DATE
----                     ----        -------          --------------              -----               ----
<S>                      <C>         <C>                    <C>                  <C>                   <C>
Gary  O. Marino          1996        10,000                 3%                   $3.625            Jan 1, 2006

John H. Marino           1996        50,000                 17%                  $3.625            Jan 1, 2006

Donald D. Redfearn       1996        50,000                 17%                   $5.00            Nov 1, 2006

</TABLE>

1992 STOCK OPTION PLAN

         The Company maintains a 1992 Stock Option Plan which provides officers,
employees and consultants of the Company that are not directors of the Company
or 5% stockholders (directly or indirectly) of the Company, with the ability to
receive grants of incentive stock options (as defined in Section 422(b) of the
Internal Revenue Code of 1986, as amended), and provides such individuals and
non-employee directors that are not 5% stockholders with the ability to receive
non-qualified stock options. The 1992 Stock Option Plan was approved by the
Company's stockholders as of July 1, 1992, and became effective as of such date.
The Company has reserved 250,000 shares of Common Stock for the grant of options
under the 1992 Stock Option Plan, all of which have been granted and are
currently outstanding at an exercise price of $3.50 per share.

                                       35

<PAGE>   36




BONUS PLAN

         In May 1995, the Board of Directors adopted the Corporate Senior
Executive Bonus Plan (the "Bonus Plan") pursuant to which participants in the
Bonus Plan shall receive cash bonuses based upon the annual performance of the
Company and the its subsidiaries, commencing with the 1995 fiscal year. Bonuses
will be paid to designated individuals based on Company's performance on a
consolidated basis, the Company's subsidiaries performance or a combination of
both.

         Participants in the Bonus Plan which are subsidiary-specific shall
receive cash bonuses based upon objective, auditable and performance-related
criteria relating to the Company's subsidiaries. No subsidiary-specific
participant will be paid a bonus greater than 50% of the salary earned by that
participant for the full year. Subsidiary-specific participants will be
designated by the Chief Executive Officer subject to ratification by the
Compensation Committee. Bonuses paid to participants for consolidated Company
performance will be paid from a bonus pool equal to 12% of any pre-tax
consolidated income in excess of that amount required to achieve a 12% return on
average shareholders' equity. The initial participants in the Bonus Plan to
receive awards based on consolidated Company performance were Messrs. Gary
Marino, John Marino, Jack Conser, Robert Coward, Larry Bush and Robert
Huddleston. Mr. Donald Redfearn and Mr. Rick Jany have been subsequently added
to the consolidated bonus plan. No participant will be paid a bonus based on
consolidated Company performance greater than the salary earned by that
participant for the full year.

1995 STOCK PLANS

         The following plans were approved by the Company's stockholders at the
Company's 1995 Annual Meeting, in July 1995:

         1995 STOCK INCENTIVE PLAN. The Board of Directors of the Company has
adopted, effective January 1, 1995, a 1995 Stock Incentive Plan (the "Stock
Incentive Plan"). Pursuant to the Stock Incentive Plan, key personnel of the
Company who have been selected as participants are eligible to receive awards of
various forms of equity-based incentive compensation, including stock options,
stock appreciation rights, stock bonuses, restricted stock awards, performance
units and phantom stock, and awards consisting of combinations of such
incentives. The Stock Incentive Plan is administered by the Compensation
Committee. Subject to the provisions of the Stock Incentive Plan, the
Compensation Committee has sole discretionary authority to interpret the Stock
Incentive Plan and to determine the type of awards to grant, when, if and to
whom awards are granted, the number of shares covered by each award and the
terms and conditions of the award. Options granted under the Stock Incentive
Plan may be "incentive stock options" ("ISOs"), within the meaning of Section
422 of the Code, or nonqualified stock options ("NQSOs"). The exercise price of
the options is determined by the Compensation Committee at the time the options
are granted, subject to a minimum price in the case of ISOs equal to the fair
market value of the Common Stock on the date of grant and a minimum price in the
case of NQSOs of the par value of the Common Stock.

                                       36

<PAGE>   37




         The Company has reserved 250,000 shares of Common Stock for issuance
under the Stock Incentive Plan. Options to purchase 141,000 and 105,000 shares
of the Company's Common Stock were granted January 1, 1995 and January 1, 1996,
respective under the Stock Incentive Plan. The January 1, 1995 and 1996 options
have exercise prices of $3.50 and $3.625 per share, respectively. Options to
purchase 27,500 shares of Common Stock have been exercised and options to
purchase 9,500 shares of Common Stock have expired due to certain employees
leaving the Company as of March 1, 1997.

         1995 EMPLOYEE STOCK PURCHASE PLAN. The Board of Directors of the
Company has adopted, effective January 1, 1995, the 1995 Employee Stock Purchase
Plan (the "Stock Purchase Plan"), under which 250,000 shares of Common Stock are
reserved for issuance. During the first quarter of 1996, the Company implemented
the Stock Purchase Plan. The Stock Purchase Plan, which is designed to qualify
under Section 423 of the Code, is designed to encourage stock ownership by
employees of the Company. Employees of the Company other than members of the
Board of Directors and owners of 5% or more of the Company's Common Stock are
eligible to participate in the Stock Purchase Plan, with certain exceptions, if
they are employed by the Company for at least 20 hours per week and more than
five months per year. No employee is eligible to participate who, after the
grant of options under the Stock Purchase Plan, owns (including all shares which
may be purchased under any outstanding options) 5% or more of the Company's
Common Stock.

         On January 1 of each year ("Enrollment Date"), the Company will grant
to each participant an option to purchase on December 31 of each such year
("Exercise Date") at a price determined as described below (the "Purchase
Price") the number of shares of Common Stock which his or her accumulated
payroll deductions on the Exercise Date will purchase at the Purchase Price. The
Purchase Price will be the lesser of (i) a percentage (not less than 85%) of the
fair market value of the Common Stock on the Enrollment Date, or (ii) a
percentage (not less than 85%) of the fair market value of the Common Stock on
the Exercise Date. As soon as practicable after any Exercise Date on which a
purchase of shares occurs, the Company will deliver to each participant, a
certificate representing the shares purchased, upon exercise of his or her
option; however, the Compensation Committee may determine to hold a
participant's certificates until the participant ceases participation in the
Stock Purchase Plan or requests delivery of the certificates.

         Common Stock of the Company was issued to employees in January 1997
pursuant to the Stock Purchase Plan in an aggregate amount of 17,908 shares.

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         The following table sets forth the number of shares and percentage
owned of the Company's Common Stock beneficially owned as of March 15, 1997 by
(i) owners of more than five percent of the Common Stock, (ii) each director of
the Company, (iii) the President and the Chairman of the Company and each other
executive officer of the Company, and (iv) all executive officers and directors
of the Company as a group.

                                       37

<PAGE>   38


<TABLE>
<CAPTION>
NAME AND ADDRESS OF                                        NUMBER OF
PRINCIPAL STOCKHOLDERS OTHER                           SHARES OF COMMON          PERCENTAGE
THAN EXECUTIVE OFFICERS OR DIRECTORS                     STOCK OWNED               OWNED (1)
------------------------------------                   ----------------          ------------
<S>                                                     <C>                       <C>
Luther King Capital Management Corporation
301 Commerce, Suite 1600
Fort Worth, TX  76102                                    1,040,000                    13.07%

NAME AND ADDRESS OF
EXECUTIVE OFFICER OR DIRECTOR
-----------------------------

Gary O. Marino
301 Yamato Road, Suite 1190
Boca Raton, FL 33431                                       474,500(4)                  5.68%

John H. Marino
RailAmerica, Inc.
King Street Station
Suite 150, 1800 Diagonal Road
Alexandria, VA 22314                                       412,500(2)                  5.15%

Donald D. Redfearn
301 Yamato Road, Suite 1190
Boca Raton, FL  33431                                      122,301(5)                  1.52%

John M. Sullivan
10279 SW Stones Throw Terrace
Palm City, FL 34990                                         51,100(3)                  0.64%

Charles Swinburn
1713 Maple Hill Place
Alexandria, VA  22302                                       51,000(6)                  0.64%

Richard Rampell
122 North County Road
Palm Beach, FL  33480                                       51,000(7)                  0.64%

Douglas Nichols                                            343,000(8)                  4.13%
260 State Street
Dallas, TX  75201

Robert Toia                                                 51,000(9)                  0.64%
574 Broadmoor Court
Sanford, NC  27330
</TABLE>



                                       38
<PAGE>   39


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

W. Graham Claytor, III
Pier 33 North
San Francisco, CA  94133                                    11,000(10)                 0.14%

Robert Coward
U.S Highway 84 West
Gatesville, TX  76528                                      101,479(11)                 1.26%

All Executive Officers and Directors                     1,668,880                    18.23%

</TABLE>


(1)      Based on 7,954,387 shares of Common Stock issued and outstanding on the
         date of the filing hereof. Does not include issuance of 478,729 shares
         of Common Stock upon exercise of the Company's outstanding, publicly
         traded Class B Warrants.

(2)      Includes options to purchase 50,000 shares of Common Stock at $3.625
         per share, pursuant to options granted January 1, 1996 under the
         Company's 1995 Stock Incentive Plan.

(3)      Includes options to purchase 50,000 shares of Common Stock at $3.50 per
         share, pursuant to options granted in 1993 under the Company's 1992
         Stock Option Plan.

(4)      Includes options to purchase 40,000 shares of Common Stock at $3.50 per
         share granted in 1993 under the Company's 1992 Stock Option Plan and
         10,000 shares of Common Stock at $3.625 per share granted January 1,
         1996 under the 1995 Stock Incentive Plan. Also includes, options to
         purchase 87,500 shares of Common Stock at $3.10 per share, 87,500
         shares of Common Stock at $3.40 per share, 87,500 shares of Common
         Stock at $3.75 per share and 87,500 shares of Common Stock at $4.15
         per share issued pursuant to Mr. Marino's employment agreement.

(5)      Includes options to purchase 40,000 shares of Common Stock at $3.50 per
         share granted to Mr. Redfearn in 1993 under the Company's 1992 Stock
         Option Plan, options to purchase 10,000 shares of Common Stock at $3.50
         per share granted to Mr. Redfearn under the Company's 1995 Non-Employee
         Directors Stock Option Plan and options to purchase 50,000 shares of
         Common Stock at $5.00 granted November 1, 1996.

(6)      Includes options to purchase 50,000 shares of Common Stock at $4.19 per
         share granted to Mr. Swinburn as of February 1, 1995, under the
         Company's 1995 Non-Employee Director Stock Option Plan.

(7)      Includes options to purchase 50,000 shares of Common Stock at $4.81 per
         share granted to Mr. Rampell as of July 27, 1995, under the Company's
         1995 Non-Employee Director Stock Option Plan.

(8)      Includes options to purchase 50,000 shares of Common Stock at $3.50 per
         share granted to Mr. Nichols as of July 24, 1996, under the Company's
         1995 Non-Employee Director Stock Option Plan. Also includes, warrants
         to purchase 125,000 shares of Common Stock at $4.60 per share and
         warrants to purchase 167,000 shares of Common Stock at $5.75 per share
         owned by First London Securities Corporation. Mr. Nichols is President
         and principal shareholder of First London Securities Corporation.

(9)      Includes options to purchase 50,000 shares of Common Stock at $3.50 per
         share granted to Mr. Toia as of July 24, 1996, under the Company's
         1995 Non-Employee Director Stock Option Plan.



                                       39

<PAGE>   40



(10)     Includes options to purchase 10,000 shares of Common Stock at $3.65
         granted to Mr. Clayton as of March 15, 1996.

(11)     Includes a $225,000 convertible subordinated note, which is currently
         convertible into Common Stock at $2.25 per share (100,000 shares of
         common stock).

ITEM 12.          CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         Donald Redfearn and Jenex Financial Corporation, a company in which he
was a principal shareholder, received $72,000 in fees during 1995 for consulting
services performed for the benefit of the Company and its subsidiaries.

         First London Securities Corporation ("First London"), of which Douglas
Nichols is President and principal shareholder, served as the exclusive
placement agent for the Company's private placement which closed in September
1996 and also the Company's private placement which closed in January 1997.
First London received as part of the September 1996 private placement a $225,000
placement fee, $45,000 nonaccountable expense fee and warrants exercisable in
one-year to purchase 125,000 shares of Common Stock at an exercise price of
$4.60 per share. First London received as part of the January 1997 private
placement a $375,750 placement fee, $75,150 nonaccountable expense fee and
warrants exercisable in one-year to purchase 167,000 shares of Common Stock at
an exercise price of $5.75 per share.

         The Company believes that all of the transactions described above are
on terms comparable to those that might have been obtained from unaffiliated
parties.

ITEM 13.  EXHIBITS AND REPORTS ON FORM 8-K

         (a) The following exhibits are filed herewith (each management contract
         or compensatory plan or arrangement included below is designated as an
         "Executive Compensation Plan or Arrangement"):

<TABLE>
<CAPTION>
<S>           <C>
       3.1    Amended and Restated Articles of Incorporation of Registrant, as amended(10)
       3.2    By-laws of Registrant(1)
       4.2    Class B Warrant(2)
       4.3    Unit Purchase Warrant(2)
       4.4    Series A Convertible Subordinated Debentures(8)
     10.14    RailAmerica, Inc. 1992 Stock Option Plan(1)+
     10.23    Loan Agreement among RailAmerica, Inc., South Central Tennessee Railroad
              Corporation, South Central Tennessee Railroad Company, Inc. and Charter
              Financial, Inc., dated as of December 31, 1993.(5)
     10.24    Lease Agreement between South Central Tennessee Railroad Authority and South
              Central Tennessee Railroad Company, Inc. dated October 16, 1984.(3)
     10.32    Stock Purchase Agreement between Steel City Truck Lines Limited, Josef Bichler
              and RailAmerica, Inc. dated December 19, 1994.(11)
     10.33    Stock Purchase Agreement between 823215 Ontario, Inc. and RailAmerica, Inc.


</TABLE>

                                       40

<PAGE>   41

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

              dated February 6, 1995.(11)
     10.35    Employment Agreement between Robert B. Coward and Kalyn Siebert,
              Incorporated.(6)
     10.36    Loan documents in connection with RailAmerica's acquisition of the assets of
              Steel City Truck Lines Limited(7)
     10.37    Stock Purchase Agreement, dated July 11, 1995, among RailAmerica, Inc., Brian
              E. Muir, Elli M.A. Mills and Kimberly Hughes, Prairie Holding Corporation and
              Dakota Rail, Inc.(8)
     10.38    Settlement Agreement, entered into March 15, 1995, by Eric D. Gerst and
              RailAmerica, Inc., RailAmerica Services Corporation and Huron & Eastern
              Railway Company, Inc.(8)
     10.39    Loan Agreement, dated September 29, 1995, by and between
              RailAmerica, Inc., Kalyn/Siebert Incorporated, RailAmerica
              Intermodal Services, Inc., RailAmerica Carriers, Inc., Steel
              City Carriers, Inc., Saginaw Valley Railway Company, Inc.,
              Huron & Eastern Railway Company, Inc. and National Bank of
              Canada(10)
     10.40    Asset Purchase Agreement, dated October 11, 1995, by and among Seagraves,
              Whiteface & Lubbock Railroad Co., American Railway Corporation, TEMCO
              Corporation and RailAmerica, Inc.(9)
     10.41    Employment Agreement between Gary O. Marino and RailAmerica, Inc.(10)+
     10.42    Employment Agreement between John H. Marino and RailAmerica, Inc.(10)+
     10.43    Stock Option Agreement, dated November 11, 1994, between RailAmerica, Inc.
              and Gary O. Marino(10)+
     10.44    RailAmerica, Inc. 1995 Stock Incentive Plan(10)+
     10.45    RailAmerica, Inc. 1995 Non-Employee Director Stock Option Plan(10)
     10.46    RailAmerica, Inc. 1995 Employee Stock Purchase Plan(10)
     10.47    RailAmerica, Inc. Corporate Senior Executive Bonus Plan(10)+
     10.49    Purchase and Sale Agreement dated November 30, 1995, by and between CSX
              Transportation, Inc. and Saginaw Valley Railway Company, Inc.(11)
     10.50    Stock Repurchase Agreement dated October 1, 1995 by and between
              RailAmerica, Inc. and the holders of all the issued and outstanding shares of the
              Company's Preferred Stock.(11)
     10.51    Asset Purchase Agreement dated January 26, 1996 by and between
              Temco Corporation and RailAmerica Equipment Corporation(11)
     10.52    Agreement of Sale dated July 18, 1996 by and between the
              Commonwealth's Department of Transportation and Delaware
              Valley Railway Company, Inc., a wholly-owned subsidiary of
              RailAmerica, Inc.(12)
     10.53    Agreement entered into by and between R. Frank Unger, Trustee of Sagamore
              National Corporation, Indiana HiRail Corporation and RailAmerica, Inc.(12)
     10.54    Asset Purchase Agreement, dated August 5, 1996, by and among
              Burlington Northern Railroad Company and Cascade and Columbia
              river Railroad Company, a subsidiary of RailAmerica, Inc.(13)
     10.55    Confidential Private Placement Memorandum dated September 20, 1996(14)
     10.56    Stock Purchase Agreement, dated as of September 20, 1996, by and among Otter
              Tail Valley Railroad Company, Inc. and Dakota Rail, Inc.(15)
     10.57    Commitment letter relating to $40,000,000 Revolving Line of Credit/Term Loan


</TABLE>

                                       41

<PAGE>   42


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

              Facility, dated March 3, 1997, by and between National Bank of
              Canada, Comerica Bank, RailAmerica, Inc., Kalyn/Siebert,
              Incorporated, RailAmerica Intermodal Services, Inc.,
              RailAmerica Carriers, Inc., Steel City Carriers, Inc., Saginaw
              Valley Railway Company, Inc., Huron and Eastern Railway
              Company, Inc., West Texas and Lubbock Railroad Company, Inc.,
              Plainview Terminal Company, Cascade and Columbia River
              Railroad Company, Inc., Minnesota Northern Railroad Company,
              Inc. and Delaware Valley Railway Company, Inc.
     10.58    Agreement for sale of certain assets, rights and obligations
              of Burlington Northern Railroad Company to Minnesota Northern
              Railroad, Inc.
     10.59    RailAmerica, Inc. Nonqualified Deferred Compensation Trust+
     10.60    Nonqualified Deferred Compensation Agreement between RailAmerica, Inc. and
              Gary O. Marino+
     10.61    Nonqualified Deferred Compensation Agreement between RailAmerica, Inc. and
              John H. Marino+


     11       Computation of Per Share Earnings
     21       Subsidiaries of Registrant
     27       Financial Data Schedule (for SEC use only).

</TABLE>

(1)      Incorporated by reference to the same exhibit number filed as part of
         the Registrant's Registration Statement on Form S-1, Registration No.
         33-49026.
(2)      Incorporated by reference to the same exhibit number filed as part of
         the Registrant's Post-Effective Amendment No. 3 on Form SB-2, dated
         November 25, 1994, Registration No. 33-49026.
(3)      Incorporated by reference to the same exhibit number filed as part of
         the Company's annual report on Form 10-KSB, filed with the Securities
         and Exchange Commission on March 31, 1993.
(4)      Incorporated by reference to the same exhibit number filed as part of
         the Registrant's Post-Effective Amendment No. 4 on Form SB-2, dated
         December 14, 1994, Registration No. 33-49026.
(5)      Incorporated by reference to the same exhibit number filed as part of
         the Company's Form 10-KSB for the year ended December 31, 1993, filed
         with the Securities and Exchange Commission on April 15, 1994.
(6)      Incorporated by reference to the same exhibit number filed as a part of
         the Registrant's Post-Effective Amendment No. 2 on Form SB-2, dated
         October 17, 1994, Registration No. 33-49026.
(7)      Incorporated by reference to the same exhibit number filed as part of
         the Company's Form 10-KSB for the year ended December 31, 1994, filed
         with the Securities and Exchange Commission on March 30, 1995.
(8)      Incorporated by reference to the same exhibit number filed as part of
         the Company's Form 10-QSB for the quarter ended June 30, 1995, filed
         with the Securities and Exchange Commission on August 9, 1995.

                                       42



<PAGE>   43



(9)      Incorporated by reference to the exhibit number 2.1 filed as part of
         the Company's Form 8-K as of November 1, 1995, filed with the
         Securities and Exchange Commission on November 3, 1995.
(10)     Incorporated by reference to the same exhibit number filed as part of
         the Company's Form 10-QSB for the quarter ended September 30, 1995,
         filed with the Securities and Exchange Commission on November 12, 1995.
(11)     Incorporated by reference to the same exhibit number filed as part of
         the Company's Form 10-KSB for the year ended December 31, 1995, filed
         with the Securities and Exchange Commission on April 12, 1996.
(12)     Incorporated by reference to the same exhibit number filed as part of
         the Company's Form 10-QSB for the quarter ended July 30, 1996, filed
         with the Securities and Exchange Commission on August 12, 1996
(13)     Incorporated by reference to the exhibit 2.1 filed as part of the
         Company's Form 8-K as of September 6, 1996, filed with the Securities
         and Exchange Commission on September 12, 1996.
(14)     Incorporated by reference to the exhibit A filed as part of the
         Company's Form 8-K as of September 30, 1996, filed with the Securities
         and Exchange Commission on October 17, 1996.
(15)     Incorporated by reference to the exhibit 2.1 filed as part of the
         Company's Form 8-K as of October 11, 1996, filed with the Securities
         and Exchange Commission on October 25, 1996.

+        Executive Compensation Plan or Arrangement.

(b)      Reports on Form 8-K.

         The Company filed the following reports on Form 8-K during the last
         quarter of fiscal year 1996:

         1.       A Form 8-K dated September 30, 1996, was filed on October 17,
                  1996, as a result of completing a Private Placement of
                  1,250,000 shares of the Company's common stock.

         2.       A Form 8-K dated October 11, 1996, was filed on October 25,
                  1996, as a result of completing the purchase of all of the
                  outstanding stock of Otter Tail Valley Railroad, Inc. for
                  $4.25 million.

         3.       A Form 8-K/A amending Form 8-K, dated October 11, 1996, was
                  filed on December 11, 1996, to disclose both the financial
                  statements of the Otter Tail Valley Railroad, Inc., which was
                  acquired by the Company, and the Company's financial
                  statements following the acquisition. The following is a list
                  of financial statements that were filed:

         (a)      Financial Statements of Otter Tail Valley Railroad

                                       43

<PAGE>   44




                  Independent Auditor's Report on 1995 and 1994 Financial
                  Statements

                  Balance Sheets as of December 31, 1995 and 1994

                  Statements of Stockholders' Equity for the years ended
                  December 31, 1995 and 1994

                  Statements of Income for the years ended December 31, 1995 and
                  1994

                  Notes to the 1995 and 1994 financial statements

                  Unaudited Balance Sheet as of  September 30, 1996

                  Unaudited Statement of Income for the nine and three months
                  ended September 30, 1996

                  Unaudited Statement of Cash Flows for the nine months ended
                  September 30, 1996

         (b)      Pro Forma Financial Statements

                  Pro Forma Consolidated Balance Sheet as of September 30, 1996

                  Pro Forma Consolidated Statement of Income for the nine months
                  ended September 30, 1996

                  Pro Forma Consolidated Statement of Income for the year ended
                  December 31, 1995

                  Notes to Pro Forma Consolidated Financial Statements


                                       44

<PAGE>   45


                                   SIGNATURES

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

                             RAILAMERICA, INC.

                             By:     /s/  Gary O Marino
                                     ---------------------------------------
                                     Gary O. Marino, Chief Executive Officer

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


Dated  March 31, 1997

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

<TABLE>
<CAPTION>
         Signatures                     Title                                                      Date
         ----------                     -----                                                      ----
<S>                                       <C>                                                       <C>
/s/ Gary O. Marino                      Chairman, President, Chief Executive                     March 31, 1997
-----------------------------           Officer and Director (Principal Financial Officer)
Gary O. Marino

/s/ John H. Marino                      Vice Chairman/Sr. Transportation Officer                 March 31, 1997
-----------------------------           and Director
John H. Marino

/s/ Donald D. Redfearn                  Executive Vice President, Secretary                      March 31, 1997
-----------------------------           and Director
Donald D. Redfearn

/s/ Douglas R. Nichols                  Director                                                 March 31, 1997
-----------------------------
Douglas R. Nichols

/s/ Richard Rampell                     Director                                                 March 31, 1997
-----------------------------
Richard Rampell

/s/ Charles Swinburn                    Director                                                 March 31, 1997
-----------------------------
Charles Swinburn

/s/ John M. Sullivan                    Director                                                 March 31, 1997
-----------------------------
John M. Sullivan

/s/ Robert F. Toia                      Director                                                 March 31, 1997
-----------------------------
Robert F. Toia

</TABLE>


                                       45


<PAGE>   46



EXHIBIT 11 - COMPUTATION OF PER SHARE EARNINGS

PRIMARY EARNINGS PER SHARE FOR THE YEAR ENDED DECEMBER 31, 1995

<TABLE>
<CAPTION>
Net earnings attributable to common shares:
<S>                                                    <C>
     Net income                                        $   868,333
     Deemed dividend on redemption of convertible
         preferred stock                                  (666,665)
                                                       -----------
     Net earnings attributable to common shares        $   201,668
                                                       ===========

Actual weighted average shares outstanding               4,554,285

Primary earnings per share                             $      0.04
                                                       ===========

FULLY DILUTED EARNINGS PER SHARE FOR THE YEAR ENDED DECEMBER 31, 1995

Net earnings attributable to common shares:
     Net income                                        $   868,333
     Deemed dividend on redemption of convertible
         preferred stock                                  (666,665)
                                                       -----------
     Net earnings attributable to common shares        $   201,668
                                                       ===========

Actual weighted average shares outstanding               4,554,285

Fully diluted earnings per share                       $      0.04
                                                       ===========

</TABLE>


<PAGE>   47


<TABLE>
<CAPTION>

EXHIBIT 21 - SUBSIDIARIES OF REGISTRANT

Subsidiary and Name Under Which Subsidiary Does Business                                State of Incorporation
--------------------------------------------------------                                ----------------------
<S>                                                                                     <C>
Cascade and Columbia River Railroad Company, Inc.                                       Delaware
Dakota Rail, Inc.                                                                       South Dakota
Delaware Valley Railway Company, Inc.                                                   Delaware
Evansville Terminal Company                                                             Delaware
Florida Rail Lines, Inc.                                                                Delaware
Gettysburg Scenic Rail Tours, Inc.                                                      Delaware
Huron and Eastern Railway Company, Inc.                                                 Michigan
Huron Distribution Services, Inc.                                                       Delaware
Kalyn/Siebert Incorporated                                                              Texas
Minnesota Northern Railroad, Inc.                                                       Delaware
Otter Tail Valley Railroad Company, Inc.                                                Minnesota
Plainview Terminal Company                                                              Texas
Prairie Holding Corporation                                                             Florida
RailAmerica de Chile, S.A.                                                              Chile
RailAmerica Carriers, Inc.                                                              Ontario, Canada
RailAmerica Equipment Corporation                                                       Delaware
RailAmerica Intermodal Services, Inc.                                                   Delaware
Saginaw Valley Railway Company, Inc.                                                    Delaware
South Central Tennessee Railroad Corporation                                            Delaware
Steel City Carriers, Inc.                                                               Ontario, Canada
U.S. Rail Lines, Inc.                                                                   Delaware
West Texas and Lubbock Railroad Company, Inc.                                           Texas



</TABLE>


<PAGE>   48
                       RAILAMERICA, INC. AND SUBSIDIARIES

                          INDEX OF FINANCIAL STATEMENTS

                                     -------



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

<TABLE>
<CAPTION>
                                                                            PAGES
                                                                            -----
<S>                                                                         <C>
Report of Independent Accountants                                            F-2

Consolidated Balance Sheets - December 31, 1996 and 1995                     F-3

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

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

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

Notes to Consolidated Financial Statements                               F-7 - F-28

</TABLE>




                                      F-1
<PAGE>   49
                       Report of Independent Accountants
                       ---------------------------------



To the Shareholders of
RailAmerica, Inc. and Subsidiaries


We have audited the accompanying consolidated balance sheets of RailAmerica,
Inc. and Subsidiaries as of December 31, 1996 and 1995, and the related
consolidated statements of income, stockholders' equity and cash flows for the
years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of RailAmerica, Inc.
and Subsidiaries as of December 31, 1996 and 1995, and the consolidated results
of their operations and their cash flows for the years then ended in conformity
with generally accepted accounting principles.



Coopers & Lybrand LLP


West Palm Beach, Florida
March 21, 1997





                                      F-2
<PAGE>   50

                       RAILAMERICA, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                           December 31, 1996 and 1995



<TABLE>
<CAPTION>
                                                                           1996           1995
                                                                           ----           ----
                               ASSETS
Current assets:
<S>                                                                 <C>           <C>
  Cash                                                                  $  3,879,972    $  3,488,866
  Restricted cash                                                               --           175,000
  Accounts receivable                                                      4,575,958       2,194,828
  Inventories                                                              3,104,555       3,360,838
  Other current assets                                                       462,867         415,870
  Deferred income taxes                                                         --           329,000

                                                                        ------------    ------------
        Total current assets                                              12,023,352       9,964,402

Property, plant and equipment, net                                        54,148,966      25,547,541

Other, net                                                                 2,426,615       1,519,827

Excess of cost over net assets of companies acquired, net                  2,965,853       3,032,192

                                                                        ------------    ------------
        Total assets                                                    $ 71,564,786    $ 40,063,962
                                                                        ============    ============



               LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Current maturities of long-term debt                                  $  1,752,926    $    969,929
  Current maturities of subordinated debt                                    212,392       1,879,057
  Accounts payable                                                         3,162,953       2,093,740
  Income taxes payable                                                       105,538         560,788
  Accrued expenses                                                         1,706,201       1,420,227

                                                                        ------------    ------------
        Total current liabilities                                          6,940,010       6,923,741
                                                                        ------------    ------------
Long-term debt, less current maturities                                   38,401,119      17,181,288
                                                                        ------------    ------------
Subordinated debt, less current maturities                                 3,477,882       3,690,274
                                                                        ------------    ------------
Deferred income taxes                                                      6,753,668       3,120,000
                                                                        ------------    ------------
Commitments and contingencies
Redeemable convertible preferred stock, $.001 par value,
  1,000,000 shares authorized                                                   --              --
Stockholders' equity:
  Common stock, $.001 par value, 30,000,000 shares
     authorized; 6,125,410 and 4,848,991 issued at
     December 31, 1996 and 1995; 5,888,410 and 4,658,991
     outstanding at December 31, 1996 and 1995                                 6,125           4,849
  Additional paid-in capital                                              11,773,036       7,599,313
  Common stock subscribed                                                  2,340,000            --
  Retained earnings                                                        2,944,774       2,439,895
  Cumulative translation adjustment                                           67,441          70,355
  Less treasury stock (237,000 and 190,000
    shares at cost, respectively)                                         (1,139,269)       (965,753)

                                                                        ------------    ------------
        Total stockholders' equity                                        15,992,107       9,148,659
                                                                        ------------    ------------
                                                                        $ 71,564,786    $ 40,063,962
                                                                        ============    ============

</TABLE>

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

                                       F-3







<PAGE>   51


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

<TABLE>
<CAPTION>
                                                                      1996           1995
                                                                      ----           ----
<S>                                                             <C>               <C>
Operating revenues:
  Transportation - railroad                                     $   9,783,041      $ 6,767,530
  Manufacturing                                                    13,637,978       17,872,777
  Other                                                             2,237,222          437,797
                                                                 ------------      -----------
                                                                   25,658,241       25,078,104
                                                                 ------------      -----------
Operating expenses:
  Transportation - railroad                                         4,397,884        3,034,068
  Cost of goods sold - manufacturing                               10,447,827       13,398,740
  Selling, general and administrative                               5,413,153        4,225,949
  Depreciation and amortization                                     1,526,510        1,231,622
                                                                 ------------      -----------
                                                                   21,785,374       21,890,379
                                                                 ------------      -----------

        Operating income                                            3,872,867        3,187,725

  Interest expense                                                 (2,078,383)      (1,277,837)

  Other (expense) income                                               (8,642)         166,654

                                                                 ------------     ------------
        Income from continuing operations before
            income taxes                                            1,785,842        2,076,542
 Provision for income taxes                                           705,405          950,299
                                                                 ------------     ------------
        Income from continuing operations                           1,080,437        1,126,243
Discontinued operations
    Loss from operations of discontinued Motor
     Carrier segment (less applicable income tax
     benefit of $322,000 and $172,000, respectively)                 (575,558)        (257,910)
             Net Income                                          $    504,879     $    868,333
                                                                 ============     ============



Net earnings attributable to common
    shares                                                       $    504,879     $    201,668
                                                                 ============     ============
Primary earnings per common share
    Continuing operations                                        $       0.22     $       0.10
    Discontinued operations                                             (0.12)           (0.06)
                                                                 ------------     ------------
        Net income                                               $       0.10     $       0.04
                                                                 ============     ============

Fully diluted earnings per common share
    Continuing operations                                        $       0.22     $       0.10
    Discontinued operations                                             (0.12)           (0.06)
                                                                 ------------     ------------
        Net income                                               $       0.10     $       0.04
                                                                 ============     ============

Weighted average common shares outstanding:
    Primary                                                         4,966,296        4,554,285
                                                                 ============      ===========
    Fully Diluted                                                   4,966,296        4,554,285
                                                                 ============      ===========

</TABLE>


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


                                       F-4



<PAGE>   52

                       RAILAMERICA, INC. AND SUBSIDIARIES
                 CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
                 For the years ended December 31, 1996 and 1995


<TABLE>
<CAPTION>
                                                                                 Stockholders' Equity
                                 ---------------------------------------------------------------------------------------------------
                                             Additional       Common                     Cumulative
                                   Par         Paid-in        Stock        Retained      Translation   Treasury
                                  Value        Capital      Subscribed     Earnings       Adjustment     Shares        Total
                                  -----        -------      ----------     --------       ----------     ------        -----
<S>                               <C>        <C>            <C>           <C>             <C>         <C>            <C>
Balance, January 1, 1995          $3,679     $ 4,132,325    $     --      $ 2,271,560     $   --      $      --      $  6,407,564

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

Issuance of common stock           1,170       3,466,988          --             --           --             --         3,468,158

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

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

Cumulative translation              --              --            --             --         70,355           --            70,355

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

                                  ------     -----------    ----------    -----------     --------    -----------    ------------
Balance, December 31, 1995         4,849       7,599,313          --        2,439,895       70,355       (965,753)      9,148,659

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

Issuance of common stock           1,264       4,128,735          --             --           --             --         4,129,999

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

Exercise of stock options             12          44,988          --             --           --             --            45,000

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

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

Balance, December 31, 1996        $6,125     $11,773,036    $2,340,000    $ 2,944,774     $ 67,441    $(1,139,269)   $ 15,992,107
                                  ======     ===========    ==========    ===========     ========    ===========    ============
</TABLE>

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



                                      F-5



<PAGE>   53

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

<TABLE>
<CAPTION>
                                                                                  1996             1995
                                                                                  ----             ----
<S>                                                                         <C>               <C>
Cash flows from operating activities:
  Net income                                                                $    504,879      $    868,333
  Adjustments to reconcile net income to net
    cash provided by operating activities:
      Depreciation and amortization                                            2,047,684         1,840,298
      Sale of properties                                                         455,932           185,755
      Write off of deferred acquisition costs                                    138,010            92,526
      Employee stock grants                                                       48,554           109,571
      Deferred income taxes                                                      263,668            61,533
      Forgiveness of debt                                                        (20,576)             --
      Changes in operating assets and liabilities, net of acquisitions:
        Accounts receivable                                                   (1,816,862)          668,086
        Inventories                                                              291,825          (678,959)
        Other current assets                                                     (41,203)         (151,486)
        Note receivable                                                           21,312            15,121
        Accounts payable                                                       1,031,238           459,616
        Income taxes payable                                                    (455,250)          444,788
        Accrued liabilities                                                     (128,307)          (68,859)
        Deposits and other                                                      (135,165)          (91,185)
                                                                            ------------      ------------
          Net cash provided by operating activities                            2,205,739         3,755,138
                                                                            ------------      ------------

Cash flows from investing activities:
  Purchase of property, plant  and equipment                                  (4,487,909)       (2,549,199)
  Acquisition of Steel City                                                         --            (993,423)
  Acquisition of Dakota Rail, Inc. net of cash acquired                             --          (1,530,254)
  Acquisition of West Texas and Lubbock Railroad                                    --            (274,000)
  Acquisition of Otter Tail Valley Railroad, net of cash acquired               (103,908)             --
  Deferred acquisition costs and other                                          (825,026)         (188,156)
                                                                            ------------      ------------
          Net cash used in investing activities                               (5,416,843)       (5,535,032)
                                                                            ------------      ------------

Cash flows from financing activities:
  Proceeds from issuance of long-term debt and capital leases                 10,033,070        34,533,216
  Principal payments on debt and capital leases                              (12,503,210)      (30,842,067)
  Sale of common stock                                                         6,466,445         2,383,209
  Purchase of treasury stock                                                    (173,516)         (965,753)
  Preferred stock dividends paid                                                    --             (50,000)
  Decrease in restricted cash                                                    175,000           290,000
  Deferred financing costs                                                       (98,741)         (106,704)
  Deferred loan costs                                                           (296,838)         (443,355)
                                                                            ------------      ------------
          Net cash provided by financing activities                            3,602,210         4,798,546
                                                                            ------------      ------------

Net increase in cash                                                             391,106         3,018,652
Cash, beginning of period                                                      3,488,866           470,214
                                                                            ------------      ------------
Cash, end of period                                                         $  3,879,972      $  3,488,866
                                                                            ============      ============

Supplemental disclosures of cash flow information:
    Cash paid during the year for interest                                  $  2,377,474      $  1,369,430
                                                                            ============      ============

    Cash paid during the year for income taxes                              $    602,154      $    202,575
                                                                            ============      ============
</TABLE>

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

                                       F-6





<PAGE>   54


                       RAILAMERICA, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                     -------

 1.      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

         Organization and Principles of Consolidation

         The accompanying consolidated financial statements include the accounts
         of RailAmerica, Inc. and all of its wholly-owned subsidiaries (the
         "Company"). All significant intercompany transactions have been
         eliminated in the preparation of the consolidated financial statements.

         The Company is a multi-modal transportation company that was
         incorporated in Delaware on March 31, 1992. The Company historically
         has developed short-line and regional railroads formed primarily
         through the acquisition of branch and light density rail lines from
         larger railroads. During 1994, the Company expanded its operations in
         the transportation area through its acquisition of Kalyn/Siebert, Inc.
         ("Kalyn"), a manufacturer of truck trailers located in Gatesville,
         Texas and during 1995 through its acquisition of Steel City Carriers,
         Inc. ("Steel City"), a regional motor carrier located in Sault Ste.
         Marie, Ontario, Canada. Steel City's functional currency is the
         Canadian dollar. Steel City has been included in discontinued
         operations, see note 2.

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

         Use of Estimates

         The preparation of financial statements in conformity with generally
         accepted accounting principles requires management to make estimates
         and assumptions that affect the reported amounts of assets and
         liabilities and disclosure of contingent assets and liabilities at the
         date of the financial statements and the reported amounts of revenues
         and expenses during the reporting periods. Actual results could differ
         from those estimates.

         Inventories

         Inventories are stated at the lower of cost or market, net of advances
         related to materials acquired, with cost determined using the average
         cost method.

         Revenue Recognition

         Transportation

         The Company recognizes transportation revenue after services are
         provided. For the years ended December 31, 1996 and 1995, approximately
         51% and 80%, respectively, of the Company's railroad transportation
         revenue was derived from interchanging traffic with CSX and for the
         year ended December 31, 1996, approximately 34% from interchanging
         traffic with Burlington Northern Sante Fe.

                                       F-7

<PAGE>   55


                       RAILAMERICA, INC. AND SUBSIDIARIES

              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued

                                     -------


1.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

         Commercial Trailer Sales

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

         Governmental Trailer Sales

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

         Sales to governmental agencies represented 20% and 29% of the Company's
         manufacturing revenue for the years ended December 31, 1996 and 1995,
         respectively.

         Concentration of Credit Risk

         The Company maintains its cash in demand deposit accounts which at
         times may exceed FDIC insurance limits. As of December 31, 1996, the
         Company had approximately $3.3 million of cash in excess of FDIC
         insurance limits.

                                       F-8

<PAGE>   56


                       RAILAMERICA, INC. AND SUBSIDIARIES

              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued

                                     -------


1.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

         Property, Plant and Equipment

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

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

         Railroad track and improvements                           3-30 years
         Buildings and improvements                               20-33 years
         Locomotives, transportation and other equipment           5-15 years

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

         Deferred Loan Origination Costs and Deferred Acquisition and Other
         Costs

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

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

         Income Taxes

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

                                       F-9

<PAGE>   57


                       RAILAMERICA, INC. AND SUBSIDIARIES

              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued

                                     -------


1.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

         Cash and Cash Equivalents

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

         Excess of Cost Over Net Assets of Companies Acquired

         The acquisitions of Kalyn and Steel City resulted in purchase price in
         excess of the fair market value of net assets acquired in the amounts
         of approximately $2.5 million and $0.9 million, respectively, which are
         reflected in the balance sheet at December 31, 1996 and 1995, net of
         accumulated amortization. The amounts are being amortized on a
         straight-line basis over twenty years. The Company periodically
         evaluates the carrying value and the periods of amortization based on
         the current and expected future cash flows of the entities giving rise
         to the excess of cost over net assets acquired. Amortization expense
         related to the excess of cost over net assets of companies acquired for
         the years ended December 31, 1996 and 1995 are $190,348 and $156,216.

         Earnings per Common Share

         For the year ended December 31, 1996, primary earnings per common share
         is based on the weighted average number of common shares outstanding
         during the year. The stock options and warrants outstanding are
         anti-dilutive and have been excluded from weighted average number of
         common shares outstanding. Fully diluted earnings per share was
         computed, in addition to the above computation using the higher of the
         average market price or the end of the year market price. Assumed
         conversion of the convertible subordinated notes payable is
         anti-dilutive and has been excluded from the weighted average shares
         outstanding.

         For the year ended December 31, 1995, earnings per common share is
         based on the weighted average number of common shares outstanding
         during the year. The stock options and warrants outstanding are
         anti-dilutive and have been excluded from weighted average number of
         common shares outstanding. On October 1, 1995, the Company was notified
         by the shareholders of its redeemable convertible preferred stock of
         their intent to convert such stock. As part of an overall plan to
         acquire its common stock at favorable prices, the Company redeemed the
         convertible preferred stock at 97.5% of the then market value of the
         underlying common stock ($1,666,665). The excess of the redemption
         price over the book value of the preferred stock was considered a
         non-recurring deemed dividend which reduced 1995 net income available
         to common shareholders by $666,665 or $0.14 per share.


                                      F-10

<PAGE>   58


                       RAILAMERICA, INC. AND SUBSIDIARIES

              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued

                                     -------


1.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

         Profit Sharing Plan

         The Company maintains a contributory profit sharing plan as defined
         under Section 401(k) of the U.S. Internal Revenue Code. The Company
         made contributions to this plan at a rate of 50% of the employees
         contribution up to a maximum annual contribution of $1,000 per eligible
         employee. An employee becomes 100% vested with respect to the employer
         contributions after completing six years of service. Employer
         contributions during the years ended December 31, 1996 and 1995 were
         approximately $61,000 and $48,000, respectively.

         Recent Accounting Pronouncements

         In February 1997, Statements of Financial Accounting Standards ("SFAS")
         No. 128 "Earnings Per Share" was issued. SFAS No. 128 established new
         standards for computing and presenting earnings per share ("EPS"). This
         statement replaces the presentation of primary EPS and will require a
         dual presentation of basic and diluted EPS. SFAS No. 128 is effective
         for financial statements issued for periods ended after December 15,
         1997 and requires restatement of all prior-period EPS data presented.
         The Company has not yet determined the impact, if any, the adoption of
         SFAS No. 128 will have on the Company's financial statements.

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

         Reclassifications

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

 2.      DISCONTINUED OPERATIONS:

         In March 1997, the Company adopted a formal plan to discontinue its
         motor carrier division. The motor carrier division consists of Steel
         City Carriers and RailAmerica Intermodal Services, both wholly-owned
         subsidiaries of the Company. As part of the plan, the Company intends
         to sell the stock or assets of the subsidiaries. Revenues for the motor
         carrier division for the years ended December 31, 1996 and 1995 were
         $7.2 million and $5.1 million, respectively.


                                      F-11

<PAGE>   59


                       RAILAMERICA, INC. AND SUBSIDIARIES

              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued

                                     -------


 2.      DISCONTINUED OPERATIONS, continued

         The assets and liabilities of the discontinued operations consist of
         the following as of December 31, 1996:

         Accounts receivable                              $  764,955
         Inventory                                           127,673
         Other current assets                                 60,254
         Property, plant and equipment, net                4,126,418
         Other assets                                      1,085,587
                                                          ----------
                 Total assets                             $6,164,887

         Accounts payable                                 $  541,730
         Accrued liabilities                                 371,410
         Long-term debt                                    3,267,880
         Deferred income taxes                               488,599
                                                          -----------
                 Total liabilities                        $4,669,619

 3.      ACQUISITIONS:

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

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

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


                                      F-12

<PAGE>   60


                       RAILAMERICA, INC. AND SUBSIDIARIES

              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued

                                     -------


 3.      ACQUISITIONS, continued

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

         The following unaudited pro forma summary presents the consolidated
         results of operations as if the acquisitions had occurred at the
         beginning of the periods presented and do not purport to be indicative
         of what would have occurred had the acquisitions been made as of those
         dates or of results which may occur in the future.

<TABLE>
<CAPTION>
                                                                      1996             1995
                                                                      ----             ----
<S>                                                                <C>             <C>
         Transportation and other revenues                         $27,234,618     $29,543,732
         Income from continuing operations before income taxes     $ 2,013,019     $ 2,743,668
         Net income                                                $   650,256     $ 1,473,416
         Net income per share                                      $       .13     $       .18
</TABLE>


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

 4.      INVENTORIES:

         Inventories consist of the following as of December 31, 1996 and 1995:

<TABLE>
<CAPTION>
                                                           1996               1995
                                                        -----------      ---------
<S>                                                     <C>              <C>
         Raw materials                                  $ 2,284,683      $1,737,683
         Work in process                                    635,780         642,265
         Finished goods                                     881,817         771,842
         Replacement or repair parts for equipment
            and road property                               381,309         209,048
                                                        -----------      ----------
                                                          4,183,589       3,360,838
         Less, advances related to materials             (1,079,034)           --
                                                        -----------      ----------
         Inventories in excess of contract advances     $ 3,104,555      $3,360,838
                                                        ===========      ==========

</TABLE>

                                      F-13

<PAGE>   61


                       RAILAMERICA, INC. AND SUBSIDIARIES

              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued

                                     -------


 5.      PROPERTY, PLANT AND EQUIPMENT:

         Property, plant and equipment consist of the following as of December
         31, 1996 and 1995:

<TABLE>
<CAPTION>
                                                           1996            1995
                                                           ----            ----
<S>                                                    <C>             <C>
         Land                                          $14,881,734     $ 5,669,201
         Buildings and improvements                      3,344,128       2,656,577
         Railroad track and improvements                27,369,412      11,948,501
         Locomotives, vehicles and other equipment      13,671,118       8,880,137
                                                       -----------     -----------
                                                        59,266,392      29,154,416
         Less accumulated depreciation                   5,117,426       3,606,875
                                                       -----------     -----------
                                                       $54,148,966     $25,547,541
                                                       ===========     ===========

</TABLE>

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

6.       OTHER ASSETS:

         Other assets consist of the following as of December 31, 1996 and 1995:


<TABLE>
<CAPTION>
                                                     1996            1995
                                                     ----            ----
<S>                                               <C>            <C>
         Notes receivable                         $  263,567     $   24,879
         Deferred loan costs, net                  1,052,365        641,834
         Deferred acquisition costs                  462,535        325,218
         Deferred financing costs                    146,001        115,824
         Deposits and other                          502,147        412,072
                                                  ----------     ----------
                                                  $2,426,615     $1,519,827
                                                  ==========     ==========

</TABLE>


         Deferred acquisition and financing costs include legal and accounting
         fees, appraisal fees, consulting fees and other costs paid to unrelated
         parties relating to potential acquisitions and equity raising.

 7.      RELATED PARTY TRANSACTIONS:

         During 1995, the Company incurred $18,470 of costs to related parties
         associated with the investigation of potential acquisitions.



                                      F-14

<PAGE>   62


                       RAILAMERICA, INC. AND SUBSIDIARIES

              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued

                                     -------


 7.      RELATED PARTY TRANSACTIONS, continued

         First London Securities Corporation ("First London"), of which Douglas
         Nichols, a director of the Company, is President and principal
         shareholder, served as the exclusive placement agent for the Company's
         private placement which closed in September 1996 and also the Company's
         private placement which closed in January 1997. First London received
         as part of the September 1996 private placement a $225,000 placement
         fee, $45,000 nonaccountable expense fee and one-year warrants to
         purchase 125,000 shares of Common Stock at an exercise price of $4.60
         per share. First London received as part of the January 1997 private
         placement a $375,750 placement fee, $75,150 nonaccountable expense fee
         and one-year warrants to purchase 167,000 shares of Common Stock at an
         exercise price of $5.75 per share.

 8.      LONG-TERM DEBT:

         Long-term debt consists of the following at December 31, 1996 and 1995:

<TABLE>
<CAPTION>
                                                                                          1996             1995
                                                                                       ----------       -------
<S>                                                                                  <C>             <C>
          Revolving line of credit.  See below                                       $24,991,465     $12,933,012

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

          Note payable, financial institution, bearing interest at
               9.50%, due in fixed monthly installments of
               $24,516 (including interest), with a final payment
               of $554,076 in February 1999.  Certain equipment,
               inventory, accounts receivable,  capital leases and
               South Central Tennessee Railroad Corp. ("SCTR")
               common stock serve as collateral                                        1,009,018       1,197,513

          Equipment note, with interest imputed at 9.92%, due in fixed monthly
               installments of $7,055 (including interest) through March
               1998.Certain equipment
               serves as collateral                                                      234,130         291,958

          Equipment notes, with interest imputed at 9.06%, due in fixed monthly
               installments of $9,812 (including interest) through October 2003
               Certain railroad
               equipment serves as collateral                                            646,567            --

          Equipment notes, with interest imputed at 8.33%, due in fixed monthly
               installments of $16,441 (including interest) through March 2003
               Certain railroad
               equipment serves as collateral                                          1,169,056            --



</TABLE>

                                      F-15

<PAGE>   63


                       RAILAMERICA, INC. AND SUBSIDIARIES

              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued

                                     -------


 8.      LONG-TERM DEBT, continued

<TABLE>

<S>                                                                                         <C>
         Equipment notes, with interest imputed at 8.90%, due in fixed monthly
              installments of $9,334 (including interest) through December 2001.
              Certain railroad
              equipment serves as collateral.                                               434,723        -

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

         Equipment notes, with interest imputed at rates from 9.28% to
              11.63%, due in fixed monthly installments of $17,691 (including
              interest) with varying maturities through
              February 2000.  Certain equipment serves as collateral                        351,619        516,692

         Equipment note payable, bearing interest at 8.89%, due in fixed monthly
              installments of $27,250 (including interest) through December 2000
              with final payment of $140,026 January
              2001.  Certain equipment serves as collateral.                              1,194,791      1,405,262

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

         Equipment note payable, bearing interest at 9.4%, due in fixed monthly
              installments of $2,409 (including interest) through
              October 1998.  Certain equipment serves as collateral.                         48,505         71,656

         Burlington Northern Sante Fe ("BNSF") rail facilities installment
              purchase obligation, annual payments of $250,000, including
              interest at 10%, maturing in October 2116. If car loads at OTVR
              fall below 6,500 in a year, BNSF will credit payments
              on this debt at a rate of $250 per car.                                     2,181,164         -

         Contract for deed, principal due at the earlier of December 1, 2008 or
              180 days following the date that rail service ceases to be
              provided on the Minnesota line operated by Dakota. The Contract
              for deed is non-interest bearing and is discounted to yield 9%.
              The unamortized discount at December 31, 1996 and 1995 is $878,169
              and $917,781,
              respectively.  Railroad property serves as collateral.                        486,146        448,235

         Note payable to the State of Minnesota, payable in quarterly
              installments of $6,024 through July 1, 2004. The note is
              non-interest bearing and is discounted to yield 9%. The
              unamortized discount at December 31, 1996 and 1995 is $50,330 and
              $59,533, respectively. Railroad property
              and equipment  serves as collateral.                                          130,394        142,089

</TABLE>

                                      F-16

<PAGE>   64


                       RAILAMERICA, INC. AND SUBSIDIARIES

              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
                                                      -------


 8.      LONG-TERM DEBT, continued

<TABLE>
<S>                                                                                     <C>            <C>
          Note payable to the Central Prairie Rail Shippers Corporation, payable
               in quarterly installments with final payment due not later than
               September 13, 2000. The note is non-interest bearing and is
               discounted to yield 9%. The unamortized discount at December 31,
               1996 and 1995 is $680 and $6,400, respectively. Railroad property
               and equipment serves as collateral                                         39,868          64,902

          Capital lease obligations                                                    2,234,813       1,079,898

          Other                                                                           26,784            --
                                                                                     -----------     -----------
                                                                                      40,154,045      18,151,217
             Less current maturities                                                   1,752,926         969,929
                                                                                     -----------     -----------

                    Long-term debt, less current maturities                          $38,401,119     $17,181,288
                                                                                     ===========     ===========

</TABLE>

         On September 29, 1995, the Company entered into a $15 million revolving
         credit loan facility ("Revolver") with National Bank of Canada ("NBC").
         On October 21, 1996, the Company closed on a $10 million increase in
         its Revolver. The Revolver's maturity date was extended to October
         1999. The Revolver bears interest at either the bank's prime rate
         (which was 8.5% at December 31, 1996) plus 0.5% or the one, three or
         six month LIBOR plus 2.5%, at the option of the Company. The Revolver
         is collateralized by substantially all the assets of the Company, Huron
         and Eastern Railway Company, Inc., Saginaw Valley Railway Company,
         Inc., Cascade and Columbia River Railroad, OTVR, RIS, Steel City, WTLR
         and Kalyn.

         The proceeds from the Revolver were used to refinance approximately $7
         million of existing debt, including debt associated with the 1994
         acquisition of Kalyn, the 1995 acquisition of Steel City and the
         borrowings with First of America Bank, Mid-Michigan, N.A.

         The Revolver includes restrictive covenants prohibiting the Company
         from incurring debt, except liabilities incurred in the normal course
         of business, guaranteeing the payment of an obligation of a third
         party, and selling, transferring or otherwise assigning substantially
         all of its assets. The Revolver also contains certain financial
         covenants which include requiring the Company to maintain a maximum
         debt to tangible net worth and interest coverage ratios. The Revolver
         also contains a covenant which restricts payment of dividends on the
         Company's Common Stock. The Company was not in compliance with certain
         of the covenants during 1996 and received the appropriate waivers from
         NBC. As of December 31, 1996, the Company's Revolver was substantially
         fully funded.


                                      F-17

<PAGE>   65


                       RAILAMERICA, INC. AND SUBSIDIARIES

              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued

                                     -------


 8.      LONG-TERM DEBT, continued

         In December 1996, the Company entered into an acquisition financing
         transaction with Comerica Bank N.A. ("Comerica") to acquire rail lines
         in Minnesota from BNSF. The interest rate on the financing was at the
         prime rate (8.5% at December 31, 1996) plus one percent and was
         scheduled to mature in 90 days from closing, which was subsequently
         extended to April 30, 1997. The acquisition loan is collateralized by
         substantially all of the assets acquired.

         During the first quarter of 1997, the Company negotiated and received a
         bank commitment which will increase its Revolver from $25 million to
         $40 million by bringing Comerica as an additional lender into the
         Revolver. It is anticipated that the acquisition loan will be rolled
         into the Revolver.

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

<TABLE>
<S>                                          <C>
         1997                                $     1,752,926
         1998                                      1,903,815
         1999                                     30,536,040
         2000                                      1,192,501
         2001                                        970,070
         Thereafter                                3,798,693
                                             ---------------
                                             $    40,154,045
                                             ===============
</TABLE>

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

         Capital Leases

         The Company entered into equipment finance leases for certain
         locomotives, tractors, trailers and other equipment expiring at various
         times through 2001. These leases are accounted for as capital leases.
         The financing of the purchase of the locomotives, tractors, trailers
         and equipment under these capital leases was capitalized using the
         interest rate appropriate at the inception of the respective leases.
         The Company also leases certain railroad properties under a capital
         lease which expires in 1998. The lease includes a purchase option for
         $350,000 with a full credit allowed to the purchaser for rents paid
         under the lease. The lease provides for base lease payments of $2,083
         per month, plus 10% of taxable income of SCTR up to $100,000, and
         15% of taxable income of SCTR in excess of $100,000.

         The following is an analysis of the Company's assets under capital
         leases at December 31, 1996:

<TABLE>
<S>                                                <C>
         Property under capital leases             $      2,603,690
         Less accumulated amortization                      283,764
                                                   ----------------
                                                   $      2,319,926

</TABLE>

                                      F-18

<PAGE>   66


                       RAILAMERICA, INC. AND SUBSIDIARIES

              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued

                                     -------


 8.      LONG-TERM DEBT, continued

         Minimum annual lease commitments at December 31, 1996 are as follows:
<TABLE>
<CAPTION>
                                                                CAPITAL           OPERATING
                                                                LEASES             LEASES
<S>                                                         <C>                <C>
         1997                                               $     730,228      $       780,096
         1998                                                     824,207              771,025
         1999                                                     617,316              584,353
         2000                                                     549,945               71,309
         2001                                                     391,389               23,283
         Thereafter                                                -                    49,920
                                                            -------------      ---------------
                Total                                           3,113,085      $     2,279,986
                                                                               ===============
           Less amount representing interest                      878,272
                                                            -------------
                Present value of future minimum
                     lease payments                             2,234,813
           Less current portion                                   557,465
                Noncurrent portion                          $   1,677,348
                                                            =============


</TABLE>

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

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

 9.      SUBORDINATED DEBT:

         Subordinated debt consists of the following at December 31, 1996 and
         1995:

<TABLE>
<CAPTION>
                                                                                       1996               1995
                                                                                    ----------          -------
<S>                                                                                 <C>                 <C>
         Convertible subordinated debentures, bearing interest at the prime rate
              (which was 8.5% at December 31, 1996) adjusted annually, payable
              semi-annually. Principal payments are due in 20 equal quarterly
              installments beginning November 1999. Convertible into common stock
              of the Company at $2.25 beginning August 31, 1995.                   $  1,000,000          $  1,000,000

         Subordinated debentures, bearing interest at the prime
              rate adjusted annually, payable semi-annually.
              Principal payments are due in 20 equal quarterly
              installments beginning May 1995.                                          690,274               902,666

</TABLE>


                                      F-19

<PAGE>   67


                       RAILAMERICA, INC. AND SUBSIDIARIES

              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued

                                     -------


 9.      SUBORDINATED DEBT, continued

<TABLE>
<S>                                                                                 <C>               <C>
         Series A Convertible Subordinated debentures, bearing interest at 8%
              payable semi-annually on January 1 and July 1. Convertible into
              common stock of the Company at $5.48 per share beginning
              January 1, 1996.  Maturing June 30, 2005.                                 2,000,000         2,000,000

         Subordinated promissory note bearing interest at 5%
              maturing January 1996                                                          --           1,666,665
                                                                                  ---------------  ----------------
                                                                                        3,690,274         5,569,331
            Less current maturities                                                       212,392         1,879,057
                                                                                  ---------------  ----------------
                                                                                  $     3,477,882  $      3,690,274
                                                                                  ===============  ================
</TABLE>


         The aggregate annual maturities of subordinated debt are as follows:

<TABLE>
<S>                                                       <C>
                1997                                      212,392
                1998                                      212,392
                1999                                      262,392
                2000                                      253,098
                2001                                      200,000
                Thereafter                              2,550,000
                                                     ------------
                                                     $  3,690,274
</TABLE>


10.      OTHER REVENUE:

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

<TABLE>
<CAPTION>
                                                            1996               1995
                                                            ----               ----
<S>                                                   <C>                 <C>
         Gain on sale of properties and
             easements                                $   1,498,738       $     243,078
         Rental income                                      577,712             136,262
         Other                                              160,772              58,457
                                                      -------------       -------------
                                                      $   2,237,222       $     437,797
                                                      =============       =============
</TABLE>


11.      REDEEMABLE CONVERTIBLE PREFERRED STOCK:

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

                                      F-20

<PAGE>   68


                       RAILAMERICA, INC. AND SUBSIDIARIES

              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
                                                      -------


12.      INCOME TAX PROVISION:

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

<TABLE>
<CAPTION>
                                                        1996             1995
                                                        ----             ----
<S>                                                <C>               <C>
         Federal income taxes:
            Current                                $       45,000    $    400,000
            Deferred                                      411,405         250,643
                                                   --------------    ------------
                                                          456,405         650,643
         State income taxes:
            Current                                        75,000         160,788
            Deferred                                        4,000          62,560
                                                   --------------    ------------
                                                           79,000         223,348
         Foreign income taxes:
            Current                                          --             --
            Deferred                                     (152,000)        (95,692)
                                                   ---------------   -------------
         Total income tax provision                $      383,405    $    778,299
                                                   ==============    ============
</TABLE>

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

<TABLE>
<S>                                                      <C>               <C>
         Continuing operations                           $      705,405    $    950,299
         Discontinued operations                               (322,000)       (172,000)
                                                         --------------    ------------
         Total income tax provision                      $      383,405    $    778,299
                                                         ==============    ============
</TABLE>

         The Company joins in the filing of a consolidated U.S income tax return
         with its domestic subsidiaries. For state income tax purposes, the
         Company and each of its domestic subsidiaries generally file on a
         separate return basis in the states in which they do business. The
         Company's Canadian subsidiaries, RailAmerica Carriers and Steel City
         Carriers, file Canadian income tax returns.

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

<TABLE>
<CAPTION>
                                                                   1996           1995
                                                                   ----           ----
<S>                                                          <C>             <C>
         Income tax provision, at 35%                        $   625,045     $   726,790
         Statutory federal Surtax exemption                      (17,858)        (20,765)
         State income tax, net of federal benefit                 51,350         145,176
         Non-deductible expenses                                  45,100          41,000
         Other, net                                                1,768          28,098
         Valuation allowance                                         -            30,000
                                                             -----------     -----------
                                                             $   705,405     $   950,299
                                                             ===========     ===========

</TABLE>

                                      F-21

<PAGE>   69


                       RAILAMERICA, INC. AND SUBSIDIARIES

              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued

                                     -------


12.      INCOME TAX PROVISION, continued

         The components of deferred income tax assets and liabilities as of
         December 31, 1996 and 1995 are as follows:

<TABLE>
<CAPTION>
                                                                     1996             1995
                                                                     ----             ----
<S>                                                              <C>              <C>
         Deferred tax assets:
         Net operating loss carryforwards                        $      864,000   $      650,000
         Land                                                            84,000           84,000
         Alternative minimum tax credit                                 557,000          512,000
                                                                 --------------   --------------

             Total deferred assets                                    1,505,000        1,246,000
         Less:  valuation allowance                                    (183,000)        (183,000)
                                                                 ---------------  --------------

             Total deferred assets, net                               1,322,000        1,063,000

         Deferred tax liabilities:
         Depreciation and amortization                                8,075,668        3,854,000
                                                                 --------------   --------------
         Net deferred tax liability                              $   (6,753,668)  $   (2,791,000)
                                                                 ==============   ==============
</TABLE>

         The liability method of accounting for deferred income taxes requires a
         valuation allowance against deferred tax assets if, based on the weight
         of available evidence, it is more likely than not that some or all of
         the deferred tax assets will not be realized. The Company has
         established a valuation allowance against tax assets of $183,000 at
         December 31, 1996 and 1995. It is management's belief that it is more
         likely than not that a portion of the deferred tax assets will not be
         realized.

         As a part of certain acquisitions, the Company acquired approximately
         $1,042,000 of net operating loss carryforwards for federal and state
         income tax purposes. The utilization of the acquired tax loss
         carryforwards is further limited by the Internal Revenue Code Section
         382 to approximately $100,000 each year. The tax loss carryforwards
         expire in the years 2001 through 2010.

         The U.S. Income Tax Return for 1993 was examined by the Internal
         Revenue Service. During the first quarter of 1997, the examination
         was completed with no changes to the returns as originally filed.

                                      F-22

<PAGE>   70


                       RAILAMERICA, INC. AND SUBSIDIARIES

              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued

                                     -------


13.      WARRANTS:

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

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

         In the first quarter of 1995, all of the Class A warrants except 10,445
         were exercised. The remaining shares expired as of March 31, 1995. In
         addition, during the first quarter half of the unit purchase warrants
         were exercised. The Class B warrants are exercisable and subject to
         being called by the Company beginning November 9, 1993 (until November
         9, 1997). The Unit Purchase Warrants are exercisable until November 9,
         1997. The Company may call the Class B warrants at $.05 per warrant
         with 30 days written notice during their exercise period if, during any
         period of 20 consecutive trading days ending not more than 10 days
         prior to the notice, the high closing bid price of the common stock has
         equaled or exceeded $5.6875 per share. The Company exercised its option
         to call the Class B warrants in February 1997. Class B Warrants must be
         converted by March 31, 1997 or the Company will repurchase those
         warrants surrendered to it for $.05 per warrant.

         In June 1995, the Company granted 127,500 warrants exercisable at $4.25
         per share, subsequently adjusted to $4.09 per share, in settlement of
         certain litigation. These warrants were outstanding at December 31,
         1996 and exercisable until September 15, 1998.


14.      STOCK OPTIONS:

         In July 1992, the Company implemented a stock option plan (the "Plan")
         for certain officers, consultants, employees and outside directors of
         the Company. The aggregate number of shares which may be issued
         pursuant to the Plan is 250,000 shares. The entire 250,000 options,
         which were issued prior to 1995, exercisable at $3.50 per share, are
         outstanding as of December 31, 1996. 110,000 of the options mature
         February 23, 1998 the remaining balance mature October 5, 2003.

                                      F-23

<PAGE>   71


                       RAILAMERICA, INC. AND SUBSIDIARIES

              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued

                                     -------


14.      STOCK OPTIONS, continued

         The Company granted an additional 275,000 stock options during 1994 to
         outside consultants. The stock options exercise prices ranged from
         $2.00 to $3.55 and were exercisable upon grant. The entire 275,000
         options expired during 1995.

         Effective January 1, 1995, the Company implemented three new stock
         option plans: the 1995 Stock Incentive Plan, the 1995 Non-Employee
         Director Stock Option Plan and the 1995 Employee Stock Purchase Plan.
         Each plan calls for 250,000 shares to be reserved for future issuance.
         During 1995, 141,000 shares were issued under the 1995 Stock Incentive
         Plan, exercisable at $3.50 per share at the date of grant, and 110,000
         were issued under the Non-Employee Director Stock Option Plan at prices
         ranging from $3.50 to $4.81 per share with 1/3 exercisable at the date
         of grant, 1/3 exercisable at the first anniversary of the grant date
         and 1/3 exercisable at the second anniversary of the grant date. During
         1996, 105,000 options were granted under the 1995 Stock Incentive Plan,
         exercisable at $3.625 per share (and 100,000 options were granted under
         the Non-Employee Director Stock Option Plan, exercisable at $3.50 per
         share. All the options granted under the Non-Employee Director Option
         Plan and the Stock Incentive Plan have a 10 year life from the date of
         grant.

         During November 1994, the Company's Board of Directors approved an
         employment arrangement with Mr. Gary Marino for him to serve as Chief
         Executive Officer of the Company and its subsidiaries. Under this
         employment arrangement Mr. Marino was issued 50,000 shares of the
         Company's common stock as a signing bonus. The Company recognized
         compensation expense equal to the number of shares issued at the fair
         market value at the time of issuance. This compensation expense was
         recognized in the third quarter of 1995.

         Mr. Marino's arrangement also provides that he will be granted
         non-qualified options to purchase an aggregate of 350,000 shares of
         common stock of the Company at varying exercise prices and exercise
         dates. Options for 87,500 shares at an exercise price of $3.10, the
         fair market value of the common stock at the time the Board of
         Directors approved the arrangement, and 87,500 shares at an exercise
         price of $3.40 were immediately exercisable upon Mr. Marino's execution
         of his written employment agreement. Additional options for 87,500
         shares each became exercisable under the employment agreement on each
         of March 1, 1996 and 1997 at exercise prices equal to $3.75 and $4.15
         per share, respectively. The Company recognized no compensation expense
         since the exercise prices at the date of grant were either equal to or
         in excess of the fair market value. Mr. Marino's options have a 10 year
         life from the date of grant and expire November 11, 2004.

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


                                      F-24

<PAGE>   72


                       RAILAMERICA, INC. AND SUBSIDIARIES

              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued

                                     -------


14.      STOCK OPTIONS, continued

         The Company has adopted the disclosure-only provisions of Statements of
         Financial Accounting Standards No. 123, "Accounting for Stock-Based
         Compensation". Accordingly, no compensation costs have been recognized
         for the stock options issued during 1995 and 1996. Had compensation
         cost for the Company's stock options issued been determined based on
         the fair value at the grant date for awards in 1996 and 1995 consistent
         with the provisions of SFAS No. 123, the Company's net income and net
         income per share would have been reduced to the pro forma amounts
         indicated below:

<TABLE>
<CAPTION>
                                                         1996              1995
                                                    --------------    ---------

<S>                                                 <C>              <C>
          Net income - as reported                  $      504,879   $      868,333
                                                    ==============   ==============
          Net (loss) income - pro forma             $     (260,911)  $      341,469
                                                    ==============   ==============

          Net income per share - as reported               $  0.10           $ 0.04
                                                           =======           ======
          Net (loss) per share - pro forma                 $ (0.05)          $(0.07)
                                                           ========          =======
</TABLE>

         The fair value of each option grant is estimated on the date of grant
         using the Black-Scholes option-pricing model with the following
         weighted-average assumptions used for grants in 1996 and 1995: dividend
         yield 0.0%; expected volatility of 45%; risk-free interest rate of
         6.36% -7.8%; and expected lives of 10 years.

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

<TABLE>
<CAPTION>
                                                                     1996                         1995
                                                           ------------------------    -------------------------
                                                                       Weighted                      Weighted
                                                                       Average                        Average
                                                           Shares    Exercise Price   Shares       Exercise Price
                                                           ------    --------------   ------       --------------
<S>                                                        <C>          <C>           <C>             <C>
         Options outstanding, beginning of year            848,500      $ 3.66        875,000         $ 3.38
         Options granted                                   295,000      $ 3.96        251,000         $ 3.90
         Options exercised                                  12,500      $ 3.60           --                -
         Options expired                                     7,000      $ 3.50        277,500         $ 3.00
         Options outstanding, end of year                1,124,000      $ 3.74        848,500         $ 3.66
         Options exercisable, end of year                  933,167      $ 3.69        600,167         $ 3.48

         Option price range at December 31, 1996                                  $ 3.50 to $ 5.00
</TABLE>


15.      NONCASH INVESTING AND FINANCING ACTIVITIES:

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

                                      F-25

<PAGE>   73


                       RAILAMERICA, INC. AND SUBSIDIARIES

              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued

                                     -------


15.      NONCASH INVESTING AND FINANCING ACTIVITIES, continued

         The Company issued 5,000 and 4,200 shares of common stock to employees
         in the first quarter of 1995 and the first quarter of 1996,
         respectively, and 50,000 shares of common stock to the Company's Chief
         Executive Officer in the third quarter of 1995. Additionally, the
         Company issued 9,719 shares of common stock to certain employees in the
         first quarter of 1996 pursuant to employment contracts.

         The Company incurred approximately $16.1 million in debt to acquire
         property, plant and equipment during 1996. These amounts included
         acquisition of a 131 mile rail line in Washington, 234 miles of rail
         line in Minnesota, 100 tank cars and other transportation equipment
         including locomotives, tractor and trailers.

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

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

16.      RESTRICTED CASH

         In 1994, the Company had set aside $335,000 of restricted cash from the
         proceeds of the acquisition financing of SCTR. The restricted cash was
         held as collateral for the debt issued in conjunction with the
         financing of the SCTR acquisition. The restricted cash consisted of two
         certificates of deposit. During 1995, $160,000 of the cash was
         released. During the first quarter of 1997, the remaining $175,000 was
         released. This amount has been included in cash on the balance sheet as
         of December 31, 1996.

         The Company had set aside $130,000 of restricted cash from the proceeds
         of the acquisition of Kalyn. The restricted cash was being held back
         until the former shareholders completed certain requirements. These
         requirements were met in the third quarter of 1995 and the $130,000 was
         released.

17.      FAIR VALUE OF FINANCIAL INSTRUMENTS:

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


                                      F-26

<PAGE>   74


                       RAILAMERICA, INC. AND SUBSIDIARIES

              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued

                                     -------


18.      CONTINGENCIES:

         In the ordinary course of conducting its business, the Company becomes
         involved in various legal actions and other claims which are pending or
         could be asserted against the Company. Litigation is subject to many
         uncertainties, the outcome of individual litigated matters is not
         predictable with assurance, and it is reasonably possible that some of
         these matters may be decided unfavorably to the Company. It is the
         opinion of management that the ultimate liability, if any, with respect
         to these matters will not be material. The Company is involved in an
         arbitration proceeding related to the termination of a lease by its
         wholly-owned subsidiary DVRC. Management believes that it terminated
         the lease properly and that the Company will ultimately prevail in the
         arbitration. If the Company does not prevail the estimated costs could
         be approximately $120,000.

         Effective January 23, 1995, the Company, through its wholly-owned
         subsidiary Kalyn, entered into a Wholesale and Retail Financing
         Agreement with Associates Commercial Corporation. The agreement
         provides for dealer and customer financing and for the repurchase of
         products sold in the event of default by the customer or dealer to the
         finance company. The Company is obligated to repurchase a maximum of
         $300,000, in the aggregate. Since inception of the Agreement, there
         have been no defaults which would have required the Company to
         repurchase products sold. The Company is involved in an arbitration
         proceeding related to the termination of a lease by its wholly-owned
         subsidiary DVRC. Management believes that it terminated the lease
         properly and that the Company will ultimately prevail in the
         arbitration. If the Company does not prevail the estimated costs would
         be approximately $120,000.


19.      SEGMENT INFORMATION:

         The Company's continuing operations have been classified into two
         business segments: rail transportation and manufacturing. The rail
         transportation segment includes the operations of the Company's
         railroad subsidiaries and the manufacturing segment includes the
         operations of Kalyn and RailAmerica Equipment Corporation.

         Business segment information for the year ended December 31, 1996
         (dollar amounts in thousands):
<TABLE>
<CAPTION>
                                                          Rail                                  Corporate
                                      Consolidated   Transportation       Manufacturing         Overhead
                                      ------------   --------------       -------------         --------
<S>                                    <C>             <C>                 <C>                <C>
         Revenue                        $  25,658       $    11,704         $    13,954        $    -
         Operating income (loss)        $   3,873       $     4,978         $     1,473        $     (2,578)
         Identifiable assets            $  66,152       $    46,129         $    12,932        $      7,091
         Depreciation and
             amortization               $   1,527       $       991         $       490        $         46
         Capital expenditures           $  29,766       $    26,849         $     2,809        $        108

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

</TABLE>

<TABLE>
<CAPTION>
                                                            Rail                               Corporate
                                      Consolidated   Transportation       Manufacturing        Overhead
                                      ------------   --------------       -------------        --------
<S>                                     <C>             <C>                 <C>                <C>
          Revenue                       $  25,078       $     7,205         $    17,873        $    -
          Operating income(loss)        $   3,188       $     2,670         $     2,646        $     (2,128)
          Identifiable assets           $  35,058       $    18,856         $    10,706        $      5,496
          Depreciation and
              amortization              $   1,232       $       824         $       408
          Capital expenditures          $   2,300       $     1,724         $       576



</TABLE>

                                      F-27

<PAGE>   75


                       RAILAMERICA, INC. AND SUBSIDIARIES

              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued

                                     -------

20.      SUBSEQUENT EVENTS (UNAUDITED):

         On February 19, 1997, the Company acquired, through its wholly-owned
         subsidiary RailAmerica de Chile, S.A., a majority interest in the stock
         of Empressa de Transporte Ferroviario S.A. ("Ferronor"), a 1,400 mile
         railroad serving northern Chile. RailAmerica has joined in the purchase
         of Ferronor with Andres Pirazzoli y Cia, Ltda ("APCO"), a family-owned
         Chilean transportation and distribution company. The purchase price
         paid by RailAmerica/APCO for substantially all of the stock of Ferronor
         was approximately $12 million and was funded 55% ($6.6 million) by
         RailAmerica and 45% ($5.4 million) by APCO.

         Ferronor operates the only north-south railroad in northern Chile,
         extending from La Calera near Santiago, where it connects with Chile's
         southern railway, Ferrocarril del Pacifico, S.A., to its northern
         terminus at Iquique, approximately 120 miles south of the Peruvian
         border. It also operates several east-west branch lines that link a
         number of iron, copper and limestone mines and production facilities
         with several Chilean Pacific port cities. Ferronor also serves
         Argentina and Bolivia through traffic interchanged with the General
         Belgrano Railroad and the Ferrocarriles Antofagasta Bolivia.

         On January 15, 1997 the Company, pursuant to Regulation D promulgated
         under the Securities Act of 1933, as amended, completed a private
         placement of 1,670,000 shares of its Common Stock, par value $.001 per
         share at a purchase price per share of $4.50 (aggregate proceeds of
         $7,515,000). Included in the line item Common stock subscribed on the
         December 31, 1996 balance sheet is $2,340,000 received during 1996
         related to this private placement.


                                      F-28