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

                                   ----------

                                    FORM 10-K

              ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 1997      Commission File Number 0-20618

                                   ----------

                                RAILAMERICA, INC.
             ------------------------------------------------------
             (Exact name of registrant as specified in its charter)

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


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


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


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

         Check whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.  Yes  X  No
                      ----   ----

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

         The aggregate market value of the voting stock held by non-affiliates
of the registrant as of March 24, 1998 computed by reference to the average bid
and asked prices of registrant's common stock reported on NASDAQ on such date
was $43,657,000.

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

DOCUMENTS INCORPORATED BY REFERENCE

         The registrant's proxy statement for the Annual Meeting of Shareholders
to be held June 18, 1998 (the"Definitive Proxy Statement") to be filed with the
Commission pursuant to Regulation 14A is incorporated by reference into Part III
of this Form 10-K.


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                               TABLE OF CONTENTS
                               -----------------

<TABLE>
<CAPTION>
                                                                                PAGE
                                                                                ----
<S>                                                                             <C>
PART I

Item 1.    Business                                                               3
Item 2.    Properties                                                            19
Item 3.    Legal Proceedings                                                     23
Item 4.    Submission of Matters to a Vote of Security Holders                   23


PART II

Item 5.    Market for Common Equity and Related Stockholder Matters              24
Item 6.    Selected Financial Data                                               25
Item 7.    Management's Discussion and Analysis                                  26
Item 8.    Financial Statements                                                  38
Item 9.    Changes in and Disagreements with Accountants on Accounting and
             Financial Disclosure                                                38

PART III

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


PART IV

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


</TABLE>

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PART I

ITEM 1.  BUSINESS

GENERAL

         RailAmerica, Inc. (together with its consolidated subsidiaries, the
"Company") is a leading operator of short line freight railroads in the United
States, based on total track miles, and an operator of a regional freight
railroad in the Republic of Chile. The Company is also a leading manufacturer of
specialized truck trailers through its wholly-owned subsidiary Kalyn/Siebert,
Inc. ("Kalyn"). Segment and geographic information called for in item 1 is set
forth in Note 20 of Notes to Consolidated Financial Statements and is
incorporated herein by reference. RailAmerica's core business is the
acquisitions of short line and regional railroads. The Company has grown rapidly
through acquisition since December 31, 1994, at which time it operated only 300
miles of track. At December 31, 1997, the Company operated approximately 2,350
miles of rail line, including approximately 950 miles in the United States and
over 1,400 miles in Chile.

         The Company plans to continue to acquire short line railroads in North
America from Class I railroads as well as from other short line operators. The
Company also continues to evaluate opportunities to acquire regional railroads
in foreign markets that are being privatized by foreign governments.
Additionally, the Company will consider other strategic acquisitions in the
specialty trailer manufacturing industry.

         Since industry deregulation in 1980, major North American railroads
have streamlined their operations by systematically divesting themselves of
branch lines to smaller rail operators that have advantageous cost structures.
The divestiture activity has accelerated in recent years as a result of the
consolidation of Class I railroads which has led to the disposition of redundant
and light-density routes. Similarly, an increasing number of foreign governments
are seeking to encourage private investment in infrastructure and stimulate
economic activity by privatizing their national rail systems through sale or by
concession to qualified operators. The Company's acquisition strategy as
described above is exemplified by: (i) the purchase, in February 1997, of a
majority interest in the stock of Empresa de Transporte Ferrovario S.A.
("Ferronor"), a railroad serving northern Chile with approximately 1,400 miles
of rail line, (ii) the purchase, in September 1997, of a 60 mile rail line in
and around Hinckley, Minnesota, and (iii) the purchase, in October 1997, of a
minority interest in the Great Southern Railway Limited, a passenger rail
service based in Southern Australia.

         The Company believes that it is well-positioned to take advantage of
the opportunities emerging in the North American and international rail
industries. The Company has developed a disciplined evaluation and acquisition
program, identifying rail properties that can be acquired on attractive terms
and can be improved by the implementation of RailAmerica's operating practices
when applied to the rail properties acquired by the Company. These practices
have had the effect of increasing traffic while reducing expenses through
introduction of operating efficiencies and customer service programs. The
Company believes that it has become a desirable partner for Class

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

         The Company's business presently is conducted through sixteen
wholly-owned consolidated subsidiaries - Huron and Eastern Railway Company, Inc.
("HESR"), Saginaw Valley Railway Company, Inc. ("SGVY"), Kalyn, Otter Tail
Valley Railroad Company ("OTVR"), South Central Tennessee Railroad Corporation
("SCTR"), Delaware Valley Railway Company, Inc. ("DVRC"), RailAmerica Intermodal
Services, Inc. ("RIS"), Dakota Rail, Inc. ("Dakota Rail"), RailAmerica Equipment
Corporation ("REC"), West Texas and Lubbock Railroad Company, Inc. ("WTLR"),
Cascade and Columbia River Railroad Company ("CCRR"), Minnesota Northern
Railroad ("MNR"), RailAmerica de Chile, S.A, Steel City Carriers, Inc. ("Steel
City Carriers"), St. Croix Valley Railroad Company ("SCXY") and RailAmerica
Australia Pty. Limited ("RAA"). All references to the operations of the
"Company" discussed in this Form 10-K describe the operations of its
subsidiaries.

         The Company was incorporated in Delaware on March 31, 1992 as a holding
company for two pre-existing railroad companies - HESR and SGVY. The Company's
principal executive office is located at 301 Yamato Road, Suite 1190, Boca
Raton, Florida 33431, and its telephone number at that location is (561)
994-6015.

RAILROAD OPERATIONS

INDUSTRY OVERVIEW

         The U.S. railroad industry is dominated by ten Class I railroads, which
operated approximately 127,000 miles of track at December 31, 1996 (the most
recent year for which data is available) and represented approximately $32
billion, or approximately 91.4%, of total rail industry operating revenue of
$34.9 billion in 1996. In addition to large railroad operators, at year end 1996
there were more than 500 short line and regional railroads, which generated
approximately $3.0 billion of operating revenue in 1996 and operated
approximately 47,000 miles of track at December 31, 1996. Reflecting downsizing
of major rail carriers, the proportion of total track miles operated by short
line and regional railroads in the United States increased to 27.2% of total
railroad industry track miles in 1996 from approximately 17.0% in 1986. The
railroad industry in the United States has undergone significant change since
the passage of the Staggers Rail Act of 1980 (the "Staggers Rail Act"), which
deregulated the pricing and types of services provided by railroads. Since 1980,
Class I railroads in the United States and Canada have systematically divested
themselves of branch lines to smaller rail operators. As a result, more than 300
short line and regional railroads operating approximately 27,000 miles of track
have been created since 1980 to serve shippers on such lines. The divestiture
has accelerated in recent years as a result of the consolidation and merger
activity among Class I railroads, which has led to the sale of overlapping
routes.

         As a result of deregulation, major railroads have been able to
concentrate their management and marketing attention on core, long-haul routes,
while divesting (through sale or lease) many of their low-density branch lines
to smaller and more cost-efficient freight railroad operators such as

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the Company. The major railroads have derived significant benefits from the
divesting of branch lines to short line operators. Divesting these branch lines
allows major railroads to minimize incremental capital expenditures, increase
traffic density, improve railcar utilization and avoid rail line abandonment.
Because of the focus of short line railroads on increasing traffic volume
through increased customer service and more efficient operations, traffic volume
on short line railroads frequently increases after divestiture. Consequently,
these transactions often result in net increases in divesting carriers' freight
traffic because much of the business originating or terminating on branch lines
feeds into divesting carriers' core routes.

GROWTH STRATEGY

   -     NORTH AMERICAN ACQUISITIONS. RailAmerica plans to continue to acquire
         short line and regional railroads that become available as a result of
         rationalizations and divestitures in North America, especially in
         geographic regions where the Company can "cluster" a number of acquired
         rail lines to achieve economies of scale.

  -      INTERNATIONAL ACQUISITIONS. RailAmerica plans to acquire additional
         foreign regional railroads that become available as a result of
         governmental privatization, primarily through joint ventures with local
         partners familiar with market conditions in the region. International
         rail acquisitions often offer the Company better growth opportunities
         due to their lack of historical operating efficiencies typical of
         government entities.

-        FOCUSED SALES AND MARKETING. RailAmerica continues to increase traffic
         from existing, former and new customers in each of its markets through
         the aggressive marketing of its enhanced customer service, negotiating
         rates where prudent and implementing other incentive arrangements for
         shippers. Once RailAmerica reestablishes frequent service for a newly
         acquired railroad, it markets its newly restored service to existing
         customers as well as to customers who may have dropped service when the
         former owner had operational control.

  -      OPERATING EFFICIENCY. The Company improves its operating efficiency
         through rationalized staffing, incentivized local management and staff,
         centralized purchasing and corporate services, efficient equipment
         utilization and outsourced maintenance.

         The Company acquires rail properties by purchase of assets, lease or
operating contract. Typically, the Company bids against other short line and
regional operators for available properties. The structure of each transaction
is determined by the seller based upon economic and strategic considerations. In
addition to the financial terms of the transaction, the Company believes sellers
consider more subjective criteria such as a prospective acquirer's operating
experience, its reputation among shippers, and its ability to close a
transaction and commence operations smoothly. The Company believes it has
established an excellent record in each of these areas. In addition, by growing
revenues on its acquired lines and providing improved service to shippers, the
Company is able to provide increased revenue to the Class I carriers that
connect with its lines. The Company


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

GENERAL

         The Company provides rail service to on-line customers through the
coordination of the railroad's general manager, marketing manager and customer
service center. Rail service for the customer is scheduled by the general
manager with the assistance of customer service personnel. Due to the Company's
flexibility in providing service, customers can initiate unscheduled rail
service on short notice by contacting the railroad's customer service center.
The general manager schedules the days' train service and provides a manifest to
the two-man crew. The crew's manifest contains information regarding the number
and type of cars to drop off/or pick up at a customer's siding, customer
requirements concerning time of pick up and/or delivery and interchange
schedules. The two-man crew, consisting of transportation specialists, operates
the locomotive and couples and uncouples railcars along the line. Since crews
are paid a salary rather than an hourly wage, they are readily available to
provide service on an as-needed basis. Payment of rail services is coordinated
with the customer through the Company's customer service center or with the
Class I interchange partner.

         The Company provides the locomotive service and, in certain instances,
the rail cars needed to move the customer's product. Maintenance of the rail
line, including capital improvements, normal track and roadbed maintenance,
signal maintenance and bridge repair, is performed by the Company or, where
efficiencies are gained, a maintenance contractor. The Company has full-time
locomotive mechanics, under the supervision of the Company's Chief Mechanical
Officer, available to maintain the locomotive and maintenance equipment, perform
car inspections and perform running repairs on cars.

         Rail traffic may be categorized as interline, local or bridge traffic.
Interline traffic either originates or terminates with customers located along a
rail line and is interchanged with other rail carriers. Local traffic both
originates and terminates on the same rail line and does not involve other rail
carriers. Bridge traffic neither originates nor terminates on a rail carrier's
line, but rather passes over the line from one connecting carrier to another.
Interline traffic generated approximately 99% of the Company's total freight
revenues in 1997.

         Flexibility with respect to work assignments is a key element of the
Company's operating strategy and contributes significantly to operational
productivity. All of the Company's railroad personnel are trained in a wide
range of skills necessary for short line operations. Employees can be assigned
to tasks on an as-needed basis because the Company is not bound by traditional
railroad industry craft and work distinctions (pursuant to which railroad
employees are assigned to tasks based upon narrowly defined job descriptions).
The Company believes the organization of its railroads into relatively small
work groups encourages greater team effort and permits more clearly defined
responsibility and accountability than is obtainable by large, more centrally
managed railroads.

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         Each of the Company's short line railroads maintains a
performance-based profit-sharing program through which a portion of a railroad's
operating profits is distributed to its employees. Profit-sharing programs are
administered by corporate headquarters and the general managers and
distributions are made in part on the basis of meeting railroad operating
targets and in part on individual performance. The general managers also
participate in quarterly performance-based profit sharing programs.

MARKETING

         The Company focuses on providing rail service to its customers that is
easily accessible, reliable and cost-effective. Following commencement of
operations by RailAmerica, the Company's railroads generally have attracted
increased rail shipments from existing customers and obtained traffic from new
customers who had not previously shipped by rail or had ceased rail shipments.
The Company believes its ability to generate additional traffic is enhanced by
its marketing efforts which are aimed at identifying and responding quickly to
the individual business needs of customers along its rail lines. As part of its
marketing efforts, the Company often schedules more frequent rail service, helps
customers negotiate price and service levels with connecting carriers and
assists customers in obtaining the quantity and type of rail equipment required
for their operations. The Company also provides non-scheduled train service on
short notice to accommodate customers' special or emergency needs.

          The Company's decentralized management structure is an important
element of its marketing strategy. Significant discretion with respect to sales
and marketing activities is given to the Company's domestic regional marketing
managers and its international marketing manager. Each regional marketing
manager works closely with personnel of the Company's railroads and with other
members of senior management to develop marketing plans to increase shipments
from existing customers and to develop business from new customers. The Company
also works with the marketing staffs of the connecting Class I carriers to
develop an appropriate array of rail-oriented proposals to meet customers' needs
and with industrial development organizations to locate new rail users. The
Company considers all of its employees to be customer service representatives
and encourages them to initiate and maintain regular contact with shippers.

CUSTOMERS

         In 1997, the Company served more than 130 customers who shipped and/or
received a wide variety of products. The Company's railroads are typically the
only rail carriers directly serving their customers. Although most of the
Company's domestic railroads have a well-diversified customer base, several of
the smaller rail lines have one or two dominant customers. In 1997, the
Company's 10 largest domestic customers accounted for approximately 42% of
domestic transportation revenue. There is no single customer which represented
more than 10% of the Company's domestic transportation revenue.

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

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

COMMODITIES

         The Company provides it customers with local rail freight services
accessing the nationwide rail systems both domestically and internationally. The
Company hauls products for its customers based upon market demands in its local
operating areas. The following table sets forth by number and percentage the
total carloads of each of the principal commodities hauled by the Company's
railroads during the years ended December 31, 1997, 1996 and 1995.

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


</TABLE>


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EMPLOYEES

         As of December 31, 1997, the Company had approximately 97 full-time
rail employees in North America. None of the Company's employees are subject to
a collective bargaining agreement. Temporary lay-offs of personnel and hiring of
part-time or short-term employees are sometimes required to adjust to the
Company's somewhat seasonal operations.

SAFETY

         An important component of the Company's operating strategy is
conducting safe railroad operations for the benefit and protection of employees,
customers and the communities served by the Company's railroads. The Company's
safety program, led by the Director of Rules, Safety and Training, involves all
of the Company's employees and is administered on a daily basis by each Regional
Vice President. Operating personnel are trained and certified in train
operations, hazardous materials handling, proper radio procedures and all other
areas subject to governmental rules and regulations. Each employee involved in
train operations is subject to pre-employment and random drug testing whether or
not required by federal regulation.

         The Company believes that each of its railroads complies fully with
federal, state and local regulations. Additionally, each railroad is given
flexibility to develop more stringent safety rules based on local requirements
or practices. The Company also participates in governmental and industry
sponsored safety programs including Operation Lifesaver (the national grade
crossing awareness program) and the American Short Line Railroad Association
Safety Committee.

COMPETITION

         In acquiring rail properties, the Company competes with other short
line and regional railroad operators, some of which are larger and have greater
resources than the Company. Competition for rail properties is based primarily
upon price, operating history and financing capability. The Company believes its
established reputation as a successful acquirer and operator of short line rail
properties, in combination with its managerial and financial resources,
effectively positions it to take advantage of future acquisition opportunities.

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

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ACQUISITION OF FERRONOR

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

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

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

ACQUISITION OF ST. CROIX VALLEY RAILROAD

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

ACQUISITION OF MINORITY INTEREST IN AUSTRALIAN PASSENGER RAIL SERVICE

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

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

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RAILROAD PROPERTIES

         The following table sets forth certain information with respect to the
railroad properties that the Company owned as of December 31, 1997:

<TABLE>
<CAPTION>
                                Date of         Track                                      Principal
           Railroad             Acquisition     Miles      Structure     Location          Commodities
           --------             -----------     -----      ---------     --------          -----------
<S>                             <C>             <C>        <C>           <C>               <C>
Huron and Eastern               March 1986         83      Owned         Michigan          Agricultural products, sugar
Railway (Huron Division)                                                                   products, fertilizer, scrap
                                                                                           steel, auto parts, aggregates

Huron and Eastern               May 1988           55      Owned         Michigan          Agricultural products, sugar
Railway (Saginaw                                   45      Leased                          products, fertilizer, scrap
Division)                                                                                  steel, auto parts, aggregates

Saginaw Valley Railway          Jan. 1991          10      Owned         Michigan          Agricultural products

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

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

Dakota Rail                     Sept. 1995         44      Contract      Minnesota         Plastics, lumber, scrap steel,
                                                           for Deed                        chemicals

West Texas & Lubbock            Nov. 1995          104     Owned         Texas             Fertilizer, sodium sulfate,
Railroad                                             4     Trackage                        chemical, cotton and cotton
                                                           rights                          products

Cascade and Columbia            Sept. 1996         131     Owned         Washington        Wood products, limestone,
River Railroad                                       6     Trackage                        paper products
                                                           rights

Otter Tail Valley Railroad      Oct. 1996          72      Owned         Minnesota         Coal, agricultural products,
                                                                                           fertilizer

Minnesota Northern              Dec. 1996          174     Owned         Minnesota         Agricultural products, sugar
Railroad                                            47     Trackage                        products, fertilizer, coal,
                                                           rights                          aggregates

Ferronor                        Feb. 1997         1,400    Majority      Chile             Iron ore, copper, limestone
                                                           owned

St. Croix Valley Railroad       Aug. 1997          44      Owned         Minnesota         Agricultural products,
                                                   16      Trackage                        fertilizer, plastics
                                                           rights

Great Southern Railway          Oct. 1997                  Minority      Southern          Passenger
                                                           Interest      Australia

</TABLE>

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TRAILER MANUFACTURING OPERATIONS

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

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

PRODUCTS

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

         Kalyn manufactures an extensive variety of light, medium and heavy duty
truck trailers. The Company's products include the following:

    -    FLATBED TRAILERS. Flatbed trailers, also known as platform trailers,
         are generally used to carry loads such as steel and building materials.
         The Company produces a wide variety of flatbed trailers, including
         straight frames, drop frames and multi-axle units for specialized
         loads. Kalyn's leading product in this category is the KDP-80, a 48
         foot drop deck flatbed trailer which is purchased primarily by
         commercial customers. This trailer has a 10 foot spread on the tandem
         axle which allows more weight per axle than narrower tandems.

    -    LOWBED TRAILERS. Lowbed trailers, also known as lowboy trailers or
         California legals, generally haul heavy equipment such as electrical
         transformers or grain silos. Lowbed trailers are equipped with up to 18
         axles and have the capacity to haul up to 300 ton loads. Heavy
         equipment lowbeds are used by heavy haulers, specialized carriers and
         riggers, larger construction and engineering firms and
         highly-specialized members of the aerospace and automotive industries.
         The products constituting this category include the following trailers:
         fixed neck lowbed, folding neck lowbed, detachable lowbed, and the
         mechanical removable gooseneck, which is Kalyn's leading trailer by
         sales in this product line.

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


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         specialty van trailer for the United States Tank Automotive Command
         ("TACOM") which has special dolly-style suspensions and removable
         landing gear so that it can be shipped on military transport cargo
         planes. These specialty van trailers can be used for tactical combat
         purposes or as storage containers. Other specialty products include
         tilt trailers, special event trailers, protected vans and oil field
         trailers.

    -    PARTS AND ACCESSORIES.  Replacement parts and accessories are primarily
         sold to dealers.

         From time to time, Kalyn is also involved in the limited sale of used
trailers, which are supplied primarily by trade-ins from its new trailer
customers. The Company sells most of its used trailers through its authorized
dealers.

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

MANUFACTURING AND ENGINEERING

         Kalyn considers the engineering expertise, combined with the
manufacturing experience of its work force to be key competitive advantages.
Kalyn utilizes this experience in its marketing by including manufacturing
personnel in initial meetings with potential Kalyn customers to assist in
defining and meeting the customer's objectives. This team approach often results
in new and unique ways to satisfy customer needs and facilitates effective
communication throughout the organization.

         Each of Kalyn's trailers is manufactured from highly customized designs
based on detailed customer specifications of each aspect of the trailer,
including dimensions, structural requirements, fabrication materials, component
parts and accessories. Kalyn's "Pro-Engineer" 3-D solid modeler drafting system
and CAD allows its engineers to readily modify trailer component designs and
generate new designs based on customer needs.

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

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

                                       13


<PAGE>   14



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

         Kalyn's manufacturing operations are conducted in thirteen Company
owned buildings, totaling approximately 198,000 square feet on an 25.5 acre
site, which were constructed between 1969 and 1997. Kalyn's manufacturing
properties serve as collateral for the Company's financing with National Bank of
Canada. The Company expects that this site will be able to meet its
manufacturing goals for the foreseeable future.

MARKETING AND DISTRIBUTION

         Kalyn's marketing strategy is focused on offering a broad range of
high-quality, customized trailers manufactured to the design specifications of
its customers. These products are marketed and distributed through a network of
approximately 170 independent dealers throughout North America and through a
direct sales force. Traditionally, Kalyn's dealers have not inventoried trailers
due to their highly customized nature. During 1995, however, certain dealers
began maintaining inventories of Kalyn trailers.

         Historically, up to 50% of all of Kalyn's commercial sales are made to
dealers, with the balance representing direct retail sales by its sales force.
Kalyn's sales staff consists of a vice president, five sales managers, and an
advertising manager. The sales staff is supported by registered mechanical
design engineers and draftsmen. Sales leads are generated through literature
mailings, trade show exhibitions, dealers, repeat customers, and word-of-mouth.
In addition, Kalyn places advertisements in trade publications such as MY LITTLE
SALESMAN, AMERICAN TRUCKER, LIFTING & TRANSPORTATION INTERNATIONAL, TRUCK MARKET
NEWS, MACHINERY TRADER, AMERICAN TOWMAN, TRUCK NEWS (CANADA), TRUCK & TRAILER
(CANADA) AND CONSTRUCTION PUBLIC WORKS (LATIN AMERICA). In recent years, Kalyn
has begun shifting resources from advertising to trade shows, which management
believes is a more cost effective method of maintaining Kalyn's name and
reputation and developing sales leads. Kalyn currently participates in
approximately five trade shows per year.

         In certain circumstances, Kalyn will enter into agreements with its
dealers to stimulate and facilitate the sale and financing of its new and used
trailers. During the first quarter of 1995, Kalyn entered into a Wholesale and
Retail Financing Agreement with Associates Commercial Corporation and Associates
Commercial Corporation of Canada, Ltd. to stimulate and facilitate the sale and
financing of its new and used trailers. In addition, in December of 1996, the
Company entered into an agreement with NewCourt Financial Ltd. in order to
provide wholesale and retail financing for its dealers located in Canada. Each
of these agreements provides floor plan financing for eligible dealers and lease
and/or purchase financing for end market purchasers.

                                       14


<PAGE>   15



CUSTOMERS

         Kalyn serves a diversified customer base operating in the construction,
trucking, agricultural, railroad, utility and oil industries. Since 1990,
commercial sales have accounted for approximately two-thirds of Kalyn's revenues
with military or governmental agency sales representing the balance. As a result
of extensive prototype testing by TACOM and the federal government budgetary
impasse during early 1996, sales to governmental accounts represented a
disproportionately low percentage of Kalyn's revenue for 1996.

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

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

         BACKLOG. As of December 31, 1997, the Company's backlog of orders was
approximately $19.7 million, compared to $8.6 million as of December 31, 1996.
Kalyn includes in its backlog only those orders for trailers for which a
confirmed customer order has been received. Kalyn manufactures trailers mostly
to customer or dealer orders and does not typically maintain an inventory of
"stock" trailers in anticipation of future orders.

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

EMPLOYEES

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


                                       15


<PAGE>   16



ACQUISITION OF CANADIAN TRAILER MANUFACTURER

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

MOTOR CARRIER OPERATIONS (DISCONTINUED OPERATIONS)

         On February 10, 1995, the Company acquired substantially all of the
assets of Steel City, a regional motor carrier located in Sault Ste. Marie,
Ontario, Canada. Steel City operates a fleet of approximately 120 tractors and
trailers, and currently serves more than 50 customers in the steel, paper and
lumber industries by transporting a broad variety of products within Canada and
between Canada and the United States, particularly Michigan, Ohio, Indiana, New
York, and Wisconsin. Steel City Carriers currently has 52 full-time employees,
as well as 25 independent contract drivers who own and operate their own
vehicles.

         Since the Company's acquisition of Steel City, its financial
performance and development have not measured up to the Company's expectations
for the business. Thus, in March 1997 the Company adopted a formal plan to
discontinue its motor carrier operations and refocus the Company's efforts on
expanding its railroad operations. The Company's Board of Directors approved the
plan of discontinuance on March 20, 1997. Management is committed to selling
either substantially all of the assets or the stock of the Company's motor
carrier subsidiaries during 1998. If such transaction is not consummated during
the second quarter of 1998 the results of operations will be reflected in
continuing operations beginning in that quarter and until a sale is completed.

REGULATION

         OVERVIEW. In addition to environmental safety and other regulations
applicable to all businesses, the Company's railroad subsidiaries are subject to
regulations of numerous government agencies, including (i) regulation by the
Surface Transportation Board ("STB") and the Federal Railroad Administration
("FRA"); (ii) certain labor related statutes including the Railway Labor Act,
Railroad Retirement Act, the Railroad Unemployment Insurance Act, and the
Federal Employer's Liability Act, and (iii) regulation by agencies in the states
in which the Company does business. Additionally, the Company is subject to STB
regulation in its acquisition of new railroad properties. As a result of the
Staggers Rail Act amendments to the Interstate Commerce Act in 1980 and
enactment of the ICC Termination Act of 1995, there has been a significant
relaxation in regulation governing rail carriers, which management believes has
greatly simplified the purchase and sale of shortline railroad properties and
expedited the closing of such transactions. The Company believes its operations
are in material compliance with all such regulations.

         STB. The STB has jurisdiction over, among other matters, the
construction, acquisition, or



                                       16


<PAGE>   17



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

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

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

         FUTURE OF THE STB. Under the ICC Termination Act the STB is presently
authorized through September 30, 1998. It is unclear whether the STB will be
reauthorized in its present form, whether its functions will be expanded to
include regulation of ocean shipping presently under the jurisdiction of the
Federal Maritime Commission and to prescribe "open access" for captive rail
shippers such as utility companies, or whether the STB will be disbanded and its
functions split between the U.S. Departments of Transportation and Justice.

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


                                       17


<PAGE>   18



         STATES. Under the ICC Termination Act states lost their jurisdiction
over economic regulation of intrastate transportation. All states retain some
jurisdiction over safety related matters.

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

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

EMPLOYEES; LABOR CONSIDERATIONS

         As of December 31, 1997, the Company had approximately 340 full-time
employees in North America and approximately 25 independent contract drivers.
None of the Company's employees are members of a union. The Company's railroad
operations are somewhat seasonal. Most agricultural shipments occur from
September through May, and much of the Company's track maintenance is performed
in the summer months. Temporary layoffs of personnel, hiring of part-time or
short-term employees, or use of independent contractors are sometimes required
to adjust to the seasonal nature of track maintenance work and other business
requirements. As of December 31, 1997 the Company had 97 full-time railroad
employees, 168 full-time employees at Kalyn, 52 full-time employees in the motor
carrier operations and 23 corporate and/or support employees.

         Ferronor operated with approximately 350 employees as of the date that
the Company acquired majority ownership. As contemplated by management,
significant reductions in the work force have been effectuated and the current
workforce is approximately 170 employees.


                                       18


<PAGE>   19



ITEM 2. DESCRIPTION OF PROPERTY

MICHIGAN PROPERTIES

         The majority of the Company's 185 miles of Michigan rail line consists
of 90 pound or heavier welded and jointed rail. The Company's track standards
allow for maximum operating speeds ranging from 10 m.p.h. to 25 m.p.h. The
Company owns approximately 1,260 acres of operating and non-operating real
estate in Michigan. The Company's Michigan rail properties serve as collateral
for the Company's $40 million Revolving Loan Agreement with the National Bank of
Canada and Comerica (the "Revolver") (See Note 8 to Notes to Consolidated
Financial Statements).

         The Company built its Midwest regional headquarters office in Vassar,
Michigan during 1997. This office building is 6,800 square feet and houses
management, dispatching, engineering, real property management, accounting and
marketing personnel. The Company also maintains an operations center in a
building it owns in Bad Axe, Michigan, which includes equipment repair and track
maintenance The Company owns a locomotive shop which was constructed in 1987, a
maintenance-of-way equipment repair building completed in 1989 and a warehouse
facility now used as a maintenance headquarters.

TENNESSEE PROPERTIES

         SCTR leases approximately 49 miles of rail line and approximately 450
acres of related real estate from the South Central Tennessee Railroad
Authority. The lease was extended in February 1997 until 2004 and provides for
base lease payments of $1,300 per month. The Company has the option to purchase
the rail line and real estate for one dollar throughout the term of the lease.

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

DELAWARE AND PENNSYLVANIA PROPERTIES

         DVRC operates approximately 55 miles of rail line, of which 45 miles
are located in southeastern Pennsylvania, and 10 miles of contiguous line extend
into the State of Delaware, where the Company interchanges with CSX
Transportation at Elsmere, Delaware. The Pennsylvania rail line was operated
pursuant to an agreement between DVRC and the Commonwealth of Pennsylvania. The
rail line in Delaware was operated by DVRC pursuant to a 10-year lease with the
Wilmington & Northern Railroad Company. DVRC terminated that lease on June 30,
1996 and has since been operating over that rail segment on a month-to-month
basis. DVRC has received grants from the Commonwealth of Pennsylvania for track
maintenance and improvements from 1994


                                       19


<PAGE>   20



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

MINNESOTA PROPERTIES

         Dakota Rail operates approximately 44 miles of rail line between
Hutchinson and Wayzata, Minnesota. The rail line is being purchased pursuant to
a contract for deed from the State of Minnesota. Dakota Rail also owns certain
non-operating real estate parcels. Total land both operating and non-operating
owned by Dakota Rail equals approximately 580 acres. In addition to the rail
line and land, Dakota Rail also owns six buildings, consisting of two depots,
two diesel houses and two other buildings.

         MNR currently operates over 221 miles of rail line of which it owns
approximately 174 miles and has trackage rights over 47 miles. The rail line
includes five branch lines, divided into seven segments in northern Minnesota.
MNR also owns approximately 2,600 acres of operating and non-operating land. MNR
sold approximately 30 miles of rail line in December 1996. MNR's rail properties
serve as collateral for the Revolver (See Note 8 to Notes to Consolidated
Financial Statements).

         OTVR owns 72 miles of rail line, in Western Minnesota from Fergus
Falls, MN to an interchange with Burlington Northern Santa Fe near Fargo, North
Dakota. The total land owned by OTVR is approximately 1,080 acres. In addition
to the rail line and land, OTVR owns a depot building in Fergus Falls. OTVR's
railroad properties serve as collateral for the Company's Revolver (See Note 8
to Notes to Consolidated Financial Statements).

         SCXY operates over 60 miles of rail line of which it owns 44 miles and
has trackage rights over 16 miles. The rail line includes two branch lines in
and around Hinckley, Minnesota.

TEXAS RAILROAD PROPERTIES

         WTLR owns approximately 104 miles of rail line, extending from the City
of Lubbock to both Seagraves and Whiteface. WTLR sold approximately 9 miles of
rail line during 1996. The total land owned by WTLR is approximately 1,500
acres. In addition to the rail line and land, WTLR owns five buildings. These
buildings consist of an office building in Lubbock used as the railroad general
offices, a one story storefront office building in Brownfield, Texas, as well as
a maintenance building and a storage shed in Brownfield and a polebarn in
Lubbock. The Company's Texas railroad properties serve as collateral for the
Revolver (See Note 8 to Notes to Consolidated Financial Statements).

WASHINGTON RAILROAD PROPERTIES

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


                                       20


<PAGE>   21



also has trackage rights over 6 miles of rail line near Wenatchee. Total land
owned by CCRR is approximately 1,600 acres. In addition to the rail line and
land, CCRR owns two buildings. These buildings consist of an office building and
a storage building in Omak, Washington. The Company's Washington railroad
properties serve as collateral for the Revolver (See Note 8 to Notes to
Consolidated Financial Statements).

CHILEAN PROPERTY

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

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

TEXAS MANUFACTURING PROPERTIES

         Kalyn's manufacturing operations are conducted in thirteen Company
owned buildings, totaling approximately 198,000 square feet on an 25.5-acre
site, which were constructed over the period from 1969 to 1997. The Company's
Texas manufacturing properties serve as collateral for the Revolver (See Note 8
to Notes to Consolidated Financial Statements).

ONTARIO PROPERTIES

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

ROLLING STOCK

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


                                       21


<PAGE>   22



third parties. Most of the Company's rail cars are subject to fixed monthly
lease payments which are offset, in part, by fees charged by the Company to
connecting railroads and shippers. The Company owns 140 tank cars that it has
leased to various shippers. The tank cars serve as collateral for term financing
agreements. All of the Company's locomotives are owned by the Company and serve
as collateral under various financing agreements (See Note 8 to Notes to
Consolidated Financial Statements). The Company also owns various other
equipment used in the maintenance and operation of its railroads. The following
tables summarize the composition of the Company's domestic railroad equipment
fleet as of December 31, 1997:

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

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

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

         As of December 31, 1997 Ferronor operated approximately 30 locomotives
and 700 rail cars in Chile.

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

ADMINISTRATIVE OFFICES

         The Company maintains its principal executive office in Boca Raton,
Florida. This office consists of approximately 6,600 square feet and is leased
through January 2001. The lease calls for monthly rental payments of
approximately $11,000 with annual increases. The Company signed an amendment to
the lease in the fourth quarter of 1997 which calls for the rental of
approximately 650 additional square feet at such facility. The increased space
was available for occupancy in January 1998. In addition, the Company subleases
a corporate office in San Francisco, California, consisting of approximately
1,000 square feet and leased through June 2001, with lease payments


                                       22


<PAGE>   23



of approximately $550 per month.

ITEM 3. LEGAL PROCEEDINGS

         In the ordinary course of conducting its business, the Company becomes
involved in various legal actions and other claims some of which are currently
pending. Litigation is subject to many uncertainties, the outcome of individual
litigated matters is not predictable with assurance, and it is reasonably
possible that some of these matters may be decided unfavorably to the Company.
It is the opinion of management that the ultimate liability, if any, with
respect to these matters will not be material. Other than ordinary routine
litigation incidental to the Company's business, no other litigation exists.

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

         No matters were submitted to a vote of security holders during the
fourth quarter of 1997.



                                       23


<PAGE>   24



PART II

ITEM 5.  MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

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


<TABLE>
<CAPTION>

                                             High Sales Price       Low Sales Price
                                             ----------------       ---------------
<S>                                          <C>                    <C>

1996

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


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

First Quarter                                 $    6 1/8              $    4 5/8
                                              ------------            -----------
Second Quarter                                     5                       4 1/4
                                              ------------            -----------
Third Quarter                                      6 5/16                  4 1/8
                                              ------------            -----------
Fourth Quarter                                     7 3/8                   5 3/8
                                              ------------            -----------


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

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

</TABLE>


     As of March 27, 1998, there were 314 holders of record of the common stock
and approximately 3,000 beneficial stockholders. The Company has never declared
or paid a dividend on its common stock. The ability of the Company to pay
dividends in the future will depend on, among other things, restrictive
covenants contained in loan or other agreements to which the Company may be
subject.



                                       24


<PAGE>   25



ITEM 6.  SELECTED FINANCIAL DATA

         The following selected financial data should be read in conjunction
with the financial statements and the notes thereto included elsewhere in this
Annual Report on Form 10-K. The statement of operations data for the years ended
December 31, 1995, 1996 and 1997 and the balance sheet data at December 31, 1996
and 1997 are derived from, and are qualified by reference to, audited financial
statements included elsewhere herein and should be read in conjunction with
those financial statements and the notes thereto. The statement of operations
data set forth below for the periods ended December 31, 1993 and 1994 and the
balance sheet data as of December 31, 1993, 1994 and 1995 are derived from the
audited financial statements of the Company not included herein (In thousands,
except operating data).

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

</TABLE>




                                       25
<PAGE>   26

ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS

GENERAL

         The Company's principal operations include the operation of short line
railroads and trailer manufacturing. The Company hauls various products, which
historically have consisted primarily of agricultural commodities, for its
customers corresponding to their local operating areas. The Company's trailer
production facility, located in Texas, manufactures a broad range of specialty
truck trailers which are marketed to a customer base from the commercial and
government sectors.

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

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

         Set forth below is a discussion of the results of operations for the
Company's railroad operations, trailer manufacturing operations and corporate
overhead and other.

RESULTS OF RAILROAD OPERATIONS

         The discussion of results of operations that follows reflects the
consolidated results of the Company's railroad operations for the years ended
December 31, 1997, 1996 and 1995. The results of operations include the
operations of Dakota Rail from September 1, 1995, WTLR and Plainview Terminal
Company ("PTC") from November 1, 1995, Evansville Terminal Company from July 1,
1996 to September 30, 1997, CCRR from September 6, 1996, OTVR from October 1,
1996, Gettysburg Railway and Gettysburg Scenic Rail Tours, Inc. ("GSRT") from
November 18, 1996 to

                                       26

<PAGE>   27



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

         The following table sets forth the operating revenues and expenses for
the Company's domestic railroad operations for the periods indicated. All
results of operations discussed in this section are for the Company's domestic
railroads only, unless indicated (in thousands).


<TABLE>
<CAPTION>
                                                        YEAR ENDED DECEMBER 31,
                                                   ---------------------------------
                                                     1997         1996         1995
                                                   ---------------------------------
<S>                                                <C>          <C>          <C>
Operating Revenue:
    Transportation revenue                         $14,737      $ 9,783      $ 6,768
    Other revenue                                    1,277        1,921          436
                                                   -------      -------      -------
Total operating revenue                             16,014       11,704        7,204
                                                   -------      -------      -------
Operating Expenses:
    Maintenance of way                               2,231        1,310          787
    Maintenance of equipment                           678          625          470
    Transportation                                   3,799        2,075        1,548
    Equipment rental                                   599          388          229
    Selling, general and administrative              2,457        1,381          801
    Depreciation and amortization                    1,337          961          798
                                                   -------      -------      -------
Total operating expenses                            11,101        6,740        4,633
                                                   -------      -------      -------
Operating income                                     4,913        4,964        2,571
    Interest and other expense                       2,842        1,308          457
                                                   -------      -------      -------
Income before income taxes                         $ 2,071      $ 3,656      $ 2,114
                                                   =======      =======      =======

</TABLE>



                                       27


<PAGE>   28



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


OPERATING REVENUES.

         Transportation revenues increased $5.0 million, or 50.6%, from $9.8
million for the year ended December 31, 1996 to $14.7 million for the year ended
December 31, 1997. CCRR, which was acquired in September 1996, had
transportation revenue of approximately $0.7 million for the four months ended
December 31, 1996 and approximately $2.6 million for 1997, an increase of $1.9
million. MNR, which was acquired in December 1996, had transportation revenue of
approximately $2.2 million for year ended December 31, 1997. OTVR, which was
acquired in September 1996, had transportation revenue of approximately $0.6
million for the four month period ended December 31, 1996 compared to $1.8
million for the year ended December 31, 1997, an increase of $1.2 million.
Gettysburg Railway, which was acquired in November 1996, had transportation
revenue of approximately $0.4 million for the year ended December 31, 1997.
These increases in transportation revenue were partially offset by a decrease of
approximately $0.2 million in revenue from Huron and Eastern Railway Company
("HESR") resulting from decreased agricultural shipments in the early 1997
compared to early 1996. Additionally, transportation revenue from South Central
Tennessee Railroad ("SCTR") decreased approximately $0.4 million due to a
decrease in demurrage revenue charged to a shipper. The domestic transportation
revenue per carload decreased from $378 to $308 per car primarily due to the
acquisitions during 1996 of railroads with lower rates per carload than the
Company's existing railroads. Domestic carloads handled totaled 46,207 for the
year ended December 31, 1997, an increase of 20,336, or 78.6%, compared to
25,871 for the year ended December 31, 1996. The increase was primarily the
result of the Company's acquisitions of MNR, which handled 10,477 carloads in
1997, CCRR, which handled 7,631 carloads in 1997, OTVR, which handled 5,776
carloads in 1996, and Gettysburg Railway, which handled 1,206 carloads in 1997.
These increased car loadings were partially offset by a decrease of 541 carloads
from HESR. Ferronor handled 22,933 carloads during the period from February 20
to December 31, 1997.

         Other revenues decreased by approximately $0.6 million, or 33.5%, from
$1.9 million for the year ended December 31, 1996 to $1.3 million for the year
ended December 31, 1997. Other revenues for 1997 and 1996 consist of gain on
sales of railroad assets, easement sales, railroad lease and rental income and
other miscellaneous income.

OPERATING EXPENSES.

         Operating expenses increased by $4.4 million, or 65.7%, from $6.7
million for the year ended December 31, 1996 to $11.1 million for the year ended
December 31, 1997. Operating expenses, as a percentage of transportation
revenue, were 68.9% and 75.3% for 1996 and 1997, respectively. The change was
primarily due to higher maintenance of way expenses caused by an unusually harsh
winter in Minnesota and Michigan in the first quarter of 1997 and higher
operating ratios for certain of the recent acquisitions as compared to the
Company's existing railroads.


                                       28


<PAGE>   29



         Maintenance of way expenses increased approximately $0.9 million, or
70.3%, from $1.3 million for the year ended December 31, 1996 to $2.2 million
for the year ended December 31, 1997 primarily due to certain acquisitions which
occurred in 1996. MNR had maintenance of way expenses of approximately $0.5
million for the year ended December 31, 1997. CCRR had maintenance of way
expenses of approximately $57,000 for the four months ended December 31, 1996
compared to maintenance of way expenses of approximately $0.2 million for 1997,
an increase of $0.2 million. Gettysburg Railway had maintenance of way expenses
of approximately $10,000 for the four months ended December 31, 1996 compared to
$0.1 million for the year ended December 31, 1997. In addition to the above
acquisitions, WTLR's and HESR's maintenance of way expenses increased
approximately $74,000 and $0.1 million, respectively from 1996 to 1997 due to
increased track work being performed as part of scheduled maintenance programs.

         Maintenance of equipment expenses increased by approximately $53,000,
or 8.5%, from $0.63 million for the year ended December 31, 1996 to $0.68
million for the year ended December 31, 1997 primarily due to certain
acquisitions which occurred in the second half of 1996.

         Transportation expense increased approximately $1.7 million, or 83.1%,
from $2.1 million for the year ended December 31, 1996 to $3.8 million for the
year ended December 31, 1997 primarily due to certain acquisitions in the second
half of 1996. MNR had transportation expenses of approximately $0.7 million in
1997. CCRR had transportation expenses of approximately $0.1 million for the
four months ended December 31, 1996 compared to $0.5 million for the year ended
December 31, 1997 an increase of $0.3 million. OTVR had transportation expenses
of approximately $59,000 in the three months ended December 31, 1996 compared to
$0.3 million for the year ended December 31, 1997 an increase of approximately
$0.3 million. Gettysburg Railway and GSRT combined had transportation expenses
of $0.3 million for the year ended December 31, 1997.

         Equipment rental increased approximately $0.2 million, or 54.5%, from
approximately $0.4 million for the year ended December 31, 1996 to $0.6 million
for the year ended December 31, 1997.

         Selling, general and administrative expenses increased approximately
$1.1 million, or 77.9%, from $1.4 million for the year ended December 31, 1996
to $2.5 million for the year ended December 31, 1997 primarily due to certain
acquisitions in the second half of 1996. MNR had selling, general and
administrative expenses of approximately $0.3 million in 1997. CCRR had selling,
general and administrative expenses of approximately $0.1 million for the four
months ended December 31, 1996 compared to $0.4 million for the year ended
December 31, 1997 an increase of $0.3 million. OTVR had transportation expenses
of approximately $44,000 in the three months ended December 31, 1996 compared to
$0.2 million for the year ended December 31, 1997 an increase of approximately
$0.1 million. Gettysburg Railway had selling, general and administrative
expenses of $0.1 million for the year ended December 31, 1997.

         Depreciation and amortization increased approximately $0.4 million, or
39.0%, from $1.0 million for the year ended December 31, 1996 to $1.3 million
for the year ended December 31, 1997


                                       29


<PAGE>   30



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

         Other Income (Expense). Interest and other expenses increased by
approximately $1.5 million, or 115.4%, from $1.3 million for the year ended
December 31, 1996 to $2.8 million for the year ended December 31, 1997. Such
increase was primarily due to the financing of the acquisitions of CCRR, MNR,
OTVR and Gettysburg Railway. The increase in interest expense from the year
ended December 31, 1996 to the year ended December 31, 1997 attributable to
these four acquisitions was $0.5 million, $0.5 million, $0.4 million and $0.1
million, respectively.

FERRONOR.

         On February 19, 1997, the Company acquired a 55% equity interest in
Ferronor, a 1,400 mile regional railroad in the Republic of Chile. The
operations of Ferronor have been included in the consolidated operations of the
Company effective February 20, 1997. Ferronor had operating revenue of $8.1
million, operating expenses (including depreciation) of $6.5 million and
operating income of $1.6 million for the period from February 20, 1997 to
December 31, 1997. Ferronor had other income of $0.6 million and interest
expense of $0.3 million. The minority interest in income of Ferronor recognized
by the Company was $0.9 million.

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

OPERATING REVENUES.

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

                                       30


<PAGE>   31



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

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

OPERATING EXPENSES.

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

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

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

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


                                       31


<PAGE>   32



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

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

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

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

RESULTS OF TRAILER MANUFACTURING OPERATIONS

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

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

</TABLE>



                                       32
<PAGE>   33


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

         NET SALES. Net sales increased approximately $9.3 million, or 68.2%,
from $13.6 million for the year ended December 31, 1996 to $22.9 million for the
year ended December 31, 1997. Net sales consist of trailer sales, part sales and
repair income. Trailer sales represent approximately 96% of the net sales in
both 1997 and 1996. Kalyn sold 547 trailers for the year ended December 31, 1996
and 730 trailers for the year ended December 31, 1997. The increase in sales
volume increased net sales by approximately $4.4 million. The average price per
trailer sold was approximately $24,000 for the year ended December 31, 1996 and
approximately $30,500 for the year ended December 31, 1997. The increase in
average price per trailer increased net sales by approximately $4.8 million.
Sales to governmental agencies represented 19% and 37% of Kalyn's net sales for
1996 and 1997, respectively. During the first half of 1996, Kalyn was in the
process of building five prototype trailers in connection with the $27 million
October 1995 TACOM contract. Full production under the contract began during the
first quarter of 1997. The increase in sales for 1997 compared to 1996 was
principally production under such contract. Kalyn produced 105 Tactical Vans
under the TACOM contract during 1997. Kalyn's backlog as of December 31, 1997
was approximately $19.7 million compared to $8.6 million at December 31, 1996.

         COST OF GOODS SOLD. Cost of goods sold increased by approximately $6.1
million, or 58.2%, from $10.4 million for the year ended December 31, 1996 to
$16.5 million for the year ended December 31, 1997. Cost of goods sold was 76.6%
for the year ended December 31, 1996 compared to 72.1% for the year ended
December 31, 1997. The decrease was partially due to certain fixed costs of
manufacturing being spread over a larger revenue base in 1997. Additionally,
government orders represented a higher percentage of sales in 1997 than in 1996.
Commercial trailers have more variations in design which generally require
greater expertise in the manufacturing process. Government contracts are
typically for larger quantities of similar style trailers. This creates greater
economies of scale in the production process which translates into a relatively
lower cost per unit produced. Historically, commercial sales have had a higher
cost of goods sold and lower gross profit margins than government sales.
Management anticipates gross profit as a percentage of net revenue to remain
fairly constant over the next twelve months.

         SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased by approximately $0.6 million, or 40.9%, from
$1.4 million for the year ended December 31, 1996 to $2.0 million for the year
ended December 31, 1997. The increase was primarily related to Kalyn's increased
sales and income during the year as discussed above.

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

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

                                       33


<PAGE>   34



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

         COST OF GOODS SOLD. Cost of goods sold decreased by approximately $3.0
million, or 22.0%, from $13.4 million for the year ended December 31, 1995 to
$10.4 million for the year ended December 31, 1996. Cost of goods sold
represented 75.0% for the year ended December 31, 1995 compared to 76.6% for the
year ended December 31, 1996. The increase was partially due to certain fixed
costs of manufacturing being spread over a smaller revenue base in 1996.
Additionally, commercial orders represented a higher percentage of sales in 1996
than in 1995. Commercial trailers have more variations in design which generally
require greater expertise in the manufacturing process. Government contracts are
typically for larger quantities of similar style trailers. This creates greater
economies of scale in the production process which translates into a relatively
lower cost per unit produced. Historically, commercial sales have had a higher
cost of goods sold and lower gross profit margins than government sales.

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

CORPORATE OVERHEAD, OTHER AND EARNINGS PER SHARE

         CORPORATE OVERHEAD. Corporate overhead, which benefits all of the
Company's business segments, has not been allocated to the business segments for
this analysis. Corporate overhead services performed for the Company's
subsidiaries include overall strategic planning, marketing, accounting, finance,
cash management, payroll, engineering and tax return preparation. The Company
believes that this presentation will facilitate a better understanding of the
changes in the results of the Company's operations. Corporate overhead, which is
included in selling, general and administrative expenses in the consolidated
statements of income, increased $0.7 million, or 28.2%, from $2.5 million for
the year ended December 31, 1996 to $3.2 million for the year ended December 31,
1997. Corporate overhead increased $0.5 million, or 24.1%, from $2.0 million for
the year ended December 31, 1995 to $2.5 million for the year ended December 31,
1996. The increases in each of the specified periods were related to the
additional costs incurred to manage the acquired subsidiaries and to establish a
strong management team to handle the Company's anticipated growth.

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


                                       34

<PAGE>   35



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

         MOTOR CARRIER OPERATIONS (DISCONTINUED OPERATION). The discussion of
results of operations that follows reflects the results of Steel City and
RailAmerica Intermodal Services from February 10, 1995 through December 31,
1997. Since the Company's acquisition of Steel City, its financial performance
and development have not met the Company's expectations. Accordingly, in March
1997 the Company adopted a formal plan to discontinue its motor carrier
operations and refocus the Company's efforts on expanding its core railroad and
trailer manufacturing operations. The Company's Board of Directors approved the
plan of discontinuance on March 20, 1997.

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

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

LIQUIDITY AND CAPITAL RESOURCES - COMBINED OPERATIONS

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

         The Company's cash provided by operating activities was $2.3 million
for the year ended December 31, 1997.

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

                                       35


<PAGE>   36



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

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

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

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

         As of December 31, 1997, the Company had working capital of $5.2
million compared to working capital of $5.1 million as of December 31, 1996.
Cash on hand as of December 31, 1997 was $3.7 million compared to $3.9 million
as of December 31, 1996. The Company's cash flows from operations historically
have been sufficient, and are currently sufficient to meet its ongoing operating
requirements, capital expenditures for property, plant and equipment, and to
satisfy the Company's interest requirements.

         The Company expects that its future cash flows will be sufficient for
its current and contemplated operations for at least the next twelve months, and
will be used for, among other things, anticipated capital expenditures for the
upgrading of existing rail lines and purchases of locomotives and equipment of
approximately $2.5 million and capital expenditures at Kalyn of approximately
$0.3 million. In addition, the Company anticipates capital expenditures of
approximately $23.6 million over the next three years related to Ferronor's new
20 year take-or-pay contract with CMH. The Company anticipates paying for this
project expansion with debt financing. The Company also anticipates purchasing
and equipping an additional facility in Quebec, Canada for its newly purchased
specialty trailer manufacturer. The costs of this project are estimated at $2.5

                                       36


<PAGE>   37



million. The Company anticipates this project will be financed with debt. The
Company does not presently anticipate any other significant capital expenditures
over the next twelve months. To the extent possible, the Company will seek to
finance any further acquisitions of property, plant and equipment in order to
allow its cash flow from operations to be devoted to other uses, including debt
reduction and acquisition requirements.

         The Company's long-term business strategy includes the selective
acquisition of additional transportation-related businesses. Accordingly, the
Company may require additional equity and/or debt capital in order to consummate
an acquisition or undertake major development activities. It is impossible to
predict the amount of capital that may be required for such acquisitions or
development, and there is no assurance that sufficient financing for such
activities will be available on terms acceptable to the Company, if at all. The
Company's Revolver allows acquisition loan advances of up to $35 million for
such acquisitions. As of March 1, 1998, the Company had approximately $3.5
million of availability under the Revolver. As noted above, it is anticipated
that the increase in availability under the Revolver to $55 million will occur
in April 1998, allowing additional availability for potential future
acquisitions.

INFLATION

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

YEAR 2000

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

NEW ACCOUNTING PRONOUNCEMENTS

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

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

                                       37


<PAGE>   38



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

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

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

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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

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

None.

                                       38


<PAGE>   39



PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

         Information concerning directors and nominees of the Company is hereby
incorporated by reference from the Company's definitive proxy statement relating
to its Annual Meeting of Shareholders to be filed with the Commission pursuant
to Regulation 14A on or before April 30, 1998.

ITEM 11.  EXECUTIVE COMPENSATION

         Information concerning the executive compensation of the Company is
hereby incorporated by reference from the Company's definitive proxy statement
relating to its Annual Meeting of Shareholders to be filed with the Commission
pursuant to Regulation 14A on or before April 30, 1998.

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         Information concerning the security ownership of the Company is hereby
incorporated by reference from the Company's definitive proxy statement relating
to its Annual Meeting of Shareholders to be filed with the Commission pursuant
to Regulation 14A on or before April 30, 1998.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         Information concerning certain relationships and related transactions
of the Company is hereby incorporated by reference from the Company's definitive
proxy statement relating to the Annual Meeting of Shareholders to be filed with
the Commission pursuant to Regulation 14A on or before April 30, 1998.


                                       39


<PAGE>   40



PART IV

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

(a)      Exhibits

  3.1    Amended and Restated Articles of Incorporation of Registrant, as
         amended(9)

  3.2    By-laws of Registrant(1)

  4.2    Class B Warrant(2)

  4.3    Unit Purchase Warrant(2)

  4.4    Series A Convertible Subordinated Debentures(7)

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

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

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

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

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

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

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

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

10.40    Asset Purchase Agreement, dated October 11, 1995, by and among
         Seagraves, Whiteface & Lubbock Railroad Co., American Railway
         Corporation, TEMCO Corporation and RailAmerica, Inc.(8)

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

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

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

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

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

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

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

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



                                       40


<PAGE>   41



         Preferred Stock.(10)

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

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

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

10.54    Asset Purchase Agreement, dated August 5, 1996, by and among Burlington
         Northern Railroad Company and Cascade and Columbia river Railroad
         Company, a subsidiary of RailAmerica, Inc.(12)

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

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

10.57    Commitment letter relating to $40,000,000 Revolving Line of Credit/Term
         Loan Facility, dated March 3, 1997, by and between National Bank of
         Canada, Comerica Bank, RailAmerica, Inc., Kalyn/Siebert, Incorporated,
         RailAmerica Intermodal Services, Inc., RailAmerica Carriers, Inc.,
         Steel City Carriers, Inc., Saginaw Valley Railway Company, Inc., Huron
         and Eastern Railway Company, Inc., West Texas and Lubbock Railroad
         Company, Inc., Plainview Terminal Company, Cascade and Columbia River
         Railroad Company, Inc., Minnesota Northern Railroad Company, Inc. and
         Delaware Valley Railway Company, Inc.(15)

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

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

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

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

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

21       Subsidiaries of Registrant(17)

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

----------
(1)      Incorporated by reference to the same exhibit number filed as part of
         the Registrant's Registration Statement on Form S-1, Registration No.
         33-49026.

(2)      Incorporated by reference to the same exhibit number filed as part of
         the Registrant's Post-Effective Amendment No. 3 on Form SB-2, dated
         November 25, 1994, Registration No. 33-49026.

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

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

                                       41


<PAGE>   42



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

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

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

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

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

(9)      Incorporated by reference to the same exhibit number filed as part of
         the Company's Form 10-QSB for the quarter ended September 30, 1995,
         filed with the Securities and Exchange Commission on November 12, 1995.

(10)     Incorporated by reference to the same exhibit number filed as part of
         the Company's Form 10-KSB for the year ended December 31, 1995, filed
         with the Securities and Exchange Commission on April 12, 1996.

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

(12)     Incorporated by reference to the exhibit 2.1 filed as part of the
         Company's Form 8-K as of September 6, 1996, filed with the Securities
         and Exchange Commission on September 12, 1996.

(13)     Incorporated by reference to the exhibit A filed as part of the
         Company's Form 8-K as of September 30, 1996, filed with the Securities
         and Exchange Commission on October 17, 1996.

(14)     Incorporated by reference to the exhibit 2.1 filed as part of the
         Company's Form 8-K as of October 11, 1996, filed with the Securities
         and Exchange Commission on October 25, 1996.

(15)     Incorporated by reference to the same exhibit number filed as part of
         the Company's Form 10-KSB for year ended December 31, 1995, filed with
         the Securities and Exchange Commission on March 31, 1997.

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

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

+        Executive Compensation Plan or Arrangement.

(b)      Reports on Form 8-K.

         No reports on Form 8-K were filed by the Company during the fourth
quarter of 1997.

                                       42


<PAGE>   43


                                   SIGNATURES

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

                                  RAILAMERICA, INC.

                                  By: /s/  Gary O. Marino
                                      ---------------------------------------
                                      Gary O. Marino, Chief Executive Officer
                                      (Principal Financial officer)

                                  By: /s/ Larry W. Bush
                                      ---------------------------------------
                                      Larry W. Bush, Controller
                                      (Principal Accounting Officer)
                                      Dated  March 31, 1998

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

<TABLE>
<CAPTION>
         SIGNATURES                     TITLE                                                    DATE
         ----------                     -----                                                    ----
<S>                                     <C>                                                      <C>
/s/ Gary O. Marino                      Chairman, President, Chief Executive                     March 31, 1998
---------------------------             Officer and Director
Gary O. Marino



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



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



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



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



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



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


</TABLE>

                                       43




<PAGE>   44



                       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, 1997 and 1996                                                  F-3

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

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

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

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

</TABLE>


                                       F-1


<PAGE>   45



                        REPORT OF INDEPENDENT ACCOUNTANTS

To the Stockholders of
RailAmerica, Inc. and Subsidiaries

We have audited the accompanying consolidated balance sheets of RailAmerica,
Inc. and Subsidiaries (the "Company") as of December 31, 1997 and 1996, and the
related consolidated statements of income, stockholders' equity and cash flows
for each of the three years in the period ended December 31, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

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

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

Coopers & Lybrand L.L.P.




West Palm Beach, Florida
March 25, 1998

                                       F-2


<PAGE>   46

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


<TABLE>
<CAPTION>

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

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

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

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

</TABLE>



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

                                       F-3



<PAGE>   47

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

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

  Interest expense                                      (3,533,920)        (2,078,383)        (1,277,837)
  Other income (expense)                                   663,128             (8,642)           166,654
  Minority interest in income of subsidiary               (851,243)                --                 --
                                                      ------------       ------------       ------------
        Income from continuing operations before
            income taxes                                 3,597,348          1,785,842          2,076,542
 Provision for income taxes                                963,382            705,405            950,299
                                                      ------------       ------------       ------------
        Income from continuing operations                2,633,966          1,080,437          1,126,243
Discontinued operations
    Estimated loss on disposal of discontinued
      Motor Carrier segment (net of income tax
      benefit of $277,000)                                (452,402)                --                 --
    Loss from operations of discontinued Motor
     Carrier segment (less applicable income tax
     benefit of $149,000, 322,000 and $172,000,
     respectively)                                        (242,365)          (575,558)          (257,910)
                                                      ------------       ------------       ------------
             Net Income                               $  1,939,199       $    504,879       $    868,333
                                                      ============       ============       ============

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

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

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

</TABLE>


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

                                       F-4


<PAGE>   48

                       RAILAMERICA, INC. AND SUBSIDIARIES
                 CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
              For the years ended December 31, 1997, 1996 and 1995


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

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

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

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

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

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

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

                                 ------------    ------------    ------------    ------------     ------------
Balance, December 31, 1995          4,848,991           4,849       7,599,313              --        2,439,895

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

Issuance of common stock            1,263,919           1,264       4,128,735              --               --

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

Exercise of stock options              12,500              12          44,988              --               --

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

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

Balance, December 31, 1996          6,125,410           6,125      11,773,036       2,340,000        2,944,774

Net income                                 --              --              --              --        1,939,199

Issuance of common stock            1,720,627           1,721       7,163,206      (2,340,000)              --

Treasury stock received for
  sales of subsidiaries                    --              --              --              --               --

Stock incentive plan issuance              --              --              --              --               --

Exercise of stock options             202,933             203         747,837              --               --

Exercise of warrants                1,080,594           1,081       3,666,653              --               --

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

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





<CAPTION>
                                                Stockholders' Equity
                                 ----------------------------------------------
                                  Cumulative
                                  Translation       Treasury
                                  Adjustment         Shares           Total
                                 ------------     ------------     ------------
<S>                              <C>              <C>              <C>
Balance, January 1, 1995         $         --     $         --     $  6,407,564

Net Income                                 --               --          868,333

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

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

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

Cumulative translation                 70,355               --           70,355

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

                                 ------------     ------------     ------------
Balance, December 31, 1995             70,355         (965,753)       9,148,659

Net income                                 --               --          504,879

Issuance of common stock                   --               --        4,129,999

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

Exercise of stock options                  --               --           45,000

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

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

Balance, December 31, 1996             67,441       (1,139,269)      15,992,107

Net income                                 --               --        1,939,199

Issuance of common stock                   --               --        4,824,927

Treasury stock received for
  sales of subsidiaries                    --         (479,629)        (479,629)

Stock incentive plan issuance              --          173,516          173,516

Exercise of stock options                  --               --          748,040

Exercise of warrants                       --               --        3,667,734

Cumulative translation                (52,068)              --          (52,068)
                                 ------------     ------------     ------------

Balance, December 31, 1997       $     15,373     $ (1,445,382)    $ 26,813,826
                                 ============     ============     ============


</TABLE>


                                      F-5
<PAGE>   49
                       RAILAMERICA, INC. AND SUBSIDIARIES
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
              For the years ended December 31, 1997, 1996 and 1995

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

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

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

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

</TABLE>



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


                                       F-6




<PAGE>   50

                       RAILAMERICA, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                     -------

 1.      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

         Organization and Principles of Consolidation

         The accompanying consolidated financial statements include the accounts
         of RailAmerica, Inc. and all of its majority-owned subsidiaries (the
         "Company"). All significant intercompany transactions have been
         eliminated in the preparation of the consolidated financial statements.
         During 1997, the Company sold all the outstanding stock of its
         subsidiaries Huron Distribution Services, Inc., Evansville Terminal
         Company and Gettysburg Scenic Rail Tours, Inc. During 1997, the Company
         formed wholly-owned subsidiaries St. Croix Valley Railroad Company,
         RailAmerica de Chile S.A. and RailAmerica Australia, Inc. During
         February 1997, the Company acquired a 55% interest in Empresa de
         Transporte Ferroviario S.A. ("Ferronor").

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

         Use of Estimates

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

         Inventories

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

         Cash and Cash Equivalents

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

                                       F-7


<PAGE>   51


                       RAILAMERICA, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                    -------

1.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

         Revenue Recognition

         Transportation

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

         Commercial Trailer Sales

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

         Governmental Trailer Sales

         The Company recognizes revenue from the sale of trailers to
         governmental agencies when title and risks of ownership are
         transferred, which is upon completion, inspection and acceptance of
         trailers by the governmental agency. At that time, the governmental
         agency has made a fixed written commitment to purchase in the form of a
         contract, the trailer has been completed and is available for pick-up
         or delivery, and the governmental agency has requested the Company to
         hold the trailer until the governmental agency determines the
         appropriate means of taking possession. The Company has no further
         obligation except to segregate the trailer and hold it for a short
         period of time, as is customary in the industry, generally less than
         one month, until pick-up or delivery. The trailers are built to the
         government's specifications pursuant to a written contract and are
         inspected and accepted for delivery by the governmental agency. The
         contract terms provide for prepayments by the government of up to 90%
         of the trailer's cost. These prepayments are recorded as advances
         against the inventory. Sales to governmental agencies represented 37%,
         20% and 29% of the Company's manufacturing revenue for the years ended
         December 31, 1997, 1996 and 1995, respectively.

                                       F-8


<PAGE>   52


                       RAILAMERICA, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                    -------

1.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

         Concentration of Credit Risk

         The Company maintains its cash in demand deposit accounts which at
         times may exceed FDIC insurance limits. As of December 31, 1997, the
         Company had approximately $3.3 million of cash in excess of FDIC
         insurance limits.

         Property, Plant and Equipment

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

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

               Buildings and improvements                           20-33 years
               Railroad track and improvements                       3-40 years
               Locomotives, transportation and other equipment       5-20 years
               Office equipment                                      5-10 years

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

         Income Taxes

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

                                       F-9


<PAGE>   53


                       RAILAMERICA, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                    -------

1.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

         Excess of Cost Over Net Assets of Companies Acquired

         The acquisition of Kalyn/Siebert, Inc. ("Kalyn") resulted in a
         purchase price in excess of the fair market value of net assets
         acquired in the amount of approximately $2.5 million, which is
         reflected in the balance sheet at December 31, 1997, net of accumulated
         amortization of $0.4 million. This amount is being amortized on a
         straight-line basis over twenty years. The Company periodically
         evaluates the carrying value and the periods of amortization based on
         the current and expected future cash flows of the entities giving rise
         to the excess of cost over net assets acquired. The acquisition of
         Steel City Carriers resulted in purchase price in excess of the fair
         market value of net assets acquired of approximately $0.9 million (see
         disclosure below). Amortization expense related to the excess of cost
         over net assets of companies acquired for the years ended December 31,
         1997, 1996 and 1995 was approximately $200,000, $190,000 and $156,000.

         Profit Sharing Plan

         The Company maintains a contributory profit sharing plan as defined
         under Section 401(k) of the U.S. Internal Revenue Code. The Company
         made contributions to this plan at a rate of 50% of the employees
         contribution up to a maximum annual contribution of $1,000 per eligible
         employee. An employee becomes 100% vested with respect to the employer
         contributions after completing six years of service. Employer
         contributions during the years ended December 31, 1997, 1996 and 1995
         were approximately $90,000, $61,000 and $48,000, respectively.

                                      F-10


<PAGE>   54


                       RAILAMERICA, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                    -------

1.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

         Foreign Currency Translation

         The financial position and results of operations of the Company's
         Canadian and Chilean subsidiaries are measured using local currency as
         the functional currency. Assets and liabilities of operations
         denominated in foreign currencies are translated into U.S. dollars at
         exchange rates in effect at year-end, while revenues and expenses are
         translated at average exchange rates prevailing during the year. The
         resulting translation gains and losses are charged directly to
         cumulative translation adjustment, a component of stockholders' equity,
         and are not included in net income until realized through sale or
         liquidation of the investment.

         Recent Accounting Pronouncements

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

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

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

         Reclassifications

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

2.       EARNINGS PER SHARE

         In 1997, the Company adopted SFAS No. 128, "Earnings per Share", which
         requires the presentation of both basic and diluted earnings per share.
         For the year ended December 31, 1997, basic earnings per share is based
         on the weighted average number of common shares outstanding during the
         year. Diluted earnings per share is based on the sum of the weighted
         average number of common shares outstanding plus common stock
         equivalents arising out of stock options, warrants and convertible
         debt. Earnings per share information for all periods have been restated
         to conform to the requirements of the standard.

                                      F-11


<PAGE>   55


                       RAILAMERICA, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                    -------

 2.      EARNINGS PER SHARE, continued

         For the years ended December 31, 1996 and 1995, basic earnings per
         common share are based on the weighted average number of common shares
         outstanding during the year. Assumed exercise of stock options and
         assumed conversion of the convertible debt were anti-dilutive and have
         been excluded from the weighted average shares outstanding for diluted
         earnings per share. On October 1, 1995, the Company was notified by the
         shareholders of its redeemable convertible preferred stock of their
         intent to convert such stock. As part of an overall plan to acquire its
         common stock at favorable prices, the Company redeemed the convertible
         preferred stock at 97.5% of the then market value of the underlying
         common stock ($1,666,665). The excess of the redemption price over the
         book value of the preferred stock was considered a non-recurring deemed
         dividend which reduced 1995 net income available to common shareholders
         by $666,665 or $0.14 per share.

         The following is a summary of the net income available for common
         stockholders and weighted average shares for the diluted calculation
         (in thousands):

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

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

</TABLE>

 3.      DISCONTINUED OPERATIONS:

         In March 1997, the Company adopted a formal plan to discontinue its
         motor carrier division. The motor carrier division consists of Steel
         City Carriers and RailAmerica Intermodal Services, both wholly-owned
         subsidiaries of the Company. As part of the plan, the Company intends
         to sell the stock or assets of the subsidiaries. Revenues for the motor
         carrier division for the years ended December 31, 1997, 1996 and 1995
         were $7.1 million, $7.2 million and $5.1 million, respectively.
         Management is committed to selling either substantially all of the
         assets or the stock of the Company's motor carrier subsidiaries during
         1998. If such transaction is not consummated during the second quarter
         of 1998 the results of operations will be reflected in continuing
         operations beginning in that quarter and until a sale is completed.
         During the fourth quarter of 1997, the Company re-evaluated the
         carrying amount of Steel City Carriers' assets and recorded an
         impairment charge of approximately $730,000. This amount was
         determined based on what the Company believes it will recover through
         the sale of this subsidiary.

                                      F-12


<PAGE>   56


                       RAILAMERICA, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                    -------

3.       DISCONTINUED OPERATIONS, continued

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

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

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

         On February 19, 1997, the Company acquired, through its wholly-owned
         subsidiary, RailAmerica de Chile, S.A., a majority interest in
         Ferronor, a 1,400 mile railroad serving northern Chile. The Company was
         joined in the purchase of Ferronor by Andres Pirrazzoli y Cia, Ltda
         ("APCO"). The purchase price paid by RailAmerica/APCO for substantially
         all of the stock of Ferronor, was approximately $12.3 million and was
         funded 55% by RailAmerica and 45% by APCO. This acquisition has been
         accounted for as a purchase and Ferronor's results have been
         consolidated since the acquisition.

         In accordance with the Shareholders' Agreement between RailAmerica and
         APCO, RailAmerica controls the appointment of a majority of the Board
         of Directors of Ferronor, including the Chairman. APCO maintains
         certain minority rights under the shareholders Agreement, such as the
         right to request the General Manager's removal under certain
         circumstances. In accordance with EITF 96-16, the Company considered
         these minority rights in determining whether to consolidate Ferronor
         and has concluded that consolidation is appropriate based upon the
         Company's ownership position, and its level of control of the Board of
         Directors and senior management.

                                      F-13


<PAGE>   57


                       RAILAMERICA, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                    -------

 4.      ACQUISITIONS, continued

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

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

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

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

                                      F-14


<PAGE>   58


                       RAILAMERICA, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                    -------

4.     ACQUISITIONS, continued

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

                                                         1997       1996
                                                       -------    -------
              Transportation and other revenues        $48,669    $38,862
              Income from continuing operations
                  before income taxes                  $ 3,866    $ 2,135
              Net income                               $ 2,207    $   772
              Net income per share                     $   .27    $   .16

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

 5.    GREAT SOUTHERN RAILWAY LIMITED

       On October 31, 1997, the Company acquired a minority interest, of
       approximately 11.4%, in the Great Southern Railway Limited ("GSR"). GSR
       completed the acquisition of the assets and business comprising the
       passenger rail service of the Australian National Railway Commission. The
       Company has invested $0.6 million in equity of GSR, $1.2 million in
       uncollateralized subordinated notes (the "Notes") and received 98,736
       options for stock exercise upon the earlier of three years from closing
       date or the date GSR is admitted to the Australian Stock Exchange. The
       options expire in five years. If all options are exercised, the Company's
       ownership interest would be diluted to approximately 10.6%. The Company
       cannot dispose of its stock investment for a period of two years. The
       Notes bear interest at 21% and mature October 31, 2007. Interest is paid
       quarterly based upon available cash flow, will be recorded as interest
       income as it is received, and interest is non-cumulative. Both these
       amounts are included in long term assets on the consolidated balance
       sheet. The Notes approximate fair value as of December 31, 1997 based
       upon the recent nature of the transaction.

                                      F-15


<PAGE>   59


                       RAILAMERICA, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 6.    INVENTORIES:

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

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

</TABLE>


 7.      PROPERTY, PLANT AND EQUIPMENT:

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

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

</TABLE>


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

 8.      OTHER ASSETS:

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

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

</TABLE>


                                      F-16


<PAGE>   60


                       RAILAMERICA, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                    -------

8.       OTHER ASSETS, continued

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

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

 9.      RELATED PARTY TRANSACTIONS:

         First London Securities Corporation ("First London"), of which Douglas
         Nichols, a director of the Company, is President and principal
         shareholder, served as the exclusive placement agent for the Company's
         private placement which closed in September 1996 and also the Company's
         private placement which closed in January 1997. First London received
         as part of the September 1996 private placement a $225,000 placement
         fee, $45,000 nonaccountable expense fee and one-year warrants to
         purchase 125,000 shares of Common Stock at an exercise price of $4.60
         per share. First London exercised its option on these warrants on
         September 30, 1997. First London received as part of the January 1997
         private placement a $375,750 placement fee, $75,150 nonaccountable
         expense fee and one-year warrants to purchase 167,000 shares of Common
         Stock at an exercise price of $5.75 per share. First London exercised
         its option on these warrants in January 1998.

         During 1997, the Company sold all the outstanding stock of its
         wholly-owned subsidiary Huron Distribution Services to a company owned
         by its Vice Chairman. The sale price was approximately $50,000, which
         consisted of cash and 10,085 shares of the Company's common stock
         valued at $44,629. A gain of approximately $17,000 was recognized on
         the transaction and is included in other income (expense) in the
         consolidated income statement.

         During 1997, the Company sold all the outstanding stock of its
         wholly-owned subsidiary Evansville Terminal Company to a group of
         investors which included a company owned by its Vice Chairman. The sale
         price was approximately $540,000, which consisted of cash, a short-term
         note, a $450,000 purchase money mortgage with interest at 8% and a
         maturity of October 2002 and 8,502 shares of the Company's common stock
         valued at $50,000. A gain of approximately $10,000 was recognized on
         the transaction and is included in other income (expense) in the
         consolidated income statement.

                                      F-17


<PAGE>   61


                       RAILAMERICA, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                    -------

 9.      RELATED PARTY TRANSACTIONS, continued

         During 1997, the Company sold all the outstanding stock of its
         wholly-owned subsidiary Gettysburg Scenic Rail Tours, Inc. ("GSRT"),
         certain railroad equipment and substantially all the assets of
         Gettysburg Railway ("GBR") to a company owned by its Vice Chairman. The
         sale price for GSRT and the railroad equipment was $0.5 million, which
         consisted of cash and 62,602 shares of the Company's common stock
         valued at $385,000. A gain of approximately $240,000 was recognized on
         the transaction and is included in other income (expense) in the
         consolidated income statement. The sale price for substantially all of
         the assets of GBR was $1.45 million, which consisted of cash, an
         $800,000 promissory note due June 30, 1998 and a $350,000 mortgage
         note, which calls for monthly payments of $3,037, at an interest rate
         of 8.5% with a maturity of June 30, 2003. A gain of approximately
         $170,000 was recognized on the transaction and is included in other
         operating income in the consolidated income statement.

         As of December 31, 1997, $1.1 million of notes receivable from related
         parties is included in current assets and $0.35 million of notes
         receivable from related parties is included in notes receivable, less
         current portions on the consolidated balance sheet.

10 .     LONG-TERM DEBT:

         Long-term debt consists of the following at December 31, 1997 and 1996:

<TABLE>
<CAPTION>
                                                                                              1997             1996
                                                                                          -----------      -----------
<S>                                                                                       <C>              <C>
              Revolving line of credit.  See below                                        $34,717,857      $24,991,465

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

              Note payable, financial institution, bearing interest at
                   9.50%, due in fixed monthly installments of
                   $24,516 (including interest), with a final payment
                   of $554,076 in February 1999. Certain equipment,
                   inventory, accounts receivable, capital leases and
                   South Central Tennessee Railroad Corp. ("SCTR")
                   common stock serve as collateral                                           801,815        1,009,018

              Equipment note, with interest imputed at 9.92%, due in
                   fixed monthly installments of $7,055 (including
                   interest), with a final payment of $153,177 in
                   March 1998. Certain equipment serves as collateral                         170,191          234,130

              Equipment notes, with interest imputed at 9.06%, due in
                   fixed monthly installments of $9,812 (including
                   interest) through October 2003 Certain locomotives
                   and flat cars serve as collateral                                          584,892          646,567


</TABLE>

                                      F-18


<PAGE>   62


                       RAILAMERICA, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                    -------

10.       LONG-TERM DEBT, continued

<TABLE>
<S>                                                                                        <C>            <C>
              Equipment note, with interest imputed at 8.33%, due in fixed monthly
                   installments of $16,441 (including interest) through March 2003
                   Certain tank cars serve as collateral                                   1,065,298      1,169,056

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

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

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

              Equipment note payable, bearing interest at 8.89%, due in fixed monthly
                   installments of $27,250 (including interest) through December 2000
                   with final payment of $140,026 January 2001. Certain equipment
                   serves as collateral                                                      958,821      1,194,791

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

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

              Equipment notes, with interest imputed at rates from 8.12% to 8.29%,
                   due in fixed monthly installments of $16,741 (including interest)
                   with varying maturities through November 2004. Certain locomotives
                   and tank cars serve as collateral                                       1,080,809             --

              Equipment note payable, bearing interest at 9.4%, due in fixed monthly
                   installments of $2,409 (including interest) through October 1998.
                   Certain equipment serves as collateral                                     23,082         48,505

              Burlington Northern Santa Fe ("BNSF") rail facilities installment
                   purchase obligation, annual payments of $250,000, including
                   interest at 10%, maturing in October 2116. If car loads at OTVR
                   fall below 6,500 in a year, BNSF will credit payments
                   on this debt at a rate of $250 per car                                  2,171,914      2,181,164


</TABLE>


                                      F-19


<PAGE>   63


                       RAILAMERICA, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                    -------

10.      LONG-TERM DEBT, continued

<TABLE>
<S>                                                                                         <C>            <C>
         Contract for deed, principal due at the earlier of December 1, 2008 or
              180 days following the date that rail service ceases to be
              provided on the Minnesota line operated by Dakota. The Contract
              for deed is non-interest bearing and is discounted to yield 9%.
              The unamortized discount at December 31, 1997 and 1996 is $833,699
              and $878,169, respectively.  Railroad property serves as collateral.          529,136        486,146

         Note payable to the State of Minnesota, payable in quarterly
              installments of $6,024 through July 1, 2004. The note is
              non-interest bearing and is discounted to yield 9%. The
              unamortized discount at December 31, 1997 and 1996 is $39,018 and
              $50,330, respectively. Railroad property and equipment
              serves as collateral.                                                         117,609        130,394

         Note payable to the Central Prairie Rail Shippers Corporation, payable
              in quarterly installments with final payment due not later than
              September 13, 2000. The note is non-interest bearing and is
              discounted to yield 9%. The unamortized discount at December 31,
              1997 and 1996 is $305 and $680, respectively. Railroad property
              and equipment serves as collateral                                            12,623         39,868

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

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

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

</TABLE>

         On September 29, 1995, the Company entered into a revolving credit loan
         facility ("Revolver") with National Bank of Canada ("NBC"). In October
         1996 and May 1997, the Company closed on $10 million and $15 million
         increases in its Revolver, respectively. The Revolver's maturity date
         was extended to May 2000. In March 1998, the Company accepted a
         commitment letter to increase the Revolver to $55 million (see Note
         21). The Revolver bears interest at either the bank's prime rate (which
         was 8.25% at December 31, 1997) plus 0.5% or the one, three or six
         month LIBOR plus 2.5%, at the option of the Company. The Revolver is
         collateralized by substantially all the assets of the Company and
         certain subsidiaries.

                                      F-20


<PAGE>   64


                       RAILAMERICA, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                    -------

10.      LONG-TERM DEBT, continued

         The Revolver includes restrictive covenants prohibiting the Company
         from incurring debt, except liabilities incurred in the normal course
         of business, guaranteeing the payment of an obligation of a third
         party, and selling, transferring or otherwise assigning substantially
         all of its assets. The Revolver also contains certain financial
         covenants which include requiring the Company to maintain a maximum
         debt to tangible net worth and interest coverage ratios. The Revolver
         restricts payment of dividends on the Company's Common Stock. As of
         December 31, 1997, the Company's Revolver was substantially fully
         funded based upon the collateral pledged at that time. The Company had
         an additional $5.3 million of availability for future purchases or
         acquisitions.

         In December 1996, the Company entered into an acquisition financing
         transaction with Comerica Bank N.A. ("Comerica") to acquire rail lines
         in Minnesota from BNSF. The interest rate on the financing was at the
         prime rate (8.5% at December 31, 1996) plus one percent and was
         scheduled to mature in 90 days from closing. During May 1997, the
         Company increased its Revolver from $25 million to $40 million by
         bringing Comerica as an additional lender into the Revolver. The
         acquisition loan was rolled into the Revolver.

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

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

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

         Capital Leases

         The Company entered into equipment finance leases for certain
         locomotives, tractors, trailers and other equipment expiring at various
         times through 2001. These leases are accounted for as capital leases.
         The financing of the purchase of the locomotives, tractors, trailers
         and equipment under these capital leases was capitalized using the
         interest rate appropriate at the inception of the respective leases.
         The Company also leases certain railroad properties under a capital
         lease which was due to expire in 1998. The lease was renegotiated and
         now matures in January 2004 and calls for monthly payments of $1,300.


                                      F-21


<PAGE>   65


                       RAILAMERICA, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                    -------

10.      LONG-TERM DEBT, continued

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

<TABLE>
<S>                                                                               <C>
              Locomotives and transportation equipment  under capital leases      $3,001,849
              Less accumulated amortization                                          453,694
                                                                                  ----------
                                                                                  $2,548,155
                                                                                  ==========

</TABLE>

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

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

</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 $853,000,
         $780,000 and $193,000 for the years ended December 31, 1997, 1996 and
         1995, respectively.

11.      SUBORDINATED DEBT:

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

<TABLE>
<CAPTION>
                                                                                       1997                1996
                                                                                   -----------        ----------
<S>                                                                                <C>                <C>
         Convertible subordinated debentures, bearing interest at the prime rate
              (which was 8.25% at December 31, 1997) adjusted annually, payable
              semi-annually. Principal payments are due in 20 equal quarterly
              installments beginning November 1999. Convertible into common
              stock of the Company at $2.25 beginning August 31, 1995.             $ 1,000,000        $1,000,000
                                                                                   -----------        ----------


</TABLE>


                                      F-22


<PAGE>   66


                       RAILAMERICA, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                    -------

11.      SUBORDINATED DEBT, continued

<TABLE>
<S>                                                                                  <C>               <C>
         Subordinated debentures, bearing interest at the prime
              rate adjusted annually, payable semi-annually.
              Principal payments are due in 20 equal quarterly
              installments beginning May 1995.                                            477,882           690,274

         Series A Convertible Subordinated debentures, bearing interest at 8%
              payable semi-annually on January 1 and July 1. Convertible into
              common stock of the Company at $5.48 per share beginning
              January 1, 1996.  Maturing June 30, 2005.                                 2,000,000         2,000,000
                                                                                  ---------------      ------------
                                                                                        3,447,882         3,690,274
            Less current maturities                                                       212,392           212.392
                                                                                  ---------------      ------------
                                                                                  $     3,265,490      $  3,477,882
                                                                                  ===============      ============

</TABLE>

         The aggregate annual maturities of subordinated debt are as follows:

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


12.      OTHER REVENUE:

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

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

</TABLE>


13.      REDEEMABLE CONVERTIBLE PREFERRED STOCK:

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

                                      F-23


<PAGE>   67


                       RAILAMERICA, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                    -------

14.      INCOME TAX PROVISION:

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

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

</TABLE>


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

<TABLE>
<S>                                      <C>             <C>             <C>
         Continuing operations           $ 963,382       $ 705,405       $ 950,299
         Discontinued operations          (426,000)       (322,000)       (172,000)
                                         ---------       ---------       ---------
         Total income tax provision      $ 537,382       $ 383,405       $ 778,299
                                         =========       =========       =========

</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 Company's majority
         owned subsidiary Ferronor files Chilean income tax returns.

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

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

</TABLE>


                                      F-24


<PAGE>   68


                       RAILAMERICA, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                    -------

14.      INCOME TAX PROVISION, continued

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

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

</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. It is management's belief
         that it is more likely than not that a portion of the deferred tax
         assets will not be realized. The Company has established a valuation
         allowance of $609,000 at December 31, 1997 and $183,000 at December 31,
         1996, respectively. The valuation allowance at December 31, 1997 is
         comprised of $84,000, which relates to prior year state net operating
         losses, and $525,000, which relates to current year acquired net
         operating losses from Ferronor.

         No provision was made in 1997 for U.S. income taxes on undistributed
         earnings of the Chilean subsidiaries as it is the intention of
         management to utilize those earnings in the Chilean operations for an
         indefinite period of time.

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

                                      F-25


<PAGE>   69


                       RAILAMERICA, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                    -------

15.      WARRANTS:

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

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

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

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

16.      STOCK OPTIONS:

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

                                      F-26


<PAGE>   70


                       RAILAMERICA, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                    -------

16.      STOCK OPTIONS, continued

         Effective January 1, 1995, the Company implemented two new stock option
         plans: the 1995 Stock Incentive Plan and the 1995 Non-Employee Director
         Stock Option Plan. Each plan calls for 250,000 shares to be reserved
         for future issuance. Options granted under the Stock Incentive Plan are
         exercisable at the date of grant. Options granted under the
         Non-Employee Director Stock Option Plan are 1/3 exercisable at the date
         of grant, 1/3 exercisable at the first anniversary of the grant date
         and 1/3 exercisable at the second anniversary of the grant date. All
         the options granted under the Stock Incentive Plan and Non-Employee
         Director Stock Option Plan have a ten year life from the date of grant.
         In June 1997, the Company's stockholders approved a 750,000 increase in
         the number of shares of common stock reserved for issuance pursuant to
         the Company's 1995 Stock Incentive Plan, bringing total shares reserved
         under this plan to 1,000,000.

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

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

         Effective January 1, 1998, Mr. Marino entered into a new employment
         agreement with the Company. The new agreement provides that he is
         granted non-qualified options to purchase 300,000 shares of common
         stock of the Company at exercise prices varying from $7.25 to $9.50.
         All of the options are immediately exercisable and expire ten years
         from the grant date. Mr. Marino is also entitled to receive 30,000
         shares of the Company's common stock subject to certain terms and
         conditions.

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

                                      F-27


<PAGE>   71


                       RAILAMERICA, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                    -------

16.      STOCK OPTIONS, continued

         The Company has adopted the disclosure-only provisions of Statements of
         Financial Accounting Standards No. 123, "Accounting for Stock-Based
         Compensation". Accordingly, no compensation costs have been recognized
         for the stock options issued during 1997, 1996 and 1995 as all stock
         options were granted with an exercise price at least equal to the
         market price on the date of grant. Had compensation cost for the
         Company's stock options issued been determined based on the fair value
         at the grant date for awards in 1997, 1996 and 1995 consistent with the
         provisions of SFAS No. 123, the Company's net income and net income per
         share would have been reduced to the pro forma amounts indicated below:

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

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

</TABLE>


         These calculations only take into account the options issued since
         January 1, 1995. The fair value of each option grant is estimated on
         the date of grant using the Black-Scholes option- pricing model with
         the following weighted-average assumptions used for grants in 1997,
         1996 and 1995: dividend yield 0.0%; expected volatility of 45%-55%;
         risk-free interest rate of 6.36% -7.8%; and expected lives of 10 years.
         The weighted average fair value of options granted for 1997, 1996 and
         1995 were $3.08, $2.65, and $2.68, respectively.

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

<TABLE>
<CAPTION>
                                                                           WEIGHTED
                                                                           AVERAGE
                                                            NUMBER OF      EXERCISE
                                                              SHARES        PRICE
                                                            ---------      --------
<S>                                                           <C>          <C>
              Outstanding at January 1, 1995                  875,000      $   3.38
              Granted                                         251,000      $   3.90
              Exercised                                            --            --
              Forfeited                                       277,500      $   3.00
              Outstanding at December 31, 1995                848,500      $   3.66

              Granted                                         295,000      $   3.96
              Exercised                                        12,500      $   3.60
              Forfeited                                         7,000      $   3.50
              Outstanding at December 31, 1996              1,124,000      $   3.74

</TABLE>


                                      F-28


<PAGE>   72


                       RAILAMERICA, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                    -------

16.      STOCK OPTIONS, continued

<TABLE>
<CAPTION>
                                                                           WEIGHTED
                                                                           AVERAGE
                                                            NUMBER OF      EXERCISE
                                                             SHARES         PRICE
                                                            ---------      --------
<S>                                                         <C>            <C>
              Granted                                         363,500      $   5.00
              Exercised                                       202,933      $   3.69
              Forfeited                                        33,667      $   4.21
              Outstanding at December 31, 1997              1,250,900      $   4.10

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

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

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

</TABLE>


         In January 1995, the Company established an Employee Stock Purchase
         Plan open to all full-time employees. Each employee may have payroll
         deductions as a percentage of their compensation, not to exceed $25,000
         per year. The purchase price equals 85% of the fair market value of a
         share of the Company's Common Stock on January 1 or December 31, of any
         given year, whichever is lower. For the years ended December 31, 1997
         and 1996, 23,433 and 17,897 shares of common stock, respectively, were
         sold to employees under this plan.

17.      NONCASH INVESTING AND FINANCING ACTIVITIES:

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

         The Company issued 5,000 and 4,200 shares of common stock to employees
         in the first quarter of 1995 and the first quarter of 1996,
         respectively, and 50,000 shares of common stock to the Company's Chief
         Executive Officer in the third quarter of 1995. The Company issued
         20,000 shares of common stock to the Company's Chief Executive Officer
         for a $95,000 note receivable during 1997. Additionally, the Company
         issued 9,719 shares of common stock to certain employees in the first
         quarter of 1996 and the first quarter of 1997 pursuant to employment
         contracts.

         The Company issued 50,000 shares of common stock, 47,000 were treasury
         stock, to employees of Kalyn during 1997 pursuant to a stock incentive
         plan.

                                      F-29


<PAGE>   73


                       RAILAMERICA, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                    -------

17.      NONCASH INVESTING AND FINANCING ACTIVITIES, continued

         The Company incurred approximately $16.1 million and $2.0 million in
         debt to acquire property, plant and equipment during 1996 and 1997,
         respectively. These amounts included acquisition of a 131 mile rail
         line in Washington, 234 miles of rail line in Minnesota, 140 tank cars
         and other transportation equipment including locomotives, tractor and
         trailers.

         The Company assumed $2.2 million of long-term debt and $3.7 million of
         deferred tax liabilities related to the acquisition of OTVR in 1996.
         The Company assumed $4.7 million in liabilities related to the
         acquisition of Ferronor in 1997.

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

         Cash paid for interest during 1997, 1996 and 1995 was $3.9 million,
         $2.4 million and $1.4 million, respectively. Cash paid for income taxes
         during 1997, 1996 and 1995 was $0.2 million, $0.6 million and $0.2
         million, respectively.

18.      FAIR VALUE OF FINANCIAL INSTRUMENTS:

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

19.      COMMITMENTS AND CONTINGENCIES:

         In the ordinary course of conducting its business, the Company becomes
         involved in various legal actions and other claims which are pending or
         could be asserted against the Company. Litigation is subject to many
         uncertainties, the outcome of individual litigated matters is not
         predictable with assurance, and it is reasonably possible that some of
         these matters may be decided unfavorably to the Company. It is the
         opinion of management that the ultimate liability, if any, with respect
         to these matters will not have a material adverse effect on the
         Company's financial position, results of operations or cash flows.

         Effective January 23, 1995, the Company, through its wholly-owned
         subsidiary Kalyn, entered into a Wholesale and Retail Financing
         Agreement with Associates Commercial Corporation. Kalyn entered into an
         additional financing agreement with NewCourt Financial USA, Inc. during
         1996. The agreements provide for dealer and customer financing and for
         the repurchase of products sold in the event of default by the customer
         or dealer to the finance company. The Company is obligated to
         repurchase a maximum of $300,000 and $200,000, respectively, in the
         aggregate on the agreements. Since inception of the Agreements, there
         have been no defaults which would have required the Company to
         repurchase products sold.

                                      F-30


<PAGE>   74


                       RAILAMERICA, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                    -------

20.      SEGMENT INFORMATION:

         The Company's continuing operations have been classified into two
         business segments: rail transportation and manufacturing. The rail
         transportation segment includes the operations of the Company's
         railroad subsidiaries and the manufacturing segment includes the
         operations of Kalyn and RailAmerica Equipment Corporation. All of the
         Company's continuing operations for 1995 and 1996 were in the United
         States. During 1997 the Company acquired operations in Chile and a
         minority interest in Australian operations.

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

         YEAR ENDED DECEMBER 31, 1997:

<TABLE>
<CAPTION>
                                                                RAIL                           CORPORATE
                                            CONSOLIDATED    TRANSPORTATION   MANUFACTURING      OVERHEAD
                                            ------------    --------------   -------------      --------
<S>                                         <C>             <C>              <C>                <C>
              Revenue                           $47,437          $24,076        $23,361          $    --
              Operating income (loss)           $ 7,319          $ 6,458        $ 4,119          $(3,258)
              Identifiable assets               $96,800          $76,249        $14,653          $ 5,898
              Depreciation and
                  amortization                  $ 2,261          $ 1,604        $   567          $    90
              Capital expenditures              $ 9,443          $ 7,597        $ 1,696          $   150

</TABLE>
         YEAR ENDED DECEMBER 31, 1996:

<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

</TABLE>


         YEAR ENDED DECEMBER 31, 1995:


<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>

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

<TABLE>
<CAPTION>
                                            CONSOLIDATED  UNITED STATES   CHILE      AUSTRALIA
                                            ------------  -------------   -----      ---------
<S>                                             <C>          <C>          <C>          <C>
              Revenue                           $47,437      $39,375      $ 8,062      $    --
              Operating income(loss)            $ 7,319      $ 5,774      $ 1,545      $    --
              Identifiable assets               $96,800      $73,685      $21,261      $ 1,854
              Depreciation and
                  amortization                  $ 2,261      $ 1,994      $   267      $    --
              Capital expenditures              $ 9,443      $ 7,493      $ 1,950      $    --

</TABLE>

                                      F-31


<PAGE>   75


                       RAILAMERICA, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                    -------

20.      SEGMENT INFORMATION, continued

         Identifiable assets consist of $96.8 million from continuing operations
         and $4.0 million from discontinued operations (not included in above
         amounts).

21.      SUBSEQUENT EVENTS:

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

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

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

                                      F-32


<PAGE>   76


                       RAILAMERICA, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                    -------

22.      UNAUDITED QUARTERLY FINANCIAL DATA:

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

<TABLE>
<CAPTION>
                                                 FIRST        SECOND       THIRD       FOURTH
                                                QUARTER(A)   QUARTER(B)   QUARTER      QUARTER
                                                ----------   ----------   -------      -------
<S>                                              <C>          <C>          <C>          <C>
         Operating revenue                       $ 8,734      $11,596      $13,134      $13,973
         Operating income                        $   992      $ 1,451      $ 1,957      $ 2,920
         Net income from
           continuing operations                 $   113      $   364      $   937      $ 1,220
         Basic net income from
           continuing operations per share       $  0.02      $  0.04      $  0.11      $  0.14
         Diluted net income from
           continuing operations per share       $  0.01      $  0.04      $  0.10      $  0.13

</TABLE>


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

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

</TABLE>


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

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

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


                                      F-33