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, 2002 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)

      5300 BROKEN SOUND BLVD, N.W.
          BOCA RATON, FLORIDA                                     33487
(Address of principal executive offices)                        (Zip Code)

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

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

     TITLE OF EACH CLASS               NAME OF EACH EXCHANGE ON WHICH REGISTERED
     -------------------               -----------------------------------------

Common Stock, $.001 Par Value                    New York Stock Exchange
Common Stock Purchase Rights                     New York Stock Exchange

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

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. |_|

Check whether the registrant is an accelerated filer (as defined in Exchange Act
Rule 12b-2) Yes |X| No |_|

The aggregate market value of the voting stock held by non-affiliates of the
registrant as of June 30, 2002 computed by reference to the average bid and
asked prices of registrant's common stock reported on the New York Stock
Exchange on such date was $335.8 million.

The number of shares outstanding of registrant's Common Stock, $.001 par value
per share, as of March 20, 2003 was 31,797,083.

DOCUMENTS INCORPORATED BY REFERENCE

      The information required by Part III (Items 10, 11, 12 and 13) will be
incorporated by reference from the registrant's Definitive Proxy Statement to be
filed with the Commission pursuant to Regulation 14A.


                                       1
<PAGE>

                                TABLE OF CONTENTS

                                                                            PAGE
                                                                            ----

PART I

Item 1.   Business                                                            3
Item 2.   Properties                                                         13
Item 3.   Legal Proceedings                                                  16
Item 4.   Submission of Matters to a Vote of Security Holders                17

PART II

Item 5.   Market for Common Equity and Related Stockholder Matters           17
Item 6.   Selected Financial Data                                            18
Item 7.   Management's Discussion and Analysis                               21
Item 7a.  Market Risk                                                        34
Item 8.   Financial Statements                                               35
Item 9.   Changes in and Disagreements with Accountants on Accounting
              and Financial Disclosure                                       35

PART III

Item 10.  Directors and Executive Officers of the Registrant                 36
Item 11.  Executive Compensation                                             36
Item 12.  Security Ownership of Certain Beneficial Owners and Management     36
Item 13.  Certain Relationships and Related Transactions                     36
Item 14.  Controls and Procedures                                            36

PART IV

Item 15.  Exhibits and Reports on Form 8-K                                   37

Signatures                                                                   40


                                       2
<PAGE>

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

PART I

ITEM 1. BUSINESS

GENERAL

      We are the largest owner and operator of short line freight railroads in
North America and a leading owner and operator of regional freight railroads in
Australia and Chile. We own, lease or operate a diversified portfolio of 49
railroads with approximately 12,900 miles of track located in the United States,
Australia, Canada, Chile and Argentina. Through our diversified portfolio of
rail lines, we operate in numerous geographic regions with varying
concentrations of commodities hauled.

      In January 2003, we announced our intention to sell our 55% equity
interest in our Chilean railroad operation, Ferronor. As a result, Ferronor has
been presented as a discontinued operation in our financial statements.

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

      Our Internet website address is www.railamerica.com. We make available
free of charge on or through our website our Annual Reports on Form 10-K,
Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, and amendments
to these reports, as soon as reasonably practicable after we electronically file
such material with, or furnish such material to, the Securities and Exchange
Commission (SEC). We also make available on our website other reports filed with
the SEC under the Securities Exchange Act of 1934, as amended, including proxy
statements and reports filed by officers and directors under Section 16(a) of
that Act. These reports may be found by selecting the option entitled "SEC
FILINGS" in the "INVESTOR RELATIONS" section on our website. Information
contained in or connected to our website is not part of this report.


                                       3
<PAGE>

      During the past six years, we have grown significantly through the
following acquisitions:

            o     In February 1997, we acquired a 55% equity interest in
                  Ferronor, a Chilean regional railroad, for $7.2 million.

            o     In April 1999, we acquired Freight Australia, an Australian
                  regional railroad, for $103 million.

            o     In July 1999, we acquired RaiLink, Inc., a holding company
                  that owned or had equity interests in 11 Canadian railroads,
                  for $49.8 million.

            o     In September 1999, we acquired the Toledo, Peoria, and Western
                  Railroad, for $17.4 million.

            o     In February 2000, we acquired RailTex, Inc., a holding company
                  that owned 25 railroads in the United States and Canada, for
                  $294.2 million.

            o     In January 2002, we acquired StatesRail, Inc. ("StatesRail"),
                  a holding company of 8 railroads in the United States, for $90
                  million.

            o     In January 2002, we acquired ParkSierra Corp. ("ParkSierra"),
                  a holding company of 3 railroads in the United States, for $48
                  million.

BUSINESS STRATEGY

      INCREASE REVENUE THROUGH FOCUSED MARKETING EFFORTS AND RELIABLE RAIL
SERVICE. In North America and Australia, we strive to increase our revenues
through focused marketing efforts and cost effective and reliable service. In
North America, we work with customers, industrial development organizations and
our Class I interchange partners to develop transportation solutions to meet the
needs of our customers. We specialize in developing customer-driven solutions
for logistical issues, with local and regional marketing representatives working
directly with customers to ensure that rail transportation services meet their
needs. The operating focus of our North American railroads is on meeting and
exceeding the customer's expectations by providing frequent, dependable rail
service at reasonable rates. In Australia, we market our services to potential
customers across the continent, primarily in eastern Australia, as the open
access rules allow us to operate over the track owned by other transportation
companies. To supplement grain revenue, we are aggressively seeking to diversify
our commodity base and regions served. We have recently signed new long-term
contracts based in New South Wales that should add $50 million in revenue over
the next three to five years and are in the process of soliciting transportation
contracts from coal shippers in the Hunter Valley region and other potential
customers.

      REDUCE DEBT TO INDUSTRY AVERAGE. At December 31, 2002, our net debt to
total capitalization, excluding accumulated other comprehensive loss, was 63%.
Our goal is to reduce this amount to 50% by the end of 2004. We intend to
accomplish this through our recently announced $100 million asset
rationalization plan, retention of earnings and generation of free cash flow.
Our asset rationalization plan includes the sale of our 55% equity interest in
Ferronor, our Chilean railroad, as well as the sale of other non-strategic and
non-core assets in North America and Australia.

      CONTINUE TO GROW THROUGH SELECTIVE ACQUISITIONS. Since 1997, we have made
seven significant acquisitions of railroad companies, which owned or had equity
interests in 50 railroads for total consideration in excess of $600 million. All
of these railroads have been successfully integrated into our operations and in
total have added in excess of 11,000 miles of track to our operations and in
excess of $400 million in revenues.

      In North America, we seek acquisition candidates that enable us to form
geographic clusters of short lines, thereby affording economies of scale as well
as marketing and operating synergies. We also seek properties where operating
efficiencies can be realized from professional management techniques and asset
rationalization, thereby enabling the target railroad to reduce operating costs
and improve service. The resultant competitive pricing and better service,
coupled with a focused sales and marketing effort, typically yields customer
loyalty and increased carloads.

      Acquisition opportunities in North America generally come from three
sources. First, certain Class I railroads have stated an intent to sell certain
branch lines over the next several years. We believe, based on our strong
operating performance and relationships with the Class I railroads, we are a
logical choice to acquire some of these properties. Second, as the short line
industry itself continues to consolidate, we believe we are in an excellent
position to acquire other short lines or groups of short lines because of our
industry reputation, demonstrated access to capital, breadth of geographic
coverage and ability to efficiently evaluate and negotiate prospective
transactions. Third, as industrial companies divest of their railroad operations
we believe our cost-effective and customer oriented approach makes us a strong
candidate to acquire some of these railroads.


                                       4
<PAGE>

      We continue to monitor acquisition candidates in economically and
politically stable international markets as a result of an increasing number of
governments seeking to privatize their national rail systems.

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

NORTH AMERICAN RAILROADS

      We currently own, lease or operate 46 rail properties in North America, of
which 45 are short line railroads that provide transportation services for both
on-line customers and Class I railroads that interchange with our rail lines.
Short line railroads are typically less than 350 miles long, serve a particular
class of customers in a small geographic area and interchange with Class I
railroads. Short line rail operators primarily serve customers on their line by
transporting products to and from the Class I interchanges. Each of our North
American rail lines is typically the only rail carrier directly serving its
customers. The ability to haul heavy and large quantities of freight as part of
a long-distance haul makes our rail services generally a more effective,
lower-cost alternative to other modes of transportation, including motor
carriers. In addition to our 45 short line railroads, we operate one tourist
railroad.

      UNITED STATES. We own, lease or operate 37 short line rail properties and
one tourist railroad in the United States with approximately 6,500 miles of
track. Our properties are geographically diversified and operate in 26 states.
We have clusters of rail properties in the Southeastern, Southwestern,
Midwestern, Great Lakes, New England and Pacific Coast regions of the United
States. We believe that this cluster strategy provides economies of scale and
helps achieve operational synergies.

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

INDUSTRY OVERVIEW

      The U.S. railroad industry is dominated by major Class I railroads, which
operated approximately 98,000 miles of track in 2001. In addition to large
railroad operators, there were more than 560 short line and regional railroads,
which operated approximately 45,000 miles of track in 2001.

      The railroad industry is subject to regulations of various government
agencies, primarily the Surface Transportation Board, or STB. For regulatory
purposes, the STB classifies railroads into three groups: Class I, Class II and
Class III, based on annual operating revenue. For 2001, the Class I railroads
had operating revenues of at least $266.7 million, Class II railroads had
revenues of $21.3 million to $266.6 million, and Class III railroads had
revenues of less than $21.3 million (these thresholds are adjusted annually for
inflation).

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

                             2001 INDUSTRY OVERVIEW

                    Number of                      2001 Revenues
Type of Railroad    Carriers     Miles Operated    (in billions)   % of Revenues
----------------    ---------    --------------    -------------   -------------
Class I                  8           97,631            $33.5            91.5%
Regional                34           17,439              1.6             4.4
Local                  529           27,563              1.5             4.1
                       ---          -------            -----           -----
  Total                571          142,633            $36.6           100.0%
                       ===          =======            =====           =====


                                       5
<PAGE>

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

SALES AND MARKETING

      We focus on providing rail service to our customers that is easily
accessible, reliable and cost-effective. In many cases, we believe customer
service and sales and marketing at railroads that we have acquired have been
neglected by the previous owners. We purchased several of our rail lines from
Class I railroads. Due to the size of the Class I railroads and their
concentration on long-haul traffic, we believe the Class I operators typically
have not effectively marketed to customers on these branch line operations.

      Following commencement of operations, our 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. We believe our ability to generate additional traffic is enhanced by
our marketing efforts which are aimed at identifying and responding quickly to
the individual business needs of customers along our rail lines. As part of our
marketing efforts, we often schedule more frequent rail service, help customers
negotiate price and service levels with interchange partners and assist
customers in obtaining the quantity and type of rail equipment required for
their operations. We also provide non-scheduled train service on short notice to
accommodate customers' special or emergency needs.

      Our decentralized management structure is an important element of our
marketing strategy. We give significant discretion with respect to sales and
marketing activities to our North American regional marketing managers. Each
regional marketing manager works closely with personnel of our 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. We
also work 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. We
consider all of our employees to be customer service representatives and
encourage them to initiate and maintain regular contact with shippers.

      Rail traffic may be categorized as interline, local or bridge traffic.
Interline traffic either originates or terminates with customers located along a
rail line and is interchanged with other rail carriers. Local traffic both
originates and terminates on the same rail line and does not involve other
carriers. Bridge traffic passes over the line from one connecting rail carrier
to another.

      Interline and local traffic generated 87%, 84% and 86% of our total
freight revenue in 2002, 2001, and 2000, respectively. We believe that high
levels of interline and local traffic provide us with greater stability of
revenues because this traffic represents shipments to or from customers located
along our lines and cannot be easily diverted to other rail carriers, unlike
bridge traffic.

      Our railroads compete directly with other modes of transportation,
principally motor carriers and, to a lesser extent, ship and barge operators.
The extent of this competition varies significantly among our railroads.
Competition is based primarily upon the rate charged and the transit time
required, as well as the quality and reliability of the service provided, for an
origin-to-destination package. To the extent other carriers are involved in
transporting a shipment, we cannot 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.


                                       6
<PAGE>

      The following table summarizes freight revenue by type of traffic carried
by our North American railroads in 2002, 2001 and 2000 in dollars and as a
percent of total freight revenue.

                                  NORTH AMERICA
                                 FREIGHT REVENUE
                             (DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
                                2002                   2001                   2000
                         ------------------     ------------------     ------------------
                             $          %           $          %           $          %
                         --------     -----     --------     -----     --------     -----
<S>                      <C>           <C>      <C>           <C>      <C>           <C>
            Interline    $235,408      81.5%    $165,821      76.5%    $146,184      72.0%
            Local          16,924       5.9%      16,044       7.4%      27,404      13.5%
            Bridge         36,430      12.6%      34,901      16.1%      29,396      14.5%
                         --------     -----     --------     -----     --------     -----
                         $288,762     100.0%    $216,766     100.0%    $202,984     100.0%
                         ========     =====     ========     =====     ========     =====
</TABLE>

      All of our short line properties interchange traffic with Class I
railroads. The following table summarizes our significant connecting carriers in
2002, 2001 and 2000 by freight revenues and carloads as a percentage of total
interchanged (interline and bridge) traffic.

                                  NORTH AMERICA
                              INTERCHANGED TRAFFIC

<TABLE>
<CAPTION>
                                                             2002                    2001                    2000
                                                     --------------------    --------------------    --------------------
                                                     Revenues    Carloads    Revenues    Carloads    Revenues    Carloads
                                                     --------    --------    --------    --------    --------    --------
<S>                                                   <C>         <C>         <C>         <C>         <C>         <C>
            Union Pacific Railroad                     30.2%       28.3%       22.2%       23.2%       24.0%       21.8%
            Canadian National Railway                  22.2%       19.9%       30.4%       26.1%       24.7%       24.7%
            CSX Transportation                         15.4%       13.4%       16.0%       12.9%       18.9%       15.0%
            Burlington Northern Santa Fe Railway       13.3%       14.5%        6.2%        5.9%        8.5%        7.3%
            Canadian Pacific Railway                    8.7%       11.3%       12.8%       16.6%       10.3%       16.6%
            Norfolk Southern                            4.6%        5.3%        5.6%        6.9%        7.2%        7.3%
            All other railroads                         5.6%        7.3%        6.8%        8.4%        6.4%        7.3%
                                                      -----       -----       -----       -----       -----       -----
                                                      100.0%      100.0%      100.0%      100.0%      100.0%      100.0%
                                                      =====       =====       =====       =====       =====       =====
</TABLE>

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

      In 2002, we served approximately 1,600 customers in North America. These
customers shipped and/or received a wide variety of products. Although most of
our North American railroads have a well-diversified customer base, several of
the smaller rail lines have one or two dominant customers. In 2002, our 10
largest North American customers accounted for approximately 27% of North
American transportation revenue, as compared to 25% of North American
transportation revenue in 2001.


                                       7
<PAGE>

      The following table sets forth by number and percentage the carloads
hauled by our North American railroads during the years ended December 31, 2002,
2001 and 2000.

                       CARLOADS CARRIED BY COMMODITY GROUP

<TABLE>
<CAPTION>
                                              2002                    2001                  2000
                                       ------------------      -----------------     ------------------
        COMMODITY GROUP                Carloads       %        Carloads      %       Carloads       %
---------------------------------      --------     -----      -------     -----     --------     -----
<S>                                   <C>           <C>        <C>         <C>        <C>         <C>
Agricultural & Farm Products             95,005       8.5%      80,835       9.1%      76,593       9.0%
Autos                                    43,843       4.0%      45,962       5.2%      47,900       5.7%
Chemicals                                84,935       7.6%      66,915       7.5%      66,827       8.0%
Coal                                    128,540      11.5%      95,433      10.7%      71,945       8.6%
Food Products                            62,471       5.6%      40,988       4.6%      39,313       4.7%
Intermodal                               39,538       3.5%      42,253       4.7%      30,134       3.6%
Lumber & Forest Products                124,025      11.1%      88,351       9.9%      90,102      10.7%
Metals                                   80,117       7.3%      52,184       5.8%      61,049       7.3%
Metallic/Non-metallic Ores               55,260       5.0%      45,658       5.1%      36,780       4.4%
Minerals                                 45,995       4.1%      19,424       2.2%      16,393       2.0%
Paper Products                           94,528       8.5%      64,914       7.3%      59,124       7.0%
Petroleum Products                       47,252       4.3%      28,593       3.2%      26,840       3.2%
Railroad Equipment/Bridge Traffic       186,388      16.7%     200,565      22.5%     192,323      22.9%
Other                                    26,028       2.3%      19,243       2.2%      24,128       2.9%
                                      ---------     -----      -------     -----      -------     -----
Total                                 1,113,925     100.0%     891,318     100.0%     839,451     100.0%
                                      =========     =====      =======     =====      =======     =====
</TABLE>

EMPLOYEES

      Currently, we have approximately 1,600 full-time railroad employees and
125 full-time corporate employees in North America. Approximately 760 of these
employees are subject to collective bargaining agreements.

SAFETY

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

REGULATION

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

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

      As a result of the 1980 Staggers Rail Act, railroads have received
considerable rate and market flexibility including the ability to obtain
wholesale exemptions from numerous provisions of the Interstate Commerce Act.
The Staggers Rail Act allowed the deregulation of all containerized and truck
trailer traffic handled by railroads. Requirements for the creation of new short
line railroads or the expansion of existing short line railroads were
substantially expedited and simplified under the


                                       8
<PAGE>

exemption process. On regulated traffic, railroads and shippers are permitted to
enter into contracts for rates and provision of transportation services without
the need to file tariffs. Moreover, on regulated traffic, the Staggers Rail Act
allows railroads considerable freedom to raise or lower rates without objection
from captive shippers. While the ICC Termination Act retained maximum rate
regulation on traffic over which railroads have exclusive control, the new law
relieved railroads from the requirements of filing tariffs and rate contracts
with the STB on all traffic other than agricultural products.

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

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

      Short line railroads located within the boundaries of a single province
which do not otherwise fall within the federal jurisdiction are regulated by the
laws of the province in question, including laws as to licensing and labor
relations. Most of Canada's ten provinces have enacted new legislation, which is
more favorable to the operation of short line railroads than previous provincial
laws. Many of the provinces require as a condition of licensing under the short
line railroads acts that the licensees comply with federal regulations
applicable to safety and other matters and remain subject to inspection by
federal railway inspectors. Under some provincial legislation, the sale of a
provincially regulated railroad line is not subject to provincial approval,
although a process of advertising and negotiating may be required in connection
with any proposed discontinuance of a provincial railway.

      Acquisition of additional railroad operations in Canada, whether federally
or provincially regulated, may be subject to review by the Investment Canada
Act, or ICA, a federal statute which applies to every acquisition of a Canadian
business or establishment of a new Canadian business by a non-Canadian. Whether
or not an acquisition is subject to review under the ICA is dependent on the
book value of the assets of the Canadian business being acquired. Acquisitions
that are subject to review must, before their completion, satisfy the Minister
responsible for administering the ICA that the acquisition is of net benefit to
Canada.

      Any contemplated acquisitions may also be subject to the provisions of the
Competition Act federal antitrust legislation of general application. The
Competition Act contains merger control provisions which apply to certain
acquisitions. As a result, acquisitions exceeding specified asset and/or revenue
thresholds may be subject to pre-merger notification and subsequent substantive
review prior to their completion.

FREIGHT AUSTRALIA

      We own Freight Australia, a regional freight railroad operating in and
around the State of Victoria, Australia. Freight Australia was purchased from
the Government of the State of Victoria, Australia on April 30, 1999 for total
consideration of approximately $103 million. Freight Australia operates over
3,150 miles of track under a 45 year lease from the State of Victoria.


                                       9
<PAGE>

INDUSTRY OVERVIEW

      The demographics and geography of Australia dictate that the freight
transport business is characterized by long distances and low volumes of
freight. Industrial flows tend to relate to production cycles and agricultural
product flows are seasonal and driven by export shipping schedules. Generally,
the pattern of surface freight movement in Australia comprises:

      o     bulk materials and grains from inland areas, usually to the closest
            port or processing plant

      o     inputs to the resources industries from coastal industrial centers,
            ports and cities to the interior

      o     general freight from coastal industrial centers, ports and cities to
            the interior, and

      o     interstate freight, comprising manufactured goods, steel, paper and
            general freight between capital cities, and to and from major
            industrial centers.

      In recent years, the Australian rail freight sector's share of the total
freight market has been maintained despite growth in road transport, largely
because of the growth in Australia's coal and mineral exports. Over a period of
30 years, rail movements of these commodities have increased almost eightfold.

      Major changes have taken place in the rail industry over the last decade,
partly as a result of the privatization of government-owned railways and the
entry of private sector participants in accordance with the competitive
neutrality provisions of the national Competition Principles Agreement. The
private sector has taken an increasingly larger role through outsourcing of
non-core activities by railway operators.

      The railway network in Australia contains approximately 25,000 miles of
track, of which approximately 21,000 miles is track used for general and bulk
freight and passenger services. The remaining 4,000 miles are private sector
owned and operated, and principally serve Australia's mining and primary
production industries.

SALES AND MARKETING

      Freight Australia focuses on providing door-to-door rail service to
customers that is easily accessible, reliable and cost-effective since truck and
other rail operators are the principle competition. Due to surplus assets and
the open access to trackage outside of Victoria, we have been able to market to
customers across the Australian continent effectively.

      Following commencement of operations, Freight Australia has 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.
We believe that our ability to generate additional traffic is enhanced by our
marketing efforts, which are aimed at identifying and responding quickly to the
individual business needs of customers along the rail lines. As part of our
marketing efforts, we often schedule more frequent rail service. Freight
Australia also provides non-scheduled train service on short notice to
accommodate customers' special or emergency needs.

      Our decentralized management structure is an important element of our
marketing strategy. We give significant discretion with respect to sales and
marketing activities to our marketing managers. Each marketing manager works
closely with personnel in other departments to develop marketing plans to
increase shipments from existing customers and to develop business from new
customers. We consider all of our employees to be customer service
representatives and encourage them to initiate and maintain regular contact with
shippers.

      Freight Australia's customers span a variety of industries, with
particular emphasis on companies in the Australian agricultural industry for
whom we carry bulk grain and other agricultural products. One customer, AWB
Limited, represented 25% of Freight Australia's transportation revenue for the
year ended 2002, 28% for the year ended 2001 and 25% for the year ended 2000.
Additionally, track access fees from V/Line Passenger represented 15% of Freight
Australia's operating revenue in 2002, 13% in 2001, and 15% in 2000.


                                       10
<PAGE>

      The following table sets forth by dollar amount (in thousands) and
percentage Freight Australia's transportation and infrastructure revenue for the
years ended December 31, 2002, 2001 and 2000.

<TABLE>
<CAPTION>
                                                             2002                2001                2000
                                                      -----------------   -----------------   -----------------
                                                        US$                 US$                 US$
                                                      Amount        %     Amount        %     Amount        %
                                                      -------     -----   -------     -----   -------     -----
<S>                                                   <C>         <C>     <C>         <C>     <C>         <C>
Agricultural products                                 $36,913        40%  $46,265        47%  $45,440        46%
Track access fees                                      18,074        20%   15,367        16%   16,309        16%
Intermodal containers                                  12,950        14%    9,742        10%   13,148        13%
Fast Track parcel service                               6,924         8%    8,235         8%    8,210         8%
Bulk (i.e., cement, gypsum,
  stone, logs)                                          9,174        10%   10,595        11%    9,932        11%
Interstate                                              7,626         8%    8,428         8%    5,954         6%
                                                      -------     -----   -------     -----   -------     -----
  Total transportation and infrastructure revenue     $91,661     100.0%  $98,632     100.0%  $98,993     100.0%
                                                      =======     =====   =======     =====   =======     =====
</TABLE>

      Freight Australia competes directly with other railroads in the open
access Australian railway network as well as with other modes of transportation,
principally motor carriers and, to a lesser extent, ship operators. Competition
is based primarily upon the rate charged and the transit time required, as well
as the quality and reliability of the service provided, for an
origin-to-destination package. To the extent other carriers are involved in
transporting a shipment, we cannot control the cost and quality of service. Cost
reductions achieved by Freight Australia over the past several years have
generally improved its ability to compete with alternate modes of
transportation.

EMPLOYEES

      Freight Australia currently has approximately 705 employees. Most of these
employees are subject to collective bargaining agreements.

SAFETY

      Freight Australia endeavors to conduct safe railroad operations for the
benefit and protection of employees, customers and communities we serve.
Operating personnel are trained and certified in train operations, hazardous
materials handling, personal safety and all other areas subject to governmental
rules and regulations. Each employee involved in train operations is subject to
pre-employment and random drug testing whether or not required by federal or
state regulation. We believe that Freight Australia complies in all material
respects with federal, state and local regulations. Freight Australia holds Rail
Safety Accreditation in accordance with Australian Standards Regulations 4292 in
Victoria, New South Wales, and South Australia. We also participate in several
governmental and industry sponsored safety programs.

REGULATION

      Freight Australia is subject to regulation in the State of Victoria by the
Office of the Regulator-General. The Office of the Regulator-General, known as
ORG, was established by the Office of the Regulator-General Act. The purpose of
the ORG is to create a regulatory framework for regulated industries which
promotes and safeguards competition and fair and efficient market conduct or, if
there is no competitive market, promotes the simulation of competitive market
conduct and the prevention of misuse of monopoly power. These objectives were
expanded by the Victorian Government in the Rail Corporations Act 1996 to ensure
that rail users have fair and reasonable access to declared railway services.

      The Rail Corporations Act 1996, known as RCA, regulates the operation of
the State of Victoria's passenger trains and trams and rail network. Part 2A of
the RCA outlines an access regime, which potentially applies to railways and
rail infrastructure and gives power to the ORG to regulate access to relevant
services. At present, however, no rail transport services have been declared to
be subject to the regime. If there were any, ORG could set the terms and
conditions of access.

      The Secretary to the Department of Infrastructure may take disciplinary
action against an accredited (licensed to provide certain services) railroad if
the railroad has failed to comply with the requirements of accreditation or has
permitted an unsafe practice or acted negligently. Disciplinary action, which
the Secretary may take, includes disqualifying the railroad from


                                       11
<PAGE>

holding an accreditation for a period specified by the Secretary, suspension of
the accreditation, early expiry of the accreditation and immediate or future
cancellation of the accreditation.

      The Transport Act contains detailed provisions authorizing the Secretary
of the Department of the Infrastructure to carry out inspections and giving
inspectors powers to enter and inspect premises (including, testing equipment
and seizing property if appropriate). All actions must be reasonably necessary
to determine compliance with the Transport Act. A search warrant or prior
written consent of the occupier is necessary for entry into premises.

      The Secretary must conduct safety audits of every person accredited at
least once every twelve months, to ensure that the accredited person is
complying with the requirements of accreditation. The Secretary may charge the
accredited person a fee for the safety audit service, subject to the limits set
out in the relevant regulations. An accredited person has a duty to inquire into
accidents and incidents.

FERRONOR

      Ferronor owns and 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 mineral
salt mines and production facilities with several Chilean Pacific port cities.
Ferronor also serves Argentina and Bolivia through traffic interchanged with the
Belgrano Cargas Railroad and the Antofagasta (Chile)-Bolivia Railway. In
addition, commencing in 2002, Ferronor began operating the Potrerillos Railway,
a customer-owned 57 mile freight railroad. In January 2003, we announced our
intention to sell our 55% equity interest in Ferronor. As a result, Ferronor has
been presented as a discontinued operation in our financial statements.


                                       12
<PAGE>

ITEM 2. PROPERTIES

NORTH AMERICAN RAILROAD PROPERTIES

The following table sets forth information with respect to the North American
railroad properties that we owned as of March 22, 2003:

<TABLE>
<CAPTION>
                                          DATE OF     TRACK                                                    PRINCIPAL
        RAILROAD                        ACQUISITION   MILES      STRUCTURE         LOCATION                   COMMODITIES
        --------                        -----------   -----      ---------         --------                   -----------
<S>                                     <C>            <C>    <C>                  <C>                 <C>
Alabama and Gulf Coast Railway           Jan. 2002     141    Owned,               Alabama,            Forest and paper products,
                                                              Trackage rights      Florida             chemicals, food products

Arizona & California Railroad            Jan. 2002     297    Owned,               Arizona,            Cement, asphalt, forest
                                                              Trackage rights      California          products, steel

Arizona Eastern Railway                  Jan. 2002     135    Owned                Arizona             Copper cathode and related
                                                                                                       materials

California Northern Railroad             Jan. 2002     255    Leased,              California          Oil/gas transmission pipe,
                                                              Trackage rights                          minerals, beer, food
                                                                                                       products, grains

Cape Breton & Central Nova               Feb. 2000     245    Owned                Nova Scotia         Coal, paper, chemicals
Scotia Railway

Carolina Piedmont Railroad               Feb. 2000      49    Owned                South Carolina      Chemicals, metal
                                                                                                       products, clay,  food
                                                                                                       products

Cascade and Columbia River               Sept. 1996    130    Owned;               Washington          Lumber & wood products,
Railroad                                                      Trackage rights                          minerals, agricultural
                                                                                                       products

Central Oregon & Pacific                 Feb. 2000     449    Owned; Leased;       Oregon,             Lumber & wood products,
Railroad                                                      Trackage rights      California          paper, chemicals

Central Railroad of Indiana              Feb. 2000      81    Owned                Indiana, Ohio       Chemicals, minerals, clay,
                                                                                                       food products

Central Railroad of                      Feb. 2000      73    Leased;              Indiana             Farm and food products,
Indianapolis                                                  Trackage rights                          chemicals, metals

Central Western                          July 1999      21    Owned                Alberta             Agricultural products

Connecticut Southern                     Feb. 2000      78    Owned;               Connecticut         Lumber & wood products,
                                                              Trackage rights                          paper products, chemicals,
                                                                                                       bridge traffic

Dallas Consolidated                      Feb. 2000     294    Leased               Texas               Farm & food products,
(Dallas, Garland &                                                                                     paper products, railroad
Northeastern Railroad and                                                                              equipment, chemicals,
Texas Northeastern Railroad)                                                                           autos

E&N Railway                              Jan. 1999      61    Owned                British             Paper products, minerals,
                                                       120    Leased               Columbia            chemicals

Eastern Alabama Railway                  Jan. 2002      25    Owned                Alabama             Minerals

Goderich-Exeter Railway                  Feb. 2000     159    Owned;               Ontario             Auto parts, farm
                                                              Leased                                   products, chemicals

Huron and Eastern Railway                March 1986    171    Owned;               Michigan            Agricultural products
                                          May 1988            leased;
                                                              Trackage rights

Ohio Consolidated                        Feb. 2000     577    Owned;               Michigan,           Autos, bridge traffic
(Indiana & Ohio Railway and                                   Leased               Ohio, Indiana       agricultural products,
 Indiana & Ohio Central Railroad)                                                                      chemicals, pulpboard
</TABLE>


                                       13
<PAGE>

<TABLE>
<CAPTION>
                                          DATE OF     TRACK                                                    PRINCIPAL
        RAILROAD                        ACQUISITION   MILES      STRUCTURE         LOCATION                   COMMODITIES
        --------                        -----------   -----      ---------         --------                   -----------
<S>                                     <C>            <C>    <C>                  <C>                 <C>
Indiana Southern Railroad                Feb. 2000     176    Owned;               Indiana             Coal, farm products,
                                                              Trackage rights                          chemicals

Kiamichi Railroad                        Jan. 2002     230    Owned,               Arkansas,           Steel, coal, aggregates,
                                                              Trackage rights      Oklahoma,           cement, food items, forest
                                                                                   Texas               products, paper products

Kyle Railroad                            Jan. 2002     692    Owned                Colorado,           Agricultural products, coal,
                                                                                   Kansas,             asphalt, aggregates
                                                                                   Nebraska

Lahaina, Kaanapali & Pacific Railroad    Jan. 2002       6    Owned                Hawaii              Tourists

Lakeland & Waterways                     July 1999     120    Owned                Alberta             Forest products,
                                                                                                       agricultural products,
                                                                                                       petroleum coke, bridge
                                                                                                       traffic

Mackenzie Northern                       July 1999     650    Owned                Alberta,            Fuel, forest products,
                                                                                   Northwest           agricultural products,
                                                                                   Territory           chemicals

Michigan Consolidated                    Feb. 2000     118    Owned                Michigan            Agricultural products,
(Mid-Michigan Railroad,                                                                                auto parts, fertilizer
Grand Rapids Eastern
Railroad, and Michigan
Shore Railroad)

Missouri & Northern                      Feb. 2000     527    Owned; leased;       Missouri,           Coal, farm products,
Arkansas Railroad                                             trackage rights      Arkansas,           food products,
                                                                                   Kansas              minerals, roofing material

New England Central                      Feb. 2000     343    Owned;               Vermont, New        Lumber & wood products,
Railroad                                                      Leased               Hampshire,          paper products, plastic,
                                                                                   Massachusetts,      coal, copper, bridge
                                                                                   Connecticut         traffic

Ottawa Valley Railway                    July 1999     389    Leased               Ontario             Bridge traffic, acid,
                                                                                                       copper concentrates,
                                                                                                       chemicals

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

Puget Sound and Pacific Railroad         Jan. 2002     150    Owned,               Washington          Forest products, chemicals,
                                                              Trackage rights                          grains, fertilizers, metal
                                                                                                       products

Saginaw Valley Railway                   Jan. 1991      57    Owned                Michigan            Agricultural products,
                                         Apr. 1998                                                     fertilizer , stone

San Diego & Imperial                     Feb. 2000     124    Trackage rights      California,         Petroleum, paper
Valley Railroad                                                                    Mexico              products, non-metallic
                                                                                                       ores, lumber

San Joaquin Valley Railroad              Jan. 2002     341    Owned,               California          Consumer products, citrus
                                                              Trackage rights                          and food products, paper
                                                                                                       products, metals, petro-
                                                                                                       chemical products

San Pedro & Southwestern Railroad        Jan. 2002      78    Owned                Arizona             Lime, nitrogen, fertilizer

South Carolina Central                   Feb. 2000      97    Owned                South Carolina      Chemicals, metals, coal,
Railroad                                                                                               paper products, waste

Southern Ontario Railway                 July 1999      54    Leased               Ontario             Fuel, metals,
                                                                                                       agricultural products
</TABLE>


                                       14
<PAGE>

<TABLE>
<CAPTION>
                                          DATE OF     TRACK                                                    PRINCIPAL
        RAILROAD                        ACQUISITION   MILES      STRUCTURE         LOCATION                   COMMODITIES
        --------                        -----------   -----      ---------         --------                   -----------
<S>                                     <C>            <C>    <C>                  <C>                 <C>
Toledo, Peoria and Western               Sept. 1999    369    Owned;               Indiana,            Intermodal, agricultural
Railroad                                                      Trackage             Illinois, Iowa      products, fertilizers,
                                                              rights                                   chemicals

Ventura County Railroad                  Aug. 1998      13    Leased               California          Automobiles, chemicals,
                                                                                                       paper products

Virginia Consolidated                    Feb. 2000     211    Leased;              Virginia,           Coal, lumber, metals
(Chesapeake & Albermarle                                      Owned                North Carolina
Railroad, North Carolina
& Virginia Railroad, and
Virginia Southern
Railroad)

West Texas & Lubbock                     Nov. 1995     104    Owned                Texas               Fertilizer, chemicals,
Railroad                                                                                               cotton products, scrap
                                                                                                       iron, steel

                                                     -----
Total track miles                                    8,282
                                                     =====
</TABLE>

AUSTRALIAN RAILROAD PROPERTIES

      On April 30, 1999, through our wholly owned subsidiary Freight Australia,
we prepaid a 45-year lease to operate 3,150 miles of track in the State of
Victoria, Australia. Freight Australia's principal commodity is agricultural
products for use in southwestern Australia as well as export markets.

CHILEAN RAILROAD PROPERTIES

      In Chile, Ferronor owns and/or operates approximately 1,500 miles of
track, extending from La Calera in the south, to its northern terminus at
Iquique. It also operates several east-west branch lines that link a number of
iron, copper and mineral salt mines and production facilities with several
Chilean Pacific port cities. Ferronor also serves Argentina and Bolivia through
traffic interchanged with the Belgrano Cargas Railroad and the Antofagasta
(Chile)-Bolivia Railway. In 2002, Ferronor commenced operating the Potrerillos
Railway, a customer-owned 57 mile railroad.

NORTH AMERICAN ROLLING STOCK

      The following tables summarize the current composition of our North
American railroad equipment fleet.

                                                        FREIGHT CARS
TYPE                                       OWNED           LEASED          TOTAL
----                                       -----        ------------       -----
Covered hopper cars                          147           2,425           2,572
Open top hopper cars                          91             262             353
Box cars                                     103           2,302           2,405
Flat cars                                    214           1,122           1,336
Tank cars                                      6               0               6
Gondolas                                       3             383             386
Passenger car                                 17               0              17
                                           -----           -----           -----
                                             581           6,494           7,075
                                           =====           =====           =====

                                                        LOCOMOTIVES
HORSEPOWER/UNIT                            OWNED           LEASED          TOTAL
---------------                            -----        ------------       -----
Over 2000                                    102             248             350
1500 to 2000                                  61              55             116
Under 1500                                    10              19              29
                                           -----           -----           -----
                                             173             322             495
                                           =====           =====           =====


                                       15
<PAGE>

INTERNATIONAL ROLLING STOCK

      The following tables summarize the current composition of our Australian
and Chilean railroad equipment fleet. We own all of our international equipment
fleet.

                                                       FREIGHT CARS
TYPE                                       CHILE         AUSTRALIA         TOTAL
----                                       -----       ------------        -----
Covered hopper cars                            0           1,111           1,111
Open top hopper cars                         223              88             311
Box cars                                     145             275             420
Intermodal containers                         87             685             772
Tank cars                                     34              79             113
Flat cars                                      0             217             217
Gondolas                                      65              73             138
                                           -----           -----           -----
                                             554           2,528           3,082
                                           =====           =====           =====

                                                        LOCOMOTIVES
HORSEPOWER/UNIT                            CHILE         AUSTRALIA         TOTAL
---------------                            -----       ------------        -----
Over 2000                                      0              32              32
1500 to 2000                                   2              25              27
Under 1500                                    40              50              90
                                           -----           -----           -----
                                              42             107             149
                                           =====           =====           =====

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

ADMINISTRATIVE OFFICES AND OTHER

      We own a 59,500 square foot office building, located in Boca Raton,
Florida, where our executive offices are located. Of this space, approximately
12,600 square feet are leased to third parties. In addition, we lease
approximately 21,000 square feet of office space in San Antonio, Texas for
$500,000 annually. The lease expires December 31, 2005.

      Freight Australia's administrative office is in Melbourne, Australia.
Freight Australia leases approximately 20,000 square feet of space from the
Victorian Government for $200,000 annually. The lease expires May 31, 2004.

      Ferronor's administrative office is in Coquimbo, Chile, where Ferronor
owns a three-story 21,600 square foot office building.

ITEM 3. LEGAL PROCEEDINGS

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

      In 2000, certain parties filed property damage claims totaling
approximately $32.5 million against RaiLink Ltd. And RaiLink Canada Ltd.,
wholly-owned subsidiaries of RailAmerica, Inc., and others in connection with
fires that allegedly occurred in 1998. We are vigorously defending these claims
and have insurance coverage to approximately $13.0 million to cover these
claims. It is the opinion of management that the ultimate liability, if any,
with respect to these matters will fall


                                       16
<PAGE>

within the insurance coverage and that these claims will not have a material
adverse effect on our financial position, results of operations or cash flows.

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

      No matters were submitted to a vote of security holders during the fourth
quarter of 2002.

PART II

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

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

           2001                             High Sales Price     Low Sales Price
      --------------                        ----------------     ---------------

      First Quarter                              $10.250             $ 7.500
      Second Quarter                              13.750               9.563
      Third Quarter                               14.250              10.050
      Fourth Quarter                              15.250               9.750
                                                 -------             -------

           2002                             High Sales Price     Low Sales Price
      --------------                        ----------------     ---------------

      First Quarter                              $14.640             $ 9.230
      Second Quarter                              11.310               8.500
      Third Quarter                               10.850               6.900
      Fourth Quarter                               8.200               6.500
                                                 -------             -------

           2003                             High Sales Price     Low Sales Price
      --------------                        ----------------     ---------------

      First Quarter (through March 24)           $  7.65             $  4.44
                                                 -------             -------

      As of March 24, 2003, there were 553 holders of record of the common
stock. We have never declared or paid a dividend on our common stock. Our senior
credit agreement and the indenture governing our senior subordinated notes limit
our ability to pay dividends.


                                       17
<PAGE>

ITEM 6. SELECTED FINANCIAL DATA

      The results of our continuing operations for the years ended December 31,
2002, 2001 and 2000 include the results of certain railroads from the dates they
were acquired as follows: StatesRail, effective January 4, 2002; ParkSierra,
effective January 8, 2002; RailTex, effective February 1, 2000; Freight
Australia, effective April 30, 1999; RaiLink, effective August 1, 1999; and TPW,
effective September 1, 1999. The income statement data for the years ended
December 31, 2002, 2001 and 2000 and the balance sheet data at December 31, 2002
and 2001 are derived from, and are qualified by reference to, audited financial
statements included elsewhere in this report and should be read in conjunction
with those financial statements and the notes thereto. The income statement data
set forth below for the periods ended December 31, 1999 and 1998 and the balance
sheet data as of December 31, 2000, 1999 and 1998 are derived from our financial
statements not included (in thousands, except operating and per share data).
Ferronor has been presented as a discontinued operation.

<TABLE>
<CAPTION>
                                                                          AS OF AND FOR THE
                                                                       YEAR ENDED DECEMBER 31,
                                                 ---------------------------------------------------------------
                                                    2002          2001          2000         1999         1998
                                                 ----------    ----------    ----------    --------    ---------
<S>                                              <C>           <C>           <C>           <C>         <C>
INCOME STATEMENT DATA
   Operating revenue                             $  428,243    $  347,546    $  334,615    $109,845    $  23,212
   Operating income                                  70,505        71,225        67,438      21,463        1,269
Income (loss) from continuing operations              5,263        15,792         8,359       4,585       (1,467)
Basic earnings (loss) per common share from
   continuing operations                         $     0.16    $     0.72    $     0.43    $   0.32    $   (0.15)
Diluted earnings (loss) per common share from
   continuing operations                         $     0.16    $     0.66    $     0.42    $   0.32    $   (0.15)
Weighted average common shares - Basic               32,047        21,510        18,040      11,090        9,553
Weighted average common shares - Diluted             32,620        25,350        18,267      11,665        9,553

BALANCE SHEET DATA
Total assets                                     $1,106,553    $  891,168    $  839,703    $443,929    $ 130,964
Long-term obligations, including
  current maturities                                387,321       301,687       358,856     162,827       66,327
Subordinated debt                                   141,331       144,988       141,411     122,449           --
Redeemable convertible preferred stock                   --            --         6,613       8,830           --
Stockholders' equity                                278,903       220,959       123,434      69,467       34,760

OPERATING DATA
Freight carloads                                  1,314,794     1,113,028     1,042,987     300,412       49,519
Track mileage                                        12,800        11,000        11,000       8,400        2,400
Number of full time employees                         2,676         2,180         2,230       1,707          652
</TABLE>

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

      Substantial Debt and Debt Service. As of December 31, 2002, we had
substantial indebtedness, and, as a result, we incur significant interest
expense. The degree to which we are leveraged could have important consequences,
including the following:

      -     our ability to obtain additional financing in the future for capital
            expenditures, potential acquisitions, and other purposes may be
            limited or financing may not be available on terms favorable to us
            or at all;

      -     a substantial portion of our cash flows from operations must be used
            to pay our interest expense and repay our debt, which would reduce
            the funds that would otherwise be available to us for our operations
            and future business opportunities; and

      -     fluctuations in market interest rates will affect the cost of our
            borrowings to the extent not covered by interest rate hedge
            agreements because the interest under our credit facilities is
            payable at variable rates.

      A default could result in acceleration of our indebtedness. If this
occurs, our business and financial condition may be materially adversely
affected.


                                       18
<PAGE>

      While as of December 31, 2002, we had no borrowings under our revolving
credit facility, this facility allows us to borrow a total of $100 million and
we may borrow up to an additional $100 million of term debt in connection with
acquisitions if we meet specified conditions.

      Covenant Restrictions. Our credit facilities and the indenture governing
our senior subordinated notes contain numerous covenants imposing restrictions
on our ability to, among other things:

      -     incur more debt;

      -     pay dividends, redeem or repurchase our stock or make other
            distributions;

      -     make acquisitions or investments;

      -     use assets as security in other transactions;

      -     enter into transactions with affiliates;

      -     merge or consolidate with others;

      -     dispose of assets or use asset sale proceeds;

      -     create liens on our assets; and

      -     extend credit.

      In addition, our credit facilities also contain financial covenants that
require us to meet a number of financial ratios and tests. Our failure to comply
with the obligations in our credit facilities and indenture could result in an
event of default under the credit facilities or the indenture, which, if not
cured or waived, could permit acceleration of the indebtedness or our other
indebtedness, or result in the same consequences as a default in payment as
described in the previous risk factor.

      Fuel Costs. Fuel costs were approximately 6.9% of our historical revenues
for the year ended December 31, 2002, 8.1% for the year ended December 31, 2001
and 8.7% for the year ended December 31, 2000. Fuel prices and supplies are
influenced significantly by international political and economic circumstances.
If a fuel supply shortage or unusual price volatility were to arise for any
reason, higher fuel prices would materially affect our operating results. While
we elected to hedge approximately 35% of our anticipated North American fuel
needs for 2003, 65% of those needs remain unhedged.

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

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

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

      Foreign Operations. We have railroad operations in Australia, Chile and
Canada. We may also consider acquisitions in other foreign countries. The risks
of doing business in foreign countries include:

      -     adverse changes in the economy of those countries;

      -     exchange rate fluctuations;


                                       19
<PAGE>

      -     adverse effects of currency exchange controls;

      -     restrictions on the withdrawal of foreign investment and earnings;

      -     government policies against ownership of businesses by
            non-nationals;

      -     the potential instability of foreign governments; and

      -     economic uncertainties including, among others, risk of
            renegotiation or modification of existing agreements or arrangements
            with governmental authorities, exportation and transportation
            tariffs, foreign exchange restrictions and changes in taxation
            structure.

      Reliance on Australian Agriculture. Factors that negatively affect the
agricultural industry in the regions in which Freight Australia operates could
have a material adverse effect on our results of operations and financial
condition. These factors include drought or other weather conditions, export and
domestic demand and total world supply, and fluctuations in agricultural prices.
For the year ended December 31, 2001 approximately 45% of Freight Australia's
revenues and for the year ended December 31, 2002 approximately 39% of Freight
Australia's revenues were derived from the agricultural industry. Our 2002
results of operations were significantly adversely impacted by a severe drought
in Australia. We expect the drought to continue to adversely affect our business
in 2003. As a result, Freight Australia will continue to be affected by
unfavorable conditions affecting the agricultural industry in areas served by
Freight Australia.

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

      Continuing Relationships with Class I Carriers. The railroad industry in
the United States and Canada is dominated by a small number of Class I carriers
that have substantial market control and negotiating leverage. Almost all of the
traffic on our North American railroads is interchanged with Class I carriers.
Our ability to provide rail service to our customers in North America depends in
large part upon our ability to maintain cooperative relationships with Class I
carriers with respect to, among other matters, freight rates, car supply,
reciprocal switching, interchange and trackage rights. Class I carriers are also
sources of potential acquisition candidates as they continue to divest
themselves of branch lines to smaller rail operators. Because we depend on Class
I carriers for our North American operations, our business and financial results
may be adversely affected if our relationships with those carriers were to
deteriorate.

      Risks of Our Australian Operations. In addition to the risks described
above, our Australian operations are subject to the following risks and
uncertainties:

      -     The applicable legislative framework enables third party rail
            operators to gain access to the railway infrastructure on which we
            operate for access fees. Because of this regulatory framework, we
            may lose customers or be forced to reduce rates to compete with
            third party rail operators.

      -     Our access agreement with V/Line Passenger in Australia contains
            penalty provisions if trains using the railway infrastructure are
            delayed, early or cancelled under a variety of circumstances
            resulting from our actions.

      -     The director of public transport for the State of Victoria,
            Australia may terminate our long-term railway infrastructure lease
            in specified circumstances, including: (1) if we fail to maintain
            all necessary accreditations; (2) if we fail to maintain railway
            infrastructure; and (3) if we fail to maintain insurance.


                                       20
<PAGE>

      Our Australian subsidiary generates approximately 19% of its total
revenues under a five-year arrangement with AWB, Limited, the sole exporter of
Australian wheat. AWB, Limited may terminate the agreement under specified
limited circumstances.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS

GENERAL

      We are the world's largest short line and regional freight railroad
operator. We own 49 railroads operating approximately 12,900 route miles in the
United States, Canada, Chile, Argentina and Australia. In North America, we
operate in 26 states, five Canadian provinces and the Northwest Territories.

      In January 2003, we announced our intent to sell our 55% equity interest
in Ferronor, our Chilean railroad operations. Accordingly, the results of
operations for the years presented have been reclassified to discontinued
operations.

      Our principal business consists of the operations of North American short
line freight railroads and international regional railroads. During 2002,
excluding Ferronor, 78% of our revenues were derived from railroad operations in
North America while 22% of revenues were derived from our international railroad
operations based in Australia.

      Our North American rail group operates 46 railroads. Each of these
railroads operates independently with their own customer base. While these
railroads are spread out geographically and carry diverse commodities, bridge
traffic accounted for 17%, coal accounted for 12%, and lumber and forest
products accounted for 11% of our carloads in North America during 2002. As a
percentage of revenues, which is impacted by several factors including the
length of the haul, bridge traffic generated 8%, coal generated 8%, and lumber
and forest products generated 17% of our North American freight revenues. Bridge
traffic, which neither originates or terminates on our line, generally has a
lower rate per carload.

      Freight Australia, our Australian regional railroad, has two primary
sources of revenues. The first is freight revenues, which comprises 78% of
Freight Australia's total revenues. Freight Australia hauls various commodities
over its line including agricultural products, cement, gypsum, stone and logs.
Agricultural products comprised approximately 39% of Freight Australia's total
revenues in 2002. The level of revenues from agricultural products is highly
dependent on the annual grain harvest in the State of Victoria. The grain
harvest in the fourth quarter of 2002 was very poor due to the worst drought in
many years in the grain regions served by Freight Australia. As a result,
revenues from transporting grain were 21% lower in 2002 than in 2001. To
partially offset this decrease in revenues and to reduce our dependence on grain
business, Freight Australia has pursued and been awarded several new long-term
contracts to move a variety of other commodity types. It is anticipated that
these new contracts should add approximately $50 million of new revenues over
the next three to five years. The second source of revenue is access fees paid
to us by other passenger or freight operators for the right to operate over our
railroad. These amounts accounted for 19% of Freight Australia's revenues in
2002.

      In addition to our railroad operations, we have historically generated
gains through asset sales. Through our various North American railroads, we own
8,300 miles of track and 63,000 acres of land. We continually review our
portfolio of railroads and look to sell entire railroads, portions of railroads
or underutilized real estate where holding such assets does not meet our
internal criteria. During 2002, we generated net gains of $9.2 million. These
gains are included in operating income in our consolidated statements of income.

      In January 2002, we acquired all of the stock of StatesRail, which owned
and operated eight railroads (including seven freight railroads and a tourist
railroad in Hawaii) with 1,647 miles of track in eleven states. Total
consideration for the acquisition was $90 million, consisting of $67 million in
cash and $23 million in our common stock (1.7 million shares).

      Also, in January 2002, we acquired all of the stock of ParkSierra, which
owned and operated three freight railroads with 703 miles of track in four
western states. Total consideration for the acquisition was $48 million,
consisting of $23 million in cash and $25 million in our common stock (1.8
million shares).

      In February 2000, we acquired RailTex, which owned and operated 25
railroads with over 4,100 miles of track in North America. Total consideration
for the acquisition was $294 million, consisting of $128 million in cash,
assumption of $105 million in debt and 6.6 million shares of our common stock
valued at $61 million.


                                       21
<PAGE>

      In December 2000, we sold our specialty truck trailer manufacturing
operations for $39 million. This segment is presented as a discontinued
operation for each period presented.

Critical Accounting Estimates

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

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

      In accordance with Statement of Financial Accounting Standards ("SFAS")
No. 5, "Accounting for Contingencies,"an accrual for a loss contingency is
established if information available prior to the issuance of the financial
statements indicates that it is probable that a liability has been incurred or
an asset has been impaired. These estimates have been developed in consultation
with outside counsel handling our defense in these matters and are based upon an
analysis of potential results, assuming a combination of litigation and
settlement strategies. Subsequent changes to those estimates are reflected in
our statement of operations in the period of the change.

      Freight Australia maintains a long service leave program for its
employees. Under the program, an employee is entitled to paid leave of up to 13
weeks after they have performed 10 years of service. Key assumptions in
estimating this liability are the discount rate, annual rate of increase in
compensation levels, employee turnover and the number of years before employees
use the accrued leave.

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

      Property, plant and equipment comprised 82% of our total assets as of
December 31, 2002. These assets are stated at cost, less accumulated
depreciation. We use the group method of depreciation under which a single
depreciation rate is applied to the gross investment in our track assets. Upon
normal sale or retirement of track assets, cost less net salvage value is
charged to accumulated depreciation and no gain or loss is recognized.
Expenditures that increase asset values or extend useful lives are capitalized.
Repair and maintenance expenditures are charged to operating expense when the
work is performed. We periodically review the carrying value of our long-lived
assets for impairment. This review is based upon our projections of anticipated
future cash flows. While we believe that our estimates of future cash flows are
reasonable, different assumptions regarding such cash flows could materially
affect our evaluations.

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

RESULTS OF OPERATIONS

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

      On a consolidated basis, we recorded net income for 2002 of $2.2 million,
or $0.07 per diluted share, compared with net income for 2001 of $17.0 million,
or $0.71 per diluted share. Our operating revenues increased $80.7 million, or
23%, to $428.2 million in 2002 from $347.5 million in 2001. The acquisitions of
ParkSierra and StatesRail contributed $90.3 million to operating revenues for
the year. This increase was partially offset by a decrease of $6.5 million in
operating revenues from Freight Australia primarily due to the drought in
Australia and a $3.1 million decrease from the disposal of Georgia Southwestern
Railroad. Operating income decreased $0.7 million, or 1%, to $70.5 million from
$71.2 million in 2001 primarily


                                       22
<PAGE>

due to a decrease of $17.0 million in Freight Australia's operating income and
$6.4 million due to failed bid costs and restructuring charges, partially offset
by the acquisitions of ParkSierra and StatesRail, which contributed $25.2
million to operating income. Interest expense, including amortization of
deferred financing costs, decreased $7.3 million, or 14%, to $43.4 million for
the year ended December 31, 2002 from $50.7 million in 2001 primarily due to a
general decrease in interest rates and the refinancing of our senior debt in May
2002, which resulted in a lower interest rate to us. In connection with our debt
refinancing in May 2002, we recorded a charge to other income (expense) of $19.1
million for the write-off of our interest rate swaps and other refinancing
related costs and we recorded a charge of $4.5 million, after tax, as an
extraordinary item for the write-off of the unamortized deferred loan costs from
the terminated credit facility, which was originally entered into in 2000.

NORTH AMERICAN RAILROAD OPERATIONS

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

NAME OF RAILROAD                                       DATE OF ACQUISITION
----------------                                       -------------------
RailTex properties (25 railroads)                      February 2000
StatesRail (8 railroads)                               January 2002
ParkSierra (3 railroads)                               January 2002

      We disposed of certain railroads as follows:

NAME OF RAILROAD                                       DATE OF DISPOSITION
----------------                                       -------------------
Minnesota Northern Railroad                            August 2000
St. Croix Valley Railroad                              August 2000
South Central Tennessee Railroad                       December 2000
Pittsburgh Industrial Railroad                         December 2000
Ontario L'Orignal Railway                              December 2000
Dakota Rail, Inc.                                      December 2001
Georgia Southwestern Railroad                          March 2002
Texas New Mexico Railroad                              May 2002

      As a result, the results of operations for the years ended December 31,
2002, 2001 and 2000 are not comparable in various material respects and are not
indicative of the results which would have occurred had the acquisitions or
dispositions been completed at the beginning of the periods presented.

      COMPARISON OF NORTH AMERICAN RAILROAD OPERATING RESULTS FOR THE YEARS
ENDED DECEMBER 31, 2002 AND 2001

      The following table sets forth the operating revenues and expenses (in
thousands) for our North American railroad operations for the periods indicated.

<TABLE>
<CAPTION>
                                                 For the year ended    For the year ended
                                                 December 31, 2002     December 31, 2001
                                                 ------------------    ------------------
<S>                                              <C>         <C>       <C>         <C>
      Total operating revenue                    $332,992    100.0%    $245,426    100.0%
                                                 --------    -----     --------    -----
      Operating expenses:
          Maintenance of way                       34,590     10.5%      23,477      9.5%
          Maintenance of equipment                 30,094      9.0%      20,984      8.5%
          Transportation                           87,817     26.4%      69,932     28.5%
          Equipment rental                         19,103      5.7%      15,136      6.2%
          Selling, general and administrative      55,678     16.7%      39,962     16.3%
          Depreciation and amortization            21,699      6.5%      15,915      6.5%
                                                 --------    -----     --------    -----
      Total operating expenses                    248,981     74.8%     185,406     75.5%
                                                 --------    -----     --------    -----
      Operating income                           $ 84,011     25.2%    $ 60,020     24.5%
                                                 ========    =====     ========    -----
</TABLE>


                                       23
<PAGE>

OPERATING REVENUES. Operating revenue increased by $87.6 million, or 36%, to
$333.0 million for the year ended December 31, 2002 from $245.4 million for the
year ended December 31, 2001 while carloads increased 25% to 1,113,925 in 2002
from 891,318 in 2001. These increases are primarily due to the acquisitions of
ParkSierra and StatesRail. Excluding revenues of $91.4 million in 2002 and $5.0
million in 2001 for the acquisitions of ParkSierra and StatesRail and the
dispositions of the Texas New Mexico Railroad and Georgia Southwestern Railroad,
operating revenues increased $1.1 million or 1% while carloads decreased by
13,696 or 2%. The increase in "same railroad" revenues, while carloads declined,
is due to a change in commodity mix. While lower rated bridge traffic declined
14,177 carloads in 2002, certain other commodities, such as metals, increased
from 2001. The average rate per carload increased in 2002 to $259 from $243 in
2001. The increase in the average rate per carload is due to the acquisitions of
ParkSierra and StatesRail which, on average, have a higher rate per carload as
well as the change in mix of commodities as previously discussed.

      The following table compares North American freight revenues, carloads and
average freight revenue per carload for the years ended December 31, 2002 and
2001:

<TABLE>
<CAPTION>
      (dollars in thousands, except average             For the year ended                   For the year ended
      rate per carload)                                 December 31, 2002                    December 31, 2001
                                                        -----------------                    -----------------

                                              Freight                 Average rate   Freight                  Average rate
                                             Revenues       Carloads  per carload   Revenues      Carloads    per carload
                                             --------       --------  ------------  --------      --------    ------------
<S>                                          <C>              <C>         <C>       <C>            <C>            <C>
      Agricultural & Farm Products           $ 27,877         95,005      $293      $ 20,524       80,835         $254
      Autos                                     9,842         43,843       224         9,982       45,962          217
      Chemicals                                28,305         84,935       333        22,907       66,915          342
      Coal                                     22,261        128,540       173        18,956       95,433          199
      Food Products                            19,817         62,471       317        11,956       40,988          292
      Intermodal                                4,082         39,538       103         4,859       42,253          115
      Lumber & Forest Products                 48,632        124,025       392        35,929       88,351          407
      Metals                                   24,400         80,117       305        14,645       52,184          281
      Metallic/Non-metallic Ores               14,196         55,260       257        11,074       45,658          243
      Minerals                                 16,983         45,995       369         7,299       19,424          376
      Paper Products                           26,240         94,528       278        20,764       64,914          320
      Petroleum Products                       16,194         47,252       343         9,819       28,593          343
      Railroad Equipment/Bridge Traffic        22,275        186,388       120        22,979      200,565          115
      Other                                     7,658         26,028       294         5,073       19,243          264
                                             --------      ---------      ----      --------      -------         ----

      Total                                  $288,762      1,113,925      $259      $216,766      891,318         $243
                                             ========      =========      ====      ========      =======         ====
</TABLE>

      Lumber and forest products revenues were $48.6 million in the year ended
December 31, 2002 compared to $35.9 million in the year ended December 31, 2001,
an increase of $12.7 million or 35%. This increase consists of $11.2 million
from the acquisitions of ParkSierra and StatesRail and an increase of $1.5
million from the existing North American railroad operations resulting from new
business secured from forest product customers in Alberta and Oregon.

      Agricultural and farm products revenues were $27.9 million in the year
ended December 31, 2002 compared to $20.5 million in the year ended December 31,
2001, an increase of $7.4 million or 36%. This increase is primarily the result
of the acquisitions of ParkSierra and StatesRail.

      Paper products revenues were $26.2 million in the year ended December 31,
2002 compared to $20.8 million in the year ended December 31, 2001, an increase
of $5.4 million or 26%. This increase consists of $7.6 million from the
acquisitions of ParkSierra and StatesRail and an increase of $0.6 million from
the existing North American railroad operations, partially offset by a decrease
of $2.7 million from divested North American operations. The increase of $0.6
million from existing North American railroad operations is due to new business
obtained in Oregon and Alberta.

      Metal revenues were $24.4 million in the year ended December 31, 2002
compared to $14.6 million in the year ended December 31, 2001, an increase of
$9.8 million or 67%. This increase consists of $6.7 million from the
acquisitions of ParkSierra and StatesRail and an increase of $3.1 million from
the existing North American railroad operations resulting from increased
carloads from new business secured in North Carolina and our new steel train
service in Southern Ontario.


                                       24
<PAGE>

      Food products revenues were $19.8 million in the year ended December 31,
2002 compared to $12.0 million in the year ended December 31, 2001, an increase
of $7.8 million or 66%. This increase consists of $8.3 million from the
acquisitions of ParkSierra and StatesRail partially offset by a decrease of $0.7
million from divested North American operations.

      Mineral revenues were $17.0 million in the year ended December 31, 2002
compared to $7.3 million in the year ended December 31, 2001, an increase of
$9.7 million or 133%. This increase is due to the acquisitions of ParkSierra and
StatesRail.

      Petroleum products revenues were $16.2 million in the year ended December
31, 2002 compared to $9.8 million in the year ended December 31, 2001, an
increase of $6.4 million or 65%. This increase consists of $5.1 million from the
acquisitions of ParkSierra and StatesRail and an increase of $1.3 million from
the existing North American railroad operations due to new customers in New
England and new business secured to diamond mines in the Canadian Northwest
territories.

      Coal revenues were $22.3 million in the year ended December 31, 2002
compared to $19.0 million in the year ended December 31, 2001, an increase of
$3.3 million or 17%. This increase is due to the acquisitions of ParkSierra and
StatesRail.

      Chemicals revenues were $28.3 million in the year ended December 31, 2002
compared to $22.9 million in the year ended December 31, 2001, an increase of
$5.4 million or 24%. This increase is due to the acquisitions of ParkSierra and
StatesRail.

      Bridge traffic revenues were $22.3 million in the year ended December 31,
2002 compared to $23.0 million in the year ended December 31, 2001, a decrease
of $0.7 million or 3%. This decrease is due to the reduction of volume
associated with one of our railroads in eastern Canada during the third and
fourth quarter of 2002.

      The change in the remaining commodities is primarily due to the
acquisitions of ParkSierra and StatesRail.

      OPERATING EXPENSES. Total operating expenses increased by $63.6 million,
or 34%, to $249.0 million for the year ended December 31, 2002 from $185.4
million for the year ended December 31, 2001. The increase in operating expenses
is primarily due to ParkSierra and StatesRail. The operating ratios, defined as
total operating expenses divided by total revenues, were 74.8% and 75.5% for the
years ended December 31, 2002 and 2001, respectively.

      MAINTENANCE OF WAY. Maintenance of way expenses increased as a percentage
of revenues to 10.5% in 2002 from 9.5% in 2001, primarily due to the reduction
of an environmental liability in 2001 of $1.9 million due to changes in
environmental regulations.

      MAINTENANCE OF EQUIPMENT. Maintenance of equipment expense, which includes
locomotive lease expense, increased as a percentage of revenues to 9.0% in 2002
from 8.5% in 2001. The increase is primarily due to car repairs on equipment
used by StatesRail properties.

      TRANSPORTATION. Transportation expenses decreased as a percentage of
revenues to 26.4% in 2002 from 28.5% in 2001. Of this decrease, lower fuel
prices accounted for 1.0 percentage point as fuel costs were 87 cents per gallon
in 2002 compared to $1.00 per gallon in 2001. Lower labor costs accounted for
the other 1.1 percentage points. Labor costs were lower due to strict cost
control measures implemented in 2002.

      EQUIPMENT RENTAL. Equipment rental expenses decreased as a percentage of
revenues to 5.7% in 2002 from 6.2% in 2001, due to improved management of leased
cars.

      SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expense increased as a percentage of revenues to 16.7% in 2002 from 16.3% in
2001 due to higher labor and insurance costs.

      DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense
remained constant in 2002 from 2001 at 6.5% of revenues.


                                       25
<PAGE>

COMPARISON OF NORTH AMERICAN RAILROAD OPERATING RESULTS FOR THE YEARS ENDED
DECEMBER 31, 2001 AND 2000

The following table sets forth the operating revenues and expenses (in
thousands) for our North American railroad operations for the years ended
December 31, 2001 and 2000.

<TABLE>
<CAPTION>
                                                    For the year ended        For the year ended
                                                    December 31, 2001         December 31, 2000
                                                    ------------------        ------------------
<S>                                                <C>           <C>         <C>           <C>
      Total operating revenue                      $245,426      100.0%      $231,445      100.0%
                                                   --------      -----       --------      -----
      Operating expenses:
          Maintenance of way                         23,477        9.5%        25,448       11.0%
          Maintenance of equipment                   20,984        8.5%        13,101        5.7%
          Transportation                             69,932       28.5%        70,958       30.7%
          Equipment rental                           15,136        6.2%        15,842        6.8%
          Selling, general and administrative        39,962       16.3%        41,062       17.7%
          Depreciation and amortization              15,915        6.5%        16,430        7.1%
                                                   --------      -----       --------      -----
      Total operating expenses                      185,406       75.5%       182,841       79.0%
                                                   --------      -----       --------      -----
      Operating income                             $ 60,020       24.5%      $ 48,604       21.0%
                                                   ========      -----       ========      -----
</TABLE>

      OPERATING REVENUES. Operating revenue increased by $14.0 million, or 6%,
to $245.4 million for the year ended December 31, 2001 from $231.4 million for
the year ended December 31, 2000 while carloads increased 6% to 891,318 in 2001
from 839,451 in 2000. The increases in revenues and carloads was primarily due
to the inclusion of the RailTex properties for twelve months in 2001 compared to
eleven months in 2000, partially offset by the sale of certain railroads in 2000
and the 4% decline in the Canadian dollar in 2001 compared to 2000. On a "same
railroad" basis, including the RailTex properties on a pro forma basis from
January 2000 and excluding the sold railroads, carloads and revenues both
increased 4% in 2001. Increased coal shipments were primarily responsible for
the increase. Transportation revenue per carload increased to $243 in 2001 from
$242 in 2000.

     The following table compares North American freight revenues, carloads and
average freight revenue per carload for the years ended December 31, 2001 and
2000:

<TABLE>
<CAPTION>
      (dollars in thousands, except average             For the year ended                      For the year ended
      rate per carload)                                 December 31, 2001                       December 31, 2000
                                                        ------------------                      ------------------

                                               Freight                 Average rate   Freight                   Average rate
                                              Revenues      Carloads   per carload    Revenues       Carloads   per carload
                                              --------      --------   ------------   --------       --------   ------------
<S>                                           <C>            <C>           <C>        <C>            <C>           <C>
      Agricultural & Farm Products            $ 20,524        80,835       $254       $ 19,235        76,593       $251
      Autos                                      9,982        45,962        217          9,797        47,900        205
      Chemicals                                 22,907        66,915        342         22,135        66,827        331
      Coal                                      18,956        95,433        199         15,612        71,945        217
      Food Products                             11,956        40,988        292         10,710        39,313        272
      Intermodal                                 4,859        42,253        115          4,076        30,134        135
      Lumber & Forest Products                  35,929        88,351        407         34,866        90,102        387
      Metals                                    14,645        52,184        281         13,683        61,049        224
      Metallic/Non-metallic Ores                11,074        45,658        243          8,796        36,780        239
      Minerals                                   7,299        19,424        376          6,237        16,393        380
      Paper Products                            20,764        64,914        320         19,229        59,124        325
      Petroleum Products                         9,819        28,593        343          9,686        26,840        361
      Railroad Equipment/Bridge Traffic         22,979       200,565        115         23,603       192,323        123
      Other                                      5,073        19,243        264          5,319        24,128        220
                                              --------       -------       ----       --------       -------       ----

      Total                                   $216,766       891,318       $243       $202,984       839,451       $242
                                              ========       =======       ====       ========       =======       ====
</TABLE>

      Coal revenues were $19.0 million in the year ended December 31, 2001
compared to $15.6 million in the year ended December 31, 2000, an increase of
$3.4 million or 21%. This increase was due to new business in Indiana and
increased moves for utilities in Minnesota.


                                       26
<PAGE>

      Agricultural and farm products revenues were $20.5 million in the year
ended December 31, 2001 compared to $19.2 million in the year ended December 31,
2000, an increase of $1.3 million or 7%. This increase was primarily due to the
inclusion of the RailTex properties for twelve months in 2001 compared to eleven
months in 2000, partially offset by a decrease of $0.9 million from divested
North American operations.

      Paper products revenues were $20.8 million in the year ended December 31,
2001 compared to $19.2 million in the year ended December 31, 2000, an increase
of $1.6 million or 8%. This increase was primarily due to the inclusion of the
RailTex properties for twelve months in 2001 compared to eleven months in 2000,
partially offset by a decrease of $0.4 million from divested North American
operations.

      Metallic and non-metallic ore revenues were $11.1 million in the year
ended December 31, 2001 compared to $8.8 million in the year ended December 31,
2000, an increase of $2.3 million or 26%. This increase was due to new business
in Texas and an increase in salt movements in Southern Ontario.

      Food products revenues were $12.0 million in the year ended December 31,
2001 compared to $10.7 million in the year ended December 31, 2000, an increase
of $1.3 million or 12%. This increase was primarily due to the inclusion of the
RailTex properties for twelve months in 2001 compared to eleven months in 2000,
partially offset by a decrease of $0.4 million from divested North American
operations.

      The change in the remaining commodities was primarily due to the inclusion
of the RailTex properties for twelve months in 2001 compared to eleven months in
2000.

      OPERATING EXPENSES. Total operating expenses increased by $2.6 million, or
1%, to $185.4 million for the year ended December 31, 2001 from $182.8 million
for the year ended December 31, 2000. The operating ratios were 75.5% and 79.0%
for the years ended December 31, 2001 and 2000, respectively.

      MAINTENANCE OF WAY. Maintenance of way expenses decreased $1.9 million, or
8%, to $23.5 million in 2001 from $25.4 million in 2000. This decrease is
primarily due to the reduction of an environmental liability in 2001 of $1.9
million due to changes in environmental regulations.

      MAINTENANCE OF EQUIPMENT. Maintenance of equipment expense, which includes
locomotive lease expense, increased $7.9 million, or 60%, to $21.0 million in
2001 from $13.1 million in 2000. This increase is primarily due to our
sale-leaseback transactions which we consummated in December 2000 and June 2001.
Additional rent from these two transactions was approximately $4.0 million in
2001. In addition, in connection with our locomotive fleet rationalization and
upgrade program, we leased additional locomotives in 2001 to replace existing
older, less powerful locomotives.

      TRANSPORTATION. Transportation expenses decreased $1.1 million, or 1%, to
$69.9 million in 2001 from $71.0 million in 2000. The decrease in transportation
expenses is primarily due to lower fuel costs in 2001 as our average price per
gallon was $1.00 in 2001 compared to $1.07 in 2000, resulting in a $1.5 million
savings. In addition, our fleet rationalization and upgrade program resulted in
more efficient locomotives and lower operating costs.


                                       27
<PAGE>

INTERNATIONAL RAILROAD OPERATIONS

      In January 2003, we announced our intent to sell our 55% equity interest
in Ferronor, the Chilean railroad operations. Accordingly, the results of
operations for the years presented have been reclassified to discontinued
operations.

      COMPARISON OF INTERNATIONAL RAILROAD OPERATING RESULTS FOR THE YEARS ENDED
DECEMBER 31, 2002 AND 2001

      The following table sets forth the operating revenues and expenses (in
thousands) for our international railroad operations for the years ended
December 31, 2002 and 2001.

                                                        2002         2001
                                                      -------     --------
      Revenues:                                       $94,915     $101,430
                                                      -------     --------
      Operating expenses:
         Transportation                                70,952       66,575
         Selling, general and administrative            8,010        5,870
         Depreciation and amortization                 10,855        6,932
                                                      -------     --------
         Total operating expenses                      89,817       79,377
                                                      -------     --------
      Operating income                                $ 5,098     $ 22,053
                                                      =======     ========

      OPERATING REVENUES. Operating revenues decreased $6.5 million, or 6%, to
$94.9 million for the year ended December 31, 2002 from $101.4 million for the
year ended December 31, 2001. Freight Australia benefited from an increase in
the Australian dollar against the U.S. dollar to 54 cents in 2002 from 52 cents
in 2001, increasing revenues by $4.5 million in 2002. This was more than offset
by lower grain traffic compared to 2001 as a result of the drought in Australia.
Freight Australia's carloads were 200,869 for the year ended December 31, 2002,
a decrease of 20,841, or 9%, compared to 221,710 for the year ended December 31,
2001. Revenue per carload was $366 for 2002 versus $376 for 2001.

      The following table compares international freight revenues, carloads and
average freight revenue per carload for the years ended December 31, 2002 and
2001:

<TABLE>
<CAPTION>
      (dollars in thousands, except average             For the year ended                      For the year ended
      rate per carload)                                 December 31, 2002                       December 31, 2001
                                                        ------------------                      ------------------

                                               Freight                Average rate   Freight                  Average rate
                                              Revenues      Carloads  per carload    Revenues      Carloads   per carload
                                              --------      --------  ------------   --------      --------   ------------
<S>                                           <C>           <C>           <C>        <C>            <C>          <C>
      Agricultural & Farm Products            $36,597        75,207       $487       $46,040        97,003       $475
      Chemicals                                   316         1,013        311           225           737        305
      Coal                                          7            38        195           244           681        358
      Intermodal                               27,500        83,331        330        26,405        82,474        320
      Lumber & Forest Products                  1,630         5,017        325         4,725         9,475        499
      Minerals                                  4,960        18,793        264         3,692        16,076        230
      Paper Products                            1,274        13,492         94         1,109        11,426         97
      Petroleum Products                        1,284         3,889        330           786         3,435        229
      Other                                        19            89        217            40           403         99
                                              -------       -------       ----       -------       -------       ----

      Total                                   $73,587       200,869       $366       $83,266       221,710       $376
                                              =======       =======       ====       =======       =======       ====
</TABLE>

      Agricultural and farm products revenues were $36.6 million in the year
ended December 31, 2002 compared to $46.0 million in the year ended December 31,
2001, a decrease of $9.4 million or 21%. This decrease is primarily due to the
drought in Australia. In 2002, Freight Australia transported 3.7 million tons of
grain compared to 5.0 million tons of grain in 2001. We are estimating that
Freight Australia will transport 2.0 million tons of grain in 2003 as the impact
of the drought will be felt for the entire year. We believe, however, that
Freight Australia will transport between 4.0 million and 5.0 million tons of
grain in 2004 if normal harvest conditions return in Australia.

      Lumber and forest products revenues were $1.6 million in the year ended
December 31, 2002 compared to $4.7 million in the year ended December 31, 2001,
a decrease of $3.1 million or 66%. The decrease is due to a decline in demand
for export wood chips from Australia.


                                       28
<PAGE>

      Minerals revenues were $5.0 million in the year ended December 31, 2002
compared to $3.7 million in the year ended December 31, 2001, an increase of
$1.3 million or 34%. This increase is primarily due to a new contract to extend
a cement haul in Australia.

      OPERATING EXPENSES. Operating expenses increased $10.4 million, or 13%, to
$89.8 million for the year ended December 31, 2002 from $79.4 million for the
year ended December 31, 2001. An increase in the Australian dollar against the
U.S. Dollar, as noted above, increased total operating expenses by $4.3 million.
The remaining increase was due to higher labor, insurance, maintenance and
depreciation expense. These increases were partially offset by reductions in
transportation costs directly related to the decrease in grain traffic in 2002.
The operating ratio for Freight Australia was 94.6% in 2002 compared to 78.3% in
2001 due to the decreased carloads and the increased operating expenses as
discussed above.

COMPARISON OF INTERNATIONAL RAILROAD OPERATING RESULTS FOR THE YEARS ENDED
DECEMBER 31, 2001 AND 2000

                                                       2001         2000
                                                     --------     --------
      Revenues:                                      $101,430     $102,204
                                                     --------     --------
      Operating expenses:
         Transportation                                66,575       70,118
         Selling, general and administrative            5,870        6,284
         Depreciation and amortization                  6,932        5,438
                                                     --------     --------
         Total operating expenses                      79,377       81,840
                                                     --------     --------
      Operating income                               $ 22,053     $ 20,364
                                                     ========     ========

      OPERATING REVENUES. Operating revenues decreased $0.8 million, or 1%, to
$101.4 million for the year ended December 31, 2001 from $102.2 million for the
year ended December 31, 2000. Freight Australia's carloads were 221,710 for the
year ended December 31, 2001, an increase of 18,174, or 9%, compared to 203,536
for the year ended December 31, 2000. Freight Australia's revenue per carload
was $376 for 2001 versus $406 for 2000. The decrease in Freight Australia's
revenues and revenue per carload was primarily due to an 11% decline in the
Australian dollar in 2001 compared to 2000. The increase in the carloads in 2001
was due to the strong grain harvest in Victoria. The decline in the value of the
Australian dollar relative to the U.S. dollar in 2001 compared to 2000 impacted
Freight Australia's revenues by $12.6 million.

      The following table compares international freight revenues, carloads, and
average freight revenue per carload for the years ended December 31, 2001 and
2000:

<TABLE>
<CAPTION>
      (dollars in thousands, except average             For the year ended                      For the year ended
      rate per carload)                                 December 31, 2001                       December 31, 2000
                                                        ------------------                      ------------------

                                               Freight                Average rate   Freight                  Average rate
                                              Revenues      Carloads  per carload    Revenues      Carloads   per carload
                                              --------      --------  ------------   --------      --------   ------------
<S>                                           <C>           <C>           <C>        <C>            <C>          <C>
      Agricultural & Farm Products            $46,040        97,003       $475       $45,123        80,835       $558
      Chemicals                                   225           737        305           315           861        366
      Coal                                        244           681        358           764         2,557        299
      Intermodal                               26,405        82,474        320        27,312        74,379        367
      Lumber & Forest Products                  4,725         9,475        499         3,111        14,386        216
      Minerals                                  3,692        16,076        230         4,068        17,076        238
      Paper Products                            1,109        11,426         97         1,093        10,286        106
      Petroleum Products                          786         3,435        229           894         3,152        284
      Other                                        40           403         99             1             4        177
                                              -------       -------       ----       -------       -------       ----

      Total                                   $83,266       221,710       $376       $82,681       203,536       $406
                                              =======       =======       ====       =======       =======       ====
</TABLE>

      Agricultural and farm products revenues were $46.0 million in the year
ended December 31, 2001 compared to $45.1 million in the year ended December 31,
2000, an increase of $0.9 million or 2%. This increase was primarily due to a
strong grain harvest in 2001, partially offset by the weaker Australian dollar
in 2001.

      Intermodal revenues were $26.4 million in the year ended December 31, 2001
compared to $27.3 million in the year ended


                                       29
<PAGE>

December 31, 2000, a decrease of $0.9 million or 3%. This decrease was due to
the lower Australian Dollar in 2001.

      OPERATING EXPENSES. Operating expenses decreased $2.5 million, or 3%, to
$79.4 million for the year ended December 31, 2001 from $81.8 million for the
year ended December 31, 2000. The decrease in operating expenses was primarily
due to the 11% decline in the Australian dollar, which reduced operating
expenses by $9.8 million. Partially offsetting this decrease was an increase in
2001 of depreciation and amortization due to the extensive capital work done on
the locomotive fleet and track since we purchased the railroad from the
government in 1999. The operating ratio improved to 78.3% in 2001 from 80.1% in
2000 due to the increased carloads and the relatively fixed nature of many of
the expenses.

CORPORATE OVERHEAD AND OTHER

      CORPORATE OVERHEAD. Corporate overhead services performed for our
subsidiaries include executive management, overall strategic planning,
accounting, finance, legal, cash management, information technology, human
resources, payroll and tax. Corporate overhead, which is included in selling,
general and administrative expenses in the consolidated statements of income,
increased $10.0 million, or 62%, to $26.1 million for the year ended December
31, 2002 from $16.1 million for the year ended December 31, 2001. Approximately
$3.3 million of the increase is due primarily to the write-off of the failed bid
costs in connection with the proposed acquisition of National Rail and
FreightCorp, two government-owned railroads in Australia. In addition, we
recorded a $1.4 million charge in 2002 relating to the consolidation of the
accounting and human resource functions from San Antonio to Boca Raton and a
$1.0 million restructuring charge relating to the termination of certain
executives in December 2002. The remaining increase was due to increased
headcount in 2002 to support the ParkSierra and StatesRail acquisitions. For the
year ended December 31, 2001, corporate overhead increased $3.7 million, or 30%,
to $16.1 million from $12.4 million for the year ended December 31, 2000. This
increase was related to the additional costs incurred to manage the acquired
railroads and to establish a strong management team to handle our continued
growth.

      ASSET RATIONALIZATION PLAN. As part of our strategic plan, we continually
review our portfolio for under performing, non-core or non-strategic assets that
can be sold. Net gains on sales of assets were $9.2 million for the year ended
December 31, 2002. This gain primarily relates to the sale of the Georgia
Southwestern Railroad in March 2002 resulting in a gain of $4.5 million and a
sale of right-of-ways resulting in a gain of $3.5 million. In December 2001, we
sold Dakota Rail, Inc. and certain other assets for $9.8 million. The proceeds
from these transactions were used to reduce our long-term debt and for general
working capital purposes. The net gains in 2001 were $6.4 million compared to
$11.2 million in 2000.

      TERMINATED MOTOR CARRIER OPERATIONS. During the year ended December 31,
2002, we recorded a charge of $1.3 million for the write-off of the remaining
assets from the motor carrier division.

      INTEREST EXPENSE. Interest expense, including amortization of financing
costs, decreased from $53.9 million in 2000 to $50.7 million in 2001 and
continued to decrease to $43.4 million in 2002. The decrease in interest expense
from 2000 to 2001 is primarily due to reduction of our long-term debt and a
decrease in base interest rates. The decrease in interest expense from 2001 to
2002 is primarily due to the refinancing of our senior debt in May 2002, which
resulted in a lower interest rate.

      FINANCING COSTS AND OTHER INCOME (EXPENSE). In connection with the May
2002 refinancing of our senior debt, we terminated our existing interest rate
swaps. Because these hedging instruments were designated as hedges of the cash
flows under the previous senior debt facility, SFAS No. 133 requires the entire
balance in other accumulated comprehensive loss to be charged to earnings.
Accordingly, a charge of $17.1 million was recorded in other income (expense)
during the year ended December 31, 2002. We also incurred a charge of $2.0
million during 2002 to write-off other refinancing related costs incurred in
connection with our May 2002 refinancing.

      INCOME TAXES. Our effective tax rates in 2002 and 2001 were 35.5% and
22.5%, respectively. In 2001, we recorded a benefit of $3.1 million from a
reduction in the Canadian federal and provincial tax rates. We believe our
effective rate in 2003 will be approximately 37%.

      DISCONTINUED OPERATIONS. In January 2003, we announced our intent to sell
our 55% equity interest in Ferronor. Accordingly, we reclassified the operating
results of Ferronor for each of the years presented to discontinued operations.
As such, the income statements for the years ended 2002, 2001 and 2000, include
$1.0 million, $1.5 million, and $1.2 million, (net of tax) respectively, of
income from discontinued operations for Ferronor. We expect to sell our 55%
equity interest in Ferronor in 2003 and use the proceeds of the sale to retire
debt. In May 2002, we sold the Texas New Mexico Railroad for $2.3


                                       30
<PAGE>

million resulting in a net gain of $1.3 million ($0.8 million, after tax). The
gain has been included in discontinued operations. In December 2000, we sold our
specialty truck trailer manufacturing operations for $38.5 million resulting in
a gain of approximately $11.5 million, net of income taxes. In connection with
the acquisition of RailTex, we refinanced our investment in our trailer
manufacturing operations resulting in additional interest expense of $7.3
million in 2000.

      EXTRAORDINARY LOSS. In connection with the refinancing of our senior debt
in May 2002, we wrote off the unamortized balance of the deferred loan costs
relating to our old senior credit facility. The total charge of $6.6 million
($4.5 million, after tax) was included as an extraordinary charge. In connection
with the reduction of our senior debt in July and August 2001, we recorded an
extraordinary charge of $0.2 million for the year ended December 31, 2001.
Pursuant to the refinancing of our debt in February 2000, we recorded an
extraordinary charge for the year ended December 31, 2000 for the loss on early
extinguishment of debt of $2.9 million. In connection with the issuance of
subordinated debt in August 2000 we recorded an extraordinary charge of $1.1
million for early extinguishment of debt.

      CUMULATIVE EFFECT OF ACCOUNTING CHANGE. In 2000, we recorded a $2.3
million charge associated with a change in accounting principle. This charge
resulted from a beneficial conversion feature associated with warrants in
connection with the junior convertible subordinated debentures issued in 1999.
This was a result of a change during 2000 of the applicable accounting
literature.

LIQUIDITY AND CAPITAL RESOURCES - COMBINED OPERATIONS

      The discussion of liquidity and capital resources that follows reflects
our consolidated results and includes all subsidiaries. Our principal source of
liquidity is cash generated from operations. In addition, we may fund any
additional liquidity requirements through borrowings under our $100 million
revolving credit facility.

Operating Activities

      Our cash provided by operating activities was $38.6 million for the year
ended December 31, 2002. This amount consists of $2.2 million in net income,
$41.3 million in depreciation and amortization and $25.4 million of refinancing
related charges, partially offset by $9.7 million of asset sale gains (including
the sale of discontinued operations) and $23.5 million of changes in working
capital accounts. Excluding the payments for the termination of the interest
rate swaps of $17.1 million, which are classified as an operating activity
pursuant to SFAS No.104, cash flows from operations would have been $55.7
million, which is comparable to $55.0 million in 2001.

Investing Activities

      Cash used in investing activities was $150.1 million for the year ended
December 31, 2002 compared to $46.7 million in 2001. The increase of $103.4
million is primarily due to the use of cash for the purchase of ParkSierra and
StatesRail which totaled $89.4 million. In addition, capital expenditures for
the year were $65.7 million or $4.0 million higher than 2001. Asset sale
proceeds were $9.3 million for the year ended 2002 compared to $18.5 million in
2001. We expect capital expenditures in 2003 to be approximately $71 million,
including Ferronor, a discontinued operation. Ferronor's capital expenditures
were $2 million in 2002 and are expected to be $7.0 million in 2003.

Financing Activities

      Cash provided by financing activities was $79.3 million for 2002 compared
to $39.4 million in 2001. The increase of $39.9 million is primarily due to $50
million of borrowings to finance the acquisitions of ParkSierra and StatesRail
and an additional $50 million of borrowings in connection with the refinancing
of the senior credit facility in May 2002, partially offset by the new financing
costs totaling $15.4 million and common stock repurchases of $5.0 million. Under
our existing senior debt facilities, our principal repayments will be $3.8
million in 2003.

      In May 2002, we refinanced our senior credit facility. The new senior
credit facility requires 1% annual principal amortization and provides (1) a
$265 million U.S. Term Loan, (2) a $50 million Canadian Term Loan, (3) a $60
million Australian Term Loan and (4) a $100 million revolving credit facility
which includes $82.5 million of U.S. dollar denominated loans, $10 million of
Canadian dollar denominated loans and $7.5 million of Australian dollar
denominated loans. The U.S. Term Loan, the Canadian Term Loan and the Australian
Term Loan mature on May 23, 2009 and the revolver loans mature on May 23, 2008.
In addition, we may incur additional indebtedness under the credit facility
consisting of up to $100 million


                                       31
<PAGE>

aggregate principal amount of additional term loans subject to the satisfaction
of certain conditions set forth in the credit agreement including consent of the
Administrative Agent and the Joint Lead Arrangers under the credit facility and
the satisfaction of all financial covenants set forth in the credit facility on
a pro forma basis on the date of the additional borrowing.

      At our option, the new senior credit facilities bear interest at either
(1) the alternative base rate (defined as the greater of (i) UBS AG's prime rate
and (ii) the Federal Funds Effective Rate plus 0.50%) if such loan is a Term
Loan or U.S. Revolving Loan or the Canadian Prime Rate (defined as the greater
of (i) UBS AG's Canadian prime rate and (ii) the average rate for 30 day
Canadian Dollar bankers' acceptances plus 1.0% per annum) if such loan is a
Canadian revolving loan plus 1.00% for the revolving credit facilities and 1.50%
for the Term Loan facility, or (2) the reserve-adjusted LIBO rate (or, in the
case of Australian revolving loans, the BBSY Rate) plus 2.00% for the revolving
credit facility and 2.50% for the term loan facilities; provided, that the
additional amounts added to the alternative base rate and the LIBO rate for the
revolving credit facilities and the term loan facilities discussed above will be
subject to adjustment based on changes in our leverage ratio effective two
fiscal quarters after the closing of the new senior credit facilities. At
December 31, 2002 the interest rate on the term loan facilities was LIBOR plus
2.50%, or 4.00%. The default rate under the new senior credit facility is 2.0%
above the otherwise applicable rate. The U.S. Term Loan and the U.S. dollar
denominated revolver are collateralized by the assets of and guaranteed by
RailAmerica, Inc. and its U.S. subsidiaries, the Canadian Term Loan and the
Canadian dollar denominated revolver are collateralized by the assets of and
guaranteed by RailAmerica, Inc. and its U.S. and Canadian subsidiaries, and the
Australian Term Loan and the Australian dollar denominated revolver are
collateralized by the assets of and guaranteed by RailAmerica, Inc. and its U.S.
and Australian Subsidiaries. The assets of Ferronor, as well as any other
subsidiaries designated in the future as unrestricted subsidiaries, are not
pledged under this agreement. Ferronor has not guaranteed and any other
unrestricted subsidiaries are not required to guarantee any of the obligations
under the credit facility. The loans were provided by a syndicate of banks with
Morgan Stanley Senior Funding, Inc., as syndication agent, UBS AG, Stamford
Branch, as administrative agent and The Bank of Nova Scotia, as collateral
agent.

      In connection with the refinancing of the senior credit facility in May
2002, we terminated our interest rate swap agreements resulting in a cash
payment of $17.1 million. Additionally, as required under our new senior credit
facility, we entered into two step-up collars for a total notional amount of $75
million with an effective date of November 24, 2002 and expiring on November 24,
2004. Under the terms of these collars, the LIBOR component of our interest
rates can fluctuate within specified ranges. From November 24, 2002 through May
24, 2003, the floor and cap are 2% and 4.5%, from May 24, 2003 through November
24, 2003, the floor and cap are 2.5% and 4.75%, from November 24, 2003 through
May 24, 2004, the floor and cap are 3.5% and 5.5% and from May 24, 2004 through
November 24, 2004, the floor and cap are 4% and 5.75%. The collars qualify and
are accounted for as cash flow hedges under SFAS No. 133. As of December 31,
2002, the fair value of these collars was a net liability of $1.9 million.

      On November 8, 2002, we entered into two interest rate swaps for a total
amount of $300 million for the period commencing December 5, 2002 through
December 5, 2003. Under the terms of the interest rate swaps, the LIBOR
component of our interest rate is fixed at 1.62% on $300 million of debt. The
swaps qualify and are accounted for as cash flow hedges under SFAS No. 133. At
December 31, 2002, the fair value of these swaps was a net liability of $0.6
million.

      The May 2002 senior credit facility and the indenture governing our senior
subordinated notes include numerous covenants imposing significant financial and
operating restrictions on RailAmerica, Inc. The covenants limit our ability to,
among other things: incur more debt or prepay existing debt, redeem or
repurchase our common stock, pay dividends or make other distributions, make
acquisitions or investments, use assets as security in other transactions, enter
into transactions with affiliates, merge or consolidate with others, dispose of
assets or use asset sale proceeds, create liens on our assets, make certain
payments or capital expenditures and extend credit. In addition, the senior
credit facility also contains financial covenants that require us to meet a
number of financial ratios and tests. Our ability to meet these ratios and tests
and to comply with other provisions of the new senior credit facility can be
affected by events beyond our control. Failure to comply with the obligations in
the new senior credit facility could result in an event of default under the new
senior credit facility, which, if not cured or waived, could permit acceleration
of the indebtedness or other indebtedness which could have a material adverse
effect on us. We were in compliance with each of these covenants as of December
31, 2002.

      In August 2000, RailAmerica Transportation Corp., our wholly-owned
subsidiary, sold units consisting of $130.0 million of 12-7/8% senior
subordinated notes due 2010 and warrants to purchase 1,411,414 shares of our
common stock. Our U.S. subsidiaries are guarantors of the senior subordinated
notes.


                                       32
<PAGE>

      In February 2000, we entered into a credit agreement and two bridge notes
in connection with the acquisition of RailTex and the refinancing of most of our
and RailTex's existing debt. The credit agreement provided (i) a $125 million
Term A loan, bearing interest at LIBOR plus 2.50% (4.44% at December 31, 2001),
(ii) a $205 million Term B loan, initially bearing interest at LIBOR plus 3.25%
(5.19% at December 31, 2001), and (iii) a $50 million revolving credit facility
which includes $30 million of U.S. dollar denominated loans, $10 million of
Canadian dollar denominated loans and $10 million of Australian dollar
denominated loans with an interest rate of LIBOR plus 2.50%. All of the capital
stock of RailAmerica, Inc.'s U.S. subsidiaries, 65% of the capital stock of the
Canadian and Australian subsidiaries and the majority of the assets of
RailAmerica, Inc.'s subsidiaries served as collateral for the senior credit
facilities. In January 2002, in connection with the acquisitions of ParkSierra
and StatesRail, we borrowed an additional $50 million under this senior credit
facility. The credit agreement and the two bridge notes have all been repaid.

      Our long-term business strategy includes the selective acquisition or
disposition of transportation-related businesses. Accordingly, we may require
additional equity and/or debt capital in order to consummate acquisitions or
undertake major business development activities. It is impossible to predict the
amount of capital that may be required for such acquisitions or business
development, and whether sufficient financing for such activities will be
available on terms acceptable to us, if at all.

      As of December 31, 2002, we had working capital of $20 million compared to
$30 million as of December 31, 2001. This decrease is primarily due to the
private placement of common stock in December 2001, in which we raised $51
million. These funds were subsequently used to fund the acquisitions of
ParkSierra and StatesRail in January 2002, thus decreasing our cash balance and
reducing our working capital balance. Our cash flows from operations and
borrowings under our credit agreements historically have been sufficient to meet
our ongoing operating requirements, capital expenditures for property, plant and
equipment, and to satisfy our debt service requirements.

      Two primary uses of the cash provided by our operations are capital
expenditures and debt service. The following table represents the minimum future
payments on our existing long-term debt and lease obligations:

<TABLE>
<CAPTION>
                                                                                2004 -     2006 -      After
                                                          TOTAL       2003       2005       2007        2007
                                                         --------    -------    -------    -------    --------
<S>                                                      <C>         <C>        <C>        <C>        <C>
            Long-term debt                               $385,701    $ 4,120    $ 8,300    $ 8,388    $364,893

            Subordinated debt                            $141,331    $     0    $21,107    $     0    $120,224

            Capital lease obligations                    $  1,620    $    80    $   492    $   648    $    400

            Operating lease obligations                  $ 97,970    $19,417    $33,701    $27,016    $ 17,836

            Long-term debt of discontinued operations    $ 20,840    $ 6,743    $ 5,248    $ 4,243    $  4,606

            Total contractual cash obligations           $647,462    $30,360    $68,848    $40,295    $507,959
</TABLE>

Common Stock Repurchases Program

      We occasionally repurchase our common stock under our share repurchase
program. These repurchases are limited to $5 million per year pursuant to our
borrowing arrangements. In July 2002, our board of directors authorized a 2
million share repurchase program through December 31, 2003, subject to
restrictions under our borrowing arrangements. During the year ended December
31, 2002, we repurchased 530,500 shares at a total cost of $4.9 million.

RECENT ACCOUNTING PRONOUNCEMENTS

      On January 1, 2002, we adopted SFAS No. 142, "Goodwill and Other
Intangible Assets" and SFAS No. 144, "Accounting for the Impairment or Disposal
of Long-Lived Assets." Under SFAS No. 142, goodwill and identifiable intangible
assets with an indefinite life will no longer be amortized; however, both
goodwill and other intangible assets will need to be tested at least annually
for impairment. SFAS No. 144 addresses financial accounting and reporting for
the impairment of long-lived assets, excluding goodwill and intangible assets,
to be held and used or disposed of. While the adoption of these pronouncements
did


                                       33
<PAGE>

not have a material impact on our consolidated financial statements, SFAS No.
144 will require us to report the results of operations of a railroad that has
been disposed of or is being held for disposal in discontinued operations.

      In August 2001, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 143 is
effective for the fiscal year beginning January 1, 2003, and requires us to
record the fair value of a liability for an asset retirement obligation in the
period in which it is incurred. We believe the adoption of this pronouncement
will not have a material impact on our financial statements.

      In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." SFAS No. 145, requires that debt extinguishments used as part of a
company's risk management strategy should not be classified as an extraordinary
item. The requirement to reclassify debt extinguishments is effective for fiscal
years beginning after May 15, 2002. We will adopt SFAS No. 145 on January 1,
2003 and reclassify $4.5 million and $0.2 million of extraordinary charges, net
of tax, to continuing operations in 2002 and 2001, respectively.

      In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146, which is effective
for exit or disposal activities initiated after December 31, 2002, requires that
a liability for a cost associated with an exit or disposal activity is
recognized at fair value when the liability is incurred rather than when
management commits to an exit or disposal plan. We believe the adoption of this
pronouncement will not have a material impact on our financial statements.

      In November 2002, the FASB issued Interpretation No. 45 ("FIN 45"),
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others: an interpretation of FASB
Statements No. 5, 57, and 107 and rescission of FASB Interpretation No. 34,"
which is effective for guarantees issued or modified after December 31, 2002.
This Interpretation addresses the disclosures to be made by a guarantor in its
interim and annual financial statements about its obligations under guarantees.
This Interpretation also clarifies the requirements related to the recognition
of a liability by a guarantor at the inception of a guarantee for the
obligations the guarantor has undertaken in issuing that guarantee. We believe
the adoption of this pronouncement will not have a material impact on our
financial statements.

      In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation-Transition and Disclosure." SFAS No. 148, which is
effective for fiscal years ending after December 15, 2002, provides alternative
methods of transition for voluntary changes to the fair value based method of
accounting for stock-based employee compensation and requires prominent
disclosure in both annual and interim financial statements about the method used
on reported results. The adoption of this pronouncement did not have a material
impact on our financial statements.

      In January 2003, the FASB issued Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities," which is effective immediately
for variable interest entities created after January 31, 2003, and applies in
the first interim period beginning after June 15, 2003 for variable interest
entities created before February 1, 2003. FIN 46 addresses the consolidation of
variable interest entities through identification of a primary beneficiary. We
believe the adoption of this pronouncement will not have a material impact on
our financial statements.

ITEM 7a. MARKET RISK

      We currently use derivatives to hedge against increases in fuel prices and
interest rates. We formally document the relationship between the hedging
instrument and the hedged items, as well as the risk management objective and
strategy for the use of the hedging instrument. This documentation includes
linking the derivatives that are designated as cash flow hedges to specific
assets or liabilities on the balance sheet, commitments or forecasted
transactions. When we enter into a derivative contract, and at least quarterly,
we assess whether the derivative item is effective in offsetting the changes in
fair value or cash flows. Any change in fair value resulting from
ineffectiveness, as defined by SFAS No. 133, is recognized in current period
earnings. For derivative instruments that are designated and qualify as cash
flow hedges, the effective portion of the gain or loss on the derivative
instrument is recorded in Accumulated Other Comprehensive Loss, a separate
component of Stockholders' Equity, and reclassified into earnings in the period
during which the hedge transaction affects earnings.

      We monitor our hedging positions and credit ratings of our counterparties
and do not anticipate losses due to counterparty nonperformance.


                                       34
<PAGE>

      FOREIGN CURRENCY. Our foreign currency risk arises from owning and
operating railroads in Canada, Chile and Australia. As of December 31, 2002, we
had not entered into any currency hedging transactions to manage this risk. A
decrease in either the Canadian dollar or the Australian dollar would negatively
impact our reported revenues and earnings for the affected period. During 2002,
the Australian dollar increased 5% while the Canadian dollar declined 1%. This
led to a net increase of $3.7 million in reported revenues and $0.1 million
increase in reported operating income, in 2002, compared to 2001. A majority of
our revenue and debt in Chile is denominated to the U.S. dollar and therefore,
we are not negatively impacted by a decline in the value of the Chilean peso.

      INTEREST RATES. Our interest rate risk results from issuing variable rate
debt obligations, as an increase in interest rates would result in lower
earnings and increased cash outflows.

      In June 2002, as required under our new senior credit facility, we entered
into two step-up collars for a total notional amount of $75 million with an
effective date of November 24, 2002 and expiring on November 24, 2004. Under the
terms of these collars, the LIBOR component of our interest rates can fluctuate
within specified ranges. From November 24, 2002 through May 24, 2003, the floor
and cap are 2% and 4.5%, from May 24, 2003 through November 24, 2003, the floor
and cap are 2.5% and 4.75%, from November 24, 2003 through May 24, 2004, the
floor and cap are 3.5% and 5.5% and from May 24, 2004 through November 24, 2004,
the floor and cap are 4% and 5.75%. The collars qualify and are accounted for as
cash flow hedges under SFAS No. 133. On November 8, 2002, we entered into two
interest rate swaps for a total amount of $300 million for the period commencing
December 5, 2002 through December 5, 2003. The swaps qualify and are accounted
for as cash flow hedges under SFAS No. 133. Under the terms of the interest rate
swaps, the LIBOR component of our interest rate is fixed at 1.62% on $300
million of debt.

      DIESEL FUEL. We are exposed to fluctuations in diesel fuel prices, as an
increase in the price of diesel fuel would result in lower earnings and
increased cash outflows. Fuel costs represented 7% of total revenues during the
year ended December 31, 2002. Due to the significance of fuel costs to our
operations and the historical volatility of fuel prices, we maintain a program
to hedge against fluctuations in the price of our diesel fuel purchases. Each
one-cent change in the price of fuel would result in a $0.4 million change in
fuel expense on an annual basis.

      The fuel-hedging program includes the use of derivatives that are
accounted for as cash flow hedges. As of December 31, 2002, we had entered into
fuel swap agreements to hedge the equivalent of 750,000 gallons per month in
2003 (35% of estimated North American consumption) at an average price of 66
cents per gallon, excluding transportation and taxes.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

      The Consolidated Financial Statements of RailAmerica, the accompanying
notes thereto and the independent accountants' reports 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.


                                       35
<PAGE>

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

      Information concerning directors, executive officers and nominees is
incorporated by reference from our definitive proxy statement relating to our
2003 Annual Meeting of Stockholders to be filed with the Commission pursuant to
Regulation 14A on or before April 30, 2003.

ITEM 11. EXECUTIVE COMPENSATION

      Information concerning executive compensation is incorporated by reference
from our definitive proxy statement relating to our 2003 Annual Meeting of
Stockholders to be filed with the Commission pursuant to Regulation 14A on or
before April 30, 2003.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
         RELATED STOCKHOLDER MATTERS

      Information concerning security ownership and securities issuable under
equity compensation plans is incorporated by reference from our definitive proxy
statement relating to our 2003 Annual Meeting of Stockholders to be filed with
the Commission pursuant to Regulation 14A on or before April 30, 2003.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

      Information concerning certain relationships and related transactions is
incorporated by reference from our definitive proxy statement relating to our
2003 Annual Meeting of Stockholders to be filed with the Commission pursuant to
Regulation 14A on or before April 30, 2003.

ITEM 14. CONTROLS AND PROCEDURES

      As of a date within 90 days of this report, our chief executive officer
and chief financial officer evaluated the effectiveness of the design and
operation of our disclosure controls and procedures.

      Management and PricewaterhouseCoopers have advised the audit committee of
our board of directors that during the course of the audit, they noted
deficiencies in internal controls of our Australian subsidiary relating to
procedures for determining which costs spent on improvements to track structure,
locomotives and freight cars qualified for capitalization under our policies.
PricewaterhouseCoopers has advised the audit committee that these internal
control deficiencies constitute a material weakness as defined by Statement of
Auditing Standards No. 60. We have performed substantial additional procedures
designed to ensure that these internal control deficiencies do not lead to
material misstatements in our consolidated financial statements and to enable
the completion of PricewaterhouseCoopers' audit of our consolidated financial
statements, notwithstanding the presence of the internal control weaknesses
noted above.

      We are in the process of implementing corrective actions as of the date of
this annual report on Form 10-K to address these issues, and are evaluating
implementation of the following corrective actions as well as additional
procedures:

o     Reorganization of the financial accounting responsibilities;

o     Developing a pre-approval process for capital projects in Australia
      similar to our process in the United States;

o     Modifying the software which tracks individual jobs on our locomotives and
      railcars to provide better information to the accounting department; and

o     Instituting new requirements for invoicing and documentation of outsourced
      track maintenance and improvements in Australia.

      Based upon this evaluation and the additional procedures performed, our
CEO and CFO concluded that the disclosure controls and procedures are effective
in ensuring that information required to be disclosed in reports we file under
the Securities Exchange Act of 1934, as amended, is recorded, processed,
summarized and reported within the time periods specified by rules and forms
promulgated under that act. We will continue to evaluate the effectiveness of
our disclosure controls and internal controls and procedures on an ongoing
basis, and will take further action as appropriate.


                                       36
<PAGE>

PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a)   Exhibits

      2.1   Amended and Restated Agreement and Plan of Merger, dated as of
            November 26, 2001 by and among RailAmerica, Inc., ParkSierra
            Acquisition Corp. and ParkSierra Corp. (30)

      2.2   Merger Agreement, dated as of October 12, 2001, among RailAmerica,
            Inc., StatesRail Acquisition Corp. and StatesRail, Inc. (32)

      2.3   Stock Purchase Agreement, dated October 12, 2001, among RailAmerica,
            Inc., New StatesRail Holdings, Inc., StatesRail L.L.C., West Texas
            and Lubbock Railroad Company, Inc. and the Members of StatesRail
            L.L.C. (32)

      2.4   Letter Agreement, dated as of October 12, 2001 between the parties
            to Exhibits 2.2 and 2.3 above. (32)

      3.1   Amended and Restated Certificate of Incorporation of Registrant, as
            amended (2)

      3.2   By-laws of RailAmerica, Inc. (1)

      3.3   Certificate Of Amendment to Amended and Restated Certificate of
            Incorporation of RailAmerica, Inc. (31)

      4.1   Form of Common Stock Purchase Rights Agreement, dated as of January
            6, 1998, between RailAmerica, Inc. and American Stock Transfer &
            Trust Company (6)

      4.2   Certificate of Designation of Series A Convertible Redeemable
            Preferred Stock (19)

      4.3   Third Amendment to the Rights Agreement, dated as of January 13,
            2000, between RailAmerica, Inc. and American Stock Transfer & Trust
            Company (10)

      4.6   Fourth Amendment to the Rights Agreement, dated as of April 13,
            2000, between RailAmerica, Inc. and American Stock Transfer and
            Trust Company (21)

      4.7   Waiver and Supplemental Agreement, dated as of April 13, 2000, among
            RailAmerica, Inc. and EGS Associates, L.P., EGS Partners, L.L.C.,
            BEV Partners, L.P., Jonas Partners, L.P., EGS Management, L.L.C.,
            William Ehrman, Frederic Greenberg, Jonas Gerstl and Juli Oliver
            (22)

      4.8   Indenture, dated as of August 14, 2000, between RailAmerica
            Transportation Corp., the Guarantors named therein and Wells Fargo
            Bank Minnesota, N.A. (24)

      4.9   Warrant Agreement, dated August 14, 2000, between RailAmerica, Inc.
            and Wells Fargo Bank Minnesota, N.A. (26)

      4.10  Warrant Registration Rights Agreement, dated August 14, 2000,
            between RailAmerica, Inc., Donaldson, Lufkin & Jenrette Securities
            Corporation, Barclays Bank PLC and Scotia Capital (USA) Inc. (27)

      4.11  Form of Placement Agent Warrant, dated as of June 2001. (32)

      4.12  Form of Placement Agent Warrant, dated as of December 2001. (32)

      4.13  First Supplemental Indenture (32)

      4.14  Second Supplemental Indenture (32)


                                       37
<PAGE>

      10.43 Stock Option Agreement, dated November 11, 1994, between
            RailAmerica, Inc. and Gary O. Marino (7)+

      10.45 RailAmerica, Inc. 1995 Non-Employee Director Stock Option Plan (2)

      10.46 RailAmerica, Inc. 1995 Employee Stock Purchase Plan (2)

      10.47 RailAmerica, Inc. Corporate Senior Executive Bonus Plan (2)+

      10.59 RailAmerica, Inc. Nonqualified Deferred Compensation Trust (5)+

      10.60 Nonqualified Deferred Compensation Agreement between RailAmerica,
            Inc. and Gary O. Marino (5)+

      10.63 RailAmerica, Inc. 1998 Executive Incentive Compensation Plan (7)+

      10.80 Form of Change in Control Agreements between RailAmerica, Inc. and
            certain executive officers (32)

      10.81 Service Agreement, dated April 4, 2001, between RailAmerica, Inc.
            and Marinus van Onselen and first amendment thereto. (32)

      10.82 Amended and Restated Executive Employment Agreement, dated as of
            January 1, 2002, between RailAmerica, Inc. and Gary O. Marino. (32)

      10.83 Amended and Restated Executive Employment Agreement, dated as of
            January 1, 2002, between RailAmerica, Inc. and Donald D. Redfearn.
            (32)

      10.84 Employment Agreement, dated as of January 1, 2002, between
            RailAmerica, Inc. and Gary M. Spiegel. (32)

      10.85 Credit agreement, dated as of May 23, 2002 among RailAmerica, Inc.,
            Palm Beach Rail Holdings, Inc., RailAmerica Transportation Corp., as
            borrower, RailAmerica Canada Corp., as the Canadian term Borrower,
            Railink Ltd., as the Canadian revolver Borrower, RailAmerica
            Australia Finance Pty., Ltd., as the Australian Term Borrower,
            Freight Victoria Limited and RailAmerica Australia Pty., Ltd., as
            the Australian Revolver Borrowers, various financial institutions
            from time to time parties hereto, as the lenders, UBS Warburg LLC
            and Morgan Stanley Senior Funding, Inc., as Joint Lead Arrangers and
            Bookrunners, Morgan Stanley Denior Funding, Inc., as Syndication
            Agent for the lenders, UBS AG, Stamford Branch, as the
            Administrative Agent for the lenders, The Bank of Nova Scotia , as
            Collateral Agent for the lenders, and The Bank of Nova Scotia and
            Credit Lyonnais New York Branch, as the Document Agents for the
            lenders. (33)

      10.86 Amendment No. 1 to Credit Agreement

      10.87 Deferred Compensation Plan, as amended

      10.88 Adoption Agreement relating to Deferred Compensation Plan, as
            amended

      21.1  Subsidiaries of Registrant

      23.1  Consent of PricewaterhouseCoopers LLP

      99.1  Principal Executive Officer Certification Pursuant to 18 U.S.C.
            Section 1350, as Adopted Pursuant to Section 906 of The
            Sarbanes-Oxley Act of 2002.

      99.2  Principal Financial Officer Certification Pursuant to 18 U.S.C.
            Section 1350, as Adopted Pursuant to Section 906 of The
            Sarbanes-Oxley Act of 2002.


                                       38
<PAGE>

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

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

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

(6)   Incorporated by reference to exhibit No. 4.1 filed as part of RailAmerica,
      Inc.'s Registration Statement on Form 8-A, filed with the Securities and
      Exchange Commission on January 8, 1998.

(7)   Incorporated by reference to the same exhibit number filed as part of
      RailAmerica, Inc.'s Form 10-Q for the quarter ended March 31, 1998, filed
      with the Securities and Exchange Commission on May 14, 1998.

(10)  Incorporated by reference to exhibit 4.1 filed as part of RailAmerica,
      Inc.'s Form 8-K as of January 13, 2000, filed with the Securities and
      Exchange Commission on January 26, 2000.

(12)  Incorporated by reference to exhibit 10.2 filed as part of RailAmerica,
      Inc.'s Form 8-K as of April 30, 1999, filed with the Securities and
      Exchange Commission on May 18, 1999.

(19)  Incorporated by reference to the exhibit of the same number filed as part
      of RailAmerica, Inc.'s Form 10-K for the year ended December 31, 1998
      filed with the Securities and Exchange Commission on March 31, 1999.

(20)  Incorporated by reference to the exhibit of the same number filed as part
      of RailAmerica, Inc.'s Form 10-K for the year ended December 31, 1999,
      filed with the Securities and Exchange Commission on March 30, 2000.

(21)  Incorporated by reference to Exhibit 4.1 filed as part of RailAmerica,
      Inc.'s Form 8-K, dated April 13, 2000.

(22)  Incorporated by reference to Exhibit 4.2 filed as part of RailAmerica,
      Inc.'s Form 8-K, dated April 13, 2000.

(24)  Incorporated by reference to the Exhibit 4.1 filed as part of RailAmerica,
      Inc.'s Registration Statement on Form S-4, Registration No. 333-45196.

(26)  Incorporated by reference to the Exhibit 4.1 filed as part of RailAmerica,
      Inc.'s Registration Statement on Form S-3, Registration No. 333-45200.

(27)  Incorporated by reference to the Exhibit 4.2 filed as part of RailAmerica,
      Inc.'s Registration Statement on Form S-3, Registration No. 333-45200.

(30)  Incorporated by reference to the Annex A, filed as part of RailAmerica,
      Inc.'s Registration Statement on Form S-4, Registration No. 333-75290.

(31)  Incorporated by reference to the same exhibit number filed as part of
      RailAmerica, Inc.'s Form 10-K for the year ended December 31, 2000, filed
      with the Securities and Exchange Commission on April 2, 2001.

(32)  Incorporated by reference to the same exhibit number filed as part of
      RailAmerica, Inc.'s Form 10-K for the year ended December 31, 2001, filed
      with the Securities and Exchange Commission on April 1, 2002.

(33)  Incorporated by reference to the same exhibit number filed as part of
      RailAmerica, Inc.'s Form 10-Q for the quarter ended June 30, 2002, filed
      with the Securities and Exchange Commission on August 14, 2002.

+     Executive Compensation Plan or Arrangement.

(b)   Reports on Form 8-K.

      Registrant filed no reports on Form 8-K during the fourth quarter of the
      year ended December 31, 2002.


                                       39
<PAGE>

                                   SIGNATURES

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

                                        RAILAMERICA, INC.


                                        By: /s/ GARY O. MARINO
                                            --------------------
                                            Gary O. Marino, Chairman, President
                                            and Chief Executive Officer


                                        By: /s/ MICHAEL J. HOWE
                                            ---------------------
                                            Michael J. Howe, Senior Vice
                                            President and Chief Financial
                                            Officer (Principal Financial
                                            Officer)


                                        By: /s/ ROBERT J. RABIN
                                            ---------------------
                                            Robert J. Rabin, Vice President and
                                            Corporate Controller (Principal
                                            Accounting Officer)

                                        Dated March 27, 2003

      In accordance with the Securities Exchange Act of 1934, this report has
been signed below by the following persons on behalf of the registrant 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 27, 2003
------------------------    Officer and Director
Gary O. Marino


/s/ DONALD D. REDFEARN      Chief Administrative Officer, Executive      March 27, 2003
------------------------    Vice President, Secretary and Director
Donald D. Redfearn


/s/ JOHN H. MARINO          Assistant Secretary and Director             March 27, 2003
------------------------
John H. Marino


/s/ DOUGLAS R. NICHOLS      Director                                     March 27, 2003
------------------------
Douglas R. Nichols


/s/ RICHARD RAMPELL         Director                                     March 27, 2003
------------------------
Richard Rampell


/s/ CHARLES SWINBURN        Director                                     March 27, 2003
------------------------
Charles Swinburn


/s/ JOHN M. SULLIVAN        Director                                     March 27, 2003
------------------------
John M. Sullivan


/s/ FERD C. MEYER, JR.      Director                                     March 27, 2003
------------------------
Ferd C. Meyer, Jr.


/s/ WILLIAM G. PAGONIS      Director                                     March 27, 2003
------------------------
William G. Pagonis
</TABLE>


                                       40
<PAGE>

                   CERTIFICATE OF THE CHIEF EXECUTIVE OFFICER

I, Gary O. Marino, certify that:

1.    I have reviewed this annual report on Form 10-K of RailAmerica, Inc.;

2.    Based on my knowledge, this annual report does not contain any untrue
      statement of a material fact or omit to state a material fact necessary to
      make the statements made, in light of the circumstances under which such
      statements were made, not misleading with respect to the period covered by
      this annual report;

3.    Based on my knowledge, the financial statements, and other financial
      information included in this annual report, fairly present in all material
      respects the financial condition, results of operations and cash flows of
      the registrant as of, and for, the periods presented in this annual
      report;

4.    The registrant's other certifying officers and I are responsible for
      establishing and maintaining disclosure controls and procedures (as
      defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
      have:

      i)    Designed such disclosure controls and procedures to ensure that
            material information relating to the registrant, including its
            consolidated subsidiaries, is made known to us by others within
            those entities, particularly during the period in which this annual
            report is being prepared;

      ii)   Evaluated the effectiveness of the registrant's disclosure controls
            and procedures as of a date within 90 days prior to the filing date
            of this annual report (the "Evaluation Date"); and

      iii)  Presented in this annual report our conclusions about the
            effectiveness of the disclosure controls and procedures based on our
            evaluation as of the Evaluation Date;

5.    The registrant's other certifying officers and I have disclosed, based on
      our most recent evaluation, to the registrant's auditors and the audit
      committee of the registrant's board of directors (or persons performing
      the equivalent functions):

      i)    All significant deficiencies in the design or operation of internal
            controls which could adversely affect the registrant's ability to
            record, process, summarize and report financial data and have
            identified for the registrant's auditors any material weaknesses in
            internal controls; and

      ii)   Any fraud, whether or not material, that involves management or
            other employees who have a significant role in the registrant's
            internal controls; and

6.    The registrant's other certifying officers and I have indicated in this
      annual report whether or not there were significant changes in internal
      controls or in other factors that could significantly affect internal
      controls subsequent to the date of our most recent evaluation, including
      any corrective actions with regard to significant deficiencies and
      material weaknesses.


/s/ Gary O. Marino
----------------------------
Gary O. Marino
Chief Executive Officer
Date: March 27, 2003


                                       41
<PAGE>

                   CERTIFICATE OF THE CHIEF FINANCIAL OFFICER

I, Michael J. Howe, certify that:

1.    I have reviewed this annual report on Form 10-K of RailAmerica, Inc.;

2.    Based on my knowledge, this annual report does not contain any untrue
      statement of a material fact or omit to state a material fact necessary to
      make the statements made, in light of the circumstances under which such
      statements were made, not misleading with respect to the period covered by
      this annual report;

3.    Based on my knowledge, the financial statements, and other financial
      information included in this annual report, fairly present in all material
      respects the financial condition, results of operations and cash flows of
      the registrant as of, and for, the periods presented in this annual
      report;

4.    The registrant's other certifying officers and I are responsible for
      establishing and maintaining disclosure controls and procedures (as
      defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
      have:

      i)    Designed such disclosure controls and procedures to ensure that
            material information relating to the registrant, including its
            consolidated subsidiaries, is made known to us by others within
            those entities, particularly during the period in which this annual
            report is being prepared;

      ii)   Evaluated the effectiveness of the registrant's disclosure controls
            and procedures as of a date within 90 days prior to the filing date
            of this annual report (the "Evaluation Date"); and

      iii)  Presented in this annual report our conclusions about the
            effectiveness of the disclosure controls and procedures based on our
            evaluation as of the Evaluation Date;

5.    The registrant's other certifying officers and I have disclosed, based on
      our most recent evaluation, to the registrant's auditors and the audit
      committee of the registrant's board of directors (or persons performing
      the equivalent functions):

      ii)   All significant deficiencies in the design or operation of internal
            controls which could adversely affect the registrant's ability to
            record, process, summarize and report financial data and have
            identified for the registrant's auditors any material weaknesses in
            internal controls; and

      ii)   Any fraud, whether or not material, that involves management or
            other employees who have a significant role in the registrant's
            internal controls; and

6.    The registrant's other certifying officers and I have indicated in this
      annual report whether or not there were significant changes in internal
      controls or in other factors that could significantly affect internal
      controls subsequent to the date of our most recent evaluation, including
      any corrective actions with regard to significant deficiencies and
      material weaknesses.


/s/ Michael J. Howe
----------------------------
Michael J. Howe
Chief Financial Officer
Date: March 27, 2003


                                       42
<PAGE>

                       RAILAMERICA, INC. AND SUBSIDIARIES
                          INDEX OF FINANCIAL STATEMENTS

The following consolidated financial statements of RailAmerica, Inc. and
Subsidiaries are referred to in Item 8:

                                                                         PAGES
                                                                         -----

Report of Independent Certified Public Accountants................     F-2

Consolidated Balance Sheets - December 31, 2002 and 2001..........     F-3

Consolidated Statements of Income - For the Years Ended
       December 31, 2002, 2001 and 2000...........................     F-4

Consolidated Statements of Stockholders' Equity - For the Years
       Ended December 31, 2002, 2001 and 2000.....................     F-5

Consolidated Statements of Cash Flows - For the Years Ended
       December 31, 2002, 2001 and 2000...........................     F-6

Notes to Consolidated Financial Statements........................     F-7-F-36


                                      F-1
<PAGE>

               REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

To the Stockholders and Board of Directors of
RailAmerica, Inc.:

In our opinion, the consolidated financial statements listed in the accompanying
index present fairly, in all material respects, the financial position of
RailAmerica, Inc. and its subsidiaries at December 31, 2002 and 2001, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2002 in conformity with accounting principles
generally accepted in the United States of America. 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 of these statements in accordance with auditing standards
generally accepted in the United States of America, which 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, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

As described in Note 14, the Company changed its method of accounting for
derivative instruments and hedging activities in 2001.


/s/ PricewaterhouseCoopers LLP

PricewaterhouseCoopers LLP

Miami, Florida
March 3, 2003


                                      F-2
<PAGE>

                       RAILAMERICA, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
DECEMBER 31,                                                                       2002            2001
---------------------------------------------------------------------------------------------------------
                                                                                     (IN THOUSANDS,
                                                                                    EXCEPT SHARE DATA)
<S>                                                                             <C>             <C>
ASSETS
Current assets:
       Cash and cash equivalents ...........................................    $    28,887     $  59,761
       Restricted cash in escrow ...........................................            371         2,418
       Accounts and notes receivable, net of allowance of
           $406 and $571, respectively .....................................         63,463        54,278
       Current assets of discontinued operations ...........................          5,834            --
       Other current assets ................................................         22,429        14,204
                                                                                -----------     ---------
           Total current assets ............................................        120,984       130,661
Property, plant and equipment, net .........................................        904,253       738,775
Long-term assets of discontinued operations ................................         50,355            --
Other assets ...............................................................         30,961        21,732
                                                                                -----------     ---------
           Total assets ....................................................    $ 1,106,553     $ 891,168
                                                                                ===========     =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
       Current maturities of long-term debt ................................    $     4,200     $  24,484
       Accounts payable ....................................................         46,722        36,035
       Accrued expenses ....................................................         38,420        39,889
       Current liabilities of discontinued operations ......................         11,624            --
                                                                                -----------     ---------
           Total current liabilities .......................................        100,966       100,408
Long-term debt, less current maturities ....................................        383,121       277,203
Subordinated debt ..........................................................        141,331       144,988
Deferred income taxes ......................................................        150,159        96,822
Long-term liabilities of discontinued operations ...........................         27,283            --
Other liabilities ..........................................................         24,790        50,788
                                                                                -----------     ---------
                                                                                    827,650       670,209
                                                                                -----------     ---------
Commitments and contingencies

Stockholders' equity:
 Common stock, $0.001 par value, 60,000,000 shares authorized;
       31,879,602 shares issued and outstanding at December 31, 2002
       and 28,842,090 shares issued and outstanding at December 31, 2001 ...             32            29
Additional paid in capital .................................................        261,372       224,248
Retained earnings ..........................................................         48,055        45,902
Accumulated other comprehensive loss .......................................        (30,556)      (49,220)
                                                                                -----------     ---------
           Total stockholders' equity ......................................        278,903       220,959
                                                                                -----------     ---------

           Total liabilities and stockholders' equity ......................    $ 1,106,553     $ 891,168
                                                                                ===========     =========
</TABLE>

   The accompanying Notes are an integral part of the Consolidated Financial
                                  Statements.


                                      F-3
<PAGE>

                       RAILAMERICA, INC. AND SUBSIDIARIES
                        CONSOLIDATED STATEMENTS OF INCOME

<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,                                                 2002          2001          2000
------------------------------------------------------------------------------------------------------------------------
                                                                          (IN THOUSANDS, EXCEPT EARNINGS PER SHARE DATA)
<S>                                                                           <C>           <C>           <C>
Operating revenue ....................................................        $ 428,243     $ 347,546     $ 334,615
                                                                              ---------     ---------     ---------
Operating expenses:
  Transportation .....................................................          242,555       196,105       195,467
  Selling, general and administrative ................................           89,784        61,982        59,484
  Net gain on sale and impairment of assets ..........................           (9,155)       (6,422)      (11,184)
  Terminated motor carrier operations, net ...........................            1,396           263            88
  Depreciation and amortization ......................................           33,158        24,393        23,322
                                                                              ---------     ---------     ---------
    Total operating expenses .........................................          357,738       276,321       267,177
                                                                              ---------     ---------     ---------
    Operating income .................................................           70,505        71,225        67,438
Interest expense, including amortization costs of
  $4,686, $4,410, and $4,854, respectively ...........................          (43,441)      (50,714)      (53,912)
Other income (expense) ...............................................          (18,908)          178        (2,267)
                                                                              ---------     ---------     ---------
  Income from continuing operations before income taxes ..............            8,156        20,689        11,259
Provision for income taxes ...........................................            2,893         4,897         2,900
                                                                              ---------     ---------     ---------
  Income from continuing operations ..................................            5,263        15,792         8,359
Discontinued operations:
  Net gain on disposal of discontinued business (net of income
      taxes of $161 and $6,850, respectively) ........................              387            --        11,527
  Income (loss) from operations of discontinued business
      (net of income taxes of ($10), $108, and ($1,600),
      respectively) ..................................................              984         1,482        (1,977)
                                                                              ---------     ---------     ---------
  Income before extraordinary item and cumulative effect
      of accounting change ...........................................            6,634        17,274        17,909
  Extraordinary loss from early extinguishment of debt  (net of
      income taxes of ($2,167), ($142) and ($2,200), respectively) ...           (4,481)         (236)       (3,996)
  Cumulative effect of accounting change .............................               --            --        (2,252)
                                                                              ---------     ---------     ---------
       Net income ....................................................        $   2,153     $  17,038     $  11,661
                                                                              =========     =========     =========

Net income available to common stockholders ..........................        $   2,153     $  16,740     $  10,991
Basic earnings per common share:
  Continuing operations ..............................................        $    0.16     $    0.72     $    0.43
  Discontinued operations ............................................             0.04          0.07          0.52
  Extraordinary item .................................................            (0.13)        (0.01)        (0.22)
  Cumulative effect of accounting change .............................               --            --         (0.12)
                                                                              ---------     ---------     ---------
    Net income .......................................................        $    0.07     $    0.78     $    0.61
                                                                              =========     =========     =========
Diluted earnings per common share:
  Continuing operations ..............................................        $    0.16     $    0.66     $    0.42
  Discontinued operations ............................................             0.04          0.06          0.52
  Extraordinary item .................................................            (0.13)        (0.01)        (0.22)
  Cumulative effect of accounting change .............................               --            --         (0.12)
                                                                              ---------     ---------     ---------
    Net income .......................................................        $    0.07     $    0.71     $    0.60
                                                                              =========     =========     =========
Weighted average common shares outstanding:
  Basic ..............................................................           32,047        21,510        18,040
  Diluted ............................................................           32,620        25,350        18,267
</TABLE>

   The accompanying Notes are an integral part of the Consolidated Financial
                                  Statements.


                                      F-4
<PAGE>

                       RAILAMERICA, INC. AND SUBSIDIARIES
                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
                                                                            STOCKHOLDERS' EQUITY
                                                       --------------------------------------------------------------------------
                                                       Number of            Additional                       Other
FOR THE YEARS ENDED DECEMBER 31,                         Shares     Par      Paid-In      Retained     Comprehensive
2002, 2001 AND 2000                                      Issued    Value     Capital      Earnings     Income (Loss)      Total
---------------------------------------------------------------------------------------------------------------------------------
                                                                                 (IN THOUSANDS)
<S>                                                      <C>        <C>     <C>           <C>            <C>            <C>
Balance, January 1, 2000 ............................    12,611     $ 13    $  47,797     $ 18,171       $  3,486       $  69,467
Net income ..........................................        --       --           --       11,661             --          11,661
Cumulative translation adjustments ..................        --       --           --           --        (27,735)        (27,735)
                                                                                                                        ---------
          Total comprehensive loss ..................                                                                     (16,074)
                                                                                                                        ---------
Issuance of common stock ............................     6,652        7       60,917           --             --          60,924
Exercise of stock options ...........................        49       --          269           --             --             269
Conversion of redeemable securities .................       339       --        2,669           --             --           2,669
Warrants issued .....................................        --       --        8,841           --             --           8,841
Purchase of treasury stock ..........................        --       --       (1,992)          --             --          (1,992)
Retirement of treasury stock ........................    (1,028)      (1)           1           --             --              --
Preferred stock dividends and accretion .............        --       --           --         (670)            --            (670)
---------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2000 ..........................    18,623       19      118,502       29,162        (24,249)        123,434
Net income ..........................................        --       --           --       17,038             --          17,038
Cumulative effect of adopting SFAS 133, net .........        --       --           --           --         (4,388)         (4,388)
Change in market value of derivative
  instruments, net ..................................        --       --           --           --         (5,008)         (5,008)
Cumulative translation adjustments ..................        --       --           --           --        (15,575)        (15,575)
                                                                                                                        ---------
            Total comprehensive loss ................                                                                      (7,933)
                                                                                                                        ---------
Issuance of common stock ............................     8,176        8       89,728           --             --          89,736
Exercise of stock options ...........................     1,334        1        8,342           --             --           8,343
Tax benefit on exercise of options and
  Warrants ..........................................        --       --        2,633           --             --           2,633
Conversion of redeemable securities .................       882        1        7,030           --             --           7,031
Purchase of treasury stock ..........................      (173)      --       (1,987)          --             --          (1,987)
Preferred stock dividends and accretion .............        --       --           --         (298)            --            (298)
---------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2001 ..........................    28,842       29      224,248       45,902        (49,220)        220,959
Net income ..........................................        --       --           --        2,153             --           2,153

Change in market value of derivative
  instruments, net ..................................        --       --           --           --         (2,472)         (2,472)

Realized loss on derivatives designated as hedges,
   net of tax .......................................        --       --           --           --         10,737          10,737
Cumulative translation adjustments ..................        --       --           --           --         10,399          10,399
                                                                                                                        ---------
            Total comprehensive income ..............                                                                      18,664
                                                                                                                        ---------
Issuance of common stock ............................     3,485        3       41,144           --             --          41,147
Exercise of stock options ...........................        83       --          589           --             --             589
Tax benefit on exercise of options and warrants .....        --       --          109           --             --             109
Warrants issued .....................................        --       --          204           --             --             204
Purchase of treasury stock ..........................      (530)      --       (4,922)          --             --          (4,922)
---------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2002 ..........................    31,880     $ 32    $ 261,372     $ 48,055       $(30,556)      $ 278,903
---------------------------------------------------------------------------------------------------------------------------------
</TABLE>

   The accompanying Notes are an integral part of the Consolidated Financial
                                  Statements.


                                      F-5
<PAGE>

                       RAILAMERICA, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,                                  2002          2001          2000
----------------------------------------------------------------------------------------------------
                                                                           (IN THOUSANDS)
<S>                                                            <C>           <C>           <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ................................................    $   2,153     $  17,038     $  11,661
Adjustments to reconcile net income to net cash
  provided by operating activities:
    Depreciation and amortization .........................       41,251        32,011        34,566
    Financing costs .......................................       25,433           378         4,857
    Interest paid in kind .................................           --            --         5,806
    Equity interest in earnings of affiliate ..............           --            --          (554)
    Net gain on sale or disposal of properties ............       (9,705)       (6,434)      (29,554)
    Cumulative effect of accounting change ................           --            --         2,252
    Deferred income taxes .................................        2,218         2,926        (2,797)
    Other .................................................          742         1,350           995
    Changes in operating assets and liabilities, net of
      acquisitions and dispositions:
       Accounts receivable ................................        2,766         5,298         3,654
       Other current assets ...............................          673         8,587         2,455
       Accounts payable ...................................       (5,640)        1,172         2,239
       Accrued expenses ...................................       (9,919)      (12,485)        5,759
       Other assets and liabilities .......................      (11,365)        5,129         3,094
----------------------------------------------------------------------------------------------------
          Net cash provided by operating activities .......       38,607        54,970        44,433
----------------------------------------------------------------------------------------------------

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment .................      (65,682)      (61,675)      (62,499)
Proceeds from sale of properties and investments ..........        9,291        18,502        96,654
Acquisitions, net of cash acquired ........................      (89,359)           --      (148,922)
Change in restricted cash in escrow .......................        1,357         1,046        (4,539)
Deferred acquisition costs and other ......................       (5,680)       (4,577)       (2,711)
----------------------------------------------------------------------------------------------------
          Net cash used in investing activities ...........     (150,073)      (46,704)     (122,017)
----------------------------------------------------------------------------------------------------

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt ..................      457,870        85,590       549,235
Principal payments on long-term debt ......................     (358,639)     (142,088)     (448,107)
Sale of common stock ......................................           --        89,736            --
Proceeds from exercise of stock options ...................          386         8,343           234
Preferred stock dividends paid ............................           --          (241)         (289)
Purchase of treasury stock ................................       (4,922)       (1,987)       (1,992)
Deferred financing costs paid .............................      (15,383)           --       (18,980)
----------------------------------------------------------------------------------------------------
          Net cash provided by financing activities .......       79,312        39,353        80,101
----------------------------------------------------------------------------------------------------

Effect of exchange rates on cash ..........................        1,280          (948)       (1,025)
----------------------------------------------------------------------------------------------------
Net increase (decrease) in cash ...........................      (30,874)       46,671         1,492
Cash, beginning of period .................................       59,761        13,090        11,598
----------------------------------------------------------------------------------------------------
Cash, end of period .......................................    $  28,887     $  59,761     $  13,090
----------------------------------------------------------------------------------------------------
</TABLE>

   The accompanying Notes are an integral part of the Consolidated Financial
                                  Statements.


                                      F-6
<PAGE>

                       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 subsidiaries (the "Company"). All of
      RailAmerica's consolidated subsidiaries are wholly-owned except Empresa De
      Transporte Ferroviario S.A. ("Ferronor"), a Chilean railroad, in which the
      Company has a 55% equity interest. All intercompany balances and
      transactions have been eliminated. Certain prior period amounts have been
      reclassified to conform to the 2002 presentation.

      In January 2003, the Company announced its intention to sell its 55%
      equity interest in Ferronor, its Chilean railroad operations. As a result,
      Ferronor has been presented as a discontinued operation in the financial
      statements.

      The Company's principal operations consist of rail freight transportation
      in North America, Chile, Argentina and Australia.

      USE OF ESTIMATES

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

      CASH AND CASH EQUIVALENTS

      The Company considers all highly liquid instruments purchased with a
      maturity of three months or less at the date of purchase to be cash
      equivalents. The Company maintains its cash in demand deposit accounts,
      which at times may exceed insurance limits. As of December 31, 2002, the
      Company had approximately $28 million of cash in excess of insurance
      limits.

      PROPERTY, PLANT AND EQUIPMENT

      Property, plant and equipment, which are recorded at historical cost, are
      depreciated and amortized on a straight-line basis over their estimated
      useful lives. Costs assigned to property purchased as part of an
      acquisition are based on the fair value of such assets on the date of
      acquisition.

      The Company self-constructs portions of its track structure and rebuilds
      certain of its rolling stock. In addition to direct labor and material,
      certain indirect costs are capitalized. Expenditures which significantly
      increase asset values or extend useful lives are capitalized. Repairs and
      maintenance expenditures are charged to operating expense when the work is
      performed.

      The Company uses the group method of depreciation under which a single
      depreciation rate is applied to the gross investment in its track assets.
      Upon normal sale or retirement of track assets, cost less net salvage
      value is charged to accumulated depreciation and no gain or loss is
      recognized. The Company periodically reviews its assets for impairment by
      comparing the projected undiscounted cash flows of those assets to their
      recorded amounts. Impairment charges are based on the excess of the
      recorded amounts over their estimated fair value, as measured by the
      discounted cash flows.

      The Company incurs certain direct labor, contract service and other costs
      associated with the development and installation of internal-use computer
      software. Costs for newly developed software or significant enhancements
      to existing software are capitalized. Research, preliminary project,
      operations, maintenance and training costs are charged to operating
      expense when the work is performed.


                                      F-7
<PAGE>

                       RAILAMERICA, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

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

             Buildings and improvements                              20-33 years
             Railroad track                                          30-40 years
             Railroad track improvements                              3-10 years
             Locomotives, transportation and other equipment          5-30 years
             Office equipment and capitalized software                5-10 years

      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 statements 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. 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.

      REVENUE RECOGNITION

      The Company recognizes transportation revenue after the freight has been
      moved from origin to destination. Other revenue is recognized as service
      is performed.

      FOREIGN CURRENCY TRANSLATION

      The financial statements and transactions of the Company's foreign
      operations are maintained in their local currency, which is their
      functional currency, except for Chile, where the U.S. dollar is used as
      the functional currency. Where local currencies are used, assets and
      liabilities are translated at current exchange rates in effect at the
      balance sheet date. Translation adjustments, which result from the process
      of translating the financial statements into U.S. dollars, are accumulated
      in the cumulative translation adjustment account, which is a component of
      accumulated other comprehensive loss in stockholders' equity. Revenues and
      expenses are translated at the average exchange rate for each period.
      Gains and losses from foreign currency transactions are included in net
      income. At December 31, 2002, accumulated other comprehensive loss
      included ($29.4) million of cumulative translation adjustments.

      STOCK-BASED COMPENSATION

      As of December 31, 2002, the Company has three stock-based employee
      compensation plans. The Company accounts for those plans under the
      recognition and measurement principles of APB Opinion No. 25, "Accounting
      for Stock Issued to Employees," and related Interpretations. No
      stock-based employee compensation cost is reflected in net income, as all
      options granted under those plans had an exercise price equal to the
      market value of the underlying common stock on the date of grant. The
      following table illustrates the effect on net income and earnings per
      share if the Company had applied the fair value recognition provisions of
      Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting
      for Stock -Based Compensation," to stock-based employee compensation.


                                      F-8
<PAGE>

                       RAILAMERICA, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

<TABLE>
<CAPTION>
                                                                                      Year Ended December 31,
                                                                              ----------------------------------------
                                                                                 2002           2001           2000
                                                                              ----------     ----------     ----------
<S>                                                                           <C>            <C>            <C>
      Net income, as reported ............................................    $    2,153     $   17,038     $   11,661
      Less: Total stock-based employee compensation determined
      under fair value based method for all awards, net of related tax
      effects ............................................................        (4,257)        (4,349)        (3,585)
                                                                              ----------     ----------     ----------
      Pro forma net income (loss) ........................................    $   (2,104)    $   12,689     $    8,076
                                                                              ==========     ==========     ==========
      Earnings (loss) per share:
          Basic-as reported ..............................................    $     0.07     $     0.78     $     0.61
                                                                              ----------     ----------     ----------
          Basic-pro forma ................................................    $    (0.07)    $     0.58     $     0.41
                                                                              ----------     ----------     ----------

          Diluted-as reported ............................................    $     0.07     $     0.71     $     0.60
                                                                              ----------     ----------     ----------
          Diluted-pro forma ..............................................    $    (0.07)    $     0.54     $     0.41
                                                                              ----------     ----------     ----------
</TABLE>

      RECENT ACCOUNTING PRONOUNCEMENTS

      On January 1, 2002, the Company adopted SFAS No. 142, "Goodwill and Other
      Intangible Assets" and SFAS No. 144, "Accounting for the Impairment or
      Disposal of Long-Lived Assets." Under SFAS No. 142, goodwill and
      identifiable intangible assets with an indefinite life will no longer be
      amortized; however, both goodwill and other intangible assets will need to
      be tested at least annually for impairment. SFAS No. 144 addresses
      financial accounting and reporting for the impairment of long-lived
      assets, excluding goodwill and intangible assets, to be held and used or
      disposed of. While the adoption of these pronouncements did not have a
      material impact on the Company's consolidated financial statements, SFAS
      No. 144 will require the Company to report the results of operations of a
      railroad that has been disposed of or is being held for disposal in
      discontinued operations.

      In August 2001, the Financial Accounting Standards Board ("FASB") issued
      SFAS No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 143
      is effective for the Company's fiscal year beginning January 1, 2003, and
      requires the Company to record the fair value of a liability for an asset
      retirement obligation in the period in which it is incurred. The Company
      believes the adoption of this pronouncement will not have a material
      impact on its financial statements.

      In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB
      Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and
      Technical Corrections." SFAS No. 145, requires that debt extinguishments
      used as part of a company's risk management strategy should not be
      classified as an extraordinary item. The requirement to reclassify debt
      extinguishments is effective for fiscal years beginning after May 15,
      2002. The Company will adopt SFAS No. 145 on January 1, 2003 and
      reclassify $4.5 million and $0.2 million of extraordinary charges, net of
      tax, to continuing operations in 2002 and 2001, respectively.

      In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
      Associated with Exit or Disposal Activities." SFAS No. 146, which is
      effective for exit or disposal activities initiated after December 31,
      2002, requires that a liability for a cost associated with an exit or
      disposal activity is recognized at fair value when the liability is
      incurred rather than when management commits to an exit or disposal plan.
      The Company believes the adoption of this pronouncement will not have a
      material impact on its financial statements.

      In November 2002, the FASB issued Interpretation No. 45 ("FIN 45"),
      "Guarantor's Accounting and Disclosure Requirements for Guarantees,
      Including Indirect Guarantees of Indebtedness of Others: an interpretation
      of FASB Statements No. 5, 57, and 107 and rescission of FASB
      Interpretation No. 34," which is effective for guarantees issued or
      modified after December 31, 2002. This Interpretation addresses the
      disclosures to be made by a guarantor in its interim and annual financial
      statements about its obligations


                                      F-9
<PAGE>

                       RAILAMERICA, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

      under guarantees. This Interpretation also clarifies the requirements
      related to the recognition of a liability by a guarantor at the inception
      of a guarantee for the obligations the guarantor has undertaken in issuing
      that guarantee. The Company believes the adoption of this pronouncement
      will not have a material impact on its financial statements.

      In December 2002, the FASB issued SFAS No. 148, "Accounting for
      Stock-Based Compensation-Transition and Disclosure." SFAS No. 148, which
      is effective for fiscal years ending after December 15, 2002, provides
      alternative methods of transition for voluntary changes to the fair value
      based method of accounting for stock-based employee compensation and
      requires prominent disclosure in both annual and interim financial
      statements about the method used on reported results. The adoption of this
      pronouncement did not have a material impact on its financial statements.

      In January 2003, the FASB issued Interpretation No. 46 ("FIN 46"),
      "Consolidation of Variable Interest Entities," which is effective
      immediately for variable interest entities created after January 31, 2003,
      and applies in the first interim period beginning after June 15, 2003 for
      variable interest entities created before February 1, 2003. FIN 46
      addresses the consolidation of variable interest entities through
      identification of a primary beneficiary. The Company believes the adoption
      of this pronouncement will not have a material impact on its financial
      statements.

2.    EARNINGS PER SHARE

      Basic earnings per share is calculated using the weighted average number
      of common shares outstanding during the year while income from continuing
      operations is reduced by preferred stock dividends and accretion.

      Diluted earnings per share is calculated using the sum of the weighted
      average number of common shares outstanding plus potentially dilutive
      common shares arising out of stock options, warrants and convertible
      securities. Options and warrants totaling 4.4 million, 1.2 million and 4.3
      million were excluded from the diluted earnings per share calculation for
      the years ended December 31, 2002, 2001 and 2000, respectively, as well as
      assumed conversion of $21.8 million (2.2 million shares) of convertible
      debentures in 2002 and $29.2 million (3.1 million shares) of convertible
      preferred stock and convertible debentures in 2000, as such securities
      were anti-dilutive.

      The following is a summary of the income from continuing operations
      available for common stockholders and weighted average shares outstanding
      (in thousands):

<TABLE>
<CAPTION>
                                                                      Year Ended December 31,
                                                                 --------------------------------
                                                                  2002        2001         2000
                                                                 -------    --------     --------
<S>                                                              <C>        <C>          <C>
            Income from continuing operations ...............    $ 5,263    $ 15,792     $  8,359
            Preferred stock dividends and accretion .........         --        (298)        (670)
                                                                 -------    --------     --------
            Income from continuing operations available
                to common stockholders (basic) ..............      5,263      15,494        7,689
            Interest on convertible debt ....................         --       1,044           --
            Preferred stock dividends and accretion .........         --         298           --
                                                                 -------    --------     --------
            Income from continuing operations available
                to common stockholders (diluted) ............    $ 5,263    $ 16,836     $  7,689
                                                                 =======    ========     ========

            Weighted average shares outstanding (basic) .....     32,047      21,510       18,040
            Assumed conversion:
                Options and warrants ........................        573       1,196          227
                Convertible debentures and preferred stock ..         --       2,644           --
                                                                 -------    --------     --------
            Weighted average shares outstanding (diluted) ...     32,620      25,350       18,267
                                                                 =======    ========     ========
</TABLE>


                                      F-10
<PAGE>

                       RAILAMERICA, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

3.    DISCONTINUED OPERATIONS

      In January 2003, the Company announced its intent to sell its 55% equity
      interest in Ferronor, its Chilean railroad operations. The Company expects
      to sell this ownership interest within the next twelve months, therefore,
      the results of operations are reported in discontinued operations, net of
      applicable income taxes, for all periods presented. In addition, the
      liabilities and assets of Ferronor have been reclassified as assets and
      liabilities of discontinued operations on the December 31, 2002 balance
      sheet (see Note 8 for description of long-term debt). Gains realized on
      the sale of this business will be reported in the period in which the
      divestiture is complete.

      The results of operations for Ferronor were as follows (in thousands):

<TABLE>
<CAPTION>
                                                     For the twelve months ended December 31,
                                                           2002        2001        2000
                                                         -------    --------     --------
<S>                                                      <C>        <C>          <C>
      Operating revenue                                  $22,619    $ 22,085     $ 22,873

      Income from discontinued operations                $   974    $  1,590     $  1,299
      Income tax benefit (provision)                          10        (108)         (50)
                                                         -------    --------     --------

      Income from discontinued operations, net of tax    $   984    $  1,482     $  1,249
                                                         =======    ========     ========
</TABLE>

      The major classes of assets and liabilities for Ferronor were as follows
      (in thousands):

                                                   For the twelve months ended
                                                           December 31,
                                                         2002        2001
                                                       -------     -------
      Accounts receivable, net                         $ 3,767     $ 3,496
      Inventory                                            939         976
      Other current assets                               1,128       1,215
                                                       -------     -------
         Total current assets                            5,834       5,687
      Property, plant and equipment, net                49,857      49,621
      Other assets                                         498         250
                                                       -------     -------
           Total assets                                $56,189     $55,558
                                                       =======     =======

      Current maturities of long- term debt            $ 6,743     $ 6,853
      Accounts payable                                   2,003       1,962
      Accrued expenses                                   2,878       3,413
                                                       -------     -------
          Total current liabilities                     11,624      12,228
      Long-term debt, less current maturities           12,427      17,230
      Subordinated debt                                  1,670       2,147
      Minority interest and other liabilities           13,186      11,709
                                                       -------     -------
           Total liabilities                           $38,907     $43,314
                                                       =======     =======

      In February 2000, the Company finalized its plan to sell its trailer
      manufacturing operations which consisted of Kalyn/Siebert, L.P. ("KSLP")
      and Kalyn/Siebert Canada ("KSC"). This business has been accounted for as
      a discontinued operation and results of operations have been excluded from
      continuing operations in the consolidated statements of operations for all
      periods presented.

      In December 2000, the Company sold KSLP for $32.5 million in cash,
      including $3.5 million which was in escrow at December 31, 2000. A gain of
      $21.0 million was recognized. In December 2000, the Company sold
      substantially all of the assets and business of KSC for $6 million in
      cash, including $2 million which


                                      F-11
<PAGE>

                       RAILAMERICA, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

3.    DISCONTINUED OPERATIONS, continued

      was in escrow at December 31, 2000. A loss of $2.6 million was recognized.
      As of December 31, 2002 and 2001, $0 and $2.2 million remained in escrow
      under terms of the sale agreements.

      Total revenue for the trailer manufacturing business was $34.7 million for
      the year ended December 31, 2000. Interest expense of $7.3 million was
      charged to the manufacturing business in 2000, representing the interest
      expense for the portion of the asset sale bridge note, which was repaid
      with the proceeds from the sale of the trailer manufacturing business.
      Loss before income taxes for the trailer manufacturing business was $4.9
      million for the year ended December 31, 2000.

4.    ACQUISITIONS

      On January 4, 2002, the Company acquired StatesRail, Inc. ("StatesRail"),
      a privately owned group of railroads headquartered in Dallas, Texas, which
      owned and operated eight railroads (including seven freight railroads and
      a tourist railroad in Hawaii) with 1,647 miles of track in 11 states.
      Total consideration for the acquisition was $90 million, consisting of $67
      million in cash and 1.7 million shares of the Company's common stock
      valued at $23 million. At December 31, 2002 there was $4.0 million in
      escrow outstanding relating to the purchase. The following table presents
      the balances of each major asset and liability caption of StatesRail as of
      the acquisition date (in thousands):

            StatesRail, Inc.                             January 4, 2002
            ----------------                             ---------------

            Cash                                            $    105
            Accounts receivable, net                           9,062
            Other current assets                               2,128
                                                            --------
                 Total current assets                         11,295
            Property, plant, and equipment, net              110,883
            Other assets                                       4,000
                                                            --------
                           Total assets                     $126,178
                                                            ========

            Current portion of long-term debt               $     60
            Accounts payable                                   4,622
            Accrued expenses                                   9,079
                                                            --------
                 Total current liabilities                    13,761
            Long-term debt                                     1,457
            Deferred income taxes                             25,907
                                                            --------
                           Total liabilities                $ 41,125
                                                            ========


                                      F-12
<PAGE>

                       RAILAMERICA, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

4.    ACQUISITIONS, continued

      On January 8, 2002, the Company acquired ParkSierra Corp. ("ParkSierra"),
      a privately owned group of railroads headquartered in Napa, California,
      which owned and operated three freight railroads with 703 miles of track
      in four western states. Total consideration for the acquisition was $48
      million, consisting of $23 million in cash and 1.8 million shares of the
      Company's common stock valued at $25 million. At December 31, 2002 there
      was $2.1 million in escrow outstanding relating to the purchase. The
      following table presents the balances of each major asset and liability
      caption of ParkSierra as of the acquisition date (in thousands):

            ParkSierra Corp.                             January 8, 2002
            ----------------                             ---------------

            Cash                                             $   899
            Accounts receivable, net                           3,793
            Other current assets                               1,664
                                                             -------
                 Total current assets                          6,356
            Property, plant, and equipment, net               62,226
                                                             -------
                           Total assets                      $68,582
                                                             =======

            Accounts payable                                 $ 1,937
            Accrued expenses                                   1,266
                                                             -------
                 Total current liabilities                     3,203
            Deferred income taxes                             19,055
            Other long-term liabilities                          108
                                                             -------
                           Total liabilities                 $22,366
                                                             =======

      The cash components of the StatesRail and ParkSierra acquisitions were
      financed through available cash and an additional $50 million term loan
      under the Company's prior senior credit facility (see Note 8).

      The results of operations of StatesRail and ParkSierra have been included
      in the Company's consolidated financial statements since the dates of
      their respective acquisitions.

      The following unaudited pro forma summary presents the consolidated
      results of operations for the Company as if the acquisitions of StatesRail
      and ParkSierra had occurred at the beginning of 2001 and does not purport
      to be indicative of what would have occurred had the acquisition been made
      as of that date or results which may occur in the future (in thousands,
      except per share data).

<TABLE>
<CAPTION>
                                                                     For the Twelve
                                                                      Months Ended
                                                                      December 31,
                                                                          2001
                                                                     --------------
<S>                                                                     <C>
            Operating revenue ......................................    $431,735
            Income from continuing operations ......................    $ 26,125
            Net income .............................................    $ 27,607
            Income from continuing operations per share - diluted ..    $   0.86
            Net income per share - diluted .........................    $   0.91
</TABLE>

      In January 2002, the Company submitted a bid for the acquisition of
      National Rail and FreightCorp, two government-owned railroads in
      Australia. Subsequently, the Company was notified that another entity was
      awarded the bid. Accordingly, the Company recorded a charge in selling,
      general and administrative expense during the year ended 2002 of $3.3
      million for the direct costs incurred in preparing, submitting and
      financing the bid.


                                      F-13
<PAGE>

                       RAILAMERICA, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

4.    ACQUISITIONS, continued

      On February 4, 2000, the Company acquired RailTex, Inc. for $128 million
      in cash, assumption of $105.3 million in debt and 6.6 million shares of
      the Company's common stock valued at $60.9 million. RailTex, the operator
      of 25 railroads with over 4,100 miles of rail lines in North America,
      became a wholly-owned subsidiary of the Company. As part of the purchase
      price and in accordance with EITF 95-3, "Recognition of Liabilities in
      Connection with a Purchase Business Combination", the Company recorded
      liabilities of $11.2 million which related to severance and change of
      control payments to former RailTex employees. The separation cost activity
      was as follows (in thousands):

                                                       Separation Costs
                                                       ----------------

            Balance February 2, 2000 ............          $ 11,200
            Payments ............................            (8,259)
                                                           --------
            Balance December 31, 2000 ...........             2,941
            Payments ............................            (1,154)
            Adjustment to purchase price ........              (729)
                                                           --------
            Balance December 31, 2001 ...........             1,058
            Payments ............................              (240)
                                                           --------
            Balance December 31, 2002 ...........          $    818
                                                           ========

      The RailTex acquisition was accounted for as a purchase and its results
      were included since the date of acquisition. On a pro forma basis
      (unaudited), as if the acquisition of RailTex had occurred on January 1,
      2000, the Company's operating revenue, income from continuing operations
      and diluted earnings per share would have been $372.0 million, $11.7
      million and $0.57, respectively. This does not purport to be indicative of
      what would have occurred had the acquisition been made on January 1, 2000
      or of results which may occur in the future.

5.    DISPOSITIONS

      In December 2002, the Company sold a right-of-way in South Carolina for
      total consideration of $4.25 million consisting of cash of $1.05 million
      and a short-term note of $3.2 million. The short-term note bears interest
      at 7.5% and is due on October, 31, 2003. The net gain on the transaction
      was $3.5 million.

      In May 2002, the Company sold the Texas New Mexico Railroad and certain
      operating assets for total consideration of $2.25 million consisting of
      cash of $0.55 million, a short-term note of $0.85 million and a long-term
      note of $0.85 million, resulting in a net gain of $0.8 million which is
      included in discontinued operations. The results of operations for the
      Texas New Mexico Railroad were not material. The short-term note accrued
      interest at 10% and was due on November 15, 2002 and the long-term note
      accrues interest at 7% and is due on May 24, 2007. In December 2002, $0.4
      million was paid on the short-term note, $0.15 million was added to the
      long-term note due on May 24, 2007 and the remaining balance of $0.3
      million was extended until December 11, 2006 at an interest rate of 7%.

      In March 2002, the Company sold the Georgia Southwestern Railroad and
      certain operating assets for total consideration of $7.1 million,
      including a long-term note for $0.8 million, resulting in a gain of $4.5
      million. The note receivable bears interest at 5% and is due February 28,
      2007. The results of operations for the Georgia Southwestern Railroad were
      not material.

      During 2001, the Company sold Dakota Rail, Inc. for $7.6 million,
      resulting in a net gain of $3.9 million. In addition, the Company sold
      other non-core assets resulting in a net gain of $2.5 million.

      During 2000, the Company sold several railroads and other non-core assets
      for total proceeds of $44.0 million, resulting in a net gain of $11.2
      million.


                                      F-14
<PAGE>

                       RAILAMERICA, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

6.    OTHER BALANCE SHEET DATA

      Other current assets consist of the following as of December 31, 2002 and
      2001 (in thousands):

                                                    2002       2001
                                                  -------    -------
            Track supplies ...................    $13,889    $ 7,702
            Prepaid expenses and other .......      8,540      6,502
                                                  -------    -------
                                                  $22,429    $14,204
                                                  =======    =======

      Accrued expenses consist of the following as of December 31, 2002 and 2001
      (in thousands):

                                                    2002       2001
                                                  -------    -------
            Accrued interest expense .........    $ 8,254    $ 8,382
            Accrued compensation and benefits       8,625      5,893
            Other accrued liabilities ........     21,541     25,614
                                                  -------    -------
                                                  $38,420    $39,889
                                                  =======    =======

7.    PROPERTY, PLANT AND EQUIPMENT

      Property, plant and equipment consist of the following as of December 31,
      2002 and 2001 (in thousands):

                                                  2002        2001
                                                --------    --------

            Land .............................  $182,004    $133,643
            Buildings and improvements .......    18,747      15,963
            Railroad track and improvements      638,743     504,491
            Locomotives, transportation and
             other equipment .................   152,426     147,489
                                                --------    --------
                                                 991,920     801,586
            Less: accumulated depreciation ...    87,667      62,811
                                                --------    --------
                                                $904,253    $738,775
                                                ========    ========

      The Company completed $8.4 million in locomotive sale/leaseback
      transactions in 2001.

8.    LONG-TERM DEBT AND LEASES

      Long-term debt consists of the following as of December 31, 2002 and 2001
      (in thousands):

<TABLE>
<CAPTION>
                                                                         2002        2001
                                                                       --------    --------
<S>                                                                    <C>         <C>
            Senior credit facilities, see below ...................    $375,000    $267,752
            Credit facility with Banco de Desarrollo (Ferronor) ...          --      11,678
            Credit facility with Banco Security (Ferronor) ........          --       7,325
            Other long-term debt ..................................      12,321      14,932
                                                                       --------    --------
                                                                        387,321     301,687
            Less current maturities ...............................       4,200      24,484
                                                                       --------    --------
                Long-term debt, less current maturities ...........    $383,121    $277,203
                                                                       ========    ========
</TABLE>

      In May 2002, the Company refinanced its senior credit facility, including
      $50 million borrowed in connection with the January 2002 acquisitions of
      ParkSierra and StatesRail. The new senior debt facility includes a $375
      million Term B loan facility consisting of $265 million of U.S. Term
      Loans, $50 million of Canadian Term Loans and $60 million of Australia
      Term Loans with a 1% annual principal amortization for seven years and the
      balance due in 2009, and a $100 million revolver with sub-limits equal to
      $82.5 million in the United States, $10 million in Canada and $7.5 million
      in Australia. The revolver is due in


                                      F-15
<PAGE>

                       RAILAMERICA, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

8.    LONG-TERM DEBT AND LEASES, continued

      2008. The interest rate on the Term B debt and the revolver is LIBOR +
      2.50% (4.00% at December 31, 2002). There were no outstanding balances
      under the revolver at December 31, 2002. The senior credit facility is
      collateralized by substantially all of the assets of the Company,
      excluding its investment in Ferronor.

      The senior credit facility and the indenture governing our senior
      subordinated notes include numerous covenants imposing significant
      financial and operating restrictions on the Company. The covenants limit
      the Company's ability to, among other things: incur more debt or prepay
      existing debt, redeem or repurchase the Company's common stock, pay
      dividends or make other distributions, make acquisitions or investments,
      use assets as security in other transactions, enter into transactions with
      affiliates, merge or consolidate with others, dispose of assets or use
      asset sale proceeds, create liens on the Company's assets, make certain
      payments or capital expenditures and extend credit. In addition, the
      senior credit facility also contains financial covenants that require the
      Company to meet a number of financial ratios and tests. The Company was in
      compliance with each of these covenants as of December 31, 2002.

      During the year ended December 31, 2001, the Company prepaid $19.1 million
      of long-term debt with cash received from the sale of common stock. Based
      on this reduction, an extraordinary charge of approximately $0.2 million,
      net of income tax of $0.1 million, was recorded in the third quarter of
      2001 from the write-off of deferred loan costs from this early
      extinguishment of debt.

      In February 2000, the Company entered into a credit agreement and two
      bridge notes in connection with the acquisition of RailTex and the
      refinancing of most of the Company's and RailTex's existing debt. The
      credit agreement provided (i) a $125 million Term A loan, bearing interest
      at LIBOR plus 2.50% (4.44% at December 31, 2001), (ii) a $205 million Term
      B loan, initially bearing interest at LIBOR plus 3.25% (5.19% at December
      31, 2001), and (iii) a $50 million revolving credit facility which
      included $30 million of U.S. dollar denominated loans, $10 million of
      Canadian dollar denominated loans and $10 million of Australian dollar
      denominated loans with an interest rate of LIBOR plus 2.50%. All of the
      capital stock of the Company's U.S. subsidiaries, 65% of the capital stock
      of the Canadian and Australian subsidiaries and the majority of the assets
      of the Company's subsidiaries served as collateral for the senior credit
      facilities. These term loans were repaid in connection with the May 2002
      refinancing discussed above.

      In connection with the February 2000 debt refinancing, the Company
      recorded an extraordinary charge of $2.2 million for early extinguishments
      of debt, net of income taxes.

      The aggregate annual maturities of long-term debt are as follows (in
      thousands):

            2003 .....................................      $  4,200
            2004 .....................................         4,344
            2005 .....................................         4,448
            2006 .....................................         4,493
            2007 .....................................         4,543
            Thereafter ...............................       365,293
                                                            --------
                                                            $387,321
                                                            ========

      During the years ended December 31, 2002, 2001 and 2000 interest of
      approximately $584, $668, and $1,257, respectively, was capitalized for
      on-going capital improvement projects.

      On May 4, 2000, the Company entered into two interest rate swap agreements
      for a total notional amount of $212.5 million. The agreements, which had a
      term of three years, required the Company to pay a fixed interest rate of
      7.23% while receiving a variable interest rate equal to the 90 day LIBOR
      rate. In May 2001, the interest rate swap agreements were extended for two
      years and the fixed pay rate was reduced to 6.723%. In connection with the
      refinancing in May 2002, the Company terminated these existing interest


                                      F-16
<PAGE>

                       RAILAMERICA, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

8.    LONG-TERM DEBT AND LEASES, continued

      rate swaps. Because these hedging instruments were designated as hedges of
      the cash flows under the previous senior debt facility, SFAS No. 133
      required the entire balance in other accumulated comprehensive loss to be
      charged to earnings. Accordingly, a charge of $17.1 million was recorded
      in other income (expense) during the year ended December 31, 2002. In
      addition, the Company recorded an extraordinary charge of $4.5 million,
      net of income taxes of $2.2 million, to write off the unamortized deferred
      loan costs relating to the prior senior credit facility, as of the date of
      refinancing.

      In connection with the refinancing of the senior credit facility in May,
      the Company, as required under its new senior credit facility, entered
      into two step-up collars for a total notional amount of $75 million with
      an effective date of November 24, 2002 and expiring on November 24, 2004.
      Under the terms of these collars, the LIBOR component of the Company's
      interest rates can fluctuate within specified ranges. From November 24,
      2002 through May 24, 2003, the floor and cap are 2% and 4.5%, from May 24,
      2003 through November 24, 2003, the floor and cap are 2.5% and 4.75%, from
      November 24, 2003 through May 24, 2004, the floor and cap are 3.5% and
      5.5% and from May 24, 2004 through November 24, 2004, the floor and cap
      are 4% and 5.75%. The collars qualify and are accounted for as cash flow
      hedges under SFAS No. 133. On November 8, 2002, the Company entered into
      two interest rate swaps for a total amount of $300 million for the period
      commencing December 5, 2002 through December 5, 2003. Under the terms of
      the interest rate swaps, the LIBOR component of the Company's interest
      rate is fixed at 1.62% on $300 million of debt. The swaps qualify and are
      accounted for as cash flow hedges under SFAS No. 133.

      Leases

      The Company has several equipment finance leases for equipment. Certain of
      these leases are accounted for as capital leases and are presented
      separately below. The minimum annual lease commitments at December 31,
      2002 are as follows (in thousands):

                                                  CAPITAL   OPERATING
                                                  LEASES      LEASES
                                                  -------   ---------

            2003 .............................    $    80    $19,417
            2004 .............................        204     17,238
            2005 .............................        288     16,463
            2006 .............................        311     14,425
            2007 .............................        337     12,591
            Thereafter .......................        400     17,836
                                                  -------    -------
                                                  $ 1,620    $97,970
                                                  =======    =======

      Rental expense under operating leases was approximately $24.4 million,
      $16.0 million, and $9.0 million for the years ended December 31, 2002,
      2001 and 2000, respectively.


                                      F-17
<PAGE>

                       RAILAMERICA, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

8.    LONG-TERM DEBT AND LEASES, continued

      The following table presents Ferronor's long-term debt balances, which are
      included in Long-term liabilities of discontinued operations in the
      balance sheet for the year ended December 31, 2002 (in thousands):

<TABLE>
<CAPTION>
                                                                         2002       2001
                                                                       -------    -------
<S>                                                                    <C>        <C>
            Credit facility with Banco de Desarrollo, see below ...      9,491     11,678
            Credit facility with Banco Security, interest rate
            rate of 4.50% - 7.00% .................................      5,813      7,325
            Other long-term debt ..................................      3,866      5,080
                                                                       -------    -------
                                                                        19,170     24,083
            Less current maturities ...............................      6,743      6,853
                                                                       -------    -------
                Long-term debt, less current maturities ...........    $12,427    $17,230
                                                                       =======    =======
</TABLE>

      In February 1999, Ferronor refinanced certain short-term debt with Banco
      de Desarrollo. The refinancing consists of two credit lines. The first
      credit line is a $5.0 million facility which bears interest at the
      interbank cost plus 1.75% (9.05% at December 31, 2002) with interest to be
      paid over 120 equal monthly installments and principal to be paid over 96
      equal installments beginning two years from the funding. The second credit
      line is a $7.7 million facility which bears interest at LIBOR plus 2.75%
      (4.25% at December 31, 2002) and is payable in 120 equal monthly
      installments (including interest).

9.    SUBORDINATED DEBT

      In August 2000, RailAmerica Transportation Corp. ("RTC"), a wholly-owned
      subsidiary of the Company, sold units consisting of $130.0 million of
      12-7/8% senior subordinated notes due 2010 and warrants to purchase
      1,411,414 shares of the Company's common stock in a private offering, for
      gross proceeds of $122.2 million after deducting the initial purchasers'
      discount. All of the Company's U.S. subsidiaries are guarantors of the
      senior subordinated notes. The net proceeds received from the issuance of
      the units were used to pay $115.0 million of then-existing debt and
      approximately $1.8 million of term loans under the Company's senior credit
      facilities, resulting in an extraordinary charge of $1.8 million, net of
      taxes, associated with the early extinguishment of debt. The warrants,
      which have an exercise price of $6.60 per share and expire on August 15,
      2010, were valued at $5.1 million and are being amortized as additional
      interest expense over ten years, the term of the senior subordinated
      notes.

      Prior to August 15, 2003, the Company may redeem up to 35% of the senior
      subordinated notes at a redemption price of 112.875% of their principal
      amount with the proceeds from an equity offering. From August 16, 2003
      through August 14, 2005, the Company may not redeem the senior
      subordinated notes and subsequent to August 14, 2005, the Company may
      redeem the senior subordinated notes for 106.438% of their principal
      amount. The premium reduces annually on a sliding scale until they may be
      redeemed at their principal amount commencing August 15, 2008.

      In June 2000, the Company engaged an investment banking firm to assist the
      Company's Board of Directors in evaluating the issuance of the senior
      subordinated notes, for which it issued three-year warrants to purchase
      150,000 shares of the Company's common stock. Of these warrants, 75,000
      are at an exercise price of $5.50 and 75,000 are at an exercise price of
      $6.50. These warrants were exercised during 2001.

      In August 1999, the Company issued $22.5 million aggregate principal
      amount of junior convertible subordinated debentures. Interest on the
      debentures accrues at the rate of 6% per annum and is payable


                                      F-18
<PAGE>

                       RAILAMERICA, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

9.    SUBORDINATED DEBT, continued

      semi-annually. The debentures are convertible, at the option of the
      holder, into shares of RailAmerica at a conversion price of $10. The
      debentures which mature on July 31, 2004, are general unsecured
      obligations and rank subordinate in right of payment to all senior
      indebtedness. At RailAmerica's option, the debentures may be redeemed at
      par plus accrued interest, in whole or in part, if the closing price of
      RailAmerica's common stock is above $20 for 10 consecutive trading days.
      During 2001 and 2000, $0.39 million and $0.35 million, respectively, of
      the junior convertible subordinated debentures were converted into common
      stock.

      The Company recognized a $2.3 million charge in the fourth quarter of 2000
      for the beneficial conversion feature included in the junior convertible
      subordinated debentures. This charge is shown as the cumulative effect of
      an accounting change.

10.   COMMON STOCK TRANSACTIONS

      In December 2001, the Company closed on the private placement sale of 4.3
      million shares of its common stock for $12.50 per share, resulting in net
      proceeds of $51.5 million. The proceeds from this private placement were
      used to finance the StatesRail and ParkSierra acquisitions, which are
      described in Note 4, as well as the reduction of debt and other general
      corporate purposes. In connection with this private placement, the Company
      issued 18-month warrants to purchase 100,000 shares of common stock at an
      exercise price of $13.75 per share to the placement agents.

      In June 2001, the Company closed on the private placement sale of 3.8
      million shares of its common stock for $10.75 per share, resulting in net
      proceeds of $38.2 million. The proceeds from this private placement were
      used to reduce debt and for general corporate purposes. In connection with
      this private placement, the Company issued 18-month warrants to purchase
      200,000 shares of common stock at an exercise price of $11.825 per share
      to the placement agents.

      The Company occasionally repurchases its common stock under its share
      repurchase program. Such repurchases are limited to $5 million per year
      pursuant to its borrowing arrangements. In July 2002, the Board of
      Directors authorized a 2 million share repurchase program through December
      31, 2003, subject to restrictions under the Company's borrowing
      arrangements. During the year ended December 31, 2002, the Company
      repurchased 530,500 shares at a total cost of $4.9 million.

      As of December 31, 2002, the Company has a total of 3,069,564 warrants
      outstanding with exercise prices ranging from $6.60 to $13.75 and with
      expiration dates ranging from March 26, 2003 to August 15, 2010.

11.   INCOME TAX PROVISION

      Income from continuing operations before income taxes for the years ended
      December 31, 2002, 2001 and 2000 consists of (in thousands):

                                           2002       2001       2000
                                         -------    -------    --------
            Domestic ................    $ 1,608    $ 5,743    $(19,539)
            Foreign subsidiaries ....      6,548     14,946      30,798
                                         -------    -------    --------
                                         $ 8,156    $20,689    $ 11,259
                                         =======    =======    ========


                                      F-19
<PAGE>

                       RAILAMERICA, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

11.   INCOME TAX PROVISION, continued

      The provision for income taxes for the years ended December 31, 2002, 2001
      and 2000 consists of (in thousands):

                                                2002        2001        2000
                                              -------     -------     -------
            Federal income taxes:
              Current ....................    $    --     $    --     $   334
              Deferred ...................     (2,341)        801       2,494
                                              -------     -------     -------
                                               (2,341)        801       2,828
                                              -------     -------     -------
            State income taxes:
              Current ....................      1,140         437         700
              Deferred ...................       (795)        565      (1,548)
                                              -------     -------     -------
                                                  345       1,002        (848)
                                              -------     -------     -------
            Foreign income taxes
              Current ....................      2,140       1,500       2,435
              Deferred ...................        733       4,737       1,535
              Change in tax law ..........         --      (3,177)         --
                                              -------     -------     -------
                                                2,873       3,060       3,970
                                              -------     -------     -------
            Total income tax provision ...    $   877     $ 4,863     $ 5,950
                                              =======     =======     =======

      The following summarizes the total income tax provisions for each of the
      years ended December 31, 2002, 2001 and 2000 (in thousands):

                                                2002        2001        2000
                                              -------     -------     -------
            Continuing operations ........    $ 2,893     $ 4,897     $ 2,900
            Discontinued operations ......        151         108       5,250
            Extraordinary item ...........     (2,167)       (142)     (2,200)
                                              -------     -------     -------
            Total income tax provision ...    $   877     $ 4,863     $ 5,950
                                              =======     =======     =======

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

<TABLE>
<CAPTION>
                                                                  2002        2001        2000
                                                                -------     -------     -------
<S>                                                             <C>         <C>         <C>
            Income tax provision, at 35% ...................    $ 2,854     $ 7,242     $ 3,951
            Net benefit due to difference between U.S. &
                Foreign tax rates ..........................        155        (408)        (15)
            Net benefit due to tax law changes in Canada ...         --      (3,177)         --
            Amortization of non-deductible warrants ........         --          --        (602)
            Permanent differences ..........................       (815)         --          --
            State income taxes, net ........................       (785)         --          --
            Other, net .....................................       (208)        610        (345)
            Valuation allowance ............................      1,692         630         (89)
                                                                -------     -------     -------
            Tax provision ..................................    $ 2,893     $ 4,897     $ 2,900
                                                                =======     =======     =======
</TABLE>

      The Company files 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 foreign subsidiaries file
      income tax returns in their respective jurisdictions.


                                      F-20
<PAGE>

                       RAILAMERICA, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

11.   INCOME TAX PROVISION, continued

      The components of deferred income tax assets and liabilities as of
      December 31, 2002 and 2001 are as follows (in thousands):

                                                        2002          2001
                                                      ---------     ---------
            Deferred tax assets:
            Net operating loss carryforward ......    $  44,346     $  26,178
            Alternative minimum tax credit .......          783           783
            Accrued expenses .....................        5,889        12,973
            Other ................................           --            24
                                                      ---------     ---------
                Total deferred tax assets ........       51,018        39,958
            Less: valuation allowance ............       (5,563)       (3,357)
                                                      ---------     ---------
                Total deferred tax assets, net ...       45,455        36,601
            Deferred tax liabilities:
            Property, plant and equipment ........      195,543       132,806
            Deferred revenue .....................           71           617
                Net deferred tax liability .......    $(150,159)    $ (96,822)
                                                      =========     =========

      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 $5.6
      million at December 31, 2002 and $3.4 million at December 31, 2001.

      The following is a summary of net operating loss carryforwards by
      jurisdiction as of December 31, 2002 (in thousands):

                                   AMOUNT   EXPIRATION PERIOD
                                  -------   -----------------
            U.S. - Federal        $ 72,942        2011 - 2022
            U.S. - State           164,037        2003 - 2022
            Luxembourg                  21               None
            Australia               34,656               None
            Canada                   6,569        2003 - 2009
                                  --------
                                  $278,225
                                  ========

      As part of certain acquisitions, the Company acquired net operating loss
      carryforwards for federal and state income tax purposes. The utilization
      of the acquired tax loss carryforwards may be limited by the Internal
      Revenue Code Section 382. These tax loss carryforwards expire in the years
      2003 through 2020.

      No provision was made in 2002 for U.S. income taxes on undistributed
      earnings of the Canadian or Australian subsidiaries as it is the intention
      of management to utilize those earnings in their respective operations for
      an indefinite period of time.

12.   STOCK OPTIONS

      The Company has stock option plans under which employees and non-employee
      directors may be granted options to purchase shares of the Company's
      common stock at the fair market value at the date of grant. Options
      generally vest in two or three years and expire in ten years from the date
      of the grant. The Company has adopted the disclosure-only provisions of
      SFAS No. 123. See Note 1 for the total compensation costs that would have
      been recognized in 2002, 2001, and 2000 if the stock options issued were
      valued based on the fair value at the grant date.


                                      F-21
<PAGE>

                       RAILAMERICA, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

12.   STOCK OPTIONS, continued

      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 2002, 2001 and 2000:
      dividend yield 0.0%, 0.0% and 0.0%; expected volatility of 46%, 41% and
      41%; risk-free interest rate of 3.0%, 4.6% and 6.5%; and expected lives of
      5, 5 and 5 years. The weighted average fair value of options granted for
      2002, 2001 and 2000 were $4.52, $5.03, and $4.75, respectively.

      Information regarding the above options for 2002, 2001 and 2000 is as
      follows:

<TABLE>
<CAPTION>
                                                                                         WEIGHTED       WEIGHTED
                                                        NUMBER OF         AVERAGE       NUMBER OF       AVERAGE
                                                       OUTSTANDING       EXERCISE         SHARES        EXERCISE
                                                          SHARES           PRICE       EXERCISABLE       PRICE
                                                       -----------       --------      -----------      --------
<S>                                                     <C>               <C>           <C>              <C>
            Outstanding at January 1, 2000 ....         1,840,000         $ 6.34
            Granted ...........................         1,882,558         $ 8.08
            Exercised .........................           (48,969)        $ 4.78
            Forfeited .........................          (222,498)        $ 7.64
                                                        ---------                       ---------
            Outstanding at December 31, 2000 ..         3,451,091         $ 7.23        1,937,858        $6.50
                                                                                        =========
            Granted ...........................         1,494,289         $11.72
            Exercised .........................          (936,223)        $ 5.31
            Forfeited .........................           (62,855)        $ 7.74
                                                        ---------                       ---------
            Outstanding at December 31, 2001 ..         3,946,302         $ 9.37        2,557,233        $8.70
                                                        ---------                       =========
            Granted ...........................         1,876,000         $10.31
            Exercised .........................           (82,912)        $ 6.79
            Forfeited .........................           (98,159)        $11.02
                                                        ---------                       ---------
            Outstanding at December 31, 2002 ..         5,641,231         $ 9.69        3,921,857        $9.25
                                                        ---------                       =========
            Authorized at December 31, 2002 ...         6,113,893
                                                        =========
</TABLE>

      The following table summarizes information about stock options outstanding
      at December 31, 2002:

<TABLE>
<CAPTION>
                                           OPTIONS OUTSTANDING                     OPTIONS EXERCISABLE
                              --------------------------------------------      -------------------------
                                                  WEIGHTED
                                                  AVERAGE         WEIGHTED                       WEIGHTED
            RANGE OF                             REMAINING        AVERAGE                        AVERAGE
            EXERCISE            NUMBER          CONTRACTUAL       EXERCISE        NUMBER         EXERCISE
            PRICE             OF OPTIONS            LIFE           PRICE        OF OPTIONS         PRICE
            -------------     ----------        -----------       --------      ----------       --------
<S>                           <C>                   <C>            <C>          <C>               <C>
            $3.50-$5.00         178,200             3.19           $ 4.53          178,200        $ 4.53
            $5.01-$7.50         483,577             6.65           $ 6.52          483,577        $ 6.52
            $7.51-$10.00      1,813,954             6.64           $ 8.77        1,777,892        $ 8.78
            $10.01-$14.45     3,165,500             9.07           $11.00        1,482,188        $11.28
                              ---------                                         ----------
                              5,641,231                                         3,921,857
                              =========                                         ==========
</TABLE>

      The Company maintains an Employee Stock Purchase Plan for 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 certain dates during the year. For the years ended December 31,
      2002, 2001 and 2000, 25,081, 21,943 and 11,749 shares of common stock,
      respectively, were sold to employees under this plan.


                                      F-22
<PAGE>

                       RAILAMERICA, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

13.   NON-CASH INVESTING AND FINANCING ACTIVITIES

      Cash paid for interest from continuing operations during 2002, 2001 and
      2000 was $41.0 million, $54.6 million and $41.2 million, respectively.
      Cash paid (received) for income taxes during 2002, 2001 and 2000 was $0.2
      million, $(1.1) million and $4.0 million, respectively.

      The following table summarizes the net cash used in acquisitions, net of
      cash acquired, for the years ended December 31, 2002, 2001, and 2000 (in
      thousands):

<TABLE>
<CAPTION>
                                                                    2002        2001       2000
                                                                  ---------     -----    ---------
<S>                                                               <C>           <C>      <C>
            Common stock issued for businesses acquired ......    $  40,905     $  --    $  60,773
            Debt issued for business acquired ................           --        --      105,376
            Details of acquisitions:
                Working capital components, other than cash ..          316        --        6,109
                Property and equipment .......................     (173,099)       --     (390,468)
                Other assets .................................           (9)       --       (6,980)
                Goodwill .....................................       (4,000)       --           --
                Notes payable and loans payable ..............        1,565        --        3,148
                Deferred income taxes payable ................       44,963        --       73,120
                                                                  ---------     -----    ---------
            Net cash used in acquisitions ....................    $ (89,359)    $  --    $(148,922)
                                                                  =========     =====    =========
</TABLE>

14.   FAIR VALUE OF FINANCIAL INSTRUMENTS

      On January 1, 2001, the Company adopted SFAS No. 133, Accounting for
      Derivative Instruments and Hedging Activities, and recorded a cumulative
      transition charge of $4.4 million, net of tax, to Accumulated Other
      Comprehensive Loss ("AOCL"). The standard requires that all derivatives be
      recorded on the balance sheet at fair value and establishes criteria for
      documentation and measurement of hedging activities.

      The Company currently uses derivatives to hedge against increases in fuel
      prices and interest rates. The Company formally documents the relationship
      between the hedging instrument and the hedged item, as well as the risk
      management objective and strategy for the use of the hedging instrument.
      This documentation includes linking the derivatives that are designated as
      cash flow hedges to specific assets or liabilities on the balance sheet,
      commitments or forecasted transactions. The Company assesses at the time a
      derivative contract is entered into, and at least quarterly, whether the
      derivative item is effective in offsetting the changes in fair value or
      cash flows. Any change in fair value resulting from ineffectiveness, as
      defined by SFAS No. 133, is recognized in current period earnings. For
      derivative instruments that are designated and qualify as cash flow
      hedges, the effective portion of the gain or loss on the derivative
      instrument is recorded in AOCL as a separate component of Stockholders'
      Equity and reclassified into earnings in the period during which the hedge
      transaction affects earnings.

      The Company monitors its hedging positions and credit ratings of its
      counterparties and does not anticipate losses due to counterparty
      nonperformance.

      Fuel costs represented 7% of total revenues during 2002. Due to the
      significance of fuel expenses to the operations of the Company and the
      historical volatility of fuel prices, the Company periodically hedges
      against fluctuations in the price of its fuel purchases. Each one-cent
      increase in the price of fuel would result in $0.4 million of additional
      fuel expense on a monthly basis.

      The fuel hedging program includes the use of derivatives that are
      accounted for as cash flow hedges. As of December 31, 2002, the Company
      entered into a fuel swap agreement to hedge 750,000 gallons per month


                                      F-23
<PAGE>

                       RAILAMERICA, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

14.   FAIR VALUE OF FINANCIAL INSTRUMENTS, continued

      in 2003 (35% of estimated North American consumption) at an average price
      of 66 cents per gallon, excluding transportation and taxes. The fair value
      of the fuel swap was a net receivable of 0.8 million at December 31, 2002.

      Interest on the Company's senior credit facility is payable at variable
      rates indexed to LIBOR. To partially mitigate the volatility of LIBOR, the
      Company entered into two interest rate swaps in May 2000. These swaps were
      accounted for as cash flow hedges under SFAS No. 133 and qualified for the
      short cut method of recognition. The interest rate swaps locked in a LIBOR
      rate of 7.23% on $212.5 million of debt for a three-year period. In 2001,
      the Company extended the interest rate swaps for two years and reduced the
      LIBOR rate to 6.723%. As noted in Note 8, the Company terminated its
      interest rate swaps and reclassified $17.1 million from accumulated other
      comprehensive loss against earnings during the year ended 2002, in
      connection with the refinancing of the senior credit facility.

      In June 2002, the Company, as required under its new senior credit
      facility, entered into two step-up collars for a total notional amount of
      $75 million with an effective date of November 24, 2002 and expiring on
      November 24, 2004. Under the terms of these collars, the LIBOR component
      of the Company's interest rates can fluctuate within specified ranges.
      From November 24, 2002 through May 24, 2003, the floor and cap are 2% and
      4.5%, from May 24, 2003 through November 24, 2003, the floor and cap are
      2.5% and 4.75%, from November 24, 2003 through May 24, 2004, the floor and
      cap are 3.5% and 5.5% and from May 24, 2004 through November 24, 2004, the
      floor and cap are 4% and 5.75%. The collars qualify and are accounted for
      as cash flow hedges under SFAS No. 133. The fair value of these collars
      was a net liability of $1.9 million at December 31, 2002.

      On November 8, 2002, the Company entered into two interest rate swaps for
      a total amount of $300 million for the period commencing December 5, 2002
      through December 5, 2003. Under the terms of the interest rate swaps, the
      LIBOR component of the Company's interest rate is fixed at 1.62% on $300
      million of debt. The swaps qualify and are accounted for as cash flow
      hedges under SFAS No. 133. The fair value of these swaps was a net
      liability of $0.6 million at December 31, 2002. Were the Company to
      refinance the debt with terms different than the terms of the debt
      currently hedged, the hedged transaction would no longer be effective and
      any deferred gains or losses would be immediately recognized into income.

      Fluctuations in the market interest rate will affect the cost of our
      remaining borrowings. Excluding the impact of our interest rate hedges, a
      1% increase in interest rates would result in a $3.8 million increase in
      interest expense. At December 31, 2002, AOCL included a $1.7 million
      charge, net of taxes, relating to the interest rate collars and swaps.

      Management believes that the fair value of its senior long-term debt
      approximates its carrying value based on the variable rate nature of the
      financing, and for all other long-term debt based on current borrowing
      rates available with similar terms and maturities. The fair value of the
      senior subordinated notes is $136.5 million as of December 31, 2002, based
      on the quoted market price.


                                      F-24
<PAGE>

                       RAILAMERICA, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

15.   PENSION AND OTHER BENEFIT PROGRAMS

      The Company maintains a pension plan for a majority of its Canadian
      railroad employees, with both defined benefit and defined contribution
      components.

      DEFINED BENEFIT - The defined benefit component applies to approximately
      60 employees who transferred employment directly from Canadian Pacific
      Railway Company ("CPR") to a subsidiary of RailLink, Ltd. The defined
      benefit portion of the plan is a mirror plan of CPR's defined benefit
      plan. The employees that transferred and joined the mirror plan were
      entitled to transfer or buy back prior years of service. As part of the
      arrangement, CPR transferred to the Company the appropriate value of each
      employee's pension entitlement.

      The following chart summarizes the benefit obligations, assets, funded
      status and rate assumptions associated with the defined benefit plan for
      the years ended December 31, 2002 and December 31, 2001 (in thousands):

<TABLE>
<CAPTION>
                                                              January 1, 2002 to    January 1, 2001 to    January 1, 2000 to
                                                              December 31, 2002     December 31, 2001     December 31, 2000
                                                              -----------------     -----------------     -----------------
<S>                                                                <C>                   <C>                   <C>
      EXCHANGE RATE BEGINNING OF YEAR ...................          $  0.63               $  0.67               $  0.69
      EXCHANGE RATE END OF YEAR .........................          $  0.63               $  0.63               $  0.67
      CHANGE IN BENEFIT OBLIGATION
      Benefit obligation at beginning of period .........          $ 3,282               $ 3,114               $ 2,853
      Service cost ......................................               64                    60                    62
      Interest cost .....................................              230                   205                   194
      Plan participants' contributions ..................               96                    89                    91
      Actuarial loss ....................................              244                     0                     0
      Benefits paid .....................................               (6)                    0                    (3)
      Foreign currency exchange rate changes ............                0                  (186)                  (83)
                                                                   -------               -------               -------
      Benefit obligation at end of period ...............          $ 3,910               $ 3,282               $ 3,114
                                                                   =======               =======               =======
      CHANGE IN PLAN ASSETS
      Fair value of plan assets at beginning of period ..          $ 3,164               $ 3,201               $ 2,655
      Actual return on plan assets ......................             (291)                  (54)                  388
      Employer contribution .............................              100                   101                   106
      Plan participants' contributions ..................               97                   106                   132
      Benefits paid .....................................               (6)                    0                    (3)
      Foreign currency exchange rate changes ............                0                  (190)                  (77)
                                                                   -------               -------               -------
      Fair value of plan assets at end of period ........          $ 3,064               $ 3,164               $ 3,201
                                                                   =======               =======               =======
      Funded status - (accrued) benefit cost ............          $  (846)              $  (118)              $    87
                                                                   =======               =======               =======
      ASSUMPTIONS
      Discount rate .....................................             6.50%                 7.00%                 7.00%
      Expected return on plan assets ....................             7.00%                 8.00%                 8.00%
      Rate of compensation increase .....................             4.00%                 4.50%                 4.50%
      COMPONENTS OF NET PERIODIC BENEFIT COST IN
        PERIOD
      Service cost ......................................          $    64               $    60               $    62
      Interest cost .....................................              230                   205                   194
      Expected return on plan assets ....................             (222)                 (241)                 (206)
      Amortization of prior service cost ................               15                    15                    16
                                                                   -------               -------               -------
      Net periodic pension cost .........................          $    87               $    39               $    66
                                                                   =======               =======               =======
</TABLE>


                                      F-25
<PAGE>

                       RAILAMERICA, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

15.   PENSION AND OTHER BENEFIT PROGRAMS, continued

      Freight Australia's employees participate in the Victorian government's
      superannuation funds. The contributions made by Freight Australia are as
      follows for the year ended December 31, 2002, 2001 and December 31, 2000
      (in thousands):

                                           2002      2001      2000
                                          ------    ------    ------
            Total contributions ......    $2,012    $1,566    $1,536
                                          ======    ======    ======

      DEFINED CONTRIBUTION - The defined contribution component applies to a
      majority of the Company's Canadian railroad employees that are not covered
      by the defined benefit component. The Company contributes 3% of a
      participating employee's salary to the plan. Pension expense for the year
      ended December 31, 2002, 2001 and 2000 for the defined contribution
      members was $0.5 million, $0.3 million and $0.2 million, respectively.

      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 $1,500 per
      eligible employee. An employee becomes 100% vested with respect to the
      employer contributions after completing five years of service. Employer
      contributions during the years ended December 31, 2002, 2001 and 2000 were
      approximately $644,000, $484,000 and $286,000, respectively.

16.   COMMITMENTS AND CONTINGENCIES

      In 2000, certain parties filed property damage claims totaling
      approximately $32.5 million against RaiLink Ltd. and RaiLink Canada Ltd.,
      wholly-owned subsidiaries of RailAmerica, and others in connection with
      fires that allegedly occurred in 1998. The Company is vigorously defending
      these claims, and has insurance coverage to approximately $13.0 million to
      cover these claims. It is the opinion of management that the ultimate
      liability, if any, with respect to these matters will fall within the
      insurance coverage and that these claims will not have a material adverse
      effect on the Company's financial position, results of operations or cash
      flows.

      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.

      The Company has a $4.7 million contingent obligation, under certain events
      of default or if line abandonment occurs, to the Canadian National
      Railroad in connection with its properties. The contingent obligation
      bears no interest and has no pre-defined terms of payment or maturity.

      The Company's operations are subject to extensive environmental
      regulation. The Company records liabilities for remediation and
      restoration costs related to past activities when the Company's obligation
      is probable and the costs can be reasonably estimated. Costs of ongoing
      compliance activities to current operations are expensed as incurred. The
      Company's recorded liabilities for these issues represent its best
      estimates (on an undiscounted basis) of remediation and restoration costs
      that may be required to comply with present laws and regulations. During
      the fourth quarter of 2001, the Company reduced its environmental
      liability by $1.9 million due to a change in environmental regulations.
      The remaining liabilities are not material. 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.


                                      F-26
<PAGE>

                       RAILAMERICA, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

17.   SEGMENT INFORMATION

      The Company's continuing operations have been classified into two business
      segments: North American rail transportation and International rail
      transportation. The North American rail transportation segment includes
      the operations of the Company's railroad subsidiaries in the United States
      and Canada, as well as corporate expenses. The international segment has
      been restated for the exclusion of the Chilean operations except for total
      assets and capital expenditures, due to its reclassification to
      discontinued operations.

      Business and geographical segment information for the years ended December
      31, 2002, 2001 and 2000 is as follows (in thousands):

      YEAR ENDED DECEMBER 31, 2002:

<TABLE>
<CAPTION>
                                                           NORTH AMERICA                INTERNATIONAL
                                                           -------------                -------------
                                    CONSOLIDATED   UNITED STATES      CANADA         CHILE        AUSTRALIA
                                    ------------   -------------     --------       -------       ---------
<S>                                  <C>              <C>            <C>            <C>           <C>
      Revenue ................       $  428,243       $274,251       $ 59,077       $    --       $ 94,915
      Depreciation and
        amortization .........       $   33,158       $ 18,428       $  3,875       $    --       $ 10,855
      Income before
        income taxes .........       $    8,156       $  1,608       $  4,404       $    --       $  2,144
      Interest expense .......       $   43,441       $ 37,073       $  3,414       $    --       $  2,954
      Total assets ...........       $1,106,553       $715,615       $141,853       $56,189       $192,876
      Capital expenditures ...       $   65,682       $ 37,980       $  8,587       $ 2,021       $ 17,094
</TABLE>

      YEAR ENDED DECEMBER 31, 2001:

<TABLE>
<CAPTION>
                                                           NORTH AMERICA                INTERNATIONAL
                                                           -------------                -------------
                                    CONSOLIDATED   UNITED STATES      CANADA         CHILE        AUSTRALIA
                                    ------------   -------------     --------       -------       ---------
<S>                                  <C>              <C>            <C>            <C>           <C>
      Revenue ................       $  347,546       $184,216       $ 61,900       $    --       $101,430
      Depreciation and
        amortization .........       $   24,393       $ 13,938       $  3,523       $    --       $  6,932
      Income before
        income taxes .........       $   20,689       $  5,743       $  2,271       $    --       $ 12,675
      Interest expense .......       $   50,714       $ 43,893       $  6,565       $    --       $    256
      Total assets ...........       $  891,168       $630,607       $ 87,952       $59,342       $113,267
      Capital expenditures ...       $   61,675       $ 29,148       $  9,869       $ 2,444       $ 20,214
</TABLE>

      YEAR ENDED DECEMBER 31, 2000:

<TABLE>
<CAPTION>
                                                           NORTH AMERICA                INTERNATIONAL
                                                           -------------                -------------
                                    CONSOLIDATED   UNITED STATES      CANADA         CHILE        AUSTRALIA
                                    ------------   -------------     --------       -------       ---------
<S>                                  <C>              <C>            <C>            <C>           <C>
      Revenue ................       $  334,615       $169,354       $ 63,057       $    --       $102,204
      Depreciation and
        amortization .........       $   23,322       $ 14,052       $  3,832       $    --       $  5,438
      Income (loss) before
        income taxes .........       $   11,259       $(19,539)      $ 13,752       $    --       $ 17,046
      Interest expense .......       $   53,912       $ 53,010       $    431       $    --       $    471
      Total assets ...........       $  839,703       $635,746       $ 83,724       $57,629       $ 62,604
      Capital expenditures ...       $   62,499       $ 24,566       $  9,570       $10,018       $ 18,345
</TABLE>


                                      F-27
<PAGE>

                       RAILAMERICA, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

18.   UNAUDITED QUARTERLY FINANCIAL DATA

      All quarterly financial data has been restated for the inclusion of
      Ferronor's results in discontinued operations.

      Quarterly financial data for 2002 is as follows (in thousands, except per
      share amounts):

<TABLE>
<CAPTION>
                                                       FIRST        SECOND         THIRD        FOURTH
                                                      QUARTER       QUARTER        QUARTER      QUARTER
                                                      --------     ---------      --------     --------
<S>                                                   <C>          <C>            <C>          <C>
            Operating revenue ...................     $105,811     $ 109,766      $108,488     $104,178
            Operating income ....................     $ 19,574     $  20,538      $ 17,761     $ 12,632
            Income(loss) from continuing
              operations ........................     $  4,899     $  (7,094)     $  5,582     $  1,876
            Net income (loss) ...................     $  5,143     $ (10,725)     $  5,913     $  1,822
            Basic income (loss) from
              continuing operations per share ...     $   0.15     $   (0.22)     $   0.17     $   0.06
            Diluted income (loss) from
              continuing operations per share ...     $   0.15     $   (0.22)     $   0.17     $   0.06
</TABLE>

      Quarterly financial data for 2001 is as follows (in thousands, except per
      share amounts):

<TABLE>
<CAPTION>
                                                       FIRST        SECOND         THIRD        FOURTH
                                                      QUARTER       QUARTER        QUARTER      QUARTER
                                                      --------     ---------      --------     --------
<S>                                                   <C>          <C>            <C>          <C>
            Operating revenue ...................     $ 85,875     $  88,008      $ 87,842     $ 85,821
            Operating income ....................     $ 17,008     $  18,888      $ 18,794     $ 16,535
            Income from continuing
              operations ........................     $  2,408     $   3,734      $  4,626     $  5,024
            Net income ..........................     $  2,787     $   4,153      $  4,919     $  5,179
            Basic income from
              continuing operations per share ...     $   0.13     $    0.20      $   0.19     $   0.20
            Diluted income from
              continuing operations per share ...     $   0.12     $    0.19      $   0.18     $   0.19
</TABLE>


                                      F-28
<PAGE>

                       RAILAMERICA, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

19.   GUARANTOR FINANCIAL STATEMENT INFORMATION

      In August 2000, RailAmerica Transportation Corp. ("Issuer"), a
      wholly-owned subsidiary of RailAmerica, Inc. ("Parent"), sold units
      including 12 7/8% senior subordinated notes, which are registered with the
      Securities and Exchange Commission. The notes are guaranteed by the
      Parent, the domestic subsidiaries of the Issuer and Palm Beach Rail
      Holdings, Inc.

RAILAMERICA, INC.
Consolidating Balance Sheet
At December 31, 2002
(in thousands)

<TABLE>
<CAPTION>
                                                                                             NON
                                                               COMPANY      GUARANTOR     GUARANTOR
                                                ISSUER         (PARENT)    SUBSIDIARIES  SUBSIDIARIES  ELIMINATIONS    CONSOLIDATED
                                               ---------      ---------    ------------  ------------  ------------    ------------
<S>                                            <C>            <C>            <C>          <C>            <C>            <C>
ASSETS
Current Assets:
  Cash ...................................     $      --      $   8,895      $    369     $  19,623      $      --      $    28,887
  Cash held in escrow ....................            --            245            --           126             --              371
  Accounts and notes receivable ..........            --            654        39,984        22,825             --           63,463
  Current assets of discontinued
    operations ...........................            --             --            --         5,834                           5,834
  Other current assets ...................            --          3,243        13,660         5,526             --           22,429
                                               ---------      ---------      --------     ---------      ---------      -----------
        Total current assets .............            --         13,037        54,013        53,934             --          120,984
                                               ---------      ---------      --------     ---------      ---------      -----------
Property, plant and equipment, net .......            42          1,374       620,534       282,303             --          904,253
Long-term assets of discontinued
  operations .............................            --             --                      50,355                          50,355
Other assets .............................        16,892          1,163         8,136         4,770             --           30,961
Investment in and advances to affiliates .       292,664        272,696       112,671        (4,623)      (673,409)              --
                                               ---------      ---------      --------     ---------      ---------      -----------
        Total assets .....................     $ 309,598      $ 288,271      $795,354     $ 386,739      $(673,409)     $ 1,106,553
                                               =========      =========      ========     =========      =========      ===========
LIABILITIES AND
   STOCKHOLDERS' EQUITY
Current Liabilities:
  Current maturities of long-term debt ...     $   2,650      $      --      $    450     $   1,100      $      --      $     4,200
  Accounts payable .......................           149            988        30,512        15,073             --           46,722
  Accrued expenses .......................         7,135          3,020        21,558         6,707             --           38,420
  Current liabilities of discontinued
    operations ...........................            --             --            --        11,624             --           11,624
                                               ---------      ---------      --------     ---------      ---------      -----------
        Total current liabilities ........         9,934          4,008        52,520        34,504             --          100,966
                                               ---------      ---------      --------     ---------      ---------      -----------
Long-term debt, less current maturities ..       262,350             --        11,871       108,900             --          383,121
Subordinated debt ........................       120,224         21,107            --            --             --          141,331
Deferred income taxes ....................       (20,251)       (15,747)      154,331        31,826             --          150,159
Long-term liabilities of discontinued
  operations .............................            --             --            --        27,283             --           27,283
Other liabilities ........................         2,504             --         7,803        14,483             --           24,790
Stockholders' equity:
  Common stock ...........................            --             32         3,263        63,589        (66,852)              32
  Additional paid-in capital .............           758        261,372       433,564        66,715       (501,037)         261,372
  Retained earnings ......................       (64,268)        48,055       131,527        53,003       (120,262)          48,055
  Accumulated other comprehensive
     Income ..............................        (1,653)       (30,556)          475       (13,564)        14,742          (30,556)
                                               ---------      ---------      --------     ---------      ---------      -----------
        Total stockholders' equity .......       (65,163)       278,903       568,829       169,743       (673,409)         278,903
                                               ---------      ---------      --------     ---------      ---------      -----------
        Total liabilities and
          stockholders' equity ...........     $ 309,598      $ 288,271      $795,354     $ 386,739      $(673,409)     $ 1,106,553
                                               =========      =========      ========     =========      =========      ===========
</TABLE>


                                      F-29
<PAGE>

                       RAILAMERICA, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

19.   GUARANTOR FINANCIAL STATEMENT INFORMATION, continued

RAILAMERICA, INC.
Consolidating Statement of Income
For the year ended December 31, 2002
(in thousands)

<TABLE>
<CAPTION>
                                                                                             NON
                                                               COMPANY      GUARANTOR     GUARANTOR
                                                ISSUER         (PARENT)    SUBSIDIARIES  SUBSIDIARIES  ELIMINATIONS    CONSOLIDATED
                                               ---------      ---------    ------------  ------------  ------------    ------------
<S>                                            <C>            <C>            <C>          <C>            <C>            <C>
Operating revenue ........................     $      --      $      --      $274,251     $ 153,992      $      --      $   428,243
                                               ---------      ---------      --------     ---------      ---------      -----------
Operating expenses:
  Transportation .........................            --             --       138,367       104,188             --          242,555
  Selling, general and administrative ....           187         25,230        51,100        13,267             --           89,784
  Gain on sale and impairment of
     assets (net) ........................            --            101        (9,191)          (65)            --           (9,155)
  Terminated motor carrier operations,
    net ..................................            --             --            --         1,396                           1,396
  Depreciation and amortization ..........            92            200        18,136        14,730             --           33,158
                                               ---------      ---------      --------     ---------      ---------      -----------
        Total operating expenses .........           279         25,531       198,412       133,516             --          357,738
                                               ---------      ---------      --------     ---------      ---------      -----------
        Operating (loss) income ..........          (279)       (25,531)       75,839        20,476             --           70,505
Interest expense .........................       (11,744)        (1,532)      (23,797)       (6,368)            --          (43,441)
Equity in earnings of subsidiaries .......        24,921           (701)           --            --        (24,220)              --
Other income (expense) ...................       (18,911)        21,001       (14,158)       (6,840)            --          (18,908)
                                               ---------      ---------      --------     ---------      ---------      -----------
      Income from continuing
         operations before income taxes ..        (6,013)        (6,763)       37,884         7,268        (24,220)           8,156
Provision for income taxes ...............       (10,517)        (8,916)       18,924         3,402             --            2,893
                                               ---------      ---------      --------     ---------      ---------      -----------
      Income from continuing operations ..         4,504          2,153        18,960         3,866        (24,220)           5,263
Gain from sale of discontinued
operations (net of tax) ..................            --             --           387            --             --              387

Income from discontinued operations (net
of tax) ..................................            --             --            --           984             --              984
Extraordinary loss from early
   extinguishment of debt (net of tax) ...        (4,481)            --            --            --             --           (4,481)
                                               ---------      ---------      --------     ---------      ---------      -----------
        Net income .......................     $      23      $   2,153      $ 19,347     $   4,850      $ (24,220)     $     2,153
                                               =========      =========      ========     =========      =========      ===========
</TABLE>


                                      F-30
<PAGE>

                       RAILAMERICA, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

19.   GUARANTOR FINANCIAL STATEMENT INFORMATION, continued

RAILAMERICA, INC.
Consolidating Statement of Cash Flows
For the year ended December 31, 2002
(in thousands)

<TABLE>
<CAPTION>
                                                                                             Non
                                                               Company      Guarantor     Guarantor
                                                Issuer         (Parent)    Subsidiaries  Subsidiaries  Eliminations    Consolidated
                                               ---------      ---------    ------------  ------------  ------------    ------------
<S>                                            <C>            <C>            <C>          <C>            <C>            <C>
Cash flows from operating activities:
  Net income .............................     $      23      $   2,153      $ 19,347     $   4,850      $ (24,220)     $     2,153
  Adjustments to reconcile net income to
    net cash provided by operating
    activities:
      Depreciation and amortization ......         3,795            955        18,162        18,339             --           41,251
      Financing costs ....................        25,433             --            --            --             --           25,433
      Equity in earnings of subsidiaries .       (24,921)           701            --            --         24,220               --
      Gain on sale or disposal of
        properties .......................            --            101       (10,588)          782             --           (9,705)
      Deferred income taxes ..............       (12,306)        (8,962)       20,142         3,344             --            2,218
      Other ..............................            --          1,417            10          (685)            --              742
      Changes in operating assets and
        liabilities, net of acquisitions
        and dispositions:
         Accounts receivable .............            --         (1,151)        4,780          (863)            --            2,766
         Other current assets ............            22          2,483        (1,555)         (277)            --              673
         Accounts payable ................            --           (727)       (4,776)         (137)            --           (5,640)
         Accrued expenses ................        (1,777)        (1,751)       (2,167)       (4,224)            --           (9,919)
         Other assets and liabilities ....       (17,057)         4,210        (1,739)        3,221             --          (11,365)
                                               ---------      ---------      --------     ---------      ---------      -----------
           Net cash provided by (used
             in) operating activities ....       (26,788)          (571)       41,616        24,350             --           38,607
                                               ---------      ---------      --------     ---------      ---------      -----------
Cash flows from investing activities:
  Purchase of property, plant and
    equipment ............................            --           (646)      (37,334)      (27,702)            --          (65,682)
  Proceeds from sale of properties .......            --            963         7,963           365             --            9,291
  Acquisitions, net of cash acquired .....            --             --       (89,359)           --             --          (89,359)
  Change in restricted cash in escrow ....            --             --         1,357            --             --            1,357
  Deferred acquisition costs and other ...            --         (3,008)           --        (2,672)            --           (5,680)
                                               ---------      ---------      --------     ---------      ---------      -----------
          Net cash used in investing
            activities ...................            --         (2,691)     (117,373)      (30,009)            --         (150,073)
                                               ---------      ---------      --------     ---------      ---------      -----------
Cash flows from financing activities:
  Proceeds from issuance of long-term
    debt .................................       343,500             --           556       113,814             --          457,870
  Principal payments on long-term debt ...      (346,254)            --          (883)      (11,502)            --         (358,639)
  Disbursements/receipts on intercompany
    debt .................................        44,925        (21,356)       76,408       (99,977)            --               --
  Proceeds from exercise of stock
    options and warrants .................            --            385            --            --             --              385
  Purchase of treasury stock .............            --         (4,921)           --            --             --           (4,921)
  Deferred financing costs paid ..........       (15,383)            --            --            --             --          (15,383)
                                               ---------      ---------      --------     ---------      ---------      -----------
          Net cash provided by (used in)
            financing activities .........        26,788        (25,892)       76,081         2,335             --           79,312
                                               ---------      ---------      --------     ---------      ---------      -----------
Effect of exchange rates on cash .........            --             --            --         1,280             --            1,280
                                               ---------      ---------      --------     ---------      ---------      -----------
Net (decrease) increase in cash ..........            --        (29,154)          324        (2,044)            --          (30,874)
Cash, beginning of period ................            --         38,049            45        21,667             --           59,761
                                               ---------      ---------      --------     ---------      ---------      -----------
Cash, end of period ......................     $      --      $   8,895      $    369     $  19,623      $      --      $    28,887
                                               =========      =========      ========     =========      =========      ===========
</TABLE>


                                      F-31
<PAGE>

                       RAILAMERICA, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

19.   GUARANTOR FINANCIAL STATEMENT INFORMATION, continued

RAILAMERICA, INC.
Consolidating Balance Sheet
At December 31, 2001
(in thousands)

<TABLE>
<CAPTION>
                                                                                             NON
                                                               COMPANY      GUARANTOR     GUARANTOR
                                                ISSUER         (PARENT)    SUBSIDIARIES  SUBSIDIARIES  ELIMINATIONS    CONSOLIDATED
                                               ---------      ---------    ------------  ------------  ------------    ------------
<S>                                            <C>            <C>            <C>          <C>            <C>            <C>
ASSETS
Current Assets:
  Cash ...................................     $      --      $  38,049      $    457     $  21,254      $      --      $    59,761
  Cash held in escrow ....................            --            245         2,000           173             --            2,418
  Accounts and notes receivable ..........            --            911        29,353        24,014             --           54,278
  Other current assets ...................            11          1,344         5,801         7,048             --           14,204
                                               ---------      ---------      --------     ---------      ---------      -----------
        Total current assets .............            11         40,550        37,611        52,489             --          130,661
                                               ---------      ---------      --------     ---------      ---------      -----------
Property, plant and equipment, net .......            48            929       434,137       303,662             --          738,775
Other assets .............................        12,884          3,518        (5,180)       10,510             --           21,732
Investment in and advances to affiliates .       344,002        187,223        29,965      (113,810)      (447,380)              --
                                               ---------      ---------      --------     ---------      ---------      -----------
        Total assets .....................     $ 356,945      $ 232,220      $496,533     $ 252,850      $(447,380)     $   891,168
                                               =========      =========      ========     =========      =========      ===========
LIABILITIES AND
   STOCKHOLDERS' EQUITY
Current Liabilities:
  Current maturities of long-term debt ...     $  16,635      $      --      $  2,695     $   6,853      $  (1,699)     $    24,484
  Accounts payable .......................            --          1,831        15,667        18,536             --           36,035
  Accrued expenses .......................         7,638          1,356        18,635        12,260             --           39,889
                                               ---------      ---------      --------     ---------      ---------      -----------
        Total current liabilities ........        24,273          3,187        36,997        37,649         (1,699)         100,408
                                               ---------      ---------      --------     ---------      ---------      -----------
Long-term debt, less current maturities ..       251,117             --         8,842        17,244             --          277,203
Subordinated debt ........................       118,942         20,679            --         5,367             --          144,988
Deferred income taxes ....................       (28,978)       (12,607)      108,991        29,417             --           96,822
Minority interest and other liabilities ..        15,155              2        20,317        20,729         (5,415)          50,788
Stockholders' equity:
  Common stock ...........................            --             29         5,565        62,035        (67,600)              29
  Additional paid-in capital .............            --        224,248       278,322        45,623       (323,945)         224,248
  Retained earnings ......................       (14,118)        45,902        37,499        50,826        (74,207)          45,902
  Accumulated other comprehensive
     Income ..............................        (9,446)       (49,220)           --       (16,040)        25,486          (49,220)
                                               ---------      ---------      --------     ---------      ---------      -----------
        Total stockholders' equity .......       (23,564)       220,959       321,386       142,444       (440,266)         220,959
                                               ---------      ---------      --------     ---------      ---------      -----------

        Total liabilities and
          stockholders' equity ...........     $ 356,945      $ 232,220      $496,533     $ 252,850      $(447,380)     $   891,168
                                               =========      =========      ========     =========      =========      ===========
</TABLE>


                                      F-32
<PAGE>

                       RAILAMERICA, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

19.   GUARANTOR FINANCIAL STATEMENT INFORMATION, continued

RAILAMERICA, INC
Consolidating Statement of Income
For the Year Ended December 31, 2001
(in thousands)

<TABLE>
<CAPTION>
                                                                                             NON
                                                               COMPANY      GUARANTOR     GUARANTOR
                                                ISSUER         (PARENT)    SUBSIDIARIES  SUBSIDIARIES  ELIMINATIONS    CONSOLIDATED
                                               ---------      ---------    ------------  ------------  ------------    ------------
<S>                                            <C>            <C>            <C>          <C>            <C>            <C>
Operating revenue ........................     $      --      $   1,776      $182,047     $ 163,723      $      --      $   347,546
                                               ---------      ---------      --------     ---------      ---------      -----------
Operating expenses:
  Transportation .........................            --             --        94,379       101,726             --          196,105
  Selling, general and administrative ....           185         15,077        32,184        14,536             --           61,982
  Gain on sale and impairment of
    assets (net) .........................            26             --        (6,440)           (8)            --           (6,422)
  Terminated motor carrier operations,
    net ..................................            --             --            --           263             --              263
  Depreciation and amortization ..........         1,031            130        12,777        10,455             --           24,393
                                               ---------      ---------      --------     ---------      ---------      -----------
      Total operating expenses ...........         1,242         15,207       132,900       126,972             --          276,321
                                               ---------      ---------      --------     ---------      ---------      -----------
      Operating (loss) income ............        (1,242)       (13,431)       49,147        36,751             --           71,225
Interest expense .........................       (14,522)        (1,581)      (23,854)      (10,757)            --          (50,714)
Equity in earnings of subsidiaries .......        25,253         12,614            --            --        (37,867)              --
Minority interest and other income
  (expense) ..............................            --         15,064        (7,490)       (7,396)            --              178
                                               ---------      ---------      --------     ---------      ---------      -----------
    Income from continuing
      operations before income taxes .....         9,489         12,666        17,803        18,598        (37,867)          20,689
Provision for income taxes ...............        (3,099)        (4,371)        5,114         7,253             --            4,897
                                               ---------      ---------      --------     ---------      ---------      -----------
      Income from continuing operations ..        12,588         17,037        12,689        11,345        (37,867)          15,792

Income from discontinued operations (net
  of tax) ................................            --             --            --         1,482             --            1,482
Extraordinary loss from early
  extinguishment of debt (net of tax) ....          (238)            --            --            --             --             (236)
                                               ---------      ---------      --------     ---------      ---------      -----------
        Net income .......................     $  12,352      $  17,037      $ 12,689     $  12,827      $ (37,867)     $    17,038
                                               =========      =========      ========     =========      =========      ===========
</TABLE>


                                      F-33
<PAGE>

                       RAILAMERICA, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

19.   GUARANTOR FINANCIAL STATEMENT INFORMATION, continued

RAILAMERICA, INC.
Consolidating Statement of Cash Flows
For the Year Ended December 31, 2001
(in thousands)

<TABLE>
<CAPTION>
                                                                                             Non
                                                               Company      Guarantor     Guarantor
                                                Issuer         (Parent)    Subsidiaries  Subsidiaries  Eliminations    Consolidated
                                               ---------      ---------    ------------  ------------  ------------    ------------
<S>                                            <C>            <C>            <C>          <C>            <C>            <C>
Cash flows from operating activities:
  Net income .............................     $  12,352      $  17,037      $ 12,689     $  12,827      $ (37,867)     $    17,038
  Adjustments to reconcile net income to
    net cash provided by operating
    activities:
      Depreciation and amortization ......         4,584            891        13,853        12,682             --           32,011
      Write-off of deferred loan costs ...           378             --            --            --             --              378
      Equity in earnings of subsidiaries .       (25,253)       (12,614)           --            --         37,867               --
      Gain on sale or disposal of
        properties .......................            --             --        (6,428)           (6)            --           (6,434)
      Deferred income taxes ..............        (3,244)        (4,371)        3,904         6,637             --            2,926
      Other ..............................            --             --            --         1,350             --            1,350
      Changes in operating assets and
        liabilities, net of acquisitions
        and dispositions:
        Accounts receivable ..............            11          1,038         3,450           799             --            5,298
        Other current assets .............            12           (515)        5,049         4,041             --            8,587
        Accounts payable .................           (74)         1,294         4,356        (4,404)            --            1,172
        Accrued expenses .................        (2,249)           218       (11,397)          942             --          (12,485)
        Other assets and liabilities .....            92            340         3,819           878             --            5,129
                                               ---------      ---------      --------     ---------      ---------      -----------
          Net cash provided by (used in)
            operating activities .........       (13,390)         3,318        29,297        35,745             --           54,970
                                               ---------      ---------      --------     ---------      ---------      -----------
Cash flows from investing activities:
  Purchase of property, plant and
    equipment ............................            (7)          (421)      (30,674)      (30,573)            --          (61,675)
  Proceeds from sale of properties .......            --             --        13,592         4,910             --           18,502
  Change in restricted cash in escrow ....            --           (245)        1,291            --             --            1,046
  Deferred acquisition costs and other ...            --         (2,319)           42        (2,300)            --           (4,577)
                                               ---------      ---------      --------     ---------      ---------      -----------
          Net cash used in investing
            activities ...................            (7)        (2,985)      (15,749)      (27,962)            --          (46,703)
                                               ---------      ---------      --------     ---------      ---------      -----------
Cash flows from financing activities:
  Proceeds from issuance of long-term
    debt .................................        84,800             --           649           141             --           85,590
  Principal payments on long-term debt ...      (136,762)            --        (5,326)           --             --         (142,088)
  Disbursements/receipts on intercompany
    debt .................................        65,360        (58,142)      (11,357)        4,139             --               --
  Sale of Common Stock ...................            --         89,736            --            --             --           89,736
  Proceeds from exercise of stock
    options and warrants .................            --          8,343            --            --             --            8,343
  Preferred stock dividends paid .........            --           (241)           --            --             --             (241)
  Purchase of treasury stock .............            --         (1,987)           --            --             --           (1,987)
  Deferred financing costs paid ..........            --             --            --            --             --               --
                                               ---------      ---------      --------     ---------      ---------      -----------
          Net cash provided by (used in)
            financing activities .........        13,398         37,709       (16,034)        4,280             --           39,353
                                               ---------      ---------      --------     ---------      ---------      -----------

Effect of exchange rates on cash .........            --             --            --          (948)            --             (948)
                                               ---------      ---------      --------     ---------      ---------      -----------
Net (decrease) increase in cash ..........            --         38,042        (2,487)       11,115             --           47,671
Cash, beginning of period ................            --              7         2,944        10,139             --           13,090
                                               ---------      ---------      --------     ---------      ---------      -----------
Cash, end of period ......................     $      --      $  38,049      $    457     $  21,254      $      --      $    59,761
                                               =========      =========      ========     =========      =========      ===========
</TABLE>


                                      F-34
<PAGE>

                       RAILAMERICA, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

19.   GUARANTOR FINANCIAL STATEMENT INFORMATION, continued

RAILAMERICA, INC.
Consolidating Statement of Income
For the Year Ended December 31, 2000
(in thousands)

<TABLE>
<CAPTION>
                                                                                             Non
                                                               Company      Guarantor     Guarantor
                                                Issuer         (Parent)    Subsidiaries  Subsidiaries  Eliminations    Consolidated
                                               ---------      ---------    ------------  ------------  ------------    ------------
<S>                                            <C>            <C>            <C>          <C>            <C>            <C>
Operating revenue ........................     $      --      $     594      $169,353     $ 165,261      $    (593)     $   334,615
                                               ---------      ---------      --------     ---------      ---------      -----------
Operating expenses:
  Transportation .........................            --             --        87,897       107,570             --          195,467
  Selling, general and administrative ....           530         11,730        34,090        13,727           (593)          59,484
  Gain on sale and impairment of assets
    (net) ................................          (762)            --       (10,753)          331             --          (11,184)
  Terminated motor carrier operations,
    net ..................................            --             --            --            88             --               88
  Depreciation and amortization ..........           944            121        12,987         9,270             --           23,322
                                               ---------      ---------      --------     ---------      ---------      -----------
      Total operating expenses ...........           712         11,851       124,221       130,986           (593)         267,177
                                               ---------      ---------      --------     ---------      ---------      -----------
      Operating income ...................          (712)       (11,257)       45,132        34,275             --           67,438
Interest expense .........................       (48,428)        (1,910)       (2,247)       (1,327)            --          (53,912)
Interest in equity of subsidiaries .......        55,891         25,301            --            --        (81,192)              --
Minority interest and other income
  (expense) ..............................            --              7           223        (2,497)            --           (2,267)
                                               ---------      ---------      --------     ---------      ---------      -----------
    Income from continuing operations
      before income taxes ................         6,751         12,141        43,108        30,451        (81,192)          11,259
Provision for income taxes ...............       (11,548)        (3,093)       10,130         7,411             --            2,900
                                               ---------      ---------      --------     ---------      ---------      -----------
     Income from continuing operations ...        18,299         15,234        32,978        23,040        (81,192)           8,359
Discontinued operations:
  Gain on disposal of discontinued
    segment (net of tax) .................            --             --        13,527        (2,000)            --           11,527
  Loss from operations of discontinued
    segment (net of tax) .................            --             --        (5,077)        3,100             --           (1,977)
  Extraordinary loss from early
    extinguishment of debt (net of tax) ..        (1,299)        (1,321)       (1,376)           --             --           (3,996)
  Cumulative effect of accounting change .            --         (2,252)           --            --             --           (2,252)
                                               ---------      ---------      --------     ---------      ---------      -----------
        Net income .......................     $  17,000      $  11,661      $ 40,052     $  24,140      $ (81,192)     $    11,661
                                               =========      =========      ========     =========      =========      ===========
</TABLE>


                                      F-35
<PAGE>

                       RAILAMERICA, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

19. GUARANTOR FINANCIAL STATEMENT INFORMATION, continued

RAILAMERICA, INC.
Consolidating Statement of Cash Flows
For the Year Ended December 31, 2000
(In thousands)

<TABLE>
<CAPTION>
                                                                                             Non
                                                               Company      Guarantor     Guarantor
                                                Issuer         (Parent)    Subsidiaries  Subsidiaries  Eliminations    Consolidated
                                               ---------      ---------    ------------  ------------  ------------    ------------
<S>                                            <C>            <C>            <C>          <C>            <C>            <C>
Cash flows from operating activities:
  Net income (loss) ......................     $  17,000      $  11,661      $ 40,052     $  24,140      $ (81,192)     $    11,661
  Adjustments to reconcile net income to
    net cash provided by operating
    activities:
      Depreciation and amortization ......         4,594          1,236        15,751        12,985             --           34,566
      Financing costs ....................         1,615          1,353           735         1,154             --            4,857
      Interest paid in kind ..............            --             --         5,806            --             --            5,806
      Equity interest in earnings of
        affiliate ........................       (55,891)       (25,301)           --          (554)        81,192             (554)
      (Gain) loss on sale or disposal of
        properties .......................          (762)            --       (31,857)        3,065             --          (29,554)
      Cumulative effect of accounting
        change ...........................            --          2,252            --            --             --            2,252
      Deferred income taxes ..............       (13,984)        (4,431)       20,549        (4,931)            --           (2,797)
      Other ..............................            --             --            --           995             --              995
      Changes in operating assets and
        liabilities, net of acquisitions
        and dispositions:
        Accounts receivable ..............          (356)           745        (2,676)        5,941             --            3,654
        Other current assets .............           (23)          (388)       (1,802)        4,668             --            2,455
        Accounts payable .................            74           (240)       (2,977)        5,382             --            2,239
        Accrued expenses .................         9,889            295        (2,562)       (1,863)            --            5,759
        Other assets and liabilities .....           263         (1,552)        4,279           104             --            3,094
                                               ---------      ---------      --------     ---------      ---------      -----------
          Net cash provided by operating
            activities ...................       (37,581)       (14,370)       45,297        51,088             --           44,433
                                               ---------      ---------      --------     ---------      ---------      -----------
Cash flows from investing activities:
  Purchase of property, plant and
    equipment ............................           (52)           (26)      (24,034)      (38,387)            --          (62,499)
  Proceeds from sale of properties .......            --             --        80,976        15,678             --           96,654
  Acquisitions, net of cash acquired .....            --             --      (148,922)           --             --         (148,922)
  Change in cash in escrow ...............            --             --        (2,507)       (2,032)            --           (4,539)
  Deferred acquisition costs and other ...            --         (2,711)           --            --             --           (2,711)
                                               ---------      ---------      --------     ---------      ---------      -----------
          Net cash used in investing
            activities ...................           (52)        (2,737)      (94,486)      (24,742)            --         (122,017)
                                               ---------      ---------      --------     ---------      ---------      -----------
Cash flows from financing activities:
  Proceeds from issuance of long-term
    debt .................................       539,150            986         6,040         3,059             --          549,235
  Principal payments on long-term debt ...       (97,186)       (11,699)     (156,010)     (183,212)            --         (448,107)
  Disbursements/receipts on intercompany
    debt .................................      (385,991)        29,805       201,256       154,930             --               --
  Proceeds from exercise of stock
    options ..............................            --            234            --            --             --              234
  Preferred stock dividends paid .........            --           (289)           --            --             --             (289)
  Purchase of treasury stock .............            --         (1,992)           --            --             --           (1,992)
  Deferred financing costs paid ..........       (18,340)           (23)         (617)           --             --          (18,980)
                                               ---------      ---------      --------     ---------      ---------      -----------
          Net cash provided by financing
            activities ...................        37,633         17,022        50,669       (25,223)            --           80,101
                                               ---------      ---------      --------     ---------      ---------      -----------
Effect of exchange rates on cash .........            --             --            --        (1,025)            --           (1,025)
                                               ---------      ---------      --------     ---------      ---------      -----------
Net (decrease) increase in cash ..........            --            (85)        1,480            98             --            1,492
Cash, beginning of period ................            --             92         1,464        10,042             --           11,598
                                               ---------      ---------      --------     ---------      ---------      -----------
Cash, end of period ......................     $      --      $       7      $  2,943     $  10,140      $      --      $    13,090
                                               =========      =========      ========     =========      =========      ===========
</TABLE>


                                      F-36