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

                                 ---------------
                                    FORM 10-K

                [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934
                   
                  FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997

                                       OR

              [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934
             
            FOR THE TRANSITION PERIOD FROM __________ TO __________
                         COMMISSION FILE NUMBER 1-10841

                              GREYHOUND LINES, INC.
              AND ITS SUBSIDIARIES IDENTIFIED IN FOOTNOTE (1) BELOW
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

<TABLE>
            <S>                                                                      <C>
                                Delaware                                                  86-0572343
                      (State or other jurisdiction                                     (I.R.S. employer
                    of incorporation or organization)                                identification no.)

            15110 N. Dallas Parkway, Suite 600, Dallas, Texas                               75248
                (Address of principal executive offices)                                  (Zip code)
</TABLE>

                                 (972) 789-7000
              (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)

          SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

<TABLE>
<CAPTION>
                           TITLE OF EACH CLASS                                  NAME OF EACH EXCHANGE ON WHICH REGISTERED
                           -------------------                                  -----------------------------------------
      <S>                                                                       <C>
                 Common Stock, $.01 par value per share                                    American Stock Exchange
      8 1/2% Convertible Subordinated Debentures, due March 31, 2007                       American Stock Exchange
</TABLE>

        SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE

     Indicate by check mark 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 registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES [X] NO [ ]

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

     Aggregate market value of Common Stock held by non-affiliates of the
registrant based on the last reported sale price of the Common Stock on the
American Stock Exchange composite tape on March 11, 1998, was $318,001,437,
which value, solely for the purposes of this calculation, excludes shares held
by registrant's executive officers and directors. Such exclusion should not be
deemed a determination by the registrant that all such individuals are, in fact,
affiliates of the registrant.

                      APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.

   CLASS OF COMMON STOCK                  OUTSTANDING AT MARCH 11, 1998
   ----------------------                 -----------------------------
      $.01 par value                             59,456,628 shares

                      DOCUMENTS INCORPORATED BY REFERENCE:

     Portions of the definitive proxy statement for the registrant, to be filed
not later than 120 days after the end of the fiscal year covered by this report,
are incorporated into Part III by reference.

(1)  This Form 10-K is also being filed by the co-registrants specified under
     the caption "Co-Registrants", each of which is a wholly-owned subsidiary of
     Greyhound Lines, Inc. and each of which has met the conditions set forth in
     General Instructions I(1)(a) and (b) of Form 10-K for filing Form 10-K in a
     reduced disclosure format.

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<PAGE>   2




CO-REGISTRANTS

This Form 10-K is also being filed by the following entities. Except as set
forth below, each entity has the same principal executive offices, zip code and
telephone number as that set forth for Greyhound Lines, Inc. on the cover of
this report:

<TABLE>
<CAPTION>
                                                                             I.R.S. EMPLOYER
                                                               COMMISSION    IDENTIFICATION   STATE OF
NAME                                                            FILE NO.          NO.         INCORP.
----                                                           ----------    ---------------  --------
<S>                                                            <C>               <C>           <C>
Atlantic Greyhound Lines of Virginia, Inc.                     333-27267-01      58-0869571    Virginia

Eagle Bus Manufacturing, Inc.                                  333-27267-02      74-2472777    Delaware

FCA Insurance Limited                                          333-27267-03         None       Islands of
                                                                                               Bermuda

GLI Holding Company                                            333-27267-04      75-2146309    Delaware

Greyhound de Mexico S.A. de C.V                                333-27267-05         None       Republic
                                                                                               of Mexico

Grupo Centro, Inc.                                             333-27267-06      75-2692522    Delaware

Los Buenos Leasing Co., Inc.                                   333-27267-07      85-0434715    New Mexico

Sistema Internacional de Transporte de Autobuses,              333-27267-08      75-2548617    Delaware
Inc. 

T & V Holding Company                                          333-27267-09      75-2238995    Delaware

Texas, New Mexico & Oklahoma Coaches, Inc.                     333-27267-10      75-0605295    Texas
1313 13th Street
Lubbock, Texas 79408
(806) 763-5389

T.N.M. & O. Tours, Inc.                                        333-27267-11      75-1188694    Texas
(Same as Texas, New Mexico & Oklahoma Coaches, Inc.)

Vermont Transit Co., Inc.                                      333-27267-12      03-0164980    Vermont
106 Main Street
Burlington, Vermont 05401
(802) 862-9671
</TABLE>

As of December 31, 1997, Atlantic Greyhound Lines of Virginia, Inc. had 150
shares of common stock outstanding (at a par value of $50.00 per share); Eagle
Bus Manufacturing, Inc. had 1,000 shares of common stock outstanding (at a par
value of $0.01 per share); FCA Insurance Limited had 120,000 shares of common
stock outstanding (at a par value of $1.00 per share); GLI Holding Company had
1,000 shares of common stock outstanding (at a par value of $0.01 per share);
Greyhound de Mexico S.A. de C.V. had 10,000 shares of common stock outstanding
(at a par value of $0.10 


<PAGE>   3
Mexican currency per share); Grupo Centro, Inc. had 1,000 shares of common stock
outstanding (at a par value of $0.01 per share); Los Buenos Leasing Co., Inc.
had 1,000 shares of common stock outstanding (at a par value of $1.00 per
share); Sistema Internacional de Transporte de Autobuses, Inc. had 1,000 shares
of common stock outstanding (at a par value of $0.01 per share); T & V Holding
Company had 3,000 shares of common stock outstanding (at a par value of $0.01
per share); Texas, New Mexico & Oklahoma Coaches, Inc. had 1,000 shares of
common stock outstanding (at a par value of $0.01 per share); T.N.M. & O. Tours,
Inc. had 1,000 shares of common stock outstanding (at a par value of $1.00 per
share); and Vermont Transit Co., Inc. had 505 shares of common stock outstanding
(no par value). Each of the above named co-registrants (1) have 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 such
co-registrant was required to file such reports), and (2) have been subject to
such filing requirements for the past 90 days.


<PAGE>   4



                     GREYHOUND LINES, INC. AND SUBSIDIARIES

                               INDEX TO FORM 10-K


<TABLE>
<CAPTION>
                                                                                                 PAGE NO.
                                                                                                 --------
                                                    PART I
<S>                                                                                                <C>
Item 1.     Business...........................................................................     5
Item 2.     Properties.........................................................................    12
Item 3.     Legal Proceedings..................................................................    13
Item 4.     Submission of Matters to a Vote of Security Holders................................    15

                                                   PART II

Item 5.     Market for the Registrant's Common Stock and Related Stockholder Matters...........    16
Item 6.     Selected Consolidated Financial Information........................................    17
Item 7.     Management's Discussion and Analysis of Financial Condition
                and Results of  Operations.....................................................    19
Item 8.     Financial Statements and Supplementary Data........................................    29
Item 9.     Changes in and Disagreements with Accountants on Accounting
                and Financial Disclosure.......................................................    62

                                                   PART III

Item 10.    Directors and Executive Officers of the Registrant.................................    63
Item 11.    Executive Compensation.............................................................    63
Item 12.    Security Ownership of Certain Beneficial Owners and Management.....................    63
Item 13.    Certain Relationships and Related Transactions.....................................    63

                                                   PART IV

Item 14.    Exhibits, Financial Statement Schedules and Reports on Form 8-K....................    64
</TABLE>


<PAGE>   5


                                     PART I

ITEM 1.  BUSINESS

GENERAL

     Greyhound Lines, Inc. and subsidiaries (the "Company") is the only
nationwide provider of scheduled intercity bus transportation services in the
United States. The Company serves the value-oriented customer by connecting
rural and urban markets throughout the United States, offering scheduled
passenger service to more than 2,600 destinations with a fleet of approximately
2,400 buses and approximately 1,600 sales locations. The Company also provides
package express service, charter bus service and, in many terminals, food
service. For the year ended December 31, 1997, the Company generated total
operating revenues of $771.1 million and EBITDA (as defined herein) of $68.4
million.

     The Company serves a diverse customer base, consisting primarily of low to
middle income passengers from a wide variety of ethnic backgrounds. Management
believes that the demographic groups that make up the core of the Company's
customer base are growing at rates faster than the U.S. population as a whole.
The Company believes that it is uniquely positioned to serve this broad and
growing market because (i) the Company's operating costs, which are lower on an
available-seat-mile basis than other modes of intercity transportation, enable
it to offer passengers everyday low prices, (ii) the Company offers the only
means of regularly scheduled intercity transportation in many of its markets,
and (iii) the Company provides additional capacity during peak travel periods to
accommodate passengers who lack the flexibility to shift their travel to
off-peak periods .

BUSINESS STRATEGY

     In late 1994 and early 1995, under the direction of a new management team,
the Company developed a "back-to-basics" operating strategy. This strategy
focused on providing a good customer-oriented product with a capacity-flexible,
sound bus operation.

     To implement this strategy, the Company improved customer service by (i)
rebuilding its infrastructure, (ii) expanding the frequency and convenience of
its schedule offerings and providing flexible scheduling of its equipment,
drivers and other resources to meet peak travel demand, and (iii) introducing
everyday low prices and actively managing fares in individual markets. In
response to these initiatives, the Company has experienced year-over-year
revenue growth in each of its last eleven consecutive quarters.

     The following table illustrates the Company's significant improvements in
operating and financial performance comparing 1997 to 1996 and 1994:

<TABLE>
<CAPTION>
                                                                        YEARS ENDED DECEMBER 31,
                                                                        ------------------------
                                                                              1997/1996                1997/1994
                                                           1997      1996    % CHANGE       1994        % CHANGE
                                                          ------   -------   --------     -------       --------
                                                                           ( IN MILLIONS)
     <S>                                                  <C>        <C>        <C>        <C>          <C>  
     Total Operating Revenues........................     $771.1     $700.9     10.0%      $615.3       25.3%
     EBITDA  (1).....................................      $68.4      $51.5     32.8%      $(29.4)       NA
     Passengers Carried..............................       20.7       18.3     13.1%        15.9       30.2%
     Total Bus Miles.................................      291.6      270.2      7.9%       238.5       22.3%
</TABLE>

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

(1)  Represents earnings before interest, taxes, depreciation and amortization
     and extraordinary items. For 1994, EBITDA includes $54.9 million in certain
     operating charges. Excluding the impact of those certain operating charges,
     1994 EBITDA would have been $25.5 million. When comparing the 1994 EBITDA,
     adjusted for these charges, to the 1997 EBITDA, 1997 shows a 168.2%
     increase over the adjusted 1994 EBITDA.



                                       5
<PAGE>   6

GROWTH STRATEGY

     By the end of 1996, with the "back to basics" strategy fully implemented
and providing a foundation of operating quality, the Company began to emphasize
growth in each of its principal businesses.

     Management believes the following represent significant growth
opportunities for the Company:

     o   CORE PASSENGER GROWTH. The Company believes that its revenues will
         continue to grow as its core demographic customer base expands, and
         that this customer base is growing at a rate that exceeds the U.S.
         population growth rate as a whole. The Company also believes that there
         are opportunities to obtain incremental revenues from its existing
         customer base through continued targeted advertising and promotional
         programs and refinements in pricing and schedule offerings designed to
         reinforce the Company's position as the low-cost alternative to other
         forms of intercity transportation. In 1997, the Company served only 2%
         of the U.S. population while about 30% of the population has similar
         income and demographic characteristics to our served market. Because
         bus transportation represents one of the smallest and most capacity
         flexible segments of the intercity transportation market, the Company
         believes that it has a unique opportunity to realize substantial
         incremental revenues and operating profits by increasing its share of
         this market.

     o   CHARTER BUSINESS. As the Company expands its fleet size and driver
         corps to support the growth of the core passenger business, it will
         provide a significant, complementary growth opportunity in the charter
         business. The incremental fleet and driver corps will allow the Company
         to increase sales of charters during the off-peak periods and also
         provide the Company additional internal resources during the peak
         periods to support growth in the core business. The increased charter
         activity will provide additional profit margin while also "smoothing"
         seasonal earnings trends for the drivers.

     o   DOMESTIC ACQUISITIONS, INTERLINE RELATIONSHIPS AND INTERMODAL
         ALLIANCES. The bus transportation industry is highly fragmented.
         Accordingly, significant opportunities exist for the Company to acquire
         regional bus operators or to form strategic alliances with these
         carriers to increase its penetration of existing markets. During the
         third quarter of 1997, the Company completed two acquisitions involving
         regional bus carriers. On July 9, 1997, the Company purchased Carolina
         Coach Company, and affiliates ("Carolina"), a Mid-Atlantic bus carrier
         and on August 25, 1997, the Company purchased Valley Transit, Inc., and
         affiliates ("Valley"), a South Texas bus carrier. The Company expects
         to realize revenue growth and operating efficiencies as a result of
         these acquisitions. In addition, the Company has entered into and will
         continue to seek, new "pooling" arrangements, which typically result in
         reduced expenses due to the consolidation of terminal facilities and
         the elimination of redundant schedule offerings, while providing
         incremental revenue opportunities due to improved schedule patterns.
         The Company is currently a party to five pooling arrangements with
         regional carriers serving overlapping markets (one of which was
         implemented on January 13, 1998). The Company also has two pooling
         arrangements approved by the U.S. Surface Transportation Board ("STB")
         but not implemented and two additional pooling arrangements pending
         approval by the STB. Management believes future acquisitions of
         domestic regional carriers and the establishment of additional pooling
         arrangements, as well as intermodal alliances with airlines and Amtrak,
         represent opportunities to achieve further growth in passenger revenues
         by capitalizing on the Company's ability to serve additional passengers
         without proportionately increasing expenses.

     o   HISPANIC MARKETS. Management believes the Spanish speaking markets in
         the U.S. and Mexico represent a significant growth opportunity. The
         Company believes that the most effective way to service passengers in
         this market is through joint ventures or other business combinations
         with Mexico-based bus carriers and U.S.-based bus carriers that
         primarily serve these markets. With this goal in mind, the Company, on
         February 9, 1998, purchased a majority interest in Golden State, a
         family-owned bus carrier in Southern California. Additionally, during
         1997 the Company invested in joint ventures that provide through-bus
         service on selected routes between destinations in the United States
         and Mexico and is involved in negotiations to establish other similar
         arrangements.



                                       6
<PAGE>   7

     o   EXPRESS BUSINESS. The Company is implementing programs to rebuild its
         package express business and capitalize on the market niche
         opportunities, specific to the Company's service. Improvements were put
         in place in 1997, including increased hours of service, improved
         billing, and the addition of more convenient schedules. These service
         improvements and the increased focus that the Company has placed on
         package express allowed the Company to capitalize on the business
         available during the United Parcel Service strike in August of this
         year. The Company will continue to develop and implement programs
         designed to further build the package express business. These programs
         focus on system upgrades to improve service, billing and package
         tracking for customers, and localized marketing strategies to
         capitalize on the Company's competitive strengths. The Company is
         concentrating on its market niche, which is same day or early next
         morning service, seven days-a-week, linking large and small markets.
         The Company is in a unique position to provide these types of services
         at an affordable price. Most importantly, the Company is focusing on
         developing door-to-door service across a significant portion of its
         network through strategic alliances with, or acquisitions of, pick-up
         and delivery ("P&D") carriers. The Company believes that door-to-door
         service combined with the Company's market advantages and low costs
         will position it for growth in the package delivery market.

          Additionally, the Company believes other revenue growth opportunities
are available, such as providing increased bus service to casino and commuter
markets and marketing selected products or services to its unique customer base.

MARKETS

     Passengers. While the Company's major passenger markets are large
metropolitan areas, its business is geographically fragmented with the 50
largest sales outlets accounting for approximately 50% of 1997 ticket sales, and
the 1,000 largest origin/destination city pairs producing only 46% of 1997
ticket sales. Demographic studies have shown that the Company's potential riders
are concentrated in the northeastern, southern and industrial midwestern United
States, as well as Texas and California. The typical passenger travels to visit
friends and relatives and generally has an annual income of below $35,000. Based
on market studies, the Company believes its customers are more price sensitive
than time sensitive. In many cases, the Company's passengers report that they
own automobiles considered sufficiently reliable for a trip of a similar
distance, but travel by bus because they are traveling alone or because of the
lower cost of bus travel. The majority of the Company's customers usually make
the decision to take a trip only a short time before actually traveling and, for
the most part, pay cash for their tickets on the day of departure.

     Package Express. The Company's package express service caters to commercial
shippers and delivery companies that require rapid delivery of small parcels,
typically within 300 miles. Shipments include automotive repair parts, computer
parts and forms, fresh flowers, eyeglasses, medical and dental supplies,
architectural and legal documents, and pharmaceutical products. With its
extensive network and multiple schedules, the Company is able to provide
expedited service, especially to small towns. Most shipments arrive at their
destination on the same day they are shipped or by early the following morning.

     Food Service. The Company's food service division manages facilities in
approximately 160 locations, which primarily serve the Company's passengers.
These operations include Company-operated facilities and contract
concessionaires and range in service levels from full-service cafeterias to
vending machines.

MARKETING AND ADVERTISING

     The Company's marketing and advertising philosophy is geared toward
stimulating extra travel through price awareness, improving the awareness and
image of Greyhound among potential customers and inducing first-time and repeat
travel. The Company uses various means to advertise its passenger travel
business including radio, television and print media (primarily yellow pages and
magazines). Additionally, the Company offers convenient around-the-clock fare
and schedule quotations via a toll-free telephone number through its telephone
information centers. The Company's telephone centers handled 32.1 million calls
in 1997, an increase of 17.3% over 1996. The Company also markets its other
passenger and in-terminal services through advertising in the terminal
facilities and in print media.



                                       7
<PAGE>   8

OPERATIONS

     The Company utilizes approximately 125 company-operated bus terminals and
approximately 1,500 agency-operated terminals and/or sales agencies organized in
11 districts and lead by district managers of customer service. Maintenance
garages are maintained at 14 strategic locations and are supplemented by
company-operated service islands and fueling points. The Company currently has
approximately 4,300 drivers based in 87 different locations across the country.
The drivers report to driver supervisors who are organized into 11 districts
reporting to district managers of driver operations. The scheduling and dispatch
of the Company's bus fleet and driver corps is a coordinated and centralized
function performed by the Company's resource management group. This group's
purpose is to serve as a liaison between management and the field in the
planning and execution of daily operations through the Company's existing
network. This is accomplished through the management of national dispatch
operations for equipment and drivers, rental of additional buses to cover peak
demand periods, planning and coordinating extra sections with the field and
analyzing and implementing pooling arrangements with other carriers. This group
also plans the fleet size and driver requirements by location during the year
and assists in determining the resource needs based on the sales plan each year.

     Information technology is an integral component of the Company's
operations. The Company's information systems support, among other things, its
scheduling and pricing, dispatch, operations planning, bus maintenance,
telephone information center, customer service, point of sale, payroll and
finance functions. As of December 31, 1997, the Company's automated fare and
schedule quotation and ticketing system, called TRIPS, was in use at 319
locations.

COMPETITION

     Passengers. The transportation industry is highly competitive. The
Company's primary sources of competition for passengers are automobile travel,
low cost air travel from both regional and national airlines, and in certain
markets, regional bus companies and trains. During the past few years, airlines
have increased their penetration in intermediate-haul markets (450 to 1,000
miles), which has resulted in the bus industry, in general, reducing prices in
these markets in order to compete. Additionally, airline discount programs have
attracted certain long-haul passengers away from the Company. However, these
lower airline fares usually contain restrictions and require advance purchase.
Typically, the Company's customers decide to travel only a short time before
their trip and purchase their tickets on the day of travel. The Company's
everyday low pricing strategy results in "walk-up" fares substantially below
comparable airline fares. In instances where the Company's fares exceed an
airline discount fare, the Company believes the airline fares typically are more
restrictive and less readily available than travel provided by the Company. In
addition, the Company believes that in many cases it offers more destination
choices and more convenient schedules.

     The automobile is the most significant form of competition to the Company.
The out-of-pocket costs of operating an automobile are generally less expensive
than bus travel, particularly for multiple persons traveling in a single car.
The Company meets this competitive threat through price and convenient
scheduling. To some extent, the Company is protected from the incremental
economies of auto travel since many of its customers travel alone. The lack of
multiple, reliable cars within a family and the fear of driving alone for long
distances serve to offset the reduced convenience of bus travel and the economic
advantage of multi-person travel in a single car.

     Competition from regional bus companies has increased materially during the
past several years. Price, frequency of service and convenient scheduling are
the current strategies of the Company to meet this competition. The Company's
competitors possess operating authority for, but do not currently operate over,
numerous routes potentially competitive to the Company. Based on market and
competitive conditions, the regional bus companies could operate such routes in
the future. Competition by U.S.-based bus and van operators for the market
represented by Spanish speaking customers in the U.S. is growing. As of January
1, 1997, barriers to entry into the cross-border intercity bus market between
the U.S. and Mexico were reduced under the North American Free Trade Agreement
("NAFTA"). Entry into either market is still regulated by the respective U.S.
and Mexican regulatory authorities. The U.S. government currently has a
moratorium on grants of cross-border authority to Mexican-owned or controlled
carriers of freight and passengers. There is no current indication as to when
the moratorium will be lifted; however, should the moratorium be lifted, the
Company could experience significant new competition on routes to, from and
across 



                                       8
<PAGE>   9


Mexican border points. Nevertheless, certain U.S.-based operators are
providing cross-border service into Mexico at this time. NAFTA also permits U.S.
carriers to make non-controlling, minority investments in Mexican-owned carriers
and permits Mexican carriers to make non-controlling, minority investments in
U.S.-owned carriers. In addition to bringing new competition, the Company
believes that the changes under NAFTA will increase the volume of bus travel
along both sides of the border and provide the Company with a growth
opportunity. The Company believes that the most effective way to service
passengers in this market is through joint ventures or other business
combinations with Mexico-based bus carriers and U.S.-based bus operators that
primarily serve these Spanish-speaking markets. The Company has established a
separate operating subsidiary that has completed joint ventures that provide
through-bus service on selected routes between destinations in the United States
and Mexico, has made investments in U.S.-based carriers and is involved in
negotiations to establish other similar arrangements.

     Package Express. The Company faces intense competition in its package
express service from local courier services, the U.S. Postal Service and
overnight, express and ground carriers. The Company continues to develop
programs to meet this competition and rebuild its package express business.
These programs focus on system upgrades to improve service, billing and tracking
for its customers, localized marketing strategies, and local or regional
alliances with, or acquisitions of, P&D carriers. Due to the incremental nature
of the package express business, the Company is able to provide same-day package
express service at distances of up to 400 miles at a substantially lower price
than prices charged by other delivery services. Management believes that if this
capability is conveniently aligned with P&D services at both ends, the revenue
potential of a value-priced, door-to-door, same-day delivery service will enable
package express revenues to grow.

     Food Service. The captive nature of the food service operations in the
Company's terminals limits competition; however, in some locations proximity to
fast food outlets and convenience stores can pose a competitive factor.

SEASONALITY

     The Company's business is seasonal in nature and generally follows the
pattern of the travel industry as a whole, with peaks during the summer months
and the Thanksgiving and Christmas holiday periods. As a result, the Company's
cash flows are seasonal in nature with a disproportionate amount of the
Company's annual cash flows being generated during the peak travel periods.
Therefore, an event that adversely affects ridership during any of these peak
periods could have a material adverse effect on the Company's financial
condition and results of operations for that year. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Seasonality."

WORKFORCE

     At March 5, 1998, the Company employed approximately 11,700 workers,
consisting of approximately 4,000 terminal employees, 4,300 drivers, 1,200
supervisory personnel, 800 mechanics, 900 telephone information agents and 500
clerical workers. Of the total workforce, approximately 9,400 are full-time
employees and approximately 2,300 are part-time employees.

     At March 5, 1998, approximately 46% of the Company's employees were
represented by collective bargaining agreements. The Amalgamated Transit Union
(the "ATU") represents approximately 4,800 of the Company's employees, including
drivers, telephone information agents in the Omaha location, terminal workers in
seven locations (approximately 170 employees) and about one-half of the
Company's mechanics. The largest ATU agreement, which covers the drivers and
maintenance employees, expires on January 31, 1999. In January 1998, the Company
and the ATU reached a tentative agreement for a new labor contract. The
agreement was submitted to the ATU membership for ratification and on March 14,
1998, the ATU membership rejected this agreement. The International Association
of Machinists and Aerospace Workers (the "IAM") represents approximately 350 of
the Company's employees, including the remaining mechanics. The IAM agreements
expire on October 1, 1999. The Company also has bargaining agreements with the
International Brotherhood of Teamsters, which represent approximately 108
employees at 3 terminal locations and the United Transportation Union, which
represents employees at one of the Company's subsidiaries. Additionally during
1997, the ATU and Teamsters attempted to unionize employees in five terminal
locations and one food service location. These unions succeeded in organizing
employees at three terminals and one food service location; contracts for all
but one of these locations are still in 


                                       9
<PAGE>   10
negotiation involving approximately 100 employees still without a contract.

TRADEMARKS

     In 1997 the Company acquired from the predecessor owner of Greyhound's
domestic bus operations, now known as Viad Corp ("Viad"), the Greyhound name and
trademarks and the "image of the running dog" trademarks worldwide, except in
Canada. The Company believes that this name and the trademarks have substantial
consumer awareness.

GOVERNMENT REGULATION

     The Department of Transportation. As a motor carrier engaged in interstate,
as well as intrastate, transportation of passengers and express shipments, the
Company is, and must remain, registered with the United States Department of
Transportation (the "DOT"). Failure to maintain a satisfactory safety rating,
designate agents for service of process or to meet minimum financial
responsibility requirements, after notice and opportunity to remedy, may result
in the DOT's ordering the suspension or revocation of the registration of the
Company and its right to provide transportation. DOT regulations also govern the
qualifications, duties and hours of service of drivers, the standards for
vehicles, parts and accessories, the maintenance of records and the submission
of reports pertaining to the Company's drivers, buses and operations. The
Company is subject to periodic and random inspections and audits by the DOT or,
pursuant to cooperative arrangements with the DOT, by state police or officials,
to determine whether the Company's drivers, buses and records are in compliance
with the DOT's regulations. The Company, from time to time, has been cited by
the DOT for noncompliance with its regulations but, nevertheless, has retained a
satisfactory safety rating. The DOT establishes minimum financial responsibility
requirements for motor carriers; the Company has met these requirements and has
been authorized to partially self-insure its bodily injury and property damage
liability. See "-- Insurance Coverage." The DOT also administers regulations to
assure compliance with vehicle noise and emission standards prescribed by the
Environmental Protection Agency (the "EPA"). All of the buses in the Company's
fleet contain engines that comply with, or are exempt from compliance with, EPA
regulations, but, on occasion, the Company has been cited and fined for
non-compliance with noise or emission standards. Additionally, there is
currently litigation pending in California, to which the Company is not
presently a party, seeking to enforce the posting of public health warnings at
locations where diesel fuel emissions are present.

     Surface Transportation Board. The Company is also regulated by the DOT's
Surface Transportation Board (the "STB"). The STB must grant advance approval
for the Company to pool operations or revenues with another passenger carrier.
The Company currently has two applications pending before the STB seeking
approval of pooling agreements with Peter Pan Bus Lines. The STB, moreover, must
authorize any merger by the Company with, or its acquisition or control of,
another motor carrier of passengers. The Company must maintain reasonable
through routes with other motor carriers of passengers, and, if found not to
have done so, the STB can prescribe them. The Company is party to certain
agreements, which are subject to STB authorization and supervision, for the
adoption of mileage guides, rules, divisions or general rate adjustments.

     State Regulations. As an interstate motor carrier of passengers, the
Company may engage in intrastate operations over any of its authorized routes.
By federal law, states are pre-empted from regulating the Company's fares or its
schedules, including the withdrawal of service over any route. However, the
Company's buses remain subject to state vehicle registration requirements, bus
size and weight limitations, fuel sales and use taxes, speed and traffic
regulations and other local standards not inconsistent with federal
requirements.

     Other. The Company is subject to regulation under the Americans with
Disabilities Act (the "ADA"). Under the ADA and interim guidelines promulgated
by the DOT, the Company is required to make its transportation system accessible
to disabled persons. The DOT is currently developing final regulations regarding
bus access. Following the promulgation of final regulations, which the DOT has
announced are expected to be finalized by September 1998, the Company will have
two years before the new regulations become effective. The Company believes that
the DOT has several alternatives under consideration, ranging from requiring all
of the Company's new buses to be equipped with lift equipment to requiring only
that terminals be equipped with stationary lift devices. The ADA does not
require the retrofitting of existing buses with lift equipment.  The Company is
unable to predict which of the various alternatives the DOT will select.
However, the Company has concluded that the implementation of certain of these
alternatives under consideration by 



                                       10
<PAGE>   11

the DOT could be material to the Company's liquidity, financial condition and
results of operations. Additionally, the ADA requires the Company to design its
new terminal facilities and, where readily achievable, retrofit existing
terminal facilities to eliminate barriers affecting access by handicapped
persons. The Company has a program to identify and address mobility barriers at
its facilities and has made, and is expected to continue to make, expenditures
to address these issues.


INSURANCE COVERAGE

     The predecessor agency to the STB granted the Company authority to
self-insure its automobile liability exposure for interstate passenger service
up to a maximum level of $5.0 million per occurrence which has been continued by
the DOT. To maintain self-insurance authority, the Company is required to
maintain a satisfactory safety rating by the DOT, a tangible net worth of $10.0
million (as of December 31, 1997, the Company's tangible net worth was $119.1
million) and a $15.0 million trust fund (currently fully funded) to provide
security for payment of claims. Subsequent to the self-insurance grant by the
federal government, 38 states granted the Company the authority to self-insure
its intrastate automobile liability exposure. The Company maintains
comprehensive automobile liability and general liability insurance to insure its
assets and operations subject to a $1.5 million self-insured retention or
deductible per occurrence. The Company also maintains property insurance subject
to a $0.1 million deductible per occurrence and maintains workers' compensation
insurance subject to a $1.0 million deductible per occurrence. Additionally, the
Company is required by some states and some of its insurance carriers to
maintain collateral deposits (which is discussed below in Liquidity and Capital
Resources).

     Insurance coverage and risk management expense are key components of the
Company's cost structure. The DOT is currently studying whether to continue or
modify the self-insurance program available to the motor carrier industry. The
loss of self-insurance authority from the DOT or a decision by the Company's
insurers to modify the Company's program substantially, by either increasing
cost, reducing availability or increasing collateral, could have a materially
adverse effect on the Company's liquidity, financial condition, and results of
operations.

ENVIRONMENTAL MATTERS

     The Company may be liable for certain environmental liabilities and
clean-up costs relating to underground fuel storage tanks and systems in the
various facilities presently or formerly owned or leased by the Company. Based
upon surveys conducted solely by Company personnel or its experts, 45 locations
have been identified as remaining sites requiring potential clean-up and/or
remediation as of December 31, 1997. The Company has estimated the clean-up
and/or remediation costs of these sites to be $2.9 million, of which
approximately $0.3 million is indemnifiable by Viad.

     The Company has potential liability with respect to two locations which the
EPA has designated Superfund sites. The Company, as well as other parties
designated by the EPA as potentially responsible parties, face exposure for
costs related to the clean-up of those sites. Based on the EPA's enforcement
activities to date, the Company believes its liability at these sites will not
be material because its involvement was as a de minimis generator of wastes
disposed of at the sites. In light of its minimal involvement, the Company has
been negotiating to be released from liability in return for the payment of
immaterial settlement amounts. Additionally, there are 12 Superfund sites that
Viad had initially assumed responsibility and liability for addressing under the
indemnity provisions of the 1987 acquisition agreement, as amended in 1991. All
of these locations involve alleged disposal of hazardous wastes occurring years
prior to the Company's corporate existence. In late 1997, Viad notified the
Company, and asserted that the Company was responsible for any liabilities at
such sites. The Company is contesting Viad's assertions and believes that the
acquisition agreement, as amended, requires Viad to bear these liabilities. Viad
had previously acknowledged in writing to the Company its responsibility for
certain of the sites; in some cases, Viad has been managing the liability since
mid-1991. Viad has advised the Company that, to date, it has incurred
approximately $0.2 million in clean-up costs at these sites. At this point, the
Company is unable to assess on-going or future potential liabilities at such
sites should it be determined that the Company, and not Viad, will assume the
liabilities at some or all of the 12 locations.

     The Company has recorded a total environmental reserve of $2.7 million at
December 31, 1997, a portion of which has also been recorded as a receivable
from Viad for indemnification. The environmental reserve relates to




                                       11
<PAGE>   12

sites identified for potential clean-up and/or remediation and represents the
present value of estimated cash flows discounted at 8.0%. As of the date of this
filing, the Company is not aware of any additional sites to be identified, and
management believes that adequate accruals have been made related to all known
environmental matters.

ITEM 2.  PROPERTIES

LAND AND BUILDINGS

     At December 31, 1997, the Company used 507 parcels of real property in its
operations, of which it owns 161 properties and leases 346 properties. Of those
properties, 379 are bus terminals, 31 are maintenance facilities, 30 are
terminal/maintenance facilities, and the remaining properties consist of driver
dormitories, parking/storage lots, office/storage/warehouse buildings and
telephone information centers. These properties are located throughout the
United States. The Company believes the current makeup of its properties is
adequate for its operations, and although there can be no assurance, based on
its recent experience, the Company believes that it will be able to find
suitable replacement properties on acceptable terms for any properties the
Company chooses to replace, or which are condemned, or for which leases are not
renewed or are otherwise terminated.

FLEET COMPOSITION, FLEET AGE AND BUS ACQUISITIONS

     During 1997, the Company took delivery of 210 buses, retired 82 buses and
through the acquisitions of Carolina and Valley added 137 buses, resulting in a
fleet of 2,373 buses at year-end. Through January 31,1998, the Company has taken
delivery of an additional 32 buses and retired 90 buses. At January 31, 1998,
the Company owned 893 buses and leased an additional 1,422 buses. Motor Coach
Industries, Inc. ("MCI") or its affiliate, Dina Autobuses, S.A. de C.V.
("DASA"), hereafter referred to collectively as "MCI", produced all but 109 of
these buses. In January 1998, the Company entered into a new long-term supply
agreement with MCI. The new agreement is for a term of ten years. If the Company
decides to acquire new buses, the Company and its affiliates must purchase at
least 80% of its new bus requirements from MCI pursuant to the agreement. The
Company has ordered 163 new buses to be delivered during the first half of 1998.
The Company is evaluating the possibility of additional deliveries during the
second half of 1998. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources".

     The average age of the Company's bus fleet has been reduced from 9.5 years
in January 1993 to approximately 6.3 years as of January 31, 1998. However, 26%
of the Company's bus fleet remains in excess of 10 years old. The Company
intends, over time, to replace these older, less reliable vehicles with new
buses. The Company believes that newer buses, as well as older buses with newer
engines, are more fuel efficient than buses with older engines. In addition, new
buses are generally less costly to maintain, in part because of warranty
coverage, and generally enhance customer satisfaction.





                                       12
<PAGE>   13


ITEM 3.  LEGAL PROCEEDINGS

SECURITIES AND DERIVATIVE LITIGATION; SEC INVESTIGATION.

     Between August and December 1994, seven purported class action lawsuits
were filed by purported owners of the Company's Common Stock, Convertible
Debentures and 10% Senior Notes against the Company and certain of its former
officers and directors. The suits sought unspecified damages for securities laws
violations as a result of statements made in public reports and press releases
and to securities analysts during 1993 and 1994 that were alleged to have been
false and misleading.

     All the purported class action cases referred to above (with the exception
of one suit that was dismissed before being served on any defendants) were
transferred to the United States District Court for the Northern District of
Texas, the Court in which the first purported class action suit was filed, and
were pending under a case styled In re Greyhound Securities Litigation, Civil
Action 3-94-CV-1793-G. A joint pretrial order was entered in the litigation
which consolidated for pretrial and discovery purposes all of the stockholder
actions and, separately, all of the debtholder actions. The joint pretrial order
required plaintiffs to file consolidated amended complaints and excused answers
to the original complaints. In July 1995, the plaintiffs filed their
consolidated amended complaints, naming the Company, Frank J. Schmieder, J.
Michael Doyle, Phillip W. Taff, Robert R. Duty, Don T. Seaquist, Charles J. Lee,
Charles A. Lynch and Smith Barney Incorporated as defendants. Messrs. Lee, Lynch
and Taff were subsequently dismissed from the case by the plaintiffs. In
September 1995, the various defendants filed motions to dismiss plaintiffs'
complaints. In October 1995, plaintiffs filed a motion seeking to certify the
class of plaintiffs.

     On October 3, 1996, the Court ruled in favor of the Company and all other
defendants, granting defendants' motions to dismiss. Pursuant to the Court's
order, the complaints were dismissed, with leave granted to the plaintiffs to
refile amended complaints within 20 days thereafter. On October 23, 1996, an
amended complaint was tendered to the Court. All seven class representatives
involved in the prior complaints were dropped from the case. A new purported
class plaintiff, John Clarkson, was named. A motion was filed seeking leave to
permit Mr. Clarkson to intervene as the new class representative. The amended
complaint alleged a class period of May 4, 1993 to October 26, 1993 and was
brought only on behalf of holders of Common Stock. The amended complaint named
the same defendants involved in the dismissed cases (the Company, Messrs.
Schmieder, Doyle, Duty and Seaquist and Smith Barney Incorporated); no new
defendants were added and none were dropped. The Court advised the parties that
no responsive pleading needed to be filed to the amended complaint until such
time as the Court ruled on the motion for intervention filed by Mr. Clarkson. In
December 1996, the defendants filed responses to plaintiff's motion for
intervention. In January 1997, the plaintiff filed a reply brief.

     On August 15, 1997, the Court denied Mr. Clarkson leave to intervene and
dismissed the litigation, noting that all claims asserted had been adjudicated.
On September 12, 1997, a notice of appeal was filed by counsel for the original
seven plaintiffs, seeking a review of the Court's ruling of October 3, 1996. On
February 9, 1998, plaintiffs dismissed their appeal, without prejudice, with a
right to re-file the appeal within six months.

     In November 1994, a shareholder derivative lawsuit was filed by Harvey R.
Rice, a purported owner of the Company's Common Stock, against present directors
and former officers and directors of the Company and the Company as a nominal
defendant. The suit seeks to recover monies obtained by certain defendants by
allegedly trading in the Company's securities on the basis of nonpublic
information and to recover monies for certain defendants' alleged fraudulent
dissemination of false and misleading information concerning the Company's
financial condition and future business prospects. The suit, filed in the
Delaware Court of Chancery, New Castle County, is styled Harvey R. Rice v. Frank
J. Schmieder, J. Michael Doyle, Charles A. Lynch, Richard J. Caley, Thomas F.
Meagher, Thomas G. Plaskett, Kenneth R. Norton, Robert B. Gill, Alfred E.
Osborne, Jr., J. Patrick Foley, Charles J. Lee and Greyhound Lines, Inc., Civil
Action No. 13854. Pursuant to a stipulation, the time for all defendants to
answer, move or otherwise plead with respect to the derivative complaint is not
yet due.

     In May 1995, a lawsuit was filed on behalf of two individuals, purported
owners of the Company's Common Stock, against the Company and certain of its
former officers and directors. The suit sought unspecified damages for
securities laws violations as a result of statements made in public reports and
press releases and to securities analysts during 1993 and 1994 that are alleged
to have been misleading. The suit, filed in the United States District Court for


                                       13
<PAGE>   14


the Northern District of Ohio, was styled James Illius and Theodore J. Krawec v.
Greyhound Bus Lines, Inc., Frank J. Schmieder and J. Michael Doyle, Civil Action
No. 1-95-CV-1140. The defendants filed a motion to transfer venue seeking to
have the case transferred to the United States District Court for the Northern
District of Texas where the class action litigation described above was pending.
In September 1995, the defendants' motion was granted, and the matter was
transferred and was consolidated into the Federal Court class action litigation
described above.

     On October 29, 1996, a purported class action lawsuit was brought by a
purported holder of Common Stock against the Company, certain of its former
officers and directors and Smith Barney and Morgan Stanley & Company, Inc. The
suit seeks unspecified damages for alleged federal and Texas state securities
laws violations in connection with a Common Stock offering made by the Company
in May 1993. The suit, filed in the 44th Judicial District Court of Dallas
County, Texas, is styled John Clarkson v. Greyhound Lines, Inc., Frank
Schmieder, J. Michael Doyle, Robert R. Duty, Don T. Seaquist, Smith Barney, Inc.
and Morgan Stanley & Company, Inc., Case No. 96-11329-B. Plaintiff, John
Clarkson, is the same individual who sought to intervene in the Federal Court
class action litigation described above, and the same law firms have appeared
for the plaintiff in both cases. On December 20, 1996, the defendants filed
their answers to the lawsuit and pleas in abatement asking the Court to stay all
proceedings pending resolution of the intervention motion and Federal Court
class action lawsuit. On February 28, 1997, the suit was transferred to a
different judge in the 68th Judicial District Court in Dallas. On March 28,
1997, the Court denied the defendants' pleas in abatement requesting the stay.
In addition, on September 12, 1997, plaintiff filed a motion seeking to certify
the class of plaintiffs. This motion, which will be contested by the defendants,
is currently set for hearing on April 13, 1998. The Court has presently set a
trial date for this case of June 16, 1998. No additional hearings or proceedings
are scheduled.

     Based on a review of the litigation, a limited investigation of the
underlying facts and discussions with legal and outside counsel, the Company
does not believe that the outcome of the above described lawsuits would have a
material adverse effect on its business, financial condition, results of
operations and liquidity. The Company intends to defend against the actions
vigorously. To the extent permitted by Delaware law, the Company is obligated to
indemnify and bear the cost of defense with respect to lawsuits brought against
its officers and directors. The Company maintains directors' and officers'
liability insurance that provides certain coverage for itself and its officers
and directors against claims of the type asserted in the subject litigation. The
Company has notified its insurance carriers of the asserted claims. Preliminary
settlement discussions have taken place among the Company, the Company's
insurance carriers and the plaintiffs but no agreement has been reached.

     In January 1995, the Company received notice that the Securities and
Exchange Commission is conducting a formal, non-public investigation into
possible securities laws violations allegedly involving the Company and certain
of its former officers, directors and employees and other persons. The
Commission's Order of Investigation (the "Order of Investigation") states that
the Commission is exploring possible insider trading activities, as well as
possible violations of the federal securities laws relating to the adequacy of
the Company's public disclosures with respect to problems with its passenger
reservation system implemented in 1993 and lower-than-expected earnings for
1993. In addition, the Commission has stated that it will investigate the
adequacy of the Company's record keeping with respect to the passenger
reservation system and its internal auditing controls. Although the Commission
has not announced the targets of the investigation, it does not appear from the
Order of Investigation that the Company is a target of the insider trading
portion of the investigation. In September 1995, the Commission served a
document subpoena on the Company requiring the production of documents, most of
which the Company had voluntarily produced to the Commission in late 1994. The
Company has fully cooperated with the Commission's investigation of these
matters. The Company has had limited contact with the Commission in connection
with the investigation since January 1996. The probable outcome of this
investigation cannot be predicted at this stage in the proceeding.

OTHER LEGAL PROCEEDINGS.

     In addition to the litigation discussed above, the Company is a defendant
in various lawsuits arising in the ordinary course of business, primarily cases
involving personal injury and property damage claims and employment-related
claims. Although these lawsuits involve a variety of different facts and
theories of recovery, the majority arise from traffic accidents involving buses
operated by the Company. The vast majority of the personal injury and property
damage claims are covered by insurance for amounts in excess of the
self-retention or deductible portion of the policies. Therefore, based on the
Company's assessment of known claims and its historical claims payout pattern



                                       14
<PAGE>   15


and discussion with legal and outside counsel and risk management personnel,
management believes that there is no proceeding either threatened or pending
against the Company relating to such personal injury and/or property damage
claims arising in the ordinary course of business that, if resolved against the
Company, would materially exceed the amounts recorded.


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

     None.




                                       15
<PAGE>   16





                                                       PART II

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

MARKET INFORMATION

     The common stock of the Company, par value $.01 per share (the "Common
Stock"), is listed on the American Stock Exchange under the symbol "BUS." The
following table sets forth the high and low sale prices for the Company's Common
Stock during the periods indicated as reported by the American Stock Exchange:

<TABLE>
<CAPTION>
                                                                                  HIGH           LOW
                                                                                  ----           ---
               <S>                                                              <C>            <C>
               First Quarter 1996............................................   $ 4 9/16       $ 2 7/8
               Second Quarter 1996...........................................     5              3 1/2
               Third Quarter 1996............................................     4 9/16         3 1/16
               Fourth Quarter 1996...........................................     4 1/2          3

               First Quarter 1997............................................   $ 5 1/2        $ 3 11/16
               Second Quarter 1997...........................................     5              3 7/16
               Third Quarter 1997............................................     4 7/8          3 3/4
               Fourth Quarter 1997...........................................     4 7/16         3 3/8

               January 1, 1998 - March 11, 1998..............................   $ 5 3/4        $ 3 1/2
</TABLE>

HOLDERS

     The number of shares of Common Stock outstanding as of March 11, 1998, was
59,456,628. The Company has issued 59,565,820 shares of Common Stock, of which
109,192 shares are currently held by the Company as treasury stock. As of March
11, 1998 there were approximately 11,402 recordholders of Common Stock.

DIVIDENDS

     The Company has not paid any dividends on the Common Stock in the past and
does not expect to pay any dividends on the Common Stock in the foreseeable
future. The indenture governing the Company's 11 1/2% Senior Notes and the
Revolving Credit Facility restricts the Company's ability to pay dividends on
the Common Stock. In the event the Company was contractually permitted to pay
dividends, the holders of Common Stock would be entitled to receive dividends
only when, as and if declared by the Board of Directors of the Company, subject
to the prior rights and preferences, if any, of holders of preferred stock.

CONVERTIBLE DEBENTURES

     At December 31, 1997, the Company had outstanding $9.8 million aggregate
principal amount of its 8 1/2% Convertible Subordinated Debentures due March 31,
2007 (the "Convertible Debentures"). At the option of the holders thereof, the
Convertible Debentures may be converted into shares of Common Stock at any time
prior to maturity (unless earlier redeemed or repurchased), at a conversion rate
of approximately 80.81 shares (subject to adjustment in certain events) of
Common Stock per $1,000 principal amount of Convertible Debentures.







                                       16
<PAGE>   17





ITEM 6.  SELECTED CONSOLIDATED FINANCIAL INFORMATION

     The statement of operations data and statement of financial position data
set forth below have been derived from the audited Consolidated Financial
Statements of the Company for each of the respective periods indicated. The
following financial information should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations",
"Business" and the Consolidated Financial Statements and notes thereto included
elsewhere in this filing. Certain reclassifications have been made to the prior
period statements to conform them to the December 31, 1997 classifications.

<TABLE>
<CAPTION>
                                                                                 YEARS ENDED DECEMBER 31,
                                                                   1997       1996       1995     1994(a)      1993
                                                                 --------   --------   --------  ---------   --------
STATEMENT OF OPERATIONS DATA:                                             (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                                              <C>        <C>        <C>       <C>         <C>     
Operating Revenues
   Transportation services
     Regular route.............................................  $658,396   $597,779   $560,239  $ 518,431   $559,883
     Package express...........................................    35,676     33,527     35,690     40,232     47,905
   Food services...............................................    21,411     21,363     19,440     19,490     19,188
   Other operating revenues....................................    55,639     48,189     41,752     37,158     38,578
                                                                 --------   --------   --------  ---------   --------
         Total Operating Revenues..............................   771,122    700,858    657,121    615,311    665,554
                                                                 --------   --------   --------  ---------   --------
Operating Expenses
   Maintenance.................................................    77,022     73,441     68,540     73,469     77,893
   Transportation..............................................   187,311    170,979    156,878    133,766    133,284
   Agents' commissions and station costs.......................   141,100    131,715    125,650    119,438    122,209
   Marketing, advertising and traffic..........................    26,860     25,811     25,513     36,445     28,431
   Insurance and safety........................................    45,860     41,088     52,820     82,786     51,143
   General and administrative..................................    90,752     80,496     72,105     70,583     67,436
   Depreciation and amortization...............................    31,259     30,683     31,010     36,046     33,154
   Operating taxes and licenses................................    51,511     49,831     48,186     47,478     47,114
   Operating rents (b).........................................    59,105     53,993     47,884     48,286     45,313
   Cost of goods sold - Food services..........................    13,289     13,774     12,597     13,465     12,617
   Other operating expenses....................................     9,947      8,243      6,575     16,502      7,119
   Restructuring expenses......................................         -          -          -      2,523          -
                                                                 --------   --------   --------  ---------   --------
         Total Operating Expenses..............................   734,016    680,054    647,758    680,787    625,713
                                                                 --------   --------   --------  ---------   --------
Operating Income (Loss)........................................    37,106     20,804      9,363    (65,476)    39,841
   Gain on Sale of Assets......................................         -          -          -          -     (5,838)
   Interest Expense............................................    27,657     27,346     26,807     33,456     30,832
   Income Tax Provision........................................     1,051         62        374     16,862      6,253
                                                                 --------   --------   --------  ---------   --------
Income (Loss) Before Extraordinary Items and Cumulative
     Effect of a Change in Accounting Principle................     8,398     (6,604)   (17,818)  (115,794)     8,594
   Extraordinary Items (c).....................................    25,323          -          -    (38,373)       407
   Cumulative Effect of a Change in Accounting Principle (d)...         -          -          -          -        690
                                                                 --------   --------   --------  ---------   --------
Net Income (Loss) .............................................   (16,925)    (6,604)   (17,818)   (77,421)     7,497
   Preferred Dividends.........................................     3,648          -          -          -          -
                                                                 --------   --------   --------  ---------   --------
Net Income (Loss) Attributable to Common Shareholders..........  $(20,573)  $ (6,604)  $(17,818) $ (77,421)  $  7,497
                                                                 ========   ========   ========  =========   ========
Net Income (Loss) Attributable to Common Shareholders
   Before Extraordinary Items and Cumulative
   Effect of a Change in Accounting Principle..................  $  4,750   $ (6,604)  $(17,818) $(115,794)  $  8,594
                                                                 ========   ========   ========  =========   ========

Diluted earnings per Share of Common Stock (e) (f):
   Income (Loss) before Extraordinary Items and
     Cumulative Effect of a Change in Accounting Principle.....  $   0.08   $  (0.11)  $  (0.33)   $ (7.58)  $   0.65
   Extraordinary Items.........................................     (0.42)         -          -       2.51      (0.03)
   Cumulative Effect of a Change in Accounting Principle.......         -          -          -          -      (0.05)
                                                                 --------   --------   --------  ---------   --------
   Net Income (Loss) per Share of Common Stock.................  $  (0.34)  $  (0.11)  $  (0.33) $   (5.07)  $   0.57
                                                                 ========   ========   ========  =========   ========
OTHER DATA:
   EBITDA (g)..................................................  $ 68,365   $51,487    $ 40,373   $(29,430)  $ 78,833
   Outstanding Shares of Common Stock (000's)..................    59,328    58,360      58,168     37,459     14,651
   Number of Common Stockholders...............................    11,398    11,383      15,228     14,692     14,611
   Dividends declared per Common Share.........................         -         -           -          -          -
</TABLE>

<TABLE>
<CAPTION>
                                                                                 AS OF DECEMBER 31,
                                                              ----------------------------------------------------
                                                                1997        1996        1995       1994       1993
                                                              ---------   ---------   ---------  ---------  ------
                                                                                   (IN THOUSANDS)
<S>                                                           <C>         <C>         <C>        <C>        <C>      
STATEMENT OF FINANCIAL POSITION DATA:
   Total Assets.............................................  $ 566,593   $ 500,282   $ 480,648  $ 511,499  $ 541,293
   Long-Term Debt (Net) (e).................................    207,953     192,581     172,671    197,125    260,412
   Stockholders' Equity.....................................    179,599     140,881     149,762    153,196    152,166
</TABLE>


----------



                                       17
<PAGE>   18



FOOTNOTES TO SELECTED CONSOLIDATED FINANCIAL INFORMATION

(a)  The 1994 results reflect $61.9 million in certain operating charges,
     including increases in insurance and legal reserves to recognize
     pre-bankruptcy claims previously thought to have been barred in the
     Company's Chapter 11 reorganization (which concluded in October 1991),
     adverse claims development in 1994 and certain litigation exposure;
     write-downs of real estate and other assets (including $7.0 million of
     depreciation); costs associated with an operational restructuring; and a
     $17.0 million increase in the income tax provision due to the reversal of a
     previously recognized deferred tax benefit.

(b)  Operating rents include bus operating lease payments of $32.1 million,
     $27.5 million, $23.7 million, $22.7 million, and $20.0 million for the
     years ended December 31, 1997, 1996, 1995, 1994, and 1993, respectively.

(c)  For the year ended December 31, 1997, the Company recorded an extraordinary
     loss of $25.3 million relating to (i) the retirement of an interest rate
     swap ($2.5 million), (ii) the retirement of the 10% Senior Notes ($21.3
     million) and (iii) the write-off of debt issuance costs related to the
     Revolving Credit Facility in place prior to the amended and restated
     Revolving Credit Facility that was completed in May 1997 ($1.5 million).
     For the year ended December 31, 1994, the Company recorded (i) an
     extraordinary loss of $3.6 million, of which $3.2 million related to the
     write-off of debt issuance costs and $0.4 million related to professional
     fees in conjunction with the replacement of the Company's existing credit
     agreement with a new credit agreement and (ii) an extraordinary gain of
     $41.9 million related to the conversion of $89.0 million of Convertible
     Debentures into Common Stock. For the year ended December 31, 1993, the
     Company recorded an extraordinary loss of $0.4 million on the write-off of
     debt issuance costs related to the replacement of the Company's then
     existing credit agreement with a new credit agreement.

(d)  The net impact from adoption of SFAS No. 109, "Accounting For Income
     Taxes," was $0.7 million and is reported as a charge to earnings as the
     cumulative effect of a change in accounting principle for the year ended
     December 31, 1993.

(e)  In January 1995, the Company issued an additional 16.3 million shares of
     Common Stock in connection with the consummation of its Common Stock rights
     offering, which provided net proceeds of approximately $28.9 million. The
     Company issued 4.0 million shares of Common Stock on October 3, 1995 in a
     public offering, which provided net proceeds of $15.4 million. The
     completion of the Company's 1994 financial restructuring resulted in the
     issuance of approximately 22.8 million shares of Common Stock in December
     1994 upon the conversion of approximately $89.0 million of Convertible
     Debentures into Common Stock.

(f)  The Company adopted SFAS No. 128 "Earnings Per Share" (SFAS No. 128)
     effective December 15, 1997. This statement requires the replacement of
     primary and fully diluted earnings per share with basic and diluted
     earnings per share. The calculation of diluted earnings per share uses the
     average share price for the period rather than the more dilutive greater of
     average share price or end of the period price required by APB Opinion 15.
     The adoption of SFAS No. 128 did not have a material impact on the earnings
     per share calculation.

(g)  Represents income before interest, taxes, depreciation and amortization,
     extraordinary items and changes in accounting principles. EBITDA is
     presented because management believes investors consider it useful in
     evaluating a company's ability to service and/or incur debt. EBITDA should
     not be considered in isolation from or as a substitute for net income, cash
     flows from operating activities and other consolidated income or cash flow
     data prepared in accordance with generally accepted accounting principles
     or as a measure of profitability or liquidity.





                                       18
<PAGE>   19



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

GENERAL

     Greyhound is the only nationwide provider of scheduled intercity bus
transportation services in the United States. The Company's primary business
consists of scheduled passenger service, package express service and food
services at certain terminals, which accounted for 85.4%, 4.6% and 2.8%,
respectively, of the Company's total operating revenues for 1997. The Company's
operations include a nationwide network of terminal and maintenance facilities,
a fleet of approximately 2,400 buses and over 1,600 sales outlets.

     In late 1994 and early 1995, under the direction of the Company's new
management team, the Company implemented a "back-to-basics" operating strategy.
This strategy focused on the Company's national bus network and capitalizing on
its low operating costs to attract and retain customers, which management
identified as the first step in rebuilding the Company's financial performance.
By the end of 1996, with the "back to basics" strategy fully implemented and
providing a foundation of operating quality, the Company began to emphasize
growth in each of its principal businesses.

     The Company believes that incremental increases in passenger revenues will
produce disproportionately larger increases in operating profits as many of the
Company's operating expenses are fixed, such as depreciation, amortization,
overhead and lease expenses related to buses and facilities. In addition, the
operating costs necessary to produce the Company's base schedule of offerings,
which consist of labor, fuel, maintenance, insurance and long-term bus leases,
cannot be changed rapidly. Accordingly, these costs do not vary proportionately
with short-term increases in demand for the Company's services.




                                       19
<PAGE>   20


RESULTS OF OPERATIONS

     The following table sets forth the Company's results of operations as a
percentage of total operating revenue for 1997, 1996 and 1995:

<TABLE>
<CAPTION>
                                                                                     YEARS ENDED DECEMBER 31,
                                                                                   ---------------------------
                                                                                    1997       1996       1995
                                                                                   ------     ------     -----
     <S>                                                                           <C>        <C>        <C>
     Operating Revenues
       Transportation Services
          Regular route..........................................................   85.4%      85.3%      85.3%
          Package express........................................................    4.6        4.8        5.4
       Food services.............................................................    2.8        3.0        3.0
       Other operating revenues..................................................    7.2        6.9        6.3
                                                                                  ------     ------     ------
              Total Operating Revenues...........................................  100.0      100.0      100.0
     Operating Expenses
       Maintenance...............................................................   10.0       10.5       10.4
       Transportation............................................................   24.3       24.4       23.9
       Agents' commissions and station costs.....................................   18.3       18.8       19.1
       Marketing, advertising and traffic........................................    3.5        3.7        3.9
       Insurance and safety......................................................    5.9        5.9        8.0
       General and administrative................................................   11.8       11.5       11.0
       Depreciation and amortization.............................................    4.0        4.4        4.7
       Operating taxes and licenses..............................................    6.7        7.1        7.3
       Operating rents...........................................................    7.7        7.7        7.3
       Cost of goods sold - Food services........................................    1.7        1.9        1.9
       Other operating expenses..................................................    1.3        1.1        1.1
                                                                                  ------     ------     ------
              Total Operating Expenses...........................................   95.2       97.0       98.6
                                                                                  ------     ------     ------
     Operating Income ...........................................................    4.8        3.0        1.4
     Interest Expense............................................................    3.6        3.9        4.0
     Income Tax Provision........................................................    0.1          -        0.1
                                                                                  ------     ------     ------
     Net Income (Loss) Before Extraordinary Items................................    1.1       (0.9)      (2.7)
                                                                                  ======     ======     ======
</TABLE>

     The following table sets forth certain operating data for the Company for
1997, 1996 and 1995. Certain statistics have been adjusted and restated from
those previously published to provide consistent comparisons.

<TABLE>
<CAPTION>
                                                                                YEARS ENDED DECEMBER 31,
                                                                           ----------------------------------
                                                                               1997         1996        1995
                                                                           -----------  ----------   --------
<S>                                                                        <C>          <C>          <C>      
     Regular Service Miles (000's)...................................        285,749      265,259      256,683
     Total Bus Miles (000's).........................................        291,597      270,187      259,746
     Passenger Miles (000's).........................................      6,977,301    6,243,262    6,033,780
     Passengers Carried (000's)......................................         20,735       18,348       17,548
     Average Trip Length (passenger miles/passengers carried)........            336          340          344
     Load (avg. number of passengers per regular service mile).......           24.4         23.5         23.5
     Load Factor (% of available seats filled).......................           53.1%        51.2%        51.1%
     Yield (regular route revenue/passenger mile)....................      $  0.0944    $  0.0957    $  0.0929
     Total Revenue Per Total Bus Mile................................           2.64         2.59         2.53
     Operating Income Per Total Bus Mile.............................           0.13         0.08         0.04
     Cost per Total Bus Mile:
       Maintenance...................................................     $    0.264   $    0.272   $    0.264
       Transportation................................................          0.642        0.633        0.604
</TABLE>




                                       20
<PAGE>   21


YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996

     The Company's results of operations include the operating results of
Carolina Coach Company, and affiliates ("Carolina") and Valley Transit, Inc.,
and affiliates ("Valley"), collectively referred to as "the acquisitions". The
results for the acquisitions are included as of their respective purchase dates,
both of which occurred during the third quarter of 1997.

     Operating Revenues. Total operating revenues increased $70.3 million (or
10.0%) for the year ended December 31, 1997 compared to the same period in 1996.
Transportation services revenues increased $62.8 million (or 9.9%) in 1997
compared to 1996 due to a $60.6 million (or 10.1%) increase in regular route
revenues (including $11.9 million related to the acquisitions) and a $2.2
million (or 6.4%) increase in package express revenues (including $0.7 million
related to the acquisitions). The 10.1% increase in regular route revenues
reflects a 13.0% increase in the number of passengers carried offset by a 1.4%
decrease in yield. Excluding the impact of the acquisitions, the Company
recognized a 7.3% increase in passengers carried, a 2.6% increase in trip length
and a 1.8% decrease in yield. The decrease in yield reflects a significant
growth in long-haul traffic (passengers traveling more than 450 miles), as the
Company has promoted and priced this product for growth. However, the reduction
in yield was partially offset by growth in the short-haul market (passengers
traveling less than 450 miles), which typically produces higher yields and, in
1997, was further offset by price increases where appropriate. The Company was
able to realize these price improvements on the short-haul traffic while
substantially increasing the number of passengers carried. The Company was able
to achieve this "double positive" through continued emphasis on improving
service while actively managing fares in individual markets. On a consolidated
basis, the decrease in trip length reflects the impact of the acquisitions, as
both Carolina and Valley have significantly shorter trip lengths than the
Company as a whole.

     The following chart reflects the increase in regular route passenger
revenue by quarter:

<TABLE>
<CAPTION>
                                                  FIRST       SECOND        THIRD        FOURTH        FULL
                                                 QUARTER      QUARTER      QUARTER       QUARTER       YEAR
                                                 -------      -------      -------       -------       ----
                                                                     (DOLLARS IN MILLIONS)
     <S>                                         <C>          <C>           <C>          <C>          <C>   
     1997 regular route revenues...............  $137.3       $154.1        $196.7       $170.3       $658.4
     1996 regular route revenues...............  $118.7       $146.2        $180.3       $152.6       $597.8
     Percentage increase.......................    15.7%         5.4%          9.1%        11.6%        10.1%
</TABLE>

     In 1997 the Company saw an increase in package express revenues, after nine
years of year-over-year declines. Package express revenues increased due to an
increase in shipments handled as a result of the United Parcel Service labor
strike in August 1997, the retention of a portion of those customers subsequent
to the strike and a price increase. In addition, in select markets, the Company
has implemented a centralized telephone customer service department dedicated to
package express service and coordinated pick-up and delivery services.

     Food service and other operating revenues increased $7.5 million (or 10.8%)
for the year ended December 31, 1997 compared to the same period in 1996
primarily due to a $2.6 million (or 30.1%) increase in charter service revenues
(including $0.4 million related to the acquisitions) and an increase in revenues
from other in-terminal services, such as money order sales, prepaid ticket
orders and increased sales of food service and retail products in the Company's
in-terminal stores.

     Operating Expenses. Total operating expenses increased $54.0 million (or
7.9%) for the year ended December 31, 1997, compared to the same period in 1996.
The increase is due primarily to increased bus miles (7.9%), higher driver
wages, increased terminal salaries, increased ticket and express commissions due
to higher sales, and increased bus operating leases. Additionally, expenses
attributable to the operations of the acquisitions ($9.9 million) are included
as of their acquisition dates, which both occurred in the third quarter. Despite
these increases, total operating expenses decreased as a percentage of total
operating revenues.

     Maintenance costs increased $3.6 million (or 4.9%) for the year ended
December 31, 1997, compared to the same period in 1996, primarily due to
increased bus miles and the inclusion of the acquisitions. Despite these
increases, maintenance costs decreased on a per-mile basis and as a percentage
of total operating revenues. The Company 




                                       21
<PAGE>   22


intends to continue to manage the average age of its fleet in order to increase
the reliability of its service while reducing overall costs.

     Transportation expenses, which consist primarily of fuel costs and driver
salaries, increased $16.3 million (or 9.6%) for the year ended December 31,
1997, compared to the same period in 1996, due primarily to increased bus miles,
a contractual driver wage increase, and the inclusion of the acquisitions. The
additional miles resulted in higher overall fuel expense and an increase in
driver wages and related driver expenses. Transportation expenses decreased on a
per-mile basis, but increased as a percentage of total operating revenues due
primarily to the impact of the contractual wage increase which was partially
offset by lower fuel prices. The Company has taken steps to limit its exposure
to fluctuations in fuel prices by contracting for delivery of a portion of its
1998 fuel purchases at prices below 1997 levels for the same periods.

     Agents' commissions and station costs increased $9.4 million (or 7.1%) for
the year ended December 31, 1997, compared to the same period in 1996, primarily
due to commissions from increased ticket and express sales and the inclusion of
the acquisitions. Despite these increases, agents' commissions and station
costs decreased as a percentage of total operating revenues.

     Marketing, advertising and traffic expenses increased $1.0 million (or
4.1%) for the year ended December 31, 1997, compared to the same period in 1996,
but decreased as a percentage of total operating revenues. The increase is
primarily due to higher advertising agency fees and production costs. Media
advertising increased over 1996 but the increased costs were entirely offset by
the exchange of bus wrap advertising for trade discounts. Additionally, cost
savings were recognized related to bringing in-house certain computing services.
As part of the Company's growth strategy, the Company expects to continue to
increase advertising expenditures in 1998.

     Insurance and safety costs increased $4.8 million (or 11.6%) for the year
ended December 31, 1997, compared to the same period in 1996, due primarily to
increased bus miles and the inclusion of the acquisitions.

     General and administrative expenses increased $10.3 million (or 12.7%) for
the year ended December 31, 1997, compared to the same period in 1996, primarily
due to additions to administrative personnel in late 1996, officer severance, an
increase in the pay-out of the management incentive plan related to improved
company performance, and the inclusion of the acquisitions.

     Depreciation and amortization expense increased $0.6 million (or 1.9%) for
the year ended December 31, 1997, compared to the same period in 1996, primarily
due to the purchase of additional buses in 1997 and late 1996 and the
depreciation and amortization attributable to the acquisitions. Depreciation and
amortization expense decreased as a percentage of total operating revenues.

     Operating taxes and license costs increased $1.7 million (or 3.4%) for the
year ended December 31, 1997, compared to the same period in 1996, primarily due
to increased payroll taxes resulting from increased salaries and headcounts
related to higher business volume and the inclusion of the acquisitions.
Operating taxes and license costs decreased as a percentage of total operating
revenues.

     Operating rents increased $5.1 million (or 9.5%) for the year ended
December 31, 1997, compared to the same period in 1996, primarily due to an
increase in the number of buses leased under operating leases in 1997 and the
inclusion of the acquisitions. Operating rents were 7.7% of total operating
revenues in each of 1997 and 1996.

     Other operating expenses increased $1.7 million (or 20.7%) for the year
ended December 31, 1997, compared to the same period in 1996, primarily due to
higher costs of goods sold associated with increased retail sales. As a result,
other operating expenses as a percentage of total operating revenues increased
slightly.

     Interest expense increased $0.3 million (or 1.1%) for the year ended
December 31, 1997, compared to the same period in 1996, as a result of increased
borrowing on the Revolving Credit Facility partially offset by lower effective
interest rates on the Company's 11 1/2% Senior Notes compared to the effective
interest rate on the retired 10% Senior Notes and renegotiated Revolving Credit
Facility. The increased borrowing is attributed to the purchase of the


                                       22
<PAGE>   23


acquisitions, the five terminals purchased from Viad, and the buses purchased
for sale/leaseback transactions partially offset by proceeds from the Preferred
Stock offering in April 1997. Additionally, the Company added three new capital
leases for 77 buses in December 1996. Interest expense decreased as a percentage
of total operating revenues.

YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995

     Operating Revenues. Total operating revenues increased $43.8 million (or
6.7%) for the year ended December 31, 1996, compared to the same period in 1995.
Transportation services revenues increased $35.4 million (or 5.9%) in 1996
compared to 1995 due to a $37.5 million (or 6.7%) increase in regular route
revenues, offset in part by a $2.2 million (or 6.1%) decrease in package express
revenues. The 6.7% increase in regular route revenues reflects a 4.6% increase
in the number of passengers carried and a 3.0% increase in yield. The increase
in yield is due in part to an increase in short-haul (less than 450 miles) and
intermediate-haul (450 to 1,000 miles) traffic, which generally generate a
higher yield than long-haul traffic. The following chart reflects the increase
in regular route passenger revenue by quarter:

<TABLE>
<CAPTION>
                                                  FIRST       SECOND        THIRD        FOURTH        FULL
                                                 QUARTER      QUARTER      QUARTER       QUARTER       YEAR
                                                 -------      -------      -------       -------       ----
                                                                     (DOLLARS IN MILLIONS)
     <S>                                         <C>          <C>           <C>          <C>          <C>   
     1996 regular route revenues...............  $118.7       $146.2        $180.3       $152.6       $597.8
     1995 regular route revenues...............   109.4        136.7         172.7        141.4        560.2
     Percentage increase.......................     8.5%         6.9%          4.4%         7.9%         6.7%
</TABLE>

     Package express revenues declined due to the continuing effects of a
reduction in 1994 of the number of routes served and the number of hours that
the Company's terminals were open, which resulted in a loss of customers that
had not been regained. In 1996, the Company increased its focus on the package
express business in an effort to reverse the decline in package express service
revenues. The Company implemented increased hours of service, improved billing
and added more convenient schedules. In addition, in select markets, the Company
implemented a centralized telephone customer service department dedicated to
package express service.

     Food service revenues increased $2.0 million (or 10.3%) for the year ended
December 31, 1996, compared to the same period in 1995, primarily due to the
addition of five new locations and the increase in passenger traffic, offset in
part by the closing of two locations.

     Other operating revenues, consisting primarily of revenue from charter and
in-terminal sales and services, increased $6.4 million (or 15.3%) for the year
ended December 31, 1996, compared to the same period in 1995, primarily due to a
$2.9 million increase in charter service revenues and an increase in revenues
from other in-terminal services, such as money order sales, prepaid ticket
orders and increased sales of gifts and other retail products.

     Operating Expenses. Total operating expenses increased $32.3 million (or
5.0%) for the year ended December 31, 1996 compared to the same period in 1995.

     Maintenance costs increased $4.9 million (or 7.2%) for the year ended
December 31, 1996, compared to the same period in 1995, due to a 4.0% increase
in bus miles and a 3.0% increase in maintenance costs per bus mile. Maintenance
costs increased on a per-mile basis due to an increase in the number of engine
changes, contractual pay increases for hourly maintenance employees, the opening
of an additional maintenance facility in March 1996 and a rate increase from a
third-party provider of bus cleaning services.

     Transportation expenses, which consist primarily of fuel costs and driver
salaries, increased $14.1 million (or 9.0%) for the year ended December 31,
1996, compared to the same period in 1995, due to the 4.0% increase in bus miles
and a 4.8% increase in transportation expenses per bus mile. Transportation
expenses increased on a per-mile basis due to a $5.8 million impact of increased
fuel prices (average price per gallon of $0.71 in 1996 versus $0.59 in 1995), a
contractual pay increase for drivers and additions to the driver supervisory
staff. Transportation expenses increased as a percentage of total operating 
revenues.

     Agents' commissions and station costs increased $6.0 million (or 4.8%) for
the year ended December 31, 1996, compared to the same period in 1995, primarily
due to increased ticket sales, as well as the conversion of 75 Company-operated
ticketing facilities to commissioned agencies, offset in part by the elimination
of facility, utility 



                                       23
<PAGE>   24

and supply costs associated with the converted ticketing facilities. The
conversions also serve to reduce insurance and general and administrative costs.
Increased costs associated with higher call volumes were entirely offset by
lower long distance telephone rates and the discontinuance of a third-party
provider of telephone customer services. Despite the increase, agents'
commissions and station costs decreased as a percentage of total operating
revenues.

     Marketing, advertising and traffic expenses increased $0.3 million (or
1.2%) for the year ended December 31, 1996, compared to the same period in 1995,
primarily due to an increase in advertising expenses in the fourth quarter of
1996.

     Insurance and safety costs decreased $11.7 million (or 22.2%) for the year
ended December 31, 1996, compared to the same period in 1995, as the increased
exposure relating to the 4.0% increase in bus miles was more than offset by
continued favorable claims experience resulting from the Company's increased
focus on claims management and risk reduction programs.

     General and administrative expenses increased $8.4 million (or 11.7%) for
the year ended December 31, 1996, compared to the same period in 1995, primarily
due to additions to administrative personnel and increased benefit costs
Company-wide and to a reduction in pension income from $2.1 million in 1995 to
$1.0 million in 1996.

     Depreciation and amortization expense decreased $0.3 million (or 1.0%) for
the year ended December 31, 1996, compared to the same period in 1995, primarily
due to the write-down in the fourth quarter of 1995 of the realizable value of
some older buses and certain real estate that subsequently was sold, offset in
part by the depreciation on 102 buses acquired in December 1995 (51 of which
were sold and leased back in 1996) and 35 buses acquired in 1996.

     Operating taxes and license costs increased $1.6 million (or 3.3%) for the
year ended December 31, 1996, compared to the same period in 1995, primarily due
to increased fuel and oil taxes resulting from a 4.0% increase in total bus
miles in 1996 compared to 1995 and increased payroll taxes resulting from higher
salaries. Despite the increase, operating taxes and license costs decreased as a
percentage of total operating revenues.

     Operating rents increased $6.1 million (or 12.7%) for the year ended
December 31, 1996, compared to the same period in 1995, primarily due to an
increase in the number of bus operating leases in 1996 and an increase in casual
bus rentals to accommodate higher peak traffic volume in 1996 compared to 1995.

     Other operating expenses increased $1.6 million (or 24.2%) for the year
ended December 31, 1996, compared to the same period in 1995, primarily due to a
$1.2 million gain in 1995 on the repurchase by the Company of $10.7 million
aggregate principal amount of 10% Senior Notes.

     Interest expense increased $0.5 million (or 1.9%) for the year ended
December 31, 1996, compared to the same period in 1995, as a result of higher
borrowings under the Revolving Credit Facility, offset in part by the
elimination of interest expense on the portion of the 10% Senior Notes 
repurchased by the Company in 1995. Despite the increase, interest expense
decreased as a percentage of total operating revenues.

LIQUIDITY AND CAPITAL RESOURCES

     The Company's principal liquidity requirements are to provide working
capital, to finance capital expenditures, including bus acquisitions, to meet
debt service requirements, including the payment of interest on borrowings under
the Revolving Credit Facility and interest on the 11 1/2% Senior Notes and to
pay Preferred Stock dividends. The Company's principal sources of liquidity are
expected to be cash flow from operations and borrowings under the Revolving
Credit Facility. The Company believes that its cash flow from operations,
together with borrowings under the Revolving Credit Facility, will be sufficient
to meet its liquidity needs for the foreseeable future.

     Net cash provided by operating activities was $50.4 million, $16.0 million
and $29.5 million for the years ended December 31, 1997, 1996 and 1995,
respectively. Net cash used for investing activities was $81.4 million, $24.1
million and $34.1 million for 1997, 1996 and 1995, respectively, principally due
to capital expenditures, consisting 



                                       24
<PAGE>   25

primarily of acquisitions of buses and real estate and facility improvements,
totaling $45.1 million, $38.4 million and $46.4 million for 1997, 1996 and 1995,
respectively, offset in part by proceeds of assets sold of $6.0 million, $16.7
million and $12.3 million, respectively. Additionally, cash used in 1997 for
investing activities includes payments for business combinations of $40.1
million relating to the acquisitions. Net cash provided by (used for) financing
activities was $32.1 million, $5.5 million and ($1.4) million for 1997, 1996 and
1995, respectively.

     As a part of its operating strategy, the Company anticipates continuing to
make significant capital expenditures in connection with improvements to its
infrastructure, including acquiring buses, making improvements to its terminals
and maintaining and upgrading its computer systems. The Company's experience
indicates that as the age of its bus fleet increases, the dependability and
quality of service declines, which may make the Company less competitive. In
addition, the Company believes that acquiring new buses and improving the
Company's terminals and computer systems will permit the Company to continue to
improve customer service, which the Company believes has contributed
significantly to its improved operating results in 1995, 1996 and 1997. The
Company has ordered 163 new buses to be delivered during the first half of 1998,
the majority of which will be temporarily financed through MCI or one of its
affiliates and/or the Revolving Credit Facility. The Company intends to seek
permanent operating lease financing for these buses.

     The Company generally uses lease financing with purchase options as the
principal source of bus financing in order to achieve the lowest net cost of bus
financing. Depending on the specific terms of a lease, such lease may be
accounted for as either an operating or capital lease. The Company may also
acquire buses outright and may purchase buses and subsequently engage in
sale-leaseback transactions with respect to such buses.

     The following table summarizes the Company's bus acquisitions and other
capital expenditures for 1997, 1996 and 1995:

<TABLE>
<CAPTION>
                                                                           1997         1996         1995
                                                                           ----         ----         ----
     Bus Acquisitions                                                             (NUMBER OF BUSES)
     ----------------
     <S>                                                                 <C>           <C>          <C>    
       Buses acquired through operating leases (1).....................       190          132           73
       Buses acquired through capital leases (1).......................         -           77            -
       Buses purchased through cash flows or borrowings (2)............        20           35          102
                                                                         --------      -------      -------
                  Total buses acquired.................................       210          244          175
                                                                         ========      =======      =======

     Capital Expenditures                                                           (IN MILLIONS)
     --------------------

       Bus purchases, net of sale proceeds (3).........................  $    5.7      $  (6.7)     $  24.3
       Real estate purchases...........................................      11.5         12.0          3.4
       Other, net of sale proceeds.....................................      21.4         16.4          6.3
                                                                         --------      -------      -------
                  Total capital expenditures, net of sale proceeds.....  $   38.6      $  21.7      $  34.0
                                                                         ========      =======      =======
</TABLE>

----------

(1)  Includes buses that were purchased in the year indicated and that
     subsequently were sold and leased back by the Company in such year.
     Excludes buses that were purchased in a prior year and sold and leased back
     by the Company in the year indicated.

(2)  Includes buses that were purchased in the year indicated and that were sold
     and leased back by the Company in a subsequent year. Excludes buses that
     were purchased in the year indicated and that subsequently were sold and
     leased back by the Company in such year.

(3)  Consists of the purchase price of buses purchased in the year indicated,
     including the purchase price of buses that subsequently were sold and
     leased back by the Company, minus the net proceeds to the Company from all
     sale-leaseback transactions and other sales of buses during such year.



                                       25
<PAGE>   26

     The Company requires significant cash flows to meet its debt service and
other continuing obligations. As of December 31, 1997, the Company had $208.0
million of long-term indebtedness outstanding, including $25.8 million of
borrowings under the Revolving Credit Facility and $150.0 million of 11 1/2%
Senior Notes. In addition, as of December 31, 1997, the Company had total
availability of $79.1 million under the Revolving Credit Facility.

     The Company is a party to a Revolving Credit Facility which was
renegotiated in December 1996 and May 1997. The amended and restated Revolving
Credit Facility consists of (i) a revolving facility providing for advances of
up to $92.5 million based on the liquidation value of certain core vehicles,
(ii) a revolving facility providing for advances of up to $2.5 million based on
a formula of eligible accounts receivable and (iii) a real estate facility
providing for borrowings of up to $30.0 million based on fair market value of
certain core real property collateral (the "Real Estate Facility"). The
Revolving Credit Facility has two interest rate options, prime and LIBOR. As of
March 5, 1998, the Company had borrowings under the Revolving Credit Facility
bearing interest at prime rate plus 0.25% (8.75%) and LIBOR plus 1.75% (weighted
average of 7.405%). The weighted average interest rate for all Revolving Credit
Facility borrowings was 7.483% at March 5, 1998. Borrowings under the Revolving
Credit Facility mature on May 21, 2002, although availability under the Real
Estate Facility will be subject to yearly reductions commencing in 1999. The
Revolving Credit Facility is secured by liens on substantially all of the assets
of the Company. The Revolving Credit Facility is subject to certain operating
and financial covenants, including maintenance of a minimum consolidated net
worth, ratio of total indebtedness to cash flow and ratio of cash flow to
interest expense. In addition, non-bus capital expenditures are limited to $30.0
million annually with no spending limitations on bus purchases. However, in
1997, the Company obtained a waiver to allow for an additional $3.0 million of
capital expenditures. As of December 31, 1997, the Company was in compliance
with all such covenants.

     The Company has entered into four advance purchase commitments for fuel.
Under these agreements the Company agrees to take delivery of fuel at a specific
location at a fixed price at a specific date in the future. The agreements have
been entered into with four suppliers for approximately 27% of projected fuel
needs for 1998, at an average price per gallon of $0.5863. Management believes
that this strategy is a conservative method to hedge against fuel price
fluctuations.

     The Company maintains cash deposits held for insurance claims and bus lease
collateral, which as of March 5, 1998 aggregated approximately $79.5 million,
including the following deposits. The Company maintains $15.0 million on deposit
in a trust fund to support its self-insurance program pursuant to the U.S.
Department of Transportation's approval of such program. As of March 5, 1998,
the Company had pledged $30.3 million in cash and $10.1 million in letters of
credit to secure its other liability insurance obligations. Depending on the
Company's future claims history and the policies of its insurance carriers, the
amount of collateral that the Company is obligated to pledge to secure its
liability insurance obligations may vary. The Company also has deposits of $24.7
million (at market value) pledged as collateral in connection with the sale and
leaseback of 319 buses. Additionally, the Company has a deposit of $9.3 million
(at market value) pledged as collateral in connection with a sale and leaseback
agreement for 125 buses.

     The Company maintains nine defined benefit pension plans, the most
significant of which (the ATU Plan) covers approximately 16,400 current and
former employees, fewer than 1,500 of which are active employees of the Company.
The ATU Plan was closed to new participants in 1983 and, as a result, over 85%
of its participants are over the age of 50. For financial reporting and
investment planning purposes, the Company currently uses an actuarial mortality
table that closely matches the actual experience related to the existing
participant population. Based upon the application of this table and other
actuarial and investment assumptions, the Company believes that the ATU Plan is
adequately funded.

     For funding purposes, legislation passed by the United States Congress in
1994, and amended in 1997, mandates the use of a prescribed actuarial mortality
table and discount rates that differ from those used by the Company for
financial reporting and investment planning purposes. Nevertheless, based upon
the application of the actuarial mortality table, discount rates and funding
calculations prescribed by the legislation, as amended, the Company does not
anticipate that it will be required to make any contributions to the ATU Plan in
the foreseeable future. However, 


                                       26
<PAGE>   27


there is no assurance, that the ATU Plan will be able to obtain the assumed rate
of return or that contributions to the ATU Plan will not be significant.


COMPUTER SYSTEMS/YEAR 2000

     Many existing computer systems and software products, including several
used by the Company, are coded to accept only two digit entries in the date code
field. Beginning in the year 2000, these date code fields will need to accept
four digit entries to distinguish 21st century dates from 20th century dates. As
a result, the Company's date critical functions related to 2000 and beyond, such
as scheduling, dispatch, sales, purchasing, planning and financial systems may
be materially adversely affected unless these computer systems are, or become,
year 2000 compliant.

     During the past three years, the Company has been replacing and enhancing
its computer systems to gain operational efficiencies. In addition, management
has initiated an enterprise-wide program to prepare the Company's computer
systems and applications for the year 2000. Many of the Company's computer
systems or applications which may not be year 2000 compliant are being upgraded
or replaced in the normal course of business as the Company takes steps to
improve its customer service and operating efficiencies. The Company's
dispatching and bus and driver tracking system is the most significant of those
systems being upgraded. The system is not currently year 2000 compliant and must
be replaced. The Company expects to begin the conversion of this system in the
second quarter of 1998 and expects to complete the conversion by the second
quarter of 1999.

     Additionally, to ensure that the Company has identified all software that
is not year 2000 compliant, the Company is completing a comprehensive assessment
of all of its systems and applications, as well as, third party systems on which
the Company relies. The Company expects the assessment of these systems and an
estimate of the costs to upgrade or revise, where necessary, to be complete by
mid-year 1998. The Company expects to make the necessary revisions or upgrades
to its software or processes to render it year 2000 compliant prior to the end
of 1999. In addition, the Company is taking steps to ensure that adequate
contingency measures are in place to eliminate or minimize the adverse
operational impact of problems which may occur during the transition to the
upgraded or revised systems or as the result of a delay in any implementations.
There can be no assurance that these transitions will not have a material
adverse effect on the Company's financial condition or results of operations. 
Despite the Company's efforts there can be no assurance that these efforts 
will be timely and successful and that the Company's systems, or those of other
companies on which the Company's systems rely, will be timely converted, revised
or upgraded or that any such failure to convert, revise or upgrade would not
have a material adverse effect on the Company's systems.





                                       27
<PAGE>   28

SEASONALITY

     The Company's business is seasonal in nature and generally follows the
pattern of the travel industry as a whole, with peaks during the summer months
and the Thanksgiving and Christmas holiday periods. As a result, the Company's
cash flows are seasonal in nature with a disproportionate amount of the
Company's annual cash flows being generated during the peak travel periods.
Therefore, an event that adversely affects ridership during any of these peak
periods could have a material adverse effect on the Company's financial
condition and results of operations for that year. The day of the week on which
certain holidays occur, the length of certain holiday periods, and the date on
which certain holidays occur within a fiscal quarter, may also affect the
Company's quarterly results of operations. The following table sets forth
certain operating data of the Company by quarter for 1997 and 1996 (in
millions):

<TABLE>
<CAPTION>
                                                                      YEAR ENDED DECEMBER 31, 1997
                                                  -------------------------------------------------------------------
                                                  FIRST          SECOND           THIRD         FOURTH
                                                  QUARTER        QUARTER       QUARTER (2)    QUARTER (2)   TOTAL (2)
                                                  -------        -------       -----------    -----------   ---------
<S>                                               <C>            <C>              <C>           <C>          <C>    
Total  Operating Revenues........................ $ 161.1        $  181.5         $228.5        $ 200.0      $ 771.1
EBITDA (1).......................................    (2.0)           10.2           39.4           20.8         68.4
Operating Income (Loss)..........................    (9.5)            2.8           31.5           12.3         37.1
Net Income (Loss) before Extraordinary Item......   (17.2)           (4.9)          23.5            3.3          4.7

Net Income (Loss) per Share of Common Stock (3):
  Basic
    Net Income (Loss) Attributable to Common
        Shareholders before Extraordinary Item... $ (0.29)       $  (0.08)        $ 0.40        $  0.06      $  0.08
  Diluted
    Net Income (Loss) Attributable to Common
        Shareholders before Extraordinary Item... $ (0.29)       $  (0.08)        $ 0.34        $  0.05      $  0.08
</TABLE>

<TABLE>
<CAPTION>
                                                                      YEAR ENDED DECEMBER 31, 1996
                                                  -----------------------------------------------------------------
                                                   FIRST         SECOND           THIRD        FOURTH
                                                  QUARTER        QUARTER         QUARTER       QUARTER        TOTAL
                                                  -------        -------         -------       -------        -----
<S>                                               <C>            <C>             <C>            <C>         <C>    
Total  Operating Revenues........................ $141.6         $ 172.3         $208.1         $178.9      $ 700.9
EBITDA (1).......................................   (7.3)            8.5           34.1           16.2         51.5
Operating Income (Loss)..........................  (14.9)            1.2           26.4            8.1         20.8
Net Income (Loss) before Extraordinary Item......  (21.5)           (5.5)          19.4            1.0         (6.6)

Net Income (Loss) per Share of Common Stock (3):
  Basic
    Net Income (Loss) Attributable to Common
        Shareholders before Extraordinary Item... $ (0.37)       $  (0.10)       $  0.33        $  0.02     $  (0.11)
  Diluted
    Net Income (Loss) Attributable to Common
        Shareholders before Extraordinary Item... $ (0.37)       $  (0.10)       $  0.33        $  0.02     $  (0.11)
</TABLE>

---------

(1) Represents earnings before interest, taxes, depreciation and amortization
    and extraordinary items.

(2) Third quarter and fourth quarter 1997 include results of operations for
    Carolina and Valley, which were acquired during the third quarter of 1997.

(3) Note that the earnings per share for the year will not be equal to the
    summation of the individual quarters due to earnings per share utilizing
    weighted average shares, which would be different for the year compared to
    the quarters.




                                       28
<PAGE>   29





ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                                                                                      PAGE NO.
                                                                                                      --------
<S>                                                                                                      <C>
Management Report on Responsibility for Financial Reporting .......................................      30

Report of Independent Public Accounts..............................................................      31

Consolidated Statements of Financial Position as of December 31, 1997 and 1996.....................      32

Consolidated Statements of Operations for the Years Ended December 31, 1997, 1996, and 1995........      33

Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 1997, 1996,
     and 1995......................................................................................      34

Consolidated Statements of Cash Flows for the Years Ended December 31, 1997, 1996, and 1995........      35

Notes to Consolidated Financial Statements.........................................................      36

Schedule II - Valuation and Qualifying Accounts - For the Years Ended December 31, 1997, 1996,
     and 1995......................................................................................      61
</TABLE>






                                       29
<PAGE>   30





                       MANAGEMENT REPORT ON RESPONSIBILITY
                             FOR FINANCIAL REPORTING

     The management of Greyhound Lines, Inc. and its subsidiaries (the
"Company") has the responsibility for preparing the accompanying consolidated
financial statements and for their integrity and objectivity. The statements
were prepared in accordance with generally accepted accounting principles
applied on a consistent basis and are not misstated due to fraud or material
error. The financial statements include amounts that are based on management's
best estimates and judgments. Management also prepared the other information in
the annual report on Form 10-K and is responsible for its accuracy and
consistency with the financial statements.

     The Company's consolidated financial statements have been audited by Arthur
Andersen LLP, independent public accountants approved by the Board of Directors.
Management has made available to Arthur Andersen LLP all the Company's financial
records and related data, as well as the minutes of the stockholders' and
directors' meetings. Furthermore, management believes that all representations
made to Arthur Andersen LLP during its audits were valid and appropriate.

     Management of the Company has established and maintains a system of
internal control that provides reasonable assurance as to the integrity and
reliability of the financial statements, the protection of assets from
unauthorized use or disposition, and the prevention and detection of fraudulent
financial reporting. The system of internal control provides for appropriate
division of responsibility and is documented by written policies and procedures
that are communicated to employees with significant roles in the financial
reporting process and updated as necessary. Management continually monitors the
internal control system for compliance. The Company maintains an internal
auditing program that independently assesses the effectiveness of the internal
controls and recommends possible improvements thereto. In addition, as part of
its audits of the Company's consolidated financial statements, Arthur Andersen
LLP considered the Company's system of internal control to the extent they
deemed necessary to determine the nature, timing and extent of audit tests to be
applied. Management has considered the internal auditors' and Arthur Andersen
LLP's recommendations concerning the Company's system of internal control and
has taken actions that the Company believes respond appropriately to these
recommendations. Management believes that the Company's system of internal
control is adequate to accomplish the objectives discussed herein.

     Management also recognizes its responsibility for fostering a strong
ethical climate so that the Company's affairs are conducted according to the
highest standards of personal and corporate conduct. This responsibility is
characterized and reflected in the Company's code of corporate conduct, which is
publicized throughout the Company. The code of conduct addresses, among other
things, the necessity of ensuring open communication within the Company;
potential conflicts of interests; compliance with all domestic and foreign laws,
including those relating to financial disclosure; and the confidentiality of
proprietary information. The Company maintains a systematic program to assess
compliance with these policies.




                                              T. Scott Kirksey
                                             Vice President and
                                          Chief Accounting Officer

Dallas, Texas
March 19, 1998




                                       30
<PAGE>   31


                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Greyhound Lines, Inc.:

     We have audited the accompanying consolidated statements of financial
position of Greyhound Lines, Inc. (a Delaware corporation) and subsidiaries as
of December 31, 1997 and 1996, and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the three years in
the period ended December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

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

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

     Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the index at Item
8 (Schedule II) is the responsibility of the Company's management and is
presented for purposes of complying with the Securities and Exchange
Commission's rules and are not part of the basic financial statements. This
schedule has been subjected to the auditing procedures applied in the audits of
the basic financial statements and, in our opinion, fairly state in all material
respects the financial data required to be set forth therein in relation to the
basic financial statements taken as a whole.





                                                    ARTHUR ANDERSEN LLP

Dallas, Texas
February 3, 1998




                                       31
<PAGE>   32





                     GREYHOUND LINES, INC. AND SUBSIDIARIES

                  CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
                      (IN THOUSANDS, EXCEPT SHARE AMOUNTS)

<TABLE>
<CAPTION>
                                                                                          DECEMBER 31,
                                                                                    ------------------------
                                                                                       1997           1996
                                                                                    ---------      ---------
<S>                                                                                 <C>            <C>      
Current Assets
   Cash and cash equivalents .....................................................  $   2,052      $     898
   Accounts receivable, less allowance for doubtful accounts of $268 and $241 ....     35,364         32,844
   Inventories ...................................................................      4,658          3,840
   Prepaid expenses ..............................................................      4,949          8,179
   Assets held for sale ..........................................................      3,889          4,224
   Other current assets ..........................................................      9,694         11,329
                                                                                    ---------      ---------
         Total Current Assets ....................................................     60,606         61,314
Prepaid Pension Plans ............................................................     25,378         24,927
Property, Plant and Equipment, net of accumulated depreciation of $124,374
    and $101,901 .................................................................    341,292        314,454
Investments in Unconsolidated Affiliates .........................................      6,076          2,437
Insurance and Security Deposits ..................................................     72,693         76,180
Goodwill, net of accumulated amortization of $499 and $0 .........................     30,215              -
Intangible Assets, net of accumulated amortization of $22,188 and $19,105 ........     30,333         20,970
                                                                                    ---------      ---------
         Total Assets ............................................................  $ 566,593      $ 500,282
                                                                                    =========      =========
Current Liabilities
   Accounts payable ..............................................................  $  32,731      $  23,900
   Accrued liabilities ...........................................................     62,237         53,500
   Unredeemed tickets ............................................................     10,325          9,523
   Current portion of reserve for injuries and damages ...........................     21,374         19,864
   Current maturities of long-term debt ..........................................      4,469         11,662
                                                                                    ---------      ---------
         Total Current Liabilities ...............................................    131,136        118,449
Reserve for Injuries and Damages .................................................     36,591         40,099
Long-Term Debt ...................................................................    207,953        192,581
Other Liabilities ................................................................     11,314          8,272
                                                                                    ---------      ---------
         Total Liabilities .......................................................    386,994        359,401
Commitments and Contingencies (Notes 15 and 19)
Stockholders' Equity
   Preferred Stock (10,000,000 shares authorized; par value $.01) 
       8 1/2% Convertible Exchangeable Preferred Stock (2,760,000 shares
          authorized and 2,400,000 shares issued as of December 31, 1997;
          aggregate liquidation preference $60,000) ..............................     60,000              -
       Series A Junior Preferred Stock (1,500,000 and 500,000 shares authorized
          as of December 31, 1997 and 1996; par value $.01; none issued) .........          -              -
   Common Stock (100,000,000 shares authorized; 59,437,514 and 58,469,469
       shares issued as of December 31, 1997 and 1996, respectively; par
       value $.01) ...............................................................        594            585
Capital in Excess of Par Value ...................................................    229,365        229,104
Retained Deficit .................................................................   (101,809)       (81,237)
Less: Unfunded Accumulated Pension Obligation ....................................     (7,513)        (6,533)
Less: Treasury Stock, at cost (109,192 shares) ...................................     (1,038)        (1,038)
                                                                                    ---------      ---------
         Total Stockholders' Equity ..............................................    179,599        140,881
                                                                                    ---------      ---------
         Total Liabilities and Stockholders' Equity ..............................  $ 566,593      $ 500,282
                                                                                    =========      =========
</TABLE>





        The accompanying notes are an integral part of these statements.




                                       32
<PAGE>   33





                     GREYHOUND LINES, INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF OPERATIONS
                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
                                                                              YEARS ENDED DECEMBER 31,
                                                                  ----------------------------------------------
                                                                      1997              1996              1995
                                                                  -----------       -----------      -----------
<S>                                                               <C>               <C>              <C>        
Operating Revenues
   Transportation services
     Regular route............................................    $   658,396       $   597,779      $   560,239
     Package express..........................................         35,676            33,527           35,690
   Food services..............................................         21,411            21,363           19,440
   Other operating revenues...................................         55,639            48,189           41,752
                                                                  -----------       -----------      -----------
         Total Operating Revenues.............................        771,122           700,858          657,121
                                                                  -----------       -----------      -----------
Operating Expenses
   Maintenance................................................         77,022            73,441           68,540
   Transportation.............................................        187,311           170,979          156,878
   Agents' commissions and station costs......................        141,100           131,715          125,650
   Marketing, advertising and traffic.........................         26,860            25,811           25,513
   Insurance and safety.......................................         45,860            41,088           52,820
   General and administrative.................................         90,752            80,496           72,105
   Depreciation and amortization..............................         31,259            30,683           31,010
   Operating taxes and licenses...............................         51,511            49,831           48,186
   Operating rents............................................         59,105            53,993           47,884
   Cost of goods sold - Food services.........................         13,289            13,774           12,597
   Other operating expenses...................................          9,947             8,243            6,575
                                                                  -----------       -----------      -----------
         Total Operating Expenses.............................        734,016           680,054          647,758
                                                                  -----------       -----------      -----------
Operating Income .............................................         37,106            20,804            9,363
Interest Expense..............................................         27,657            27,346           26,807
                                                                  -----------       -----------      -----------
Net Income (Loss) Before Income Taxes.........................          9,449           ( 6,542)        ( 17,444)
Income Tax Provision..........................................          1,051                62              374
                                                                  -----------       -----------      -----------
Net Income (Loss) Before Extraordinary Item...................          8,398           ( 6,604)        ( 17,818)
Extraordinary Item............................................         25,323                 -                -
                                                                  -----------       -----------      -----------
Net Loss......................................................       ( 16,925)          ( 6,604)        ( 17,818)
Preferred Dividends...........................................          3,648                 -                -
                                                                  -----------       -----------      -----------
Net Loss Attributable to Common Stockholders..................    $  ( 20,573)      $   ( 6,604)     $  ( 17,818)
                                                                  ===========       ===========      ===========
Net Income (Loss) Attributable to Common Stockholders
     Before Extraordinary Item................................    $     4,750       $   ( 6,604)     $  ( 17,818)
                                                                  ===========       ===========      ===========

Net Income (Loss) Per Share of Common Stock:
   Basic
     Net Income (Loss) Attributable to Common Stockholders
          Before Extraordinary Item...........................    $      0.08       $    (0.11)      $     (0.33)
     Extraordinary Item.......................................          (0.43)               -                 -
                                                                  -----------       -----------      -----------
     Net Loss Attributable to Common Stockholders.............    $     (0.35)      $    (0.11)      $     (0.33)
                                                                  ===========       ==========       ===========
   Diluted
     Net Income (Loss) Attributable to Common Stockholders
          Before Extraordinary Item...........................    $      0.08       $    (0.11)      $     (0.33)
     Extraordinary Item.......................................          (0.42)               -                 -
                                                                  -----------       ----------       -----------
     Net Loss Attributable to Common Stockholders ............    $     (0.34)      $    (0.11)      $     (0.33)
                                                                  ===========       ==========       ===========
</TABLE>



        The accompanying notes are an integral part of these statements.




                                       33
<PAGE>   34




                     GREYHOUND LINES, INC. AND SUBSIDIARIES

                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                                                           COMMON STOCK   
                                                          PREFERRED STOCK            COMMON STOCK           SUBSCRIBED    
                                                        SHARES      AMOUNT        SHARES        AMOUNT        SHARES 
                                                        ------      ------        ------        ------     ------------
<S>                                                      <C>       <C>              <C>        <C>             <C>
BALANCE DECEMBER 31, 1994 ......................             -     $       -        37,568     $     375        16,279
Rights Offering ................................             -             -        16,279           163       (16,279)
Tender of debentures ...........................             -             -             6             -             - 
Issuance of stock in connection with
   employee option and 401(k) programs .........             -             -           424             5             - 
Issuance of new equity interests ...............             -             -         4,000            40             - 
Adjustment for unfunded
   accumulated pension obligation ..............             -             -             -             -             - 
Net loss .......................................             -             -             -             -             - 
                                                         -----     ---------        ------     ---------       ------- 
BALANCE, DECEMBER 31, 1995 .....................             -             -        58,277           583             - 

Issuance of stock in connection with
   employee option and 401(k) programs .........             -             -                       1,922             - 
Adjustment for unfunded
   accumulated pension obligation ..............             -             -             -             -             - 
Net loss .......................................             -             -             -             -             - 
                                                         -----     ---------        ------     ---------       ------- 
BALANCE, DECEMBER 31, 1996 .....................             -             -        58,469           585             - 

Issuance of stock in connection with
   employee option and 401(k) programs .........             -             -                       7,747             - 
Issuance of preferred stock ....................         2,400        60,000             -             -             - 
Dividends on preferred stock ...................             -             -             -             -             - 
Acquisition of Carolina ........................             -             -           168             2             - 
Benefit of pre-bankruptcy deferred tax assets ..             -             -             -             -             - 
Adjustment for unfunded
   accumulated pension obligation ..............             -             -             -             -             - 
Net loss .......................................             -             -             -             -             - 
                                                         -----     ---------        ------     ---------       ------- 
BALANCE, DECEMBER 31, 1997 .....................         2,400     $  60,000        59,411     $     594             - 
                                                         =====     =========        ======     =========       ======= 


<CAPTION>
                                                                                                              CAPITAL IN 
                                                    COMMON STOCK                              CAPITAL IN      EXCESS OF  
                                                     SUBSCRIBED        TREASURY STOCK          EXCESS OF      PAR VALUE  
                                                       AMOUNT        SHARES       AMOUNT       PAR VALUE      SUBSCRIBED 
                                                    ------------     ------       ------      -----------     -----------
<S>                                                  <C>           <C>           <C>            <C>            <C>
BALANCE DECEMBER 31, 1994 ......................     $     163           109     $  (1,038)     $ 182,826      $  29,184
Rights Offering ................................          (163)            -             -         29,184        (29,184)
Tender of debentures ...........................             -             -             -             75              - 
Issuance of stock in connection with
   employee option and 401(k) programs .........             -             -             -            990              - 
Issuance of new equity interests ...............             -             -             -         15,347              - 
Adjustment for unfunded
   accumulated pension obligation ..............             -             -             -              -              - 
Net loss .......................................             -             -             -              -              - 
                                                     ---------     ---------     ---------      ---------      ---------
BALANCE, DECEMBER 31, 1995 .....................             -           109        (1,038)       228,422              - 

Issuance of stock in connection with
   employee option and 401(k) programs .........             -             -             -            682              - 
Adjustment for unfunded
   accumulated pension obligation ..............             -             -             -              -              - 
Net loss .......................................             -             -             -              -              - 
                                                     ---------     ---------     ---------      ---------      ---------
BALANCE, DECEMBER 31, 1996 .....................             -           109        (1,038)       229,104              - 

Issuance of stock in connection with
   employee option and 401(k) programs .........             -             -             -          1,385              - 
Issuance of preferred stock ....................             -             -             -         (2,440)             - 
Dividends on preferred stock ...................                           -             -              -              - 
Acquisition of Carolina ........................             -             -             -            748              - 
Benefit of pre-bankruptcy deferred tax assets ..             -             -             -            569              - 
Adjustment for unfunded
   accumulated pension obligation ..............             -             -             -              -              - 
Net loss .......................................             -             -             -              -              - 
                                                     ---------     ---------     ---------      ---------      ---------
BALANCE, DECEMBER 31, 1997 .....................     $       -           109     $  (1,038)     $ 229,366      $       - 
                                                     =========     =========     =========      =========      =========

<CAPTION>
                                                     UNFUNDED
                                                    ACCUMULATED
                                                     PENSION         RETAINED
                                                    OBLIGATION       DEFICIT         TOTAL
                                                    -----------      --------        -----
<S>                                                  <C>            <C>            <C>
BALANCE DECEMBER 31, 1994 ......................     $  (1,499)     $ (56,815)     $ 153,196
Rights Offering ................................             -              -              -
Tender of debentures ...........................             -              -             75
Issuance of stock in connection with
   employee option and 401(k) programs .........             -              -            995
Issuance of new equity interests ...............             -              -         15,387
Adjustment for unfunded
   accumulated pension obligation ..............        (2,073)             -         (2,073)
Net loss .......................................             -        (17,818)       (17,818)
                                                     ---------      ---------      ---------
BALANCE, DECEMBER 31, 1995 .....................        (3,572)       (74,633)       149,762

Issuance of stock in connection with
   employee option and 401(k) programs .........             -              -            684
Adjustment for unfunded
   accumulated pension obligation ..............        (2,961)             -         (2,961)
Net loss .......................................             -         (6,604)        (6,604)
                                                     ---------      ---------      ---------
BALANCE, DECEMBER 31, 1996 .....................        (6,533)       (81,237)       140,881

Issuance of stock in connection with
   employee option and 401(k) programs .........             -              -          1,392
Issuance of preferred stock ....................             -              -         57,560
Dividends on preferred stock ...................             -              -         (3,648)
Acquisition of Carolina ........................             -              -            750
Benefit of pre-bankruptcy deferred tax assets ..             -              -            569
Adjustment for unfunded
   accumulated pension obligation ..............          (980)             -           (980)
Net loss .......................................             -        (16,925)       (16,925)
                                                     ---------      ---------      ---------
BALANCE, DECEMBER 31, 1997 .....................     $  (7,513)     $(101,810)     $ 179,599
                                                     =========      =========      =========
</TABLE>







        The accompanying notes are an integral part of these statements.




                                       34
<PAGE>   35





                     GREYHOUND LINES, INC. AND SUBSIDIARIES
                                        
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                                      YEARS ENDED DECEMBER 31,
                                                                              ---------------------------------------
                                                                                1997           1996           1995
                                                                              ---------      ---------      ---------
<S>                                                                           <C>            <C>            <C>       
Cash Flows From Operating Activities
   Net Loss ................................................................  $ (16,925)     $  (6,604)     $ (17,818)
   Extraordinary item ......................................................     25,323              -              -
   Noncash expenses and gains included in net loss
     Depreciation and amortization .........................................     31,259         30,683         31,010
     Other noncash expenses and gains, net .................................      1,618          1,962            903
Net Change in Certain Operating Assets and Liabilities
     Accounts receivable ...................................................     (1,099)        (2,932)         4,129
     Inventories ...........................................................       (278)          (225)           164
     Prepaid expenses ......................................................      5,359           (826)         2,895
     Other current assets ..................................................       (261)        (1,791)         1,104
     Insurance and security deposits .......................................      3,838           (247)        10,832
     Intangible assets .....................................................    (11,610)        (6,038)        (5,301)
     Accounts payable ......................................................      6,798          5,875          3,763
     Accrued liabilities ...................................................      7,335            237          5,594
     Reserve for injuries and damages ......................................     (1,999)        (5,698)        (6,682)
     Unredeemed tickets ....................................................        501            383         (1,119)
     Other liabilities .....................................................        (16)         1,251              -
                                                                              ---------      ---------      ---------
        Net Cash Provided by Operating Activities ..........................     49,843         16,030         29,474
                                                                              ---------      ---------      ---------
Cash Flows From Investing Activities
     Capital expenditures ..................................................    (45,114)       (38,402)       (46,370)
     Proceeds from assets sold .............................................      6,547         16,680         12,349
     Payments for business acquisitions, net of cash acquired ..............    (40,104)             -              -
     Buyout of MDFC lease ..................................................          -         (1,624)             -
     Other investing activities ............................................     (2,146)          (758)           (55)
                                                                              ---------      ---------      ---------
        Net Cash Used for Investing Activities .............................    (80,817)       (24,104)       (34,076)
                                                                              ---------      ---------      ---------
Cash Flows From Financing Activities
     Payments on debt and capital lease obligations ........................    (20,297)        (9,551)       (18,771)
     Proceeds from long-term borrowings ....................................          -          4,106              -
     Proceeds from 11 1/2%  Senior Notes and 8 1/2% Convertible
          Exchangeable Preferred Stock Issuance ............................    203,031              -              -
     Redemption of 10% Senior Notes ........................................   (161,022)             -              -
     Payment of 8 1/2% Convertible Exchangeable Preferred Stock dividends ..     (2,784)             -              -
     Retirement of interest swap ...........................................     (3,010)             -              -
     Net proceeds from Rights Offering .....................................          -              -         11,685
     Proceeds from issuance of Common Stock ................................      1,097            258         15,415
     Repurchase Senior Notes ...............................................          -              -         (9,687)
     Net change in revolving credit facility ...............................     15,113         10,665              -
                                                                              ---------      ---------      ---------
        Net Cash Provided by (used for) Financing Activities ...............     32,128          5,478         (1,358)
                                                                              ---------      ---------      ---------
Net Increase/(Decrease) in Cash and Cash Equivalents .......................      1,154         (2,596)        (5,960)
Cash and Cash Equivalents, Beginning of Period .............................        898          3,494          9,454
                                                                              ---------      ---------      ---------
Cash and Cash Equivalents, End of Period ...................................  $   2,052      $     898      $   3,494
                                                                              =========      =========      =========

Supplemental Schedule of Noncash Investing and Financing Activities:
     Cash capital expenditures .............................................  $ (45,114)     $ (38,402)     $ (46,370)
     Non-cash capital expenditures (See Note 3) ............................  $    (875)     $ (20,004)     $      -
                                                                              ---------      ---------      ---------
     Total Capital expenditures ............................................  $ (45,989)     $ (58,406)     $ (46,370)
                                                                              =========      =========      =========
</TABLE>







        The accompanying notes are an integral part of these statements.




                                       35
<PAGE>   36


                     GREYHOUND LINES, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 1997

1.  BACKGROUND AND OPERATING ENVIRONMENT

     Greyhound Lines, Inc. and subsidiaries (the "Company") is the only
nationwide provider of scheduled intercity bus service in the United States. The
Company provides various services including scheduled passenger service, package
express service and food services at certain terminals. The Company's operations
include a nationwide network of terminal and maintenance facilities, a fleet of
approximately 2,400 buses and approximately 1,600 sales outlets. The Company's
operating subsidiaries include Texas, New Mexico & Oklahoma Coaches, Inc.
("TNM&O"), Vermont Transit Co., Inc. ("VTC"), Carolina Coach Company
("Carolina"), Valley Transit Co., Inc. ("Valley") and Sistema Internacional de
Transporte de Autobuses, Inc. ("SITA"). The Company is subject to regulation by
the Department of Transportation (the "DOT") and certain states.

2.  SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

     The accompanying consolidated financial statements include the accounts of
the Company. Investments in companies that are 20% to 50% owned ("affiliates")
are accounted for using the equity method. All significant intercompany
transactions and balances have been eliminated.

Certain Reclassifications

         Certain reclassifications have been made to the prior period statements
to conform them to the December 31, 1997 classifications.

Cash and Cash Equivalents

     Cash and cash equivalents include short-term investments that are part of
the Company's cash management portfolio. These investments are highly liquid and
have original maturities of three months or less.

Inventories

     Inventories are stated at the lower of cost or market, with costs
determined using the first-in, first-out method.

Property, Plant and Equipment

     Property, plant and equipment, including capitalized leases, are recorded
at cost, including interest during construction, if any. Depreciation is
recorded over the estimated useful lives or lease terms, net of assumed residual
values, ranging from three to 20 years for structures and improvements, four to
12 years for revenue equipment, and five to 10 years for all other items. The
Company principally uses the straight-line method of depreciation for financial
reporting purposes and accelerated methods for tax reporting purposes.
Maintenance costs are expensed as incurred, and renewals and betterments are
capitalized.

Goodwill

     Goodwill represents the excess of cost over fair value of assets acquired
related to the acquisition of regional bus carriers as prescribed by the
purchase method of accounting. Additionally, the Company is amortizing Goodwill
on a straight-line basis over a 20 to 30 year period.



                                       36
<PAGE>   37
                     GREYHOUND LINES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

Debt Issuance Costs and Discounts

     Costs incurred related to the issuance of debt are deferred, and such costs
and any related discounts are amortized to interest expense using the
straight-line method over the life of the related debt.

Software Development Costs

     The direct costs of internally developed software are capitalized when
technological feasibility has been established, and amortization of the software
begins when the software is ready for use. The cost of the capitalized software
is amortized over a period of five years.

Income Taxes

     Deferred tax assets and liabilities are based upon the estimated future tax
effects of the differences in the tax bases of existing assets and liabilities
and the related financial statement carrying amounts, using currently enacted
tax laws and rates.

Reserve for Injuries and Damages

     The Company maintains comprehensive automobile liability, general
liability, workers' compensation, and property insurance to insure its assets
and operations. Automobile and general liability insurance coverages are subject
to a $1.5 million self-insured retention or deductible per occurrence. The
Company also maintains property insurance subject to a $0.1 million deductible
per occurrence, and maintains workers' compensation insurance, subject to a $1.0
million deductible per occurrence.

     Successful claims against the Company, which do not exceed the deductible
or self-insured retention, are paid out of operating cash flows. A reserve for
injuries and damages has been established for these claim payments. The reserve
is based on an assessment of actual claims and claims incurred but not reported,
based upon historical experience. This reserve also includes an estimate of
environmental liabilities.

Revenue Recognition

     Transportation revenue is recognized when the service is provided. A
liability for tickets sold but not used is recorded as unredeemed tickets.

Use of Estimates

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

Long-Lived Assets

     The Company periodically evaluates whether the remaining useful life of
long-lived assets may require revision or whether the remaining unamortized
balance is recoverable. When factors indicate that an asset should be evaluated
for possible impairment, the Company uses an estimate of the asset's cash flow
in evaluating its fair value.



                                       37
<PAGE>   38
                     GREYHOUND LINES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

Earnings Per Share

     The Company adopted SFAS No. 128 "Earnings Per Share" (SFAS No. 128)
effective December 15, 1997. This statement requires the replacement of primary
and fully diluted earnings per share with basic and diluted earnings per share.
The calculation of earnings per share under SFAS No. 128 has a favorable impact
on earnings per share as it excludes potentially dilutive options from the
calculation of basic earnings per share. Additionally, the calculation of
diluted earnings per share uses the average share price for the period rather
than the potentially more dilutive greater of average share price or end of the
period price required by APB Opinion 15. The adoption of SFAS No. 128 did not
have a material impact on the earnings per share calculation.

Basic earnings (loss) per common share is calculated by dividing net income
(loss) attributable to common stockholders by the weighted average shares of
common stock of the Company ("Common Stock"). The calculation of diluted
earnings (loss) per share of Common Stock considers the effect of Common Stock
equivalents outstanding during the period, the conversion of the Company's 8
1/2% Convertible Subordinated Debentures due 2007 (the "Convertible Debentures")
and 8 1/2% Convertible Exchangeable Preferred Stock (the "Preferred Stock").
Common Stock equivalents represent the dilutive effect of the assumed exercise
of certain outstanding stock options. For the year ended December 31, 1997, the
assumed conversion of the Preferred Stock and Convertible Debentures has an
anti-dilutive effect. Additionally, for the years ended December 31, 1996 and
1995, the assumed exercise of outstanding in-the-money stock options and
conversion of Convertible Debentures has an anti-dilutive effect. As a result,
these shares are excluded from the final determination of the weighted average
shares outstanding at December 31, 1997, 1996 and 1995.

     Also note that the 1997 earnings per share calculation reflects the pro
rata impact of dividends which will accrue to the holders of the Preferred
Stock. The following tables detail the components utilized to calculate earnings
per share for 1997, 1996 and 1995.

<TABLE>
<CAPTION>
                                                                  FOR THE YEAR ENDED DECEMBER 31, 1997
                                                                -----------------------------------------
                                                                                                PER-SHARE
                                                                   INCOME           SHARES        AMOUNT
                                                                ------------      ----------     --------
     <S>                                                        <C>               <C>            <C>     
     BASIC EARNINGS PER SHARE
         Net Income attributable to common shareholders......   $  4,750,000      58,964,093     $   0.08
                                                                ============      ==========     ========

         Effect of Dilutive Securities :
           Options issued to Company employees
                 and Members of the Board of Directors.......              -       1,737,481
                                                                ------------      ----------

     DILUTED EARNINGS PER SHARE
         Net Income attributable to common
            shareholders plus assumed conversions............   $  4,750,000      60,701,574     $   0.08
                                                                ============      ==========     ========
</TABLE>

<TABLE>
<CAPTION>
                                                                  FOR THE YEAR ENDED DECEMBER 31, 1996
                                                                -----------------------------------------
                                                                                                PER-SHARE
                                                                   INCOME           SHARES        AMOUNT
                                                                ------------      ----------     --------
     <S>                                                        <C>               <C>            <C>     
     BASIC AND DILUTED EARNINGS PER SHARE
         Net Loss attributable to common shareholders........   $(6,604,000)      58,263,327     $ (0.11)
                                                                ===========       ==========     =======
</TABLE>



                                       38
<PAGE>   39

                     GREYHOUND LINES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)



<TABLE>
<CAPTION>
                                                                  FOR THE YEAR ENDED DECEMBER 31, 1995
                                                                -----------------------------------------
                                                                                                PER-SHARE
                                                                   INCOME           SHARES        AMOUNT
                                                                ------------      ----------     --------
     <S>                                                        <C>               <C>            <C>     
     BASIC AND DILUTED EARNINGS PER SHARE
         Net Loss attributable to common shareholders........   $(17,818,000)     54,595,377     $ (0.33)
                                                                ============      ==========     =======
</TABLE>

Future Accounting Changes

     The Company plans to adopt Statement of Financial Accounting Standards No.
130 ("SFAS No. 130"), "Reporting Comprehensive Income", effective for the
Company's fiscal year beginning January 1, 1998. SFAS No. 130 established
standards for the reporting and display of comprehensive income and its
components in a full set of general-purpose financial statements. Comprehensive
income is defined as the total of net income and all other non-owner changes in
equity. The Company's only non-owner change in equity at December 31, 1997, is a
minimum pension liability adjustment. Upon adoption, comprehensive income and
the cumulative other comprehensive income will be reported in a consolidated
statement of shareholders' equity.

     The Company plans to adopt Statement of Financial Accounting Standards No.
131 ("SFAS No. 131"), "Disclosures about Segments of an Enterprise and Related
Information", effective for the Company's fiscal year beginning January 1, 1998.
This Statement requires a public business enterprise to report financial and
descriptive information about its reportable operating segments. Operating
segments are components of an enterprise about which separate financial
information is available that is evaluated regularly by the chief operating
decision maker in deciding how to allocate resources and in assessing
performance. The Company will not be required to make changes related to this
standard, as the Company has only one reportable segment.

     The Company plans to adopt Statement of Financial Accounting Standards No.
132 ("SFAS No. 132"), "Employers' Disclosures about Pensions and Other
Postretirement Benefits", effective for the Company's fiscal year beginning
January 1, 1998. This Statement standardizes the disclosure requirements for
pensions and other postretirement benefits to the extent practicable, requires
additional information on changes in the benefit obligations and fair values of
plan assets that will facilitate financial analysis and eliminates other
disclosures no longer useful as prescribed in previous standards. The Company
anticipates that its' disclosure will be affected by this standard, and the
Company will comply by the effective date.

     The Company plans to adopt Statement of Position 98-1 ("SOP 98-1"),
"Accounting for the Cost of Computer Software Developed or Obtained for
Internal-Use", effective for the Company's fiscal year beginning January 1,
1999. SOP 98-1 provides guidance on accounting for the costs of computer
software developed or obtained for internal-use and identifies the
characteristics of internal-use software. The Company has determined the impact
of adoption will be minimal.

3.  STATEMENTS OF CASH FLOWS SUPPLEMENTARY DISCLOSURES

     Cash paid for interest was $29.4 million, $24.5 million and $22.7 million
for the years ended December 31, 1997, 1996 and 1995, respectively. There were
no cash payments for federal income taxes for the years ended December 31, 1997,
1996 and 1995, other than payments related to an Internal Revenue Service "IRS"
audit of the Company's 1987 through 1989 tax returns which resulted in a $0.3
million payment in 1996.

     Significant noncash investing and financing activities during 1997 included
$0.9 million primarily related to stock issued in July for consideration in the
purchase of Carolina. In 1996, noncash activity included 77 buses which were
acquired under a capital lease for $17.9 million and computer equipment which
was acquired under a capital lease for $2.1 million.



                                       39
<PAGE>   40

                     GREYHOUND LINES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)



4.  INVENTORIES

     Inventories consisted of the following (in thousands):

<TABLE>
<CAPTION>
                                                                                         DECEMBER 31,
                                                                                 --------------------------
                                                                                   1997                1996
                                                                                 -------             ------
     <S>                                                                         <C>                 <C>
     Service parts...........................................................    $ 2,880             $ 2,078
     Fuel....................................................................        576                 609
     Food service operations.................................................      1,202               1,153
                                                                                 -------             -------
       Inventories...........................................................    $ 4,658             $ 3,840
                                                                                 =======             =======
</TABLE>

5.  PREPAID EXPENSES

     Prepaid expenses consisted of the following (in thousands):

<TABLE>
<CAPTION>
                                                                                          DECEMBER 31,
                                                                                 --------------------------
                                                                                   1997                1996
                                                                                 -------             ------
     <S>                                                                         <C>                 <C>
     Insurance...............................................................    $ 1,520             $ 4,003
     Taxes and licenses......................................................      1,064               1,303
     Rents...................................................................      1,424                 992
     Other...................................................................        941               1,881
                                                                                 -------             -------
       Prepaid expenses......................................................    $ 4,949             $ 8,179
                                                                                 =======             =======
</TABLE>

6.  OTHER CURRENT ASSETS

     Other current assets consisted of the following (in thousands):

<TABLE>
<CAPTION>
                                                                                         DECEMBER 31,
                                                                                 -------------------------
                                                                                   1997               1996
                                                                                 -------            ------
     <S>                                                                         <C>                <C>
     Deposits on insurance...................................................    $ 7,576            $  7,090
     Deposits on business combinations.......................................          -               1,644
     Deferred acquisition costs..............................................      1,128                 436
     Other...................................................................        990               2,159
                                                                                 -------            --------
       Other current assets..................................................    $ 9,694            $ 11,329
                                                                                 =======            ========
</TABLE>

     The deposits on insurance held as of December 31, 1997 and 1996, are the
current portion of insurance deposits that include self-insurance deposits
required by the Company's primary insurance carrier to cover interstate and
certain intrastate claims for bodily injury and property damage liability.
Deposits on business combinations represented deposits on two acquisitions
pending at the end of 1996, which were subsequently completed in 1997. Deferred
acquisition costs represent costs associated with potential acquisitions by
SITA. These acquisition costs will be considered as part of the cost of the
acquisitions when determining the purchase price allocation, or expensed when it
is determined that the purchase will not be completed.





                                       40
<PAGE>   41

                     GREYHOUND LINES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)


7.  BENEFIT PLANS

Pension Plans

     The Company has nine defined benefit pension plans. The first plan (the
"ATU Plan") covers substantially all of the Company's ongoing hourly employees
hired before November 1, 1983. The Company's hourly plan provides normal
retirement benefits to the covered employees based upon a percentage of average
final earnings, reduced pro rata for service of less than 15 years. Participants
in this plan will continue to accrue benefits as long as no contributions are
due from the Company. In the event a contribution is required, the plan benefits
will be frozen until such time as the assets of the plan exceed 115% of the plan
liabilities. The second plan covered salaried employees through May 7, 1990,
when the plan was curtailed. The third plan is a multi-employer pension plan,
instituted in 1992, to cover certain union mechanics. The remaining six plans
are held by TNM&O, VTC, and Carolina and cover substantially all of their
salaried and hourly personnel. It is the Company's policy to fund the minimum
required contribution under existing laws.

     The Company's net periodic pension expense (income) included the following
(in thousands):

<TABLE>
<CAPTION>
                                                                             YEARS ENDED DECEMBER 31,
                                                                  ---------------------------------------------
                                                                      1997             1996             1995
                                                                  -----------       ------------     ----------
     <S>                                                          <C>               <C>              <C>      
     Service cost-benefits earned during the period.............  $     4,549       $     3,779      $   4,331
     Interest cost on projected benefit obligations.............       51,958            51,257         60,041
     Actual return on plan assets...............................     (120,808)          (49,621)      (148,028)
     Net amortization and deferral..............................       64,554            (6,072)        81,922
                                                                  -----------       ------------     ---------
       Net periodic pension expense (income)....................  $       253       $      (657)     $  (1,734)
                                                                  ===========       ===========      =========
</TABLE>

     The following table sets forth the funded status and amounts recognized in
the consolidated statements of financial position for the pension plans (in
thousands):

<TABLE>
<CAPTION>
                                                             DECEMBER 31, 1997                  DECEMBER 31, 1996
                                                   ---------------------------------   --------------------------------
                                                     PREPAID       ACCRUED PENSION      PREPAID       ACCRUED PENSION
                                                   PENSION PLANS    PLAN LIABILITIES   PENSION PLANS  PLAN LIABILITIES
                                                   -------------   -----------------   -------------  -----------------
<S>                                                  <C>             <C>                <C>               <C>     
Actuarial present value of benefit obligations
   Vested benefit obligations.....................   $  633,544      $  66,033          $  648,142        $ 43,254
                                                     ==========      =========          ==========        ========

   Accumulated benefit obligations................   $  649,056      $  66,889          $  661,682        $ 43,474
                                                     ==========      =========          ==========        ========

Projected benefit obligations.....................   $  660,744      $  68,679          $  672,863        $ 44,177
Plan assets at fair value.........................      759,507         60,661             720,136          38,345
                                                     ----------      ---------          ----------        --------
Plan assets greater than (less than) projected
   benefit obligations............................       98,763         (8,018)             47,273          (5,832)
Unrecognized net (gain) loss......................      (73,385)         7,407             (22,346)          6,896
Adjustment required to recognize
    minimum liability.............................            -         (7,513)                  -          (6,533)
                                                     ----------      ---------          ----------        --------
   Prepaid (accrued) pension costs................   $   25,378      $  (8,124)         $   24,927        $ (5,469)
                                                     ==========      =========          ==========        ========
</TABLE>

     Statement of Financial Accounting Standards No. 87, "Employers Accounting
for Pensions," required the Company to record an additional minimum liability of
$1.0 million as of December 31, 1997. This provision is reflected as a reduction
of stockholders' equity.





                                       41
<PAGE>   42
                     GREYHOUND LINES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)



     In determining the benefit obligations and service costs for the Company's
defined benefit pension plans, the following assumptions were used:

<TABLE>
<CAPTION>
                                                                                     DECEMBER 31,
                                                                              ---------------------------
                                                                                 1997              1996
                                                                              -----------       ---------
   <S>                                                                        <C>                <C>
   Weighted average discount rate..........................................      7.25%            7.50%
   Expected long-term rate of return on plan assets........................    7.50-9.00%       7.50-9.00%
   Rate of salary progression..............................................    0.00-6.00%       0.00-6.00%
</TABLE>

     Plan assets consist primarily of government-backed securities, corporate
equity securities, guaranteed insurance contracts, annuities and corporate debt
obligations.

Cash or Deferred Retirement Plans

     The Company sponsors 401(k) cash or deferred retirement plans that cover
substantially all of its ongoing salaried, hourly and represented employees.
Costs to the Company related to these plans were $1.7 million, $2.1 million, and
$1.1 million for the years ended December 31, 1997, 1996 and 1995, respectively.
On October 31, 1991, the Company contributed 500,000 shares of its Common Stock
to an employee stock ownership plan ("ESOP") for its employees. Effective
December 31, 1994, this plan was amended to merge it into the Company's 401(k)
profit sharing plan. An IRS determination letter relating to this merger was
filed and received in 1996.

Other Plans

     A contributory trusteed health and welfare plan has been established for
all active hourly employees which are represented by collective bargaining
agreements and a contributory health and welfare plan has been established for
salaried employees and hourly employees who are not represented by collective
bargaining agreements. For the years ended December 31, 1997, 1996 and 1995, the
Company incurred costs of $17.8 million, $16.3 million, and $13.9 million,
respectively, related to these plans. No post-retirement health and welfare
plans exist.

     The Company also has a Supplemental Executive Retirement Plan (the "SERP"),
which covers only key executives of the Company. During 1995, the SERP was
converted from a defined benefit plan to a defined contribution plan. For the
years ended December 31, 1997, 1996 and 1995, the Company incurred costs of $0.2
million, $0.4 million and $0.3 million, respectively.





                                       42
<PAGE>   43
                     GREYHOUND LINES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)


8.  PROPERTY, PLANT, AND EQUIPMENT

     Property, plant and equipment consisted of the following (in thousands):

<TABLE>
<CAPTION>
                                                                                      DECEMBER 31,
                                                                             ---------------------------
                                                                                 1997            1996
                                                                             ----------       ----------
   <S>                                                                       <C>               <C>      
   Land and improvements...................................................  $   85,809       $   77,954
   Structures and improvements
     Owned.................................................................     101,854           89,473
     Capitalized leased assets.............................................         650              650
     Lease interests.......................................................       6,540            4,376
     Leasehold improvements................................................      28,757           27,006
   Revenue equipment
     Owned.................................................................     149,627          135,732
     Capitalized leased assets.............................................      36,101           34,165
     Leasehold improvements................................................       3,123            2,900
   Furniture and fixtures..................................................      42,778           32,499
   Vehicles, machinery and equipment
     Owned.................................................................      10,427            9,478
     Capitalized lease assets..............................................           -            2,122
                                                                             ----------       ----------
   Property, plant and equipment...........................................     465,666          416,355
       Accumulated depreciation............................................    (124,374)        (101,901)
                                                                             ----------       ----------
           Property, plant equipment, net..................................  $  341,292       $  314,454
                                                                             ==========       ==========
</TABLE>

     During 1997, the Company took delivery of 210 buses, all but six of which
were manufactured by Motor Coach, Inc. ("MCI") or its affiliate, Dina Autobuses,
S.A. de C.V. ("DASA"); hereafter referred to collectively as "MCI." The Company
purchased 20 of these buses and the remaining were financed as long-term
operating leases. The Company purchased 58 buses throughout the year that were
later sold and then leased back.

     The Company paid $10.3 million to Viad in the fourth quarter of 1997 to
acquire terminal facilities in San Jose, CA, Nashville, TN and Reno, NV and
Viad's joint venture interests in the terminals in Denver, CO, and Albuquerque,
NM.

     Accumulated depreciation of capitalized leased assets amounted to $12.1
million and $9.2 million at December 31, 1997 and 1996, respectively.

9.  INSURANCE AND SECURITY DEPOSITS

     Insurance and security deposits consisted of the following (in thousands):

<TABLE>
<CAPTION>
                                                                                      DECEMBER 31,
                                                                             ---------------------------
                                                                                 1997            1996
                                                                             ---------         ---------
   <S>                                                                       <C>               <C>      
   Insurance deposits......................................................  $  37,205         $  40,481
   Security deposits.......................................................     33,756            35,314
   Other...................................................................      1,732               385
                                                                             ---------         ---------
           Insurance and security deposits.................................  $  72,693         $  76,180
                                                                             =========         =========
</TABLE>

     Insurance deposits are required by the Company's self-insurance
authorizations and the Company's primary insurance carrier to cover self-insured
interstate and certain intrastate auto liability as well as workers'
compensation coverage in certain states.



                                       43
<PAGE>   44
                     GREYHOUND LINES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)


     Security deposits at December 31, 1997 and 1996, include (i) a $24.7
million (at current market value) pledge of assets required as a collateral
deposit for a $70.1 million sale/leaseback of 319 buses, and (ii) a $9.3 million
(at current market value) deposit required by the lessor in conjunction with a
separate sale/leaseback of 125 buses.

10.  INTANGIBLE ASSETS

     Intangible assets consisted of the following (in thousands):

<TABLE>
<CAPTION>
                                                                                    DECEMBER 31,
                                                                             ---------------------------
                                                                                 1997            1996
                                                                             ---------         ---------
   <S>                                                                       <C>               <C>      
   Trademark...............................................................  $  10,198         $  10,198
   Software................................................................     30,561            23,340
   Debt issuance costs.....................................................     10,082             4,807
   Deferred lease costs....................................................      1,652             1,701
   Other...................................................................         28                29
                                                                             ---------         ---------
   Intangible assets.......................................................     52,521            40,075
     Accumulated amortization..............................................    (22,188)          (19,105)
                                                                             ---------         ---------
       Intangible assets, net..............................................  $  30,333         $  20,970
                                                                             =========         =========
</TABLE>

     Trademarks are amortized using the straight-line method over 15 years.

11.  ACCRUED LIABILITIES

     Accrued liabilities consisted of the following (in thousands):

<TABLE>
<CAPTION>
                                                                                      DECEMBER 31,
                                                                             ---------------------------
                                                                                1997             1996
                                                                             ---------         ---------
   <S>                                                                       <C>               <C>      
   Compensation, benefits and payroll-related taxes........................  $  26,375         $  18,750
   Bus operating leases and rentals........................................      5,900             4,125
   Interest................................................................      4,145             8,000
   Operating, property and income taxes....................................      3,998             4,115
   Dividends payable.......................................................        864                 -
   Other expenses..........................................................     20,955            18,510
                                                                             ---------         ---------
       Accrued liabilities.................................................  $  62,237         $  53,500
                                                                             =========         =========
</TABLE>





                                       44
<PAGE>   45
                     GREYHOUND LINES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)


12.  LONG-TERM DEBT AND INTEREST EXPENSE

     Long-term debt consisted of the following (in thousands):

<TABLE>
<CAPTION>
                                                                                  DECEMBER 31,
                                                                           ------------------------
                                                                              1997           1996
                                                                           ---------      ---------
<S>                                                                        <C>            <C>      
Secured Indebtedness
  Revolving bank loans, prime plus 0.75% or LIBOR plus 2.25% (weighted
      average 8.6%) as of December 31, 1997 and prime plus
      1.75% (weighted average 10.0%) as of December 31, 1996, due 2002 ..  $  25,778      $  10,665
  Capital lease obligations (weighted average 10.4% at December 31, 
      1997 and 1996) due through 2003 ...................................     26,635         29,604
  Real estate mortgages (11.2% and weighted average 9.4% at
     December 31, 1997 and 1996, respectively) due through 2006 .........        205          1,685
  Note payable, prime plus 1.5%, due 2004 ...............................          -         13,452
Unsecured Indebtedness
  10% Senior notes (13.5% imputed rate), due 2001, net of
     unamortized discount of  $13,991 at December 31, 1996 ..............          -        138,679
  11 1/2% Senior notes, due 2007 ........................................    150,000              -
  8 1/2% Convertible debentures, due 2007 ...............................      9,804          9,804
  Other long-term debt (weighted average 10.0% at December 31, 1996)
     due through 1997 ...................................................          -            354
                                                                           ---------      ---------
Long-term debt ..........................................................    212,422        204,243
  Less current maturities ...............................................     (4,469)       (11,662)
                                                                           ---------      ---------
     Long-term debt, net ................................................  $ 207,953      $ 192,581
                                                                           =========      =========
</TABLE>

Revolving Credit Facility

     The Company is a party to a Revolving Credit Facility which was
renegotiated in December 1996 and May 1997. This renegotiation of the Revolving
Credit Facility resulted in an extraordinary loss of $1.5 million, relating to
the write-off of the previous debt issuance costs that were being amortized.

     The amended Revolving Credit Facility consists of (i) a revolving facility
providing for advances of up to $92.5 million based on the liquidation value of
certain core vehicles, (ii) a revolving facility providing for advances of up to
$2.5 million based on a formula of eligible accounts receivable and (iii) a real
estate facility providing for borrowings of up to $30.0 million based on the
fair market value of certain core real property collateral (the "Real Estate
Facility"). The Revolving Credit Facility has two interest rate options, prime
and LIBOR. As of March 5, 1998, the Company had borrowings under the Revolving
Credit Facility bearing interest at prime rate plus 0.25% (8.75%) and LIBOR plus
1.75% (weighted average 7.405%). The weighted average interest rate for all
Revolving Credit Facility borrowings was 7.483% at March 5, 1998. Borrowings
under the Revolving Credit Facility mature on May 21, 2002, although
availability under the Real Estate Facility will be subject to yearly reductions
commencing in 1999. The Revolving Credit Facility is secured by liens on
substantially all of the assets of the Company.

10% Senior Notes

     The Company retired the 10% Senior Notes in May 1997 with the proceeds from
the issuance of the 11 1/2% Senior Notes and the Company's 8 1/2% Convertible
Exchangeable Preferred Stock. This transaction resulted in an extraordinary loss
of $21.3 million relating to the write-off of the discount and debt issuance
costs, combined with the prepayment penalties.




                                       45
<PAGE>   46

                     GREYHOUND LINES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)


     The Company's 10% Senior Notes due 2001 (the "10% Senior Notes") bore
interest at the rate of 10% per annum, payable each January 31 and July 31. The
10% Senior Notes had an original stated principal amount of $165.0 million, of
which $1.7 million had been held by the Company prior to December 1995. During
December 1995, the Company repurchased (the "Senior Note Repurchase") an
additional $10.7 million aggregate principal amount of the 10% Senior Notes
pursuant to a put/call agreement with one of the Company's principal
stockholders. The 10% Senior Notes are reflected net of unamortized discount in
the Consolidated Statements of Financial Position to reflect an imputed interest
rate of 13.5%, and also net of any Senior Notes held by consolidated
subsidiaries.

11 1/2% Senior Notes

     The Company's 11 1/2% Senior Notes due 2007 (the "11 1/2% Senior Notes")
bear interest at the rate of 11 1/2% per annum, payable each April 15 and
October 15 commencing on October 15, 1997. The 11 1/2% Senior Notes are
redeemable at the option of the Company in whole or in part, at any time on or
after April 15, 2002, at redemption prices of 105.750% in 2002, 103.834% in
2003, 101.917% in 2004 and 100% in 2005 and thereafter plus any accrued but
unpaid interest. Upon a change of control of the Company, as defined in the
indenture, the Company will be required to make an offer to repurchase all or
any part of each holder's 11 1/2% Senior Notes at a price equal to 101% of the
principal amount thereof plus interest. The 11 1/2% Senior Note indenture
contains certain covenants that, among other things, limit the ability of the
Company to incur additional indebtedness, pay dividends or make other
distributions, repurchase equity interests or subordinated indebtedness, create
certain liens, sell assets or enter into certain mergers or consolidations.

Convertible Debentures

     During 1992, the Company issued $98.9 million of 8 1/2% Convertible
Subordinated Debentures ("Convertible Debentures") of which $9.8 million remains
outstanding. Interest on the Convertible Debentures is payable semiannually
(each March 31 and September 30). The Convertible Debentures are convertible at
the option of the holder at any time prior to maturity, unless previously
redeemed, into Common Stock at the conversion price of $12.375 per share
(equivalent to a conversion rate of approximately 80.81 shares per $1,000
principal amount of Convertible Debentures), subject to adjustment in certain
events.

Other

     Under the most restrictive provisions of all its debt agreements, the
Company is limited in incurring additional indebtedness, is limited on the
payment of dividends on its Common Stock, and may not enter into certain
mergers, or acquire or dispose of any assets (except in the ordinary course of
business). The Revolving Credit Facility is subject to certain operating and
financial covenants, including maintenance of a minimum consolidated net worth,
ratio of total indebtedness to cash flow and ratio of cash flow to interest
expense. In addition, non-bus capital expenditures are limited to $30.0 million
annually with no spending limitations on bus purchases. However, in 1997, the
Company obtained a waiver to allow for an additional $3.0 million of capital
expenditures. As of December 31, 1997, the Company was in compliance with all
such covenants.

     During March 1994, the Company ordered 151 new buses from MCI for an
aggregate cost of $34.8 million. The buses were 90% financed through a ten-year
installment note, which was secured by the purchased buses and which bore
interest at a rate of prime plus 1.5 percent. In February 1995, the Company made
a prepayment on the amount owed of $12.9 million. The remainder of these notes
were paid in April 1997 with the proceeds from the sale of the Company's
securities.

     During 1993, the Company executed three interest rate swap agreements
whereby fixed interest rates were swapped for variable interest rates. The
purpose of these agreements was to hedge the interest rates related to the



                                       46
<PAGE>   47
                     GREYHOUND LINES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)


Company's 10% Senior Notes and the Convertible Debentures. The five-year swap
transactions totaled $150.0 million, and a deposit of $10.0 million was provided
to secure the transaction. When the Company entered into a previous bank credit
facility in December 1993, the deposit was returned to the Company. During
January 1994, the Company terminated a $75.0 million interest rate swap
agreement. The gain resulting from the termination was $1.6 million and is being
recognized evenly over the remaining term of the five-year agreement.

     The Company amended its two remaining interest rate swap agreements during
October 1994, to lock in the future payments under the agreements until maturity
in July 1998. The net result of the amendments was to ensure that these swaps
would not be subject to interest rate risk. These agreements were terminated in
April 1997, with proceeds from the sale of the Company's securities. This
transaction resulted in an extraordinary loss of $1.5 million. The net interest
expense during 1997 and 1996 resulting from the interest rate swap agreements
was $0.3 million and $1.2 million, respectively.

     At December 31, 1997, maturities of long-term debt for the next five fiscal
years ending December 31 and all years thereafter, are as follows (in
thousands):

<TABLE>
             <S>                                                <C>        
             1998.............................................  $    4,469
             1999.............................................       4,850
             2000.............................................       5,741
             2001.............................................       2,511
             2002 ............................................      29,025
             Thereafter.......................................     165,826
                                                                ----------
                                                                $  212,422
                                                                ==========
</TABLE>

13.  INCOME TAXES

Income Tax Provision

     The income tax provision consisted of the following (in thousands):

<TABLE>
<CAPTION>
                                                                                   YEARS ENDED DECEMBER 31,
                                                                             ----------------------------------
                                                                                1997          1996         1995
                                                                             --------        ------       -----
     <S>                                                                     <C>             <C>          <C>   
     Current
        Federal...........................................................   $      -        $    -       $  312
        State.............................................................        482            62           62
                                                                             --------        ------       ------
              Total Current...............................................        482            62          374
                                                                             --------        ------       ------

     Deferred
        Federal...........................................................        478             -            -
        State.............................................................         91             -            -
                                                                             --------        ------       ------
              Total Deferred..............................................        569             -            -
                                                                             --------        ------       ------
              Income tax provision........................................   $  1,051        $   62       $  374
                                                                             ========        ======       ======
</TABLE>





                                       47
<PAGE>   48

                     GREYHOUND LINES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)




Effective Tax Rate

     The differences, expressed as a percentage of income before taxes and
extraordinary items, between the statutory and effective federal income tax
rates are as follows:

<TABLE>
<CAPTION>
                                                                                    YEARS ENDED DECEMBER 31,
                                                                              ----------------------------------
                                                                               1997           1996          1995
                                                                              ------         -----         -----
     <S>                                                                      <C>            <C>           <C>
     Statutory tax rate....................................................     34.0%        (34.0)%       (34.0)%
     Dividends received deduction..........................................      -            (0.5)         (0.1)
     Non-compliance fees...................................................      -            (0.3)          0.3
     State income taxes....................................................      6.1           1.0           0.4
     Unrecognized current year benefit.....................................      -            31.0          32.4
     Recognition of previously unrecognized deferred tax assets............    (31.0)          -             -
     Other.................................................................      2.0           3.8           3.1
                                                                              ------         -----         -----
        Effective tax rate.................................................     11.1%          1.0%          2.1%
                                                                              ======         =====         =====
</TABLE>

Deferred Tax Assets

     Significant components of deferred income taxes at December 31, 1997 and
1996, were as follows (in thousands):

<TABLE>
<CAPTION>
                                                                                      DECEMBER 31,
                                                                             -----------------------------
                                                                                 1997             1996
                                                                             ----------        -----------
<S>                                                                          <C>               <C>        
Deferred Tax Assets
     Federal and state NOL carryforwards...................................  $   43,124        $    30,624
     Reserve for injuries and damages......................................      16,943             17,840
     Book over tax depreciation and amortization...........................       2,066              1,358
     Other accrued expenses and reserves...................................       6,303              5,487
     Other deferred tax assets.............................................         245                358
                                                                             ----------        -----------
       Total deferred tax assets...........................................      68,681             55,667
                                                                             ----------        -----------
Deferred Tax Liabilities
     Tax over book depreciation and amortization...........................      16,298             12,131
     Pension cost for tax purposes in excess of books......................       8,749              8,322
     Other deferred tax liabilities........................................         398                245
                                                                             ----------        -----------
       Total deferred tax liabilities......................................      25,445             20,698
                                                                             ----------        -----------
Net deferred tax assets....................................................      43,236             34,969
Valuation allowance........................................................     (43,236)           (34,969)
                                                                             ----------        -----------
       Deferred tax assets, net of valuation allowance.....................  $        -        $         -
                                                                             ==========        ===========
</TABLE>

     With the Company reporting income before taxes and extraordinary items, a
provision is required to be recognized as if the extraordinary item had not
occurred. Before the extraordinary loss, the Company would use previously
unrecognized deferred tax assets to offset taxes on the income. Use of the
deferred tax asset would normally reflect the recognition of tax expense and an
equal benefit due to the reduction of the valuation allowance, resulting in no
impact to the provision. However, a portion of the Company's deferred tax asset
arose prior to the fresh start date, and as a result, $0.6 million of the
reversal of the related valuation allowance was used to increase capital in
excess of par rather than reduce tax expense at December 31, 1997. Therefore, a
provision would be required equal to the portion of the valuation allowance
reduction related to deferred tax assets that arose prior to the fresh start
date. The benefit from the extraordinary loss has been fully reserved as the
Company currently does not believe that a sufficient history of earnings has
been established to make realization of the deferred tax asset more likely than
not. At December 31, 1997, the remaining deferred tax asset that arose prior to
the fresh start date was $4.2 million. Future recognition of these assets will
increase capital in excess of par rather than reduce tax expense.



                                       48
<PAGE>   49
                     GREYHOUND LINES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)


Availability and Amount of NOL's

     The Financial Restructuring resulted in an ownership change, as defined
under Section 382 of the Internal Revenue Code (the "Code"). The provisions of
the Code, as they apply to the Company, require that an annual limitation be
placed on the amount of net operating loss ("NOL") carryforwards which may be
utilized. Consequently, the Company's NOL carryforwards from 1994 are now
subject to an annual limitation of $2.1 million. Any unused portion of the
current annual limitation may be carried forward to the following year. The
Company estimates a 1997 taxable loss of $19.6 million. Additionally, the
Company incurred taxable losses in 1996 and 1995 of $19.7 million and $29.8
million respectively. Neither the 1997, 1996, nor 1995 loss is subject to
limitation under Section 382. The Company will also carry forward the unused
1997, 1996, and 1995 annual limitation of $2.1 million from the 1994 NOL
carryforward. As a result, the Company will carryforward available NOL's of
$100.6 million, $25.2 million of which is subject to the annual $2.1 million
limitation. The NOL carryforwards expire as follows (in thousands):

<TABLE>
           <S>                                                  <C>      
           2006...............................................  $   1,100
           2007...............................................      2,900
           2008...............................................      9,800
           2009...............................................     17,700
           2010...............................................     29,800
           2011...............................................     19,700
           2012...............................................     19,600
                                                                ---------

                                                                $ 100,600
                                                                =========
</TABLE>

14.  FAIR VALUES OF FINANCIAL INSTRUMENTS

     Statement of Financial Accounting Standards No. 107, "Disclosures About
Fair Value of Financial Instruments" ("SFAS No. 107"), requires disclosure of
the fair value of financial instruments. The following methods and assumptions
were used by the Company in estimating the fair value disclosures for its
financial instruments.

     For cash and cash equivalents, accounts receivable, and the revolving bank
loans, the carrying amounts reported in the Consolidated Statements of Financial
Position approximate fair value. The fair values of the interest rate swaps,
short-term deposits and long-term insurance deposits are based upon quoted
market prices at December 31, 1997 and 1996, where available. For the portion of
short-term deposits and long-term insurance and security deposits where no
quoted market price is available, the carrying amounts are believed to
approximate fair value. For the other secured indebtedness, real estate
mortgages, note payable and other long-term debt, the fair values are estimated
using discounted cash flow analysis, based upon the Company's incremental
borrowing rates for similar types of borrowing arrangements. The fair values of
the Senior Notes and the Convertible Debentures were based upon quoted market
prices at December 31, 1997 and 1996.





                                       49
<PAGE>   50
                     GREYHOUND LINES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)


     The carrying amounts and fair values of the Company's financial instruments
at December 31, 1997 and 1996, are as follows (in thousands):

<TABLE>
<CAPTION>
                                                    DECEMBER 31, 1997              DECEMBER 31, 1996
                                                 ----------------------         ----------------------
                                                 CARRYING         FAIR          CARRYING         FAIR
                                                  AMOUNT          VALUE          AMOUNT          VALUE
                                                 --------         -----         --------         -----
<S>                                              <C>            <C>            <C>            <C>      
Other Current Assets
  Deposits on Insurance .......................  $   7,576      $   7,576      $   7,090      $   7,090
  Deposits on Business Combinations ...........          -              -            900            900
Insurance and Security Deposits
  Insurance Deposits ..........................     37,205         37,205         40,481         40,481
  Security Deposits ...........................     33,756         34,265         35,314         35,314
Long-Term Debt
  Interest Rate Swaps .........................          -              -           (857)        (3,929)
  Real Estate Mortgages .......................       (205)          (141)        (1,685)        (1,074)
  Note Payable ................................          -              -        (13,452)       (10,096)
  10% Senior Notes ............................          -              -       (138,679)      (146,946)
  11 1/2% Senior Notes ........................   (150,000)      (165,750)             -              -
  8 1/2% Convertible Subordinated Debentures ..     (9,804)        (9,804)        (9,804)        (9,730)
  Other Long-Term Debt ........................          -              -           (354)          (354)
</TABLE>

15.  LEASE COMMITMENTS

     The Company leases buses and terminals from various parties pursuant to
capital and operating leases expiring at various dates through 2065.

     At December 31, 1997, scheduled future minimum payments for the next five
fiscal years ending December 31, under the capital leases and noncancelable
operating leases are as follows (in thousands):

<TABLE>
<CAPTION>
                                                                               CAPITAL        OPERATING
                                                                               LEASES           LEASES
                                                                             ---------        ----------
           <S>                                                               <C>              <C>       
           1998...........................................................   $   7,015        $   46,883
           1999...........................................................       6,894            44,396
           2000...........................................................       7,201            41,768
           2001...........................................................       3,535            41,152
           2002...........................................................       3,919            31,721
           Thereafter.....................................................       6,197           108,238
                                                                             ---------        ----------
                   Total minimum lease payments...........................      34,761        $  314,158
                                                                                              ==========
               Amounts representing interest..............................       8,126
                                                                             ---------
                   Present value of minimum lease payments................   $  26,635
                                                                             =========
</TABLE>

     For the years ended December 31, 1997, 1996 and 1995, rental expenses for
operating leases (net of sublease rental income of approximately $2.1 million,
$2.2 million and $1.9 million, respectively) amounted to $57.6 million, $52.4
million, and $47.8 million, respectively. Rental expenses for bus operating
leases, excluding casual rents and other short term leases during peak periods,
amounted to $32.1 million, $27.5 million and $23.7 million in 1997, 1996 and
1995, respectively.





                                       50
<PAGE>   51
                     GREYHOUND LINES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)


16.  STOCK OPTION PLANS

     As of December 31, 1997, the Company's five stock option plans have
authorized the grant of options to employees and outside directors for up to
7,939,446 shares of the Company's Common Stock. All options granted have five to
10 year terms and vest over a three to four year period of continued employment
or service on the Company's Board of Directors.

     The Company has elected to continue to follow Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25) and related
Interpretations in accounting for its employee stock options. However, pro forma
information regarding net income and earnings per share is required by FASB
Statement No. 123 "Accounting for Stock-Based Compensation" (SFAS 123), and has
been determined as if the Company had accounted for its employee stock options
under the fair value method of that Statement. The fair value for these options
was estimated at the date of grant using a Black-Scholes option pricing model
with the following weighted-average assumptions for 1997: risk-free interest
rates of 6.0%; dividend yield of zero; volatility factor of the expected market
price of the Company's Common Stock of 0.40; and a weighted-average expected
life of the options of 7.1 years, and the assumptions for 1996: risk-free
interest rates of 6.0% and 7.0%; dividend yield of zero; volatility factor of
the expected market price of the Company's Common Stock of 0.35; and a
weighted-average expected life of the options of 5.7 years.

     The Black-Scholes option valuation model (the "Black-Scholes Model") was
developed for use in estimating the fair value of traded options which have no
vesting restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions including the expected
stock price volatility. Because the Company's employee stock options have
characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect the
fair value estimate, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of its employee
stock options.

     Had compensation cost for these plans been determined consistent with SFAS
123, the Company's net loss and earnings per share would have been reduced to
the following:

<TABLE>
<CAPTION>
                                                                                  1997        1996        1995
                                                                              ----------    --------   --------- 
     <S>                                                                      <C>           <C>        <C>       
     Pro forma net loss (in 000's).........................................   $  (21,899)   $ (8,647)  $ (19,379)
     Pro forma net earnings per share......................................   $    (0.36)   $  (0.15)  $   (0.35)
</TABLE>





                                       51
<PAGE>   52
                     GREYHOUND LINES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)


A summary of the Company's stock option activity and related information for the
years ended December 31 follows:

<TABLE>
<CAPTION>
                                                                     OPTIONS OUTSTANDING
                                                  SHARES        ------------------------------
                                                 AVAILABLE                    WEIGHTED AVERAGE
                                                 FOR GRANT         SHARES      EXERCISE PRICE
                                               -----------      -----------   ----------------
<S>                                            <C>              <C>           <C>     
Balance, December 31, 1994..................     1,557,760        1,912,251     $   7.47
   New shares authorized....................     4,365,810                -            -
   Options granted..........................    (3,892,186)       3,892,186         2.64
   Options exercised........................             -           (9,400)        2.84
   Terminated or canceled...................       673,650         (683,650)       10.75
                                               -----------      -----------     --------
Balance, December 31, 1995..................     2,705,034        5,111,387         3.35
   Options granted..........................    (1,352,000)       1,352,000         3.56
   Options exercised........................             -         (100,450)        2.43
   Terminated or canceled...................       418,000         (418,000)        4.21
                                               -----------      -----------     --------
Balance, December 31, 1996..................     1,771,034        5,944,937         3.35
   Options granted..........................    (1,324,000)       1,324,000         2.70
   Options exercised........................             -         (258,694)        2.59
   Terminated or canceled...................       510,369         (510,369)        3.48
                                               -----------      -----------     --------
Balance, December 31, 1997..................       957,403        6,499,874     $   3.24
                                               ===========      ===========     ========
</TABLE>

         The table below details the Company's options outstanding by related
option exercise price.

<TABLE>
<CAPTION>
                                               WEIGHTED            WEIGHTED                          WEIGHTED
           RANGE OF          OPTIONS           AVERAGE             AVERAGE            OPTION         AVERAGE
        EXERCISE PRICE     OUTSTANDING      REMAINING LIFE      EXERCISE PRICE     EXERCISABLE    EXERCISE PRICE
        --------------     -----------      --------------      --------------     -----------    --------------
     <S>                  <C>               <C>                 <C>                <C>            <C>
     $     0  -  3.00        2,896,722            3.9           $      1.87           2,260,926      $    2.22
        3.09  -  5.44        3,383,902            5.0                  3.60           1,246,130           3.42
        9.81  - 20.625         219,250            4.5                 15.63             219,250          15.63
                          ------------      ---------           -----------         -----------      ---------
                             6,499,874            4.5           $      3.24           3,726,306      $    3.41
                          ============      =========           ===========        ===========      =========
</TABLE>

         Additionally, the Company had 2,150,515 and 683,986 options exercisable
at December 31, 1996 and 1995, respectively. Included in the above options
granted for 1997 and 1996 were options granted at a value less than market value
on that date. For 1997, of the 1,324,000 options granted, 703,300 were granted
at market value with a weighted average exercise price of $4.27, while 620,700
shares were granted below market value with a weighted average exercise price of
$0.92 and a fair value of $3.32. For 1996, of the 1,352,000 options granted,
1,318,000 were granted at market value with a weighted average exercise price of
$3.66, while 34,000 shares were granted below market value with no weighted
average exercise price and a fair value of $3.69.

17.  STOCKHOLDERS' EQUITY

     The Company is authorized to issue 100,000,000 shares of $.01 par value
common stock.

     The Company is authorized to issue 10,000,000 shares of $.01 par value
preferred stock. The Board of Directors may designate and issue one or more
series of preferred stock from the authorized and unissued shares of preferred
stock. As of December 31, 1997, the Company has designated 1,500,000 shares of
preferred stock as "Series A" junior preferred stock in connection with the
stockholders rights plan discussed below. No "Series A" junior preferred stock
had been issued as of December 31, 1997.

     During 1997, the Company issued 2,400,000 shares of 8 1/2% convertible
exchangeable preferred stock ("the 




                                       52
<PAGE>   53
                     GREYHOUND LINES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)


Preferred Stock"). The Preferred Stock carries a liquidation preference of
$25.00 per share plus accumulated and unpaid dividends. The holders of the
Preferred Stock are currently entitled to vote with the holders of the Common
Stock on all matters submitted to a vote of stockholders of the Company, each
share of Preferred Stock entitling the holder thereof to one vote. The Company,
however, may seek stockholder approval to amend the Restated Certificate of
Incorporation of the Company to eliminate the provisions thereof providing such
voting rights to holders of Preferred Stock. If such amendment is approved,
holders of the Preferred Stock will have no voting rights except as provided by
law or set forth in the Certificate of Designations. Dividends accrue at a rate
per annum equal to 8 1/2% of the liquidation preference per share of Preferred
Stock and are payable quarterly in arrears on February 1, May 1, August 1 and
November 1 of each year commencing August 1, 1997. The Preferred Stock is
convertible at any time after July 15, 1997, at the option of the holder
thereof, into Common Stock of the Company at a conversion price of $4.875 per
share. The Preferred Stock will be redeemable at the option of the Company, in
whole or in part, at any time on or after May 3, 2000, at redemption prices of
104.86% in 2000, 103.64% in 2001, 102.43% in 2002, 101.21% in 2003 and 100% in
2004 and thereafter plus accumulated and unpaid dividends. Upon a change of
control of the Company (as defined), the Company will be required to make an
offer to repurchase all or any part of each holder's Preferred Stock at a price
equal to 100% of the liquidation preference plus accumulated and unpaid
dividends.

     On March 22, 1994, the Company's Board of Directors adopted a stockholder
rights plan (the "Rights Plan"). The Rights Plan, which was amended in 1997,
provides for a dividend distribution of a Preferred Stock Purchase Right (the
"Rights") for each share of Common Stock held by stockholders of record at the
close of business on April 4, 1994. The Rights will become exercisable only in
the event that, with certain exceptions, an acquiring party accumulates 20% or
more of the Company's voting stock or a person's or group's commences or
announces intentions to commence a tender or exchange offer the consummation of
which would result in the ownership of 30% or more of the Company's outstanding
voting stock (even if no shares are actually purchased pursuant to such offer).
The Rights have no voting rights and are not entitled to receive dividends. The
Rights will expire on March 22, 2004. Each Right will entitle the holder to buy
1/1000th of a share of Series A preferred stock at a price of $35. The Series A
preferred stock would have one vote, voting together with the Common Stock upon
issuance. In addition, upon the occurrence of certain events, holders of the
Rights will be entitled to purchase either Common Stock or shares in an
acquiring entity at 50% of the market value. The Company will be entitled to
redeem the Rights at $.01 per Right at any time through the tenth day following
the acquisition of a 20% position in its voting stock.

     In October 1995, the Company completed a sale of 10,004,144 shares of
Common Stock. Four million shares were sold by the Company and 6,004,144 shares
were sold by Motor Coach Industries Limited, a selling stockholder. The Company
did not receive any portion of the proceeds from the sale of shares of Common
Stock by the selling stockholder. Net proceeds to the Company from the sale of
the 4,000,000 shares of Common Stock offered by the Company were $15.4 million.
The Company used $9.7 million of the net proceeds it received for the Senior
Note Repurchase. The purchase price for the Senior Notes was based on
arm's-length negotiations. The Company used the remaining net proceeds from the
sale of the Common Stock for general corporate purposes.

18.  ACQUISITIONS

During 1997, the Company completed two acquisitions involving regional bus
carriers. These purchases were accounted for using the purchase method of
accounting; accordingly, the acquired companies' results of operations are
included in the Company's consolidated financial statements from the dates of
acquisition. On July 9, 1997, the Company purchased Carolina and affiliates, a
Mid-Atlantic bus carrier, for the purchase price of approximately $25.3 million
comprised of $20.4 million in cash, the assumption of $4.1 million of
indebtedness and the issuance of $0.75 million in Common Stock of the Company
(167,597 shares based on average market prices of the Company's Common Stock
prior to closing). Additionally, on August 25, 1997, the Company purchased
Valley and affiliates, a South Texas bus carrier, for $19.0 million in cash. The
preliminary allocation of the purchase price among assets and liabilities
resulted in liabilities in excess of assets of $30.0 million, which is subject
to final adjustment. This amount 



                                       53
<PAGE>   54
                     GREYHOUND LINES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)


has been recorded as Goodwill and is being amortized over a 30 year period. The
remaining Goodwill relates to acquisitions made by SITA and is being amortized
over a 20 year period. Amortization of Goodwill at December 31, 1997, was $0.5
million.


19.  COMMITMENTS AND CONTINGENCIES

SECURITIES AND DERIVATIVE LITIGATION; SEC INVESTIGATION.

     Between August and December 1994, seven purported class action lawsuits
were filed by purported owners of the Company's Common Stock, Convertible
Debentures and 10% Senior Notes against the Company and certain of its former
officers and directors. The suits sought unspecified damages for securities laws
violations as a result of statements made in public reports and press releases
and to securities analysts during 1993 and 1994 that were alleged to have been
false and misleading.

     All the purported class action cases referred to above (with the exception
of one suit that was dismissed before being served on any defendants) were
transferred to the United States District Court for the Northern District of
Texas, the Court in which the first purported class action suit was filed, and
were pending under a case styled In re Greyhound Securities Litigation, Civil
Action 3-94-CV-1793-G. A joint pretrial order was entered in the litigation
which consolidated for pretrial and discovery purposes all of the stockholder
actions and, separately, all of the debtholder actions. The joint pretrial order
required plaintiffs to file consolidated amended complaints and excused answers
to the original complaints. In July 1995, the plaintiffs filed their
consolidated amended complaints, naming the Company, Frank J. Schmieder, J.
Michael Doyle, Phillip W. Taff, Robert R. Duty, Don T. Seaquist, Charles J. Lee,
Charles A. Lynch and Smith Barney Incorporated as defendants. Messrs. Lee, Lynch
and Taff were subsequently dismissed from the case by the plaintiffs. In
September 1995, the various defendants filed motions to dismiss plaintiffs'
complaints. In October 1995, plaintiffs filed a motion seeking to certify the
class of plaintiffs.

     On October 3, 1996, the Court ruled in favor of the Company and all other
defendants, granting defendants' motions to dismiss. Pursuant to the Court's
order, the complaints were dismissed, with leave granted to the plaintiffs to
refile amended complaints within 20 days thereafter. On October 23, 1996, an
amended complaint was tendered to the Court. All seven class representatives
involved in the prior complaints were dropped from the case. A new purported
class plaintiff, John Clarkson, was named. A motion was filed seeking leave to
permit Mr. Clarkson to intervene as the new class representative. The amended
complaint alleged a class period of May 4, 1993 to October 26, 1993 and was
brought only on behalf of holders of Common Stock. The amended complaint named
the same defendants involved in the dismissed cases (the Company, Messrs.
Schmieder, Doyle, Duty and Seaquist and Smith Barney Incorporated); no new
defendants were added and none were dropped. The Court advised the parties that
no responsive pleading needed to be filed to the amended complaint until such
time as the Court ruled on the motion for intervention filed by Mr. Clarkson. In
December 1996, the defendants filed responses to plaintiff's motion for
intervention. In January 1997, the plaintiff filed a reply brief.

     On August 15, 1997, the Court denied Mr. Clarkson leave to intervene and
dismissed the litigation, noting that all claims asserted had been adjudicated.
On September 12, 1997, a notice of appeal was filed by counsel for the original
seven plaintiffs, seeking a review of the Court's ruling of October 3, 1996. On
February 9, 1998, plaintiffs dismissed their appeal, without prejudice, with a
right to re-file the appeal within six months.

     In November 1994, a shareholder derivative lawsuit was filed by Harvey R.
Rice, a purported owner of the 



                                       54
<PAGE>   55
                     GREYHOUND LINES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)


Company's Common Stock, against present directors and former officers and
directors of the Company and the Company as a nominal defendant. The suit seeks
to recover monies obtained by certain defendants by allegedly trading in the
Company's securities on the basis of nonpublic information and to recover monies
for certain defendants' alleged fraudulent dissemination of false and misleading
information concerning the Company's financial condition and future business
prospects. The suit, filed in the Delaware Court of Chancery, New Castle County,
is styled Harvey R. Rice v. Frank J. Schmieder, J. Michael Doyle, Charles A.
Lynch, Richard J. Caley, Thomas F. Meagher, Thomas G. Plaskett, Kenneth R.
Norton, Robert B. Gill, Alfred E. Osborne, Jr., J. Patrick Foley, Charles J. Lee
and Greyhound Lines, Inc., Civil Action No. 13854. Pursuant to a stipulation,
the time for all defendants to answer, move or otherwise plead with respect to
the derivative complaint is not yet due.

     In May 1995, a lawsuit was filed on behalf of two individuals, purported
owners of the Company's Common Stock, against the Company and certain of its
former officers and directors. The suit sought unspecified damages for
securities laws violations as a result of statements made in public reports and
press releases and to securities analysts during 1993 and 1994 that are alleged
to have been misleading. The suit, filed in the United States District Court for
the Northern District of Ohio, was styled James Illius and Theodore J. Krawec v.
Greyhound Bus Lines, Inc., Frank J. Schmieder and J. Michael Doyle, Civil Action
No. 1-95-CV-1140. The defendants filed a motion to transfer venue seeking to
have the case transferred to the United States District Court for the Northern
District of Texas where the class action litigation described above was pending.
In September 1995, the defendants' motion was granted, and the matter was
transferred and was consolidated into the Federal Court class action litigation
described above.

     On October 29, 1996, a purported class action lawsuit was brought by a
purported holder of Common Stock against the Company, certain of its former
officers and directors and Smith Barney and Morgan Stanley & Company, Inc. The
suit seeks unspecified damages for alleged federal and Texas state securities
laws violations in connection with a Common Stock offering made by the Company
in May 1993. The suit, filed in the 44th Judicial District Court of Dallas
County, Texas, is styled John Clarkson v. Greyhound Lines, Inc., Frank
Schmieder, J. Michael Doyle, Robert R. Duty, Don T. Seaquist, Smith Barney, Inc.
and Morgan Stanley & Company, Inc., Case No. 96-11329-B. Plaintiff, John
Clarkson, is the same individual who sought to intervene in the Federal Court
class action litigation described above, and the same law firms have appeared
for the plaintiff in both cases. On December 20, 1996, the defendants filed
their answers to the lawsuit and pleas in abatement asking the Court to stay all
proceedings pending resolution of the intervention motion and Federal Court
class action lawsuit. On February 28, 1997, the suit was transferred to a
different judge in the 68th Judicial District Court in Dallas. On March 28,
1997, the Court denied the defendants' pleas in abatement requesting the stay.
In addition, on September 12, 1997, plaintiff filed a motion seeking to certify
the class of plaintiffs. This motion, which will be contested by the defendants,
is currently set for hearing by the court on April 13, 1998. The Court has
presently set a trial date of June 16, 1998. No additional hearings or
proceedings are scheduled.

     Based on a review of the litigation, a limited investigation of the
underlying facts and discussions with legal and outside counsel, the Company
does not believe that the outcome of the above described lawsuits would have a
material adverse effect on its business, financial condition, results of
operations and liquidity. The Company intends to defend against the actions
vigorously. To the extent permitted by Delaware law, the Company is obligated to
indemnify and bear the cost of defense with respect to lawsuits brought against
its officers and directors. The Company maintains directors' and officers'
liability insurance that provides certain coverage for itself and its officers
and directors against claims of the type asserted in the subject litigation. The
Company has notified its insurance carriers of the asserted claims. Preliminary
settlement discussions have taken place among the Company, the Company's
insurance carriers and the plaintiffs but no agreement has been reached.

     In January 1995, the Company received notice that the Securities and
Exchange Commission is conducting a formal, non-public investigation into
possible securities laws violations allegedly involving the Company and certain
of its former officers, directors and employees and other persons. The
Commission's Order of Investigation (the 



                                       55
<PAGE>   56
                     GREYHOUND LINES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)


"Order of Investigation") states that the Commission is exploring possible
insider trading activities, as well as possible violations of the federal
securities laws relating to the adequacy of the Company's public disclosures
with respect to problems with its passenger reservation system implemented in
1993 and lower-than-expected earnings for 1993. In addition, the Commission has
stated that it will investigate the adequacy of the Company's record keeping
with respect to the passenger reservation system and its internal auditing
controls. Although the Commission has not announced the targets of the
investigation, it does not appear from the Order of Investigation that the
Company is a target of the insider trading portion of the investigation. In
September 1995, the Commission served a document subpoena on the Company
requiring the production of documents, most of which the Company had voluntarily
produced to the Commission in late 1994. The Company has fully cooperated with
the Commission's investigation of these matters. The Company has had limited
contact with the Commission in connection with the investigation since January
1996. The probable outcome of this investigation cannot be predicted at this
stage in the proceeding.

INSURANCE COVERAGE

     The predecessor agency to the STB granted the Company authority to
self-insure its automobile liability exposure for interstate passenger service
up to a maximum level of $5.0 million per occurrence which has been continued by
the DOT. To maintain self-insurance authority, the Company is required to
maintain a satisfactory safety rating by the DOT, a tangible net worth of $10.0
million (as of December 31, 1997, the Company's tangible net worth was $119.1
million) and a $15.0 million trust fund (currently fully funded) to provide
security for payment of claims. Subsequent to the self-insurance grant by the
federal government, 38 states granted the Company the authority to self-insure
its intrastate automobile liability exposure. The Company maintains
comprehensive automobile liability and general liability insurance to insure its
assets and operations subject to a $1.5 million self-insured retention or
deductible per occurrence. The Company also maintains property insurance subject
to a $0.1 million deductible per occurrence and maintains workers' compensation
insurance subject to a $1.0 million deductible per occurrence. Additionally, the
Company is required by some states and some of its insurance carriers to
maintain collateral deposits (which was discussed in Liquidity and Capital
Resources).

     Insurance coverage and risk management expense are key components of the
Company's cost structure. The DOT is currently studying whether to continue or
modify the self-insurance program available to the motor carrier industry. The
loss of self-insurance authority from the DOT or a decision by the Company's
insurers to modify the Company's program substantially, by either increasing
cost, reducing availability or increasing collateral, could have a materially
adverse effect on the Company's liquidity, financial condition and results of
operations.

ENVIRONMENTAL MATTERS

     The Company may be liable for certain environmental liabilities and
clean-up costs relating to underground fuel storage tanks and systems in the
various facilities presently or formerly owned or leased by the Company. Based
upon surveys conducted solely by Company personnel or its experts, 45 locations
have been identified as remaining sites requiring potential clean-up and/or
remediation as of December 31, 1997. The Company has estimated the clean-up
and/or remediation costs of these sites to be $2.9 million, of which
approximately $0.3 million is indemnifiable by Viad.

     The Company has potential liability with respect to two locations which the
EPA has designated Superfund sites. The Company, as well as other parties
designated by the EPA as potentially responsible parties, face exposure for
costs related to the clean-up of those sites. Based on the EPA's enforcement
activities to date, the Company believes its liability at these sites will not
be material because its involvement was as a de minimis generator of wastes
disposed of at the sites. In light of its minimal involvement, the Company has
been negotiating to be released from liability in return for the payment of
immaterial settlement amounts. Additionally, there are 12 Superfund sites
that Viad had initially assumed responsibility and liability for addressing 
under the indemnity provisions of 



                                       56
<PAGE>   57
                     GREYHOUND LINES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)


the 1987 acquisition agreement, as amended in 1991. All of these locations
involve alleged disposal of hazardous wastes occurring years prior to the
Company's corporate existence. In late 1997, Viad notified the Company, and
asserted that the Company was responsible for any liabilities at such sites. The
Company is contesting Viad's assertions and believes that the acquisition
agreement, as amended, requires Viad to bear these liabilities. Viad had
previously acknowledged in writing to the Company its responsibility for certain
of the sites; in some cases, Viad has been managing the liability since 
mid-1991. Viad has advised the Company that, to date, it has incurred
approximately $0.2 million in clean-up costs at these sites. At this point, the
Company is unable to assess on-going or future potential liabilities at such
sites should it be determined that the Company, and not Viad, will assume the
liabilities at some or all of the 12 locations.

     The Company has recorded a total environmental reserve of $2.7 million at
December 31, 1997, a portion of which has also been recorded as a receivable
from Viad for indemnification. The environmental reserve relates to sites
identified for potential clean-up and/or remediation and represents the present
value of estimated cash flows discounted at 8.0%. As of the date of this filing,
the Company is not aware of any additional sites to be identified, and
management believes that adequate accruals have been made related to all known
environmental matters.

     At December 31, 1997, clean-up and/or remediation costs under the plan are
as follows (in thousands):

<TABLE>
     <S>                                                        <C>      
     1998.....................................................  $   1,582
     1999.....................................................        581
     2000.....................................................        450
     2001.....................................................        216
     Thereafter...............................................         36
                                                                ---------
              Total environmental expenditures................      2,865
     Amounts representing interest............................        203
                                                                ---------
     Reserve for environmental expenditures...................  $   2,662
                                                                =========
</TABLE>

POTENTIAL PENSION PLAN FUNDING REQUIREMENTS

     The Company maintains nine defined benefit pension plans, the most
significant of which (the ATU Plan) covers approximately 16,400 current and
former employees, fewer than 1,500 of which are active employees of the Company.
The ATU Plan was closed to new participants in 1983 and, as a result, over 85%
of its participants are over the age of 50. For financial reporting and
investment planning purposes, the Company currently uses an actuarial mortality
table that closely matches the actual experience related to the existing
participant population. Based upon the application of this table and other
actuarial and investment assumptions, the Company believes that the ATU Plan is
adequately funded.

     For funding purposes, legislation passed by the United States Congress in
1994, and amended in 1997, mandates the use of a prescribed actuarial mortality
table and discount rates that differ from these used by the Company for
financial reporting and investment planning purposes. Nevertheless, based upon
the application of the actuarial mortality table, discount rates and funding
calculations prescribed by the legislation, the Company does not anticipate that
it will be required to make any contributions to the ATU Plan in the foreseeable
future. However, there is no assurance, that the ATU Plan will be able to obtain
the assumed rate of return or that contributions to the ATU Plan will not be
significant.

OTHER LEGAL PROCEEDINGS

     In addition to the litigation discussed above, the Company is a defendant
in various lawsuits arising in the ordinary course of business, primarily cases
involving personal injury and property damage claims and employment-related
claims. Although these lawsuits involve a variety of different facts and
theories of recovery, the majority arise from traffic accidents involving buses
operated by the Company. The vast majority of the personal injury and property
damage claims are covered by insurance for amounts in excess of the
self-retention or deductible portion of the policies. Therefore, based on the
Company's assessment of known claims and its historical claims payout pattern



                                       57
<PAGE>   58
                     GREYHOUND LINES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)


and discussion with legal and outside counsel and risk management personnel,
management believes that there is no proceeding either threatened or pending
against the Company relating to such personal injury and/or property damage
claims arising in the ordinary course of business that, if resolved against the
Company, would materially exceed the amounts recorded.



20.  RELATED PARTY TRANSACTIONS

   Motor Coach Industries International, Inc.

     In connection with the Company's financial restructuring, Motor Coach
Industries Limited, an affiliate of MCI, purchased 6,004,144 shares in January
1995, thus becoming a beneficial owner of greater than 5% of the Company's
Common Stock. This stock was sold, in its entirety, in October 1995.

     As an inducement to purchase the shares, the Company paid an affiliate of
MCI fees of approximately $524,000. In addition, the Company extended the term
of the Bus Purchase Requirements Agreement dated March 18, 1987 between the
Company, MCI and Transit Bus International, Inc., which also is a subsidiary of
MCI, to continue through March 18, 1998. The Company also agreed to prepay debt
owed to MCI Acceptance Corp. ("MCIAC"), an affiliate of MCI. This pre-payment,
in the amount of $12.9 million, was made in February 1995. In January 1998, the
Company entered into a new long-term supply agreement with MCI. The new
agreement is for a term of ten years and requires the Company and its affiliates
to purchase at least 80% of its new bus requirements from MCI pursuant to the
agreement.

     The Company's President and Chief Executive Officer, Craig R. Lentzsch,
previously served as Executive Vice President and Chief Financial Officer of
MCII where he had been employed from 1992 to November 1994. Additionally, the
Company's Vice President of Corporate Development, Jeffrey W. Sanders,
previously served as Vice President and Controller of MCII where he had been
employed from 1993 to January 1997.

   Universal Coach Parts, Inc.

     Universal Coach Parts, Inc. ("UCP") is a nationwide distributor of service
parts and since December 1992 has provided inventory and inventory management
services for the Company. UCP is also a wholly owned subsidiary of MCII. For the
years ended December 31, 1997, 1996 and 1995, the Company paid $14.4 million,
$15.0 million, and $15.2 million, respectively, to UCP for the purchase of
inventory and inventory management services. Additionally, at December 31, 1997
and 1996, the Company included in its Consolidated Statements of Financial
Position net amounts payable to UCP of $2.1 million and $1.3 million,
respectively.

   Connor, Clark & Company, Ltd.

     In connection with the Company's financial restructuring, Connor, Clark &
Company, Ltd. ("Connor Clark"), formerly the Company's largest shareholder,
agreed to act as a standby purchaser for up to 650,000 shares, all of which were
purchased by it in January 1995. As an inducement to serve as a standby
purchaser, the Company paid Connor Clark fees of approximately $84,000.

     Herbert Abramson, Director and Vice President of Connor Clark, served on
the Company's Board of Directors from September 21, 1994 until his resignation
on October 26, 1995.




                                       58
<PAGE>   59

                     GREYHOUND LINES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)


   Snyder Capital Management, Inc.

     In connection with the Company's financial restructuring, Snyder Capital
Management, Inc., on behalf of 49 accounts managed by it (the "SCM Accounts"),
committed to oversubscribe for up to an aggregate of 2,181,977 shares which were
purchased in January 1995. In consideration for the committed oversubscription,
the Company paid the SCM Accounts fees of approximately $282,000.


   Put/Call Agreement with Certain Shareholder

     In June 1995, the Company entered into a Put/Call agreement with a certain
shareholder in which the shareholder was to purchase, on the market, up to $15.0
million face amount of the Company's 10% Senior Notes. In December 1995, the 
Company exercised its option to purchase the $10.7 million aggregate principal 
of its Senior Notes held by the shareholder for the purchase price of $9.7 
million, as specified under the terms of the agreement. The completion of this 
transaction satisfied each party's obligations under the agreement, and it has 
been terminated.

   Frederick F. Richards

     Frederick F. Richards has been engaged by the Company as an independent
management consultant on an at-will basis since November 1994, supplying
consulting services to the Company on a variety of operational and technology
issues. Mr. Richards received $340,000, $180,000 and $160,000 for these services
in 1997, 1996 and 1995, respectively, from the Company. On December 9, 1997, Mr.
Richards became an executive officer of the Company and serves as Senior Vice
President and Chief Information Officer. Mr. Richards is the son-in-law of A. A.
Meitz, a director of the Company since November 21, 1995.





                                       59
<PAGE>   60
                     GREYHOUND LINES, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)



21.  QUARTERLY FINANCIAL DATA (UNAUDITED)

     Selected unaudited quarterly financial data for the years ended December
31, 1997 and 1996 are as follows (in thousands, except per share amounts):

<TABLE>
<CAPTION>
                                                        FIRST         SECOND          THIRD        FOURTH
               YEAR ENDED DECEMBER 31, 1997            QUARTER        QUARTER        QUARTER       QUARTER
               ----------------------------           ---------      ---------      ---------     ---------
<S>                                                   <C>            <C>            <C>           <C>      
Operating revenues .................................  $ 161,148      $ 181,530      $ 228,524     $ 199,920
Operating expenses .................................    170,651        178,766        197,035       187,564
                                                      ---------      ---------      ---------     ---------
Operating income (loss) ............................     (9,503)         2,764         31,489        12,356
Interest expense ...................................      7,586          6,526          6,618         6,927
Income tax provision ...............................         79             86             83           803
                                                      ---------      ---------      ---------     ---------
Net income (loss) before extraordinary item and
    preferred dividends ............................    (17,168)        (3,848)        24,788         4,626
Extraordinary item .................................          -         25,323              -             -
                                                      ---------      ---------      ---------     ---------
Net income (loss) ..................................    (17,168)       (29,171)        24,788         4,626
Preferred dividends ................................          -          1,063          1,275         1,310
                                                      ---------      ---------      ---------     ---------
Net income (loss) ..................................  $ (17,168)     $ (30,234)     $  23,513     $   3,316
                                                      =========      =========      =========     =========

Net income (loss) per share of Common Stock:
   Basic
     Net income (loss) attributable to common
        stockholders before extraordinary item .....  $   (0.29)     $   (0.08)     $    0.40     $    0.06
     Extraordinary item ............................          -          (0.43)             -             -
                                                      ---------      ---------      ---------     ---------
     Net income (loss) attributable to common 
        stockholders ...............................  $   (0.29)     $   (0.51)     $    0.40     $    0.06
                                                      =========      =========      =========     ---------
   Diluted
     Net income (loss) attributable to common
        stockholders before extraordinary item .....  $   (0.29)     $   (0.08)     $    0.34     $    0.05
     Extraordinary item ............................          -          (0.43)             -             -
                                                      ---------      ---------      ---------     ---------
     Net income (loss) attributable to common 
        stockholders ...............................  $   (0.29)     $   (0.51)     $    0.34     $    0.05
                                                      =========      =========      =========     =========
</TABLE>

<TABLE>
<CAPTION>
                                                   FIRST         SECOND          THIRD        FOURTH
               Year Ended December 31, 1996       QUARTER        QUARTER        QUARTER       QUARTER
               ----------------------------      ---------      ---------      ---------     ---------
<S>                                              <C>            <C>            <C>           <C>      
Operating revenues ............................  $ 141,643      $ 172,256      $ 208,046     $ 178,913
Operating expenses ............................    156,499        171,104        181,659       170,792
                                                 ---------      ---------      ---------     ---------
Operating income (loss) .......................    (14,856)         1,152         26,387         8,121
Interest expense ..............................      6,626          6,637          6,955         7,128
Income tax provision ..........................         63             48             34           (83)
                                                 ---------      ---------      ---------     ---------
Net income (loss) .............................  $ (21,545)     $  (5,533)     $  19,398     $   1,076
                                                 =========      =========      =========     =========

Net income (loss) per share of Common Stock:
   Basic ......................................  $   (0.37)     $   (0.10)     $    0.33     $    0.02
                                                 =========      =========      =========     =========
   Diluted ....................................  $   (0.37)     $   (0.10)     $    0.33     $    0.02
                                                 =========      =========      =========     =========
</TABLE>




                                       60
<PAGE>   61







                                                                     SCHEDULE II

                    GREYHOUND LINES, INC. AND SUBSIDIARIES(a)
                        VALUATION AND QUALIFYING ACCOUNTS
              FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                            ADDITIONS      ADDITIONS
                                             BALANCE AT     CHARGED TO     CHARGED TO                   BALANCE
                                             BEGINNING      COSTS AND        OTHER                       AT END
           CLASSIFICATION                    OF PERIOD      EXPENSES       ACCOUNTS      DEDUCTIONS     OF PERIOD
           --------------                    ---------      ----------     ----------    ----------     ---------
<S>                                          <C>            <C>            <C>            <C>             <C>      
December 31, 1995:
    Allowance for Doubtful Accounts......    $     840      $     975      $  (1,011)     $    (587) (b)  $     217
    Inventory Reserves...................           61             48              -              -             109
    Accumulated Amortization of
       Intangible Assets.................        9,644          5,790           (533)             -          14,901
    Reserves for Injuries and Damages....       72,343         33,788              -        (40,470) (d)     65,661
                                             ---------      ---------      ---------      ---------       ---------
         Total Reserves and Allowances...    $  82,888      $  40,601      $  (1,544)     $ (41,057)      $  80,888
                                             =========      =========      =========      =========       =========

December 31, 1996:
    Allowance for Doubtful Accounts......    $     217      $     585      $    (155)     $    (406) (b)  $     241
    Inventory Reserves...................          109            (14)             -              -              95
    Accumulated Amortization of
       Intangible Asset..................       14,901          5,613              -         (1,409) (c)     19,105
    Reserves for Injuries and Damages....       65,661         23,443              -        (29,141) (d)     59,963
                                             ---------      ---------      ---------      ---------       ---------
         Total Reserves and Allowances...    $  80,888      $  29,627      $    (155)     $ (30,956)      $  79,404
                                             =========      =========      =========      =========       =========

December 31, 1997:
    Allowance for Doubtful Accounts......    $     241      $     302      $     (61)     $    (214) (b)  $     268
    Inventory Reserves...................           95             80              -              -             175
    Accumulated Amortization of
       Intangible Assets.................       19,105          5,435              -         (2,351) (c)     22,189
    Reserves for Injuries and Damages....       59,963         32,687           (194)       (34,491) (d)     57,965
                                             ---------      ---------      ----------     ---------       ---------
         Total Reserves and Allowances...    $  79,404      $  38,504      $    (255)     $ (37,056)      $  80,597
                                             =========      =========      =========      =========       =========
</TABLE>



----------

(a) This schedule should be read in conjunction with the Company's audited
    consolidated financial statements and related notes thereto.

(b) Write-off of uncollectible receivables net of recovery of bad debt.

(c) Write-off of other assets and deferred costs.

(d) Payments of settled claims.





                                       61
<PAGE>   62



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

     None.




                                       62
<PAGE>   63


                                    PART III


ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

     "Election of Directors", "Continuing Directors", "Executive Officers of the
Company" and "Section 16 (a) Beneficial Ownership Reporting Compliance" in the
definitive proxy statement is incorporated herein by reference.


ITEM 11.  EXECUTIVE COMPENSATION

     "Executive Compensation" in the definitive proxy statement is incorporated
herein by reference.


ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     "Outstanding Voting Securities of the Company and Principal Holders
Thereof" in the definitive proxy statement is incorporated herein by reference.


ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     "Certain Relationships and Other Matters " in the definitive proxy
statement is incorporated herein by reference.




                                       63
<PAGE>   64





                                    PART IV

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

       (a)      CERTAIN DOCUMENTS FILED AS PART OF THE FORM 10-K

1. AND 2.  FINANCIAL STATEMENTS AND FINANCIAL STATEMENTS SCHEDULES

     The following financial statements and financial statements schedules are
set forth in Item 8 of the Form 10-K Annual Report. Financial Statement
Schedules not included in this Form 10-K Annual Report have been omitted because
they are not applicable or the required information is shown in the financial
statements or notes thereto. Fifty percent or less owned companies accounted for
by the equity method have been omitted because, considered in the aggregate,
they have not been considered to constitute a significant subsidiary.


<TABLE>
<CAPTION>
                                                                                                    PAGE NO.
                                                                                                    --------
     <S>                                                                                               <C>
     Management Report on Responsibility for Financial Reporting.................................      30
     Report of Independent Public Accountants....................................................      31
     Consolidated Statements of Financial Position at December 31, 1997 and 1996.................      32
     Consolidated Statements of Operations for the years ended December 31, 1997, 1996
       and 1995..................................................................................      33
     Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 1997,
       1996 and 1995.............................................................................      34
     Consolidated Statements of Cash Flows for the Years Ended December 31, 1997, 1996
       and 1995..................................................................................      35
     Notes to consolidated Financial Statements..................................................      36
     Schedule II - Valuation and Qualifying Accounts.............................................      61
</TABLE>

3.  EXHIBITS

         3.1      --Restated Certificate of Incorporation of Greyhound Lines,
                    Inc.(2)
         3.2      --Restated Bylaws of Greyhound Lines, Inc.(2)
         3.3      --Article Fourth of the Restated Certificate of Incorporation
                    of the Registrant relating to its capital stock.(4)
         3.4      --Certificate of Amendment in the Restated Certificate of
                    Incorporation of the Registrant amending Article Fourth
                    thereof.(5)
         3.5      --Certificate of Amendment in the Restated Certificate of
                    Incorporation of the Registrant amending Article Eighth
                    thereof.(8)
         3.6      --Form of Certificate of Amendment to Certificate of
                    Incorporation.(10)
         4.1      --Certificate of Designations of Series A Junior Preferred
                    Stock of the Registrant.(8)
         4.2      --Indenture governing the 8 1/2% Convertible Subordinated
                    Debentures due March 31, 2007, including the form of 8 1/2%
                    Convertible Subordinated Debentures due March 31, 2007.(3)
         4.3      --Form of First Supplemental Indenture to the Indenture
                    between the Registrant and Shawmut Bank Connecticut, N.A.,
                    as Trustee.(11)
         4.4      --Amended and Restated Rights Agreement, dated as of April 8,
                    1997, between the Registrant and Mellon Securities Trust
                    Company, as Rights Agent. (18)
         4.5      --Indenture, dated April 16, 1997, by and among the Company,
                    the Guarantors and PNC Bank, N.A., as Trustee. (19)
         4.6      --First Supplemental Indenture dated as of July 9, 1997
                    between the Registrant and PNC Bank, N.A. as Trustee.(23)
         4.7      --Second Supplemental Indenture dated as of August 25, 1997
                    between the Registrant and PNC Bank, N.A. as Trustee.(24)



                                       64
<PAGE>   65

         4.8      --Form of 11 1/2% Series A Senior Notes due 2007.(19) 
         4.9      --Form of 11 1/2% Series B Senior Notes due 2007.(21)
         4.10     --Form of Guarantee of 11 1/2% Series A and B Senior
                    Notes.(21)
         4.11     --Indenture dated April 16, 1997 by and between the Company
                    and U.S. Trust of Texas, N.A., as Trustee. (20)
         4.12     --Certificates of Designation for the 8 1/2% Convertible
                    Exchangeable Preferred Stock. (22)
         10.1     --Acquisition Agreement dated December 22, 1986, among The
                    Greyhound Corporation, Greyhound Lines, Inc., the
                    Registrant, GLI Holding Company, GLI Bus Operations Holding
                    Company and GLI Merger Company.(1)
         10.2     --First Amendment to Acquisition Agreement dated January 31,
                    1987.(1)
         10.3     --Second Amendment to Acquisition Agreement dated March 18,
                    1987.(1)
         10.4     --Third Amendment to Acquisition Agreement dated March 18,
                    1987.(1)
         10.5     --Fourth Amendment to Acquisition Agreement dated September
                    18, 1987.(1)
         10.6     --Contested Claim Pool Trust Agreement to be entered into as
                    of October 31, 1991, by and between the Registrant and Smith
                    Barney Trust Company, as trustee.(2)
         10.7     --Claims Treatment Agreement dated August 23, 1991, by and
                    among Eagle Bus Manufacturing, Inc., the Registrant,
                    Trailways Commuter Transit, Inc., GLI Bus Operations Holding
                    Company, GLI Food Services, Inc., Southern Greyhound Lines
                    Co., GLI Holding Company, Central Greyhound Lines Co.,
                    Greyhound Travel Services, Inc., Eastern Greyhound Lines,
                    Co., and Western Greyhound Lines Co., on the one hand, and
                    The Dial Corp, on the other.(2)
         10.8     --Memorandum of Agreement, dated as of October 1, 1996,
                    between Greyhound Lines, Inc. and District No. 9,
                    International Association of Machinists, AFL-CIO.(17)
         10.9     --Memorandum of Agreement, dated as of October 1, 1996,
                    between Greyhound Lines, Inc. and the International
                    Association of Machinists and Aerospace Workers covering
                    garage employees at Miami, Florida; St. Petersburg, Florida;
                    Columbia, South Carolina; Orlando, Florida; Charleston, West
                    Virginia and Tallahassee, Florida.(17)
         10.10    --Memorandum of Agreement, dated as of October 1, 1996,
                    between Greyhound Lines, Inc. and the International
                    Association of Machinists and Aerospace Workers covering
                    garage employees at Dallas, Texas, Houston, Texas, Kansas
                    City, Missouri, San Antonio, Texas, Brownsville, Texas and
                    Grand Junction, Colorado.(17)
         10.11    --Memorandum of Agreement, dated as of May 25, 1993, between
                    the Registrant and the Amalgamated Council of Greyhound
                    Local Unions.(6)
         10.12    --Lease Agreement No. 1, dated as of December 29, 1993,
                    between Wilmington Trust Company and the Registrant.(6)
         10.13    --Lease Agreement No. 2, dated as of December 29, 1993,
                    between Wilmington Trust Company and the Registrant.(6)
         10.14    --Lease Agreement No. 3, dated as of December 29, 1993,
                    between Wilmington Trust Company and the Registrant.(6)
         10.15    --Lease Supplement No. 1-1, dated as of December 30, 1993,
                    between Wilmington Trust Company and the Registrant.(6)
         10.16    --Lease Supplement No. 2-1, dated as of December 30, 1993,
                    between Wilmington Trust Company and the Registrant.(6)
         10.17    --Lease Supplement No. 3-1, dated as of December 30, 1993,
                    between Wilmington Trust Company and the Registrant.(6)
         10.18    --Tax Indemnification Agreement, dated as of December 29,
                    1993, between NationsBank Lease Investments, Inc. and the
                    Registrant.(6)
         10.19    --Pledge Agreement, dated as of December 29, 1993, among the
                    Registrant, Wilmington Trust Company and NationsBank Lease
                    Investments, Inc.(6)
         10.20    --Participation Agreement, dated as of December 29, 1993,
                    among NationsBank Lease Investments, Inc. and the
                    Registrant.(6)
         10.21    --Greyhound Lines, Inc. 1991 Management Incentive Stock Option
                    Plan.(2)



                                       65
<PAGE>   66

         10.22    --Greyhound Lines, Inc. 1993 Management Incentive Stock Option
                    Plan.(5)
         10.23    --Greyhound Lines, Inc. 1993 Non-Employee Director Stock
                    Option Plan.(8)
         10.24    --First Amendment to the Registrant 1993 Non-Employee Director
                    Stock Option Plan.(9)
         10.25    --Second Amendment to Greyhound Lines, Inc. 1993 Non-Employee
                    Director Stock Option Plan.(13)
         10.26    --Greyhound Lines, Inc. Supplemental Executive Retirement
                    Plan.(16)
         10.27    --Amendment to the Greyhound Lines, Inc. Supplemental
                    Executive Retirement Plan.(17)
         10.28    --Lease Agreement, dated as of March 28, 1994, between
                    Wilmington Trust Company and the Registrant.(7)
         10.29    --Lease Supplement No. 1, dated as of March 28, 1994, between
                    Wilmington Trust Company and the Registrant.(7)
         10.30    --Pledge Agreement, dated as of March 28, 1994, among the
                    Registrant, Wilmington Trust Company and Cargill Leasing
                    Corporation.(7)
         10.31    --Participation Agreement, dated as of March 28, 1994, among
                    Cargill Leasing Corporation and the Registrant.(7)
         10.32    --Bill of Sale, dated as of March 28, 1994, between the
                    Registrant and Wilmington Trust Company.(7)
         10.33    --Tax Indemnification Agreement, dated as of March 28, 1994,
                    between Cargill Leasing Corporation and the Registrant.(7)
         10.34    --Lease Agreement, dated as of March 29, 1994, between
                    Wilmington Trust Company and the Registrant.(7)
         10.35    --Lease Supplement No. 1, dated as of March 29, 1994, between
                    Wilmington Trust Company and the Registrant.(7)
         10.36    --Pledge Agreement, dated as of March 29, 1994, among the
                    Registrant, Wilmington Trust Company and Cargill Leasing
                    Corporation.(7)
         10.37    --Participation Agreement, dated as of March 29, 1994, among
                    Cargill Leasing Corporation and the Registrant.(7)
         10.38    --Bill of Sale, dated as of March 29, 1994, between the
                    Registrant and Wilmington Trust Company.(7)
         10.39    --Tax Indemnification Agreement, dated as of March 29, 1994,
                    between Cargill Leasing Corporation and the Registrant.(7)
         10.40    --Employment Agreement dated November 15, 1994, between
                    Registrant and Craig R. Lentzsch.(12)
         10.41    --Greyhound Lines, Inc. 1995 Long Term Stock Incentive
                    Plan.(14)
         10.42    --Greyhound Lines, Inc. 1995 Director's Stock Incentive
                    Plan.(14)
         10.43    --Employment Agreement dated September 18, 1995 between
                    Registrant and John Werner Haugsland.(15)
         10.44    --1995 Bus Purchase Agreement.(16)
         10.45    --Third Amended and Restated Loan and Security Agreement dated
                    as of May 21, 1997 by and between Greyhound Lines, Inc. and
                    Foothill Capital Corporation and BankBoston.(23)
         11       --Computation of Registrant's earnings per share for the year
                    ended December 31, 1995.(16)
         11.1     --Computation of Registrant's earnings per share for the year
                    ended December 31, 1996.(17)
         11.2     --Computation of Registrant's earnings per share for the year
                    ended December 31, 1997.(25)
         21       --Subsidiaries of the Registrant.(25)
         23.1     --Consent of Arthur Andersen LLP.(25)
         27       --Financial Data Schedule as of and for the year ended
                    December 31, 1997.(26)

-----

(1)      Incorporated by reference from the Annual Report Form 10-K/A for the
         year ended December 31, 1994.

(2)      Incorporated by reference from the Registration Statement on Form S-1
         (File Nos. 33-45060-01 and 33-45060-02) regarding the Registrant's 8
         1/2% Convertible Subordinated Debentures Due 2007.



                                       66
<PAGE>   67


(3)      Incorporated by reference from the Company's Registration Statement on
         Form S-1 (File No. 33-47908) regarding the Registrant's Common Stock
         and 10% Senior Notes Due 2001 held by the Contested Claims Pool Trust.

(4)      Incorporated by reference from the Company's Registrant Statement on
         Form S-3 (File No. 33-61044).

(5)      Incorporated by reference from the Company's Registrant Statement on
         Form S-8 (File No. 33-63506) regarding the Registrant's 1991 and 1993
         Management Stock Option Plans.

(6)      Incorporated by reference from the Registrant's Annual Report on Form
         10-K for the year ended December 31, 1993.

(7)      Incorporated by reference from the Registrant's Quarterly Report on
         Form 10-Q for the quarter ended March 31, 1994.

(8)      Incorporated by reference from the Registrant's Quarterly Report on
         Form 10-Q for the quarter ended June 30, 1994.

(9)      Incorporated by reference from the Registrant's Quarterly Report on
         Form 10-Q for the quarter ended September 30, 1994.

(10)     Incorporated by reference from the Registration Statement on Form S-1
         (File No. 33-56131) regarding the Registrant's Common Stock.

(11)     Incorporated herein by reference from the Registrant's Issuer Tender
         Offer Statement on Schedule 13E-4 (File No. 5-41800).

(12)     Incorporated by reference to the Registrant's Annual Report on Form
         10-K for the year ended December 31, 1994.

(13)     Incorporated by reference from the Registrant's Quarterly Report on
         Form 10-Q for the quarter ended March 31, 1995.

(14)     Incorporated by reference from the Registrant's Quarterly Report on
         Form 10-Q for the quarter ended June 30, 1995.

(15)     Incorporated by reference from the Registrant's Quarterly Report on
         Form 10-Q for the quarter ended September 30, 1995.

(16)     Incorporated by reference to the Registrant's Annual Report on Form
         10-K for the year ended December 31, 1995.

(17)     Incorporated by reference to the Registrant's Annual Report on Form
         10-K for the year ended December 31, 1996.

(18)     Incorporated by reference from the Registrant's Quarterly Report on
         Form 8-K regarding the Rights Agreement dated April 8, 1997.

(19)     Incorporated by reference from the Company's Registration Statement on
         Form S-4 regarding the Company's 11 1/2% Series B Senior Notes due
         2007.




                                       67
<PAGE>   68

(20)     Incorporated by reference from the Company's Registration Statement on
         Form S-3 regarding the Company's 8 1/2% Convertible Exchangeable
         preferred Stock, Common Stock and 8 1/2% Convertible Subordinated
         Debentures due 2009.

(21)     Incorporated by reference from Amendment 1 to Form S-4 filed on June
         27, 1997.

(22)     Incorporated by reference from Amendment 1 to Form S-3 filed on June
         27, 1997.

(23)     Incorporated by reference from the Registrant's Quarterly Report on
         Form 10-Q for the quarter ended June 30, 1997.

(24)     Incorporated by reference from the Registrant's Quarterly Report on
         Form 10-Q for the quarter ended September 30, 1997.

(25)     Filed herewith.

(26)     Filed only in EDGAR format with the Registrant's Annual Report on Form
         10-K for the year ended December 31, 1997.

(b) REPORTS ON FORM 8-K

     The Company filed no current reports on Form 8-K with the Securities and
Exchange Commission during the quarter ended December 31, 1997, nor was it
required to do so.




                                       68
<PAGE>   69






                                   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 in the City of Dallas
and the State of Texas, on March 19, 1997.

                                       GREYHOUND LINES, INC.

                                       By:         /s/ CRAIG R. LENTZSCH
                                           -------------------------------------
                                                    Craig R. Lentzsch
                                           President and Chief Executive Officer
                                               (Principal Executive Officer)

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

<TABLE>
<CAPTION>
                     Signature                                Title                           Date
                     ---------                                -----                           ----
<S>                                             <C>                                      <C>
           /s/  THOMAS G. PLASKETT              Chairman of the Board of Directors       March 19, 1998
------------------------------------------
             Thomas G. Plaskett

            /s/  RICHARD J. CALEY               Director                                 March 19, 1998
------------------------------------------
              Richard J. Caley

              /s/  LINDA CHAVEZ                 Director                                 March 19, 1998
------------------------------------------
                Linda Chavez

           /s/  CRAIG R. LENTZSCH               Director, President and Chief            March 19, 1998
------------------------------------------      Executive Officer
              Craig R. Lentzsch                 

               /s/ A.A. MEITZ                   Director                                 March 19, 1998
------------------------------------------
                 A.A. Meitz

           /s/  FRANK L. NAGEOTTE               Director                                 March 19, 1998
------------------------------------------
              Frank L. Nageotte

         /s/  ALFRED E. OSBORNE, JR.            Director                                 March 19, 1998
------------------------------------------
           Alfred E. Osborne, Jr.

            /s/  STEPHEN M. PECK                Director                                 March 19, 1998
------------------------------------------
               Stephen M. Peck

            /s/ ERNEST P. WERLIN                Director                                 March 19, 1998
------------------------------------------
              Ernest P. Werlin

            /s/  T. SCOTT KIRKSEY               Vice President and                       March 19, 1998
------------------------------------------      Chief Accounting Officer
              T. Scott Kirksey                  
</TABLE>







                                       69
<PAGE>   70




<TABLE>
<S>                                             <C>                                      <C>
CO-REGISTRANTS



ATLANTIC GREYHOUND LINES OF
VIRGINIA, INC.

By:

           /s/  CRAIG R. LENTZSCH               Chairman of the Board, President,        March 19, 1998
------------------------------------------      and Chief Executive Officer
              Craig R. Lentzsch                 

            /s/  J. FLOYD HOLLAND               Director                                 March 19, 1998
------------------------------------------
              J. Floyd Holland

            /s/  T. SCOTT KIRKSEY               Chief Accounting Officer                 March 19, 1998
------------------------------------------
              T. Scott Kirksey


EAGLE BUS MANUFACTURING, INC.

By:

           /s/  CRAIG R. LENTZSCH               Director and President                   March 19, 1998
------------------------------------------
              Craig R. Lentzsch

           /s/  JACK W. HAUGSLAND               Director                                 March 19, 1998
------------------------------------------
              Jack W. Haugsland

            /s/  T. SCOTT KIRKSEY               Chief Accounting Officer                 March 19, 1998
------------------------------------------
              T. Scott Kirksey


FCA INSURANCE LIMITED

By:

           /s/  CRAIG R. LENTZSCH               Director and President                   March 19, 1998
------------------------------------------
              Craig R. Lentzsch

           /s/  JACK W. HAUGSLAND               Director                                 March 19, 1998
------------------------------------------
              Jack W. Haugsland

          /s/  RICHARD D. SPURLING              Director                                 March 19, 1998
------------------------------------------
             Richard D. Spurling

            /s/  F. CHESLEY WHITE               Director                                 March 19, 1998
------------------------------------------
              F. Chesley White

            /s/  T. SCOTT KIRKSEY               Chief Accounting Officer                 March 19, 1998
------------------------------------------
              T. Scott Kirksey
</TABLE>






                                       70
<PAGE>   71

<TABLE>
<S>                                             <C>                                      <C>
GLI HOLDING COMPANY

By:

           /s/  CRAIG R. LENTZSCH               Director, President and                  March 19, 1998
------------------------------------------      Chief Executive Officer
              Craig R. Lentzsch                 

           /s/  JACK W. HAUGSLAND               Director                                 March 19, 1998
------------------------------------------
              Jack W. Haugsland

            /s/  T. SCOTT KIRKSEY               Chief Accounting Officer                 March 19, 1998
------------------------------------------
              T. Scott Kirksey


GREYHOUND de MEXICO S.A. de C.V.

By:

           /s/  CRAIG R. LENTZSCH               Director and President                   March 19, 1998
------------------------------------------
              Craig R. Lentzsch

           /s/  JACK W. HAUGSLAND               Director                                 March 19, 1998
------------------------------------------
              Jack W. Haugsland

           /s/  JEFFREY W. SANDERS              Director                                 March 19, 1998
------------------------------------------
              Jeffrey W. Sanders

            /s/  T. SCOTT KIRKSEY               Chief Accounting Officer                 March 19, 1998
------------------------------------------
              T. Scott Kirksey


GRUPO CENTRO, INC.

By:

           /s/  CRAIG R. LENTZSCH               Director and President                   March 19, 1998
------------------------------------------
              Craig R. Lentzsch

           /s/  JACK W. HAUGSLAND               Director                                 March 19, 1998
------------------------------------------
              Jack W. Haugsland

            /s/  T. SCOTT KIRKSEY               Chief Accounting Officer                 March 19, 1998
------------------------------------------
              T. Scott Kirksey
</TABLE>






                                       71
<PAGE>   72



<TABLE>
<S>                                             <C>                                      <C>
LOS BUENOS LEASING CO., INC.

By:

             /s/  ALFONSO PENEDO                Director, President, Chief               March 19, 1998
------------------------------------------      Executive Officer and General
               Alfonso Penedo                   Manager

            /s/  T. SCOTT KIRKSEY               Chief Accounting Officer                 March 19, 1998
------------------------------------------
              T. Scott Kirksey


SISTEMA INTERNACIONAL de
TRANSPORTE de AUTOBUSES, INC.

By:

           /s/  CRAIG R. LENTZSCH               Director and President                   March 19, 1998
------------------------------------------
              Craig R. Lentzsch

           /s/  JACK W. HAUGSLAND               Director                                 March 19, 1998
------------------------------------------
              Jack W. Haugsland

            /s/  T. SCOTT KIRKSEY               Chief Accounting Officer                 March 19, 1998
------------------------------------------
              T. Scott Kirksey


T & V HOLDING COMPANY

By:

           /s/  CRAIG R. LENTZSCH               Director and President                   March 19, 1998
------------------------------------------
              Craig R. Lentzsch

           /s/  JACK W. HAUGSLAND               Director                                 March 19, 1998
------------------------------------------
              Jack W. Haugsland

            /s/  T. SCOTT KIRKSEY               Chief Accounting Officer                 March 19, 1998
------------------------------------------
              T. Scott Kirksey
</TABLE>






                                       72
<PAGE>   73



<TABLE>
<S>                                             <C>                                      <C>
TEXAS, NEW MEXICO & OKLAHOMA
COACHES, INC.

By:

           /s/  CRAIG R. LENTZSCH               Director and Chief                       March 19, 1998
------------------------------------------      Executive Officer
              Craig R. Lentzsch                 

           /s/  JACK W. HAUGSLAND               Director                                 March 19, 1998
------------------------------------------
              Jack W. Haugsland

            /s/  J. FLOYD HOLLAND               Director                                 March 19, 1998
------------------------------------------
              J. Floyd Holland

          /s/  ROBERT D. GREENHILL              Director                                 March 19, 1998
------------------------------------------
             Robert D. Greenhill

            /s/  T. SCOTT KIRKSEY               Chief Accounting Officer                 March 19, 1998
------------------------------------------
              T. Scott Kirksey


T.N.M. & O. TOURS, INC.

By:

           /s/  CRAIG R. LENTZSCH               Director and Chief                       March 19, 1998
------------------------------------------      Executive Officer
              Craig R. Lentzsch                 

           /s/  JACK W. HAUGSLAND               Director                                 March 19, 1998
------------------------------------------
              Jack W. Haugsland

            /s/  J. FLOYD HOLLAND               Director                                 March 19, 1998
------------------------------------------
              J. Floyd Holland

          /s/  ROBERT D. GREENHILL              Director                                 March 19, 1998
------------------------------------------
             Robert D. Greenhill

          /s/  RICHARD M. PORTWOOD              Director                                 March 19, 1998
------------------------------------------
             Richard M. Portwood

            /s/  T. SCOTT KIRKSEY               Chief Accounting Officer                 March 19, 1998
------------------------------------------
              T. Scott Kirksey
</TABLE>






                                       73
<PAGE>   74




<TABLE>
<S>                                             <C>                                      <C>
VERMONT TRANSIT CO., INC.

By:

           /s/  CRAIG R. LENTZSCH               Director, President and                  March 19, 1998
------------------------------------------      Chief Executive Officer
              Craig R. Lentzsch                 

           /s/  JACK W. HAUGSLAND               Director                                 March 19, 1998
------------------------------------------
              Jack W. Haugsland

            /s/  J. FLOYD HOLLAND               Director                                 March 19, 1998
------------------------------------------
              J. Floyd Holland

            /s/  T. SCOTT KIRKSEY               Chief Accounting Officer                 March 19, 1998
------------------------------------------
              T. Scott Kirksey
</TABLE>






                                       74
<PAGE>   75



                                INDEX TO EXHIBITS



<TABLE>
<CAPTION>
EXHIBIT NO.                                                                 DESCRIPTION
-----------                                                                 -----------
    <S>                                     <C>


    11.2                                    Computation of Registrant's earnings per share for the year ended
                                            December 31, 1997.

    21                                      Subsidiaries of the Registrant.

    23.1                                    Consent of Arthur Andersen LLP.

    27                                      Financial Data Schedule as of and for the year ended
                                            December 31, 1997.
</TABLE>