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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, 2002

TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________

Commission file number 0-16704

PROVIDENCE AND WORCESTER RAILROAD COMPANY
-----------------------------------------

(Exact name of registrant as specified in its charter)
------------------------------------------------------


Rhode Island 05-0344399
----------------------------- --------------------------
(State or other jurisdiction of I.R.S. Employer Identification No.
incorporation or organization)

75 Hammond Street, Worcester, Massachusetts 01610
----------------------------- --------------------------
(Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code(508) 755-4000

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

Name of each exchange
Title of Each Class on which registered
----------------------------- --------------------------
Not Applicable Not Applicable

Securities registered pursuant to Section 12(g) of the Act:
Common stock, $.50 par value
----------------------------------------------------------------

(Title of Class)
----------------------------------------------------------------

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. X

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 that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No



As of March 1, 2003, the aggregate market value of the voting stock held by
non-affiliates of the Registrant was $24,306,539. (For this purpose, all
directors of the Registrant are considered affiliates.)

As of March 1, 2003, the Registrant had 4,443,756 shares of Common Stock
outstanding.

Documents Incorporated by Reference -
- -------------------------------------
None

Exhibit Index - Page IV-1.


PART I

Item 1. Business
- ----------------

Providence and Worcester Railroad Company ("P&W") is a regional freight
railroad operating in Massachusetts, Rhode Island, Connecticut and New York. The
Company is the only interstate freight carrier serving the State of Rhode Island
and possesses the exclusive and perpetual right to conduct freight operations
over the Northeast Corridor between New Haven, Connecticut and the
Massachusetts/Rhode Island border. Since commencing independent operations in
1973, the Company, through a series of acquisitions of connecting lines, has
grown from 45 miles of track to its current system of approximately 545 miles.
P&W operates the largest double stack intermodal terminal facilities in New
England in Worcester, Massachusetts, a strategic location for regional
transportation and distribution enterprises.

The Company transports a wide variety of commodities for its customers,
including construction aggregate, iron and steel products, chemicals, lumber,
scrap metals, plastic resins, cement, coal, processed foods and edible food
stuffs, such as frozen foods, corn syrup and animal and vegetable oils. Its
customers include Cargill, Inc., The Dow Chemical Company, Exxon-Mobil
Corporation, Frito-Lay, Inc., Getty Petroleum Marketing Inc., International
Paper Company, Northeast Utilities, Smurfit-Stone Container Corporation and
Tilcon Connecticut, Inc. In 2002, P&W transported approximately 32,000 carloads
of freight and 59,000 intermodal containers. The Company also generates income
through sales of properties, grants of easements and licenses and leases of land
and tracks.

P&W's connections to multiple Class I railroads, either directly or through
connections with regional and short-line carriers, provide the Company with a
competitive advantage by allowing it to offer creative pricing and routing
alternatives to its customers. In addition, the Company's commitment to
maintaining its track and equipment to high standards enables P&W to provide
fast, reliable and efficient service.


Industry Overview

General

Railroads are divided into three classes based on operating revenues: Class
I, $266.7 million or more; Class II, $21.3 million to $266.6 million; and Class
III, less than $21.3 million. As a result of mergers and consolidations, there
are now only seven Class I railroads in the country. These large systems handle
92% of the nation's rail freight business.

The rail freight industry underwent a revitalization after the passage of
the Staggers Rail Act, which deregulated the pricing and types of services
provided by railroads. As a result, railroads were able to achieve significant
productivity gains and operating cost decreases while gaining pricing
flexibility. Rail freight service became more competitive with other
transportation modes with respect to both quality and price. The volume of
freight moved by rail has risen dramatically since 1980 and profitability has
improved significantly.

One result of the revitalization of the industry has been the growth of
regional (over 350 miles) and short-line railroads, which has been fueled by a
trend among Class I railroads to divest certain branch lines in order to focus
on their long-haul core systems. There are now more than 550 of these regional
and short-line railroads. They operate in all 50 states, account for more than
30% of all rail track, employ 12% of all rail workers and generate about 8% of
all rail revenue.

Generally, freight railroads handle two types of traffic: conventional
carloads and intermodal containers used in the shipment of goods via more than
one mode of transportation, e.g., by ship, rail and truck. By using a
hub-and-spoke approach to shipping, multiple containers can be moved by rail to
and from an intermodal terminal and then either delivered to their final
destinations by truck or transferred to ship for export. Over the past decade,
commodity shippers have increasingly turned to intermodal transportation
principally as an alternative to long-haul trucking. The development of new
intermodal technology, which allows containers to be moved by rail double
stacked (i.e., stacked one on top of the other) in specially designed railcars,
together with increasing highway traffic congestion and the shortage of
long-haul truck drivers have contributed to this trend.


Regional Developments

There are a number of development projects underway in New England to
increase port capacity along the extensive coastline and to improve the
intermodal transportation and distribution infrastructure in the region. These
projects present significant opportunities for the Company to increase its
business.


I-1


Quonset/Davisville

The State of Rhode Island has proposed the redevelopment of a 1,000 acre
portion of the former Naval facility at Quonset/Davisville to a more active port
and industrial park. This facility already houses a number of rail oriented
industries and an auto port. Construction of a freight rail improvement project
to provide additional track capacity and double stack clearance on the Northeast
Corridor between Quonset/Davisville and the connection of the Corridor to the
Company's main line at Central Falls, R.I commenced in 2002 at a cost in excess
of $120 million.


Massachusetts Highway Improvement Program

Work has begun on a significant expansion of the Company's bulk transload
and intermodal yards in Worcester in conjunction with the Massachusetts Highway
Department's $250 million project creating a direct Worcester connection to the
Massachusetts Turnpike. This project will result in a near doubling of the
Company's transload facilities when completed.


Port of New Haven

The State of Connecticut has completed rebuilding the Tomlinson Bridge in
New Haven, which provides rail access to the Port of New Haven. In conjunction
with this project, the Company is working with the City of New Haven and area
users of the rail systems to fund a design for the restoration of local street
rail service directly to port properties. Completion of this project will
provide the Company with improved access to customers at the Port of New Haven.


Middletown/Hartford Line

In cooperation with the state of Connecticut, the Company has been engaged
in the restoration of the rail line extending from Middletown to Hartford,
Connecticut. In April 2000, the state of Connecticut appropriated $1.85 million
to fund their portion of the project (approx 70%). The restoration of this 11
mile segment is now complete and ready for service. With a planned industrial
park along this line and a new connection to other carriers in Hartford, the
Company believes restoration of this line presents opportunities for future
revenue growth.


New London Interchange

Through its New London interchange with the New England Central Railroad
P&W has been able to develop significant new business with the Canadian National
Railway ("CN") and the Canadian Pacific Railway. P&W has worked aggressively to
leverage its extensive bulk transload facilities in developing additional
chemical and plastics traffic with CN and has developed a significant volume of
steel traffic with CN that had previously moved via truck.


Port of Providence

The Port of Providence, in conjunction with the Company, has made
investments in its infrastructure, including paving, lighting and "on dock"
rail, to accommodate growth in the movement of imported coal to inland markets
and to handle that product more efficiently. This is expected to be a growing
source of revenue for the Company over the next few years. More than 250,000
tons of coal have been handled through the Port of Providence to date.

Railroad Operations

The Company's rail freight system extends over approximately 545 miles of
track. The Company interchanges freight traffic with CSX at Worcester,
Massachusetts and at New Haven, Connecticut; with the Springfield Terminal
Railway Company (formerly Boston and Maine Railroad) at Gardner, Massachusetts;
with the New England Central Railroad (formerly Central Vermont Railway) at New
London, Connecticut; and with the New York and Atlantic Railroad (formerly Long
Island Railroad) at Fresh Pond Junction on Long Island. Through its connections,
P&W links more than 80 communities on its lines. It operates four classification
yards (areas containing tracks used to group freight cars destined for a
particular industry or interchange), located in Worcester, Massachusetts,
Cumberland, Rhode Island and Plainfield and New Haven, Connecticut.

By agreement with a private operator, the Company operates two approved
customs intermodal yards in Worcester. A customs intermodal yard is an area
containing tracks used for the loading and unloading of containers. These yards

I-2


are U.S. Customs bonded, and international traffic must be inspected and
approved by U.S. Customs officials. The intermodal facility serves primarily as
a terminal for movement of container traffic from the Far East destined for
points in New England. Several major container ship lines utilize double stack
train service through this terminal. P&W works closely with the terminal
operator to develop and maintain strong relationships with steamship lines
involved in international intermodal transportation.


Customers

The Company serves approximately 160 customers in Massachusetts, Rhode
Island, Connecticut and New York. The Company's 10 largest customers account for
nearly half of its operating revenues. In 2002, Tilcon Connecticut, Inc., which
ships construction aggregate from three separate quarries on P&W's system to
asphalt production plants in Connecticut and New York, accounted for
approximately 15.4% of the Company's operating revenues. No other customer
accounted for 10% or more of its total operating revenues in 2002.


Markets

The Company transports a wide variety of commodities for its customers. In
2002, chemicals and plastics and construction aggregate were the two largest
commodity groups transported by the Company, constituting 35% and 20%,
respectively, of conventional carload freight revenues. The following table
summarizes the Company's conventional carload freight revenues by commodity
group as a percentage of such revenues:

Commodity 2002 2001 2000 1999 1998
- --------- ---- ---- ---- ---- ----
Chemicals and Plastics ............ 35% 34% 38% 41% 41%
Construction Aggregate ............ 20 19 17 17 17
Forest and Paper Products ......... 13 16 16 14 14
Food and Agricultural ............. 12 13 13 14 15
Metal products and other .......... 12 12 10 8 75
Scrap Metal and Waste ............. 8 6 6 6 6
--- --- --- --- ---
Total .......................... 100% 100% 100% 100% 100%
=== === === === ===


Sales and Marketing

P&W's sales and marketing staff of four people has 50 years of combined
experience in pricing and marketing railroad services. The sales and marketing
staff focuses on understanding and addressing the raw material requirements and
transportation needs of its existing customers and businesses on its lines. The
staff grows existing business by maintaining close working relationships with
both customers and connecting carriers. The sales and marketing staff strives to
generate new business for the Company through (i) targeting companies already on
P&W's rail lines but not currently using rail services, (ii) working with state
and local development officials, developers and real estate brokers to encourage
the development of industry on the Company's rail lines and (iii) identifying
and targeting the non-rail transportation of goods into and out of the region in
which the Company operates. Unlike many other regional and short-line railroads,
the Company is able to offer its customers creative pricing and routing
alternatives because of its multiple connections to other carriers.


Safety

An important component of the Company's operating strategy is conducting
safe railroad operations for the benefit and protection of employees, customers
and the communities served by its rail lines. Since commencing active operations
in 1973, the Company has committed significant resources to track maintenance to
minimize the risk of derailments and believes its rail system is in good
condition.

Safety of the Company's operations is of paramount importance for the
benefit and protection of the Company's employees, customers and the communities
served by its rail lines. The Company and its employees have made dramatic
improvements in preventing injuries while at the same time increasing operations
and expanding the work force.


I-3


Rail Traffic

Rail traffic is classified as on-line or overhead traffic. On-line traffic
is traffic that originates or terminates with shippers located on a railroad.
Overhead traffic passes from one connecting carrier to another and neither
originates nor terminates with shippers located on a railroad. Presently, P&W is
solely an on-line carrier but expects to provide overhead service in the future
for certain rail traffic to and from Long Island.

Rail freight rates can be in various forms. Generally, customers are given
a "through" rate, a single figure encompassing the rail transportation of a
commodity from point of origin to point of destination, regardless of the number
of carriers which handle the car. Rates are developed by the carriers based on
the commodity, volume, distance and competitive market considerations. The
entire freight bill is paid either to the originating carrier ("prepaid") or to
the destination carrier ("collect") and divided between all carriers which
handle the move. The basis for the division varies and can be based on factors
(or revenue requirements) independently established by each carrier which
comprise the through rate, or on a percentage basis established by division
agreements among the carriers. A carrier such as P&W, which actually places the
car at the customer's location and attends to the customer's daily switching
requirements, receives revenue greater than an amount based simply on mileage
hauled.


Employees

As of January 1, 2003, the Company had 153 full-time employees, 117 of
which were represented by three national railroad labor organizations. The
Company's employees have been represented by unions since the Company commenced
independent operations in 1973.

The Company's initial agreement with the United Transportation Union
covering the trainmen was unusual in the railroad industry since it provided the
Company with discretion in determining crew sizes, eliminated craft distinctions
and provided a guaranteed annual wage for a maximum number of hours worked. The
Company's collective bargaining agreements have been in effect since February
1973 for trainmen, since May 1974 for clerical employees and dispatchers and
since June 1974 for maintenance employees. These contracts do not expire but are
subject to re-negotiation after the agreed-upon moratoriums. The moratorium
periods are typically three to five years in length. The labor agreements may
next be amended at July 1, 2004 for the United Transportation Union (trainmen),
July 1, 2006 for the Brotherhood of Railroad Signalmen (maintenance) and
December 31, 2005 for the Transportation Communications Union (clerical). The
Company considers its employee and labor relations to be good.


Competition

The Company is the only rail carrier serving businesses located on- line.
However, the Company competes with other carriers in the location of new
rail-oriented businesses in the region. The Company also competes with other
modes of transportation, particularly long-haul trucking companies, for the
transportation of commodities. Any improvement in the cost or quality of these
alternate modes of transportation, for example, legislation granting material
increases in truck size or allowable weight, could increase competition and may
materially adversely affect the Company's business and results of operations. As
a means of competing, P&W strives to offer greater convenience and better
service than competing carriers and at costs lower than some competing non-rail
carriers. The Company also competes by participating in efforts to attract new
industry to the areas which it serves.

Certain rail competitors, including CSX and Norfolk Southern, are larger or
better capitalized than the Company. While P&W believes the acquisition and
division of Conrail will lead to expansion opportunities, the Conrail
transaction may lead to increased competition with other freight railroads,
particularly in Massachusetts, and efforts by CSX and Norfolk Southern to reduce
revenue to connecting regional and short-line carriers.

The Company believes that its ability to grow depends, in part, upon its
ability to acquire additional connecting rail lines. In making acquisitions, P&W
competes with other short-line and regional rail operators, some of which are
larger and have greater financial resources than the Company.


I-4


Governmental Regulation

The Company is subject to governmental regulation by the United States
Surface Transportation Board ("the STB"), the Federal Railroad Administration
("the FRA") and other federal, state and local regulatory authorities with
respect to certain rates and railroad operations, as well as a variety of
health, safety, labor, environmental and other matters, all of which could
potentially affect the competitive position and profitability of the Company.
Additionally, the Company is subject to STB regulation and may be required to
obtain STB approval prior to its acquisition of any new railroad properties.
Management of the Company believes that the regulatory freedoms granted by the
Staggers Rail Act have been beneficial to the Company by giving it flexibility
to adjust prices and operations to respond to market forces and industry
changes. However, various interests, and certain members of the United States
House of Representatives and Senate (which have jurisdiction over federal
regulation of railroads), have from time to time expressed their intention to
support legislation that would eliminate or reduce significant freedoms granted
by the Staggers Rail Act.


Environmental Matters

The Company's railroad operations and real estate ownership are subject to
extensive federal, state and local environmental laws and regulations
concerning, among other things, emissions to the air, discharges to waters and
the handling, storage, transportation and disposal of waste and other materials.
The Company handles, stores, transports and disposes of petroleum and other
hazardous substances and wastes. The Company also transports hazardous
substances for third parties and arranges for the disposal of hazardous wastes
generated by the Company. The Company believes that it is in material compliance
with applicable environmental laws and regulations.

Item 2. Properties
- ------------------

Track

P&W's rail system extends over approximately 545 miles of track, of which
it owns approximately 170 miles. The Company has the right to use the remaining
375 miles pursuant to perpetual easements and long- term trackage rights
agreements. Under certain of these agreements, the Company pays fees based on
usage.

Virtually all of the main lines on which the Company operates are in FRA
class 3 condition (allowing 40 m.p.h. speeds) or better. The Company intends to
maintain these lines in such excellent condition.

Of the approximately 545 miles of the Company's system, 313 miles, or 57%,
are located in Connecticut, 103 miles, or 19%, are located in Massachusetts, 102
miles, or 19%, are located in Rhode Island and 28 miles, or 5%, are located in
New York.


Rail Facilities

P&W owns land and a building with approximately 69,500 square feet of floor
space in Worcester, Massachusetts. The building houses the Company's executive
and administrative offices and some of the Company's storage space.
Approximately 2,600 square feet are leased to outside tenants.

The Company owns and operates three principal classification yards located
in Worcester, Massachusetts, Cumberland, Rhode Island and Plainfield,
Connecticut and also operates a classification yard in New Haven, Connecticut.
In addition, the Company has maintenance facilities in Plainfield and Worcester.
P&W believes that its executive and administrative office facilities,
classification yards and maintenance facilities are adequate to support its
current level of operations.


Other Properties

The Company owns or has the right to use a total of approximately 130 acres
of real estate located along the principal railroad lines from downtown
Providence through Pawtucket, Rhode Island. Of this amount, P&W owns
approximately eight acres in Pawtucket and has a perpetual easement for railroad
purposes over the remaining 122 acres.

The Company has invested nearly $12 million in the development of the South
Quay, which is adjacent to 12 acres of land owned by the Company. This
investment has resulted in the creation of approximately 33 acres of waterfront
land.

I-5

P&W actively manages its real estate assets in order to maximize revenues.
The income from property management is derived from sales and leasing of
properties and tracks and grants of easements to government agencies, utility
companies and other parties for the installation of overhead or underground
cables, pipelines and transmission wires as well as recreational uses such as
bike paths.


Rolling Stock

The following schedule sets forth the rolling stock owned by the Company as
of December 31, 2002:

Description Number
----------- ------
Locomotive .................................................. 32
Gondola ..................................................... 77
Flat Car .................................................... 5
Ballast Car ................................................. 30
Passenger Equipment ......................................... 7
Caboose ..................................................... 2
------
Total .................................................. 153
======

The 32 diesel electric locomotives, which include seven used 3,900
horsepower GE B39-8 locomotives acquired in 2002, are used on a daily basis, are
maintained to a high standard, comply with all FRA and Association of American
Railroads rules and regulations and are adequate for the needs of the Company's
freight operations. The gondolas and flat cars are considered modern rail cars
and are used by certain P&W customers. Other rail freight customers use their
own freight cars or obtain such equipment from other sources. The ballast cars
are used in track maintenance. From time to time, the Company has leased ballast
cars to other adjoining railroads. The passenger equipment and caboose are not
utilized in P&W's rail freight operations but are used on an occasional basis
for Company functions, excursions and charter trips.


Equipment

P&W has a state-of-the-art digital touch control dispatching system at its
Worcester operations center permitting two-way radio contact with every train
crew and maintenance vehicle on its lines. The system also enables each train
crew to maintain radio contact with other crew members. The Company maintains a
computer facility in Worcester with back-up computer facilities in Worcester and
Plainfield, Connecticut to assure the Company's ability to operate in the event
of disruption of service in Worcester. The Company also has state-of-the-art
automatic train defect detectors at strategic locations which inspect passing
trains and audibly communicate the results to train crews and dispatchers in
order to protect against equipment failure en route.

The Company maintains a modern fleet of track maintenance equipment and
aggressively pursues available opportunities to work with federal and state
agencies for the rehabilitation of bridges, grade crossings and track. The
Company's locomotives are equipped with the cab signal technology necessary for
operations on the Northeast Corridor and are equipped with automatic civil speed
enforcement systems which were required by the introduction of high speed
passenger service on the Northeast Corridor.


Item 3. Legal Proceedings
- -------------------------

On January 29, 2002, the Company received a "Notice of Potential Liability"
from the United States Environmental Protection Agency ("EPA") regarding an
existing Superfund Site that includes the J.M. Mills Landfill in Cumberland,
Rhode Island. EPA sends these "Notice" letters to potentially responsible
parties ("PRPs") under the Comprehensive Environmental Response, Compensation,
and Liability Act ("CERCLA"). EPA identified the Company as a PRP based on its
status as an owner and/or operator because its railroad property traverses the
Superfund Site. Via these Notice letters, EPA makes a demand for payment of past
costs (identified in the letter as $762,000) and future costs associated with
the response actions taken to address the contamination at the Site, and
requests PRPs to indicate their willingness to participate and resolve their
potential liability at the Site. The Company has responded to EPA by stating
that it does not believe it has any liability for this Site, but that it is
interested in cooperating with EPA to address issues concerning liability at the
Site. At this point, two other parties have already committed via a consent
order with EPA to pay for the Remedial Investigation/Feasibility Study ("RI/FS")
phase of the clean-up at the Site, which will take approximately two or more
years to complete. After that, EPA will likely seek to negotiate the cost of the
Remedial Design and implementation of the remedy at the Site with the PRPs it
has identified via these Notice Letters (which presently includes over sixty
parties, and is likely to increase after EPA completes its investigation of the

I-6


identity of PRPs). The Company believes that none of its activities caused
contamination at the Site, and will contest this claim by EPA.

In connection with the EPA claim described above, the two parties who have
committed to conduct the RI/FS at the Site filed a complaint in the U.S.
District Court of Rhode Island against the Company, in an action entitled CCL
Custom Manufacturing, Inc. v. Arkwright Incorporated, et al (consolidated with
Unilever Bestfoods v. American Steel & Aluminum Corp. et al), C.A. No. 01-496/L,
on December 18, 2002. The Company is one of about sixty parties named thus far
by Plaintiffs, who seek to recover response costs incurred in investigating and
responding to the releases of hazardous substances at the Site. Plaintiffs
allege that the Company is liable under 42 U.S.C. section 961(a)(3) of CERCLA as
an "arranger" or "generator" of waste that ended up at the Site. The Company has
entered into a Generator Cooperation Agreement with other defendants to allocate
costs in responding to this suit, and to share technical costs and information
in evaluating the Plaintiffs' claims. The Company does not believe it generated
any waste that ended up at this Site, or that its activities caused
contamination at the Site. The Company will contest this suit.



Item 4. Submission of Matters to a Vote of Security Holders
- -----------------------------------------------------------

Not applicable.



I-7



Part II

Item 5. Market for Registrant's Common Stock and Related Stockholder Matters
- ----------------------------------------------------------------------------

The Common Stock is quoted on the American Stock Exchange ("AMEX") under the
trading symbol "PWX". The following table sets forth, for the periods indicated,
the high and low sale prices per share for the Common Stock as reported on the
AMEX. Also included are dividends paid per share of Preferred Stock and Common
Stock during these quarterly periods.


Common Stock
------------
Trading Prices Dividends Paid
-------------- --------------
High Low Preferred Common
---- --- --------- ------
2002
First Quarter........ 8.36 6.87 $ 5.00 $ .04
Second Quarter....... 11.99 7.85 -0- .04
Third Quarter........ 8.30 6.86 -0- .04
Fourth Quarter....... 8.44 6.05 -0- .04


2001
First Quarter........ 9 6.875 $ 5.00 $ .04
Second Quarter....... 10.12 7.35 -0- .04
Third Quarter........ 8.52 6.57 -0- .04
Fourth Quarter....... 7.30 6.24 -0- .04




As of March 1, 2003, there were approximately 695 holders of record of the
Company's Common Stock.

The declaration of cash dividends on both the Preferred and the Common Stock is
made at the discretion of the Board of Directors based on the Company's
earnings, financial condition, capital requirements and other relevant factors
and restrictions.

II-1


Item 6. Selected Financial Data
- -------------------------------

The selected financial data set forth below has been derived from audited
financial statements. The data should be read in conjunction with the Company's
audited financial statements and notes thereto and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the other
information included elsewhere in this annual report on Form 10-K.



Years Ended December 31,
2002 2001 2000 1999 1998
------- ------- ------- ------- -------
(in thousands, except per share amounts)
Income Statement Data:
Operating revenues .......... $22,868 $22,598 $23,470 $22,152 $22,974
Other income ................ 877 1,003 2,049 3,974 4,156
------- ------- ------- ------- -------
Total Revenues .............. 23,745 23,601 25,519 26,126 27,130
------- ------- ------- ------- -------
Operating expenses .......... 23,698 22,245 22,301 21,410 20,272
Interest expense ............ -- -- -- -- 495
------- ------- ------- ------- -------
Total expenses .............. 23,698 22,245 22,301 21,410 20,767
------- ------- ------- ------- -------
Income before income taxes
and extraordinary item ..... 47 1,356 3,218 4,716 6,363
Provision for income taxes .. 25 505 1,200 1,690 2,360
------- ------- ------- ------- -------
Income before extraordinary
item ....................... 22 851 2,018 3,026 4,003
Extraordinary loss from
early extinguishment of
debt, net of income tax
benefit .................... -- -- -- -- 219
------- ------- ------- ------- -------
Net income .................. 22 851 2,018 3,026 3,784
Preferred Stock dividend .... 3 3 3 3 3
------- ------- ------- ------- -------

Net income available to
common shareholders ........ $ 19 $ 848 $ 2,015 $ 3,023 $ 3,781
======= ======= ======= ======= =======

Basic income per common
share (a) .................. $ -- $ .19 $ .47 $ .71 $ 1.13
======= ======= ======= ======= =======

Diluted income per common
share (a) .................. $ -- $ .19 $ .46 $ .70 $ 1.10
======= ======= ======= ======= =======

Weighted average
shares-basic ............... 4,429 4,390 4,323 4,260 3,352
======= ======= ======= ======= =======

Weighted average
shares-diluted ............. 4,497 4,458 4,390 4,334 3,433
======= ======= ======= ======= =======

Cash dividends declared on
Common Stock ............... $ 710 $ 702 $ 693 $ 640 $ 402
======= ======= ======= ======= =======

December 31,
2002 2001 2000 1999 1998
------- ------- ------- ------- -------
(in thousands)
Balance Sheet Data:
Total assets ................. $90,500 $89,161 $89,073 $86,371 $84,594
Shareholders' equity ......... 68,641 69,073 68,483 66,683 63,709


(a) The income per share amounts for 1998 are stated net of a loss of $.06 per
share attributable to the extraordinary item.

II-2


Item 7. Management's Discussion and Analysis of Financial Condition and Results
- -------------------- ----------------------------------------------------------
of Operations
-------------

The following discussion should be read in connection with the Company's audited
financial statements and notes thereto included elsewhere in this annual report
on Form 10-K.

The statements contained in Management's Discussion and Analysis of Financial
Condition and Results of Operations ("MDA") which are not historical are
"forward-looking statements" within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. These forward- looking statements represent the Company's present
expectations or beliefs concerning future events. The Company cautions, however,
that actual results could differ materially from those indicated in MDA.


Critical Accounting Policies

The Securities and Exchange Commission ("SEC") recently issued guidance for the
disclosure of "critical accounting policies". The SEC defines such policies as
those that require application of management's most difficult, subjective or
complex judgments, often as a result of the need to make estimates about the
effect of matters that are inherently uncertain and may change in subsequent
periods.

The Company's significant accounting policies are described in Note 1 of the
Notes to Financial Statements. None of these significant accounting policies
require management to make difficult, subjective or complex judgments or
estimates, and therefore none meet the SEC definition of "critical".


Overview

The Company is a regional freight railroad operating in Massachusetts, Rhode
Island, Connecticut and New York.

The Company generates operating revenues primarily from the movement of freight
in both conventional freight cars and in intermodal containers on flat cars over
its rail lines. Freight revenues are recorded at the time delivery is made to
the customer or the connecting carrier. Modest non-freight operating revenues
are derived from demurrage, switching, weighing, special train and other
transportation services as well as from services rendered to freight customers
and other outside parties by the Company's Maintenance of Way, Communications &
Signals, and Maintenance of Equipment Departments. Operating revenues also
include amortization of deferred grant income.

The Company's operating expenses consist of salaries and wages and related
payroll taxes and employee benefits, depreciation and amortization, insurance
and casualty claim expense, diesel fuel, car hire, property taxes, materials and
supplies, purchased services and other expenses. Many of the Company's operating
expenses are of a relatively fixed nature and do not increase or decrease
proportionately with increases or decreases in operating revenues unless the
Company's management were to take specific actions to restructure the Company's
operations.

When comparing the Company's results of operations from one year to another, the
following factors should be taken into consideration. First, the Company has
historically experienced fluctuations in operating revenues and expenses due to
unpredictable events such as one-time freight moves and customer plant
expansions and shut-downs. Second, the Company's freight volumes are susceptible
to increases and decreases due to changes in international, national and
regional economic conditions. Third, the volume of capitalized track or
recollectable projects performed by the Company's Maintenance of Way and
Communications & Signals Departments can vary significantly from year to year
thereby impacting total operating expenses.

II-3


The Company also generates income through sales of properties, grants of
easements and licenses, and leases of land and tracks. Income or loss from sale,
condemnation and disposal of property and equipment and grants of easements is
recorded at the time the transaction is consummated and collectibility is
assured. This income varies significantly from year to year.

One of the Company's customers, Tilcon Connecticut, Inc., which ships
construction aggregate from three separate quarries on the Company's system to
asphalt production plants in Connecticut and New York, accounted for
approximately 15.4%, 14.4% and 12.4% of its operating revenues in 2002, 2001,
and 2000, respectively. The Company does not believe that this customer will
cease to be a rail shipper or will significantly decrease its freight volume in
the foreseeable future. In the event that this customer should cease or
significantly reduce its rail freight operations, management believes that the
Company could restructure its operations to reduce operating costs by an amount
sufficient to substantially offset the decrease in operating revenues.

Results of Operations

The following table sets forth the Company's operating revenues by category in
dollars and as a percentage of operating revenues:

Years Ended December 31,
-----------------------------------------------
2002 2001 2000
------------- -------------- -------------
(in thousands, except percentages)
Freight Revenues:
Conventional carloads ....... $19,119 83.6% $18,427 81.6% $18,747 79.9%
Containers .................. 2,406 10.5 2,826 12.5 2,995 12.8
Non-Freight Operating Revenues:
Transportation services ..... 806 3.5 888 3.9 1,041 4.4
Other ....................... 537 2.4 457 2.0 687 2.9
------- ----- ------- ----- ------- -----
Total.................... $22,868 100.0% $22,598 100.0% $23,470 100.0%
======= ===== ======= ===== ======= =====

The following table sets forth conventional carload freight revenues by
commodity group in dollars and as a percentage of such revenues:

Years Ended December 31,
-----------------------------------------------
2002 2001 2000
------------- -------------- -------------
(in thousands, except percentages)
Chemicals and plastics ....... $ 6,783 35.5% $ 6,263 34.0% $ 7,053 37.6%
Construction aggregate ....... 3,759 19.7 3,509 19.0 3,150 16.8
Forest and paper products .... 2,434 12.7 2,847 15.5 2,940 15.7
Food and agricultural products 2,400 12.5 2,453 13.3 2,495 13.3
Metal products and other ..... 2,235 11.7 2,152 11.7 1,924 10.3
Scrap metal and waste ........ 1,508 7.9 1,203 6.5 1,185 6.3
------- ----- ------- ----- ------- -----
Total ...................... $19,119 100.0% $18,427 100.0% $18,747 100.0%
======= ===== ======= ===== ======= =====

II-4


The following table sets forth a comparison of the Company's operating expenses
expressed in dollars and as a percentage of operating revenues:

Years Ended December 31,
-----------------------------------------------
2002 2001 2000
------------- -------------- -------------
(in thousands, except percentages)
Salaries, wages, payroll taxes
and employee benefits ....... $13,402 58.6% $13,372 59.2% $12,688 54.1%
Casualties and insurance ..... 1,049 4.6 709 3.1 795 3.4
Depreciation and amortization 2,734 12.0 2,728 12.1 2,681 11.4
Diesel fuel .................. 1,051 4.6 1,074 4.8 1,280 5.5
Car hire, net ................ 874 3.8 983 4.3 952 4.0
Purchased services, including
legal and professional fees . 1,550 6.8 2,159 9.6 2,385 10.2
Repairs and maintenance of
equipment ................... 875 3.8 803 3.5 971 4.1
Track and signal materials ... 2,242 9.8 2,381 10.5 2,245 9.6
Track usage fees ............. 1,715 7.5 330 1.5 331 1.4
Other materials and supplies . 842 3.7 910 4.0 918 3.9
Other ........................ 1,449 6.3 1,549 6.8 1,627 6.9
------- ----- ------- ----- ------- -----
Total ....................... 27,783 121.5 26,998 119.4 26,873 114.5
Less capitalized and
recovered costs ............ 4,085 17.9 4,753 21.0 4,572 19.5
------- ----- ------- ----- ------- -----
Total ...................... $23,698 103.6% $22,245 98.4% $22,301 95.0%
======= ===== ======= ===== ======= =====


Year ended December 31, 2002 Compared to Year Ended December 31, 2001

Amtrak Arbitration

The Company has been party to an arbitration proceeding with the National
Railroad Passenger Corporation ("Amtrak") concerning Amtrak's claim for rate
increases with respect to the Company's freight operations over a portion of
Amtrak's Northeast Corridor in the States of Rhode Island and Connecticut. The
arbitrator issued a decision in June 2002 in which he ordered the Company to pay
Amtrak additional track usage fees and siding maintenance costs retroactive to
July 9, 1999. The statement of income for 2002 includes $935,000 of track usage
fees and $165,000 of siding maintenance costs which relate to years prior to
2002. The additional costs related to 2002 operations, resulting from the
arbitrator's decision, are track usage fees and siding maintenance costs of
approximately $427,000 and $40,000, respectively. In past years it was the
Company's practice to net its track usage fees against conventional freight
revenues. Because of the increased significance of track usage fees upon the
Company's operations and in order to conform to common industry practice the
Company began reporting track usage fees as an operating expense during 2002.
Operating revenues and expenses for prior years have been reclassified to
conform to the presentation in 2002.

Operating Revenues

Operating revenues increased $270,000, or 1.2%, to $22.9 million in 2002 from
$22.6 million in 2001. This increase was comprised of a $692,000 (3.8%) increase
in conventional freight revenues partially offset by a $420,000 (14.9%) decrease
in container freight revenues and a $2,000 (.1%) decrease in non-freight
operating revenues.

The increase in conventional freight revenues results from a 6.0% increase in
traffic volume, partially offset by a 2.1% decrease in the average revenue
received per conventional carloading. The Company's conventional freight
carloadings increased by 1,803 to 31,938 in 2002 from 30,135 in 2001. The
increase in conventional traffic results from new customers as well as increases
from certain existing customers. The decrease in the average revenue received
per conventional carloading is attributable to a shift in traffic mix toward
lower rated commodities, such as construction and demolition debris and
construction aggregates.

The decrease in container freight revenues is primarily due to a decrease in
traffic volume. Total intermodal containers handled decreased by 9,305 to 59,391
containers in 2002 from 68,696 containers in 2001. This decrease is the result
of the loss of a customer during the third quarter of 2001 and to the continuing
weakness in economic conditions.

II-5


Operating Expenses

Operating expenses increased $1.5 million, or 6.5%, to $23.7 million in 2002
from $22.2 million in 2001. Operating expenses as a percentage of operating
revenues ("operating ratio") increased to 103.6% in 2002 from 98.4% in 2001.
This increase is entirely attributable to the impact of the Amtrak arbitration
decision as previously discussed.

Other Income

Other income decreased to $877,000 in 2002 from $1.0 million in 2001. This
decrease is primarily the result of a reduction in interest income due to lower
investable cash balances and rates of return.

Year ended December 31, 2001 Compared to Year Ended December 31, 2000

Operating Revenues

Operating revenues decreased $872,000, or 3.7%, to $22.6 million in 2001 from
$23.5 million in 2000. This decrease was comprised of a $320,000 (1.7%) decrease
in conventional freight revenues, a $169,000 (5.6%) decrease in container
freight revenues and a $383,000 (22.2%) decrease in non-freight operating
revenues.

The decrease in conventional freight revenues results from a 2.9% decrease in
the average revenue received per conventional carloading, partially offset by a
small increase in traffic volume. The Company's conventional freight carloadings
increased by 359, or 1.2%, to 30,135 in 2001 from 29,776 in 2000.

The increase in conventional carloadings results from new customers and
increased traffic from certain existing customers, partially offset by decreases
in traffic from other existing customers, primarily in the manufacturing sector
of the economy. These decreases have resulted from weakening conditions in the
national economy and from several plant closings. The decrease in the average
revenue received per conventional carloading occurred because of a shift in
traffic mix toward lower rated commodities, such as construction and demolition
debris and construction aggregates. The impact of this shift in traffic mix more
than offset the effect of modest increases in the freight rates for certain
commodities.

The decrease in container freight revenues is primarily due to a decrease in
container traffic volume. Total intermodal containers handled decreased by 3,043
or 4.2% to 68,696 in 2001 from 71,739 in 2000. This decrease is attributable to
weakened economic conditions as well as the loss of a customer.

The decrease in non-freight operating revenue is the result of decreased
demurrage charges and maintenance department billings. Revenues of this nature
typically vary from year to year depending upon the needs of customers and other
outside parties.

Operating Expenses

Operating expenses decreased $56,000, or .3%, to $22.2 million in 2001 from
$22.3 million in 2000. The operating ratio increased to 98.4% in 2001 from 95.0%
in 2000. Increases in certain operating expense categories were offset by
decreases in others. The expense category with the greatest change was salaries,
wages, payroll taxes and employee benefits, which increased by $684,000 during
2001. An increase in employee health and welfare costs of $418,000 accounts for
the majority of this increase.

Other Income

Other income decreased to $1.0 million in 2001 from $2.0 million in 2000. This
decrease is primarily attributable to a reduction in gains from the sale,
condemnation and disposal of property, equipment and easements.

Liquidity and Capital Resources

The Company generated $4.3 million, $3.0 million and $3.9 million of cash from
operations in 2002, 2001 and 2000, respectively. The Company's total cash and
cash equivalents decreased by $916,000 in 2002 and $1.8 million in 2001 and
increased by $933,000 in 2000. The principal utilization of cash during the
three year period was for expenditures for property and equipment acquisitions
and payment of dividends.

II-6


During 2002, 2001 and 2000 the Company generated $444,000, $498,000 and $1.3
million, respectively, from the sales and disposals of properties not considered
essential for railroad operations and from the granting of easements and
licenses. Included in these amounts are $1.1 million in 2000 generated from the
sale of permanent easements. The Company holds various properties which could be
made available for sale, lease or grants of easements and licenses. Revenues
from sales of properties, easements and licenses can vary significantly from
year to year.

In June 2001, the Company's principal bank renewed the Company's revolving line
of credit for a two year period through June 1, 2003 and increased the borrowing
limit to $3.0 million. Borrowings under this line are unsecured and bear
interest at either the prime rate or one and one half per cent over either the
one or three month London Interbank Offered Rates. The Company does not pay any
commitment fee on this line. The Company had no advances against this line of
credit during 2002 and 2001.

Substantially all of the mainline track owned by the Company meets FRA Class 3
standards (permitting freight train speeds of 40 miles per hour), and the
Company intends to continue to maintain this track at this level. The Company
expended $3.1 million, $3.4 million and $3.0 million for track structure and
bridge improvements in 2002, 2001 and 2000, respectively. Deferred grant income
of $305,000 in 2002, $204,000 in 2001 and $679,000 in 2000 financed a portion of
these improvements. Management estimates that approximately $3.0 million of
improvements to the Company's track structure and bridges will be made in 2003,
provided that sufficient funds, including grant proceeds, are available.
Improvements to the Company's track structure are made, for the most part, by
the Company's Maintenance of Way Department personnel.

During 2002 the Company acquired seven used 3,900 horsepower GE B39-8
locomotives for $1.3 million in cash and seven older 2,250 horsepower GE U-23B
locomotives which it owned. The Company intends to acquire two additional used
GE B39-8 locomotives in 2003 for approximately $320,000 and one additional GE
U-23B locomotive.

In 2002, the Company paid dividends in the amount of $5.00 per share,
aggregating $3,000, on its outstanding noncumulative Preferred Stock and $0.16
per share, aggregating $710,000, on its outstanding Common Stock. Continued
payment of such dividends is contingent upon the Company's continuing to have
the necessary financial resources available.

The Company believes that expected cash flows from operating activities will be
sufficient to fund its capital requirements for at least the next 12 months. To
the extent that the Company is successful in consummating acquisitions or
implementing its expansion plans, it may be necessary to finance such
acquisitions or expansion plans through the issuance of additional equity
securities, incurrence of indebtedness or both.

On January 29, 2002, the Company received a "Notice of Potential Liability" from
the United States Environmental Protection Agency ("EPA") regarding an existing
Superfund Site that includes the J.M. Mills Landfill in Cumberland, Rhode
Island. EPA sends these "Notice" letters to potentially responsible parties
("PRPs") under the Comprehensive Environmental Response, Compensation, and
Liability Act ("CERCLA"). EPA identified the Company as a PRP based on its
status as an owner and/or operator because its railroad property traverses the
Superfund Site. Via these Notice letters, EPA makes a demand for payment of past
costs (identified in the letter as $762,000) and future costs associated with
the response actions taken to address the contamination at the Site, and
requests PRPs to indicate their willingness to participate and resolve their
potential liability at the Site. The Company has responded to EPA by stating
that it does not believe it has any liability for this Site, but that it is
interested in cooperating with EPA to address issues concerning liability at the
Site. At this point, two other parties have already committed via a consent
order with EPA to pay for the Remedial Investigation/Feasibility Study ("RI/FS")
phase of the clean-up at the Site, which will take approximately two or more
years to complete. After that, EPA will likely seek to negotiate the cost of the
Remedial Design and implementation of the remedy at the Site with the PRPs it
has identified via these Notice Letters (which presently includes over sixty
parties, and is likely to increase after EPA completes its investigation of the
identity of PRPs). The Company believes that none of its activities caused
contamination at the Site, and will contest this claim by EPA.

In connection with the EPA claim described above, the two parties who have
committed to conduct the RI/FS at the Site filed a complaint in the U.S.
District Court of Rhode Island against the Company, in an action entitled CCL
Custom Manufacturing, Inc. v. Arkwright Incorporated, et al (consolidated with
Unilever Bestfoods v. American Steel & Aluminum Corp. et al), C.A. No. 01-496/L,
on December 18, 2002. The Company is one of about sixty parties named thus far
by Plaintiffs, who seek to recover response costs incurred in investigating and
responding to the releases of hazardous substances at the Site. Plaintiffs
allege that the Company is liable under 42 U.S.C. section 961(a)(3) of CERCLA as
an "arranger" or "generator" of waste that ended up at the Site. The Company has


II-7


entered into a Generator Cooperation Agreement with other defendants to allocate
costs in responding to this suit, and to share technical costs and information
in evaluating the Plaintiffs' claims. The Company does not believe it generated
any waste that ended up at this Site, or that its activities caused
contamination at the Site. The Company will contest this suit.

Land Held for Development

Pursuant to permits issued by the United States Department of the Army Corp of
Engineers ("ACE") and the Rhode Island Coastal Resources Management Council
("CRMC"), the Company created 33 acres of waterfront land in East Providence,
Rhode Island ("South Quay") originally designed to capitalize on the growth of
intermodal transportation utilizing rail, water and highway connections. The
property has good highway access (1/2 mile from I-195) and direct rail access
and is adjacent to a 12 acre site also owned by the Company.

The permits for the property allow for construction of a dock along the west
face of the South Quay. The ACE permit has been extended to December 31, 2003
and the CRMC permit has been extended to May 11, 2009.

In April 1999, the Rhode Island Supreme Court issued an Opinion confirming the
Company's fee simple absolute title to the South Quay. In January 2000, the
Rhode Island Superior Court confirmed the Company's fee simple absolute title to
the 12 acre parcel adjacent to the South Quay. Also in 1999, the Rhode Island
Department of Transportation entered into a contract for engineering services to
undertake roadway improvements to provide direct vehicular access from the
interstate highway system to the South Quay. The project is anticipated to be
complete by 2004.

The City of East Providence has been working to create a large waterfront
redevelopment area with a proposed zoning overlay (which has not yet been
unveiled) that would encourage development of restaurants, shops, marinas,
condominiums and "clean" employment. The Company has been cooperating with the
City of East Providence in these efforts. In addition, the City is moving
forward with the plan, described above, that will provide a direct connection
from I-195 to the South Quay.

In 2001, the Company completed overhead clearances between Worcester and the
South Quay, which enables operation of double stack trains (having a height of
nineteen feet, two inches) and multi-level automobile cars.

Selected Quarterly Financial Data

Historically the Company has experienced lower operating revenues in the first
quarter of the year. The following table sets forth selected financial data for
each quarter of 2002 and 2001. The information for each of these quarters is
unaudited but includes all normal recurring adjustments that the Company
considers necessary for a fair presentation. These results, however, are not
necessarily indicative of results for any future period.


Year Ended December 31, 2002
-------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
(in thousands, except per share amounts)
Operating Revenues ............. $ 4,956 $ 6,284 $ 6,313 $ 5,315
Income (Loss) from Operations .. (809) (653) 681 (49)
Net Income (Loss) .............. (313) (318) 543 110

Basic Income (Loss) Per Common
Share ......................... $ (.07) $ (.07) $ .12 $ .02

Diluted Income (Loss) Per Common
Share ......................... $ (.07) $ (.07) $ .12 $ .02

II-8


Year Ended December 31, 2001
-------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
(in thousands, except per share amounts)
Operating Revenues ............. $ 5,074 $ 5,830 $ 6,071 $ 5,623
Income (Loss) from Operations .. (484) 263 526 48
Net Income (Loss) .............. (191) 301 448 293

Basic Income (Loss) Per Common
Share ......................... $ (.04) $ .07 $ .10 $ .06

Diluted Income (Loss) Per Common
Share ......................... $ (.04) $ .07 $ .10 $ .06


Inflation

In recent years, inflation has not had a significant impact on the Company's
operations.

Seasonality

Historically, the Company's operating revenues are lowest for the first quarter
due to the absence of construction aggregate shipments during this period and to
winter weather conditions.

Recent Accounting Pronouncements

On June 29, 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and
Other Intangible Assets". SFAS No. 142 applies to all acquired intangible assets
whether acquired singly, as part of a group, or in a business combination. SFAS
142 requires, among other things, the cessation of the amortization of goodwill.
The Company adopted this statement on January 1, 2002 and there was no effect on
the Company's financial statements.

In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations". This statement establishes accounting standards for recognition
and measurement of a liability for an asset retirement obligation and the
associated costs. Under this statement, an entity must recognize the fair value
of a liability for an asset retirement obligation in the period in which it is
incurred or in a period in which a reasonable estimate of fair value may be
made. This statement is effective for financial statements issued for fiscal
years beginning after June 15, 2002. The Company does not expect any material
financial statement impact as a result of the adoption of this statement.

In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets". This statement supersedes SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets or for Long-Lived Assets to
be Disposed Of," in its entirety, and APB Opinion No. 30, "Reporting the Results
of Operations - Reporting the Effects of Disposal of a Segment of a Business,
and Extraordinary, Unusual and Infrequently Occurring Events and Transactions,"
only for segments to be disposed of. The provisions of this statement were
adopted January 1, 2002 and there was no effect on the Company's financial
statements.

In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections".
This statement rescinds FASB Statement No. 4, "Reporting Gains and Losses from
Extinguishment of Debt," and an amendment of that Statement, FASB Statement No.
64, "Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements". This
statement also rescinds FASB Statement No. 44, "Accounting for Intangible Assets
of Motor Carriers". This statement amends FASB Statement No. 13, "Accounting for
Leases," to eliminate an inconsistency between the required accounting for
sale-leaseback transactions and the required accounting for certain lease
modifications that have economic effects that are similar to sale-leaseback
transactions. This statement also amends other existing authoritative
pronouncements to make various technical corrections, clarify meanings, or
describe their applicability under changed conditions. This statement is
effective for financial statements issued on or after May 15, 2002. The Company
does not expect any material financial statement impact as a result of the
adoption of this statement.

In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities". This statement addresses financial accounting
and reporting for costs associated with exit or disposal activities and
nullifies Emerging Issues Task Force Issue No. 94-3, "Liability Recognition for


II-9


Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)". This statement is
effective for exit or disposal activities that are initiated after December 31,
2002. The Company does not expect any material financial statement impact as a
result of the adoption of this statement.

In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure-an Amendment of FASB Statement No. 123".
SFAS No. 148 provides alternative methods of transition for a voluntary change
to the fair value based method of accounting for stock-based employee
compensation. The Company does not currently intend to adopt the fair value
based method of measuring compensation associated with stock awards and grants.
As a consequence of continuing to utilize the intrinsic value method of
measuring such compensation, the Company will be required in 2003 to provide
additional disclosures in its quarterly financial statements which will reflect
the impact on net income and earnings per share on a pro forma basis as if it
had applied the fair value method to stock-based employee compensation.


Item 7A. Quantitative and Qualitative Disclosure About Market Risk
- ------------------------------------------------------------------

Cash and Cash Equivalents

As of December 31, 2002, the Company is exposed to market risks which primarily
include changes in U.S. interest rates.

The Company invests cash balances in excess of operating requirements in
short-term securities, generally with maturities of 90 days or less. In
addition, the Company's revolving line of credit agreement provides for
borrowings which bear interest at variable rates based on either prime rate or
one and one half percent over either the one or three month London Interbank
Offered Rates. The Company had no borrowings outstanding pursuant to the
revolving line of credit agreement at December 31, 2002. The Company believes
that the effect, if any, of reasonably possible near-term changes in interest
rates on the Company's financial position, results of operations, and cash flows
would not be material.


II-10


Item 8. Financial Statements and Supplementary Data
- ---------------------------------------------------

PROVIDENCE AND WORCESTER RAILROAD COMPANY


INDEX TO FINANCIAL STATEMENTS



Page
----
Independent Auditors' Report......................... II-12

Balance Sheets as of December 31, 2002 and 2001...... II-13

Statements of Income for the Years Ended December 31,
2002, 2001 and 2000................................. II-14

Statements of Shareholders' Equity for the Years Ended
December 31, 2002, 2001 and 2000.................... II-15

Statements of Cash Flows for the Years Ended
December 31, 2002, 2001 and 2000.................... II-16

Notes to Financial Statements........................ II-17


II-11


INDEPENDENT AUDITORS' REPORT


To the Board of Directors and
Shareholders of Providence and
Worcester Railroad Company
Worcester, Massachusetts


We have audited the accompanying balance sheets of Providence and
Worcester Railroad Company as of December 31, 2002 and 2001, and
the related statements of income, shareholders' equity, and cash
flows for each of the three years in the period ended December 31,
2002. Our audits also included the financial statement schedule
listed in the Index at Item 14(a)(2). These financial statements
and financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion
on the financial statements and financial statement schedule based
on our audits.

We conducted our audits in accordance with auditing standards
generally accepted in the United States of America. 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, such financial statements present fairly, in all
material respects, the financial position of Providence and
Worcester Railroad Company as of December 31, 2002 and 2001, and
the results of its operations and its cash flows for each of the
three years in the period ended December 31, 2002, in conformity
with accounting principles generally accepted in the United States
of America. Also, in our opinion, such financial statement
schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material
respects the information set forth therein.


/s/ Deloitte & Touche LLP

Boston, Massachusetts
March 7, 2003

II-12


PROVIDENCE AND WORCESTER RAILROAD COMPANY
BALANCE SHEETS
(Dollars in Thousands Except Per Share Amounts)

December 31,
2002 2001
------- -------
ASSETS
Current Assets:
Cash and equivalents .................................. $ 2,888 $ 3,804
Accounts receivable, net of allowance for
doubtful accounts of $125 in 2002 and 2001 ........... 3,304 3,809
Materials and supplies ................................ 1,634 1,434
Prepaid expenses and other ............................ 536 493
Deferred income taxes ................................. 126 73
------- -------
Total Current Assets ................................. 8,488 9,613

Property and Equipment, net ............................ 70,057 67,647
Land Held for Development .............................. 11,955 11,901
------- -------
Total Assets ........................................... $90,500 $89,161
======= =======

LIABILITIES AND SHAREHOLDERS' EQUITY

Current Liabilities:
Accounts payable ...................................... $ 3,017 $ 1,745
Accrued expenses ...................................... 964 781
------- -------
Total Current Liabilities ............................ 3,981 2,526
------- -------
Profit-Sharing Plan Contribution ....................... -- 151

------- -------
Deferred Grant Income .................................. 7,980 7,891
------- -------
Deferred Income Taxes .................................. 9,898 9,520
------- -------

Commitments and Contingencies (Note 8)

Shareholders' Equity:
Preferred stock, 10% noncumulative, $50 par
value; authorized, issued and outstanding 645
shares in 2002 and 2001 .............................. 32 32
Common stock, $.50 par value; authorized
15,000,000 shares; issued and outstanding
4,443,380 shares in 2002 and 4,411,238 shares
in 2001 .............................................. 2,222 2,206
Additional paid-in capital ............................ 29,619 29,376
Retained earnings ..................................... 36,768 37,459
------- -------
Total Shareholders' Equity ........................... 68,641 69,073
------- -------
Total Liabilities and Shareholders' Equity ............. $90,500 $89,161
======= =======

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

II-13


PROVIDENCE AND WORCESTER RAILROAD COMPANY
STATEMENTS OF INCOME
(Dollars in Thousands Except Per Share Amounts)

Years Ended December 31,
2002 2001 2000
-------- -------- --------
Revenues:
Operating Revenues - Freight and Non-
Freight .................................... $22,868 $22,598 $23,470
Other Income ................................ 877 1,003 2,049
-------- -------- --------
Total Revenues ............................ 23,745 23,601 25,519
-------- -------- --------

Expenses:
Operating:
Maintenance of way and structures .......... 3,279 3,124 3,324
Maintenance of equipment ................... 2,166 2,004 2,175
Transportation ............................. 6,532 6,326 6,376
General and administrative ................. 3,925 4,036 3,541
Depreciation ............................... 2,734 2,681 2,587
Taxes, other than income taxes ............. 2,253 2,391 2,441
Car hire, net .............................. 874 983 952
Employee retirement plans .................. 220 370 574
Track usage fees ........................... 1,715 330 331
-------- -------- --------
Total Operating Expenses .................. 23,698 22,245 22,301
-------- -------- --------

Income before Income Taxes ................... 47 1,356 3,218

Provision for Income Taxes ................... 25 505 1,200
-------- -------- --------

Net Income ................................... 22 851 2,018

Preferred Stock Dividends .................... 3 3 3
-------- -------- --------

Net Income Available to Common Shareholders .. $ 19 $ 848 $ 2,015
======= ======= =======

Basic Income Per Common Share ................ $ -- $ .19 $ .47
======= ======= =======

Diluted Income Per Common Share .............. $ -- $ .19 $ .46
======= ======= =======

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

II-14


PROVIDENCE AND WORCESTER RAILROAD COMPANY
STATEMENTS OF SHAREHOLDERS' EQUITY
(Dollars in Thousands Except Per Share Amounts)

Years Ended December 31, 2002, 2001 and 2000
---------------------------------------------
Total
Additional Share-
Preferred Common Paid-in Retained holders'
Stock Stock Capital Earnings Equity
------- ------- ------- ------- -------
Balance, January 1, 2000 .... $ 32 $ 2,141 $28,519 $35,991 $66,683

Issuance of 56,418 common
shares to fund the Company's
1999 profit sharing plan
contribution ............... 28 363 391
Issuance of 14,117 common
shares for stock options
exercised, employee stock
purchases, conversion of 2
preferred shares and other . 7 80 87
Dividends paid:
Preferred stock, $5.00 per
share ..................... (3) (3)
Common stock, $.16 per share (693) (693)
Net income for the year ..... 2,018 2,018
------- ------- ------- ------- -------
Balance, December 31, 2000 .. 32 2,176 28,962 37,313 68,483

Issuance of 45,140 common
shares to fund the Company's
2000 profit sharing plan
contribution ............... 23 334 357
Issuance of 14,283 common
shares for stock options
exercised, employee stock
purchases, and other ....... 7 80 87
Dividends paid:
Preferred stock, $5.00 per
share ..................... (3) (3)
Common stock, $.16 per share (702) (702)
Net income for the year ..... 851 851
------- ------- ------- ------- -------
Balance, December 31, 2001 .. 32 2,206 29,376 37,459 69,073

Issuance of 16,205 common
shares to fund the Company's
2001 profit sharing plan
contribution ............... 8 143 151
Issuance of 15,937 common
shares for stock options
exercised, employee stock
purchases, and other ....... 8 100 108
Dividends paid:
Preferred stock, $5.00 per
share ..................... (3) (3)
Common stock, $.16 per share (710) (710)
Net income for the year ..... 22 22
------- ------- ------- ------- -------
Balance, December 31, 2002 .. $ 32 $ 2,222 $29,619 $36,768 $68,641
======= ======= ======= ======= =======
The accompanying notes are an integral part of the financial statements.

II-15


PROVIDENCE AND WORCESTER RAILROAD COMPANY
STATEMENTS OF CASH FLOWS
(Dollars in Thousands)

Years Ended December 31,
2002 2001 2000
-------- -------- --------
Cash Flows from Operating
Activities:
Net income ................................ $ 22 $ 851 $ 2,018
Adjustments to reconcile net income to net
cash flows from operating activities:
Depreciation and amortization ........... 2,734 2,728 2,681
Amortization of deferred grant income ... (216) (211) (201)
Profit-sharing plan contribution to be
funded with common stock .............. -- 151 348
Gains from sale, condemnation and
disposal of property, equipment and
easements, net ........................ (337) (359) (1,244)
Deferred income taxes ................... 325 405 230
Other, net .............................. 38 69 55
Increase (decrease) in cash and
equivalents from:
Accounts receivable ................... 506 (642) (73)
Materials and supplies ................ (200) 298 375
Prepaid expenses and other ............ (43) 219 (531)
Accounts payable and accrued expenses . 1,511 (489) 208
-------- -------- --------
Net cash flows from operating activities .. 4,340 3,020 3,866
-------- -------- --------
Cash Flows from Investing Activities:
Purchase of property and equipment ........ (5,378) (5,019) (4,255)
Proceeds from sale and condemnation of
property, equipment and easements ........ 444 498 1,288
Proceeds from deferred grant income ....... 289 368 647
-------- -------- --------
Net cash flows used in investing activities (4,645) (4,153) (2,320)
-------- -------- --------
Cash Flows from Financing Activities:
Dividends paid ............................ (713) (705) (696)
Issuance of common shares for stock options
exercised and employee stock purchases ... 102 83 83
-------- -------- --------
Net cash flows used in financing activities (611) (622) (613)
-------- -------- --------
Increase (Decrease) in Cash and Equivalents (916) 933
Cash and Equivalents, Beginning of Year .... 3,804 5,559 4,626
-------- -------- --------
Cash and Equivalents, End of Year .......... $ 2,888 $ 3,804 $ 5,559
======== ======== ========

Supplemental Disclosures:
Cash paid during year for income taxes .... $ -- $ 11 $ 1,464
======== ======== ========

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

II-16


PROVIDENCE AND WORCESTER RAILROAD COMPANY
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
(Dollars in Thousands Except Per Share Amounts)

1. Description of Business and Summary of Significant Accounting Policies

Description of Business
-----------------------

Providence and Worcester Railroad Company (the "Company") is an interstate
freight carrier conducting railroad operations in Massachusetts, Rhode
Island, Connecticut and New York. Through its connecting carriers, it
services customers located throughout North America.

One customer accounted for 15.4%, 14.4% and 12.4% of the Company's
operating revenues in 2002, 2001 and 2000, respectively.

Cash and Equivalents
--------------------

The Company considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents for purposes of
classification in the balance sheets and statements of cash flows. Cash
equivalents are stated at cost, which approximates fair market value.

Materials and Supplies
----------------------

Materials and supplies, which consist of items for the improvement and
maintenance of track structure and equipment, are stated at cost,
determined on a first-in, first-out basis, and are charged to expense or
added to the cost of property and equipment when used.

Property and Equipment
----------------------

Property and equipment, including land held for development, is stated at
historical cost (including self-construction costs). Acquired railroad
property is recorded at the purchased cost. Major renewals or betterments
are capitalized while routine maintenance and repairs, which do not improve
or extend asset lives, are charged to expense when incurred. Gains or
losses on sales or other dispositions are credited or charged to income.
Depreciation is provided using the straight-line method over the estimated
useful lives of the assets as follows:

Track structure 20 to 67 years
Buildings and other structures 33 to 45 years
Equipment 4 to 25 years

The Company continually evaluates long-lived assets for impairment whenever
events or changes in circumstances indicate that the carrying amount of an
asset may not be recoverable. When factors indicate that assets should be
evaluated for possible impairment, the Company uses an estimate of the
related undiscounted future cash flows over the remaining lives of the
assets in measuring whether the carrying amounts of the assets are
recoverable.

Deferred Grant Income
---------------------

The Company has availed itself of various federal and state programs
administered by the states of Connecticut, Massachusetts and Rhode Island
for reimbursement of expenditures for capital improvements. In order to
receive reimbursement, the Company must submit requests for the projects,
including cost estimates. The Company receives from 70% to 100% of the
costs of such projects, which have included bridges, track structure and
public improvements. To the extent that such grant proceeds are used for
capital improvements to bridges and track structure, they are recorded as
deferred grant income and amortized into operating revenues on a
straight-line basis over the estimated useful lives of the related
improvements ($216 in 2002, $211 in 2001 and $201 in 2000).

Grant proceeds utilized to finance public improvements, such as grade
crossings and signals, are recorded as a direct offset to the related
expense.

II-17


Although the Company cannot predict the extent and length of future grant
programs, it intends to continue filing requests for such grants when they
are available.

Revenue Recognition
-------------------

Freight revenues are recorded at the time delivery is made to the customer
or the connecting carrier.

Gain or loss from sale, condemnation and disposal of property and equipment
and easements is recorded at the time the transaction is consummated and
collectibility is assured.

Income Taxes
------------

Deferred income taxes are recorded based on the differences between the
financial statement and tax basis of assets and liabilities. Such deferred
income taxes are also adjusted to reflect changes in the U.S. tax laws when
enacted and changes in blended state tax rates.

Income per Common Share
-----------------------

Basic income per common share is computed using the weighted average number
of common shares outstanding during each year. Diluted income per common
share reflects the effect of the Company's outstanding convertible
preferred stock, options and warrants (using the treasury stock method),
except where such items would be antidilutive.

A reconciliation of weighted average shares used for the basic computation
and that used for the diluted computation is as follows:


Years Ended December 31,
2002 2001 2000
--------- --------- ---------
Weighted average shares for basic ...... 4,428,522 4,389,916 4,323,237
Dilutive effect of convertible preferred
stock, options and warrants ........... 68,692 67,919 67,028
--------- --------- ---------
Weighted average shares for diluted .... 4,497,214 4,457,835 4,390,265
========= ========= =========

Options and warrants to purchase 188,103, 195,503 and 204,563 shares of
common stock were outstanding during 2002, 2001 and 2000, respectively, but
were not included in the computation of diluted earnings per common share
because their effect would be antidilutive.

Employee Stock Option Plan
--------------------------

The Company accounts for stock-based awards to employees using the
intrinsic value method.

Use of Estimates
----------------

The preparation of the Company's financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results may differ from those
estimates. The Company's principal estimates include the allowance for
doubtful accounts, useful lives of properties, accrued liabilities
including health insurance claims and legal and other contingencies, and
income taxes.

II-18


Stock Based Compensation
------------------------

The Company accounts for stock-based compensation awards to employees using
the intrinsic value method in accordance with Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees". Had the Company
used the fair value method to value compensation, as set forth in Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation", the Company's net income and net income per share would have
been reported as follows:

Years Ended December 31,
2002 2001 2000
------- ------- -------
Net income (loss) available to
common shareholders:
As reported .......................... $ 19 $ 848 $ 2,015
Less impact of stock option expense... 30 32 30
------- ------- -------
Pro forma ............................ $ (11) $ 816 $ 1,985
======= ======= =======
Basic income (loss) per share:
As reported .......................... $ -- $ .19 $ .47
Less impact of stock option expense... -- -- .01
------- ------- -------
Pro forma ............................ $ -- $ .19 $ .46
======= ======= =======
Diluted income (loss) per share:
As reported .......................... $ -- $ .19 $ .46
Less impact of stock option expense... -- .01 .01
------- ------- -------
Pro forma ............................ $ -- $ .18 $ .45
======= ======= =======

The fair value of options on their grant date is measured using the
Black/Scholes option pricing model. The estimated weighted average fair
value of options granted during 2002, 2001 and 2000 were $4.35, $3.62 and
$4.20 per option, respectively. Key assumptions used to apply this pricing
model are as follows:

2002 2001 2000
--------- --------- ---------
Average risk-free interest rate 4.97% 4.97% 6.30%
Expected life of option grants 7.0 years 7.0 years 7.0 years
Expected volatility of underlying stock 76% 58% 55%
Expected dividend payment rate, as
a percentage of the share price
on the date of grant 2.37% 2.25% 2.00%

The option pricing model used was designed to value readily tradable stock
options with relatively short lives and no vesting restrictions. In
addition, option valuation models require the input of highly subjective
assumptions including the expected price volatility. Because the options
granted to employees are not tradable and have contractual lives of ten
years and changes in the subjective input assumptions can materially affect
the fair value estimate, in management's opinion, the models do not
necessarily provide a reliable measure of fair value of the options issued
under the Company's stock plan.

Comprehensive Income
--------------------

Comprehensive Income equals net income for 2002, 2001 and 2000.

Segment Reporting
-----------------

The Company organizes itself as one segment reporting to the chief
operating decision maker. Products and services consist primarily of
interstate freight rail services. These include the movement of freight in
both conventional freight cars and in intermodal containers on flat cars
over the Company's rail lines, as well as non-freight transportation
services such as switching, weighing and special trains and other services


II-19


rendered to freight customers and other outside parties by the Company's
Maintenance of Way, Communications & Signals and Maintenance of Equipment
Departments.

Recently Issued Financial Accounting Standards
----------------------------------------------

On June 29, 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and
Other Intangible Assets". SFAS No. 142 applies to all acquired intangible
assets whether acquired singly, as part of a group, or in a business
combination. SFAS 142 requires, among other things, the cessation of the
amortization of goodwill. The Company adopted this statement on January 1,
2002 and there was no effect on the Company's financial statements.

In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations". This statement establishes accounting standards
for recognition and measurement of a liability for an asset retirement
obligation and the associated costs. Under this statement, an entity must
recognize the fair value of a liability for an asset retirement obligation
in the period in which it is incurred or in a period in which a reasonable
estimate of fair value may be made. This statement is effective for
financial statements issued for fiscal years beginning after June 15, 2002.
The Company does not expect any material financial statement impact as a
result of the adoption of this statement.

In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". This statement supersedes
SFAS No. 121, "Accounting for the Impairment of Long- Lived Assets or for
Long-Lived Assets to be Disposed Of," in its entirety, and APB Opinion No.
30, "Reporting the Results of Operations - Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions," only for segments to be
disposed of. The provisions of this statement were adopted January 1, 2002
and there was no effect on the Company's financial statements.

In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical
Corrections". This statement rescinds FASB Statement No. 4, "Reporting
Gains and Losses from Extinguishment of Debt," and an amendment of that
Statement, FASB Statement No. 64, "Extinguishments of Debt Made to Satisfy
Sinking-Fund Requirements". This statement also rescinds FASB Statement No.
44, "Accounting for Intangible Assets of Motor Carriers". This statement
amends FASB Statement No. 13, "Accounting for Leases," to eliminate an
inconsistency between the required accounting for sale-leaseback
transactions and the required accounting for certain lease modifications
that have economic effects that are similar to sale-leaseback transactions.
This statement also amends other existing authoritative pronouncements to
make various technical corrections, clarify meanings, or describe their
applicability under changed conditions. This statement is effective for
financial statements issued on or after May 15, 2002. The Company does not
expect any material financial statement impact as a result of the adoption
of this statement.

In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities". This statement addresses
financial accounting and reporting for costs associated with exit or
disposal activities and nullifies Emerging Issues Task Force Issue No.
94-3, "Liability Recognition for Certain Employee Termination Benefits and
Other Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)". This statement is effective for exit or disposal
activities that are initiated after December 31, 2002. The Company does not
expect any material financial statement impact as a result of the adoption
of this statement.

In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure-an Amendment of FASB Statement No.
123". SFAS No. 148 provides alternative methods of transition for a
voluntary change to the fair value based method of accounting for
stock-based employee compensation. The Company does not currently intend to
adopt the fair value based method of measuring compensation associated with
stock awards and grants. As a consequence of continuing to utilize the
intrinsic value method of measuring such compensation, the Company will be
required in 2003 to provide additional disclosures in its quarterly


II-20


financial statements which will reflect the impact on net income and
earnings per share on a pro forma basis as if it had applied the fair value
method to stock-based employee compensation.

Reclassifications
-----------------

Certain prior year amounts have been reclassified to be consistent with
current year presentation.

2. Property and Equipment

Property and equipment consists of the following:
December 31,
2002 2001
------- -------
Land and improvements .................... $10,414 $10,303
Track structure .......................... 62,473 59,499
Buildings and other structures ........... 7,888 7,686
Equipment ................................ 24,962 23,949
------- -------
105,737 101,437
Less accumulated depreciation ............ 35,680 33,790
------- -------
Total property and equipment, net ........ $70,057 $67,647
======= =======


3. Land Held for Development

Pursuant to permits issued by the United States Department of the Army Corp
of Engineers ("ACE") and the Rhode Island Coastal Resources Management
Council ("CRMC"), the Company created 33 acres of waterfront land in East
Providence, Rhode Island ("South Quay") originally designed to capitalize
on the growth of intermodal transportation utilizing rail, water and
highway connections. The property has good highway access (1/2 mile from
I-195) and direct rail access and is adjacent to a 12 acre site also owned
by the Company.

The permits for the property allow for construction of a dock along the
west face of the South Quay. The ACE permit has been extended to December
31, 2003 and the CRMC permit has been extended to May 11, 2009.

In April 1999, the Rhode Island Supreme Court issued an Opinion confirming
the Company's fee simple absolute title to the South Quay. In January 2000,
the Rhode Island Superior Court confirmed the Company's fee simple absolute
title to the 12 acre parcel adjacent to the South Quay. Also in 1999, the
Rhode Island Department of Transportation entered into a contract for
engineering services to undertake roadway improvements to provide direct
vehicular access from the interstate highway system to the South Quay. The
project is anticipated to be complete by 2004.

The City of East Providence has been working to create a large waterfront
redevelopment area with a proposed zoning overlay (which has not yet been
unveiled) that would encourage development of restaurants, shops, marinas,
condominiums and "clean" employment. The Company has been cooperating with
the City of East Providence in these efforts. In addition, the City is
moving forward with the plan, described above, that will provide a direct
connection from I-195 to the South Quay.

In 2001, the Company completed overhead clearances between Worcester and
the South Quay, which enables operation of double stack trains (having a
height of nineteen feet, two inches) and multi-level automobile cars.

II-21


4. Revolving Line of Credit

The Company has a revolving line of credit with its principal bank in the
amount of $3,000 expiring June 1, 2003. Borrowings under this line of
credit are unsecured, due on demand and bear interest at either the bank's
prime rate or one and one half percent over either the one or three month
London Interbank Offered Rates. The Company pays no commitment fee on this
line. There were no loans outstanding under the line at any time during
2002 or 2001.

5. Other Income

Other income consists of the following: Years Ended December 31,
2002 2001 2000
------ ------ ------
Gains from sale, condemnation and
disposal of property, equipment and
easements, net ........................... $ 337 $ 359 $1,244
Rentals and license fees under
various operating leases ................. 490 448 489
Interest .................................. 50 196 316
------ ------ ------
$ 877 $1,003 $2,049
====== ====== ======

Gains from sale, condemnation and disposal of property, equipment and
easements for 2000 includes $1,132 received from the sale of permanent
easements.

6. Amtrak Arbitration

The Company has been party to an arbitration proceeding with the National
Railroad Passenger Corporation ("Amtrak") concerning Amtrak's claim for
rate increases with respect to the Company's freight operations over a
portion of Amtrak's Northeast Corridor in the states of Rhode Island and
Connecticut. The arbitrator issued a decision in June 2002 in which he
ordered the Company to pay Amtrak additional track usage fees and siding
maintenance costs retroactive to July 9, 1999. The statement of income for
2002 includes $935 of track usage fees and $165 of siding maintenance costs
which relate to years prior to 2002. The liability to Amtrak as of December
31, 2002, in the amount of $1,250, is included in accounts payable.

7. Income Taxes

The provision for income taxes consists of the following:

Years Ended December 31,
2002 2001 2000
------ ------ ------
Current:
Federal ........................... $ (300) $ 90 $ 900
State ............................. -- 10 70
------ ------ ------
(300) 100 970
Deferred, Federal and State ........ 325 405 230
------ ------ ------
$ 25 $ 505 $1,200
====== ====== ======

II-22


The following summarizes the estimated tax effect of temporary differences
that are included in the net deferred income tax provision:

Years Ended December 31,
2002 2001 2000
----- ----- -----
Depreciation ........................... $ 382 $ 326 $ 207
Deferred grant income .................. (32) 2 (272)
Gains from sale, condemnation and
disposal of property and equipment .... (15) (20) 346
Accrued casualty and other claims ...... (56) 56 (71)
Other .................................. 46 41 20
----- ----- -----
$ 325 $ 405 $ 230
===== ===== =====

Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amount of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. The tax
effects of significant items comprising the Company's net deferred income
tax liability as of December 31, 2002 and 2001 are as follows:

December 31,
2002 2001
------- -------
Deferred income tax liabilities:
Differences between book and tax basis of
property and equipment ....................... $12,723 $12,356
------- -------
Other ......................................... 13 18
------- -------
12,736 12,374
------- -------
Deferred income tax assets:
Rental income received in advance ............. 7 17
Deferred grant income ......................... 2,833 2,801
Accrued casualty and other claims ............. 80 24
Allowance for doubtful accounts and other ..... 44 85
------- -------
2,964 2,927
------- -------

Net deferred income tax liability .............. $ 9,772 $ 9,447
======= =======

A reconciliation of the U.S. federal statutory rate to the effective tax
rate is as follows:

Years Ended December 31,
2002 2001 2000
---- ---- ----
Federal statutory rate ....................... 34% 34% 34%
Depreciation of properties acquired from
bankrupt railroads having a tax basis
in excess of cost ........................... (48) (3) (2)
Non deductible expenses, etc ................. 67 5 4
State income tax, net of federal income
tax benefit ................................. -- 1 1
---- ---- ----
Effective tax rate ........................... 53% 37% 37%
==== ==== ====

II-23


8. Commitments and Contingencies

The Company is a defendant in certain lawsuits relating to casualty losses,
many of which are covered by insurance subject to a deductible. The Company
believes that adequate provision has been made in the financial statements
for any expected liabilities which may result from disposition of such
lawsuits.

On January 29, 2002, the Company received a "Notice of Potential Liability"
from the United States Environmental Protection Agency ("EPA") regarding an
existing Superfund Site that includes the J.M. Mills Landfill in
Cumberland, Rhode Island. EPA sends these "Notice" letters to potentially
responsible parties ("PRPs") under the Comprehensive Environmental
Response, Compensation, and Liability Act ("CERCLA"). EPA identified the
Company as a PRP based on its status as an owner and/or operator because
its railroad property traverses the Superfund Site. Via these Notice
letters, EPA makes a demand for payment of past costs (identified in the
letter as $762) and future costs associated with the response actions taken
to address the contamination at the Site, and requests PRPs to indicate
their willingness to participate and resolve their potential liability at
the Site. The Company has responded to EPA by stating that it does not
believe it has any liability for this Site, but that it is interested in
cooperating with EPA to address issues concerning liability at the Site. At
this point, two other parties have already committed via a consent order
with EPA to pay for the Remedial Investigation/Feasibility Study ("RI/FS")
phase of the clean-up at the Site, which will take approximately two or
more years to complete. After that, EPA will likely seek to negotiate the
cost of the Remedial Design and implementation of the remedy at the Site
with the PRPs it has identified via these Notice Letters (which presently
includes over sixty parties, and is likely to increase after EPA completes
its investigation of the identity of PRPs). The Company believes that none
of its activities caused contamination at the Site, and will contest this
claim by EPA.

In connection with the EPA claim described above, the two parties who have
committed to conduct the RI/FS at the Site filed a complaint in the U.S.
District Court of Rhode Island against the Company, in an action entitled
CCL Custom Manufacturing, Inc. v. Arkwright Incorporated, et al
(consolidated with Unilever Bestfoods v. American Steel & Aluminum Corp. et
al), C.A. No. 01- 496/L, on December 18, 2002. The Company is one of about
sixty parties named thus far by Plaintiffs, who seek to recover response
costs incurred in investigating and responding to the releases of hazardous
substances at the Site. Plaintiffs allege that the Company is liable under
42 U.S.C. section 961(a)(3) of CERCLA as an "arranger" or "generator" of
waste that ended up at the Site. The Company has entered into a Generator
Cooperation Agreement with other defendants to allocate costs in responding
to this suit, and to share technical costs and information in evaluating
the Plaintiffs' claims. The Company does not believe it generated any waste
that ended up at this Site, or that its activities caused contamination at
the Site. The Company will contest this suit.

9. Employee Benefit Plans

Stock Option Plan
-----------------

The Company has a non-qualified stock option plan ("SOP") covering all
management personnel having a minimum of one year of service with the
Company and who are not holders of a majority of either its outstanding
common stock or its outstanding preferred stock. In addition, the Company's
outside directors are eligible to participate in the SOP. The SOP covers
50,000 common shares or 5% of the shares of common stock outstanding,
whichever is greater (222,169 shares at December 31, 2002). Options granted
under the SOP, which are fully vested when granted, are exercisable over a
ten year period at the market price for the Company's common stock as of
the date the options are granted.


II-24


Changes in stock options outstanding are as follows:

Weighted Average
----------------
Number Exercise Fair
of shares Price Value
------ ------ ------
Outstanding at January 1, 2000 ..... 37,569 $ 9.92

Granted ............................ 8,060 8.00 $4.20
Exercised .......................... (614) 5.37
Expired ............................ (3,411) 8.90
------ ------ ------
Outstanding and exercisable at
December 31, 2000.................. 41,604 9.70

Granted ............................ 8,130 7.13 $3.62
Exercised .......................... (1,220) 5.72
Expired ............................ (1,763) 5.99
------ ------ ------
Outstanding and exercisable at
December 31, 2001.................. 46,751 9.50

Granted ............................ 8,200 6.75 $4.35
Exercised .......................... (3,431) 7.17
Expired ............................ (2,761) 6.88
------ ------ ------
Outstanding and exercisable at
December 31, 2002.................. 48,759 $ 9.35
====== ====== ======

The following table sets forth information regarding options at December
31, 2002:

Weighted Average
Range of Number ----------------
Number Exercise Currently Exercise Remaining
of Options Prices Exercisable Price Life (in years)
--------- ---------- ---------- ---------- -----------
1,779 $3.25 - 4.88 1,779 $4.38 1
33,877 5.50 - 8.25 33,877 7.30 7
6,703 8.50 - 12.75 6,703 12.38 7
6,400 18.38 6,400 18.38 6

Defined Contribution Retirement Plans
-------------------------------------

The Company has a deferred profit-sharing plan ("Plan") which covers all of
its employees who are members of its collective bargaining units.
Contributions to the Plan are required in years in which the Company has
income from "railroad operations" as defined in the Plan. Contributions are
to be equal to at least 10% but not more than 15% of the greater of income
before income taxes or income from railroad operations subject to a maximum
contribution of $3.5 per eligible employee. Contributions to the Plan may
be made in cash or in shares of the Company's common stock valued at the
closing market price on the day contributed. Contributions accrued under
this Plan amounted to $151 in 2001 and $357 in 2000. No contributions were
accrued in 2002 since the Company had negative income from operations. The
Company made its 2001 and 2000 contributions in newly issued shares of its
common stock.

The Company also has a Simplified Employee Pension Plan ("SEPP") which
covers substantially all employees who are not members of one of its
collective bargaining units. Contributions to the SEPP are discretionary
and are determined annually as a percentage of each covered employee's
compensation up to the maximum amount allowable by law. Contributions
accrued under the SEPP amounted to $203 in 2002, $201 in 2001 and $208 in
2000 which, in each year, was less than the maximum amount allowable by
law.

II-25


Employee Stock Purchase Plan
----------------------------

The Company has an Employee Stock Purchase Plan ("ESPP") under which
eligible employees may purchase registered shares of common stock at 85% of
the market price for such shares. An aggregate of 200,000 shares of common
stock are authorized for issuance under the ESPP which was established in
1997. Any shares purchased under the ESPP are subject to a two year
lock-up. ESPP purchases amounted to 11,831 shares in 2002, 12,413 shares in
2001 and 12,828 shares in 2000.

10. Preferred Stock

The Company's $50 par value preferred stock is convertible into 100 shares
of common stock at the option of the shareholder. The noncumulative stock
dividend is fixed by the Company's Charter at an annual rate of $5.00 per
share, out of funds legally available for the payment of dividends.

The holders of preferred stock are entitled to one vote for each share in
the election of two-thirds of the Board of Directors. The holders of
preferred stock and holders of common stock are entitled to one vote per
share, voting as separate classes, upon matters voted on by shareholders.


II-26



Item 9. Disagreements on Accounting and Financial Disclosure
- ------------------------------------------------------------
None.

II-27


PART III

Item 10. Directors and Executive Officers of the Registrant
- -----------------------------------------------------------

The Company's Charter and Bylaws provide that the members of the Board of
Directors (the "Board") shall be elected separately by the Company's two classes
of stock. Holders of Common Stock elect one-third of the Board of Directors and
the holders of Preferred Stock elect the remainder of the Board. Directors are
elected to serve until the next annual meeting and until their successors have
been duly elected by the shareholders. There are currently three directors
elected by the holders of the Common Stock and six directors elected by the
holders of the Preferred Stock. Officers are elected by and serve at the
discretion of the Board of Directors.


Directors and Executive Officers

The current directors and executive officers, their ages and their
positions held with the Company are as follows:

Name Age Position
---- --- --------
Robert H. Eder(a) ............... 70 Chairman of the Board and Chief
Executive Officer
Orville R. Harrold(b) ........... 70 President, Chief Operating
Officer and Director
Robert J. Easton ................ 59 Treasurer
P. Scott Conti .................. 45 Vice President Engineering
Mary A. Tanona .................. 45 Secretary and General Counsel
Richard W. Anderson (a) ......... 55 Director
Frank W. Barrett(b) ............. 63 Director
John H. Cronin(b) ............... 69 Director
J. Joseph Garrahy(b) ............ 72 Director
John J. Healy(b) ................ 67 Director
Charles M. McCollam, Jr.(b) ..... 70 Director
Merrill W. Sherman(a) ........... 54 Director
- --------------
(a) Elected by holders of Common Stock.
(b) Elected by holders of Preferred Stock.

The following is a brief summary of the background of each director and
executive officer.


Directors and Executive Officers

Robert H. Eder, Chairman of the Board and Chief Executive Officer. Mr. Eder
became President of the Company in 1966 and led the Company through its efforts
to become an independent operating company. He has been Chairman of the Board
since 1980. He is a graduate of Harvard College and Harvard Law School. He (with
his wife) is also majority owner and Chairman of an affiliated company, Capital
Properties, Inc., a real estate holding company of which he is also a Director.
Mr. Eder is admitted to practice law in Rhode Island and New York.

Orville R. Harrold, President, Chief Operating Officer and Director. Mr.
Harrold has been with the Company since the commencement of independent
operations in February 1973. Over the past 29 years, he has held the positions
of Chief Engineer and General Manager, becoming President in 1980. Mr. Harrold
has a bachelors degree in mechanical engineering from the Pratt Institute,
Brooklyn, New York and has been employed in the railroad industry in various
capacities since 1960.

Robert J. Easton, Treasurer. Mr. Easton has been with the Company since
1986, initially as Controller. He was promoted to the position of Treasurer and
Controller in 1988. Prior to joining the Company, Mr. Easton had 21 years of
experience in public accounting. He is a Certified Public Accountant with a
bachelors degree in accounting from the University of Rochester.

P. Scott Conti, Vice President Engineering. Mr. Conti has been with the
Company since 1988 and is responsible for all activities of the Maintenance of
Way and Engineering Department which maintains the Company's tracks, bridges,


III-1


buildings and grade crossings, overseeing all construction activity on or
affecting railroad property. From June 1988 to December 1997, Mr. Conti served
as Engineering Manager. In January 1998 he was promoted to Chief Engineer and in
March 1999 he was promoted to Vice President. Prior to Joining the Company, Mr.
Conti was employed by Perini Corporation.

Mary A. Tanona, Secretary and General Counsel. Ms. Tanona joined the
Company in 1999 as Assistant General Counsel and Assistant Secretary. In 2000
she was promoted to General Counsel. Prior to joining the Company, Ms Tanona was
an associate with Dewey Ballantine in New York. Most recently, she served as
associate general counsel at Arbor National Mortgage. She is a 1987 graduate of
Fordham University School of Law and holds a bachelor of arts degree from Smith
College. Ms. Tanona is admitted to practice law in Massachusetts, Rhode Island
and New York.

Richard W. Anderson, Director. Mr. Anderson has been a Director of the
Company since 1998. He is Senior Vice President of Massachusetts Capital
Resource Company ("MCRC"), a private investment firm funded by major
Massachusetts based life insurance companies providing high risk growth capital
to Massachusetts businesses. He began working at MCRC in 1981. Mr. Anderson is
also a director of Valpey Fisher Corporation, a company specializing in
frequency control devices.

Frank W. Barrett, Director. Mr. Barrett has been a Director of the Company
since 1995. From 1993 to 1998 he was Executive Vice President at Springfield
Institution for Savings ("SIS"). Effective January 1, 1999, he became Executive
Vice President and Chief Lending Officer of Family Bank. Family Bank was a
Massachusetts subsidiary of Peoples Heritage Financial Group and the acquirer of
SIS. Family Bank became First Massachusetts Bank, N.A. upon the acquisition of
Bank North Group by Peoples Heritage Financial Group (which then changed its
name to BankNorth Group). Effective June 2000, he became Executive Vice
President of First Massachusetts Bank, N.A. Effective January 2002, First
Massachusetts Bank, N.A. was merged into Banknorth Massachusetts. No change in
Mr. Barrett's responsibility was effected as a result of the merger. Mr. Barrett
is also a director of Dairy Mart Convenience Store, Inc.

John H. Cronin, Director. Mr. Cronin has been a Director of the Company
since 1986. Since 1971 until his retirement in 1996, Mr. Cronin was owner and
President of Ideal Products, Inc., a wholesale entertainment supply company.

J. Joseph Garrahy, Director. Mr. Garrahy has been a Director of the Company
since 1992. He is a former four term Governor of Rhode Island and, since 1990,
has been an independent business consultant in the State of Rhode Island. Mr.
Garrahy is also a director of Grove Real Estate Investment Trust.

John J. Healy, Director. Mr. Healy has been a Director of the Company since
1991. He has been President of Worcester Affiliated Mfg. L.L.C., an independent
business consulting firm involved in efforts to revitalize manufacturing in
Massachusetts, since January 1997. Mr. Healy is also President of the
Manufacturing Assistance Center.

Charles M. McCollam, Jr., Director. Mr. McCollam has been a Director of the
Company since 1996. He owns and operates a number of insurance businesses in the
State of Connecticut, as well as McCollam Associates, a consulting firm. He was
the Chief of Staff to a former governor of Connecticut.

Merrill W. Sherman, Director. Ms. Sherman has been a Director of the
Company since 1999. She is President and Chief Executive Officer of Bancorp
Rhode Island, Inc. and has been President, Director and Chief Executive Officer
of its primary subsidiary, Bank Rhode Island, a community bank in the greater
Providence metropolitan area, since its formation in March 1996.

Committees of the Board of Directors

The Board of Directors has an Executive Committee, a Stock Option &
Compensation Committee and an Audit Committee. The Board of Directors does not
have a nominating committee. In accordance with the By-laws of the Company, the
Executive Committee, currently comprised of Robert H. Eder, Chairman, John J.
Healy and Orville R. Harrold, exercises the authority of the Board of Directors
when formal Board action is required between meetings, subject to the
limitations imposed by law, the By-laws or the Board of Directors. The Executive


III-2


Committee acts on routine matters such as authorizing the execution of
government contracts for reimbursement for Company work on highway projects
adjacent to the railroad and grade crossing rehabilitation.

The Stock Option & Compensation Committee, currently comprised of John H.
Cronin, Chairman, Richard W. Anderson and Charles M. McCollam, Jr., is
responsible for establishing the amount of option shares to be granted to the
Company's employees under the Stock Option Plan and for making recommendations
to the full Board concerning executive officer compensation.

The Audit Committee of the Board of Directors, currently comprising J.
Joseph Garrahy, Chairman, Frank W. Barrett and Merrill W. Sherman, is
responsible for providing independent, objective oversight of the Company's
accounting functions and internal controls. The Audit Committee is composed of
three directors, all of whom are independent as defined by the American Stock
Exchange listing standards. The Audit Committee operates under a written charter
first adopted and approved by the Board of Directors on April 26, 2000. The
Company reviews the charter annually, and expects that it will be modified to
comply with the requirements of the Sarbanes-Oxley Act of 2002.

The Board of Directors held four meetings, the Audit Committee held six
meetings, the Stock Option & Compensation Committee held two meetings and the
Executive Committee held five meetings during the fiscal year ended December 31,
2002.

Compensation of Directors

During the fiscal year ended December 31, 2002, each director who was not
an employee of the Company received a base fee of $500 for each attended meeting
of the Board of Directors plus $50 per attended meeting for each year of service
as a director, and each member of the Audit Committee and the Stock Option &
Compensation Committee received $300 for each attended meeting of the committee
(other than the Chairman of the Committee, who received $350).

During the month of January of each year, directors of the Company who were
serving as such on the preceding December 31 and are not full time employees of
the Company are granted options for the purchase of 100 shares of the Common
Stock of the Company, plus options for an additional ten shares for each full
year of service to the Company. The exercise price is the last sale price of the
Common Stock on the last business day of the preceding year, and the term of
each option is ten years (subject to earlier termination if the grantee ceases
to serve as a director), provided, however, that no option is exercisable within
six months following the date of grant.

III-3


Item 11. Executive Compensation
- -------------------------------

The following table summarizes the compensation paid or accrued by the
Company during the three year period ended December 31, 2002, to its Chief
Executive Officer and each of its executive officers who earned more than
$100,000 in salary and bonus in 2002 (the "Named Executive Officers"), for
services rendered in all capacities to the Company during 2002.

Summary Compensation Table

Long-Term
Annual Compensation Compensation
------------------- ------------
Securities
Underlying All
Other Options to Other
Annual Purchase Compen-
Salary Compen- Common sation
Name and Principal Position Year ($)(a) Bonus($) sation($) Stock ($)(b)
- ---------------------------- ---- ------ ------ -------- ------------ ------
Robert H. Eder.............. 2002 358,655 0 2,638 0 45,796
Chairman of the Board and 2001 342,464 0 36,459(c) 0 45,236
Chief Executive Officer 2000 325,621 0 35,337(c) 0 47,302

Orville R. Harrold.......... 2002 308,250 0 0 1,151 38,992
President and Chief 2001 293,955 0 0 1,128 37,758
Operating Officer 2000 279,077 0 0 1,178 39,242

P. Scott Conti.............. 2002 125,578 0 0 234 8,503
Vice President Engineering 2001 114,192 0 0 223 7,993
2000 105,546 0 0 232 7,916

Robert J. Easton............ 2002 144,618 0 0 356 9,762
Treasurer 2001 138,846 0 0 281 9,719
2000 133,304 0 0 301 9,998

Mary A. Tanona.............. 2002 116,352 0 0 112 7,854
Secretary and General 2001 109,373 0 0 90 7,656
Counsel 2000 84,954(d) 0 0 0 6,372


(a) Includes amounts taxable to employees for personal use of Company-owned
vehicles, other than Mr. Eder and Ms. Tanona, who do not have personal use
of a Company-owned vehicle.

(b) Includes amounts paid directly to the retirement accounts of management
staff under the Company's simplified employee pension plan, and, in the
case of Robert H. Eder and Orville R. Harrold, includes for 2002 premiums
paid for life insurance coverage in the amounts of $32,296 and $25,492,
respectively.

(c) Includes the cost of a vehicle for Mr. Eder.

(d) Appointed to the position of Secretary and General Counsel effective
October 2, 2000.

III-4


OPTION/SAR GRANTS IN LAST FISCAL YEAR

The following table contains information concerning the grant of stock
options under the Company's Non-Qualified Stock Option Plan to the Named
Executive Officers during the Company's last fiscal year. The Company does not
issue stock appreciation rights.

% of Total
Number of Options
Securities Granted To
Underlying Employees Grant Date
Options In Fiscal Exercise Expiration Present
Name Granted(a) 2002 Price($) Date Value($)(b)
------ ---------- --------- ------ -------- -----------
Robert H. Eder(c)..... 0 0 0 0 0

Orville R. Harrold.... 1,151 16.44 6.75 01/02/12 5,006.85

P. Scott Conti........ 234 3.34 6.75 01/02/12 1,017.90

Robert J. Easton...... 356 5.09 6.75 01/02/12 1,548.60

Mary A. Tanona........ 112 1.60 6.75 01/02/12 487.20

(a) All options were granted on January 2, 2002 and became exercisable on July
2, 2002.

(b) Amounts represent fair value of options and were estimated as of the date
of grant using Black-Scholes options - pricing model with the following
weighted average assumptions: expected volatility of 76%; expected life 7
years; and risk free interest rate of 4.97%. Dividends at the rate of 2.37%
per share were assumed for purposes of this estimate.

(c) Under the terms of the Company's Non-Qualified Stock Option Plan, Mr. Eder
is not eligible to receive a grant of stock options.


AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR END OPTION VALUES

The following table sets forth individual exercises of stock options during
2002 and the year-end values of options to purchase Common Stock held by the
Named Executive Officers as of December 31, 2002.

Number of Securities
Underlying Unexercised Value of Unexercised
Options at In-the-Money at
December 31, 2002 December 31, 2002(b)
----------------- --------------------
Shares
Acquired on Value Exercisable/ Exercisable/
Name Exercise Realized($)(a) Unexercisable Unexercisable($)
---- ----------- -------------- ------------- ----------------

Robert H. Eder....... 0 0 0/0 0/0

Orville R. Harrold... 2,702 2,494 2,018/0 85/0

P. Scott Conti....... 223 396 745/0 234/0

Robert J. Easton..... 0 0 2,251/0 745/0

Mary A. Tanona....... 0 0 202/0 168/0


(a) Based on the last sale price of the Common Stock on the date of exercise
minus the exercise price.

(b) Based on the difference between the exercise price of each grant and the
closing price of the Company's Common Stock on the AMEX on December 31,
2002, which was $7.75.


III-5


Item 12. Security Ownership of Certain Beneficial Owners and Management
- -----------------------------------------------------------------------

The table set forth below reflects the only persons (including any "group"
as that term is used in Section 13(d)(3) of the Securities Exchange Act of 1934)
who, to the best of the Company's knowledge, were on March 7, 2003 the
beneficial owners of more than five percent of the Company's outstanding Common
Stock, $.50 par value, or Preferred Stock, $50 par value. Each share of the
Company's outstanding Preferred Stock is convertible at any time, at the option
of the holder, into one hundred shares of Common Stock of the Company. The
footnote to the table below sets forth the percentages of the outstanding Common
Stock which would be held by the indicated owners if such owners' Preferred
Stock were converted in whole into Common Stock.


Percent
Name and Address Number of Shares Owned of Class
- ---------------- ---------------------- --------

Robert H. and Linda Eder 842,742 (Common) 19.0%(a)
2441 S.E. Bahia Way 500 (Preferred) 77.5%
Stuart, Florida 34996

Steinberg Priest & Sloan Capital 508,870 (Common) 11.5%
Management, LLC.
Michael A. Steinberg & Company, Inc.
Michael A. Steinberg
12 East 49th Street
New York, New York 10017

Franklin Resources, Inc. 302,000 (Common) 6.8%
One Franklin Parkway
San Mateo, CA 94403-1906

Keeley Asset Management Corp. 245,820 (Common) 5.5%
Kamco Performance Limited Partnership
Kamco Limited Partnership No. 1
401 South LaSalle Street
Chicago, Illinois 60605


(a) Assuming no conversion of Preferred Stock. If their Preferred Stock were
converted in whole to Common Stock, Mr. and Mrs. Eder would own 19.9% of
the outstanding Common Stock.

Of the shares owned by Mr. and Mrs. Eder, 768,162 shares of Common Stock
and 500 shares of Preferred Stock were held directly by Mr. Eder, and 74,580
shares of Common Stock were held directly by Mrs. Eder. By reason of their
ownership, Mr. and Mrs. Eder may be deemed to be "control persons" with respect
to the Company.


III-6


The following table reflects, as of March 7, 2003, the beneficial ownership
of the Common Stock of the Company by directors, nominees for directors, Named
Executive Officers and all officers and directors as a group.


Name Number Percentage
- ---- ------ ----------

Richard W. Anderson(a) ....................... 201,160 4.5%
Frank W. Barrett(b) .......................... 1,310 *
P. Scott Conti(c) ............................ 3,952 *
John H. Cronin(d) ............................ 2,480 *
Robert J. Easton(e) .......................... 4,723 *
Robert H. Eder(f) ............................ 892,742 19.8%
J. Joseph Garrahy(g) ......................... 1,520 *
Orville R. Harrold(h) ........................ 34,574 *
John J. Healy(i) ............................. 1,740 *
Charles M. McCollam, Jr.(j) .................. 1,050 *
Merrill W. Sherman(k) ........................ 830 *
Mary A. Tanona(l) ............................ 1,134 *
All executive officers and directors as a group
(13 people)(m)................................ 1,147,260 25.5%

* Less than one percent

(a) Includes 200,000 shares of common stock held by Massachusetts Capital
Resource Company of which Mr. Anderson disclaims beneficial ownership.
Mr. Anderson is Senior Vice President of Massachusetts Capital
Resource Company. Also includes 460 shares of Common Stock issuable
under stock options exercisable within 60 days.

(b) Includes 810 shares of Common Stock issuable under stock options
exercisable within 60 days.

(c) Includes 745 shares of Common Stock issuable under stock options
exercisable within 60 days.

(d) Includes 1,150 shares of Common Stock issuable under stock options
exercisable within 60 days.

(e) Includes 118 shares of Common Stock held by Mr. Easton's wife in her
name and 2,251 shares of Common Stock issuable under stock options
exercisable within 60 days.

(f) Includes 74,580 shares of Common Stock owned by Mr. Eder's wife and
assumes the conversion of the 500 shares of Preferred Stock owned by
Mr. Eder.

(g) Includes 850 shares of Common Stock issuable under stock options
exercisable within 60 days.

(h) Includes (i) 1,700 shares of Common Stock held by Mr. Harrold's wife,
(ii) 3,200 shares of Common Stock held by a custodian in an individual
retirement account for the benefit of Mr. Harrold and (iii) 1,882
shares of Common Stock issuable under stock options exercisable within
60 days.

(i) Includes 1,440 shares of Common Stock issuable under stock options
exercisable within 60 days.

(j) Includes 110 shares of Common Stock issuable under stock options
exercisable within 60 days.

(k) Includes 330 shares of Common Stock issuable under stock options
exercisable within 60 days.

(l) Includes 202 shares of Common Stock issuable under stock options
exercisable within 60 days.

(m) Includes 19 shares of Common Stock owned by an officer of the Company
who is not a Named Executive Officer, 50,000 shares of Common Stock
issuable upon conversion of Preferred Stock and 10,230 shares of
Common Stock issuable under stock options exercisable within 60 days.


Item 13. Certain Relationships and Related Transactions
- -------------------------------------------------------

Not Applicable


III-7


PART IV

Item 14. Exhibits, Financial Statements Schedules, and Reports on Form 8-K
- --------------------------------------------------------------------------


(a) (1) All financial statements:

An index of financial statements is included in Item 8, page II-11 of
this annual report

(2) Financial Statement schedule:
Schedule II Valuation and Qualifying Accounts.....Page IV-6

All other schedules are omitted because they are not applicable
or not required, or because the required information is shown
either in the financial statements or the notes thereto.

(3) Listing of Exhibits.

(10A) Material Contracts (incorporated by reference to Exhibit 10
to the registration statement of the Registrant on Form 10, to
the Non-Qualified Stock Option Plan and Employee Stock Purchase
Plan of the Registrant on Forms S-8 and to the registration
statements of the Registrant on Form S-1).



(23) Independent Auditors' Consent

(99) Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbannes-Oxley Act of 2002.

(b) A report on Form 8-K was filed on April 4, 2002 reporting that by
press release dated April 3, 2002 the Registrant reported to the
general public that it had entered into a memorandum of understanding
with an affiliate of Chevron Texaco Corp. with respect to joint
development by the two companies of property located on the waterfront
in East Providence, Rhode Island.

A report on Form 8-K was filed on June 28, 2002 reporting that by
press release dated June 27, 2002 the Registrant announced to the
general public that a ruling had been issued by the arbitrator in a
proceeding with the National Railroad Passenger Corporation ("Amtrak")
concerning Amtrak's claim for rate increases and maintenance costs for
rail sidings with respect to the Registrant's freight operations over
a portion of Amtrak's Northeast Corridor in the States of Rhode Island
and Connecticut.

(c) Exhibits (annexed).

Controls and Procedures

Financial Statement Schedule. See item (a) (2.) above




IV-1


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.


PROVIDENCE AND WORCESTER RAILROAD COMPANY

/s/ Robert H. Eder
--------------------------------------------
By Robert H. Eder
Chief Executive Officer
Dated: March 31, 2003

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:

Signature Title Date
--------- ----- ----
/s/ Robert H. Eder
________________________ Chief Executive Officer March 31, 2003
Robert H. Eder and Chairman (Principal
Executive Officer)

/s/ Orville R. Harrold
________________________ President and Director March 31, 2003
Orville R. Harrold (Chief Operating Officer)

/s/ Robert J. Easton
________________________ Treasurer March 31, 2003
Robert J. Easton (Principal financial officer and
principal accounting officer)
/s/ Frank W. Barrett
________________________ Director March 31, 2003
Frank W. Barrett

/s/ J. Joseph Garrahy
________________________ Director March 31, 2003
J. Joseph Garrahy

/s/ Merrill W. Sherman
________________________ Director March 31, 2003
Merrill W. Sherman

IV-2


Providence and Worcester Railroad Company
Certification Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002

I, Robert H. Eder, certify that:

1. I have reviewed this annual report on Form 10-K of Providence and Worcester
Railroad Company;

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

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

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

a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant is made known to us by others within
those entries, particularly during the period in which this annual report is
being prepared;

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

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

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

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

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

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

DATE: March 31, 2003
By: /s/ Robert H. Eder
---------------------------
Robert H. Eder,
Chairman of the Board
And Chief Executive Officer

IV-3


Providence and Worcester Railroad Company
Certification Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002

I, Robert J. Easton certify that:

1. I have reviewed this annual report on Form 10-K of Providence and Worcester
Railroad Company;

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

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

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

a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant is made known to us by others within
those entries, particularly during the period in which this annual report is
being prepared;

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

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

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

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

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

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

DATE: March 31, 2003
By: /s/ Robert J. Easton
---------------------------
Robert J. Easton
Treasurer and Principal
Financial Officer

IV-4



Controls and Procedures

Based on their evaluation of the effectiveness of the Company;s
disclosure controls and procedures as of a date within 90 days prior to
the filing date of this annual report, the undersigned officers of the
Company have concluded that such disclosure controls and procedures are
adequate. There were no significant changes in internal controls or in
other factors that could significantly affect internal controls,
including any corrective actions with regard to significant
deficiencies and material weaknesses, subsequent to the date of the
most recent evaluation by the undersigned officers of the Company of
the design and operation of internal controls which could adversely
affect the Company's ability to record, process, summarize and report
financial data.


IV-5


SCHEDULE II

PROVIDENCE AND WORCESTER RAILROAD COMPANY

VALUATION AND QUALIFYING ACCOUNTS

YEARS ENDED DECEMBER 31, 2002, 2001, AND 2000
(IN THOUSAND DOLLARS)

Column A Column B Column C Additions Column D Column E
-------- -------- ------------------ -------- --------
(1) (2)
Balance Charged to Charged to Balance
at costs and other at end
Description beginning expenses accounts Deductions of
of period describe (A) period
Allowance for doubtful
accounts:
Year ended
December 31, 2002..... $ 125 $125
===== ====
Year ended
December 31, 2001..... $ 125 $ 5 $ (5) $125
===== ==== ====== ====
Year ended
December 31, 2000..... $ 125 $125
===== ====
- ---------
(A) Bad debts written off.


IV-6


EXHIBIT 99



PROVIDENCE AND WORCESTER RAILROAD COMPANY
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of Providence and Worcester Railroad
Company (the Company) on form 10-K for the year ended December 31, 2002, as
filed with the Securities and Exchange Commission on the date hereof (the
Report), I, Robert H. Eder, Chief Executive Officer of the Company, certify,
pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of Section 13 (a) or
15 (d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations
of the Company.





/s/ Robert H. Eder
-----------------------------
Robert H. Eder,
Chairman of the Board And Chief
Executive Officer
March 31, 2003

In connection with the Annual Report of Providence and Worcester Railroad
Company (the Company) on form 10-K for the year ended December 31, 2002, as
filed with the Securities and Exchange Commission on the date hereof (the
Report), I, Robert J. Easton, Chief Financial Officer of the Company, certify,
pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of Section 13(a) or 15
(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations
of the Company.




/s/ Robert J. Easton
-----------------------------
Robert J. Easton,
Treasurer and Chief Financial Officer
March 31, 2003



EXHIBIT 23




INDEPENDENT AUDITORS' CONSENT


We consent to the incorporation by reference in Registration Statement
Nos. 333-65937, 333-65949, and 333-21617 of Providence and Worcester
Railroad Company on Form S-8 of our report dated March 7, 2003
appearing in this Annual Report on Form 10-K of Providence and
Worcester Railroad Company for the year ended December 31, 2002.


/s/ Deloitte & Touche LLP

Boston, Massachusetts
March 28, 2003