UNITED STATES SECURITIES AND EXCHANGE COMMISSION

FORM 10-K

OR

Commission File No. 001-08728

FLORIDA EAST COAST INDUSTRIES, INC.

Registrant’s Telephone Number, Including Area Code: (904) 829-3421

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

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 þ   NO o

Indicate by check mark if the 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 the 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. o

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).
YES þ   NO o

Based on the closing price on June 30, 2004, the aggregate market value of the common stock held by non-affiliates of the Registrant was approximately $883 million.

The number of shares of the Registrant’s common stock, no par value, outstanding at February 18, 2005 is 32,140,610 shares and 6,546,527 shares of treasury stock.

DOCUMENTS INCORPORATED BY REFERENCE

Certain portions of the Registrant’s definitive Proxy Statement for the Annual Meeting of Shareholders to be held on June 2, 2005 (the Proxy Statement) are incorporated by reference in Part III of this report.

TABLE OF CONTENTS

Forward-Looking Statements

This Form 10-K contains 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 include the Company’s present expectations or beliefs concerning future events. These statements may be identified by the use of words like “plan,” “expect,” “aim,” “believe,” “project,” “anticipate,” “intend,” “estimate,” “may,” “will,” “should,” “could,” and other expressions that indicate future events and trends. Such forward-looking statements may include, without limitation, statements that the Company does not expect that lawsuits, review of open tax years by the IRS, environmental costs, commitments, including future contractual obligations, contingent liabilities, financing availability, labor negotiations or other matters will have a material adverse effect on its consolidated financial condition, statements concerning future capital needs and sources of such capital funding, statements concerning future intentions with respect to the payment of dividends, execution of a share repurchase program, and other potential capital distributions, number of shares to be repurchased, availability of cash to fund the stock repurchase, ability to reinvest (tax deferred) sales proceeds into qualifying 1031 properties, future growth potential of the Company’s lines of business, performance of the Company’s product offerings, other similar expressions concerning matters that are not historical facts, and projections relating to the Company’s financial results. The Company cautions that such statements are necessarily based on certain assumptions, which are subject to risks and uncertainties that could cause actual results to materially differ from those contained in these forward-looking statements. Important factors that could cause such differences include, but are not limited to, the changing general economic conditions (particularly in the state of Florida, the southeast US and the Caribbean) as they relate to economically sensitive products in freight service and building rental activities; ability to manage through economic recessions or downturns in customers’ business cycles; industry competition; possible future changes in the Company’s structure, lines of business, business and investment strategies, and related implementation; legislative or regulatory changes; technological changes; volatility of fuel prices (including volatility caused by military actions); changes in levels of preventive and capital maintenance and depreciation rates resulting from future railway right-of-way and equipment life studies; changes in the ability of the Company to complete its financing plans, changes in interest rates, the settlement of future contractual obligations as estimated in time and amount (customary to the Company’s historical cost structure) including labor direct negotiations, mediation and in one instance, mutually agreed binding arbitration in a satisfactory way; changes in insurance markets, including increases in insurance premiums and deductibles; the availability and costs of attracting and retaining qualified independent third party contractors; liability for environmental remediation and changes in environmental laws and regulations; the ultimate outcome of environmental investigations or proceedings and other types of claims and litigation; natural events such as weather conditions, hurricanes, floods, earthquakes and forest fires; discretionary government decisions affecting the use of land and delays resulting from weather conditions and other natural occurrences, like hurricanes, that may affect construction or cause damage to assets; the ability of buyers to terminate contracts to purchase real estate from the Company prior to the expiration of inspection periods; failure or inability of third parties to fulfill their commitments or to perform their obligations under agreements; costs and availability of land and construction materials; buyers’ inability or unwillingness to close transactions, particularly where buyers only forfeit deposits upon failure to close; the Company’s future taxable income and other factors that may affect the availability and timing of utilization of the Company’s deferred tax assets; uncertainties, changes or litigation related to tax laws, regulations and the application thereof that could limit the tax benefits of the EPIK sale or of other possible transactions involving the Company; and other risks inherent in the real estate and other businesses of the Company.

As a result of these and other factors, the Company may experience material fluctuations in future operating results on a quarterly or annual basis, which could materially and adversely affect its business, financial condition, operating results and stock price.

Readers should not place undue reliance on forward-looking statements, which reflect management’s view only as of the date thereof. The Company undertakes no obligation to publicly release revisions to the forward-looking statements in this Report that reflect events or circumstances after the date hereof, or reflects the occurrence of unanticipated events.

PART I

As used throughout this Form 10-K Annual Report, the terms “FECI,” the “Company” and “Registrant” mean Florida East Coast Industries, Inc. and its consolidated subsidiaries.

ITEM 1. BUSINESS

General

FECI is a holding company incorporated under the laws of the state of Florida in 1983 engaged, through two wholly owned subsidiaries, in the railroad and real estate businesses. The Company’s railroad subsidiary, Florida East Coast Railway, LLC (FECR or Railway), connects many of the major population centers and port facilities of Florida’s east coast, and provides efficient service for its customers through multiple competitive connections to the rest of North America. The Company, primarily through its real estate subsidiary, Flagler Development Company (Flagler), is engaged in the acquisition, development, management, leasing, operation and selected sale of commercial and industrial properties. Flagler has extensive real estate holdings in Florida.

Information regarding FECI’s reclassification of its former Class A and Class B common stock into a single class of common stock is contained in Item 5 and Note 2 of the financial statements in Item 8 of this Annual Report on Form 10-K.

Financial information about FECI’s operating segments is contained in Items 6, 7 and 8 of this Annual Report on Form 10-K.

Railway

General

FECR operates a Class II railroad along 351 miles of mainline track between Jacksonville and Miami, Florida, serving some of the most densely populated areas of the state. FECR also owns and operates approximately 277 miles of branch, switching and other secondary track and 158 miles of yard track, all within Florida. FECR has the only coastal right-of-way between Jacksonville and Miami and is the exclusive rail-service provider to the Port of Palm Beach, Port Everglades (Fort Lauderdale), and the Port of Miami.

FECR serves approximately 1,000 carload and intermodal customers combined. During 2004, the number of customers included approximately 200 drayage customers, which previously were customers of FECI’s trucking subsidiary and now are serviced by FECR. The following table summarizes FECR’s freight shipments by commodity group and as a percentage of rail freight revenues:

TRAFFIC
Years Ended December 31
(dollars and units in thousands)

(Prior year’s results have been reclassified to conform to current year’s presentation.)

FECR connects with Norfolk Southern Railway Company (NS) and with CSX Transportation, Inc. (CSXT) at Jacksonville and is able to offer its customers competitive rail connections to the rest of North America. During 2004, approximately 37% of FECR’s freight revenues were attributable to traffic that originated on other railroads; approximately 5% was attributable to traffic that originated on FECR but bound for other destinations, and 58% was attributable to traffic that both originated and terminated on FECR’s system (local traffic). Haulage operating agreements with NS and South Central Florida Express, Inc. (SCFE) generated 8% of FECR’s revenue in 2004. With the exception of haulage services provided for SCFE described below, FECR does not receive traffic from one railroad to be passed over its track to another railroad.

FECR handles rail cars for SCFE between Fort Pierce and Jacksonville for interchange with CSXT or NS. SCFE is a short-line railroad operating under a long term Trackage Rights Agreement over a branch line owned by FECR extending from Fort Pierce to Lake Harbor. A concurrent Car Haulage Agreement is in effect between Fort Pierce and Jacksonville.

FECR also handles certain types of traffic for NS from Jacksonville to Miami under a Haulage Agreement, whereby FECR receives specified revenues for each unit transported. In late 2001, FECR began offering a service that is known as the “Hurricane Train.” This extends FECR’s commercial reach into the Atlanta region. This service is operated pursuant to an agreement with NS allowing up to 50 spaces per day. During 2004, we reached and exceeded this capacity on certain days, which may limit the ability to grow this business segment in the future unless additional capacity is made available. In early 2005, we are reviewing opportunities to increase loadings on the “Hurricane Train” service. Additionally, through joint marketing arrangements, FECR provides direct service to the south Florida markets; one with CSX transportation, with loads originating in the Northeast and one with Norfolk Southern, with loads originating in the Chicago and surrounding areas.

FECR owns or has an interest in approximately 1,206 acres of ancillary properties, including 3 rail corridors (661 acres) that are either abandoned or are candidates for abandonment, within the state of Florida. FECR continues to evaluate these holdings and, when appropriate, engages in strategic activities (sales, development, etc.). Sales of these properties are reported in other sales of the realty segment. FECR also actively manages its 100’ wide railroad right-of-way to generate miscellaneous rents and right-of-way lease profits, which are not reported as part of the railway segment but as other income. FECR leases its right-of-way to various tenants for use, including telecommunications companies’ fiber optics systems pursuant to long-term leases. These rents also are included in other income. In addition, FECR generates revenues from the grant of licenses and leases to use railroad property and rights-of-way for outdoor advertising, parking lots and lateral crossings of wires and pipes by municipalities, and utility and telecommunications companies. These miscellaneous rents are included in other income.

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Customers

One customer, Rinker Materials Corporation, generated approximately 21% of rail revenues in 2004. FECR’s top five customers accounted for approximately 43% of 2004 freight revenues. Two of these customers do business as providers of aggregate materials.

Competition

Although FECR is often the only rail carrier directly serving its customers, FECR competes directly with other railroads that could potentially deliver freight to FECR’s markets and customers via different routes and use of multiple modes of transportation such as transload services. FECR’s primary rail competition for carload traffic is CSXT. FECR also competes directly with other modes of transportation, including motor carriers, ships, and barges. FECR’s Intermodal freight services (trailers and containers on flat-rail cars) compete directly with motor carriers. Any improvement in the cost or quality of these alternate modes of transportation could increase competition from these other modes of transportation and adversely affect FECR’s business.

There is continuing strong competition among rail, water, and highway carriers. Price is usually only one factor of importance as shippers and receivers choose a transport mode and a specific transportation company with which to do business. Inventory carrying costs, service reliability, ease of handling, and the desire to avoid loss and damage during transit are increasingly important considerations, especially for higher valued finished goods, machinery and consumer products. Additionally, decisions about ports of call can affect FECR’s business. As international shipping companies alter their ship rotations into various ports, this could change the railroad’s intermodal shipments from the affected port facility.

Regulation

FECR is subject to regulation by the Surface Transportation Board (STB) of the U.S. Department of Transportation (USDOT). The STB has jurisdiction over some rates, conditions of service and the extension or abandonment of rail lines. The STB also has jurisdiction over the consolidation, merger, or acquisition of control of and by rail common carriers. The USDOT, through the Federal Railroad Administration (FRA), regulates the safety of railroad operations, including certain track and mechanical equipment standards and certain human factor issues. The USDOT and Occupational Safety and Health Administration (OSHA) have jurisdiction over a number of safety and health aspects of rail operations, including the movement of hazardous materials.

Rates in the rail industry were substantially deregulated by The Staggers Act of 1980 (The Staggers Act) and subsequent legislation and regulation. The Staggers Act encouraged and enabled rail carriers to innovate and compete for business, thereby contributing to the revitalization of the industry. Accordingly, the nation’s rail carriers can be expected to vigorously oppose efforts to re-impose such economic regulation.

FECR is also subject to extensive environmental laws and regulations. Violations of various statutory and regulatory programs can result in civil penalties, remediation expenses, natural resource damage claims, potential injunctions, cease and desist orders and criminal penalties. Some environmental statutes impose strict liability, rendering a person liable for environmental damage without regard to negligence or fault on the part of such person. In addition, FECR’s present and historic ownership and operation of real property, including rail yards, in connection with its transportation operations involve the storage, use, or disposal of hazardous substances that may have contaminated and may in the future contaminate the environment. FECR may also be liable for the costs of cleaning any site at which it has disposed (intentionally or unintentionally) of hazardous substances by virtue of, for example, an accident, derailment, or leak, or to which it has transported hazardous substances it generated, such as waste oil (see Item 3. Legal Proceedings).

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Risks

Cyclical Risks. FECR’s freight traffic is subject to the effect of cycles in the U.S. national, regional, and local economies and, to a lesser extent, cycles in the international economies. Historically, traffic tends to increase at the beginning of an economic recovery. Traffic tends to decrease early in an economic downturn.

Market Risks. FECR’s freight traffic is generally affected by overall economic conditions, particularly those in the state of Florida, and with respect to intermodal traffic, international economies, including the Caribbean, South America, and Asian economies. In addition, the level of state and federal highway and other public projects can affect the amount of aggregate loadings FECR’s customers request. There can be no assurance that the overall economy will rebound quickly from any slowdowns or that Florida’s economy will continue to experience higher than the national average growth.

Claims and Lawsuits. The nature of FECR’s business exposes it to the potential for various claims and litigation related to labor and employment, personal injury and occupational illness, property damage, environmental and other matters. FECR maintains insurance for most of these potential claims, subject to varying deductibles and self-insured retentions. Therefore, FECR may be subject to claims or litigation that could involve significant expenditures. See Item 3 for a discussion of legal proceedings.

Fuel Price Risks. FECR’s operations require significant amounts of diesel fuel. Prices of diesel fuel can vary greatly. Increases in fuel price may be passed along to customers through a “fuel surcharge” or otherwise, though often with delayed effect. However, there are no assurances that these surcharges will cover the entire fuel price increase for a given period, or that competitive market conditions will effectively allow freight providers the ability to pass along this cost. FECR forward purchases fuel to manage the risk of fuel price increases. As of December 31, 2004, FECR had forward purchase contracts of 5.2 million gallons of fuel for delivery from January 2005 to December 2005 for an average purchase price of $1.13 per gallon before taxes and freight. This represents 35% of the estimated consumption for year 2005.

Interchange Carrier Risks. Approximately 37% of FECR’s traffic is interchanged from CSXT, SCFE, or NS. The ability of these carriers (CSXT and NS) to market and service southbound traffic into the Florida market will affect the amount of traffic FECR moves.

Rail Car Utilization Risks. FECR earns per diem rents on the use of its car and intermodal fleet of equipment based on other railroads’ or transportation service providers’ use of the equipment. Future significant downturns in the overall U.S. economy, equipment obsolescence or reduced market demand for our car and/or intermodal fleet, or efforts by other railroads or transportation providers to improve equipment utilization practices could affect the utilization of and per diem rents for this equipment from other railroads and transportation service providers which would lower operating profits. Also, FECR, through operating agreements, currently leases approximately 2,700 rail cars from Greenbrier Leasing Corporation (Greenbrier), Bombardier Capital (Bombardier), and other entities, with lease lengths of up to five to ten years, mostly cancelable every three years. The lease terms call for FECR to be billed an hourly rate based upon the length of time the car is on-line versus off-line. As a car goes off-line, a per diem rent sharing arrangement goes into effect whereby Greenbrier and FECR apportion the rent based upon the length of time the car is off-line. Rents from the Greenbrier, Bombardier and other leases received by FECR were $3.9 million, $4.0 million and $3.0 million in 2004, 2003 and 2002, respectively. Certain of these leases provide for base rents payable to Greenbrier and others by FECR if the car remains on FECR’s line for a specified number of days. To date, these base rents (i.e., those above normal car hire) payable to Greenbrier and others have been minimal.

Natural Disaster Risks. FECR’s operating assets are predominately located on Florida’s eastern seaboard and susceptible to damage, destruction and operational disruption from natural disasters like hurricanes and other severe storms. Damage and destruction of operating assets could be material with accompanying long periods of operational outage. Additionally, certain of FECR’s customers (especially aggregate) and their operations are subject to natural disasters, the effect of such being significantly reduced loadings.

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Real Estate

General

FECI owns 100% of the stock of Flagler. Flagler is engaged in the acquisition, development, leasing, management, operation and selected sale of commercial and industrial properties in the state of Florida.

Flagler owns and operates office and industrial properties in Florida. Flagler owned and operated 60 buildings as of December 31, 2004, with approximately 6.6 million rentable sq. ft. A schedule of these buildings is included in Part 1, Item 2 of this report. At December 31, 2004, Flagler’s operating properties were 95% occupied. Flagler’s operating properties consist primarily of Class “A” office space and high-quality commercial/industrial facilities primarily constructed after 1992.

At December 31, 2004, Flagler had 1,321,000 sq. ft. of properties in various phases of development, consisting of 804,000 sq. ft. under construction (including a 239,000 sq. ft. build-to-suit project), and 517,000 sq. ft. in the pre-development phase, located in the Jacksonville, Orlando and Miami-Dade area markets. For those projects in the pre-development phase, Flagler is engaged in engineering, architectural planning and design.

Flagler owns 740 acres of developable land with entitlements for the construction of 12.1 million sq. ft. of additional office, industrial and commercial space. Additionally, Flagler owns approximately 2,000 acres of unimproved, unentitled land or land with limited entitlements, primarily situated adjacent to FECR’s rights-of-way along the eastern coast of Florida, available for potential future development or disposition.

At December 31, 2004, Flagler held net land sale proceeds totaling $88.3 million in escrow with a qualified intermediary, some or all of which is intended to be reinvested through qualifying tax-deferred exchanges. Flagler has identified qualifying reinvestment properties, which may be purchased during the first half of 2005. These properties include land and buildings to be developed and/or operated consistent with Flagler’s current strategic property portfolio.

Projects under Development

The primary geographic focus of Flagler’s development activities has been in the Miami, Fort Lauderdale, Jacksonville and Orlando markets. Projects under development include:

	•	SouthPark Center I – Orlando, FL: Located near the intersection of John Young Parkway and Beeline Expressway. Six buildings, totaling 836,000 sq. ft., have been completed, one of which (a building of approximately 133,000 sq. ft.) was sold to a third party during 2003. The park has entitlements for an additional 163,000 sq. ft. of office space. A seventh building of approximately 93,000 sq ft remains in pre-development.
	•	SouthPark Center II – Orlando, FL: In 1999, based on the success of SouthPark Center I, Flagler acquired approximately 90 acres across John Young Parkway from its existing park. The land has remaining entitlements for 1.5 million sq. ft. of office space, as well as 98,000 sq. ft. of commercial space. Two buildings totaling approximately 196,000 sq ft, have been developed, one of which, a 60,000 sq. ft. build-to-suit project, was sold to a third party during 2004. At December 31, 2004, a third 137,000 sq ft. office building was under construction.
	•	Flagler Station – Miami, FL: Located northwest of Miami International Airport, Flagler owns and operates thirty buildings, totaling 3.3 million rentable sq. ft., at December 31, 2004, including 540,000 rentable sq. ft. previously held in partnership with Duke Realty, which Flagler purchased in January 2003. Construction is currently underway for a 239,000 rentable sq. ft. build-to-suit office building for Ryder System, Inc. as well as a 201,000 sq. ft. industrial building. The park has entitlements for an additional 2.9 million sq. ft. of office, industrial and commercial space. Pre-development is currently underway for an additional 160,000 sq. ft. industrial building. Flagler owns approximately 95 acres adjacent to this park for future development or sale.
	•	Deerwood North – Jacksonville, FL: Located near the intersection of Southside Boulevard and Gate Parkway North, north of J. Turner Butler Boulevard, Deerwood North consists of three office buildings,

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		totaling 383,000 rentable sq. ft. In addition, construction is underway as of December 31, 2004 for a fourth 113,000 sq. ft. office building.
	•	Flagler Center – Jacksonville, FL: Located in south Jacksonville at the Old St. Augustine Road and I-95 interchange. Flagler owns and operates seven buildings, totaling 771,000 rentable sq. ft. An eighth building, a 114,000 sq. ft office building, is under construction at December 31, 2004, with a ninth and tenth building, a 150,000 sq. ft. warehouse building, which is 81% pre-leased, and a 114,000 sq. ft. office building, respectively, in pre-development. The park has entitlements for an additional 4.1 million sq. ft. of office, industrial and commercial space on approximately 331 developable acres. Flagler completed the interchange at Old St. Augustine Road and I-95 during 2004, providing a more efficient access to Flagler Center. Flagler also completed the expansion of Old St. Augustine Road to four lanes in 2003, providing increased traffic flow near the site, as well as additional site accessibility.
	•	Flagler Plaza – Sunrise, FL: A 41-acre tract located at Sunrise, FL in West Broward County. The property is entitled for 823,000 sq. ft. of office space. The site is master planned for four office buildings. Flagler is evaluating the property for future development.

The following is a summary of the Company’s development activity as of December 31, 2004:

Customers

Flagler leases to approximately 250 tenants in a variety of industries, including financial services, distribution, hospitality services, and import/export. Flagler’s largest tenant, based on square footage, occupied approximately 4% of leased space at December 31, 2004. Flagler’s largest tenant, based on rental revenues, accounted for approximately 6% of 2004 continuing operations’ contractual rental income. Flagler’s five largest tenants, based on rental revenues, accounted for approximately 23% of continuing operations’ contractual rental income.

Competition

The real estate industry is generally characterized by significant competition. There are numerous developers and real estate companies (including those in Florida) competing with the Company for acquisitions of properties, resources for development and prospective tenants. Competition may adversely affect the Company’s ability to attract and retain tenants and achieve favorable rental rates. The Company may compete with entities having greater financial and other resources. There can be no assurance that the existence of such competition may not have a material adverse effect on the Company’s business, operations, or cash flows.

Regulation

Real estate development in Florida is subject to extensive regulation at both the state and local levels. One of the primary purposes of regulation is to ensure that infrastructure, such as traffic circulation, sanitary sewer, solid waste, drainage, potable water, parks and recreation and transportation facilities, is adequate to serve proposed development. If the facilities in the area of the development are inadequate or will become inadequate as a result of the proposed development, the developer must either improve the infrastructure to a level satisfactory to the regulatory agencies or provide financial assurances that the necessary improvements will be made as development

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progresses. In many areas of Florida, significant infrastructure improvements need to be made in order to support additional development. Infrastructure improvement requirements could adversely affect the ability of developers in Florida, including Flagler, to develop real estate projects.

Larger developments may be regulated as a Development of Regional Impact (DRI) if they meet statutorily prescribed thresholds. The process for obtaining governmental approval of a DRI project includes an evaluation of the project’s impact on the environment, infrastructure and government services, and requires the involvement of numerous federal, state and local governmental agencies. The DRI review process is lengthy and expensive and may result in an approval that requires significant capital improvements or other exactions as a condition of the approved development.

In addition, federal, state and local regulations govern the development of lands containing endangered or protected wildlife species, and sensitive environmental areas such as wetlands and coastal areas. Much of the developable land in Florida is impacted by those regulations. As a result, those regulations may limit the Company’s ability to develop its real estate holdings.

Real estate ownership and development is subject to extensive federal, state, and local environmental regulation governing hazardous substances. Pursuant to those regulations, the owner or operator of contaminated real estate may be required to perform remediation, regardless of the cause of the contamination. The sale or development of properties may also be restricted due to environmental concerns. In addition, violation of those regulations may result in civil penalties, remediation expenses, natural resource damages, injunctions, and cease and desist orders and criminal penalties. The Company is not presently aware of any material contamination, or any material adverse environmental development issues relating to its real estate operations. However, there can be no assurance that environmental issues will not arise in the future.

Risks

Market Risks. There can be no assurance that the U.S. economy in general, or the economy of the Southeast and Florida in particular, will continue at its current strong pace, which may adversely affect the Company. Certain significant expenditures associated with the development, management and servicing of real estate (such as real estate taxes, maintenance costs and debt payments, if any) generally could not be reduced even if an economic downturn caused less revenue to be generated from the Company’s properties. Additionally, capital expenditures (especially infrastructure related) for development of office parks occur early in the construction cycle, potentially becoming subject to longer than expected holding periods and costs in the event of economic downturns.

Development Risks. The Company’s real estate development activities require significant capital expenditures. Capital investment at Flagler for 2005 is expected to be between $150 million and $170 million, which includes $75 million to $85 million for acquisitions of land and/or finished buildings utilizing proceeds from third and fourth quarter 2004 realty sales. The Company has obtained funds for its capital expenditures and operating activities through operating cash flows, property sales, and financings. There can be no assurance that funds available from operating cash flow, property sales and financings will continue to be sufficient to fund the Company’s required or desired capital expenditures for development. If the Company were unable to obtain sufficient funds, it might have to defer or otherwise limit certain development activities. Further, any new development, or any rehabilitation of older projects, may require compliance with new building codes and other regulations. The Company cannot estimate the cost of complying with such codes and regulations, and such costs can make a new project, or some otherwise desirable uses of an existing project, not economically feasible.

Cyclical Risks. Flagler’s leasing occupancy and development are subject to the effect of cycles in the regional and local economies and, to a lesser extent, by the U.S. national economy. Historically, leasing occupancy and new building development activity are affected late in a period of economic recovery and late in an economic downturn.

Natural Disaster Risks. Flagler’s operating assets are located in Florida and are susceptible to damage, destruction and operational disruption (including rents from tenants) from natural disasters like hurricanes and other severe storms, especially those assets along the east coast. Damage and destruction of operating assets could be material with accompanying long periods of operational outage.

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Telecommunications

FECI completed the sale of its wholly owned telecommunications subsidiary, EPIK, to Odyssey Telecorp, Inc. (Odyssey), a privately held holding company specializing in telecom network assets during the fourth quarter of 2002. In accordance with SFAS 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (SFAS 144), EPIK’s results from operations and the estimated disposition gain have been reported as discontinued operations for all years presented. See Part II, Items 7 (Management’s Discussion and Analysis of Financial Condition and Results of Operations) and 8 (Financial Statements) of this Annual Report on Form 10-K for a more detailed discussion of the sale of this subsidiary.

Financial Information about FECI’s Segments

The Company had total segment operating revenues of $378.2 million, an operating profit of $130.2 million and total assets of $1.1 billion in 2004. (See Note 8 Segment Information of the Financial Statements and Supplementary Data set forth in Part II, Item 8 of this report on Form 10-K). The Company’s total railroad operating revenues were $200.8 million and real estate revenues were $177.4 million (which included land sales of $104.8 million). Segment operating profit included $47.3 million from the railroad, $98.0 million from real estate (which included land sales of $89.0 million), less $15.1 million of corporate general and administrative expenses. During 2002, the Company sold EPIK and discontinued FLX’s (Florida Express Carriers, Inc.) trucking operations. The financial results of these two businesses, along with certain buildings sold or held for sale, and partnership interests sold, are accounted for and shown in discontinued operations, which includes a 2004 and 2003 gain/(loss) from the operation of discontinued operations, net of taxes, of $0.1 million and ($0.2) million, respectively, and a 2004 and 2003 gain on disposition of discontinued operations, net of taxes, of $2.6 million and $2.1 million, respectively.

Sources and Availability of Raw Materials

All raw materials FECR and Flagler use, including fuel, track materials and building construction materials, are available in adequate supply from multiple sources.

Seasonality

FECR’s rail traffic is relatively stable throughout the year with higher volumes ordinarily occurring during the second and last quarters of the year. The Company’s real estate business is not generally seasonal.

Working Capital

At December 31, 2004, the Company’s current assets exceeded current liabilities by $111.4 million. The Company had a $200 million revolving credit facility at December 31, 2004 (see Note 14 of Item 8 of the Financial Statements). At December 31, 2004, there were no monies drawn on the facility (see also Part II, Item 7., Management’s Discussion and Analysis of Financial Condition and Results of Operations). At December 31, 2004, the Company had cash and cash equivalent balances of $126.2 million, including $91.4 million, held by a qualifying intermediary, designated for possible use to purchase real property via tax-deferred exchange. The Board of Directors authorized the expenditure of up to $40 million to repurchase its outstanding common stock through a program of open market purchases and privately negotiated transactions. The Company expects to finance the stock repurchase primarily from available cash balances, cash generated from operations, and external financing to the extent necessary. At December 31, 2004, the Company had not repurchased stock pursuant to this authorization.

Employees

FECI employed 20 people; FECR employed 798, and Flagler had 67 employees as of December 31, 2004. Approximately 567 of FECR’s employees are represented by labor unions: United Transportation Union (UTU) train and engine service employees, Brotherhood of Maintenance of Way Employees (BMWE) track maintenance, structures and roadway shop employees, and International Brotherhood of Electrical Workers (IBEW) representing six crafts including agents and clerical, carmen, maintenance of equipment foremen, signals and communications, train dispatchers, boilermakers, electricians, machinists, sheetmetal workers and shop laborers.

FECR is a party to Collective Bargaining Agreements (CBAs) with these three national labor unions. All agreements are currently amendable. The Company is in various stages of negotiations with collective bargaining representatives of these unions, including direct negotiations, mediation and in one instance, mutually agreed binding arbitration, which is scheduled for the second quarter of 2005. The Company anticipates a satisfactory resolution of these negotiations and proceedings.

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Company Web Address

The Company’s Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports are available through the Company’s website (www.feci.com) as soon as reasonably practicable after such material is electronically filed with or furnished to the Securities and Exchange Commission and are available free of charge upon request from the Company.

Additionally, the Company’s Code of Conduct, Corporate Governance Guidelines and Charters of the Committees of the Board of Directors are also posted on the website. This information is also available in print form via mail by request to the Company.

ITEM 2. PROPERTIES

The Company’s material physical properties at December 31, 2004 are listed below and are grouped by industry segment.

Railway

FECR owns three connected four-story buildings in St. Augustine, Florida, which are used by FECI and FECR as corporate headquarters. FECR also owns a railroad right-of-way, generally 100 feet wide, along the east coast of Florida extending for 351 miles used for its railroad operations. FECR also owns and operates approximately 277 miles of branch, switching and other secondary track, and 158 miles of yard track, various rail car marshalling yards, trailer/container and automobile loading and unloading facilities, signaling system facilities, and a number of operating offices, shops and service house buildings.

On March 2, 1998, FECR entered into a Trackage Agreement with SCFE providing for, among other things, the exclusive operation and maintenance of 56 miles of branch mainline.

FECR’s tracks, bridges and other fixed property and signal improvements are maintained to a level based on the needs of service. The mainline is, in general, constructed of 132-pound per yard continuous welded rail supported on concrete crossties. These facilities provide a reliable infrastructure for rail operations suited to the business demands of customers, including unrestricted movement of double-stacked containers, tri-level automobiles, and heavier axle rail cars.

The branch mainlines, way switching and yard tracks are, for the most part, of 115-pound per yard materials supported by wood ties.

FECR owns or leases 76 diesel electric locomotives, 2,456 freight cars, 1,655 trailers for highway revenue service, numerous pieces of rail-mounted and non-rail-mounted work equipment, and numerous automobiles used in maintenance and transportation operations. Generally, FECR’s equipment is in good physical condition, considering its years of service and operating utilization.

During 2003, FECR commenced an engineering- and economics-based study of its principal right-of-way and equipment assets to develop a multi-year maintenance and replacement plan and associated estimates of the assets’ remaining lives. The engineering studies segregated the equipment and right-of-way assets into the following major groupings: Locomotives, rolling stock (e.g. hoppers, flatcars, etc.), bridges, and track structure (rail, ties, ballast, and other track material). During the third and fourth quarters of 2004, the engineering studies (including associated estimated depreciation lives) for locomotives and rolling stock were completed. The studies generally indicated no significant changes in capital maintenance or replacement programs or depreciation expense. (See Note 3 of the Financial Statements in Part II, Item 8 of this report). The finalizations of the bridge and right-of-way asset engineering studies are expected during the first and second quarters of 2005, respectively.

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These pending studies and their conclusions may result in material changes in FECR’s maintenance and capital spending and in the estimated remaining useful lives of its property, plant and equipment, which may affect future depreciation rates and expense.

In addition, FECR currently manages approximately 2,700 rail cars from Greenbrier Leasing Corporation, Bombardier Capital, and other entities, with operating terms of up to five to ten years, generally cancelable every three years. The terms call for FECR to be billed an hourly rate based upon the length of time the car is on-line versus off-line. As a car goes off-line, a per diem rent sharing arrangement goes into effect whereby Greenbrier and FECR apportion the rent based upon the length of time the car is off-line. Rents from the Greenbrier, Bombardier and other entities received by FECR were $3.9 million, $4.0 million and $3.0 million in 2004, 2003 and 2002, respectively. Certain of these agreements provide for base rents payable to Greenbrier and others by FECR if the car remains on FECR’s line for a specified number of days. To date, these base rents (i.e., those above normal car hire) payable to Greenbrier and others have been minimal.

Real Estate

At year-end 2004, Flagler’s commercial and industrial portfolio included 60 buildings aggregating 6.6 million rentable sq. ft. Flagler’s income-producing properties are detailed below:

FLAGLER’S INCOME-PRODUCING BUILDINGS
(at December 31, 2004)

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On February 4, 2005, Flagler completed the acquisition of a partially leased 240,000 sq. ft. Class A office building located in Doral, Florida. Flagler utilized approximately $41.6 million of land sales proceeds held in escrow at December 31, 2004 to purchase this property.

Certain of these buildings are mortgaged to secure loans with outstanding balances due of $342.9 million as of December 31, 2004. The mortgage notes consist of $238.4 million of seven- and ten-year notes with a blended interest and principal repayment payable monthly based on a fixed 7.23% weighted-average interest rate on the outstanding principal amount of the mortgage notes and a thirty-year amortization period. In addition, $105 million of seven-year mortgage notes were issued on August 10, 2004, with $104.5 million outstanding at December 31, 2004. These mortgage notes consist of a $60 million note with a fixed rate of interest of 5.27% and a $45 million note with a floating rate of interest based on the 90-day LIBOR Index plus 1.00% (3.40% at December 31, 2004). Repayments of principal and interest are payable monthly based upon a thirty-year amortization schedule.

The Company periodically reviews its inventory of income-producing commercial and industrial properties, as well as undeveloped properties to determine how best to maximize its value, including possible sale, if market conditions warrant. The Company will continue to develop additional rentable commercial and industrial space if market conditions warrant. The Company currently has 804,000 sq. ft. under construction, including a 239,000 sq. ft. build-to-suit project, and 517,000 sq. ft. in the pre-development phase (see Part I, Item 1. Business, in this report on Form 10-K).

Flagler’s land portfolio includes the following major land holdings:

     Lemberg Tract and Miller Shop

Three tracts totaling 1,169 acres located in St. Johns County along US 1 between Jacksonville and St. Augustine. Additionally, FECR owns an adjacent 200-acre parcel located along the headwaters of the San Sebastian River in St. Augustine. This parcel is part of FECR’s former mechanical shop property. The Company is currently in the process of evaluating the zoning and possible future changes to current zoning or potential Development of Regional Impact processes. The Company is evaluating the development potential of these parcels for a variety of future uses, including potential development or disposition.

     Fort Pierce K-4

A 319-acre tract located in St. Lucie County at the southeast quadrant of the intersection of I-95 and the Florida Turnpike. The land use designation for the property is for mixed-use development, with 160 acres of the property presently zoned for heavy industrial. The remainder is presently zoned for agriculture or residential. When market analysis reflects the proper demand for industrial use, the property could be developed as industrial zoned property. Various approvals from state, regional and local government entities will be required. This property is currently being marketed for sale.

     Downtown Miami Lot

An 8-acre tract located in downtown Miami fronting on NW 1^st Avenue adjacent to the Miami Arena and less than one block from the federal courthouse currently being constructed. The future land-use designation and zoning of the property are for office/mixed-use. Flagler is evaluating the development of the property for the allowable future use.

     Bartram Park

A 90-acre parcel located in south Jacksonville at the intersection of I-95 and Old St. Augustine Road, across the interstate from Flagler Center. The property has entitlements for 882,000 sq. ft. of office, industrial and commercial space. Bartram Park is currently under contract for $22 million to an unaffiliated third party. The sale agreement contains, and is subject to, certain due diligence contingencies that enable either or both parties to exit the agreement. The sale is expected to close during the third quarter of 2005.

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FECR Properties

FECR also owns lands outside of the right-of-way. These holdings include certain properties in South Florida and large rail yards in Jacksonville, Fort Pierce, and Miami. Exclusive of operating rail yards, some of FECR’s land portfolio includes the following:

     Right-of-Way Corridors

The Company continues to hold an interest in several corridors, upon which rail service is not currently provided. The Titusville Branch in Volusia and Brevard counties is approximately 35 miles in length and contains 450 acres. In addition, the Edgewater Branch extends from Edgewater to Maytown connecting to the Aurantia to Benson Junction corridor. This corridor is approximately 16 miles in length and contains 191 acres. The Company has recently entered into discussions with the Florida Department of Environmental Protection regarding acquisition of these lines for recreational purposes.

A corridor extends southerly for approximately six miles from the Miami International Airport to a major metropolitan mall in Miami-Dade County. The northerly portion of this corridor remains in rail service. On February 22, 2005, FECI entered into a contract to sell 0.4 miles of this right-of-way for approximately $11.1 million. The sale agreement contains, and is subject to, certain due diligence contingencies that enable the buyer to terminate the agreement.

     Cadillac Gauge Property

This property is located in an industrial area on Cidco Road in Cocoa, Florida. This property has over 100,000 sq. ft. of warehouse space on 92 acres of land. The property offers a variety of uses and is currently being marketed for sale.

     Eyster Boulevard

This site is located in the City of Rockledge, south of Eyster Boulevard, and consists of 64.1 acres with approximately 1,290 ft. of frontage along Eyster Boulevard and over 2,600 ft. of rail frontage. A portion of the site has 330 ft. of frontage along Murrell Road. The property is currently being marketed for sale as commercial and industrial sites.

     New Smyrna

This site is located on Route 44 in New Smyrna Beach along Florida’s east coast. The property includes undeveloped acreage and an active FECR locomotive repair shop. The undeveloped acreage offers a variety of uses and may be offered for sale in the future.

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Summary of FECI Land Holdings

The Company owned and managed 5,321 acres of land at year-end 2004, which included 543 acres on which buildings are located; 740 acres of developable land with entitlements, including the projects under development described in Item 1, Part 1 of this report; 2,832 acres of unentitled land, including the undeveloped properties described in Item 1, Part I of this report, and 1,206 acres held by FECR. These properties are held for lease, development, and/or sale and are in fourteen counties of the state of Florida with 4,115 acres held by Flagler and 1,206 acres held by FECR.

ITEM 3. LEGAL PROCEEDINGS

The Company is the defendant and plaintiff in various lawsuits resulting from its operations. In the opinion of management, appropriate provision has been made in the financial statements for the estimated liability that may result from disposition of such matters. The Company maintains comprehensive liability insurance for bodily injury and property claims, but is self-insured or maintains a significant self-insured retention for these exposures, particularly at FECR. These lawsuits are related to alleged bodily injuries sustained by Railway employees or third parties, employment related matters such as alleged wrongful termination and commercial or contract disputes.

The Company is subject to proceedings and consent decrees arising out of its historic disposal of fuel and oil used in the transportation business. It is the Company’s policy to accrue environmental cleanup costs when it is probable that a liability has been incurred and an amount can be reasonably estimated. As assessments and cleanups proceed, these accruals are reviewed and adjusted.

The Company is participating, together with several other potentially responsible parties (PRPs), in the remediation of a site in Jacksonville, Florida, pursuant to an agreement with the United States Environmental Protection Agency (USEPA). The site previously accepted waste oil from many businesses. The Company has accrued $250,000, which is its estimated share of the total estimated cleanup costs for the site. To date, approximately $145,000 has been expended. The cleanup is expected to take approximately five years. Based upon management’s evaluation of the PRPs, which include the City of Jacksonville, CSX Transportation, Inc. and the federal government, the Company does not expect to incur additional material amounts, even though the Company may have joint and several liability. It is possible that the remediation costs could be higher than anticipated, but the Company is not aware of any facts or circumstances, which indicate that the costs are expected to be materially higher than currently anticipated.

FECR is one of several PRPs alleged to have contributed to the environmental contamination at and near the Miami International Airport (MIA) in a lawsuit filed on or about April 11, 2001 by Miami-Dade County in the Miami-Dade County 11th Judicial Circuit Court. In regard to FECR, Miami-Dade County generally alleges that FECR is or was the owner of sites at or near MIA and that the past acts of an FECR lessee or others contaminated the soil and/or groundwater at those sites, which allegedly impacted MIA property. The County generally sought damages for past and future remediation costs relating to MIA’s property. In June 2004, FECR and Miami-Dade County entered into a Settlement Agreement, General Release and Covenant Not to Sue whereby FECR would be released from all claims that have been or could be asserted against FECR in the lawsuit by Miami-Dade County, upon payment to Miami-Dade County of approximately $100,000 and FECR’s release of Miami-Dade County from FECR related claims at MIA. In December 2004, the Settlement Agreement was approved by the court, and the matter was settled in accordance with the terms of the Settlement Agreement.

The Company monitors a small number of sites leased to others, or acquired by the Company or its subsidiaries. Based on management’s ongoing review and monitoring of the sites, and the ability to seek contribution or indemnification from the PRPs, the Company does not expect to incur material additional costs, if any.

It is difficult to quantify future environmental costs as many issues relate to actions by third parties or changes in environmental regulations. However, based on information presently available, management believes that the ultimate disposition of currently known matters will not have a material effect on the financial position, liquidity, or results of operations of the Company.

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On February 24, 2004, the Broward County Commission approved the negotiated termination of a long-term ground lease between the County and the Company.

The ground lease covered 97 acres owned in fee by Broward County at Port Everglades, which is located near Fort Lauderdale, Florida. The County and the Company have now terminated the entire lease. In consideration for the early termination, the Company (a) conveyed title to certain land improvements and a warehouse on the leased property and (b) paid to Broward County $5.4 million reduced by additional rental payments made by the Company from November 2003 until closing and some other minor adjustments, the net additional payment being $3.7 million. Additionally, the Company paid $1.8 million to resolve a dispute under a related agreement between the County, the City of Hollywood, and the Company for payments in-lieu-of taxes for the lease term. The settlement terminates all agreements affecting the Company in respect to the leased premises.

During the third quarter of 2003, the Company recorded a charge of $16.4 million ($10.1 million after tax), reflecting management’s estimate of the cost of terminating the ground lease. Final costs of terminating the ground lease, including the settlement with the City, were $16.9 million. The additional costs of $0.5 million are included in the 2004 operating results.

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

There were no matters submitted to a vote of security holders during the fourth quarter of 2004.

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PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND
             ISSUER PURCHASES OF EQUITY SECURITIES

Price Range of Common Stock and Dividend Policy

The common stock of FECI is traded on the New York Stock Exchange with the symbol “FLA.” As of February 18, 2005, there were 1,568 holders of record of FECI’s common stock.

The following table shows the high and low sales prices and dividends per share by quarter for 2004 and 2003:

The Company pays quarterly cash dividends on its outstanding shares of common stock. On August 28, 2003, the Company declared a special dividend of $1.50 per share on its outstanding common stock, payable on September 25, 2003, to shareholders of record on September 11, 2003. The company currently expects to continue paying quarterly cash dividends in an amount at least equal to the dividends paid in 2004; however, the determination of the amount of future cash dividends, if any, to be declared and paid by the Company will depend upon, among other things, the Company’s financial condition, funds from operations, level of capital expenditures, future business prospects and other factors deemed relevant by the Board of Directors. The closing price of the common stock was $42.08 as of February 18, 2005.

On February 27, 2003, FECI’s Board of Directors approved the submission of a proposal to shareholders to amend the Company’s Articles of Incorporation to eliminate the Company’s dual-class structure by reclassifying the Company’s Class A common stock and Class B common stock into a new single class of common stock on a one-for-one basis. The reclassification was subsequently approved at the Annual Meeting of Shareholders held on May 28, 2003. On September 10, 2003, FECI and The St. Joe Company received a favorable ruling from the U.S. Internal Revenue Service regarding FECI’s reclassification of its Class A and Class B common stock into a single class of common stock. The letter ruling confirmed that the proposed reclassification would not have an adverse affect on the tax-free status of the October 2000 spin-off of St. Joe’s equity interest in FECI to St. Joe’s shareholders. FECI filed

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an amendment to its Articles of Incorporation with the Secretary of State of Florida in order to effect the reclassification on September 22, 2003. The consolidated financial statements reflect the reclassification for all periods presented. The single class of common stock trades on the New York Stock Exchange under the ticker symbol “FLA.”

The tabular presentation regarding Securities Authorized for Issuance under Equity Compensation Plan Information Plans is presented in the Proxy Statement.

On August 28, 2003, the Board of Directors authorized the expenditure of up to $75 million to repurchase the Company’s outstanding common stock through a program of open market purchases and privately negotiated transactions.

On August 13, 2004, the Company purchased 5.5 million shares of common stock from The Alfred I. duPont Testamentary Trust (Trust) and The Nemours Foundation (Foundation) for $34.50 per share or approximately $191 million. The price represented an 8.0% discount to the 30-day average closing price ending August 4, 2004. The shares represented approximately 14.9% of the Company’s total outstanding common stock and are held as treasury stock. After the transaction, the Trust owned 3,085,930 shares, or approximately 9.8% of the total shares outstanding. The Foundation no longer owns any shares of the Company. In connection with the transaction, the Trust representatives Winfred L. Thornton, John S. Lord, and Herbert H. Peyton resigned from the FECI Board of Directors during August 2004. The Trust also agreed not to sell additional shares until January 1, 2005. The transaction was approved by the directors of the FECI Board, other than the representatives of the Trust.

The share-repurchase transaction with the Trust and Foundation described earlier exhausted the above $75 million share repurchase authority. After the transaction with the Trust, the Board authorized the Company to repurchase up to $40 million of common stock through a program of open market purchases and privately negotiated transactions, from time to time. The following table sets forth the repurchases made during the three months ended December 31, 2004:

* Shares purchased represent shares surrendered to the Company for federal withholding obligations related to employees’ vesting on previously restricted stock. During 2004 31,173 shares were surrendered for this purpose at an average of $38.88 per share. Additionally, in August 2004, the CEO surrendered to the Company 59,769 shares at $39.74 per share, to pay the strike price and withholding obligations for the exercise of 80,524 options.

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ITEM 6. SELECTED FINANCIAL DATA

The selected consolidated financial data set forth below with respect to the Company’s consolidated statements of income for each of the five years in the period ended December 31, 2004, and with respect to the consolidated balance sheets for the same periods are derived from the consolidated financial statements. This selected financial data should be read in conjunction with Part II, Items 7 (Management’s Discussion and Analysis of Financial Condition and Results of Operations), and 8 (Notes to the Financial Statements and Supplementary Data) included elsewhere herein. Income statement data, discontinued operations and earnings per share results for all years have been reclassified to treat EPIK, FLX and certain Flagler buildings as discontinued operations, consistent with the 2004 presentation. Included in 2002 and 2001 discontinued operations is an impairment of certain telecommunications assets. See Note 4 to the Financial Statements in Item 8 below for additional discussion.

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Details of EPIK’s, FLX’s, and certain Flagler buildings’ income (loss) from operation of discontinued operations are provided in the following tables:

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

Management’s discussion and analysis should be read in conjunction with Item 8., Financial Statements, Item 1., Business, and Item 2., Properties, included elsewhere herein. The following discussion contains forward-looking statements (see cautionary statement at the front of this report). The Company’s actual results may differ significantly from those projected in the forward-looking statements.

GENERAL OVERVIEW

FECI is a holding company engaged in the rail and real estate businesses through two wholly owned subsidiaries.

The Company’s assets and operations are located in the state of Florida. Consequently, the Company’s performance is significantly affected by the general health of the Florida economy, while more broadly affected by the national economy, and international economies, including the Caribbean, South America, and Asia.

The Company generates rail-operating revenues primarily from the movement of freight in both conventional freight cars and intermodal shipments of containers and trailers on flatcars over its rail lines. Starting in November of 2002, certain drayage operations previously performed by FLX were assumed by FECR. Freight and drayage revenues are recorded as freight moves from origin to destination. Modest non-freight operating revenues are derived from demurrage and detention (equipment per diem paid by customers), switching, weighing, special train and other transportation services. The Company has one railroad customer that accounted for approximately 21%, 20%, and 19% of the railroad’s operating revenues in 2004, 2003 and 2002, 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 near future. FECR’s top five customers accounted for approximately 43%, 43%, and 46% of 2004, 2003, and 2002 freight revenues. While FECR may compete directly with certain of its connecting rail carriers, FECR revenues can also be affected by broader rail industry issues like service reliability, shipper satisfaction, government regulation, and the effects of Class I mergers and acquisitions. Additionally, broader transportation industry issues associated with motor carriers, ships, barges, and ports can affect transportation logistics and patterns, which influence rail shipments and freight revenues.

The Company’s rail expenses consist of salaries and wages (71% of FECR’s work force is covered by collective bargaining agreements, each agreement currently amendable with several in negotiations, mediation and one in binding arbitration), related payroll taxes and employee benefits, depreciation (primarily reflecting FECR’s capital requirements for maintaining the current operations), insurance and casualty claim expense, diesel fuel, car hire (generally, a net rent credit received from others utilizing FECR’s car fleet less rents paid by FECR to use foreign equipment), property taxes, materials and supplies, purchased services and other expenses. Many of the railway’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 takes specific actions to restructure the Company’s operations. The Company experiences increases/decreases in fuel costs as the price of diesel fuel fluctuates in the market.

The Company’s real estate operations are cyclical and are affected by local demographic and general economic trends and the supply and rate of absorption of new construction. Although the Company’s real estate business has a large portfolio of income-producing properties expected to provide reasonably stable operating results from a large and diverse customer base, the Company’s real estate earnings may be significantly affected from period to period by the nature and timing of sales of developed property and non-core real estate assets as well as market conditions that tighten competition for tenants. Acquisitions may also significantly affect the comparability of operating results period to period due to the immediate impact from the addition of income-producing developed operating properties, as is contemplated by the potential acquisitions utilizing tax deferred net land sales proceeds held at December 31, 2004. Additionally, certain significant expenditures (including capital for maintaining or providing infrastructure to the properties) may fluctuate significantly over time.

Flagler has a portfolio of land, which includes land held for future development (entitled and unentitled), surplus land, some of which is under contract or held for sale, and land located in the parks that is under the existing buildings (543 acres) or undevelopable (832 acres). The Company believes that Flagler’s 740 acres of entitled land and 2,832 acres of unentitled land, which are held for future development or disposition, are capable of supporting five- to ten-years of future development. During 2005, additional developable land may be purchased from reinvested land sale

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proceeds in qualifying tax-deferred exchanges. These properties will be held for future development. The Company’s determination to develop or sell property is based on market conditions. Flagler holds approximately 518 acres of surplus land included in unentitled land above, all of which is either on the market or under contract for sale and expected to be sold over the next several years.

FECR owns or has an interest in approximately 1,206 acres of land that is held for lease, development, and/or sale, including 3 rail corridors (661 acres) that are either abandoned or are candidates for abandonment. There are 148 acres currently on the market or under contract for sale. FECR continues to evaluate the appropriate uses for the remaining land.

Real estate operating revenues are generated from (i) rental agreements on its commercial and industrial portfolio of buildings, as well as rents on its land holdings, (ii) sales of land and/or buildings and (iii) development, brokerage and property management services provided to customers.

Real estate operating expenses include costs of managing its commercial and industrial properties, costs associated with providing services to customers, and costs associated with land (both holding and development costs) and building sales. The Company incurs property management expenses, such as building maintenance, leasing costs and property taxes, beginning when buildings are completed and placed in the Company’s inventory of leasable properties. The Company sells certain real estate holdings when the return on such sales is considered advantageous, causing fluctuations in costs of real estate sales based on the basis in the properties sold, timing, and significance of such dispositions.

Passive revenues are generated from leases of railroad right-of-way to telecommunication and other companies for the installation of fiber optic, utilities, and other conduits, and additional uses of the right-of-way (e.g., signboards). These revenues, along with their associated expenses, are recorded net in other income.

FINANCIAL CONDITION, LIQUIDITY, AND CAPITAL RESOURCES

Net cash generated by operating activities was $72.3 million; $136.0 million and $55.3 million in the years ended December 31, 2004, 2003 and 2002, respectively. The year-to-year fluctuation in net cash generated by operating activities reflects a $74.6 million income tax refund received during the second quarter of 2003.

During the years ended December 31, 2004, 2003 and 2002, cash flows provided by investing activities were $10.0 million, $22.0 million and $6.6 million, respectively, representing primarily proceeds from the disposition of assets (mostly buildings and land) offset by costs of development and purchases of properties. Proceeds from asset sales were $121.5 million, $124.2 million and $88.8 million in 2004, 2003 and 2002, respectively.

During the years ended December 31, 2004, 2003 and 2002, the Company invested approximately $80 million, $75 million and $27 million, respectively, at Flagler. Flagler’s 2004 capital expenditures reflect $74 million for park infrastructure development which includes $18 million of infrastructure cost at Flagler Center, including $4 million related to construction of the I-95 interchange at Old St. Augustine Road in Jacksonville, Florida, and $42 million for new building construction. Capital investment at Flagler for 2005 is expected to be between $150 million and $170 million, which includes $75 million to $85 million for acquisitions of land and/or finished buildings utilizing proceeds from third and fourth quarter 2004 realty sales. For the years ended December 31, 2004, 2003 and 2002, the Company’s capital investments at FECR were approximately $30 million, $27 million and $30 million, respectively. Capital expenditures for the Railway in 2005, before the purchase of any strategic land parcels to be inventoried for future Railway customers, are expected to range from $30 million to $36 million.

Net cash (used in) provided by financing activities was ($81.1) million, ($116.9) million, and $7.9 million in the years ended December 31, 2004, 2003, and 2002, respectively. Finance activities during 2004 include primarily the purchase of treasury stock ($191.1 million) offset by proceeds from mortgage debt ($105 million). On August 13, 2004, the Company purchased 5.5 million shares of common stock from The Alfred I. duPont Testamentary Trust and The Nemours Foundation for $34.50 per share or approximately $191 million. These repurchased shares are shown on the Consolidated Balance Sheets as Treasury Stock. This transaction exhausted the remaining $72 million that existed under the previous $75 million stock repurchase authorization. As a result, on August 4, 2004, the Board of Directors authorized the expenditure of $40 million to repurchase common stock from time to time through a program of open market purchases and/or privately negotiated transactions. Finance activities in 2003 were primarily the repayment ($53 million) of monies borrowed on the lines of credit and the payment ($60.5 million) of dividends

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including a special dividend of $1.50 per share. Finance activities in 2002 were primarily proceeds ($14.0 million) from borrowings on the line of credit offset by payments of dividends ($3.7 million) and debt service ($2.5 million).

At December 31, 2004, the Company had in place a $200 million revolving credit facility pursuant to an agreement, as amended from time to time, between the Company and certain banking institutions (the Credit Facility Agreement). The description herein of the revolving credit facility is qualified in its entirety by reference to the Credit Facility Agreement, which is incorporated as Exhibit 10(a) to the Company’s Reports on Form 10-K for years ended December 31, 2004, 2003 and 2002. On February 7, 2003, the Credit Facility Agreement was extended for an additional year to March 31, 2005 and amended to reduce the facility’s size from $300 million to $200 million, increase the stock repurchase and special dividend limit from $50 million to $150 million, increase the non-recourse mortgage financing limit from $250 million to $325 million, and make other miscellaneous modifications. At December 31, 2004, the Company had no monies drawn on the revolving credit facility. Pursuant to the Credit Facility Agreement, the Company has agreed, among other things, to maintain certain financial ratios. The Company believes the most restrictive of such ratios is the Group Debt/EBITDA ratio (as defined in the Credit Facility Agreement). The Credit Facility Agreement provides that at December 31, 2004, the Company’s Group Debt/EBITDA ratio shall be no greater than 2.50. At December 31, 2004, the Company’s actual Group Debt/EBITDA ratio was .01. Pursuant to the Credit Facility Agreement, the required Group Debt/EBITDA ratio is 2.50 from January 1, 2004 to March 31, 2005, all as more particularly set forth in the Credit Facility Agreement. On February 22, 2005, the Company entered into a new unsecured $150 million, 5-year revolving credit agreement. The new credit facility provides a more favorable interest rate and terms and replaced the company’s existing $200 million credit facility agreement. Although no assurances can be given as to the Company’s future compliance with the Group Debt/EBITDA ratio covenant or other financial covenants, the Company has complied with the terms of the Credit Facility Agreement in the past and expects to continue to comply with them until the applicable agreement expires or is terminated.

The Company believes its access to liquidity via cash generated from operations (including proceeds from land sales) and the Credit Agreement and/or external financing (e.g. leveraging buildings) will be sufficient to support needs in future years including the 2005 capital programs.

Results of Operations for 2004 compared to 2003 and 2003 compared to 2002

Discussions are based on segment information — see Note 8 included in Item 8 of this report.

Railway

FECR’s management team continued its focus on improving profitability during 2004 and 2003. Continuing investments in both operational and human capital were made during these periods to enhance customer service and safety while controlling costs. FECR transported record levels of aggregate revenues during 2004 and 2003. After several years of decline in intermodal revenue, FECR saw an increase in intermodal revenue during the second half of 2003, which continued into 2004 with $86.4 million of intermodal revenue, an increase of $13.7 million over 2003. Leading the way was a resurgence in intermodal parcel/LTL, motor carrier, and international segments of the business, as well as continued strength on the “Hurricane Train” service, an Atlanta-based intermodal service introduced in 2001. FECR developed an aggressive marketing plan in the third quarter 2003, featuring a strong defense of existing top customers, while simultaneously developing a group of new customers in the domestic truckload motor carrier segment and the retail market segment, thus positioning FECR with strong momentum throughout 2004. Critical to the rebound has been a complete re-branding and integration of FECR’s drayage services into the intermodal product mix. During 2004 and 2003, the Company invested approximately $30 million and $27 million, respectively, of capital in equipment, improved physical plant, and new technologies at FECR.

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RAILWAY OPERATING RESULTS

(Prior year’s results have been reclassified to conform to current year’s presentation.)

TRAFFIC
Years Ended December 31
(dollars and units in thousands)

(Prior year’s results have been reclassified to conform to current year’s presentation.)

(Prior year’s results have been reclassified to conform to current year’s presentation.)

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Revenues — 2004 versus 2003

Railway segment’s operating revenues increased $19.7 million to $200.8 million in 2004 versus $181.1 million in 2003. Most of the increase resulted from intermodal revenues ($13.7 million) and aggregate rock revenues (crushed stone) ($4.8 million). Freight revenues were $197.1 million for 2004, compared with $177.8 million for 2003. Intermodal revenues increased $13.7 million to $86.4 million for 2004. After years of decline from haulage traffic with a connecting carrier, this revenue increased $2.2 million to $9.9 million in 2004. The “Hurricane Train” service from Atlanta resulted in additional revenues of $3.2 million, showing its success in the Atlanta marketplace, and local traffic (including drayage) increased $9.0 million over 2003 primarily from increased traffic from the retail segment, motor carriers, parcel LTL carriers, and the international segment. Offsetting these intermodal revenue increases was a reduction in the intermodal traffic from one of its interline carriers. Freight revenues from aggregate rock/crushed stone traffic increased $4.8 million in 2004 due to an increase in construction demand throughout the state of Florida. Revenues from stone clay & glass shipments increased $0.5 million due to the high demand for domestic building products as Florida’s construction and re-construction (hurricane related) demand increased. Revenues from foodstuff traffic increased $1.0 million due to increased business from one major customer and new customers locating on FECR’s line. Automotive (vehicles) traffic decreased $0.6 million to $17.6 million primarily due to the change in shipment patterns for automobiles bought back from rental car agencies.

Revenues — 2003 versus 2002

Railway segment’s operating revenues were up $14.3 million at $181.1 million for 2003 versus $166.8 million for 2002. Most of the increase resulted from intermodal revenues ($10.0 million) which included drayage operations ($9.0 million) formerly performed by the Company’s trucking subsidiary, that are now included in intermodal. Excluding drayage, intermodal increased $1.0 million to $72.6 million for 2003. Additional increases were due to aggregate rock traffic (crushed stone), metals traffic (other) and foodstuff traffic. Freight revenues were $177.8 million for 2003, compared with $163.8 million for 2002. Revenues from aggregate rock/crushed stone traffic increased $5.0 million in 2003 due to the increase in construction demand throughout the state of Florida. Revenues from metals shipments (other) increased $0.6 million due to the high demand for domestic metal products as Florida construction demand increased. Revenues from foodstuff traffic increased $0.2 million due to increased business from two major customers. Revenues from SCFE increased $0.4 million from 2002 to $1.9 million primarily due to the bridge connecting FECR to SCFE being out of service for almost eight weeks in 2002. Automotive (vehicles) traffic decreased $1.5 million to $18.2 million due to the weaker demand for automobiles. The “Hurricane Train” service from Atlanta resulted in additional revenues of $2.5 million, showing its success in the Atlanta marketplace, while local haulage and interline traffic decreased $1.8 million over 2002 primarily from reduced traffic with Norfolk Southern, decreased traffic from LTL carriers and decreased international business. The LTL carriers’ traffic was affected by the sluggish economy. Intermodal units were down 6,200 units primarily due to a change in the pricing of certain intermodal moves with an interchange partner. Previously, south- and northbound hauls for this interchange carrier were priced separately. However, during 2003, FECR combined pricing for both moves under a single unit move, causing units overall to decrease.

Expenses — 2004 versus 2003

Operating expenses increased $15.3 million to $153.4 million in 2004, compared with $138.1 million in 2003. A significant portion of the increased expenses resulted from the increased volumes and the impact of three Florida hurricanes that impacted the property. Compensation and benefits increased $3.6 million or 7.0% to $54.8 million in 2004 primarily because of the Railway’s general wage increases for 2004, additional labor costs to move higher traffic levels and increases in variable compensation. Fuel expenses increased $2.6 million to $16.3 million due to increased fuel price ($2.4 million) and consumption ($0.4 million) and a reduction due to non-locomotive fuel ($0.2 million). Depreciation expenses increased $0.6 million in 2004 due to increased levels of 2003 and 2004 capital expenditures. Purchased services increased $1.2 million and materials and stores increased $1.2 million due to additional repairs and services to freight cars and trailers due to additional business. Drayage services increased $3.7 million during 2004 due to increase volumes of business. Hurricanes Charley, Frances, and Jeanne disrupted Railway operations in the third quarter and early fourth quarter 2004. Clean up and repair costs were $3.0 million primarily for tree removal, signal repairs, crossing repairs, increased train operations costs, and building damages. Approximately $1.0 million of these costs have been or are expected to be reimbursed by various governmental agencies. Net hurricane costs are included in other expenses.

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FECR forward purchases fuel to manage the risk of fuel price increases. As of December 31, 2004, FECR had forward purchase contracts of 5.2 million gallons of fuel for delivery from January 2005 to December 2005 for an average purchase price of $1.13 per gallon before taxes and freight. This represents 35% of the estimated consumption for year 2005.

Expenses — 2003 versus 2002

Operating expenses increased $13.5 million to $138.1 million for 2003, compared with $124.6 million for 2002. Commencing in late 2002, FECR began to directly manage the dray operations for intermodal shipments to the Railway, increasing FECR’s expenses $9.2 million over 2002. Compensation and benefits increased $1.6 million or 3.3% to $51.2 million for 2003 primarily because of the Railway’s general wage increases for 2003, offset by a 2002 infrequent maximum medical coverage claim and employee separation costs. Fuel expenses increased $2.0 million to $13.7 million due to increased fuel price and consumption due to increased aggregate business. Equipment rents decreased $0.6 million primarily the result of reductions in the amount of leased intermodal equipment. Property taxes increased $0.7 million to $5.5 million due to an increase in the Railway’s assessment from the State of Florida. Depreciation expenses increased $1.8 million in 2003 due to increased levels of 2002 and 2003 capital expenditures. Purchased services decreased $0.5 million in 2003 due to in-sourcing intermodal trailer maintenance.

Trucking

During the third quarter of 2002, the Company adopted a plan to discontinue and ceased operations of its regional long-haul trucking operations. The Company largely completed its operational shut down and disposition activities for the trucking operation during the fourth quarter of 2002. Wind-down activities were completed during the second quarter of 2003.

Accordingly, the Company reported the results of the trucking operations and the estimated disposition loss as discontinued operations under the provisions of SFAS 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (SFAS 144), and all periods presented have been restated accordingly.

As a result of the discontinuance, certain liabilities were accrued related to this exit plan. A roll-forward of the liabilities through December 31, 2004 is as follows:

Real Estate

During 2004, Flagler added two buildings to its portfolio of income-producing properties through its development activities. Flagler completed construction of the I-95 Interchange at Old St. Augustine Road, adjacent to Flagler Center. The Company also completed the construction of all remaining major infrastructure initiatives at its existing business parks, including SouthPark Center II and Flagler Center.

The Company began construction of four additional buildings, with completion expected in 2005, and a 239,000 rentable sq. ft. build-to-suit project, which is expected to be completed in March 2005. The Company expects to start

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construction on seven additional new buildings during 2005 due to increased demand and in light of improved market conditions. During 2005, Flagler intends to reinvest a significant portion of the $88.3 million of land sale proceeds, held at December 31, 2004 in tax-deferred exchanges, to add strategic operating properties and future developable land holdings to its realty portfolio.

Flagler’s existing land holdings, with entitlements for construction of 12.1 million sq. ft. of office and industrial space, offers opportunities for further development or sale. The Company intends to continue its program to realize the value of its extensive land holdings at Flagler and the Railway by developing or monetizing them. Flagler’s future rate of growth, profitability, capital investment and sales of land depends, in part, on the extent of future demand in Florida’s commercial real estate markets, operating costs, and rental rates for leases, which are subject to uncertainty.

REALTY SEGMENT REVENUES

(Prior year’s results have been reclassified to conform to current year’s presentation.)

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REALTY SEGMENT EXPENSES

(Prior year’s results have been reclassified to conform to current year’s presentation.)

Revenues from Continuing Operations — 2004 versus 2003

Flagler rental revenues increased $6.0 million or 9.4% from $63.6 million in 2003 to $69.6 million in 2004. Revenues from operating properties increased $6.1 million including an increase related to net termination fees of $0.7 million in 2004. Same store occupancy increased to 94% at December 31, 2004 compared to occupancy of 87% at December 31, 2003, with a corresponding increase of $3.7 million in same store revenues. Additionally, same store revenue increased from a net termination fee of $0.5 million for a total increase in same store revenue of $4.2 million. Properties acquired in 2003 contributed an additional $0.3 million, primarily attributable to a 2004 net termination fee of $0.2 million. Deerwood North 300, which began operations in 2004, contributed revenues of $1.6 million in 2004. Income from land rents decreased $0.2 million due to the sale of certain land parcels. Income from equity investments decreased $0.1 million due to the dissolution of Flagler’s partnership interests in 2003.

For all leases renewed during calendar 2004, beginning cash rental rates averaged approximately 3% less than the ending rate of the expiring leases, however straight-line rental rates over the new lease term averaged approximately 3% higher than the average straight-line rental rates of the expiring leases. This is currently typical in the industry, although to a lesser degree than in the past given improvements in the rate environment over the past six to twelve months.

Flagler held 60 finished buildings with 6.6 million square feet and occupancy of 95% at December 31, 2004. “Same store” properties include 5.8 million square feet and 94% occupancy at December 31, 2004, compared to 87% at December 31, 2003.

Flagler sales revenue increased from $63.5 million in 2003 to $99.7 million in 2004 related primarily to the $80 million sale of a 460-acre parcel in Doral, Florida in December 2004.

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Revenues from Continuing Operations — 2003 versus 2002

Flagler’s rental revenues increased $3.9 million or 6.5% from $59.7 million in 2002 to $63.6 million in 2003. Included in 2003 and 2002 revenues are net termination fees of $0.1 million and $1.9 million, respectively. Excluding termination fees, the increase in rental revenues from year-over-year is $5.7 million or 9.9%. Excluding termination fees, revenues from operating properties increased $6.3 million, with $4.5 million of the increase attributable to properties acquired in January 2003. “Same store” revenues increased $0.5 million (excluding net termination fees) over the prior year. Newer properties contributed a $1.3 million revenue increase in 2003 related to occupancy increases. Income from equity investments decreased $0.7 million due to the buy out of the Flagler Station partnership interests from Duke Realty. Other income decreased $0.1 million related primarily to non-recurring option income received in 2002 and decreased land lease revenue in 2003.

Flagler held 58 finished buildings with 6.4 million square feet and occupancy of 88% at year-end 2003. “Same store” properties, including 51 buildings and 5.4 million square feet, were 89% occupied at December 31, 2003, compared to 86% at December 31, 2002.

Flagler’s sales revenue increased from $32.1 million in 2002 to $63.5 million in 2003. Real estate sales in 2003 included the 2,170-acre Ball Tract ($22.1 million), 78 acres in Flagler Center sold to Citigroup ($14.4 million), 32 acres in Flagler Center sold to Baptist Hospital ($9.5 million), and a 228-acre parcel in the Fort Pierce K-4 tract sold to Wal-Mart ($5.6 million), as well as other less significant land sales.

Other realty sales decreased by $11.6 million to $27.0 million in 2003 as 2002 included a large land sale (Buena Vista Yard) for $34.5 million.

Expenses from Continuing Operations — 2004 versus 2003

Flagler’s operating expenses increased $4.7 million or 8.4% from $55.9 million in 2003 to $60.6 million in 2004. Properties beginning operations in 2004 contributed $1.1 million of the increase, including $0.6 million of depreciation and amortization. Operating expenses for properties acquired in 2003 increased $0.3 million. Same store operating expenses increased $0.7 million related to increased owners’ association costs ($0.4 million), increased repairs and maintenance ($0.1 million), increased janitorial costs ($0.1 million), increased electrical costs related to occupancy increases ($0.1 million), increased management and administrative costs ($0.2 million) and other expense increases ($0.1 million). These costs increases were offset by decreased landscaping costs ($0.2 million) and decreased insurance cost ($0.1 million). Land holding costs increased $2.9 million primarily related to increased real estate taxes ($1.0 million) and increased depreciation ($1.9 million) associated with unallocated infrastructure placed in service during 2004. These increased operating expenses were offset by decreased corporate overhead of $0.3 million.

Flagler’s cost of land sales decreased from $33.9 million to $14.9 million, a decrease of $19.0 million or 56.2%.

Flagler is the guarantor of a tenant’s previous lease obligation. The guarantee was entered into during 1999 as an inducement to acquire a large, long-term tenant lease. Flagler is liable for the sublease obligation, which expires April 30, 2006. The estimated value of the remaining guarantee is approximately $0.7 million at December 31, 2004.

Expenses from Continuing Operations — 2003 versus 2002

Flagler’s operating expenses increased $5.8 million or 11.5% from $50.1 million to $55.9 million year-over-year. Properties acquired in 2003 contributed $2.9 million of the increase, including $1.9 million of additional depreciation and amortization. Existing operating properties’ (including “same store” and new in 2001 properties) operating expenses increased $2.2 million mainly due to increased recoverable real estate taxes ($0.3 million), insurance ($0.4 million), recoverable repairs and maintenance ($0.5 million), non-recoverable repairs and maintenance ($0.6 million), recoverable administrative costs ($0.3 million) and other insignificant charges. Corporate overhead expenses increased $0.6 million primarily related to staffing costs, bad debt expenses, and holding company allocations.

Flagler’s cost of land sales increased $14.3 million from $19.6 million to $33.9 million related to the increased sales activity stated above.

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Other rental expenses increased $18.6 million to $23.5 million in 2003 primarily due to accrued lease termination costs ($16.4 million) on 97 acres of land at Port Everglades in Broward County, Florida.

Results from Discontinued Operations

In accordance with SFAS 144, components of Flagler that meet certain criteria have been accounted for as discontinued operations. Therefore, income or loss attributable to the operations and sale of the components classified as discontinued operations are presented in the summary of operating results as discontinued operations, net of applicable income taxes.

During March 2004, Flagler sold a 60,000-sq ft. build-to-suit office building for $12.6 million recognizing a pre-tax gain of $3.7 million, or $2.3 million, net of applicable taxes. During September 2004, Flagler sold a 147,000-sq. ft. industrial building for $4.1 million, for a $0.4 million pre-tax gain, or $0.3 million, net of applicable taxes.

Discontinued operations include the operations of the buildings sold in 2004, the operations of an industrial building sold in November 2003, Flagler’s 50% interest in three buildings formerly held in partnership with Duke Realty sold during July 2003, as well as the operations of an industrial building sold during September 2002. The operating results of these properties, as well as the gains on the sales of these properties are included in discontinued operations for all periods presented.

Telecommunications

FECI completed the sale of its wholly owned telecommunications subsidiary, EPIK, to Odyssey Telecorp, Inc. (Odyssey), a privately held holding company specializing in telecom network assets during the fourth quarter of 2002. In accordance with SFAS 144, EPIK’s results from operations and the estimated disposition gain have been reported as discontinued operations for all years presented.

In the course of a strategic alternatives’ review conducted primarily in the third quarter of 2002, the Company obtained information about deteriorating conditions in the telecommunications industry, the prospects for EPIK’s business, the fair value of the Company’s investment in EPIK, and the alternatives available to the Company in respect of this investment. As a result, the Company concluded that EPIK’s long-lived assets had no material value whether held for use or sold. Accordingly, in the third quarter of 2002, the Company fully impaired the carrying value

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($238.7 million) of EPIK’s long-lived assets. On November 22, 2002, the Company was approached by a party with a proposal to purchase EPIK for contingent consideration if the Company provided funds for the purchaser’s use in connection with EPIK. After negotiation, agreement (as was filed with the Securities and Exchange Commission on Form 8-K on December 17, 2002) was reached which included a commitment by the Company to provide funds totaling $16.5 million, net, for the purchaser’s use in connection with EPIK. The Company sold the stock of EPIK on December 3, 2002. The resulting gain the Company recognized during the fourth quarter of 2002 from the disposition of EPIK resulted from the difference between EPIK’s negative book value, $39.1 million, and the net cash provided for purchaser’s use, $16.5 million, net, other transaction fees and costs, $6.3 million, and income taxes, $6.3 million, as discussed in the Company’s 8-K filed on December 17, 2002.

Included in EPIK’s above expenses for 2002 is asset impairment charges of $238.7 million associated with EPIK’s write-down of its telecommunication assets.

At the time of EPIK’s sale, the Company accrued certain liabilities (primarily employee severance) related to the sale. A roll-forward of the liabilities through December 31, 2004 is as follows:

In addition, FECI is a guarantor on certain leases (primarily office space) and could be contingently liable if EPIK were to default on certain lease obligations. Estimates of the amounts guaranteed were approximately $2.5 million at the time of the sale. These amounts could be subject to change in subsequent periods and are estimated to be $0.1 million at December 31, 2004.

Corporate Expenses

Corporate expenses for the years ended December 31, 2004 and 2003 were $15.1 million and $13.1 million, respectively. Increases during 2004 primarily relate to costs associated with increased incentive-based compensation (i.e. restricted stock and annual bonuses) expense. In a transaction (the “Transaction”) initiated at the request of the Board of Directors, the Company cancelled vested, in-the-money stock options (the “Options”) to acquire 144,000 shares of the Company’s common stock held by the Company’s Chief Executive Officer (“CEO”). The embedded value of the Options (fair market value less strike price) was $2 million. The embedded value, less applicable tax withholding, was paid in common stock. The CEO was issued 36,407 shares (valued at $35.06, which was the closing price on February 27, 2004). The stock, together with applicable withholdings, represents the pre-tax embedded value. Because the original stock option award was cancelled and the Company replaced this award with FECI common stock, in accordance with FASB Interpretation No. 44, the Company was required to recognize compensation expense in the amount of $2 million with respect to the Transaction. The Board recognized the need for the CEO to address the near-term maturity of the Options and preferred that he do so without the current market sale of 144,000 shares and that he increase his outright ownership in the Company.

Corporate expenses increased from $11.5 million in 2002 to $13.1 million in 2003 primarily as a result of costs associated with the reclassification of the common stock (see Note 2 of Item 8) and increased equity incentive compensation expenses. The reclassification of common stock resulted in additional legal and administrative fees of $0.3 million in 2003. During 2002, restricted stock awards (pursuant to which restrictions lapse pro rata over four years) were granted to senior executives. The stock grants also provide for accelerated lapsing of restrictions based on the Company’s performance to pre-established targets. During 2003, the Compensation Committee of the Board of Directors approved performance acceleration of 25% of the grant. These grants resulted in additional recognition of compensation expense of $0.8 million for 2003.

On February 10, 2005, as filed on Form 8-K with the Securities and Exchange Commission, FECI announced that Mr. Adolfo Henriques had been appointed Chairman, President, and Chief Executive Officer succeeding Mr. Robert W. Anestis effective on or about March 28, 2005. Mr. Anestis will remain in his current capacity until then.

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Interest Expense

Interest expense for the years ended December 31, 2004 and 2003 was $16.7 million and $17.1 million, respectively. The lower interest expense resulted primarily from additional interest being capitalized into new construction during 2004. Interest cost (i.e. cash paid for interest) was $19.3 million and $18.0 million for 2004 and 2003, respectively. Cash paid for interest increased primarily due to increased levels of mortgage notes at Flagler.

Interest expense for 2003 was $17.1 million, compared to $19.6 million for 2002. The lower interest expense resulted primarily from decreased borrowings on the revolver.

Other Income

Other income for 2004 and 2003 was $13.0 million and $9.5 million, respectively. Pipe and wire crossing income for 2004 included $2.6 million from two one-time wire crossing agreements entered into in 2004.

Other income decreased to $9.5 million in 2003 from $10.8 million in 2002. Pipe and wire crossings for 2002 included $1.9 million of income from additional pipe and wire crossing agreements.

Income Tax

Income tax expenses represent an effective rate of 39.0% in 2004, compared to 38.5% in 2003 and 2002.

During 2004, the U.S. Congress passed the American Jobs Creation Act of 2004, which included certain tax law changes that are expected to effect future (starting in 2005) taxable earnings of FECI. Generally, these tax law changes are expected to benefit the company through additional current period tax credits for rail right-of-way maintenance expenses (previously capitalized and depreciated) and reduced federal taxes on diesel fuel, respectively. The tax credit for track maintenance is limited (annually) to $3,500 per mile of track and available for years 2005 through 2006. The Internal Revenue Service is expected to issue regulations regarding the utilization of this tax credit. Between December 31, 2004 and June 30, 2005 the railroad fuel tax will be reduced from $0.043 per gallon to $0.033 per gallon. From July 1, 2005 to December 31, 2006, the tax is reduced to $0.023 per gallon. From January 1, 2007, the tax is eliminated.

Net Income

As a result of the foregoing factors, net income was $80.6 million, or $2.29 per diluted share, for 2004, compared to $43.2 million, or $1.17 per diluted share in 2003, and a net loss of $107.8 million, or $2.94 per diluted share in 2002.

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Summary of Operating Results
2004 versus 2003

     Information by industry segment: