UNITED STATES SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

Quarterly report pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934

for the quarter ended March 31, 2004

Commission File No. 001-31456

GENESEE & WYOMING INC.

(203) 629-3722

Shares of common stock outstanding as of the close of business on April 30, 2004:

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.

þYES     oNO

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2)

þYES     oNO

INDEX

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GENESEE & WYOMING INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)
(Unaudited)

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

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GENESEE & WYOMING INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
(Unaudited)

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

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GENESEE & WYOMING INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)

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

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GENESEE & WYOMING INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1.

PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION:

     The interim consolidated financial statements presented herein include the accounts of Genesee & Wyoming Inc. and its subsidiaries. References to “GWI” or the “Company” mean Genesee & Wyoming Inc. and, unless the context indicates otherwise, its consolidated subsidiaries. All significant intercompany transactions and accounts have been eliminated in consolidation. These interim consolidated financial statements have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (the SEC). In the opinion of management, the unaudited financial statements for the three-month periods ended March 31, 2004 and 2003, are presented on a basis consistent with audited financial statements and contain all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation. The results of operations for interim periods are not necessarily indicative of results of operations for the full year. The interim consolidated financial statements should be read in conjunction with the audited financial statements and notes thereto for the year ended December 31, 2003 included in the Company’s 2003 Form 10-K. Certain prior period balances have been reclassified to conform to the 2004 presentation.

2.

EXPANSION OF OPERATIONS:

United States

     Georgia-Pacific Railroads: On December 31, 2003, the Company completed the purchase from Georgia-Pacific Corporation (GP) of all of the issued and outstanding shares of common stock of the Chattahoochee Industrial Railroad (CIRR), the Arkansas Louisiana & Mississippi Railroad Company (ALM), and the Fordyce and Princeton RR Co. (F&P, and collectively, the GP Railroads) for approximately $54.9 million in cash. The purchase price was allocated to current assets ($2.7 million), property and equipment ($37.6 million), and intangible assets ($27.1 million), less current liabilities assumed ($12.5 million). As contemplated with the acquisition, the Company implemented a severance program which is included in the table below. The aggregate cost of the severance program, $1.0 million, is considered a liability assumed in the acquisition, and as such, was allocated to the purchase price. In conjunction with the acquisition, the Company entered into two Transportation Services Agreements (TSAs) which are 20-year agreements for the GP Railroads to provide rail transportation service to GP. One of the TSAs has been determined to be an intangible asset and approximately $27.1 million of the purchase price has been allocated to this asset. The TSA asset will be amortized on a straight-line basis over a 30 year life, which is the expected life of the plant being served, beginning January 1, 2004. The Company funded the acquisition through its revolving line of credit held under its primary credit agreement.

The table below sets forth a roll-forward of the activity affecting the restructuring reserves established in acquisitions including the number of employees and actual cash payments:

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Schedule of Acquisition Restructuring Activity

For U.S. tax purposes, the Company has made elections under Internal Revenue Code Section 338 to treat the GP Railroads each as a purchase of assets.

Pro Forma Financial Results

     The following table summarizes the Company’s unaudited pro forma operating results for the quarter ended March 31, 2003, as if the GP Railroads had been acquired as of the beginning of that period. Actual results for the quarter ended March 31, 2004 are presented for comparison purposes (in thousands, except per share amounts):

     The pro forma operating results include the acquisition of the GP Railroads adjusted for depreciation expense, net of tax resulting from the step-up of GP Railroads property based on appraised values, and incremental interest expense, net of tax related to borrowings used to fund the GP Railroads acquisition.

     The pro forma financial information does not purport to be indicative of the results that actually would have been obtained had all the transactions been completed as of the assumed dates and for the periods presented and are not intended to be a projection of future results or trends.

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3.

EARNINGS PER SHARE

     The following table sets forth the computation of basic and diluted earnings per share (EPS) (in thousands, except per share amounts):

     On February 11, 2004, the Company announced a three-for-two common stock split in the form of a 50% stock dividend distributed on March 15, 2004 to stockholders of record as of February 27, 2004. All share, per share and par value amounts presented herein have been restated to reflect the retroactive effect of the stock split.

Dividends

     At the discretion of the Board of Directors, the Company can declare dividends to holders of class A common stock. In the event that dividends are declared (other than stock dividends) to holders of class B common stock, holders of class A common stock would be entitled to dividends at least ten percent greater. In the event of a dividend other than a Regular Dividend as defined in the Certificate of Incorporation, holders of preferred stock are also entitled to equivalent dividends based on the number of common shares convertible.

4.

EQUITY INVESTMENTS

Australian Railroad Group (ARG)

     ARG is a company which is 50%-owned by the Company and is accounted for under the equity method of accounting. The related equity earnings in this investment are shown within the Equity in Net Income of International Affiliates section in the accompanying consolidated statements of income. The following are U.S. GAAP condensed balance sheets of ARG as of March 31, 2004 and December 31, 2003, and the related condensed consolidated statements of income and cash flows for the three months ended March 31, 2004 and 2003 (in thousands of U.S. dollars). For the dates and periods indicated below, one Australian dollar could be exchanged into the following amounts of U.S. dollars:

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Australian Railroad Group Pty. Ltd.
Condensed Consolidated Balance Sheets

9

Australian Railroad Group Pty. Ltd.
Condensed Consolidated Statements of Income

Australian Railroad Group Pty. Ltd.
Condensed Consolidated Statements of Cash Flows

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South America

     Ferroviaria Oriental S.A. (Oriental) is a company which is 22.89%-owned by the Company and is accounted for under the equity method of accounting. The related equity earnings in this investment are shown within the Equity in Net Income of International Affiliates section in the accompanying consolidated statements of income. Oriental has a U.S. functional currency and the following condensed results of operations for the three months ended March 31, 2004 and 2003 are based on accounting principles generally accepted in the United States (in thousands):

Condensed balance sheet information for Oriental as of March 31, 2004 and December 31, 2003:

     The above data does not include non-recourse debt of $12.0 million held at an intermediate unconsolidated affiliate or any of the general and administrative, interest or income tax costs at various intermediate unconsolidated affiliates. The Company’s share of the various costs from the intermediate unconsolidated affiliates is $207,000 and $148,000 for the quarters ended March 31, 2004 and 2003, respectively, and is included in the Company’s equity income (loss) reported for South America for the quarters ended March 31, 2004 and 2003, respectively.

     As noted previously, the Company holds its equity interest in Oriental through a number of intermediate holding companies, and the Company accounts for its interest in Oriental under the equity method of accounting. The Company indirectly holds a 12.52% equity interest in Oriental through an interest in Genesee & Wyoming Chile (GWC), and the Company holds its remaining 10.37% equity interest in Oriental through other companies. GWC is an obligor of non-recourse debt of $12.0 million, which has an adjustable interest rate dependent on operating results of Oriental. This non-recourse debt is secured by a lien over GWC’s 12.52% indirect equity interest in Oriental.

This debt became due and payable on November 2, 2003. Due to the political and economic unrest and uncertainties in Bolivia, it has become difficult for GWC to refinance this debt and the Company has chosen not to repay the non-recourse obligation. GWC entered into discussions with its creditors on plans to restructure the debt, and as a result of those discussions, GWC obtained a written waiver of principal repayment from the creditors which expired on January 31, 2004. Negotiations with the creditors continue, and currently, none of GWC’s creditors have commenced court proceedings to (i) collect on the debt or (ii) exercise their rights pursuant to the lien.

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If the Company were to lose its 12.52% equity stake in Oriental due to creditors exercising their lien on GWC’s indirect equity interest in Oriental, the Company would record a $180,000 write-off, the basis of its investment in Oriental held through GWC. Because the $12.0 million of debt is serviced by the income generated by GWC, the Company’s loss of the 12.52% equity interest in Oriental would not have a material adverse impact on the Company’s future equity income. A default, acceleration or effort to foreclose on the lien under the non-recourse debt will have no impact on the Company’s remaining 10.37% equity interest in Oriental because that equity interest is held indirectly through holding companies outside of GWC’s ownership in Oriental. The Company plans to continue providing management resources to Oriental and generates substantially all of its equity income through the 10.37% ownership interest.

Oriental has no obligations associated with the $12.0 million debt. In addition, a default, acceleration or effort to foreclose on the lien under the non-recourse debt would not result in a breach of a representation, warranty, covenant, cross-default or acceleration under the Company’s Senior Credit Facility.

5.

COMMITMENTS AND CONTINGENCIES:

     Legal Proceedings – On March 31, 2004, Messrs. Chambers and Wheeler filed a complaint against Genesee & Wyoming Inc. in the Chancery Court of Delaware. The complaint relates to the sale by the plaintiffs in April of 1999 to the Company of their ownership interests in certain of the Company’s Canadian operations. Under the terms of the purchase agreement, among other things, the plaintiffs were granted options to purchase up to 270,000 shares of the Company’s Class A Common Stock at an exercise price of $2.56 per share if certain of the Company’s Canadian operations had achieved certain financial performance targets in any annual period between 1999 and 2003. The complaint alleges that these financial performance targets have been met, and the plaintiffs are seeking, among other things, a declaratory judgment that the options granted under the purchase agreement have vested and are exercisable. The Company has determined that the Canadian operations at issue failed to achieve these financial performance targets in any of the required years, and it intends to vigorously defend this lawsuit.

     In addition, the Company is a defendant in certain lawsuits resulting from its operations. The Company believes that it has adequate provisions in the financial statements for any expected liabilities which may result from disposition of such lawsuits. While it is possible that some of the foregoing matters may be resolved at a cost greater than that provided for, the Company believes that the ultimate liability, if any, will not be material to its operating results, financial condition or liquidity.

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6.

COMPREHENSIVE INCOME:

     Comprehensive income is the total of net income and all other non-owner changes in equity. The following table sets forth the Company’s comprehensive income, net of tax, for the three months ended March 31, 2004 and 2003 (in thousands):

     The following table sets forth the components of accumulated other comprehensive income, net of tax, included in the consolidated balance sheets as of March 31, 2004, and December 31, 2003 (in thousands):

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7.

GEOGRAPHIC AREA INFORMATION:

     The table below sets forth the Company’s Geographic Area Data for the quarters ended March 31, 2004 and 2003:

Geographic Area Data

8.

DERIVATIVE FINANCIAL INSTRUMENTS:

     The Company actively monitors its exposure to interest rate and foreign currency exchange rate risks and uses derivative financial instruments to manage the potential impact of certain of these risks. The Company uses derivatives only for purposes of managing risk associated with underlying exposures. Management believes that its use of derivative instruments to manage risk is in the Company’s best interest. However, the Company’s use of derivative financial instruments may result in short-term gains or losses and increased earnings volatility.

Accounting for Derivative Financial Instruments

Interest Rate Risk

     The Company uses interest rate swap agreements to manage its exposure to changes in interest rates for its floating rate debt. Interest rate swap agreements are accounted for as cash flow hedges. Gains or losses on the swaps, representing interest rate differentials to be received or paid on the swaps, are recognized in the consolidated statements of income as a reduction or increase in interest expense, respectively. In accordance with the derivative accounting requirements, the effective portion of the change in the fair value of the derivative instrument is recorded in the consolidated balance sheets as a component of current assets or liabilities and other comprehensive income. The ineffective portion of the change in the fair value of the derivative instrument, along with the gain or loss on the hedged item, is recorded in earnings and reported in the consolidated statements of income, on the same line as the hedged item.

     During 2003, 2002 and 2001, the Company entered into various interest rate swaps fixing its base interest rate by exchanging its variable LIBOR interest rates on long-term debt for a fixed interest rate. The swaps expire at various dates through September 2007 and the fixed base rates range from 3.35% to 5.46%. At March 31, 2004 and December 31, 2003, the notional amount under these agreements was $58.2 million and $60.6 million, respectively and the fair value of these interest rate swaps was a negative $2.7 million and $2.2 million, respectively.

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Foreign Currency Exchange Rate Risk

     The Company uses purchased options to manage foreign currency exchange rate risk related to certain projected cash flows related to foreign operations. The instruments are carried at fair value in the consolidated balance sheets as a component of prepayments or other assets or accrued expenses or other liabilities. Changes in the fair value of derivative instruments that are used to manage exchange rate risk in foreign currency denominated cash flows are recognized in the consolidated balance sheets as a component of accumulated other comprehensive income in common stockholders’ equity.

     During 2003 and 2002, the Company entered into various exchange rate options that established exchange rates for converting Mexican Pesos to U.S. Dollars, all but one of which have expired. The remaining option expires in September 2004, and gives the Company the right to sell Mexican Pesos for U.S. Dollars at an exchange rate of 12.61 Mexican Pesos to the U.S. Dollar. The Company paid an up-front premium for this option of $49,000 in the quarter ended March 31, 2003. At March 31, 2004 and December 31, 2003, the notional amount under exchange rate options was $2.6 million and $5.3 million, respectively. At March 31, 2004 and December 31, 2003, the fair value of exchange rate currency options was $6,000 and $15,000, respectively.

9.

INTANGIBLE AND OTHER ASSETS, NET AND GOODWILL:

     Acquired intangible assets are as follows (in thousands):

     The Chiapas-Mayab Operating License is being amortized over 30 years which is the life of the concession agreement with the Mexican Communications and Transportation Department. The Chiapas-Mayab Operating License is subject to exchange rate changes resulting from conversion of Mexican Pesos to U.S. Dollars at different periods.

     On July 23, 2003 as a result of a settlement agreement with Commonwealth Edison Company, the Company amended and restated the Service Assurance Agreement (SAA) and began to amortize the Amended and Restated Service Assurance Agreement (ARSAA). The estimate of the useful life of the ARSAA asset is based on the Company’s estimate of the useful life of the coal-fired electricity generation plant to which the Company provides service, which the Company estimates will be in service through 2027. Prior to the settlement date, upon adoption of SFAS No. 142, the Service Assurance

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Agreement was determined to have an indefinite useful life and therefore was no longer subject to amortization.

     The Transportation Services Agreement, entered into in conjunction with the GP transaction (the TSA), is a 20-year agreement to provide exclusive rail transportation service to GP facilities. The Company believes that the customer’s facilities have a 30-year economic life and that the Company will continue to be the exclusive rail transportation service provider until the end of the plant’s useful life. Therefore, the TSA is being amortized on a straight-line basis over a 30-year life beginning January 1, 2004.

     The Track Access Agreements are perpetual trackage agreements assumed in the Company’s acquisition of Utah Railway Company. Under SFAS No. 142 these assets have been determined to have an indefinite useful life and therefore are not subject to amortization.

     Deferred financing costs are amortized over terms of the related debt using the effective-interest method for the fixed term debt and using the straight-line method for the revolving loan portion of debt.

     Other assets consist primarily of executive split dollar life insurance, assets held for sale and a minority equity investment in an agricultural facility. Executive split dollar life insurance is the present value of life insurance benefits which the Company funds but that are owned by executive officers. The Company retains a collateral interest in the policies’ cash values and death benefits. Assets held for sale or future use primarily represent surplus track and locomotives.

     Upon adoption of SFAS No. 142, amortization of goodwill was discontinued as of January 1, 2002. The changes in the carrying amount of goodwill are as follows:

10.

PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS:

Components of net periodic benefit cost

Employer Contributions

     The Company previously disclosed in its financial statements for the year ended December 31, 2003, that it expected to contribute $216,701 to its pension plan in

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2004. As of March 31, 2004, $39,561 of contributions have been made. The Company presently anticipates contributing an additional $177,140 to fund its pension plan in 2004 for a total of $216,701.

11.

RECENTLY ISSUED ACCOUNTING STANDARDS:

     The Financial Accounting Standards Board (FASB) recently issued the following Emerging Issues Task Force Bulletin (EITF):

Issue No. 03-06 – “Participating Securities and the Two-Class Method Under FASB Statement No. 128, Earnings Per Share”

     Statement 128 provides guidance on the calculation and disclosure of earnings per share (EPS). In its deliberations of Statement 128, the Board decided to require the use of the two-class method of computing EPS for those enterprises with participating securities or multiple classes of common stock. This EITF provides further guidance on applying the two-class method to both basic and diluted EPS. It requires that earnings be allocated to participating securities based on contractual participation rights in certain circumstances in calculating EPS. This EITF also clarifies other matters related to FASB 128. This EITF is effective for the quarter ending June 30, 2004 and requires retroactive restatement for all periods presented. The Company is in the process of evaluating what impact, if any, this standard will have on the Company’s Consolidated Financial Statements.

12.

SUBSEQUENT EVENT – REGISTRATION STATEMENT FOR SALE OF CLASS A COMMON STOCK

     On May 3, 2004, the Company filed a registration statement on Form S-3 with the Securities and Exchange Commission relating to a proposed public offering of 3,358,303 shares of its Class A Common Stock. The shares will be offered by The 1818 Fund III, L.P., a private equity partnership managed by Brown Brothers Harriman & Co. and will be issued by the Company upon the conversion by The 1818 Fund III, L.P. of 22,886 shares of the Company’s outstanding Series A Preferred Stock. Certain of the Company’s stockholders have granted the underwriters a 30-day option to purchase up to an additional 503,745 shares of Class A Common Stock to cover any over-allotments, with The 1818 Fund III, L.P. accounting for 310,175 of such shares and certain management stockholders accounting for the remaining 193,570 shares. The Company will receive no proceeds from the offering.

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ITEM 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations

     The following discussion should be read in conjunction with the Company’s consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q, and with the consolidated financial statements, related notes and other financial information included in the Company’s 2003 Form 10-K.

Forward-Looking Statements

     This report and other documents referred to in this report may contain forward-looking statements based on current expectations, estimates and projections about the Company’s industry, management’s beliefs, and assumptions made by management. Words such as “anticipates,” “intends,” “plans,” “believes,” “seeks,” “estimates,” variations of such words and similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and are subject to certain risks, uncertainties and assumptions that are difficult to forecast including risks related to adverse weather conditions, changes in environmental and other laws and regulations to which the Company is subject, difficulties associated with the integration of acquired railroads, derailments, unpredictability of fuel costs and general economic and business conditions. Therefore, actual results may differ materially from those expressed or forecast in any such forward-looking statements. Such risks and uncertainties include, in addition to those set forth in this Item 2, those noted in the Company’s 2003 Form 10-K. The Company undertakes no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise.

General

     The Company is a holding company whose subsidiaries and unconsolidated affiliates own and/or operate short line and regional freight railroads and provide related rail services in North America, South America and Australia. The Company generates revenues primarily from the movement of freight over track owned or operated by its railroads. The Company also generates non-freight revenues primarily by providing freight car switching and rail services such as railcar leasing, repair and storage to industrial companies with extensive railroad facilities within their complexes, to shippers along its lines, and to the Class I railroads that connect with its North American lines.

     For a complete description of the Company’s accounting policies, see Note 2 to the audited consolidated financial statements for the year ended December 31, 2003 included in the Company’s 2003 Form 10-K.

United States

     Georgia-Pacific Railroads: On December 31, 2003, the Company completed the purchase from Georgia-Pacific Corporation (GP) of all of the issued and outstanding shares of common stock of the Chattahoochee Industrial Railroad (CIRR), the Arkansas Louisiana & Mississippi Railroad Company (ALM), and the Fordyce and Princeton RR Co. (F&P, collectively, the GP Railroads) for approximately $54.9 million in cash. The purchase price was allocated to current assets ($2.7 million), property and equipment ($37.6 million), and intangible assets ($27.1 million), less current liabilities assumed ($12.5 million). As contemplated with the acquisition, the Company implemented a severance program. The aggregate cost of the severance program, $1.0 million, is considered a liability assumed in the acquisition, and as such, was allocated to the purchase price. In conjunction with the acquisition, the Company entered into two Transportation Services Agreements (TSAs) which are 20-year agreements for the GP Railroads to provide rail transportation service to GP. One of the TSAs was determined to be an intangible asset and approximately $27.1

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million of the GP Railroad’s purchase price was allocated to this asset. The TSA asset is being amortized on a straight-line basis over a 30 year life, which is the expected life of the plant being served, beginning January 1, 2004. The Company funded the acquisition through its revolving line of credit held under its primary credit agreement.

RESULTS OF OPERATIONS

Three Months Ended March 31, 2004 Compared to Three Months Ended March 31, 2003

     Operating Revenues

     Operating revenues (which exclude revenues from the Company’s equity investments) were $72.4 million in the quarter ended March 31, 2004 compared to $58.9 million in the quarter ended March 31, 2003, an increase of $13.5 million or 23.0%. The increase was attributable to $5.9 million in revenues from the new GP Railroads and a $7.6 million increase on existing operations. The $13.5 million increase in operating revenues consisted of $10.3 million in freight revenues of which $4.5 million was from the new GP Railroads and $5.8 million was on existing operations, and $3.2 million in non-freight revenues of which $1.4 million was from the new GP Railroads and $1.8 million was on existing operations. The $7.6 million increase on existing operations was primarily attributable to the Company’s Canada Region with a $3.4 million revenue increase of which $1.5 million was due to the 14.6% appreciation of the Canadian dollar relative to the U.S. dollar and $1.9 million primarily attributable to freight revenues; the Company’s New York-Pennsylvania Region with a $1.5 million increase of which $1.3 million was freight revenue; and the Company’s Rail Link Region with a $1.2 million increase due primarily to increased switching operations. The following table compares freight revenues, carloads and average freight revenues per carload for the quarters ended March 31, 2004 and 2003:

Freight Revenues and Carloads Comparison by Commodity Group
Quarters Ended March 31, 2004 and 2003
(dollars in thousands, except average per carload)

     Total carloads were 151,208 in the quarter ended March 31, 2004 compared to 129,930 in the quarter ended March 31, 2003, an increase of 21,278, or 16.4%. The increase consists of 11,928 from the new GP Railroads and 9,350 on existing

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operations due largely to a 3,707 increase in carloads of metals in the New York-Pennsylvania Region and a 3,019 increase in carloads of farm and food products in the Canada Region. The average revenue per carload increased to $362 in the quarter ended March 31, 2004, compared to $343 per carload in the quarter ended March 31, 2003, an increase of 5.5%. The increase in revenues per carload was due, in part, to higher average revenues per car from the new GP Railroads and, in part, to higher average revenues per car in the Company’s Canada Region due to the 14.6% appreciation of the Canadian dollar relative to the US dollar.

     Non-freight revenues were $17.6 million in the quarter ended March 31, 2004 compared to $14.3 million in the quarter ended March 31, 2003, an increase of $3.3 million or 22.7%. The $3.3 million increase was attributable to $1.4 million of non-freight revenues from the new GP Railroads of which $840,000 was car hire revenue, and a $1.9 million increase on existing operations of which $1.2 million was switching and $415,000 was other operating income. The following table compares non-freight revenues for the quarters ended March 31, 2004 and 2003:

Non-Freight Operating Revenues Comparison
Quarters Ended March 31, 2004 and 2003
(dollars in thousands)

Operating Expenses

     Operating expenses were $60.8 million in the quarter ended March 31, 2004, compared to $50.9 million in the quarter ended March 31, 2003, an increase of $9.9 million or 19.6%. The increase was attributable to $3.8 million in operating expenses from the new GP Railroads and an increase of $6.1 million in operating expenses on existing operations. The following table sets forth a comparison of the Company’s operating expenses in the quarters ended March 31, 2004 and 2003:

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Operating Expense Comparison
Quarters Ended March 31, 2004 and 2003
(dollars in thousands)

     Labor and benefits expense was $26.4 million in the quarter ended March 31, 2004 compared to $21.9 million in the quarter ended March 31, 2003, an increase of $4.5 million or 20.7%. The increase was attributable to $1.3 million in labor and benefits expense from the new GP Railroads and an increase of $3.2 million on existing operations. The increase on existing operations is due to a $2.6 million increase in labor and benefits expense related to increased freight shipments, regular wage increases and the 14.6% appreciation of the Canadian dollar, $125,000 from new senior management positions, and $550,000 related to revised executive benefit plans.

     Equipment rents were $6.9 million in the quarter ended March 31, 2004 compared to $5.0 million in the quarter ended March 31, 2003, an increase of $1.9 million or 37.6%. The increase was attributable to $1.1 million in freight car operating lease and car hire expense from the new GP Railroads and an increase of $800,000 on existing operations primarily due to car hire on increased freight shipments.

     Depreciation and amortization expense was $4.7 million in the quarter ended March 31, 2004 compared to $3.7 million in the quarter ended March 31, 2003, an increase of $1.0 million or 27.0%. The increase was attributable to $565,000 from the new GP Railroads and an increase of $435,000 on existing operations including $107,000 related to the Amended and Restated Service Assurance Agreement which the Company began amortizing in July 2003.

     Casualties and insurance expense was $3.7 million in the quarter ended March 31, 2004 compared to $3.0 million in the quarter ended March 31, 2003, an increase of $736,000 or 24.8%. The increase was attributable to a $1.0 million increase in derailment expense, offset by decreases in insurance expense and FELA and third party claims.

     All other expenses combined were $19.2 million in the quarter ended March 31, 2004 compared to $17.3 million in the quarter ended March 31, 2003, an increase of $1.9 million or 11.0%. The increase was attributable to $900,000 from the new GP Railroads and $1.0 million on existing operations.

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Operating Ratio

     The Company’s operating ratio (total operating expenses as a percentage of operating revenues) improved to 84.0% in the quarter ended March 31, 2004 from 86.4% in the quarter ended March 31, 2003.

Interest Expense

     Interest expense was $2.4 million in the quarter ended March 31, 2004 compared to $2.3 million in the quarter ended March 31, 2003, an increase of $93,000, or 4.0%.

Other Income, Net

     Other income, net in the quarter ended March 31, 2004, was $192,000 compared to $326,000 in the quarter ended March 31, 2003, a decrease of $134,000. Other income, net consists primarily of exchange rate transaction gains on foreign dollar-denominated cash accounts, minority interest expense and interest income.

Income Taxes

     The Company’s effective income tax rate in the quarter ended March 31, 2004 was 39.0% compared to 36.4% in the quarter ended March 31, 2003. The increase was primarily attributable to an increase in the effective tax rate of the Company’s Mexico Region.

Equity in Net Income of Unconsolidated International Affiliates

     Equity earnings of unconsolidated international affiliates, net were $3.8 million in the quarter ended March 31, 2004, compared to $1.7 million in the quarter ended March 31, 2003, an increase of $2.1 million. Equity earnings in the quarter ended March 31, 2004, consisted of $3.7 million from Australian Railroad Group and $40,000 from South America affiliates. Equity earnings in the quarter ended March 31, 2003, consisted of $2.0 million from Australian Railroad Group offset by an equity loss of $277,000 from South America affiliates. See additional information regarding ARG’s financial results in the Supplemental Information – Australian Railroad Group section.

Net Income and Earnings Per Share

     The Company’s net income in the quarter ended March 31, 2004 was $9.5 million compared to net income of $5.5 million in the quarter ended March 31, 2003, an increase of $4.0 million. The increase in net income was the result of an increase in net income from operations of $1.9 million and an increase in equity in net income of unconsolidated international affiliates of $2.1 million.

     Basic and Diluted Earnings Per Share in the quarter ended March 31, 2004 were $0.40 and $0.35 respectively, on weighted average shares of 22.9 million and 27.3 million respectively, compared to $0.23 and $0.21 respectively, on weighted average shares of 22.5 million and 26.6 million respectively, in the quarter ended March 31, 2003. The increases in weighted average shares outstanding for Basic and Diluted Earnings Per Share are primarily attributable to the exercise of employee stock options.

Supplemental Information – Australian Railroad Group

     ARG is a company owned 50% by the Company and 50% by Wesfarmers Limited, a public corporation based in Perth, Western Australia. The Company accounts for its 50% ownership in ARG under the equity method of accounting. As a result of the strengthening of the Australian dollar relative to the U.S. dollar in 2004, the average currency translation rate for the quarter ended March 31, 2004 was 28.6% more favorable than the rate for the quarter ended March 31, 2003, the impact of

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which should be considered in the following discussions of equity earnings, freight and non-freight operating revenues, and operating expenses.

     In the quarters ended March 31, 2004 and 2003, the Company recorded $3.7 million and $2.0 million, respectively, of equity earnings in the Equity in Net Income of International Affiliates – Australian Railroad Group caption in the accompanying consolidated statements of income.

Freight Revenues

Australian Railroad Group Freight Revenues and Carloads by Commodity Group
Quarters Ended March 31, 2004 and 2003
(U.S. dollars in thousands, except average per carload)