EMONS TRANSPORTATION GROUP INC, 10-K, 1998-09-25

EMONS TRANSPORTATION GROUP INC
10-K, 1998-09-25
RAILROADS, LINE-HAUL OPERATING

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

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FORM 10-K

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE
ACT OF 1934

FOR THE FISCAL YEAR ENDED JUNE 30, 1998

[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM TO

COMMISSION FILE NO.: 0-5206

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EMONS TRANSPORTATION GROUP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

DELAWARE 23-2441662
(STATE OF INCORPORATION) (I.R.S. EMPLOYER
IDENTIFICATION NUMBER)

96 SOUTH GEORGE STREET, YORK, PA
(ADDRESS OF PRINCIPAL EXECUTIVE 17401
OFFICES) (ZIP CODE)

REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (717) 771-1700

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

NONE

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

COMMON STOCK, $.01 PAR VALUE
$0.14 SERIES A CUMULATIVE CONVERTIBLE PREFERRED STOCK, $.01 PAR VALUE

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.

Yes X No

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

As of September 4, 1998, 6,075,868 shares of voting Common Stock were
outstanding including 1,295,831 shares held by an escrow agent. For
information regarding the escrow agent, see "Industries' Reorganization"
below. The aggregate market value of shares of voting Common Stock held by
nonaffiliates of the registrant as of September 4, 1998 was $14,280,624. For
this purpose the average of the closing bid and asked prices ($2.75 per
share), as of September 4, 1998, has been used.

Portions of the definitive proxy statement for the annual meeting of
stockholders to be held on November 19, 1998 are incorporated by reference
into Part III of this Form 10-K.

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1
<PAGE>

This Form 10-K contains certain "forward-looking" statements regarding
future events and the future performance of Emons Transportation Group, Inc.
that involve risks and uncertainties that could cause actual results to differ
materially. Those risks and uncertainties include, but are not limited to,
economic conditions, customer demand, increased competition in the relevant
market, government regulation, and other factors described herein and in other
filings with the Securities and Exchange Commission that could cause the
Company's results to differ from its current expectations.

PART I

ITEM 1. BUSINESS

Emons Transportation Group, Inc. ("Emons Transportation Group"), a Delaware
corporation headquartered in York, Pennsylvania, is a freight transportation
and distribution services company serving the Mid-Atlantic and Northeast
regions of the United States. The Company owns four short line railroads,
operates rail/truck transload facilities and a rail intermodal terminal, and
provides customers with logistics services for the movement and storage of
freight. Emons Transportation Group was organized in December 1986, and is the
owner of all of the outstanding capital stock of Emons Industries, Inc.
("Industries"), Emons Finance Corp. ("EFC"), the Maryland and Pennsylvania
Railroad Company ("MPA"), Emons Logistics Services, Inc. ("Logistics"), Maine
Intermodal Transportation, Inc. ("MIT") and Emons Railroad Group, Inc.
("Railroad Group"), which owns all of the outstanding capital stock of
Yorkrail, Inc. ("YKR"), Penn Eastern Rail Lines, Inc. ("PRL") and the St.
Lawrence & Atlantic Railroad Company ("SLR"). Prior to the formation of Emons
Transportation Group in December 1986, Industries, which was incorporated in
1955, was the parent company. For information regarding the formation of Emons
Transportation Group, see "Industries' Reorganization" below.

Unless the context otherwise requires, the terms "Emons" and the "Company"
when used herein shall refer to Emons Transportation Group and its
consolidated subsidiaries. The Company's executive offices are located at 96
South George Street, York, Pennsylvania 17401 (Telephone 717-771-1700).

Description of Operations

The Company owns and operates four short line railroads, MPA, YKR, PRL and
SLR. The combined revenues from these railroad operations accounted for 91%,
87% and 86% of the Company's total operating revenues in fiscal 1998, 1997 and
1996, respectively. The Company also owns and operates a logistics services
business in York, Pennsylvania, and a rail intermodal terminal in Auburn,
Maine. These operations are intended to increase the Company's rail traffic by
providing a wide variety of value added services, including rail/truck
transfer, storage and other distribution services, and options to businesses
located both on and off of the Company's rail lines.

The Company operates in two geographic regions, Pennsylvania and New
England. Pennsylvania operations consist of MPA, YKR, PRL and Logistics,
located in south-central and southeastern Pennsylvania. New England operations
consist of SLR, which extends from Portland, Maine, through New Hampshire to
Norton, Vermont, and MIT, which commenced rail intermodal operations on SLR in
Auburn, Maine, in September 1994.

Emons Transportation Group's three largest rail operations, MPA, YKR and
SLR, all have direct or indirect connections with multiple Class I railroads.
Multiple Class I connections make these railroads attractive places for
industry to locate and build new facilities because of competitive service and
pricing from the competing Class I connecting carriers. In addition, as
discussed further below, two Class I consolidations that are currently in
progress, the split up of Consolidated Rail Corporation ("Conrail") by the
Norfolk Southern Railroad ("NS") and CSX Corporation ("CSX"), and the
acquisition of Illinois Central Railroad ("IC") by the Canadian National
Railway ("CN"), provide the Company's railroad operations with additional long
term opportunities. The consolidations of these railroads may open up new
markets for the Company's customers as a result of single line rail service to
more regions served by these merged Class I railroads.

2
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In July 1998, CSX and NS received formal written approval from the Surface
Transportation Board ("STB") to divide Conrail's assets between the two Class
I railroads. Based upon management's review of publicly available information
regarding the division of Conrail, all of the Company's railroads with dual
connections with Class I railroads will continue to maintain their dual
connections. The Company's two railroads in York, Pennsylvania will also
obtain access to the Canadian Pacific Railway ("CP") through a commercial
relationship and connection via NS from Harrisburg to York, Pennsylvania. In
addition, one of PRL's rail lines in Bristol, Pennsylvania will obtain dual
access, which it does not currently have, with CSX and NS. The exact date that
NS and CSX will commence operating their respective portions of Conrail is
currently not known, but is anticipated to take place sometime in early 1999.
While the impact of the consolidation of these companies on future traffic
patterns and the resultant effect on the Company's railroad operations are
uncertain at this time, the Company believes that the consolidation may create
additional rail business for the Company's Pennsylvania rail operations as a
result of longer Class I single line rail service on competitive routes and
access to CP.

In February 1998, CN announced its acquisition of IC, and in July 1998 filed
a formal application with the STB seeking regulatory approval for the control
and integration of IC's rail operations. The acquisition of IC would provide
CN with a single "Y" shaped network connecting the Pacific and Atlantic Coasts
in Canada, and the U. S. Gulf coast in New Orleans, with the joining of the
railroads in Chicago. In addition, in April 1998, CN and IC entered into a 15
year marketing agreement with the Kansas City Southern Railway ("KCSR") which
provides access to key southern and southwestern markets, and access to
Mexico's rail system through affiliates of KCSR. While the impact of the
proposed consolidation on future traffic patterns and the resultant effect on
the Company's railroad operations are uncertain at this time, the Company
believes that CN's acquisition of IC, if approved by the STB, will provide SLR
with single line access to many points in the midwest and south, and further,
that the marketing agreement with KCSR may open up opportunities for SLR in
Mexico.

PENNSYLVANIA

MPA, located in York, Pennsylvania, owns 26 miles of main line track and
related properties. There are approximately 30 active customers that utilize
MPA's service for in-bound and/or out-bound shipments of freight, including 20
customers located directly on line. MPA primarily serves customers in the
paper, building products and distribution industries. MPA's largest customer,
P. H. Glatfelter Company, a paper manufacturer, accounted for approximately
41% of MPA's operating revenues in fiscal 1998. MPA currently interchanges
rail traffic with Conrail and YKR at York, Pennsylvania, and CSX at Hanover,
Pennsylvania. Based upon current publicly available information, MPA will
interchange rail traffic with NS in York, Pennsylvania, and maintain its CSX
and YKR interchanges upon completion of the acquisition of Conrail by CSX and
NS.

YKR operates 16 miles of main line track and related properties in and
around York, Pennsylvania. YKR serves approximately 20 active customers,
including 12 customers located directly on line. YKR primarily serves
customers in the paper, agricultural, building products, and distribution
industries. YKR's largest customer, P. H. Glatfelter Company, accounted for
19% of YKR's fiscal 1998 operating revenues. YKR interchanges rail traffic
with CSX at Porters Sideling, Pennsylvania, MPA at York, Pennsylvania, and
Conrail at West York, Pennsylvania. Based upon current publicly available
information, YKR will interchange rail traffic with NS at West York,
Pennsylvania, and maintain its CSX and MPA interchanges upon completion of the
acquisition of Conrail by CSX and NS.

In November 1997, through its newly created wholly-owned subsidiary, Penn
Eastern Rail Lines, Inc., the Company entered into an Asset Purchase Agreement
to acquire substantially all of the assets and leases of four railroad
operations, eight locomotives, and track equipment from an individual owner
and operator. On December 30, 1997, this transaction was consummated and
operations commenced on December 31, 1997. The rail operations consist of
seven individual rail lines aggregating approximately 44 miles of track
located in various areas of southeastern Pennsylvania, including two lines
owned, four lines leased from the Pennsylvania Department of Transportation,
and a line currently leased from the owner of an industrial park. PRL serves

3
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approximately 15 active on line customers in the printing, food grade,
agricultural, steel, energy, scrap, and consumer products industries. Each of
PRL's seven rail lines currently interchanges rail traffic with Conrail at
various locations in southeastern Pennsylvania. Based upon currently available
information, PRL will interchange rail traffic with NS upon completion of the
acquisition of Conrail by CSX and NS, and one rail line in Bristol,
Pennsylvania will have access to CSX and NS under the merger plan.

Emons Logistics Services, Inc. offers logistics services for customers in
the Mid-Atlantic region from its facilities in York, Pennsylvania. Logistics
currently operates facilities located on MPA and YKR in York, Pennsylvania,
which allow manufacturers and users of dry/liquid bulk commodities, lumber and
other building products, steel, canned goods and packaged consumer products to
take advantage of favorable rail economics for the long-haul shipment of their
products combined with truck delivery to companies that are not located on a
rail line. Logistics provides short term storage and various value-added
services, such as rail/truck transfer and truck brokering services for its
customers. These operations generate revenues for the Company both for the
logistics services performed and for the movement of freight by rail. The
Company believes that these operations are important to the growth of the
railroad operations in south-central Pennsylvania since they enable customers
who are not located directly on line to utilize rail transportation.

A significant portion of the Company's logistics operations are located at
"Lincoln Yard" on YKR in West York, Pennsylvania. The facilities at Lincoln
Yard consist of approximately 25 acres, including approximately two acres
utilized for bulk transfer services, and an additional 23 acres purchased in
1995 for outside transload and storage purposes and future expansion. Bulk
transfer operations include rail/truck transfer of food grade products, such
as vegetable oils and plastic pellets, and other bulk products such as
industrial oils, chemicals and agricultural products. The Company developed
approximately five of the 23 acres acquired in 1995 for outside transload and
storage purposes, and currently utilizes these facilities for the transfer and
storage of aggregates, steel and other products. The Company is currently
evaluating the feasibility of expanding its rail/truck transfer operations at
Lincoln Yard, and has received a grant from the state of Pennsylvania in the
amount of approximately $763,000 to be applied toward 50% of the cost of
construction of a bulk intermodal facility.

Until the fall of 1997, Logistics operated three on line warehouses,
including two leased facilities utilized for the storage of finished paper and
woodpulp. In the fall of 1997, the Company decided to exit its paper and
woodpulp warehouse operations, and transferred this business to an independent
on line warehouse operator, thereby retaining the rail freight revenues
generated by this business. Logistics operates the third warehouse, a 15,000
square foot building located on MPA in central York, that provides rail/truck
transfer and storage for the distribution of canned goods and various building
products.

NEW ENGLAND

SLR operates approximately 165 miles of main line track and related
properties between Portland, Maine and Norton, Vermont. SLR serves
approximately 60 customers, including 29 customers located directly on line.
SLR primarily serves customers in the paper, construction, agricultural,
energy, warehousing and distribution industries. SLR's major customers, Crown
Vantage and New England Public Warehouse, accounted for 17% and 16% of SLR's
operating revenues in fiscal 1998, respectively. SLR interchanges rail traffic
with CN at Island Pond, Vermont, Guilford Rail Systems at Danville Junction,
Maine and Portland, Maine (via Danville Junction), the New Hampshire and
Vermont Railroad at Groveton, New Hampshire, and the New Hampshire Central
Railroad at North Stratford, New Hampshire.

In November 1997, SLR entered into agreements to lease and operate all of
the track and property owned by the Berlin Mills Railway Company ("BMS")
located in Berlin and Gorham, New Hampshire, and on November 4, 1997 commenced
operations. BMS, which is owned by Crown Paper Co. ("Crown Vantage"), consists
of approximately 11 miles of track, and serves Crown Vantage's paper and pulp
mills in Berlin and Gorham. The lease agreement includes an initial lease term
of ten years and a five year renewal option.

4
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In December 1997, SLR entered into an Asset Purchase Agreement to acquire
approximately one mile of track from the New Hampshire and Vermont Railroad
Company in Groveton, New Hampshire for $280,000. On December 29, 1997, this
transaction was consummated and SLR commenced operations on this section of
track on December 30, 1997. The one mile of track connects with SLR's existing
rail operations in Groveton and provides SLR with strategic direct access to
two customers.

In July 1998, the Company entered into an Agreement in Principle to acquire a
94 mile rail line in Quebec, Canada from CN for Can$7 million. The rail line
connects with CN's Halifax to Montreal main line at St. Rosalie, Quebec, and
SLR at the Quebec/Vermont international border.

The MIT rail intermodal terminal located on SLR in Auburn, Maine, commenced
operations in September 1994. The terminal includes 42 acres of land (16 acres
currently developed in Phase I), three double-ended working tracks for loading,
unloading and storage of intermodal railcars, lighted parking for trailers and
containers, a gate house, a truck scale, a trailer/container maintenance
facility and various other improvements. The City of Auburn owns the terminal
and leases it to MIT under a long-term lease arrangement which includes an
initial term of 20 years, three 10 year renewal options, and a purchase option
in year 50. The Company believes that this operation will be an important
factor in the growth and development of SLR by providing additional business
volume to SLR's rail operations. Through coordinated train service between CN
and SLR, MIT offers premium rail intermodal service which includes third
morning service between Auburn and Chicago on dedicated intermodal trains
transporting truck trailers and containers. Service is also provided to and
from points in Canada by CN and throughout North America by other connecting
rail carriers at Chicago and Detroit. MIT operations are conducted by an
independent contractor, In-Terminal Services (a subsidiary of Mi-Jack
Products), who currently operates intermodal terminals throughout North
America.

Employees

At June 30, 1998, the Company employed a total of 140 active persons, 78 of
which were represented by various labor organizations. The Company has labor
agreements with unions which represent certain MPA and all SLR non-management
employees. Currently, all MPA and SLR unionized employees are covered by
collective bargaining agreements which expire in December and May 2000,
respectively. Employees of the remainder of the Company's operations are not
represented by labor organizations. The Company has not experienced any work
stoppages and considers its employee relations to be satisfactory.

Regulation

The Company's rail subsidiaries are subject to the regulatory jurisdiction of
the Surface Transportation Board ("STB"), a federal agency that is the
successor to the Interstate Commerce Commission. The STB has jurisdiction over,
among other things, the rates charged, the issuance of securities and the
extension or abandonment of rail lines, routes or service by common carriers,
and the consolidation, merger and acquisition of control of and by such
carriers. The Company's rail subsidiaries are also subject to regulation by the
Federal Railroad Administration as to safety requirements and operating
practices, and are subject to regulations by the governmental authorities of
Pennsylvania, Maine, Vermont, and New Hampshire.

Competition

For customers located directly on line, which constitute the majority of the
Company's freight business, the Company's railroads are the only rail carriers
directly serving their respective customers. The Company's rail operations in
New England also include a significant portion of overhead traffic which is
subject to competition from alternative rail routes. All of the Company's
railroads experience significant competition from other modes of freight
transportation, particularly highway motor carriers. Factors such as the nature
of the commodity transported, freight rates, distance, transit time, and
quality and reliability of service are considered in determining the mode of
transportation utilized. The Company's ability to compete in these areas is, to
a large extent, dependent upon the performance of its connecting rail carriers.

5
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Industries' Reorganization

Prior to 1986, the Company provided management, leasing and brokerage
services for rail transportation equipment. In response to a severe decline in
the boxcar leasing business, in March 1984 Industries filed a petition for
reorganization under Chapter 11 of the United States Bankruptcy Code. In
December 1986, the Bankruptcy Court for the Southern District of New York (the
"Bankruptcy Court") confirmed Industries' Reorganization Plan (the "Plan") and
Emons Transportation Group became the parent of Industries and MPA.

Under the Plan, each unsecured creditor received an initial distribution of
cash, Common Stock and Senior Preferred Stock for its claim. Since numerous
disputed claims remained at the time of consummation of the Plan, an escrow
agent, appointed in connection with the Plan, was instructed to distribute
additional amounts of cash and securities to holders of allowed claims on a
quarterly basis in each quarter that disputed claims are reduced by litigation
or settlement. The Bankruptcy Court postponed the distribution of any cash and
securities in 1989 until it could determine whether certain other potential
unsecured claims should be included in the bankruptcy proceeding. In July and
August 1997, upon approval from the Bankruptcy Court for a partial
distribution, the escrow agent distributed 1,434,922 shares of the Company's
Common Stock and 589,461 shares of the Company's $0.14 Series A Cumulative
Convertible Preferred Stock. In November 1997, the Bankruptcy Court also
approved a motion to allow distributions to be made to new claimants. The
escrow agent currently holds 1,295,831 shares of Common Stock and 572,342
shares of Preferred Stock. The escrow agent has the right to vote the shares
held by it and has expressed its intention generally to vote such shares
proportionally in accordance with the vote cast by unaffiliated stockholders.

6
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ITEM 2. PROPERTIES

With respect to material properties owned or leased by the Company, the
following table sets forth the location of the property, the approximate square
feet of space, miles of railroad track or acreage, and use made of such
facilities. All properties are owned by the Company, except as otherwise noted,
are in good condition, adequately fulfill the Company's requirements, and are
being used to the fullest extent necessary for the Company's operations. The
Company's primary lender has a security interest in all of the property owned
by the Company.

<TABLE>
<CAPTION>
APPROXIMATE
SQUARE
ADDRESS FEET OF SPACE USE
------- ------------- ---
<C> <C> <S>
96 South George Street 5,900 Executive and administrative offices and
York, PA(1) Pennsylvania administrative offices

Princess Street 15,000 Locomotive repair facility
York, PA

Queen and Hay Streets 80,000 Rail/truck transfer and 15,000 square
York, PA foot warehouse facility for canned goods
and various building products

East Princess Street 70,000 Rail/truck transfer and storage facility
York, PA

North George Street 85,000 Agricultural bulk products transfer
York, PA(1) facility

Arch Street 7,500 Rail/truck transfer facility for
York, PA aggregates and fertilizer

Lewiston Junction Road 4,000 New England administrative offices
Auburn, ME(1)

Lewiston Junction Road 106,700 Locomotive repair facility
Auburn, ME(3)

Island Pond, VT(2) 295,000 Rail/truck transfer, storage and
distribution facility for lumber
</TABLE>
- --------
(1) Leased from a third party.
(2) Leased to a third party.
(3) Land portion leased from a third party.

7
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<TABLE>
<CAPTION>
ACREAGE OR
APPROXIMATE
ADDRESS DISTANCE USE
------- ----------- ---
<C> <C> <S>
York, PA to Hanover, PA 26 miles Main line railroad track plus rail yards
and related facilities

York, PA to Porters 16 miles Main line railroad track plus rail yards
Sideling, PA and related facilities

Emmaus, PA to East 15.8 miles Main line railroad track plus rail yards
Greenville, PA(1)

Boyertown, PA to 8.5 miles Main line railroad track plus rail yards
Pottstown, PA(1)

Kutztown, PA to 4.4 miles Main line railroad track
Topton, PA(1)

Manheim, PA(1) .6 miles Main line railroad track

Denver, PA to 12 miles Main line railroad track plus rail yards
Sinking Springs, PA

Bridgeport, PA 2.1 miles Main line railroad track

Bristol, PA(1) 1 mile Main line railroad track

Lincoln Yard 25 acres Rail/truck transfer and storage facility
West Market Street for bulk food grade products, chemicals
West York, PA and non-food bulk products, and steel,
aggregates and other products

Portland, ME to 165 miles Main line railroad track plus rail yards
Norton, VT and related facilities

Norway to .5 miles Branch railroad track
South Paris, ME(1)

Auburn, ME(1) 4 miles Branch railroad track

Berlin, NH(1) 11 miles Branch railroad track and customer sidings

Lewiston Junction Road 42 acres Rail intermodal terminal
Auburn, ME(1)
</TABLE>
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(1) Leased from a third party.
(2) Leased to a third party.
(3) Land portion leased from a third party.

ITEM 3. LEGAL PROCEEDINGS

Certain subsidiaries of the Company are currently subject to a number of
claims and legal actions that arise in the ordinary course of business,
including claims under the Federal Employers' Liability Act ("FELA"), a fault
based system under which injuries to and deaths of railroad employees are
settled by negotiations or litigation based upon comparative negligence. The
Company believes that it has adequate insurance coverage and has provided
adequate reserves for any liabilities which may result from the ultimate
outcome of these claims.

Emons Industries, Inc. ("Industries"), a subsidiary of the Company, is
currently a defendant in 680 product liability actions. In addition, one of
the Company's railroads is in the process of remediating a fuel oil spill at
its locomotive maintenance facility in York, Pennsylvania.

Product Liability Actions

8
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sold and discontinued these business activities in March 1971 and commenced
its railcar leasing and railroad operations in October 1971. One of the drugs
which had been distributed was diethylstilbestrol ("DES"), which was taken by
women during pregnancy to prevent miscarriage.

As of June 30, 1998, Industries was one of numerous defendants (including
many of the largest pharmaceutical manufacturers) in 680 lawsuits in which the
plaintiffs allege that DES caused adenosis, infertility, cancer or birth
defects in the offspring or grandchildren of women who ingested DES during
pregnancy. In these actions, liability is premised on the defendant's
participation in the market for DES, and liability is several and limited to
the defendant's share of the market. Of these lawsuits, 675 were commenced
after the confirmation of Industries' Reorganization Plan in December 1986
(the "Plan"), while the remaining five lawsuits are claims which will be
treated under the Plan. These actions are currently in various stages of
litigation.

On April 16, 1998, the Bankruptcy Court granted Industries' motion for
summary judgment declaring that the post-confirmation lawsuits represent
claims which should be asserted against Industries' Chapter 11 estate and are
not post-reorganization liabilities. A formal judgment was entered by the
court on May 6, 1998. In September 1998, one counsel representing multiple DES
claimants appealed the Bankruptcy Court's judgment to the United States
District Court.

Industries has product liability insurance and defense coverage for nearly
all the claims which fall within the policy period 1948 to 1970 up to varying
limits by individual and in the aggregate for each policy year. To date,
Industries has not exhausted insurance coverage in any policy year. During the
period July 1, 1997 to June 30, 1998, 30 new actions were commenced in which
Industries was named as a defendant and 238 lawsuits were settled or dismissed
at no liability to Industries. Included in the cases outstanding as of June
30, 1998, 365 were commenced in the prior year in a single filing in a state
court in Ohio shortly before the effective date of a revision to Ohio's
product liability statute which, among other things, limits damages
recoverable from pain and suffering. On June 29, 1998, the Ohio Supreme Court
ruled that Ohio law would not permit DES cases in which the plaintiff could
not identify the manufacturer of DES allegedly ingested by mothers of DES
plaintiffs. As a result, 289 Ohio DES cases against the Company are subject to
dismissal. Counsel for these plaintiffs filed motions for reargument and to
stay implementation of the decision.

Management intends to vigorously defend all of these actions. In the event
that the bankruptcy decision is reversed by the appellate court, it is
possible that Industries could ultimately have liability in these actions in
excess of its product liability insurance coverage described above. However,
based upon Industries' experience in prior DES litigation, including the
proceedings before the Bankruptcy Court, and its current knowledge of pending
cases, the Company believes that it is unlikely that Industries' ultimate
liability, if any, in excess of insurance coverage and existing reserves in
the pending cases, will be in an amount sufficient to have a material adverse
effect upon the Company's consolidated financial position or results of
operations.

Environmental Liability

During fiscal 1994, the Company's Maryland and Pennsylvania Railroad ("MPA")
discovered a diesel fuel oil spill at its locomotive maintenance facility in
York, Pennsylvania, resulting from the fueling of its locomotives. MPA is
currently performing additional testing and is working with the Pennsylvania
Department of Environmental Protection ("PADEP") to investigate and, to the
extent necessary, remediate the contaminated area. In January 1997, as a
result of these testing activities, MPA discovered free product in some of its
monitoring wells. The Company estimates that the cost to remediate the free
product could potentially range from $100,000 to $200,000, although the final
costs have not yet been determined. The Company has provided sufficient
reserves for the anticipated remediation costs. PADEP could also potentially
require further investigation and, to the extent necessary, remediation of
ground water and/or soils at this facility at some point in the future.
However, the Company cannot determine at this time whether PADEP will require
further investigation and remediation, or what the ultimate costs of
addressing this matter may be or what effect, if any, they could have upon the
Company's consolidated financial position or results of operations.

9
<PAGE>

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

NONE

PART II

ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Emons Transportation Group's Common Stock is traded on The Nasdaq SmallCap
Market under the symbol "EMON." The table below sets forth, for the periods
indicated, the high and low bid for the Common Stock as reported on The Nasdaq
SmallCap Market.

<TABLE>
<CAPTION>
COMMON STOCK
PRICE RANGE
----------------
FISCAL YEAR FISCAL QUARTER HIGH BID LOW BID
----------- -------------- -------- -------
<S> <C> <C> <C>
1998...................................... First $3.875 $1.375
Second 3.625 2.375
Third 4.0625 2.625
Fourth 3.25 2.625
1997...................................... First $3.1875 $1.5625
Second 5.375 2.75
Third 3.5625 2.75
Fourth 2.75 1.875
</TABLE>

As of September 4, 1998, the Company had 6,075,868 shares of Common Stock
issued and outstanding which were held by approximately 1,766 stockholders of
record. No cash dividends have been paid on the Common Stock and no cash
dividends are expected to be paid on the Common Stock in the foreseeable
future. The Company's Loan and Security Agreement with its primary lender
prohibits the payment of cash dividends and certain other distributions
without the prior consent of the lender.

As of September 4, 1998, 1,487,278 shares of $0.14 Series A Cumulative
Convertible Preferred Stock were issued and outstanding which were held by
approximately 676 stockholders of record. The holders of the $0.14 Series A
Cumulative Convertible Preferred Stock are entitled to a dividend of $0.14 per
share per annum which is to be paid semi-annually. The Board of Directors
voted to omit the regular semi-annual dividend which would have been payable
from the period January 2, 1991 through July 1, 1998. Dividends in arrears as
of September 4, 1998 aggregated $1,665,751. These shares are quoted on the OTC
Bulletin Board.

10
<PAGE>

ITEM 6. SELECTED FINANCIAL DATA

EMONS TRANSPORTATION GROUP, INC. AND SUBSIDIARIES

SELECTED FINANCIAL DATA

FOR THE FIVE YEARS ENDED JUNE 30, 1998
(NOT COVERED BY REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS)

<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Operating revenues...... $17,445,037 $16,058,252 $14,917,077 $13,996,608 $11,994,286
=========== =========== =========== =========== ===========
Income from operations.. $ 2,197,070 $ 1,926,419 $ 1,627,339 $ 2,073,724 $ 811,164
=========== =========== =========== =========== ===========
Income (loss) before
cumulative effect of
change in accounting
principle.............. $ 4,917,622 $ 773,793 $ 469,501 $ 766,077 $ (184,325)
Cumulative effect of
change in accounting
principle for income
taxes.................. -- -- -- -- (750,000)
----------- ----------- ----------- ----------- -----------
Net income (loss)....... $ 4,917,622 $ 773,793 $ 469,501 $ 766,077 $ (934,325)
=========== =========== =========== =========== ===========
Earnings (loss) per
common share(1):
Earnings before
cumulative effect of
change in accounting
principle:
Basic............... $ 0.79 $ 0.09 $ 0.04 $ 0.09 $ (0.08)
Diluted............. $ 0.63 $ 0.09 $ 0.04 $ 0.09 $ (0.03)
Cumulative effect of
change in accounting
principle for income
taxes:
Basic............... -- -- -- -- (0.13)
----------- ----------- ----------- ----------- -----------
Diluted............. -- -- -- -- (0.10)
----------- ----------- ----------- ----------- -----------
Net income (loss):
Basic............... $ 0.79 $ 0.09 $ 0.04 $ 0.09 $ (0.21)
=========== =========== =========== =========== ===========
Diluted............. $ 0.63 $ 0.09 $ 0.04 $ 0.09 $ (0.13)
=========== =========== =========== =========== ===========
Total assets............ $28,673,277 $24,301,875 $22,789,914 $20,745,575 $19,844,423
=========== =========== =========== =========== ===========
Debt.................... $12,342,175 $11,864,130 $11,086,009 $10,862,098 $11,047,433
=========== =========== =========== =========== ===========
</TABLE>
- --------
(1) In fiscal 1998, the Company adopted Statement of Financial Accounting
Standards No. 128, "Earnings Per Share." The adoption of this statement did
not have an impact on previously reported earnings per share for the fiscal
years ended June 30, 1997, 1996, 1995 and 1994.

11
<PAGE>

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

Management's Discussion and Analysis of Financial Condition and Results of
Operations should be read in conjunction with the Company's Consolidated
Financial Statements and related notes thereto, and other financial information
included elsewhere in this Form 10-K.

Liquidity and Capital Resources

The Company's primary sources of liquidity include its cash and accounts
receivable, which aggregated $4,888,000 and $3,920,000 at June 30, 1998 and
1997, respectively, and the balance available under the Company's $2 million
working capital facility. On August 15, 1997, the Company entered into a Loan
and Security Agreement with a new lender which provided a $7,775,000 seven year
term loan and a revolving working capital facility of up to $2 million. The
proceeds of the $7,775,000 term loan were utilized to retire existing bank
indebtedness and fund refinancing costs. The Company intends to utilize the $2
million working capital facility to help fund the Company's internal growth
activities and acquisition program. As of June 30, 1998, the Company had
borrowings outstanding of $250,000 under the working capital facility, and had
additional availability of $967,000 computed in accordance with the facility's
eligibility criteria.

The Company acquired two rail lines and leased a third rail line in the
second quarter of fiscal 1998 (the "Acquired Operations"), as described below.

In November 1997, the Company's St. Lawrence & Atlantic Railroad ("SLR")
entered into agreements to lease and operate all of the track and property
owned by the Berlin Mills Railway Company ("BMS") located in Berlin and Gorham,
New Hampshire, and on November 4, 1997 commenced operations. BMS, which is
owned by Crown Paper Co. ("Crown Vantage"), consists of approximately 11 miles
of track, and serves Crown Vantage's paper and pulp mills in Berlin and Gorham.
The lease agreement includes an initial lease term of ten years and a five year
renewal option. SLR acquired two locomotives and miscellaneous supplies from
BMS in conjunction with this transaction for $65,000.

In December 1997, SLR entered into an Asset Purchase Agreement to acquire
approximately one mile of track from the New Hampshire and Vermont Railroad
Company in Groveton, New Hampshire for $280,000. On December 29, 1997, this
transaction was consummated and SLR commenced operations on this section of
track on December 30, 1997. The one mile of track connects with SLR's existing
rail operations in Groveton, and provides SLR with strategic direct access to
two customers.

In November 1997, through its newly created wholly-owned subsidiary, Penn
Eastern Rail Lines, Inc. ("PRL"), the Company entered into an Asset Purchase
Agreement to acquire substantially all of the assets and leases of four
railroad operations, eight locomotives, and track equipment from an individual
owner and operator. On December 30, 1997 this transaction was consummated and
operations commenced on December 31, 1997. The rail operations consist of seven
individual rail lines aggregating approximately 44 miles of track located in
various areas of southeastern Pennsylvania, including two lines owned, four
lines leased from the Pennsylvania Department of Transportation, and a line
leased from the owner of an industrial park. The purchase price consisted of
$250,000 in cash at closing, a $250,000 note payable on January 2, 1998, and
85,000 shares of the Company's Common Stock.

The cash and note portion of the PRL acquisition and the purchase of
locomotives from BMS were funded by sale-leaseback transactions with a
financial institution for the sale of the respective locomotives aggregating
$557,000. The locomotives are leased for a period of seven years and include a
buyout provision for approximately 35% of the sales value at the end of the
seventh year. These leases have been treated as capital leases for accounting
purposes. The acquisition of track from NHVT in the amount of $280,000 was
funded under the Company's $2 million working capital facility.

The Company's cash and cash equivalents increased $1,162,000 for the year
ended June 30, 1998. The net increase includes $3,098,000 of cash provided by
operations, $574,000 of proceeds from the sale of assets,

12
<PAGE>

including $557,000 of cash received in connection with the sale-leaseback of
locomotives, and a $43,000 net increase in long-term borrowings. These
increases were partially offset by $928,000 of cash invested in acquired and
leased rail properties, $1,417,000 of other capital investments, and $214,000
of deferred debt issuance costs.

The Company generated $3,098,000 of cash from operations for the year ended
June 30, 1998 as compared to $1,764,000 for the prior year. Excluding changes
in assets and liabilities, cash provided by operations increased $286,000 from
$2,350,000 for the year ended June 30, 1997 to $2,636,000 for the year ended
June 30, 1998 as a result of improved performance in the current year. Cash was
increased by $462,000 for changes in assets and liabilities for the year ended
June 30, 1998, primarily as a result of an increase in a variety of accrued
expenses.

The Company invested $1,417,000 in capital expenditures in addition to
acquired and leased rail properties during the year ended June 30, 1998,
including $1,172,000 of investments in railroad track structures (net of
$761,000 of government grants), and $245,000 of other capital investments.
Excluding Acquired Operations, the Company's gross investment in capital track
projects of $1,608,000 for the year ended June 30, 1998 decreased significantly
from gross investments of $3,297,000 in the prior year as the Company's five
year track rehabilitation program has been substantially completed. As of June
30, 1998, the Company had in excess of $500,000 of government grants and
approximately $300,000 of government funding under no interest loan programs
available for future track rehabilitation, customer sidings and other track
improvement projects. In addition, the Company was awarded a $763,000, 50%
matching grant from the state of Pennsylvania for the construction of a bulk
intermodal facility for the Company's logistics operations in York,
Pennsylvania.

The Company's net long-term debt obligations, excluding $557,000 of non-cash
capital lease obligations incurred in connection with acquired rail properties,
increased $43,000 during fiscal 1998, including $8,477,000 of additional
borrowings offset by $8,434,000 of debt payments. Additional long-term debt
obligations include $7,775,000 of long-term borrowings in connection with the
Company's debt refinancing in August 1997, $280,000 of working capital loan
borrowings in connection with the acquisition of track from NHVT, and $422,000
of other borrowings. Reductions in long-term debt obligations include the
repayment of $7,602,000 of bank debt in connection with the debt refinancing
and scheduled debt repayments.

Fiscal 1998 as compared to Fiscal 1997

GENERAL

The railroad industry in North America has been undergoing a consolidation of
Class I rail carriers over the past several years. Two Class I consolidations
are currently in progress that will impact the future operations of the
Company's railroads. These include the split up of Consolidated Rail
Corporation ("Conrail") by Norfolk Southern Railroad ("NS") and CSX Corporation
("CSX"), and the acquisition of Illinois Central Railroad ("IC") by the
Canadian National Railway ("CN").

In July 1998, CSX and NS received formal written approval from the Surface
Transportation Board ("STB") to divide up Conrail's assets between the two
Class I railroads. While the impact of the consolidation of these companies on
future traffic patterns and the resultant effect on the Company's railroad
operations are uncertain at this time, the Company believes that the
consolidation may create additional rail business for the Company's
Pennsylvania rail operations as a result of longer Class I single line service
on competitive routes and access to the Canadian Pacific Railway through a
commercial relationship and connection via NS from Harrisburg to York,
Pennsylvania.

13
<PAGE>

and IC entered into a 15 year marketing agreement with the Kansas City Southern
Railway ("KCSR") which provides access to key southern and southwestern
markets, and access to Mexico's rail system through affiliates of KCSR. While
the impact of the proposed consolidation on future traffic patterns and the
resultant effect on the Company's railroad operations are uncertain at this
time, the Company believes that CN's acquisition of IC, if approved by the STB,
will provide SLR with single line access to many points in the midwest and
south, and further, that the marketing agreement with KCSR may open up
opportunities for SLR in Mexico.

RESULTS OF OPERATIONS

Current year results are impacted by several events which took place during
fiscal 1998. First, as described further under Liquidity and Capital Resources,
the Company refinanced its bank borrowings in August 1997. Second, as also
described further under Liquidity and Capital Resources, the Company acquired
two rail lines and leased a third rail line during the second quarter of fiscal
1998 (the "Acquired Operations"). Finally, current year results are impacted by
the renegotiation of the Operating and Marketing Agreement between SLR and the
CN, SLR's primary connecting carrier, which became effective October 1, 1997.
The renegotiated agreement amends the revenue structure for business transacted
with CN, resulting in a reduction of SLR's operating revenues from CN. In
return, CN has provided SLR with additional car hire expense relief, and has
agreed to forgive repayment of principal and interest associated with the $1.5
million promissory note each quarter over a seven year period. The renegotiated
agreement impacts operating revenues, operating expenses, interest expense and
non-operating income.

The Company generated net income of $4,918,000 for the year ended June 30,
1998 as compared to net income of $774,000 for the year ended June 30, 1997.
Approximately $3.5 million of the Company's fiscal 1998 net income was
attributable to the recognition of deferred tax benefits, primarily associated
with the Company's net operating loss carryforwards. Income before income taxes
increase $317,000 from $1,171,000 in fiscal 1997 to $1,488,000 in fiscal 1998.
Operating revenues increased $1,387,000, while operating expenses increased
$1,116,000 over the prior year.

REVENUES

Operating revenues increased $1,387,000, or 8.6%, from $16,058,000 for the
year ended June 30, 1997 to $17,445,000 for the year ended June 30, 1998.
Acquired Operations generated $1,017,000 of additional operating revenues in
the current year, including $382,000 of freight and haulage revenues, $474,000
of switching service fees for operating BMS, and $161,000 of other operating
revenues, consisting largely of railcar storage and demurrage revenues.
Excluding Acquired Operations, operating revenues increased $370,000,
consisting of $1,705,000 additional freight and haulage revenues (excluding
intermodal freight), partially offset by a $481,000 decrease in logistics
revenues, a $70,000 decrease in intermodal freight and handling revenues, and a
$784,000 decrease in other operating revenues.

Freight and haulage revenues increased $2,087,000, or 18.4%, consisting of a
13.6% increase in the number of carloads handled and a 4.2% increase in average
revenues per carload. Total traffic handled increased approximately 5,025
carloads from 37,025 for the year ended June 30, 1997 to 42,050 for the year
ended June 30, 1998. Excluding Acquired Operations, freight and haulage
revenues increased $1,705,000, or 15%, and traffic handled increased 3,825
carloads, or 10.3%. This net increase includes approximately 925 additional
carloads on Pennsylvania rail operations and approximately 2,900 additional
carloads on SLR operations in New England.

The 925 net increase in traffic for Pennsylvania rail operations, excluding
Acquired Operations, includes approximately 300 additional carloads to three
new customers in fiscal 1998, 750 additional bridge carloads, and additional
rail traffic from a variety of other customers. These increases were partially
offset by a reduction of almost 400 carloads to the Company's logistics
operations, described further below, and less significant reductions in rail
traffic from other customers.

14
<PAGE>

Approximately 2,000 of the 2,900 additional carloads on SLR are attributable
to new business added over the past two years. Approximately 500 additional
carloads were generated from five new on line customers, including a liquid
propane gas distributor which commenced operations in April 1998 and is
expected to generate significant additional business, approximately 800
carloads were generated by two new overhead moves, over 250 additional
carloads were generated by a building products distributor which expanded its
on line operations during fiscal 1997, over 250 additional carloads were
generated by the Company's on line bulk transload customer as a result of new
customers utilizing this facility, and approximately 130 additional carloads
were generated by a new local oil move to an on line paper customer that
commenced operations in the fourth quarter which is similar to the oil move
that was established for another paper customer in the prior year. In addition
to this new business, SLR handled 430 additional salt carloads to an on line
customer who was awarded a key supply contract in the current year, 400
additional carloads to the paper mill served by BMS as a result of favorable
service provided by SLR under this new agreement, and a one time move of 500
carloads of pipe for the installation of a gas pipe line in the states of
Maine and New Hampshire.

The 4.2% increase in average revenues per carload is attributable to rate
adjustments and mix of business, which includes a higher percentage of higher
rated SLR traffic.

Logistics revenues generated by the Company's operations in York,
Pennsylvania, decreased $481,000, or 39%, for the year ended June 30, 1998 as
compared to the prior year, including a $282,000 decrease in transfer and
handling revenues and a $199,000 decrease in storage and truck brokering
revenues. The number of railcars handled decreased 400 carloads, or 21%. The
net decrease in volume is largely attributable to the loss of logistics
business for a building products distributor which relocated its operations to
its own facility on one of the Company's Pennsylvania rail lines in March
1997, and a decrease in paper business as a result of the Company's decision
in the second quarter of fiscal 1998 to exit paper warehousing operations and
to direct this business to an independent warehouse operator located on line.
These decreases were partially offset by additional agricultural bulk transfer
carloads. The decreases in low margin storage and truck brokering revenues is
primarily attributable to the decline in paper business.

Intermodal freight and handling revenues generated by the Company's rail
intermodal terminal in Auburn, Maine decreased $70,000 in fiscal 1998 as
compared to the prior year. Intermodal volume decreased approximately 900
trailers and containers, or 7%, from 12,900 trailers and containers for the
year ended June 30, 1997 to 12,000 trailers and containers for the year ended
June 30, 1998. The decrease in intermodal volume is attributable to
competition from a new intermodal terminal that opened nearby in the prior
year, the conversion of certain intermodal business to rail boxcars, and eight
days of lost business as a result of a severe ice storm in New England and
Eastern Canada in January 1998.

Excluding Acquired Operations, other operating revenues decreased $784,000
from the prior year primarily as a result of a reduction in fees from CN in
connection with the renegotiation of the Operating and Marketing Agreement
between SLR and CN, a reduction in passenger service revenues primarily
related to the Sunday River Ski Train, which did not operate in the current
year, a reduction in railcar brokering commissions as a result of the
termination of a significant contract, and reductions in railcar storage fees
and easement income. These decreases were partially offset by additional
demurrage revenues.

Non-operating income of $241,000 for the year ended June 30, 1998 includes
$215,000 of principal and interest forgiven on the $1.5 million promissory
note due CN in connection with the renegotiation of the Operating and
Marketing Agreement between SLR and CN. Non-operating income of $167,000 in
the prior year includes $153,000 for the unanticipated proceeds from a former
investment.

EXPENSES

Operating expenses increased $1,116,000, or 7.9%, from $14,132,000 for the
year ended June 30, 1997 to $15,248,000 for the year ended June 30, 1998. The
increase consists of $910,000 additional cost of operations and $206,000
additional selling and administrative expenses.

15
<PAGE>

Cost of operations increased $909,000, or 8.2%, from $11,061,000 for the year
ended June 30, 1997 to $11,971,000 for the current year. Cost of operations for
the current year includes $858,000 of additional railroad operating expenses
associated with Acquired Operations. Excluding Acquired Operations, cost of
operations increased $52,000, including $272,000 additional railroad operating
expenses, $58,000 additional intermodal operating expenses, and additional
provisions under profit sharing and incentive compensation arrangements,
partially offset by a $430,000 decrease in logistics operating expenses.

Railroad operating expenses increased $1,130,000 for the year ended June 30,
1998 as compared to the prior year. Excluding Acquired Operations, railroad
operating expenses increased $272,000, consisting of $49,000 additional
expenses for Pennsylvania rail operations and $223,000 additional SLR expenses.
Railroad operating expenses for Pennsylvania rail operations only increased
$49,000 despite a 5% increase in the number of carloads handled as a result of
cost reduction programs instituted in the prior year. The net increase in SLR
railroad operating costs includes an increase in transportation and locomotive
maintenance costs as a result of a 16% increase in carloads handled during the
current year, additional transportation and maintenance of way costs incurred
as a result of a severe ice storm in New England and eastern Canada in January
1998, and costs incurred for the repair of track in Vermont as a result of a
washout in March 1998. These increases were partially offset by a reduction in
switching fees previously paid to NHVT that are no longer required as a result
of the acquisition of track from NHVT, a reduction in car hire expense in
conjunction with the renegotiation of the CN Operating and Marketing Agreement,
and an $84,000 charge in the prior year for a sales tax assessment by the State
of Maine for the years 1991 through 1996.

Logistics operating expenses decreased $430,000 from the prior year including
a reduction in labor and benefits as a result of the 21% reduction in the
number of railcars handled and the change in the mix of labor required to
service current business, and reductions in property rent and brokered freight
expenses as a result of the Company's decision to exit paper warehousing
operations.

Rail intermodal operating expenses increased $58,000, despite a 7% decrease
in the number of trailers and containers handled, as a result of increased
security costs and additional provisions for loss and damage.

Selling and administrative expenses increased $206,000, or 6.8%, from
$3,071,000 for the year ended June 30, 1997 to $3,277,000 for the year ended
June 30, 1998. This increase includes additional wages and benefits, additional
directors fees associated with the addition of two outside directors,
additional legal fees incurred in connection with union negotiations and other
legal matters, additional commissions associated with the increased volume of
rail business, and additional provisions under profit sharing and incentive
compensation arrangements. These increases were partially offset by reduced
wages, benefits and other expenses associated with the reduction of two
management personnel during the first quarter of fiscal 1998, a reduction in
business taxes as a result of tax planning strategies, and a reduction in
professional fees incurred to pursue potential business opportunities in the
prior year which resulted in the rail acquisitions described under Liquidity
and Capital Resources.

Interest expense increased $43,000 for the year ended June 30, 1998 as
compared to the prior year. This increase includes a $108,000 charge incurred
in connection with the refinancing of the Company's bank debt in August 1997,
and additional interest incurred on borrowings to finance the rail operations
and related locomotives acquired in the second quarter of the current fiscal
year. These amounts were partially offset by more favorable interest rates
under the August 1997 bank refinancing, temporary repayments of portions of the
Company's term loan during the year, the mix of debt, which includes a greater
amount of no and low interest government track work loans in the current year
as compared to the prior year, and $23,000 of interest provided in the prior
year in conjunction with the sales tax assessment by the State of Maine.

The Company recorded a $3,430,000 tax benefit for the year ended June 30,
1998, as compared to tax expense of $397,000 for the year ended June 30, 1997.
The provision for income taxes for fiscal 1998 includes $3,545,000 attributable
primarily to the reduction of the valuation allowance due to the deferred tax
assets generated by the Company's net operating loss carryforwards. In
accordance with applicable accounting standards, the Company continually
reviews the estimated amount of net operating loss carryforward benefits

16
<PAGE>

that it believes it will be able to utilize in the future. Based upon the
sustained significant increase in taxable income in the current year, new
business added to the Company's railroad operations in the current year, and
acquisitions completed during the current year, the Company reduced the
valuation allowance attributable to the net operating loss deferred tax assets
in fiscal 1998 because its reassessment indicated that it appeared more likely
than not that the benefits will be realized.

Fiscal 1997 as compared to Fiscal 1996

RESULTS OF OPERATIONS

The Company generated net income of $774,000 for the year ended June 30, 1997
as compared to net income of $470,000 for the year ended June 30, 1996. Income
before income taxes increased $412,000, from $759,000 for fiscal 1996 to
$1,171,000 for fiscal 1997. Operating revenues increased $1,141,000, while
operating expenses increased $842,000. The provision for income taxes increased
$107,000 in fiscal 1997 over the prior year.

Results for the year ended June 30, 1997 include the unfavorable impact of a
sales tax assessment from the State of Maine in the amount of $107,000,
consisting of an $84,000 charge for sales taxes relating to calendar years 1991
through 1996, and a $23,000 charge for related interest thereon. Results for
the year ended June 30, 1996 include the impact of a favorable settlement of
disputed local business taxes to the City of York, Pennsylvania in the amount
of $117,000 pertaining to fiscal years 1988 through 1995, consisting of $85,000
of taxes and $32,000 of accrued interest thereon. These items are hereafter
referred to as the "state sales and local tax adjustments." In addition, the
Company recorded $153,000 of non-operating income in fiscal 1997 relating to
the unanticipated proceeds from a former investment.

REVENUES

Operating revenues increased $1,141,000, or 7.7%, from $14,917,000 for year
ended June 30, 1996 to $16,058,000 for the year ended June 30, 1997. This net
increase includes $1,184,000 additional freight and haulage revenues (excluding
intermodal freight) and $156,000 additional intermodal freight and handling
revenues, partially offset by a $166,000 reduction in logistics revenues and a
$33,000 reduction in other operating revenues.

Freight and haulage revenues increased $1,184,000, or 11.6%, consisting of a
7.2% increase in the number of carloads handled and a 4.2% increase in average
revenues per carload. Total traffic handled increased approximately 2,475
carloads from 34,550 for the year ended June 30, 1996 to 37,025 for the year
ended June 30, 1997. The increase includes approximately 1,200 additional
carloads on the Pennsylvania rail operations and 1,275 additional carloads on
SLR operations in New England.

The 1,200 carload net increase in traffic for Pennsylvania rail operations
includes 725 additional low rated bridge moves and additional rail traffic
generated by a variety of other customers, including 325 additional carloads to
an on line paper manufacturer, 380 additional mini-train limestone shuttle
service carloads, 275 additional carloads to an on line steel fabrication
customer, 175 additional carloads generated by two new on line customers, 185
additional carloads generated by the Company's logistics operations, and a
variety of less significant other increases in business. These increases were
partially offset by a reduction of 525 carloads to an on line warehouse and
distribution services customer as the result of the relocation of product to an
alternative storage location, a reduction of 360 agricultural carloads as a
result of rate increases imposed by a connecting carrier for a period of time
earlier in fiscal 1997, and a reduction of 365 coal carloads (four unit coal
trains) due to timing of shipments and the use of higher capacity railcars.

The 1,275 carload increase in traffic on SLR includes 500 carloads
attributable to a new local oil move to an on line paper manufacturer, 600
additional carloads to an on line building products distributor as a result of

17
<PAGE>

the expansion of its operations, 260 additional carloads to four new customers,
three of which are located on line, and a variety of less significant
increases. These increases were partially offset by a decrease of 375 paper
related carloads as a result of lost business due to competitive routes.

The 4.2% increase in average revenues per carload is primarily attributable
to rate increases on SLR and higher rates on the local oil move on SLR which
encompass truck-to-rail transload services that are paid by SLR to an
independent contractor. This increase was partially offset by lower average
revenues per carload for the Company's Pennsylvania operations due to a higher
percentage of low rated bridge traffic.

Logistics revenues generated by the Company's operations in York,
Pennsylvania, decreased $166,000, or 11.8%, for the year ended June 30, 1997 as
compared to the prior year. The number of railcars handled increased
approximately 250 cars, or 15%, and related railcar transfer and value added
revenues increased 16%. The increase includes additional agricultural products
bulk transfer business as a result of the expansion of one feed broker's
operations and the assumption of operations previously performed by another
feed broker in March 1997. This increase was partially offset by a reduction in
canned goods business as the movement of this product continues to shift to
alternative modes of transportation, a reduction in paper business as a result
of pulp and paper supply conditions, and a reduction in building products
business as a result of the relocation of the Company's primary lumber reload
customer's operations to a facility located on one of the Company's
Pennsylvania rail lines in March 1997, where it intends to expand into other
building products. The increase in transfer and value added revenues was more
than offset by reductions in storage and truck brokering revenues associated
with canned goods and paper business.

The Company's rail intermodal terminal, which commenced operations on SLR in
September 1994, generated an additional $156,000 of freight and intermodal
handling revenues in fiscal 1997 as compared to the prior year. Intermodal
volume increased approximately 4,300 trailers and containers, or 50%, from
8,600 trailers and containers in the prior year to 12,900 trailers and
containers in fiscal 1997.

Other operating revenues decreased $33,000 from fiscal 1996 to fiscal 1997
consisting of a decrease in demurrage revenues partially offset by additional
easement income, railcar storage income and third party track work revenues.

Non-operating income increased from $82,000 in fiscal 1996 to $167,000 in
fiscal 1997. The fiscal 1997 amount includes $153,000 for the unanticipated
proceeds from a former investment, while the prior year amount consists of
gains on sales of non-essential real estate.

EXPENSES

Operating expenses increased $842,000, or 6.3%, from $13,290,000 for the year
ended June 30, 1996 to $14,132,000 for the year ended June 30, 1997. The
increase consists of $540,000 additional cost of operations and $302,000
additional selling and administrative expenses. Excluding the impact of the
state sales and local tax adjustments, operating expenses increased $673,000,
or 5%.

Cost of operations increased $540,000, or 5.1%, from $10,521,000 for the year
ended June 30, 1996 to $11,061,000 for the year ended June 30, 1997. Excluding
the impact of the state sales and local tax adjustments, cost of operations
increased $456,000, or 4.3%. This increase includes $576,000 additional
railroad operating expenses, $90,000 additional intermodal operating expenses,
and additional provisions under profit sharing and incentive compensation
arrangements. These increases were partially offset by a $279,000 reduction in
logistics operating expenses.

The increase in railroad operating expenses of $576,000 is primarily
attributable to additional transportation expense and, to a lesser extent,
additional locomotive maintenance expense, partially offset by a reduction in
maintenance of way expense. The increase in transportation expense includes
additional operating costs associated with the 7.2% increase in traffic
handled, including approximately $300,000 of additional costs

18
<PAGE>

associated with the new local oil move on SLR which includes fees for truck-
to-rail transload services paid to an independent contractor, and additional
locomotive fuel costs as a result of substantial price increases for a period
of time during fiscal 1997. The increase in locomotive maintenance expense is
attributable to a higher level of locomotive repairs for both Pennsylvania and
New England operations as a result of the increase in traffic handled and
aging of the Company's locomotive fleet. The decrease in maintenance of way
expense is a result of more favorable weather conditions in fiscal 1997 as
compared to the prior year, which also had a less significant favorable impact
on transportation operating costs in fiscal 1997. The unusually heavy snowfall
and cold temperatures in both the Mid-Atlantic and Northeast regions of the
United States in fiscal 1996 had an unfavorable impact on all three of the
Company's railroads. Additional labor costs, fuel usage and other operating
expenses were required in order to keep the tracks clear and train operations
running. SLR also incurred additional maintenance of way costs in fiscal 1996
to repair a washed out section of track after a flood in November 1995, and to
clear a fire lane as a result of summer drought conditions.

The $279,000 decrease in logistics operating expenses is primarily
attributable to reductions in property rent and brokered freight expenses as a
result of the decrease in canned goods and paper business, partially offset by
additional operating costs in connection with the 15% increase in railcars
handled.

Rail intermodal operating expenses increased $90,000 due to additional fees
paid to the terminal's independent operator as a result of the 50% volume
increase over fiscal 1996 and additional security costs.

Selling and administrative expenses increased $302,000, or 10.9%, from
$2,769,000 for the year ended June 30, 1996 to $3,071,000 for the year ended
June 30, 1997. Excluding the impact of the state sales and local tax
adjustments, selling and administrative expenses increased $217,000, or 7.6%.
This net increase consists of additional professional fees and other expenses
incurred to pursue potential business opportunities, normal wage and other
cost increases, and additional provisions under profit sharing and incentive
compensation arrangements.

Interest expense decreased $16,000 for the year ended June 30, 1997 as
compared to the prior year. Interest expense decreased $71,000 excluding the
impact of the state sales and local tax adjustments, despite an increase in
the amount of long-term debt outstanding, due to the mix of debt which
includes a greater amount of no and low interest government track work loans
in fiscal 1997 as compared to the prior year.

The provision for income taxes increased $107,000, from $290,000 for the
year ended June 30, 1996 to $397,000 for the year ended June 30, 1997, while
the effective tax rate decreased from 38% for fiscal 1996 to 34% for fiscal
1997. The increase in income tax expense is primarily the result of a $412,000
increase in income before income taxes, while the decrease in the effective
tax rate is attributable to the mix of state taxable income and deferred tax
requirements.

Year 2000 Compliance Issues

The Company has evaluated its risks with respect to year 2000 compliance
issues and the impact on its information systems and operations, and has
identified three significant risk areas. These include third party software
utilized by the Company on its own information systems, outside service
providers and value added networks, and information systems utilized by the
Company's primary connecting rail carriers. The Company has investigated the
potential impact of the year 2000 with respect to each significant risk area
identified, and has determined that all critical software either is year 2000
compliant, is in the process of being modified to accommodate the year 2000,
or is replaceable by alternative software options at a reasonable cost.

The Company is reliant upon its third party vendors, outside service
providers and value added networks, and connecting rail carriers to become
year 2000 compliant for its successful transition into the new millennium.
Since year 2000 compliance by these parties is outside of the Company's
control, there can be no assurance that the systems critical to the Company's
operations will be compliant by the year 2000. If any of these parties do not
successfully achieve year 2000 compliance, the Company's operations may be
adversely affected.

19
<PAGE>

The Company has engaged the services of an outside consultant to prepare a
year 2000 compliance plan, which has been substantially completed, and is
currently in the process of implementing the plan for all other hardware and
software systems which may be affected by the year 2000. The Company does not
anticipate that the cost of becoming year 2000 compliant will be material.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Financial Statements and the notes and schedules thereto are listed under
Item 14 hereof.

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

NONE

PART III

Items 10 through 12 have been omitted. A definitive proxy statement will be
filed by the Company not later than 120 days after the close of its fiscal
year, which is hereby incorporated by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

NONE

20
<PAGE>

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE

The Board of Directors
Emons Transportation Group, Inc.:

We have audited in accordance with generally accepted auditing standards, the
consolidated financial statements of Emons Transportation Group, Inc. and
Subsidiaries included in this Form 10-K, and have issued our report thereon
dated September 10, 1998. Our audit was made for the purpose of forming an
opinion on those statements taken as a whole. The financial statement schedule
referred to in Item 14 is the responsibility of the Company's management and is
presented for purposes of complying with the Securities and Exchange
Commission's rules and is not part of the basic financial statements. The
financial statement schedule has been subjected to the auditing procedures
applied in the audits of the basic financial statements and, in our opinion,
fairly state in all material respects the financial data required to be set
forth therein in relation to the basic financial statements taken as a whole.

/s/ Arthur Andersen LLP

Lancaster, PA
September 10, 1998

21
<PAGE>

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

The Board of Directors
Emons Transportation Group, Inc.:

We have audited the accompanying consolidated balance sheets of Emons
Transportation Group, Inc. and Subsidiaries as of June 30, 1998 and 1997, and
the related consolidated statements of operations, stockholders' equity and
cash flows for each of the three years in the period ended June 30, 1998.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements
based on our audits.

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

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Emons
Transportation Group, Inc. and Subsidiaries as of June 30, 1998 and 1997, and
the results of their operations and their cash flows for each of the three
years in the period ended June 30, 1998 in conformity with generally accepted
accounting principles.

/s/ Arthur Andersen LLP

Lancaster, PA
September 10, 1998

22
<PAGE>

PART IV

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

(INDEX TO FINANCIAL STATEMENTS AND SCHEDULES)

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
(a) (1) Financial Statements of Emons Transportation Group, Inc. and
Subsidiaries:
Consolidated Balance Sheets as of June 30, 1998 and 1997.............. 24
Consolidated Statements of Operations for the years ended June 30,
1998, 1997 and 1996.................................................. 25
Consolidated Statements of Stockholders' Equity for the years ended
June 30, 1998, 1997 and 1996......................................... 26
Consolidated Statements of Cash Flows for the years ended June 30,
1998, 1997 and 1996.................................................. 27
Notes to Consolidated Financial Statements............................ 28
(2) Schedules Applicable to Consolidated Financial Statements:
Schedule III--Financial Statements of Emons Transportation Group, Inc.
(Parent Company Only)
Balance Sheets as of June 30, 1998 and 1997........................... 43
Statements of Operations for the years ended June 30, 1998, 1997 and
1996................................................................. 44
Statements of Cash Flows for the years ended June 30, 1998, 1997 and
1996................................................................. 45
All other schedules are omitted as the required information is not
applicable or information is presented in the financial statements or
related notes.
(b) No reports on Form 8-K were filed during the quarter ended June 30,
1998.
(c) A list of exhibits can be found on pages 47 and 48 hereof.
</TABLE>

23
<PAGE>

EMONS TRANSPORTATION GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 1998 AND 1997

<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents.......................... $ 2,677,004 $ 1,515,188
Accounts receivable, less allowance of $158,800 in
1998 and $102,898 in 1997......................... 2,210,900 2,405,304
Materials and supplies............................. 191,845 87,154
Prepaid expenses................................... 375,004 338,512
Deferred income taxes (Note 8)..................... 476,000 70,000
----------- -----------
Total current assets............................. 5,930,753 4,416,158
Property, plant and equipment, net (Note 1).......... 20,659,750 19,392,709
Deferred expenses and other assets................... 737,774 493,008
Deferred income taxes (Note 8)....................... 1,345,000 --
----------- -----------
TOTAL ASSETS......................................... $28,673,277 $24,301,875
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt.................. $ 1,335,408 $ 887,791
Accounts payable................................... 964,453 1,045,742
Accrued payroll and related expenses............... 1,665,185 995,880
Income taxes payable............................... 95,519 81,569
Other accrued expenses............................. 1,213,747 1,267,343
----------- -----------
Total current liabilities........................ 5,274,312 4,278,325
Long-term debt (Note 5).............................. 11,006,767 10,976,339
Other liabilities.................................... 758,238 814,040
Deferred income taxes (Note 8)....................... -- 1,794,000
----------- -----------
Total Liabilities................................ 17,039,317 17,862,704
----------- -----------
Commitments and contingencies (Notes 6 and 11)....... -- --
Stockholders' Equity:
Preferred stock, authorized 3,000,000 shares $0.14
Series A Cumulative Convertible Preferred Stock,
$0.01 par value, issued and outstanding 1,528,231
and 1,650,857 shares at June 30, 1998 and 1997,
respectively (redeemable at Company's option,
involuntary liquidation value of $2.00 per share)
(Note 7).......................................... 15,282 16,509
Common stock, $0.01 par value, authorized
15,000,000 shares, issued and outstanding
6,039,811 and 5,800,624 shares at June 30, 1998
and 1997, respectively............................ 60,398 58,006
Additional paid-in capital........................... 23,733,554 23,503,442
Deficit.............................................. (11,871,499) (16,789,121)
----------- -----------
11,937,735 6,788,836
Unearned compensation--restricted stock awards....... (303,775) (349,665)
----------- -----------
Total Stockholders' Equity....................... 11,633,960 6,439,171
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY........... $28,673,277 $24,301,875
=========== ===========
</TABLE>

See accompanying notes to consolidated financial statements.

24
<PAGE>

EMONS TRANSPORTATION GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JUNE 30, 1998, 1997 AND 1996

<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Operating revenues..................... $17,445,037 $16,058,252 $14,917,077
Operating expenses:
Cost of operations................... 11,970,552 11,061,247 10,521,232
Selling and administrative........... 3,277,415 3,070,586 2,768,506
----------- ----------- -----------
Total operating expenses........... 15,247,967 14,131,833 13,289,738
----------- ----------- -----------
Income from operations................. 2,197,070 1,926,419 1,627,339
Other income (expense):
Interest income...................... 100,993 86,080 74,827
Interest expense..................... (1,051,600) (1,008,945) (1,025,175)
Other, net........................... 241,159 167,239 82,010
----------- ----------- -----------
Total other income (expense)....... (709,448) (755,626) (868,338)
----------- ----------- -----------
Income before income taxes............. 1,487,622 1,170,793 759,001
Provision (benefit) for income taxes
(Note 8).............................. (3,430,000) 397,000 289,500
----------- ----------- -----------
Net income............................. 4,917,622 773,793 469,501
Preferred dividend requirements (Note
10)................................... 218,275 233,150 237,771
----------- ----------- -----------
Income applicable to common
shareholders.......................... $ 4,699,347 $ 540,643 $ 231,730
=========== =========== ===========
Weighted average number of common
shares (Notes 1 and 4):
Basic................................ 5,953,586 5,757,027 5,695,149
=========== =========== ===========
Diluted.............................. 7,829,379 6,288,853 6,100,447
=========== =========== ===========
Earnings per common share (Notes 1 and
4):
Basic................................ $ 0.79 $ 0.09 $ 0.04
=========== =========== ===========
Diluted.............................. $ 0.63 $ 0.09 $ 0.04
=========== =========== ===========
</TABLE>

See accompanying notes to consolidated financial statements.

25
<PAGE>

EMONS TRANSPORTATION GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 1998, 1997 AND 1996

<TABLE>
<CAPTION>
CUMULATIVE
CONVERTIBLE UNEARNED
PREFERRED STOCK COMMON STOCK ADDITIONAL RETAINED COMPENSATION
------------------ ------------------ PAID-IN EARNINGS RESTRICTED STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL (DEFICIT) STOCK AWARDS EQUITY
--------- ------- --------- ------- ----------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at June 30,
1995................... 1,726,950 $17,270 5,669,643 $56,696 $23,289,866 $(18,032,415) $(215,101) $ 5,116,316
Conversion of preferred
stock.................. (46,720) (468) 42,046 421 47 -- -- --
Cancellation of
restricted stock
issued................. -- -- (8,000) (80) (7,920) -- 8,000 --
Amortization of unearned
compensation........... -- -- -- -- -- -- 32,802 32,802
Net income.............. -- -- -- -- -- 469,501 -- 469,501
--------- ------- --------- ------- ----------- ------------ --------- -----------
Balance at June 30,
1996................... 1,680,230 16,802 5,703,689 57,037 23,281,993 (17,562,914) (174,299) 5,618,619
Conversion of preferred
stock.................. (29,373) (293) 26,435 264 29 -- -- --
Shares issued pursuant
to 1986 Stock Option
Plan................... -- -- 4,000 40 4,085 -- -- 4,125
Stock issued under
restricted stock plan.. -- -- 69,000 690 219,185 -- (219,875) --
Cancellation of
restricted stock
issued................. -- -- (2,500) (25) (1,850) -- 1,875 --
Amortization of unearned
compensation........... -- -- -- -- -- -- 42,634 42,634
Net income.............. -- -- -- -- -- 773,793 -- 773,793
--------- ------- --------- ------- ----------- ------------ --------- -----------
Balance at June 30,
1997................... 1,650,857 16,509 5,800,624 58,006 23,503,442 (16,789,121) (349,665) 6,439,171
Conversion of preferred
stock.................. (122,626) (1,227) 110,358 1,104 123 -- -- --
Shares issued pursuant
to 1986 Stock Option
Plan................... -- -- 110,500 1,105 109,796 -- -- 110,901
Stock issued under
restricted stock plan.. -- -- 25,000 250 79,277 -- (79,527) --
Stock issued in
connection with
acquisition of rail
properties............. -- -- 85,000 850 170,150 -- -- 171,000
Cancellation of
restricted stock
issued................. -- -- (69,500) (695) (44,930) -- 45,625 --
Restricted stock
repurchased and
retired................ -- -- (22,171) (222) (84,304) -- -- (84,526)
Amortization of unearned
compensation........... -- -- -- -- -- -- 79,792 79,792
Net income.............. -- -- -- -- -- 4,917,622 -- 4,917,622
--------- ------- --------- ------- ----------- ------------ --------- -----------
Balance at June 30,
1998................... 1,528,231 $15,282 6,039,811 $60,398 $23,733,554 $(11,871,499) $(303,775) $11,633,960
========= ======= ========= ======= =========== ============ ========= ===========
</TABLE>

See accompanying notes to consolidated financial statements.

26
<PAGE>

EMONS TRANSPORTATION GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 1998, 1997 AND 1996

<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income............................ $ 4,917,622 $ 773,793 $ 469,501
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation........................ 1,257,847 1,170,720 1,136,301
Amortization........................ 153,721 130,146 127,201
Gain on sale of assets.............. (26,266) (14,273) (82,010)
Gain on forgiveness of debt......... (121,820) -- --
Change in deferred income taxes..... (3,545,000) 290,000 194,000
Changes in assets and liabilities:
Accounts receivable, materials and
supplies and prepaid expenses.... 53,221 117,939 (533,407)
Accounts payable and accrued
expenses......................... 548,370 (580,891) 1,095,986
Other assets and liabilities,
net.............................. (139,851) (123,161) 22,827
----------- ----------- -----------
Net cash provided by operating
activities............................. 3,097,844 1,764,273 2,430,399
----------- ----------- -----------
Cash flows from investing activities:
Proceeds from sale of assets.......... 574,125 14,273 179,586
Additions to property, plant and
equipment............................ (1,417,103) (2,310,977) (2,801,382)
Investment in acquired rail
properties........................... (927,644) -- --
Increase in deferred expenses......... (20,188) -- --
----------- ----------- -----------
Net cash used in investing activities... (1,790,810) (2,296,704) (2,621,796)
----------- ----------- -----------
Cash flows from financing activities:
Proceeds from issuance of long-term
debt................................. 8,476,696 1,894,853 1,025,775
Reduction in long-term debt........... (8,433,831) (1,116,732) (801,864)
Debt issuance costs................... (214,458) -- --
Proceeds from issuance of common
stock................................ 26,375 4,125 --
----------- ----------- -----------
Net cash provided by (used in) financing
activities............................. (145,218) 782,246 223,911
----------- ----------- -----------
Net increase in cash and cash
equivalents............................ 1,161,816 249,815 32,514
Cash and cash equivalents at beginning
of year................................ 1,515,188 1,265,373 1,232,859
----------- ----------- -----------
Cash and cash equivalents at end of
year................................... $ 2,677,004 $ 1,515,188 $ 1,265,373
=========== =========== ===========
</TABLE>

See accompanying notes to consolidated financial statements.

27
<PAGE>

EMONS TRANSPORTATION GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED JUNE 30, 1998, 1997 AND 1996

NOTE 1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

a. The Company and Operations

Emons Transportation Group, Inc. ("Emons Transportation Group") is a freight
transportation and distribution services company serving the Mid-Atlantic and
Northeast regions of the United States. Emons Transportation Group and its
subsidiaries (collectively the "Company") own four short line railroads,
operate rail/truck transfer facilities and a rail intermodal terminal, and
provide customers with warehousing and logistics services for the movement and
storage of freight.

b. Principles of Consolidation

The consolidated financial statements include the accounts of Emons
Transportation Group, Inc. and its wholly-owned subsidiaries. All significant
intercompany balances and transactions have been eliminated in consolidation.

c. Use of Estimates

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

d. Cash and Cash Equivalents

Cash and cash equivalents include cash on hand and highly liquid short-term
investments, including bank repurchase agreements, with a maturity of three
months or less. Short-term instruments are carried at cost which approximates
market value.

e. Materials and Supplies

Materials and supplies are stated at the lower of cost or market.

f. Properties

Property, plant and equipment are carried at cost less accumulated
depreciation. The Company uses the Depreciation Accounting method for its four
railroad operations, the Maryland and Pennsylvania Railroad ("MPA"), Yorkrail
("YKR"), Penn Eastern Rail Lines ("PRL") and the St. Lawrence & Atlantic
Railroad ("SLR"). Under Depreciation Accounting, the initial cost or purchase
price of railroad track structures is depreciated over the estimated useful
life of the track structures, and the cost of replacing railroad track
structures is capitalized and depreciated over the estimated useful life of the
replacements. Government grants received for track rehabilitation programs
relating to the replacement of railroad track structures are accounted for as a
reduction of the related capitalized cost of the track structures.

Depreciation expense is computed on a straight-line basis over the estimated
useful lives of the respective assets which range from 25 to 35 years for
railroad track structures and from 3 to 20 years for all other assets.

28
<PAGE>

EMONS TRANSPORTATION GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

FOR THE YEARS ENDED JUNE 30, 1998, 1997 AND 1996

Property, plant and equipment at June 30, 1998 and 1997 consists of the
following:

<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Land and railroad track structures.................. $23,950,960 $22,347,581
Equipment........................................... 5,240,435 4,473,853
Buildings........................................... 2,200,449 2,160,155
Other............................................... 156,744 60,560
----------- -----------
31,548,588 29,042,149
Less accumulated depreciation....................... 10,888,838 9,649,440
----------- -----------
$20,659,750 $19,392,709
=========== ===========
</TABLE>

g. Deferred Expenses

Deferred expenses consist of deferred financing costs, deferred costs
incurred in connection with operating contracts, and deferred costs incurred in
connection with the design and lease of the Company's rail intermodal terminal.
Deferred financing costs are amortized over the terms of the related
agreements, deferred costs incurred in connection with operating contracts are
amortized over the terms of the related contracts, and deferred costs
associated with the design and lease of the Company's rail intermodal terminal
are amortized over a five year period, in each case using the straight-line
method of amortization.

h. Earnings Per Share

In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 128 ("FAS 128") "Earnings per
Share." FAS 128 is effective for financial statements for reporting periods
ending after December 15, 1997, and requires restatement of earnings per share
data for all prior periods presented. The Company adopted FAS 128 in fiscal
1998.

i. Stock-Based Compensation

The Company accounts for stock options issued under its stock option plans in
accordance with Accounting Principals Board Opinion No. 25 and, accordingly, no
compensation expense has been recognized in the Company's financial statements.
The Company has adopted the disclosure requirements of Financial Accounting
Standards No. 123 ("FAS 123") "Accounting for Stock-Based Compensation" which
are provided in Note 12, "Stock-Based Compensation and Warrants."

j. New Accounting Pronouncements

In June 1997, the FASB issued Statement of Financial Accounting Standards No.
131 ("FAS 131") "Disclosures about Segments of an Enterprise and Related
Information." FAS 131 establishes standards for the way that public business
enterprises report information about operating segments in annual financial
statements and requires that those enterprises report information about
operating segments in interim financial reports issued to shareholders. It also
establishes standards for related disclosures about products and services,
geographic areas, and major customers. FAS 131 is effective for financial
statements for periods beginning after December 15, 1997. The Company has not
determined the impact of this statement on the Company's consolidated financial
statement disclosures.

29
<PAGE>

EMONS TRANSPORTATION GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

FOR THE YEARS ENDED JUNE 30, 1998, 1997 AND 1996

NOTE 2. ACQUISITION AND LEASE OF RAILROAD OPERATIONS

Effective November 1, 1997, SLR entered into agreements to lease and operate
all of the track, consisting of approximately 11 miles, and property owned by
the Berlin Mills Railway Company ("BMS") located in Berlin and Gorham, New
Hampshire, and on November 4, 1997 commenced operations. SLR acquired two
locomotives and miscellaneous supplies from BMS in conjunction with this
transaction for $65,000.

In December 1997, SLR entered into an Asset Purchase Agreement to acquire
approximately one mile of track from the New Hampshire and Vermont Railroad
Company ("NHVT") in Groveton, New Hampshire for $280,000. On December 29, 1997
this transaction was consummated and SLR commenced operations on this section
of track on December 30, 1997.

On November 7, 1997, through its newly created wholly-owned subsidiary, Penn
Eastern Rail Lines, Inc., the Company entered into an Asset Purchase Agreement
to acquire substantially all of the assets and leases of four railroad
operations, eight locomotives, and track equipment from an individual owner
and operator. On December 30, 1997, this transaction was consummated and
operations commenced on December 31, 1997. The rail operations consist of
seven individual rail lines aggregating approximately 44 miles of track
located in various areas of southeastern Pennsylvania, including two lines
owned, four lines leased from the Pennsylvania Department of Transportation,
and a line leased from the owner of an industrial park. The $671,000 purchase
price consisted of $250,000 in cash at closing, a $250,000 note payable on
January 2, 1998, and 85,000 shares of the Company's Common Stock.

The cash and note portion of the PRL acquisition and the purchase of
locomotives from BMS were each funded by sale-leaseback transactions for the
sale of the respective locomotives aggregating $557,000. The locomotives are
leased for a period of seven years, and the lease agreements include buyout
provisions for approximately 35% of the sales value at the end of the seventh
year. These leases have been accounted for as capital leases. The acquisition
of track from NHVT in the amount of $280,000 was funded under the Company's $2
million working capital facility.

In July 1998, the Company entered into an Agreement in Principle to acquire
a 94 mile rail line in Quebec, Canada from the Canadian National Railway
Company ("CN") for Can$7 million. The rail line connects with CN's Halifax to
Montreal main line at St. Rosalie, Quebec, and SLR at the Quebec/Vermont
international border.

NOTE 3. SUPPLEMENTAL CASH DISCLOSURES

a. Cash Payments

The Company made the following cash payments for the fiscal years ended June
30, 1998, 1997 and 1996:

<TABLE>
<CAPTION>
1998 1997 1996
-------- ---------- ----------
<S> <C> <C> <C>
Interest...................................... $968,529 $1,044,323 $1,044,323
Income Taxes.................................. 101,050 99,965 99,965
</TABLE>

b. Non-cash Investing and Financing Activities

During fiscal 1998, the Company issued 85,000 shares of Common Stock valued
at $171,000 in connection with the acquisition of Penn Eastern Rail Lines,
Inc.

30
<PAGE>

EMONS TRANSPORTATION GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

FOR THE YEARS ENDED JUNE 30, 1998, 1997 AND 1996

During fiscal 1998, the Company entered into sale-leaseback transactions for
ten locomotives in the amount of $557,000 in connection with the lease of
Berlin Mills Railway Company and the acquisition of Penn Eastern Rail Lines,
Inc.

During fiscal 1998, the Company repurchased and retired 22,171 shares of
restricted stock and issued 82,500 shares of stock pursuant to the 1986 Stock
Option Plan.

NOTE 4. EARNINGS PER SHARE

Basic earnings per common share is computed by dividing income applicable to
common shareholders by the weighted average number of shares of common stock
outstanding during the period. Diluted earnings per common share is computed
by dividing income applicable to common shareholders by the weighted average
number of common shares and dilutive potential common shares outstanding
during the period. Diluted earnings per common share for fiscal years 1997 and
1996 does not include the conversion of preferred stock because the effect of
such inclusion would be anti-dilutive.

Earnings per share amounts are computed as follows:

<TABLE>
<CAPTION>
FOR THE YEAR ENDED JUNE 30, 1998
----------------------------------
INCOME SHARES EPS
------------ ----------- --------
<S> <C> <C> <C>
Net Income............................... $ 4,917,622
Less: Preferred dividend requirements.. (218,275)
------------
Basic EPS
Income applicable to common
shareholders.......................... $ 4,699,347 5,953,586 $ 0.79
=======
Effect of Dilutive Securities
Stock options and warrants............. -- 472,599
Convertible preferred stock............ 218,275 1,403,194
------------ -----------
Diluted EPS
Income applicable to common
shareholders plus assumed
conversions........................... $ 4,917,622 7,829,379 $ 0.63
============ =========== =======
</TABLE>

<TABLE>
<CAPTION>
FOR THE YEAR ENDED JUNE 30, 1997
-----------------------------------
INCOME SHARES EPS
------------ ------------ --------
<S> <C> <C> <C>
Net Income............................. $ 773,793
Less: Preferred dividend
requirements........................ (233,150)
------------
Basic EPS
Income applicable to common
shareholders........................ $ 540,643 5,757,027 $ 0.09
========
Effect of Dilutive Securities
Stock options and warrants........... -- 531,826
Convertible preferred stock.......... -- --
------------ ------------
Diluted EPS
Income applicable to common
shareholders plus assumed
conversions......................... $ 540,643 6,288,853 $ 0.09
============ ============ ========
</TABLE>

31
<PAGE>

EMONS TRANSPORTATION GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

FOR THE YEARS ENDED JUNE 30, 1998, 1997 AND 1996

<TABLE>
<CAPTION>
FOR THE YEAR ENDED JUNE 30, 1996
-----------------------------------
INCOME SHARES EPS
------------ ------------ --------
<S> <C> <C> <C>
Net Income............................. $ 469,501
Less: Preferred dividend
requirements........................ (237,771)
------------
Basic EPS
Income applicable to common
shareholders........................ $ 231,730 5,695,149 $ 0.04
========
Effect of Dilutive Securities
Stock options and warrants........... -- 405,298
Convertible preferred stock.......... -- --
------------ ------------
Diluted EPS
Income applicable to common
shareholders plus assumed
conversions......................... $ 231,730 6,100,447 $ 0.04
============ ============ ========
</TABLE>

The effect of this accounting change did not have a material impact on
previously reported earnings per share.

NOTE 5. LONG-TERM DEBT

Long-term debt at June 30, 1998 and 1997 consists of the following:

<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Term Loan Facility, interest at prime or
eurodollar rate, plus applicable margin, at the
Company's option................................. $ 7,525,000 $ --
Working Capital Facility, interest at prime or
eurodollar rate, plus applicable margin, at the
Company's option................................. 250,000 --
SLR Revolver Commitment, interest at prime........ -- 3,500,000
SLR Term Note, interest at 11%.................... -- 3,756,744
SLR $1,500,000 Promissory Note, interest at 8.5%.. 1,378,179 1,500,000
SLR Deferred Interest Note, interest at prime..... 54,316 97,768
SLR 1994 Track Rehabilitation Assistance Loan from
the State of Maine, non-interest bearing......... 560,588 603,710
SLR 1995 Track Rehabilitation Assistance Loan from
the State of Maine, non-interest bearing......... 89,565 102,274
SLR 1995 Track Rehabilitation Assistance Loan from
the State of New Hampshire, interest at 4.95%.... 1,179,145 1,170,715
YKR Senior Secured Term Loan, interest at 8.94%... -- 164,005
YKR Senior Secured Term Loan, interest at prime
plus 2%.......................................... -- 225,000
YKR Seller Land Financing, interest at 10%........ 56,667 113,333
Capital Lease Obligations--Locomotives, interest
at 7.5%.......................................... 530,192 --
Railroad Liability Insurance Financing, interest
at 8.16%......................................... 620,643 485,091
Equipment Loans, interest ranging from 10.29% to
12%.............................................. 97,880 145,490
----------- -----------
12,342,175 11,864,130
Less current portion.............................. 1,335,408 887,791
----------- -----------
$11,006,767 $10,976,339
=========== ===========
</TABLE>

32
<PAGE>

EMONS TRANSPORTATION GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

FOR THE YEARS ENDED JUNE 30, 1998, 1997 AND 1996

The prime rate and eurodollar rates at June 30, 1998 were 8.5% and 5.6875%,
respectively.

On August 15, 1997, the Company entered into a Loan and Security Agreement
(the "Agreement") with a new lender which provided a $7,775,000 seven year term
loan and a $2 million working capital facility. The $7,775,000 proceeds from
the term loan were utilized to retire the SLR Revolver Commitment, the SLR Term
Note and the two outstanding YKR Senior Secured Term Loans, and to pay a
portion of the refinancing costs. The term loan is payable in quarterly
installments, with a balloon payment at the end of the seventh year, in
accordance with the following schedule:

<TABLE>
<CAPTION>
QUARTERLY
QUARTER ENDING PAYMENT
-------------- ----------
<S> <C>
September 30, 1997--June 30, 1998................................ $ 62,500
September 30, 1998--June 30, 1999................................ 150,000
September 30, 1999--June 30, 2001................................ 200,000
September 30, 2001--June 30, 2002................................ 262,500
September 30, 2002--June 30, 2003................................ 300,000
September 30, 2003--March 31, 2004............................... 325,000
June 30, 2004.................................................... 2,100,000
</TABLE>

The Company is required to make additional principal payments within 120 days
after the end of each fiscal year equal to 50% of "Excess Cash Flow," as
defined in the Agreement, which is deducted from the balloon payment. The
Excess Cash Flow payment required based upon the Company's operating results
for the year ended June 30, 1998 is estimated to total $235,000.

The initial term of the working capital facility is two years, and borrowings
under this facility are limited based upon eligible accounts receivable as
defined in the Agreement. As of June 30, 1998, the Company had borrowings of
$250,000 outstanding under the working capital facility, and had additional
availability of $967,000 computed in accordance with the facility's eligibility
criteria.

Interest on both the term loan and working capital borrowings outstanding is
based upon the bank's prime rate or the eurodollar rate, plus an applicable
margin, at the option of the Company. The applicable margin ranges from 0.0% to
0.5% for prime based borrowings, and from 1.75% to 3% for eurodollar based
borrowings, depending upon the Company's financial performance. As of June 30,
1998, the applicable margin was 0.0% for prime based borrowings and 2.5% for
eurodollar based borrowings. The non-use fee on the working capital facility
ranges from 0.25% to 0.5%, also based upon the Company's financial performance,
and was 0.5% at June 30, 1998.

The term loan and working capital facility borrowings are secured by all of
the assets of the Company, and the Agreement includes certain restrictive
covenants, the more significant of which require that the Company meet
prescribed financial ratios and maintain specified levels of insurance, and
which also restrict additional borrowings, capital expenditures, lease
commitments, and dividends. The Agreement also required that the Company enter
into an interest rate contract by September 30, 1997, with respect to a
principal amount of at least one-half of the available term loan balance.
Accordingly, on September 23, 1997, the Company entered into a five year
interest rate swap agreement under which the Company fixed its LIBOR interest
rate at 6.28% on one-half of the scheduled available term loan balance
outstanding.

The SLR $1,500,000 Promissory Note is subordinated to the $7,775,000 term
loan and $2 million working capital facility. In conjunction with the
aforementioned refinancing transaction, the Company renegotiated the

33
<PAGE>

EMONS TRANSPORTATION GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

FOR THE YEARS ENDED JUNE 30, 1998, 1997 AND 1996

terms of the SLR Operating and Marketing Agreement with CN, SLR's primary
connecting carrier, including the terms of the $1,500,000 Promissory Note. In
accordance with the revised agreement, the $1,500,000 Promissory Note is being
amortized on a quarterly basis over a seven year period commencing October 1,
1997, at an assumed interest rate of 8.5%, without any principal or interest
payment requirements provided that the Company continues to own and operate
SLR. Principal payments amortized and interest forgiven in fiscal 1998 totaled
$121,820 and $93,073, respectively, and are included in "Other income" in the
accompanying Consolidated Statements of Operations. The SLR Deferred Interest
Note is payable in monthly installments of $3,621, plus interest at prime,
until paid in full.

In fiscal 1994, the State of Maine awarded SLR a $646,832 non-interest
bearing term loan in connection with the State's track rehabilitation
assistance program. The term loan is payable in semi-annual installments of
$21,561 through June 30, 2011. In September 1995, the State of Maine awarded
SLR an additional $463,158 non-interest bearing term loan under the State's
track rehabilitation assistance program, $159,039 of which had been drawn as of
June 30, 1998. This additional term loan is payable in semi-annual installments
of $23,158. In fiscal 1995, the State of New Hampshire awarded SLR a
$1,150,000, 4.95% track rehabilitation assistance term loan, $1,144,121 of
which had been drawn as of June 30, 1998. This term loan, plus interest accrued
in the amount of $52,825, is payable in quarterly installments of $23,656,
including principal and interest, through December 2017.

The final payment for the YKR Seller Land Financing in the amount of $56,667
is payable in August 1998. The Company's Railroad Liability Insurance Financing
is payable in monthly installments of $18,143, including principal and
interest, over a 30 month period through November 2000. The Equipment Loans are
payable in various amounts ranging up to $2,357 per month, including interest,
and mature at various dates through November 2000.

Maturities of debt over the next five years are as follows:

<TABLE>
<CAPTION>
FISCAL YEAR AMOUNT DUE
----------- ----------
<S> <C>
1999............................................................. $1,335,408
2000............................................................. 1,719,121
2001............................................................. 1,269,878
2002............................................................. 1,414,054
2003............................................................. 1,590,055
</TABLE>

The fair value of debt obligations outstanding, which approximates market
value, and the five year interest rate swap agreement at June 30, 1998 was
approximately $12,276,000.

NOTE 6. LEASE COMMITMENTS

a. Capital Leases

In December 1997, the Company entered into sale-leaseback transactions for
the sale of ten locomotives in the amount of $557,000, which have been
accounted for as capital leases. The locomotives are leased for a period of
seven years, and the lease includes a buyout for approximately 35% of the sales
value at the end of the seventh year.

34
<PAGE>

EMONS TRANSPORTATION GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

FOR THE YEARS ENDED JUNE 30, 1998, 1997 AND 1996

b. Operating Leases

The Company leases land, rail facilities, its rail intermodal terminal,
locomotives and other equipment, automobiles and office space under non-
cancelable operating lease arrangements.

The Company leases its rail intermodal terminal from the City of Auburn,
Maine under a lease agreement which includes an initial term of 20 years,
three optional 10 year renewal periods, and a purchase option in year 50.

As described more fully in Note 2, "Acquisition and Lease of Railroad
Operations," SLR entered into a Lease Agreement to lease all of the track,
consisting of approximately 11 miles, and property owned by BMS. SLR is
required to make monthly lease payments of $8,333, adjusted annually by an
escalation provision based upon a specified railroad inflation index. The
Lease Agreement includes an initial term of ten years and a five year renewal
option.

As described more fully in Note 2, "Acquisition and Lease of Railroad
Operations," PRL acquired five leased rail lines, one from the owner of an
industrial park for $1 per year, and four from the Pennsylvania Department of
Transportation ("PennDOT"). The line leased from the owner of the industrial
park includes an initial five year term that expires December 2002, and three
successive five year renewal periods. The Company has the right of first
refusal to purchase the rail line during the initial term and any renewal term
should the owner decide to sell the rail line. The lines leased from PennDOT
include a five year lease term that expires June 30, 2000. PRL is required to
have an appraisal of each line performed no later than March 31, 1999, at
which time PennDOT has the right to sell each line for its net liquidation
value, subject to certain adjustments, and the remaining term of the lease
agreement for each line that is sold will be canceled. PRL has the right of
first refusal with respect to the sale of each line.

c. Future Minimum Lease Payments

Future minimum lease commitments under non-cancelable leases as of June 30,
1998 are as follows:

<TABLE>
<CAPTION>
OPERATING CAPITAL
FISCAL YEAR LEASES LEASES
----------- ---------- ---------
<S> <C> <C>
1989.................................................. $ 640,381 $ 80,595
2000.................................................. 569,416 80,595
2001.................................................. 519,052 80,595
2002.................................................. 437,449 80,595
2003.................................................. 390,841 80,595
2004 and thereafter................................... 2,861,873 309,129
---------- ---------
Total future minimum lease payments.................... $5,419,012 712,104
==========
Less--amount representing interest, at 7.5%............ (181,912)
---------
Present value of future minimum lease payments......... $ 530,192
=========
</TABLE>

Rent expense totaled $1,073,610, $1,190,601 and $1,116,477 for the fiscal
years ended June 30, 1998, 1997 and 1996, respectively.

35
<PAGE>

EMONS TRANSPORTATION GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

FOR THE YEARS ENDED JUNE 30, 1998, 1997 AND 1996

NOTE 7. PREFERRED STOCK

As of June 30, 1998, a total of 1,528,231 shares of $0.14 Series A
Cumulative Convertible Preferred Stock were issued and outstanding. The
principal terms of the Preferred Stock are as follows:

a. Liquidation value is $2.00 per share.

b. Dividends, when and as declared by the Board of Directors, are
cumulative and payable semi-annually on January 1 and July 1 each year at a
rate of $0.14 per share per annum.

c. The Preferred Stock may be redeemed, in whole or in part, at the
option of the Company at any time after September 27, 1997 for $2.00 per
share.

d. Holders of the $0.14 Series A Cumulative Convertible Preferred Stock
have the right to vote (on a one vote per share basis) as a class together
with the holders of Common Stock on all matters.

e. Each share of $0.14 Series A Cumulative Convertible Preferred Stock is
convertible, at any time, into nine-tenths shares of Common Stock.

NOTE 8. INCOME TAXES

The provision for income taxes for the years ended June 30, 1998, 1997 and
1996 is comprised of the following:

<TABLE>
<CAPTION>
1998 1997 1996
----------- -------- --------
<S> <C> <C> <C>
Current:
Federal..................................... $ 45,000 $ 17,000 $ 7,000
State....................................... 70,000 90,000 88,500
----------- -------- --------
Total current............................. 115,000 107,000 95,500
----------- -------- --------
Deferred:
Federal..................................... (3,420,000) 232,000 122,000
State....................................... (125,000) 58,000 72,000
----------- -------- --------
Total deferred............................ (3,545,000) 290,000 194,000
----------- -------- --------
Total..................................... $(3,430,000) $397,000 $289,500
=========== ======== ========
</TABLE>

The Company utilized approximately $2,200,000 of federal and $1,300,000 of
state net operating loss carryforwards in computing the fiscal 1998 current
provision for income taxes.

Deferred tax assets and liabilities are comprised of the following at June
30, 1998 and 1997:

<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Deferred tax assets:
Accrued expenses................................ $ 1,000,000 $ 712,000
Net operating loss carryforwards................ 15,110,000 21,345,000
----------- -----------
16,110,000 22,057,000
Valuation allowance............................... (11,896,000) (21,539,000)
----------- -----------
4,214,000 518,000
Deferred tax liabilities:
Property, plant and equipment................... (2,393,000) (2,242,000)
----------- -----------
Net deferred tax asset (liability)................ $ 1,821,000 $(1,724,000)
=========== ===========
</TABLE>

36
<PAGE>

EMONS TRANSPORTATION GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

FOR THE YEARS ENDED JUNE 30, 1998, 1997 AND 1996

At June 30, 1998, the Company had approximately $44,000,000 of federal net
operating loss carryforwards available, which expire in various years from
fiscal 1999 through fiscal 2008, a significant portion of which expire in
fiscal 2002.

The valuation allowance has been provided to reduce the deferred tax assets,
which relate principally to the Company's net operating loss carryforwards, to
the estimated recoverable amount based upon the estimated utilization of the
deferred tax assets. The Company continually reassesses the estimated amount
of deferred tax assets that it believes it will be able to utilize in the
future. In fiscal 1998, the Company reduced the valuation allowance and
recognized a deferred tax benefit in the amount of $3,545,000 relating
principally to its net operating loss carryforwards. Based upon the sustained
significant increase in taxable income in the current year, new business added
to the Company's railroad operations in the current year, and acquisitions
completed during the current year, the Company recognized additional tax
benefits in fiscal 1998 because its reassessment indicated that it appeared
more likely than not that the benefits will be realized.

A reconciliation of the difference between the United States statutory
federal income tax rate and the Company's effective income tax rate for the
years ended June 30, 1998, 1997 and 1996 is as follows:

<TABLE>
<CAPTION>
1998 1997 1996
------ ---- -----
<S> <C> <C> <C>
United States statutory tax rate..................... 34.0% 34.0% 34.0%
State income taxes, net of federal income taxes...... (2.4) 8.3 13.9
Reduction of prior valuation allowance against net
operating loss carryforwards........................ (263.4) (9.6) (12.1)
Other, net........................................... 1.2 1.2 2.3
------ ---- -----
Effective Tax Rate................................... (230.6)% 33.9% 38.1%
====== ==== =====
</TABLE>

NOTE 9. CUSTOMER CONCENTRATIONS

The majority of the Company's revenues are generated from freight
transportation services provided to customers in the Northeast and Mid-
Atlantic regions of the United States, many of whom are involved in the pulp
and paper industry.

Two customers each accounted for approximately 10% of the Company's fiscal
1998 total operating revenues, one customer accounted for approximately 10% of
the Company's fiscal 1997 operating revenues, and one customer accounted for
approximately 12% of fiscal 1996 operating revenues.

NOTE 10. DIVIDENDS

On November 20, 1997, and June 18, 1998, the Board of Directors voted to
omit the regular semi-annual dividend of $0.07 per share on its $0.14
Cumulative Convertible Preferred Stock which would have been payable on
January 2, 1998 and July 1, 1998, respectively. Dividends in arrears as of
June 30, 1998 aggregated $1,711,619 as compared to $1,617,840 for the prior
year.

NOTE 11. CONTINGENCIES

37
<PAGE>

EMONS TRANSPORTATION GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

FOR THE YEARS ENDED JUNE 30, 1998, 1997 AND 1996

litigation based upon comparative negligence. The Company believes that it has
adequate insurance coverage and has provided adequate reserves for any
liabilities which may result from the ultimate outcome of these claims.

Product Liability Actions

Prior to March 1971, under previous management, Industries (then known as
Amfre-Grant, Inc.) was engaged in the business of distributing (but not
manufacturing) various generic and prescription drugs. Industries sold and
discontinued these business activities in March 1971 and commenced its railcar
leasing and railroad operations in October 1971. One of the drugs which had
been distributed was diethylstilbestrol ("DES"), which was taken by women
during pregnancy to prevent miscarriage.

As of June 30, 1998, Industries was one of numerous defendants (including
many of the largest pharmaceutical manufacturers) in 680 lawsuits in which the
plaintiffs allege that DES caused adenosis, infertility, cancer or birth
defects in the offspring or grandchildren of women who ingested DES during
pregnancy. In these actions, liability is premised on the defendant's
participation in the market for DES, and liability is several and limited to
the defendant's share of the market. Of these lawsuits, 675 were commenced
after the confirmation of Industries' Reorganization Plan in December 1986 (the
"Plan"), while the remaining five lawsuits are claims which will be treated
under the Plan. These actions are currently in various stages of litigation.

On April 16, 1998, the Bankruptcy Court granted Industries' motion for
summary judgment declaring that the post-confirmation lawsuits represent claims
which should be asserted against Industries' Chapter 11 estate and are not
post-reorganization liabilities. A formal judgment was entered by the court on
May 6, 1998. In September 1998, one counsel representing multiple DES claimants
appealed the Bankruptcy Court's judgment to the United States District Court.

Industries has product liability insurance and defense coverage for nearly
all the claims which fall within the policy period 1948 to 1970 up to varying
limits by individual and in the aggregate for each policy year. To date,
Industries has not exhausted insurance coverage in any policy year. During the
period July 1, 1997 to June 30, 1998, 30 new actions were commenced in which
Industries was named as a defendant and 238 lawsuits were settled or dismissed
at no liability to Industries. Included in the cases outstanding as of June 30,
1998, 365 were commenced in the prior year in a single filing in a state court
in Ohio shortly before the effective date of a revision to Ohio's product
liability statute which, among other things, limits damages recoverable from
pain and suffering. On June 29, 1998, the Ohio Supreme Court ruled that Ohio
law would not permit DES cases in which the plaintiff could not identify the
manufacturer of DES allegedly ingested by mothers of DES plaintiffs. As a
result, 289 Ohio DES cases against the Company are subject to dismissal.
Counsel for these plaintiffs filed motions for reargument and to stay
implementation of the decision.

Management intends to vigorously defend all of these actions. In the event
that the bankruptcy decision is reversed by the appellate court, it is possible
that Industries could ultimately have liability in these actions in excess of
its product liability insurance coverage described above. However, based upon
Industries' experience in prior DES litigation, including the proceedings
before the Bankruptcy Court, and its current knowledge of pending cases, the
Company believes that it is unlikely that Industries' ultimate liability, if
any, in excess of insurance coverage and existing reserves in the pending
cases, will be in an amount sufficient to have a material adverse effect upon
the Company's consolidated financial position or results of operations.

38
<PAGE>

EMONS TRANSPORTATION GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

FOR THE YEARS ENDED JUNE 30, 1998, 1997 AND 1996

Environmental Liability

During fiscal 1994, the Company's Maryland and Pennsylvania Railroad ("MPA")
discovered a diesel fuel oil spill at its locomotive maintenance facility in
York, Pennsylvania, resulting from the fueling of its locomotives. MPA is
currently performing additional testing and is working with the Pennsylvania
Department of Environmental Protection ("PADEP") to investigate and, to the
extent necessary, remediate the contaminated area. In January 1997, as a
result of these testing activities, MPA discovered free product in some of its
monitoring wells. The Company estimates that the cost to remediate the free
product could potentially range from $100,000 to $200,000, although final
costs have not yet been determined. The Company has provided sufficient
reserves for the anticipated remediation costs. PADEP could also potentially
require further investigation and, to the extent necessary, remediation of
ground water and/or soils at this facility at some point in the future.
However, the Company cannot determine at this time whether PADEP will require
further investigation and remediation, or what the ultimate costs of
addressing this matter may be or what effect, if any, they could have upon the
Company's consolidated financial position or results of operations.

Railroad Industry Consolidation

The Company routinely interchanges traffic with certain Class I railroads
that are currently undergoing consolidations. Consolidated Rail Corporation,
which interchanges traffic with the Company's Pennsylvania rail operations, is
being divided and acquired by the Norfolk Southern Railroad and CSX
Corporation. The Canadian National Railway, which interchanges traffic with
SLR, announced that it will acquire the Illinois Central Railroad, pending
approval from the Surface Transportation Board. While the Company does not
anticipate any significant negative impact as a result of these
consolidations, and believes that they may create additional long-term
opportunities for its railroad operations, there can be no assurance that
these consolidations will not have an unfavorable impact on the Company's
railroad operations.

NOTE 12. STOCK-BASED COMPENSATION AND WARRANTS

a. Stock Option Plans

In November 1996, the Board of Directors and shareholders adopted the 1996
Stock Option Plan (the "Plan"), which replaced the Company's expiring 1986
Stock Option Plan. The terms of the new Plan are substantially the same as the
terms of the 1986 Stock Option Plan. The Plan provides for the issuance of a
maximum of 500,000 shares of the Company's Common Stock to key employees.
Under the Plan, the Company may grant either non-qualified or incentive stock
options at an exercise price not less than 100% of the fair market value at
the date of grant. Options may be exercised in accordance with time periods
established by the Compensation Committee of the Board of Directors, and
expire ten years after the date of grant. During fiscal 1998, the Company
issued options to purchase 226,000 shares of the Company's Common Stock under
the Plan at prices ranging from $1.8750 to $3.9063, which vest over periods
ranging from three to five years. As of June 30, 1998, 146,000 options were
available for issuance under the Plan.

Separate from the above plans, the Company has granted stock options to its
non-employee directors on various dates from fiscal 1988 through fiscal 1998
to purchase shares of the Company's Common Stock at exercise prices equal to
the fair market value of the stock on the date of grant. The vesting period
for these options ranges from three to four years, and these options expire
ten years from the date of grant.

39
<PAGE>

EMONS TRANSPORTATION GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

FOR THE YEARS ENDED JUNE 30, 1998, 1997 AND 1996

A summary of stock option activity under the stock option plans described
above is as follows:

<TABLE>
<CAPTION>
OPTION PRICE PER SHARE
------------------------------
STOCK OPTIONS RANGE WEIGHTED AVERAGE
------------- ------------- ----------------
<S> <C> <C> <C>
Balance at June 30, 1995...... 715,000 $0.81-$2.56 $ 1.05
Options granted............. 60,000 1.25-2.44 1.69
Options forfeited........... (32,500) 0.91-2.56 1.51
--------
Balance at June 30, 1996...... 742,500 0.81-2.44 1.08
Options granted............. 220,500 2.28-3.25 3.16
Options exercised........... (4,000) 1.00-1.06 1.03
Options forfeited........... (36,000) 0.91-1.06 1.01
--------
Balance at June 30, 1997...... 923,000 0.81-3.25 1.58
Options granted............. 256,000 1.88-3.91 2.76
Options exercised........... (110,500) 0.81-1.06 1.00
Options forfeited........... (144,500) 0.81-3.25 1.84
--------
Balance at June 30, 1998...... 944,500 0.81-3.91 1.93
========
<CAPTION>
JUNE 30, 1998 JUNE 30, 1997 JUNE 30, 1996
------------- ------------- ----------------
<S> <C> <C> <C>
Options exercisable........... 425,599 377,333 223,750
Weighted average exercise
price........................ $ 1.26 $ 1.04 $ 0.99
</TABLE>

A summary of stock option information regarding options outstanding at June
30, 1998 is as follows:

<TABLE>
<CAPTION>
WEIGHTED WEIGHTED STOCK WEIGHTED
RANGE OF UNEXERCISED AVERAGE AVERAGE OPTIONS AVERAGE
EXERCISE STOCK REMAINING EXERCISE CURRENTLY EXERCISE
PRICES OPTIONS LIFE (YEARS) PRICE EXERCISABLE PRICE
-------- ----------- ------------ -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$0.75-$1.25.......... 457,500 6.6 $1.03 359,500 $1.02
1.26-2.25............ 115,000 8.8 1.79 18,666 1.54
2.26-3.25............ 314,000 9.0 3.06 47,433 2.96
3.26-4.00............ 37,500 9.7 3.91
------- -------
Total.............. 924,000 7.8 1.93 425,599 1.26
======= =======
</TABLE>

40
<PAGE>

EMONS TRANSPORTATION GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

FOR THE YEARS ENDED JUNE 30, 1998, 1997 AND 1996

The Company accounts for stock options issued under its stock option plans
in accordance with APB Opinion No. 25 and, accordingly, no compensation
expense has been recognized in the Company's financial statements. The
Company's pro forma net income and earnings per share under the provisions of
FAS 123 for the years ended June 30, 1998, 1997 and 1996 would have been as
follows:

<TABLE>
<CAPTION>
1998 1997 1996
---------- -------- --------
<S> <C> <C> <C>
Net income:
As reported..................................... $4,917,622 $773,793 $469,501
Pro forma....................................... 4,759,774 721,741 460,668
Basic earnings per share:
As reported................................... $ 0.79 $ 0.09 $ 0.04
Pro forma..................................... 0.76 0.08 0.04
Diluted earnings per share:
As reported................................... $ 0.63 $ 0.09 $ 0.04
Pro forma..................................... 0.61 0.08 0.04
Weighted average fair value of options granted.... $ 2.08 $ 2.38 $ 1.26
</TABLE>

The pro forma information provided above does not include the impact of
stock options granted prior to July 1, 1995. As a result, compensation cost
under FAS 123 included in the determination of the pro forma information may
not be representative of what compensation cost would have been had the
provisions of FAS 123 been applied to prior years, and may not be indicative
of compensation cost under FAS 123 in future years. The fair value of options
granted on the date of grant included in the pro forma information for the
years ended June 30, 1998, 1997 and 1996 was estimated using the Black-Scholes
option pricing model using the following assumptions:

<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Weighted average:
Risk free interest rate...................... 6.0% 6.8% 6.7%
Expected life................................ 10 years 10 years 10 years
Expected volatility.......................... 60.4% 58.4% 57.7%
Expected dividend yield...................... 0.0% 0.0% 0.0%
</TABLE>

41
<PAGE>

EMONS TRANSPORTATION GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

FOR THE YEARS ENDED JUNE 30, 1998, 1997 AND 1996

b. Restricted Stock Plan

The Company has a Restricted Stock Plan under which the Company can award up
to 800,000 shares of Common Stock to employees. Shares awarded under the
Restricted Stock Plan may not be sold or transferred until they vest. The
Management Compensation Committee of the Board of Directors determines the
vesting schedule for each of the recipients of the Restricted Stock Awards.
Compensation under the Restricted Stock Plan is charged to earnings over the
respective vesting periods ranging from five to ten years. At June 30, 1998,
1997 and 1996, 314,450, 269,950 and 336,450 shares were available for
issuance, respectively. A summary of activity under the Company's Restricted
Stock Plan is as follows:

<TABLE>
<CAPTION>
1998 1997 1996
------- -------- -------
<S> <C> <C> <C>
Awards:
Shares........................................... 25,000 69,000 --
Fair value at date of grant...................... $79,527 $219,875 $ --
Cancellations:
Shares........................................... 69,500 2,500 8,000
Fair value at date of grant...................... $45,625 $ 1,875 $ 8,000
Compensation expense............................... $79,792 $ 42,634 $32,802
</TABLE>

c. Common Stock Warrants

At June 30, 1998, the Company had warrants outstanding to purchase up to
160,000 shares of common stock at prices ranging from $1.00 to $2.625 per
share.

NOTE 13. QUARTERLY FINANCIAL DATA (UNAUDITED)

<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------------------------
SEPTEMBER 30 DECEMBER 31 MARCH 31 JUNE 30
------------ ----------- ---------- ----------
<S> <C> <C> <C> <C>
FOR THE FISCAL YEAR ENDED
JUNE 30, 1998:
Operating revenues......... $4,102,957 $4,070,869 $4,292,856 $4,978,355
Income from operations..... 564,660 563,190 300,918 768,302
Net income................. 220,977 429,681 125,894 4,141,070
Earnings per common share:
Basic.................... $ 0.03 $ 0.06 $ 0.01 $ 0.68
Diluted.................. 0.03 0.06 0.01 0.53
FOR THE FISCAL YEAR ENDED
JUNE 30, 1997:
Operating revenues......... $3,929,894 $4,094,299 $3,853,105 $4,180,954
Income from operations..... 518,611 562,259 238,672 606,877
Net income................. 175,547 203,969 102,383 291,894
Earnings per common share:
Basic.................... $ 0.02 $ 0.03 $ 0.01 $ 0.04
Diluted.................. 0.02 0.02 0.01 0.04
</TABLE>

42
<PAGE>

EMONS TRANSPORTATION GROUP, INC.
(PARENT COMPANY ONLY)

BALANCE SHEETS

AS OF JUNE 30, 1998 AND 1997

<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................ $ 2,360,767 $ 390,391
Accounts receivable.............................. 4,285 10,957
Prepaid expenses and other current assets........ 45,183 24,264
Due from affiliates.............................. 2,178,625 3,901,542
Deferred income taxes............................ 392,000 14,000
------------ ------------
Total current assets........................... 4,980,860 4,341,154
Investments in subsidiaries at equity.............. 12,283,786 2,242,123
Property and equipment, net of accumulated
depreciation of $501,219 and $472,982 as of June
30, 1998 and 1997, respectively................... 77,513 76,086
Due from affiliates................................ 1,116,739 1,956,592
Deferred income taxes.............................. 1,719,000 --
Other assets....................................... 113,925 21,515
------------ ------------
TOTAL ASSETS....................................... $ 20,291,823 $ 8,637,470
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt................ $ 69,363 $ 13,121
Accounts payable................................. 58,714 63,405
Accrued payroll and related expenses............. 264,161 155,175
Income taxes payable............................. 265,720 30,720
Other accrued expenses........................... 108,786 121,534
Due to affiliates................................ 7,040,580 --
------------ ------------
Total current liabilities...................... 7,807,324 383,955
Long-term debt..................................... 100,539 41,344
Note payable to affiliate.......................... 750,000 450,000
Deferred income taxes.............................. -- 1,323,000
------------ ------------
Total Liabilities.............................. 8,657,863 2,198,299
------------ ------------
Stockholders' Equity:
Preferred stock, authorized 3,000,000 shares
$0.14 Series A Cumulative Convertible Preferred
Stock, $0.01 par value, issued and outstanding
1,528,231 and 1,650,857 shares at June 30, 1998
and 1997, respectively......................... 15,282 16,509
Common stock, $0.01 par value, authorized
15,000,000 and 11,000,000 shares at June 30,
1998 and 1997, respectively, issued and
outstanding 6,039,811 and 5,800,624 shares at
June 30, 1998 and 1997, respectively............ 60,398 58,006
Additional paid-in capital....................... 23,733,554 23,503,442
Deficit.......................................... (11,871,499) (16,789,121)
------------ ------------
11,937,735 6,788,836
Unearned compensation--restricted stock awards..... (303,775) (349,665)
------------ ------------
Total Stockholders' Equity..................... 11,633,960 6,439,171
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY......... $ 20,291,823 $ 8,637,470
============ ============
</TABLE>

43
<PAGE>

EMONS TRANSPORTATION GROUP, INC.
(PARENT COMPANY ONLY)

STATEMENTS OF OPERATIONS

FOR THE YEARS ENDED JUNE 30, 1998, 1997 AND 1996

<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Operating revenues:
Intercompany management fees......... $ 2,015,556 $ 1,762,846 $ 1,471,555
----------- ----------- -----------
Operating expenses:
General and administrative expenses.. 1,968,840 1,727,671 1,451,705
Depreciation......................... 28,347 24,978 21,733
----------- ----------- -----------
Total operating expenses........... 1,997,187 1,752,649 1,473,438
----------- ----------- -----------
Income (loss) from operations.......... 18,369 10,197 (1,883)
Other income (expense):
Intercompany interest income......... 577,428 -- --
Interest and other income............ 55,324 35,359 35,670
Interest expense..................... (73,693) (45,556) (33,787)
----------- ----------- -----------
Total other income (expense)....... 559,059 (10,197) 1,883
----------- ----------- -----------
Income before income taxes and equity
in undistributed net earnings of
subsidiaries.......................... 577,428 -- --
Provision (benefit) for income taxes... (3,331,537) 20,000 10,000
----------- ----------- -----------
Income (loss) before equity in
undistributed net earnings of
subsidiaries.......................... 3,908,965 (20,000) (10,000)
Equity in undistributed net earnings of
subsidiaries.......................... 1,008,657 793,793 479,501
----------- ----------- -----------
Net income............................. $ 4,917,622 $ 773,793 $ 469,501
=========== =========== ===========
</TABLE>

44
<PAGE>

EMONS TRANSPORTATION GROUP, INC.
(PARENT COMPANY ONLY)

STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED JUNE 30, 1998, 1997 AND 1996

<TABLE>
<CAPTION>
1998 1997 1996
----------- ---------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income............................... $ 4,917,622 $ 773,793 $ 469,501
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation........................... 28,347 24,978 21,733
Amortization of deferred compensation.. 79,792 42,634 32,802
Equity in net earnings of
subsidiaries.......................... (1,008,657) (793,793) (479,501)
Change in deferred income taxes........ (3,376,537) 2,000 1,000
Changes in assets and liabilities:
Accounts receivable, prepaid expenses
and other current assets............ (14,247) 46,495 (6,233)
Accounts payable and accrued
expenses............................ 326,547 1,164 (14,139)
Other assets......................... (92,410) 11,475 (5,079)
----------- ---------- ---------
Net cash provided by operating activities.. 860,457 108,746 20,084
----------- ---------- ---------
Cash flows from investing activities:
Additions to property and equipment...... (29,665) (8,375) (68,347)
Investments in subsidiaries.............. (9,739,006) -- --
(Increase) decrease in due to/from
affiliates, net......................... 10,030,778 (2,392,426) 53,467
Dividends received from subsidiaries..... 706,000 2,200,000 --
Proceeds from issuance of common stock... 26,375 4,125 --
----------- ---------- ---------
Net cash provided by (used in) investing
activities................................ 994,482 (196,676) (14,880)
----------- ---------- ---------
Cash flows from financing activities:
Proceeds from issuance of long-term
debt.................................... 142,830 -- 75,300
Reduction in long-term debt.............. (27,393) (12,938) (7,897)
----------- ---------- ---------
Net cash provided by (used in) financing
activities................................ 115,437 (12,938) 67,403
----------- ---------- ---------
Net increase (decrease) in cash and cash
equivalents............................... 1,970,376 (100,868) 72,607
Cash and cash equivalents at beginning of
year...................................... 390,391 491,259 418,652
----------- ---------- ---------
Cash and cash equivalents at end of year... $ 2,360,767 $ 390,391 $ 491,259
=========== ========== =========
</TABLE>

45
<PAGE>

PURSUANT TO THE REQUIREMENT OF SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED
ON ITS BEHALF BY THE UNDERSIGNED, THERETO DULY AUTHORIZED.

Emons Transportation Group, Inc.

<TABLE>
<S> <C> <C>
/s/ Robert Grossman Chairman of the Board of September 24, 1998
*By: _________________________________ Directors, President and
ROBERT GROSSMAN, Chief Executive Officer

PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.

<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----

<S> <C> <C>
/s/ Robert Grossman Chairman of the Board of September 24, 1998
______________________________________ Directors, President and
ROBERT GROSSMAN, Chief Executive Officer

/s/ Scott F. Ziegler Vice President--Finance, September 24, 1998
______________________________________ Controller and Secretary,
SCOTT F. ZIEGLER, signing on behalf of the
registrant as its
principal accounting
officer and as Director

/s/ Robert J. Smallacombe Director September 24, 1998
______________________________________
ROBERT J. SMALLACOMBE,

/s/ Dean H. Wise Director September 24, 1998
______________________________________
DEAN H. WISE,

/s/ Alfred P. Smith Director September 24, 1998
______________________________________
ALFRED P. SMITH,

/s/ Kimberly A. Madigan Director September 24, 1998
______________________________________
KIMBERLY A. MADIGAN,

/s/ Michael J. Blake Director September 24, 1998
______________________________________
MICHAEL J. BLAKE,
</TABLE>

46
<PAGE>

EXHIBITS

The following exhibits are filed as a part of this report. For convenience
of reference, exhibits are listed according to numbers assigned in the Exhibit
Table of Item 601 of Regulation S-K under the Securities Exchange Act of 1934.

<TABLE>
<CAPTION>
PAGE IN
EXHIBIT SEQUENTIALLY
NUMBER EXHIBIT NUMBERED COPY
------- ------- -------------
<C> <S> <C>
3(a) Certificate of Incorporation for Emons Holdings, Inc.
dated December 19, 1986 (incorporated by reference
from Emons Holdings, Inc. Report on Form 10-K for the
year ended June 30, 1987, Exhibit Number 3 (a)) --

3(b) Certificate of Amendment of Certificate of
Incorporation for Emons Holdings, Inc. dated September
26, 1989 (incorporated by reference from Emons
Holdings, Inc. Report on Form 10-Q for the quarter
ended September 30, 1989, Exhibit Number 3 (b)) --

3(c) Amended and Restated By-Laws for Emons Holdings, Inc.
(incorporated by reference from Emons Holdings, Inc.
Report on Form 10-Q for the quarter ended September
30, 1989, Exhibit Number 3 (c)) --

3(d) Certificate of Amendment of Certificate of
Incorporation of Emons Holdings, Inc. dated November
18, 1993 (incorporated by reference from Emons
Transportation Group, Inc. Report on Form 10-Q for the
quarter ended December 31, 1993, Exhibit Number 3 (d)) --

10(a) Lease Agreement dated July 19, 1994 by and between the
City of Auburn, Maine and Maine Intermodal
Transportation, Inc. (incorporated by reference from
Emons Transportation Group, Inc. Report on Form 10-K
for the year ended June 30, 1995, Exhibit Number 10
(a)) --

10(b) Amended and Restated Employment Agreement with Robert
Grossman dated December 31, 1989 (incorporated by
reference from Emons Transportation Group, Inc. Report
on Form 10-K for the year ended June 30, 1997, Exhibit
Number 10 (b)) --

10(c) Amendment to the Amended and Restated Employment
Agreement with Robert Grossman dated May 26, 1994
(incorporated by reference from Emons Transportation
Group, Inc. Report on Form 10-K for the year ended
June 30, 1997, Exhibit Number 10 (c)) --

10(d) Amendment to the Amended and Restated Employment
Agreement with Robert Grossman dated June 17, 1998 --

10(e) Loan and Security Agreement dated August 15, 1997
among Emons Transportation Group, Inc., Emons
Industries, Inc., Emons Finance Corp., Maryland and
Pennsylvania Railroad, Emons Logistics Services, Inc.,
Maine Intermodal Transportation, Inc., Emons Railroad
Group, Inc., Yorkrail, Inc., and St. Lawrence &
Atlantic Railroad, as the Borrowers, and LaSalle
National Bank, as the Lender (incorporated by
reference from Emons Transportation Group, Inc. Report
on Form 10-K for the year ended June 30, 1997, Exhibit
Number 10 (f)) --

10(f) Lease Agreement dated as of November 1, 1997 between
St. Lawrence & Atlantic Railroad Company and Berlin
Mills Railway, Inc. (incorporated by reference from
Emons Transportation Group, Inc. Report on Form 10-Q
for the quarter ended September 30, 1997, Exhibit
Number 10 (b)) --
</TABLE>

47
<PAGE>

<TABLE>
<CAPTION>
PAGE IN
EXHIBIT SEQUENTIALLY
NUMBER EXHIBIT NUMBERED COPY
------- ------- -------------
<C> <S> <C>
10(g) Asset Purchase Agreement between John C. Nolan,
Lancaster Northern Railway, Inc., Chester Valley
Railway, Inc., East Penn Railways, Inc., and Bristol
Industrial Terminal Railway, Inc. and Penn Eastern
Rail Lines, Inc. dated November 7, 1997 (incorporated
by reference from Emons Transportation Group, Inc.
Report on Form 10-Q for the quarter ended December 31,
1997, Exhibit Number 10 (c)) --

10(h) Asset Purchase Agreement between New Hampshire and
Vermont Railroad Company, Inc. and St. Lawrence &
Atlantic Railroad Company dated December 12, 1997
(incorporated by reference from Emons Transportation
Group, Inc. Report on Form 10-Q for the quarter ended
December 31, 1997, Exhibit Number 10 (d)) --

21(a) Listing of subsidiaries --

23(a) Consent of Arthur Andersen LLP --

27(a) Financial Data Schedule --
</TABLE>

<PAGE>

EXHIBIT 10(D)

AMENDMENT TO THE AMENDED AND RESTATED EMPLOYMENT AGREEMENT

This Agreement, dated as of June 17, 1998, is made between EMONS
TRANSPORTATION GROUP, INC. (formerly known as Emons Holdings, Inc.), a
Delaware corporation with offices at 96 South George Street, York,
Pennsylvania 17401 (together with any and all present and future affiliates
and subsidiaries thereof, the "Company"), and ROBERT GROSSMAN, residing at
1013 Stillwood Circle, Lititz, PA 17543 formerly at 57 Deer Ford Drive,
Lancaster, PA 17601 (the "Employee"). All capitalized terms contained in this
Agreement not otherwise defined herein have the meanings defined in the
Amended and Restated Employment Agreements, dated as of December 31, 1989 and
May 26, 1994, between the Company and Employee (the "Amended and Restated
Employment Agreement").

RECITALS

The Company and Employee previously entered into an Employment Agreement,
dated as of December 31, 1986 (the "1986 Employment Agreement"), between the
Company and Employee, pursuant to which the Company engaged Employee to serve
as Chairman of the Board and Chief Executive Officer of the Company and
perform services for the Company pursuant to the terms and condition of the
1986 Employment Agreement.

The Company and Employee amended and restated the 1986 Employment Agreement
in the Amended and Restated Employment Agreement, dated as of December 31,
1989 (the "Amended and Restated Employment Agreement"), between the Company
and Employee, to read in full as set forth in the amended and restated
Employment Agreement.

Pursuant to an amendment thereto dated May 26, 1994, the Company and
Employee amended the Amended and Restated Employment Agreement.

The Company and Employee desire to further amend the Amended and Restated
Employment Agreement in certain respects as provided herein.

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

In consideration of the promises herein contained and of other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, and intending to be legally bound hereby, the parties hereto
agree to amend the Amended and Restated Employment Agreement as set forth
herein:

1. Amendment to Section 1. Section 1 is hereby amended by substituting
"December 31, 1997 for "the starting date."

2. Amendment to Section 3. Section 3 is hereby amended by substituting
"$250,000" for "$212,000".

3. Except as herein specifically amended, all terms, covenants and
provisions of the Amended and Restated Employment Agreement shall remain in
full force and effect and shall be performed by the parties thereto
according to its terms and provisions.

IN WITNESS WHEREOF, the undersigned have executed and delivered this
Amendment to the Amended and Restated Employment Agreement as of the date
first above stated.

Emons Transportation Group, Inc.

/s/ Scott F. Ziegler
By: _________________________________
NAME SCOTT F. ZIEGLER
TITLE: VICE PRESIDENT--FINANCE &
CONTROLLER

/s/ Robert Grossman
_____________________________________
ROBERT GROSSMAN

<PAGE>

EXHIBIT 21(A)

EMONS TRANSPORTATION GROUP, INC.

LISTING OF SUBSIDIARIES

<TABLE>
<CAPTION>
STATE OF
SUBSIDIARY INCORPORATION
---------- -------------
<S> <C>
Emons Finance Corp................................................ Delaware
Emons Industries, Inc. ........................................... New York
Emons Logistics Services, Inc..................................... Delaware
Emons Railroad Group, Inc. ....................................... Delaware
St. Lawrence & Atlantic Railroad Company........................ Delaware
Yorkrail, Inc................................................... Delaware
Penn Eastern Rail Lines, Inc. .................................. Delaware
Maine Intermodal Transportation, Inc.............................. Delaware
Maryland and Pennsylvania Railroad Company........................ Pennsylvania
</TABLE>

<PAGE>

EXHIBIT 23(A)

CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS

As independent public accountants, we hereby consent to the incorporation of
our reports dated September 10, 1998 included in this annual report on Form
10-K into the Company's previously filed: Form S-8 Registration Statement File
No. 33-22485 and Form S-3 Registration Statement File No. 33-22485.

/s/ Arthur Andersen LLP

Lancaster, PA
September 24, 1998

<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE EMONS
TRANSPORTATION GROUP, INC. CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED
JUNE 30, 1998, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> JUN-30-1998
<CASH> 2,677,004
<SECURITIES> 0
<RECEIVABLES> 2,369,700
<ALLOWANCES> 158,800
<INVENTORY> 191,845
<CURRENT-ASSETS> 5,930,753
<PP&E> 31,548,588
<DEPRECIATION> 10,888,838
<TOTAL-ASSETS> 28,673,277
<CURRENT-LIABILITIES> 5,274,312
<BONDS> 11,006,767
0
15,282
<COMMON> 60,398
<OTHER-SE> 11,558,280
<TOTAL-LIABILITY-AND-EQUITY> 28,673,277
<SALES> 0
<TOTAL-REVENUES> 17,445,037
<CGS> 0
<TOTAL-COSTS> 11,970,552
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,051,600
<INCOME-PRETAX> 1,487,622
<INCOME-TAX> (3,430,000)
<INCOME-CONTINUING> 4,917,622
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,917,622
<EPS-PRIMARY> 0.79
<EPS-DILUTED> 0.63

</TABLE>