RAILTEX INC, 10-K, 1999-03-30

RAILTEX INC
10-K, 1999-03-30
RAILROADS, LINE-HAUL OPERATING

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UNITED STATES SECURITIES AND
EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

[X] Annual report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the fiscal year ended

DECEMBER 31, 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 Number 34-022552

RAILTEX, INC.
----------------------------------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

TEXAS 74-1948121
------------------------------ ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)

4040 BROADWAY, SUITE 200
SAN ANTONIO, TEXAS 78209
-------------------------------------- ----------
(Address of principal executive offices) (Zip Code)

Registrant's telephone number,
including area code: (210) 841-7600
--------------

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act: Common Stock, $0.10
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.

|X| YES [ ] 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. [ ]

The aggregate market value (based on the closing sales price on March 1, 1999 as
reported by the Nasdaq National Market) of the voting stock of the Registrant
held by non-affiliates of the Registrant was approximately $90.9 million. For
the sole purpose of making this calculation, the term "non-affiliate" has been
interpreted to exclude directors and executive officers of the Registrant. Such
interpretation is not intended to be, and should not be construed to be, an
admission by the Registrant or such directors or executive officers that such
directors and executive officers are "affiliates" of the Registrant, as that
term is defined under the Securities Exchange Act of 1934.

Indicate the number of shares outstanding of the Registrant's Common Stock as of
March 1, 1999: 9,273,963.

DOCUMENTS INCORPORATED BY REFERENCE

Certain portions of the Company's Proxy Statement for its annual meeting of
shareholders are incorporated by reference into Items 10, 11, 12 and 13 of Part
III. The Registrant intends to file such Proxy Statement no later than 120 days
after the end of the fiscal year covered by this Form 10-K.
<PAGE>
TABLE OF CONTENTS

PART I

ITEM PAGE

1. Business.................................................... 3
2. Properties.................................................. 16
3. Legal Proceedings........................................... 22
4. Submission of Matters to a Vote of Security Holders......... 22

PART II

5. Market for Registrant's Common Equity and Related
Stockholder Matters....................................... 23
6. Selected Consolidated Financial and Operating Data.......... 24
7. Management's Discussion and Analysis of Financial
Condition and Results of Operations....................... 25
8. Financial Statements........................................ 39
9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................. 67

PART III

10. Executive Officers and Directors of the Registrant.......... 68
11. Executive Compensation...................................... 69
12. Security Ownership of Certain Beneficial Owners and
Management................................................ 69
13. Certain Relationships and Related Transactions ............. 69

PART IV

14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K.................................................. 70

2
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This Form 10-K contains certain "forward-looking" statements within the
meaning of The Private Securities Litigation Reform Act of 1995 and information
relating to RailTex, Inc. and its subsidiaries that are based on the beliefs of
the Company's management and that involve known and unknown risks and
uncertainties. When used in this report, the words "anticipate," "believe,"
"estimate," "expect" and "intend" and words or phrases of similar import, as
they relate to the Company or its subsidiaries or Company management, are
intended to identify forward-looking statements. Such statements reflect the
current risks, uncertainties and assumptions related to certain factors
including, without limitation, currency risks, competitive factors, general
economic conditions, customer relations, relationships with vendors, fuel costs,
the interest rate environment, governmental regulation and supervision,
seasonality, technological change, changes in industry practices, one-time
events and other factors described herein and in other filings made by the
Company with the Securities and Exchange Commission. Based upon changing
conditions, should any one or more of these risks or uncertainties materialize,
or should any underlying assumptions prove incorrect, actual results may vary
materially from those described herein as anticipated, believed, estimated,
expected or intended. The Company undertakes no obligation to update, and the
Company does not have a policy of updating or revising, these forward-looking
statements.

PART I

ITEM 1. BUSINESS

RailTex, Inc. is North America's leading operator of short line freight
railroads. Its holdings include short line railroads concentrated in the
Southeastern and Midwestern United States, in the Great Lakes and New England
regions of the United States and in Eastern Canada. The Company also owns
investments in two Brazilian railroads and provides management consulting
services in Kazakhstan. In 1998, RailTex railroads transported almost 550,000
carloads of freight for more than 1,100 customers. Traffic which originated or
terminated on RailTex's lines generated approximately 86.4% of the Company's
total freight revenues in 1998. References to "RailTex" or the "Company" mean
RailTex, Inc. and, unless the context indicates otherwise, its consolidated
subsidiaries.

The Company was incorporated in Texas in December 1977, and until 1984 its
principal business was the short-term, full-service leasing and management of
open top aggregate hopper railcars. In October 1984, RailTex entered the short
line freight railroad business by contracting to operate the San Diego &
Imperial Valley Railroad ("SDIV"). By year end 1988, the Company's short line
railroad portfolio had grown to six rail lines and generated 85.0% of the
Company's operating revenues. In mid-1989, RailTex sold its railcar leasing
assets, utilizing the sale proceeds to purchase additional short line railroad
properties. Since the sale of its railcar leasing assets, the Company's primary
business activity has been the operation of short line railroads.

The Company's strategy is to grow through (i) the creation of new business
and improvement in operating performance of newly added and currently operated
properties and (ii) additions to and divestitures from its portfolio of short
line railroad properties, primarily through strategic acquisitions of Class I
railroad branch lines or existing short line properties, and divestiture of
non-strategic lines.

The Company believes its focus on customer service, ability to offer multiple
Class I connections to its customers, operating expertise and its expertise in
acquiring railroad properties that generate financial returns in excess of its
cost of capital, position it to effectively implement its strategy.

Since deregulation of the U.S. and Canadian railroad industries in the
1980's, major North American railroads have taken steps to improve profitability
and increase market share by streamlining their operations. These major
railroads have generally concentrated their management and marketing attention
on core, long-haul routes, while divesting (through sale or lease) many of their
branch lines to smaller and more cost-efficient freight railroad operators such
as RailTex. These short line "feeder" railroads typically serve multiple
industries located along branch lines and "feed" freight to the connecting main
line carriers. RailTex intends to continue to capitalize on the opportunities
created by the major railroad's ongoing commitment to streamline operations.
Almost all of the rail lines operated by the Company were previously operated by
four of North America's largest railroads. RailTex also believes it has
significant opportunities to expand its portfolio by acquiring existing short
line railroads in both the United States and Canada.

3
<PAGE>
The Company believes that the majority of its acquisition opportunities will
be in the U.S. and Canada, however international rail privatization may offer
additional long term opportunities as certain governments privatize their
country's rail systems. The Company's strategy regarding international
acquisitions includes analyzing the country's political and economic
environment, identifying potential country risks and attracting strong local
investment partners. The Company will review international acquisition
opportunities, however the majority of the Company's resources will be devoted
to domestic opportunities.

The Company has consistently increased the traffic volume and operating
efficiency of its portfolio of railroad properties. RailTex credits its
operating record to its ability and willingness to provide consistent and
flexible service levels tailored to the needs of its customers, an aggressive
marketing focus designed to identify potential opportunities and its incentive
based compensation programs, which reward employees for improving customer
service and operating results.

RailTex believes its established reputation as an acquirer and operator of
railroad properties, in combination with its managerial and financial resources,
has positioned the Company to take advantage of future growth opportunities.

RECENT DEVELOPMENTS

In February 1999, Ronald A. Rittenmeyer was elected Chairman of the Company's
Board of Directors. Mr. Rittenmeyer joined the Company in August 1998 as
President and Chief Executive Officer and replaces Bruce M. Flohr, who has
assumed the new title of Founder and Chairman Emeritus.

In January 1999, a wholly-owned subsidiary of the Company, the Dallas,
Garland and Northeastern Railroad ("DGNO") commenced operations on 89 miles of
rail line north of Dallas, Texas ("North Dallas Lines") under a lease
arrangement with Union Pacific Railroad. The North Dallas Lines connect to and
will be operated as part of the DGNO.

The Company, through its wholly-owned subsidiary, RailTex International
Holdings ("RIHI"), currently owns equity interests in the Ferrovia Centro
Atlantica, S.A. ("FCA") and the Ferrovia Sul Atlantico, S.A. ("FSA"), which
operate railroads in Brazil. The continuing economic uncertainty existing in
Brazil has impacted the ability of FCA and FSA to finance short-term capital
needs. As a result, during 1998 the Board of Directors of FSA implemented a call
for additional capital contributions from existing shareholders. The Company did
not participate in the capital call and, as a result, its equity percentage in
FSA was diluted. The respective Boards of Directors of FCA and FSA may implement
additional capital contribution calls from existing shareholders in the future.
The Company may or may not choose to participate in such capital calls. In the
event that the Company does not participate, its equity percentage could be
further diluted.

In January 1999, the Brazilian government began to allow the Brazilian
currency (Real) to trade freely against the U.S. dollar. As of March 1, 1999,
the Real had devalued approximately 43% versus the U.S. dollar. As a result of
the devaluation, the Company may establish a non-cash reserve against the value
of its Brazilian investments at the end of the first quarter of 1999. The
Company will determine the amount of the reserve based upon a review of the
Brazilian railroad operations and of the devaluation of the Real. This reserve
could adversely affect the Company's financial position and the results of its
operations.

4
<PAGE>
In November 1998, a wholly-owned subsidiary of the Company, Goderich-Exeter
Railway ("GEXR") commenced operations on the Guelph Line under a lease
arrangement with Canadian National Railways ("CN"). The Guelph Line is a 99 mile
rail line that operates between Silver and London, Ontario and connects with the
GEXR at Stratford, Ontario.

In September 1998, the Company acquired approximately 10 miles of track in
two separate five mile sections from the Burlington Northern and Santa Fe
Railway ("BNSF") for approximately $810,000. One section is in Carthage,
Missouri and the other is in Joplin, Missouri. Both sections are being operated
as part of the Company's Missouri & Northern Arkansas Railroad ("M&NA").

In June 1998, the Company acquired 100% of the outstanding stock of Central
Properties, Inc. ("CPI") for approximately $14.3 million. CPI was a privately
held company which owned 100% of the stock of two railroads in Ohio and Indiana.
The Central Railroad of Indianapolis ("CERA") operates almost 92 miles of rail
line in north central Indiana under lease and trackage rights arrangements. The
Central Railroad of Indiana ("CIND") owns and operates 81 miles of rail line
between Cincinnati, Ohio and Shelbyville, Indiana. The Company began actively
operating the two railroads in August 1998.

In October 1997, Entergy Services, Inc. ("Entergy") filed a lawsuit in the
United States District Court of the Middle District of Louisiana against Union
Pacific Railroad Company ("UP") for breach of contract as the result of service
issues. On January 28, 1999, the court decided in favor of Entergy and is in the
process of determining the materiality of the breach of contract. Should the
court decide that the breach of contract was material, Entergy may no longer be
obligated under its contract with UP. One of the Company's railroads recognizes
revenue as a result of Entergy's contract with UP and a decision in Entergy's
favor could have an adverse effect on the Company.

Approximately 30% of the Company's carloads interchange with the UP. As a
result, the Company has been impacted by the congestion the UP is experiencing
primarily through car supply issues and increased operating expenses due to
overtime associated with running trains on unscheduled days and delays caused by
waiting for access to UP yards. Additionally, revenues have been lost to other
modes of transportation as customers avoid the service problems caused by the UP
congestion. To the extent that the UP problems continue or worsen, the Company's
results of operations could be adversely impacted.

As a result of the acquisition of Consolidated Rail Corporation ("Conrail")
by CSX Transportation, Inc. ("CSX") and Norfolk Southern Railway Company ("NS"),
Conrail's rail lines will be divided between CSX and NS which may cause revenue
to be diverted from the New England Central Railroad, Inc. ("NECR") and the
Indiana Southern Railroad, Inc. ("ISRR"), wholly-owned subsidiaries of RailTex,
Inc. In addition the Indiana & Ohio Rail Corp. ("INOH"), a wholly-owned
subsidiary of RailTex, Inc., believes the division of rail lines between CSX and
NS may cause operating inefficiencies for INOH. The Company believes the effect
on revenues and operating efficiencies for these railroads will be immaterial.

In order to improve its overall profitability and financial returns, the
Company is continually analyzing its portfolio of railroad properties with the
objective of identifying those properties which do not meet the Company's
overall financial objectives and which do not offer significant revenue or
operating expansion opportunities. As a result, the Company is divesting its
Northeast Kansas and Missouri Railroad ("NEKM") for approximately $3.2 million
to UP. The completion of this transaction is dependent upon Surface
Transportation Board ("STB") approval and no material gain or loss is expected.
As part of its stated strategy to capitalize on opportunities more strategic to
the Company and to minimize management time and resources spent on smaller
properties, the Company may divest additional railroads in the future.

5
<PAGE>
INDUSTRY OVERVIEW

The U.S. railroad industry is dominated by Class I railroads, which operated
approximately 122,000 miles of track at year end 1997 (the most recent year for
which data is available) and represented approximately $32.3 billion, or 91.4%,
of total rail industry operating revenues of approximately $35.3 billion in
1997. In addition to the large railroads, at year end 1997 there were more than
540 short line and regional railroads, such as the Company's railroads, which
generated approximately $3.0 billion of operating revenues in 1997 and operated
almost 50,000 miles of track. Reflecting downsizing by major rail carriers, the
proportion of total track miles operated by short line and regional railroads in
the United States increased to 29.0% of total railroad industry track miles in
1997 from 17.0% in 1986.

The Staggers Rail Act of 1980 ("Staggers Act") enabled many of the structural
changes in the U.S. rail industry which have favorably affected the Company's
ability to add short line railroads. Canada's National Transportation Act of
1987 liberalized the process for branch line divestiture, much as the Staggers
Act facilitated the process for U.S. railroads (see further discussion in
Regulation, below).

As the result of deregulation, major railroads have been able to concentrate
their management and marketing attention on core, long-haul routes, while
divesting (through sale or lease) many of their branch lines to smaller and more
cost-efficient freight railroad operators such as RailTex. The major railroads
have derived significant benefits from the divesting of branch lines to short
line operators. Divesting these branch lines allows major railroads to minimize
incremental capital expenditures, increase traffic density and improve railcar
utilization. Because of the focus of short line railroads on increasing traffic
volume through increased customer service and more efficient operations, traffic
volume on short line railroads frequently increases after divestiture.
Consequently, these transactions often result in net increases in divesting
carriers' freight traffic because much of the business originating or
terminating on branch lines feeds into divesting carriers' core routes.

The timing and pace of RailTex's acquisition activity with Class I railroads
is primarily dependent upon a timetable established by the Class I railroads.
The Company will review all potential acquisitions for rail lines offered by the
Class I railroads made available to it; however, the number of lines available
for acquisition is often affected by Class I merger activity or other
commitments of the Class I railroads' resources.

The Company has purchased some of the railroad properties it operates from
sellers other than major railroads and believes other independent railroad
operators represent significant additional sources of desirable properties. The
timing and pace of the acquisition of existing short line railroads is primarily
a function of identifying the seller and then successfully negotiating
financial, tax and other considerations.

BUSINESS STRATEGY

6
<PAGE>
OPERATING AND GROWTH STRATEGY

RailTex's operating and growth strategy is to improve the performance of and
create additional business on its same railroad and newly added properties by
focusing on improved customer service and operating efficiency. The key
components of RailTex's operating and growth strategy are:

CUSTOMER SERVICE: The Company seeks to build its business by aggressively
marketing and delivering convenient and cost effective service to meet its
customers' transportation needs. To this end, the Company works with its
customers to assess their requirements and then tailors its operations to
increase the frequency and reliability of service. The Company believes its
efforts to enhance customer service have generally resulted in increased traffic
with customers along the Company's lines. In addition, the Company believes that
its customer service emphasis and the ability of certain of its railroad
properties to offer multiple Class I connections without restrictions, make it
an attractive alternative for large, industrial development opportunities.

OPERATING EFFICIENCY: RailTex focuses on promoting cost-efficient operations
at all levels of its organization. The Company benefits from a lower cost,
flexible work environment that places a premium on innovation and service while
always managing costs.

MANAGEMENT PHILOSOPHY: RailTex, through its centrally supported and locally
executed management philosophy, has developed a culture that encourages
employees to take initiative and responsibility. The Company rewards
productivity through its performance-based, incentive compensation programs.
During the last three years, the Company's employees received an average of 12%
of their combined base and overtime pay in incentive payments.

EXPANSION AND DIVESTITURE STRATEGY

The key components of RailTex's expansion and divestiture strategy are:

STRATEGIC ACQUISITIONS: RailTex believes that its current base of core
properties throughout the U.S. and Canada provide it with a substantial
advantage in acquiring railroad properties in geographic proximity to the
currently owned properties. In these instances, RailTex expects to achieve
certain operating, marketing and administrative synergies by combining the
operations of the acquired railroad with an existing railroad.

DIVERSIFICATION: RailTex believes that its revenue diversification limits its
exposure to geographic, economic and customer related risks, while it positions
the Company to take advantage of a broad range of business opportunities. This
diversification, and the stability it provides to the Company's operations,
differentiates RailTex from other regional and short line carriers.
Diversification also enables the Company to develop and maintain close working
relationships with essentially all major rail carriers in North America.

EXPERIENCE: RailTex believes it has positioned itself as a reliable,
experienced acquirer and operator of railroad properties. The Company believes
its record, evidenced by its acquisition, integration and operation of rail
properties since 1984, has established itself as a successful acquirer of short
line properties. RailTex also believes its ability to finance and close
transactions and commence operations in a timely manner is well recognized by
the major rail carriers. In addition, the Company believes it has developed good
relationships with the major rail carriers and that these relationships provide
an advantage in competing for additional properties.

DIVESTITURES: The Company believes that in order to capitalize on
opportunities more profitable to its overall portfolio and to minimize the
amount of management time and effort on the smaller properties in its portfolio,
it may from time to time divest certain of its railroad properties. The Company
believes there is a market for such divestitures among other smaller short line
operating companies and selected strategic buyers.

7
<PAGE>
PORTFOLIO EXPANSION

Since 1984, the Company has built a portfolio of railroads, almost all of
which were added as a result of a competitive bidding process. RailTex has
developed a disciplined approach for identifying, analyzing, negotiating and
structuring additions to RailTex's portfolio of short line railroads. The
Company believes this approach, together with its ability to finance
acquisitions quickly with borrowings under the Company's $70.0 million revolving
U.S. acquisition facility ("U.S. Acquisition Facility") and its CDN $25.0
million revolving Canadian acquisition facility ("Canadian Acquisition
Facility"), has provided it with a competitive advantage. At March 1, 1999, the
Company had $53.4 million and CDN $25.0 million available under the U.S.
Acquisition Facility and Canadian Acquisition Facility, respectively.

The Company has developed an acquisition team which is responsible for
implementing the Company's expansion program. Expansion opportunities are
presented to the Company by divesting carriers or are identified by the Company
through dialogues maintained by this acquisition team with major rail carriers
and other railroad operators.

Opportunities are evaluated based on their ability to provide financial
returns in excess of the Company's cost of capital. In addition, among other
matters, revenue and operating synergies with existing properties and the effect
on geographic, commodity, connecting carrier and customer diversification are
also considered. Members of the Company's acquisition team, assisted by senior
management, complete a thorough evaluation of each opportunity. This evaluation
includes in-depth, on-site investigations, reviews of historical traffic
volumes, interviews with operating personnel and current and potential customers
and conversations with local officials and members of the business community.

RailTex adds short line railroad properties to its portfolio through
purchase, lease or contract to operate. Typically, the Company bids against
other short line operators for available properties. The timing and structure of
each transaction is determined by the seller based upon strategic and economic
considerations. The primary factors considered by a Class I carrier are the
price they will receive for the sale of a railroad property and the price per
carload they will pay a new operator for interchanging traffic. Sellers also
consider a prospective operator's experience and its ability to close a
transaction and commence operations in a timely manner.

Following the closing of a transaction, railroad properties acquired by
RailTex are integrated into the Company by "Go Teams" of RailTex professionals.
These transition teams are composed of experienced Company employees assembled
from throughout the RailTex organization. These teams conduct interim operations
until the new general managers of these railroads are able to hire and train a
full-time work force. The Company believes its approach to commencing operations
on its properties benefits its customers by helping to eliminate the service
delays and interruptions which often accompany transitions to new operators.

SHORT LINE OPERATIONS

MARKETING

Following commencement of operations by RailTex, the Company's railroads
generally have attracted increased rail shipments from existing customers and
obtained traffic from new customers which had not previously shipped by rail or
had ceased rail shipments. The Company believes its ability to generate
additional traffic is accomplished by its marketing and customer service efforts
which are aimed at identifying and responding quickly to the individual business
needs of customers along its rail lines. As part of these marketing efforts, the
Company often schedules more frequent rail service, helps customers negotiate
price and service levels with connecting carriers and assists customers in
obtaining the quantity and type of rail equipment required for their operations.
The Company also often runs non-scheduled trains on short notice to accommodate
customers' special or emergency needs.

8
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The Company assigns primary responsibility for price and service decisions
affecting a railroad's customers to the general manager of each railroad,
thereby providing such managers the ability to respond to the needs of the
customer. These railroad managers encourage their entire staff to participate in
marketing efforts. General managers and marketing personnel at each railroad are
supported by senior marketing management at RailTex's headquarters, who assist
with sales calls, provide industrial development expertise, conduct formal
marketing training and make coordinated sales calls on national accounts which
have facilities on more than one Company railroad.

In 1998, the Company served more than 1,100 customers which shipped and
received a wide variety of products. RailTex's ten largest customers accounted
for approximately 27.8% of the Company's operating revenues in 1998. The
Company's largest customer in 1998 was CN, representing approximately 7.0 % of
operating revenues. Assuming continuation of RailTex's expansion strategy,
management expects its reliance on any one customer, including CN, to diminish
over time. RailTex believes its relationships with its customers are excellent.

MANAGEMENT

The Company's management structure is an important element in its operating
strategy. Significant operational autonomy and responsibility for operating
financial results is given to local railroad management. Local managers are
expected to be highly efficient at executing the operating plan of the railroad,
as well as serving as a primary customer contact and marketing source. Corporate
headquarters has responsibility for centralized policy setting and strategic
capital and financial planning, as well as accounting and other shared services.
Also at headquarters, a group of experienced professionals provide additional
expertise to all the Company's railroads in certain technical fields including
engineering, mechanical, information technology and safety programs. The
Company's management structure puts service-oriented decision making close to
the customer but also provides a centralized support system to ensure
consistency and efficiency in more specialized or technical areas.

Larger RailTex railroads are managed by a general manager who has authority
for all train operations. General managers operate their railroads pursuant to
business plans developed annually. Many of the Company's general managers have
been recruited from operating or marketing management at the major railroads and
typically have several years of railroad industry experience. Each new general
manager is provided an extensive orientation to the Company's operating policies
and procedures. In addition, all general managers attend periodic staff meetings
to exchange information with respect to operating, marketing and regulatory
issues. General managers also remain current on industry developments by, among
other means, attending national and regional railroad conferences.

Smaller RailTex railroads typically report to and are managed by a general
manager at a larger RailTex property. The managing property is chosen where
geographic distances allow for efficient supervision of both properties. Small
railroads managed by a larger railroad generally interchange with the same Class
I railroad.

The Company's larger railroads may have in excess of 100 employees including
specialists in operations and marketing in addition to office and clerical
employees. The Company's smaller railroads typically employ a general or
operations manager in addition to railroad and clerical employees. Most major
track, locomotive and railcar repair and derailment work is contracted to
outside specialists; however, the Company's larger railroads often perform some
of these repairs inhouse.

WORK FORCE

The ability to be a low cost, flexible service provider is a key element of
the Company's operating strategy and contributes significantly to the
operational results of the Company's railroads. Many of the Company's personnel
are trained in a wide range of skills necessary for short line operations.
Trains are typically operated by two-person crews, consisting of transportation
specialists who operate the locomotive and couple and uncouple railcars. The
Company believes the organization of its railroads into relatively small work
groups encourages greater team effort and permits more clearly defined
responsibility and accountability than is obtainable by larger, more centrally
managed railroads.

9
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All but one of the Company's short line railroads maintains a
performance-based, incentive compensation program through which a portion of a
railroad's operating profits is distributed quarterly to its employees.
Incentive compensation programs are administered by the general managers and
distributions are made principally on the basis of individual performance.

As of March 1, 1999, a total of 169 employees, or approximately 17.6% of the
Company's workforce, of five of the Company's U.S. railroads were represented by
labor unions; four by the United Transportation Union ("UTU") and one by the
Brotherhood of Locomotive Engineers ("BLE"). Two railroads have active contracts
and the three remaining railroads are in negotiation. One of the railroads
acquired in the June 1998 CPI acquisition had an existing labor contract with
the UTU. Seven employees remain covered under that agreement. In September 1998,
64 employees of the M&NA voted for representation by the BLE. In each case all
employees are represented by one union.

In addition, the Company has received notification that the BLE has filed for
representation at two more of the Company's railroads. At one of these railroads
a vote was held on March 4, 1999. The results of that vote will not be known
until the bargaining group is determined.

At March 1, 1999, the Company had more than 950 full-time employees. The
Company believes that its relations with its employees are good. An active
program of employee involvement was begun in late 1997 to further strengthen the
relationship between the employees and the Company.

SAFETY

An important component of the Company's operating strategy is its emphasis on
conducting safe railroad operations for the benefit and protection of employees,
customers and the communities served by the Company's railroads. All general
managers undergo a week-long training course at the Hazardous Materials Training
Center operated by the Association of American Railroads. Operations managers of
railroads which transport hazardous materials also attend this course. New
transportation specialists attend intensive ten day training courses conducted
by the Company which cover all aspects of safe and appropriate locomotive and
railcar handling. In addition, transportation specialists, prior to receiving
locomotive engineer certification, attend a special one week training course
conducted by the Company. This basic training is supplemented at each railroad
with field and classroom training and annual safety and rules tests, conducted
by operating and safety training specialists who visit each railroad on a
quarterly basis. The Company also conducts safety inspections on each of its
railroads. Each employee involved in train operations is subject to
pre-employment and random drug testing, whether or not required by federal
regulation. In addition, personnel from each railroad conduct
railroad/highway-crossing safety education programs at schools, driver education
courses and service clubs in the communities they serve.

TRAFFIC

Rail traffic may be categorized as interline, local or bridge traffic.
Interline traffic either originates or terminates with customers located along a
rail line and is interchanged with other rail carriers. Local traffic both
originates and terminates on the same rail line and does not involve other rail
carriers. Bridge traffic neither originates nor terminates on a rail carrier's
line, but rather passes over the line from one connecting rail carrier to
another.

Traffic which originated or terminated on RailTex's lines generated 86.4% and
86.8% of the Company's total freight revenues in 1998 and 1997, respectively.
The Company believes that higher levels of interline and local traffic provide
it with greater stability of revenues because such traffic represents shipments
to or from customers located along its lines which, unlike bridge traffic,
cannot easily be diverted to other rail carriers.

10
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The following table summarizes freight revenues by type of traffic carried by
the Company's railroads in 1998 and 1997, in dollars and as a percent of total
freight revenues.

FREIGHT REVENUES
(DOLLARS IN THOUSANDS)

1998 1997
---------------- ----------------
Interline .............................. $105,922 76.5% $ 97,243 76.0%
Local .................................. 13,660 9.9 13,850 10.8
Bridge ................................. 18,819 13.6 16,921 13.2
-------- ----- -------- -----
Total freight revenues ............... $138,401 100.0% $128,014 100.0%
======== ===== ======== =====

CONNECTING CARRIERS

Most of RailTex's short line properties interchange traffic with multiple
carriers. At March 1, 1999, the Company's railroads connected with 25 railroads
operated by other carriers. Of the Company's rail lines, 55% connect with two or
more carriers.

The following table summarizes the Company's significant connecting carriers
in 1998 and 1997 by freight revenues and carloads as a percentage of total
interchanged (interline and bridge) traffic.

INTERCHANGED TRAFFIC
<TABLE>
<CAPTION>
1998 1997
-------------------- --------------------
FREIGHT FREIGHT
-------------------- --------------------
CONNECTING CARRIER REVENUES CARLOADS REVENUES CARLOADS
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Union Pacific Corporation ...................... 32.4% 31.2% 31.8% 27.8%
Canadian National Railways ..................... 19.0 18.3 19.8 19.3
CSX Transportation, Inc. ....................... 18.0 18.7 18.9 22.1
Consolidated Rail Corporation .................. 10.9 8.4 10.6 8.6
Norfolk Southern Railway Company ............... 7.6 9.9 8.0 10.7
Burlington Northern Santa Fe Railway Company ... 3.4 2.2 3.7 2.4
All other railroads, including RailTex railroads 8.7 11.3 7.2 9.1
-------- -------- -------- --------
Total interchanged traffic .................. 100.0% 100.0% 100.0% 100.0%
======== ======== ======== ========
</TABLE>
Charges for interchanged traffic are generally billed to the customer by the
connecting carrier and cover the entire transportation of a shipment from origin
to destination, including the portion that travels over the Company's lines. The
Company's revenues from such traffic are generally collected through fees paid
directly to the Company by the connecting carriers rather than by customers on
its lines and are payable regardless of whether the connecting carriers are able
to collect from the customers. The fees payable by connecting carriers are set
forth in contracts entered into by each of the Company's railroads with their
respective connecting carriers and are subject to periodic adjustments.

COMMODITIES

RailTex's railroads transport a wide variety of commodities for their
customers. Some of the Company's railroads have a well-diversified commodity
base, while other Company railroads transport one or two dominant commodities.
By building on an already diverse traffic base, RailTex seeks over the long term
to limit its exposure to any single commodity. In 1998, lumber and forest
products and coal, which contributed 19.3% and 13.4%, respectively, of freight
revenues, were the two largest commodity groups transported by the Company's
railroads. See table summarizing the Company's freight revenues and traffic
volume in 1998 and 1997 by commodity group in Management's Discussion and
Analysis of Financial Condition and Results of Operations.

11
<PAGE>
The following is a description of the commodities transported by the Company:

LUMBER AND FOREST PRODUCTS represented 19.3% of 1998 freight revenues and
12.1% of 1998 traffic volume. The Company transports finished lumber used in
construction, as well as woodchips and pulpwood used in particle board and paper
manufacturing. The Company serves paper mills and lumber producers in Oregon,
Georgia and Nova Scotia, Canada, as well as lumber distribution facilities in
New England.

COAL for electric power generating plants represented 13.4% of 1998 freight
revenues and 18.5% of 1998 traffic volume. The Company provides freight services
for six large electric utilities located in Indiana, Missouri, Arkansas and Nova
Scotia. In Indiana and Nova Scotia, the Company transports unit coal trains from
local coal mines to the utility's power plants. The Company transports unit
trains of Powder River Basin coal to power plants in Missouri and Arkansas and
unit trains of West Virginia, Indiana and Nova Scotia coal to co-generation
plants in Virginia, Indiana and Nova Scotia, respectively.

CHEMICALS represented 12.3% of 1998 freight revenues and 9.5% of 1998 traffic
volume. The Company primarily transports chemicals used in the manufacturing of
polyester fiber in South Carolina. Chemicals also includes the transportation of
liquid and bulk agricultural fertilizers and plastic pellets.

SCRAP PAPER AND PAPER PRODUCTS represented 8.3% of 1998 freight revenues and
6.4% of 1998 traffic volume. The Company serves paper mills that produce paper
products in Oregon and newsprint and paper in Nova Scotia. The Company also
serves warehouses for paper and paper products in New England and South Carolina
manufacturing facilities that produce paper plates, cups and bowls and specialty
paper products.

FARM PRODUCTS represented 8.2% of 1998 freight revenues and 8.6% of 1998
traffic volume. Farm products consist primarily of corn, wheat, peanuts and
soybeans. Field crops produced in Indiana, Ohio, Georgia, North Carolina,
Kansas, Missouri, Michigan and Texas account for the majority of this traffic;
however, the Company also transports unit trains of soybeans and grain to
Louisiana for export.

SCRAP METAL AND METAL PRODUCTS represented 8.1% of 1998 freight revenues and
7.5% of 1998 traffic volume. The Company serves a steel works in Nova Scotia
that utilizes scrap metal to manufacture railroad rail and steel blooms. The
Company also serves a steel mini-mill in South Carolina that utilizes scrap
steel and a steel works in Missouri that utilizes coiled steel for the
manufacture of steel springs. The Company serves steel plants or mills in Ohio,
Connecticut and Ontario, Canada.

RAILROAD EQUIPMENT represented 5.8% of 1998 freight revenues and 11.5% of
1998 traffic volume. Railroad equipment consists primarily of the transportation
of empty coal cars in Missouri, empty auto railcars for automobile manufacturers
in Michigan and new railcars manufactured in Nova Scotia.

FOOD PRODUCTS represented 5.0% of 1998 freight revenues and 4.7% of 1998
traffic volume. Food products consist primarily of vegetable oils, peanut meal,
canned goods, lard and other products.

NON-METALLIC ORES represented 4.8% of 1998 freight revenues and 6.8% of 1998
traffic volume. Non-metallic ores consist primarily of limestone used in road
construction in Texas, Virginia and Georgia. Non-metallic ores also include salt
transported by the Company from a large mine in Ontario and sand which is used
in glass manufacturing and in foundries supporting the automotive industry.

MINERALS AND STONE represented 4.3% of 1998 freight revenues and 3.1% of 1998
traffic volume. The Company transports chemical lime used in the manufacturing
of manganese, calcium carbonate, finished brick and cement.

AUTOS AND AUTO PARTS represented 3.9% of 1998 freight revenues and 5.4% of
1998 traffic volume. The Company moves automotive bridge traffic between Detroit
and Cincinnati under a haulage agreement with CN.

12
<PAGE>
PETROLEUM PRODUCTS represented 3.0% of 1998 freight revenues and 2.3% of 1998
traffic volume. The majority of this traffic is liquified petroleum gas produced
in New Mexico and Texas which is destined for southern California and,
ultimately, Tijuana, Mexico. The Company also serves a large petrochemical plant
in Louisiana which manufactures fuel additives. Petroleum products also includes
the transportation of asphalt originating in New Mexico and asphalt terminating
in Pennsylvania and Michigan.

OTHER represented 3.6% of 1998 freight revenues and 3.6% of 1998 traffic
volume. Other traffic is primarily composed of machinery and fuel blending
agents.

COMPETITION

PORTFOLIO ADDITIONS

In the process of building its portfolio of short line railroads, RailTex
typically competes with other short line railroad operators and regional
railroads. Competition for railroad properties is based primarily upon price,
operating history and financing capability. The relative ease of access to
capital has lowered barriers to entry in the short line acquisition market and
may have resulted in additional bidders for short line properties. In addition,
to the extent Class I railroads reduce the amount of branch lines available for
purchase, competition for the acquisition of such branch lines may increase. The
Company believes its established reputation as an acquirer and operator of short
line rail properties, in combination with its managerial and financial
resources, effectively positions it to be competitive on future strategic
acquisitions.

RAILROAD OPERATIONS

Each of the Company's railroads is typically the only rail carrier directly
serving its customers; however, the Company's railroads compete directly with
other modes of transportation, principally motor carriers and, to a much lesser
extent, barge operators. The extent of this competition varies significantly
among RailTex's railroads. Competition is based primarily upon the rate charged
and the transit time required, as well as the quality and reliability of the
service provided, for an origin-to-destination transportation package. Cost
reductions achieved by major rail carriers over the past several years have
generally improved their ability to compete with truckload carriers. Since
traffic on most of the Company's railroads is interchanged with long-haul rail
lines, the Company believes it benefits from the improving competitiveness of
its connecting carriers.

INSURANCE

RailTex maintains insurance to cover costs associated with personal injury,
including death, and property damage, including derailments. The Company's
liability policies, which include third party property damage, are currently
subject to a self-insured retention of $500,000 per occurrence. With respect to
its transportation of hazardous commodities, the Company's liability policies
cover sudden releases of hazardous materials, including expenses related to
evacuation. Personal injuries associated with grade crossing accidents and
damage to property of shippers are also covered under the Company's liability
policies. The Company's property damage policies, which cover owned/leased
property, are currently subject to a self-insured retention of $100,000 per
occurrence.

The Company's railroad employees are covered by the Federal Employers'
Liability Act ("FELA"), a fault-based system under which injuries and deaths of
railroad employees are settled by negotiation or litigation based on the
comparative negligence of the employee and the employer. FELA-related claims are
covered under the Company's liability insurance policies.

The Company believes its insurance coverage is adequate in light of its
experience and the experience of the rail industry. However, the Company can
give no assurance as to the adequacy, availability or cost of insurance in the
future.

13
<PAGE>
REGULATION

UNITED STATES

OVERVIEW. In addition to the environmental, safety and other regulations
generally applicable to all businesses, the Company's railroad subsidiaries are
subject to regulation by the STB, the successor to the Interstate Commerce
Commission ("ICC"), and the Federal Railroad Administration ("FRA") and by
regulatory agencies in the various states in which they do business. The Company
believes its operations are in material compliance with these regulations.
Additionally, the Company is subject to STB regulation in its acquisition of new
railroad properties by purchase, lease or contract to operate. Since 1980, there
has been a significant relaxation in regulations governing such transactions and
this change has favorably affected the Company's ability to add railroad
properties to its portfolio. Various interests in the United States have sought
and continue to seek reimposition of government controls on the railroad
industry in areas deregulated in whole or in part since 1980, including stricter
rate regulation, competitive access and more onerous labor protection conditions
for rail line transfers.

STB. The ICC Termination Act, which was enacted on December 29, 1995,
eliminated the ICC as an independent agency and created the STB, a new agency
within the Department of Transportation which began functioning on January 1,
1996. The ICC Termination Act made a number of changes which have altered the
procedure and timing for federal approval of rail projects, including
abandonments, line sales, mergers, rates and tariffs. The ICC Termination Act
made significant changes in line sale procedures, particularly with respect to
labor protection on Class II and III acquisitions. Specifically, a Class II
carrier that acquires a line must provide one year of severance pay to employees
who lose their jobs as a result of the acquisition, less any railroad earnings
the employee may receive from the acquiring carrier. Class III carriers and non
carriers are exempt from paying labor protection as a consequence of acquiring a
line. With respect to mergers, the STB is required to approve mergers of two or
more Class II or Class III carriers. Employees adversely affected by a merger,
involving at least one Class II and one or more Class III carriers, must receive
one year of severance pay reduced by any railroad earnings the employee may
receive from the acquiring carrier. If the merger involves only Class III
carriers, no labor protection may be imposed. The ICC Termination Act also
simplified and streamlined the abandonment process. With respect to rates and
tariffs, railroads no longer have an obligation to file tariffs with the federal
government. However, in some instances, primarily for agricultural products,
railroads must make those rates available to persons requesting them in writing.

FRA. The FRA regulates railroad safety and equipment standards, including
track maintenance and train speed standards, special procedures for handling
hazardous shipments, locomotive and railcar inspection and repair requirements,
operating practices and crew qualifications.

STATE REGULATORY AGENCIES. State regulatory agencies do not have authority to
engage in economic regulation of railroads that are part of the interstate
network. State and local governments generally retain jurisdiction over local
rail safety matters, such as the installation of grade crossings, grade crossing
warning devices and safety inspectors.

CANADA

OVERVIEW. The Company's Canadian railroad subsidiaries are subject to
regulation by various governmental departments and regulatory agencies at the
federal or provincial level depending on whether the railroad operated by the
subsidiary in question falls within federal or provincial jurisdiction. The
Company believes that the operations of its railroad subsidiaries in Canada are
in material compliance with all applicable Canadian federal and provincial laws
and regulations.

14
<PAGE>
FEDERAL. A Canadian railroad generally falls within the jurisdiction of
federal regulation if the railroad crosses provincial or international borders
or if the Parliament of Canada has declared the railroad to be a federal work or
undertaking and in certain other circumstances. If a railroad operating company
operates a railroad that falls within the federal jurisdiction, all other
railroads owned, operated, leased or controlled by the company also fall within
federal jurisdiction. Any company which proposes to construct or operate a
railway in Canada which falls within federal jurisdiction is required to obtain
a certificate of fitness under the Canada Transportation Act ("CTA"), which is
issued on proof of insurance. Under the CTA, the sale of a federally regulated
railroad line is not subject to federal approval, although a process of
advertising and negotiations may be required in connection with any proposed
discontinuance of a federal railway. Federal railroads are governed by federal
labor relations laws.

PROVINCIAL. Short lines located within the boundaries of a single province
which do not otherwise fall within the federal jurisdiction are regulated by the
laws of the province in question, including laws as to licensing and labor
relations. Most of Canada's ten provinces have enacted new legislation which is
more favorable to the operation of short line railroads than previous provincial
laws. Many of the provinces require as a condition of licensing under their
short line railroads acts that the licensees comply with federal regulations
applicable to safety and other matters and remain subject to inspection by
federal railway inspectors. Under some provincial legislation, the sale of a
provincially regulated railroad line is not subject to provincial approval,
although a process of advertising and negotiations may be required in connection
with any proposed discontinuance of a provincial railway.

INVESTMENT CANADA ACT. The Company's acquisition of additional railroads in
Canada, whether federally or provincially regulated, will, in the case of
acquisitions involving assets having a book value in excess of CDN $5.0 million,
be subject to approval pursuant to the Investment Canada Act, the federal act in
Canada governing purchases of Canadian businesses by non-Canadians.

ENVIRONMENTAL MATTERS

The Company's operations are subject to various U.S. and Canadian federal,
state, provincial and local laws and regulations relating to the protection of
the environment, which have become increasingly stringent. These environmental
laws and regulations, which are implemented principally in the U.S. by the
Environmental Protection Agency ("EPA") and comparable state agencies and
principally in Canada by provincial agencies, govern the management of hazardous
wastes, the discharge of pollutants into the air and surface and underground
waters and the manufacture and disposal of certain substances.

In October 1998, the Utah Transit Authority ("UTA") asserted a claim for
contribution against one of the Company's railroads under the Comprehensive
Environmental Response, Compensation and Liability Act ("CERCLA") relating to
certain pollution existing at one of their rail yards over which the Company has
an operating easement. The Company believes it is not a potentially responsible
party under CERCLA and believes it is contractually indemnified against such
claim. The amount of contribution being sought by the UTA is unknown at this
time.

There are no other material environmental claims pending or, to the Company's
knowledge at this time, threatened against the Company.

The Company believes that its operations are in material compliance with
current environmental laws and regulations. The Company estimates that any
expenses incurred in maintaining compliance with current laws and regulations
will not have any material effect on the Company's earnings or capital
expenditures. However, the Company can provide no assurance that the current
regulatory requirements will not change, that currently unforeseen environmental
incidents will not occur or that past non-compliance with environmental laws
will not be discovered on the Company's properties.

15
<PAGE>
ITEM 2. PROPERTIES

The Company, through its subsidiaries, operates short line railroads
concentrated in the Southeastern and Midwestern United States, in the Great
Lakes and New England regions of the United States and in Eastern Canada. The
Company also owns investments in two Brazilian railroads and provides management
consulting services in Kazakhstan. The Company has added railroad properties to
its portfolio through purchase of track and roadbed, lease of such assets,
contracts to operate properties under management agreements and purchase of
railroad company common stock, depending upon the economic and strategic
considerations of the divesting carriers. After acquiring the right to operate a
railroad property, the Company must arrange for the purchase or lease of
operating equipment and hire the work force necessary to operate the property.

For properties which the Company owns, the continuity of operations of
purchased railroad properties has been limited to the physical transfer of these
assets. The Company typically does not contractually assume any of the
operations or liabilities of the divesting carriers. Quality of the Company's
title to its owned rights-of-way varies. The Company's properties were acquired
by its predecessors over extended periods of time and by different companies.
Accordingly, the original conveyancing documents were not standardized and are
subject to judicial interpretation as to the interest conveyed to the original
acquiring railroad. In cases involving other railroads, deeds have sometimes
been construed to create either an easement for railroad purposes or an
ownership interest that terminated upon the cessation of use for railroad
purposes. If the Company ceases to operate its railroad over a parcel, the
Company's interest in the parcel could revert to adjacent landowners or to
others holding a reversionary interest. Under certain limited circumstances, two
of the railroad properties may be repurchased by the original selling carriers
for their original purchase prices.

In addition, the purchase price of one of the Company's railroads is subject
to reimbursement up to $5.0 million if certain levels of carloadings are not
achieved within a specified time period, as detailed in the purchase and sale
agreement. The Company expects to recover approximately $2.1 million plus
interest related to this reimbursement during the first quarter of 1999.

For properties it leases, the Company ordinarily assumes all operating and
financial responsibilities, including maintenance, payment of property taxes and
regulatory compliance, upon commencement date. Lease payments on three railroad
properties leased from one major railroad are structured to ensure that the
Company interchanges an agreed-upon percentage of outbound carloads with the
lessor railroad. Under these leases, no payments to the lessor are required as
long as a minimum percentage of traffic volume is interchanged with the lessor;
therefore, the Company, to some extent, controls the amounts which may be
payable under these leases. If the minimum percentage of traffic volume
interchanged with the lessor is not met, the amounts which may be payable under
these leases could be significant and have an adverse effect on the Company.
These leases are subject to an initial 20 year term with one or more renewal
terms at the Company's option. In addition, lease payments on five properties
leased from two other major railroads are subject to reduction from the base
rate, down to zero, depending upon the level of traffic interchanged with the
lessors. The maximum aggregate annual base rate lease payments under these
leases is approximately $1.7 million. These leases have initial lease terms of
five to 20 years and leases on four of the five properties include purchase
options which may be exercised by the Company after one to three years of
operation. To date, no payments have been required under any of the Company's
railroad property leases. Generally, upon the termination of a lease, the
Company does not have a right to the return of any capital investment made in
the property leased.

Rail properties operated by the Company under management agreements typically
have initial ten year terms followed by either a purchase option or one or more
renewal terms at the Company's option. These operating contracts typically
require that the Company assume all operating and financial responsibilities for
freight operations on the property, including maintenance, payment of property
taxes and regulatory compliance. Payments by RailTex for the right to conduct
rail operations on these properties are typically calculated as a percentage of
its revenues from the respective properties. Generally, as in the case of
leases, upon termination of these agreements the Company does not have a right
to the return of any capital investment made in the property managed.

16
<PAGE>
Railroad properties owned, leased or operated under contract by the Company's
subsidiaries typically consist of the track, ties and underlying land. Real
estate adjacent to the railroad rights-of-way is generally retained by the
seller and the Company's holdings of such property is not significant.
Similarly, the seller typically retains mineral rights and fiber optics
easements in the properties acquired by the Company. Revenues derived by the
Company from various rentals and easements totaled approximately $3.1 million in
1998.

In order to improve its overall profitability and financial returns, the
Company is continually analyzing its portfolio of railroad properties with the
objective of identifying those properties which do not meet the Company's
overall financial objectives and which do not offer significant revenue or
operating expansion opportunities. As a result, the Company is divesting its
Northeast Kansas and Missouri Railroad for approximately $3.2 million to UP. The
completion of this transaction is dependent upon STB approval and no material
gain or loss is expected. As part of its stated strategy to capitalize on
opportunities more strategic to the Company and to minimize management time and
resources spent on smaller properties, the Company may divest additional
railroads in the future.

The following list describes each of the railroads operated by the Company as
of March 1, 1999:

The assets of the Cape Breton & Central Nova Scotia ("CBNS") were purchased
from CN on October 1, 1993. The line is approximately 245 miles long and runs
from Truro to Sydney, Nova Scotia. Traffic includes coal, which is imported, as
well as originating and terminating on the line. Inbound traffic consists of
scrap iron, chemicals and salt. Outbound traffic consists of newsprint,
woodpulp, steel railroad rail and railroad cars.

The assets of the Carolina Piedmont ("CPDR") were purchased from CSX on
November 2, 1990. The line is approximately 37 miles long and runs from
Greenville to Laurens, South Carolina. On April 28, 1997, the assets of the
Greenville and Northern Railway were purchased. The line is approximately 12
miles long and runs from Travelers Rest to Greenville, South Carolina. Inbound
traffic consists of plastics, resins, vegetable oils, cement, lumber, potash,
glass, sand, brick, newsprint and various chemicals. Outbound traffic consists
of pulpwood, scrap paper and industrial engines.

The assets of the Central Oregon & Pacific ("CORP") were partially purchased
and partially leased from Southern Pacific Transportation Company ("SP") on
December 31, 1994. SP was subsequently acquired by UP. The purchased segment is
approximately 336 miles long and runs from Belleview to Eugene, Oregon and from
Eugene to Cordes, Oregon. Another 105 miles is leased for five years and runs
from Cordes to Coquille, Oregon and from Belleview, Oregon to Black Butte,
California. The CORP operates an additional 8 miles of track from Danebo to
Springfield Jct., Oregon under trackage rights. Outbound traffic consists of
lumber and wood products and pulp and paper products. Traffic also includes
lumber and wood products which both originate and terminate on the line.

On June 23, 1998, the Company acquired 100% of the outstanding stock of
Central Properties, Inc. CPI was a privately held company which owned 100% of
the stock of two railroads in Ohio and Indiana. The Central Railroad of
Indianapolis operates almost 92 miles of rail line in north central Indiana
under lease and trackage rights arrangements. The Central Railroad of Indiana
owns and operates 81 miles of rail line between Cincinnati, Ohio and
Shelbyville, Indiana. The Company began actively operating the two railroads in
August 1998. Inbound and outbound traffic consists of farm products, chemicals
and non-metallic minerals.

The Chesapeake & Albemarle ("C&A") was leased from NS on April 2, 1990 for a
term of 20 years, with an option in favor of C&A to purchase the line during the
term of the lease. The railroad is approximately 82 miles long and runs from
Chesapeake, Virginia to Edenton, North Carolina. Inbound traffic consists of
limestone and lumber. Outbound traffic consists of grain, lumber and scrap
metal.

17
<PAGE>
The assets of the Connecticut Southern ("CSOR") were purchased from Conrail
on September 21, 1996. The purchased segment is approximately 23 miles long and
is located in Hartford, Connecticut. The CSOR operates an additional 55 miles of
track from just north of New Haven, Connecticut to Springfield, Massachusetts
under a trackage rights agreement with Amtrack. Inbound traffic consists of
lumber and wood products, pulp and paper products and metal products. Outbound
traffic consists of scrap paper.

The assets of the Dallas, Garland and Northeastern were partially purchased
and partially leased from UP on February 9, 1992. The lease agreement provides
for a 20 year term and grants RailTex three options to renew for additional 20
year terms. The line is approximately 92 miles long and extends from Trenton to
Garland, Texas. Inbound traffic consists of limestone, food, farm products and
plastics. Outbound traffic consists of food, farm products and plastics. On
January 31, 1999, the DGNO began operating on an additional 89 miles of rail
line north of Dallas, Texas under a lease arrangement with UP. Traffic on the
North Dallas Lines consists primarily of corn syrup, lumber and auto parts.

Substantially all of the assets of the Georgia Southwestern ("GSWR") were
purchased from CSX on June 5, 1989. In 1995, the operations of the Georgia Great
Southern ("GGS") and the Georgia and Alabama ("GAAB") were consolidated into the
GSWR. The GSWR currently operates, in total, over 357 miles. One segment extends
from Preston east to Rochelle, Georgia, and another segment extends from
Cuthbert south to Bainbridge, Georgia. The GSWR also operates from Columbus to
Cusseta, Georgia and from Columbus, east to Americus then south to Albany,
Georgia under a combination of track lease and operating rights with NS and from
Bainbridge to Saffold, Georgia under trackage rights with CSX including two
miles of track in Dawson, Georgia which was acquired by GGS from CSX on December
14, 1990. The GAAB was leased from NS on June 1, 1989 for a term of 20 years
with an option in favor of RailTex to purchase the line during the term of the
lease. The railroad runs from Smithville, Georgia to White Oak, Alabama. Inbound
traffic consists of cement, fertilizer, forest products, crushed stone and
chemicals. Outbound traffic consists of forest products, grain, food products,
lumber, auto parts, paper and scrap metal.

The assets of the Goderich-Exeter Railway were purchased from CN on April 3,
1992. The line is approximately 70 miles long and runs from Goderich to
Centralia, Ontario and from Goderich to Stratford, Ontario. On November 16,
1998, the GEXR commenced operations on the Guelph Line under a lease arrangement
with CN. The Guelph Line is a 99 mile rail line that operates between Silver and
London, Ontario and connects with the GEXR at Stratford, Ontario. Inbound
traffic consists of fertilizer and grain. Outbound traffic consists of salt,
grain and road machinery. VIA Rail Canada, Inc. also operates passenger trains
over the Guelph Line.

The stock of the Indiana & Ohio Rail Corp. was purchased on June 4, 1996. On
February 15, 1997, a subsidiary of the INOH, purchased from Grand Trunk Western
Railroad, Inc. the assets of the former Detroit, Toledo and Ironton ("DTI").
Together, the INOH line and the DTI line operate 576 miles of track under a
combination of owned track, lease and operating rights in southeastern Indiana
and western Ohio extending north to Detroit, Michigan. Beginning January 1,
1998, the operations of the former INOH and DTI were restructured to operate as
the Indiana and Ohio ("IORY") and the Indiana and Ohio Central ("IORC"). Inbound
traffic consists of automobiles and automobile parts, farm products,
non-metallic ores, chemicals and scrap metal. Outbound traffic consists of
automobiles and automobile parts, farm products, food, chemicals, clay, stone
and scrap metal.

The assets of the Indiana Southern were purchased from Conrail on April 11,
1992. The line extends 170 miles from Indianapolis to Evansville, Indiana. In
addition, ISRR operates six miles of trackage rights over Canadian Pacific
Railway Company ("CP") rail between Elnora and Bee Hunter, Indiana. Traffic
consists primarily of coal, which both originates and terminates on the line.

The assets of the Mid-Michigan ("MMRR") were purchased from CSX on December
19, 1987. The MMRR consists of two separate line segments. One segment is
approximately 30 miles long and runs from Elmdale to Greenville, Michigan. The
other segment is approximately 37 miles long and runs from Paines to Alma,
Michigan. Inbound traffic consists of fertilizer, asphalt, plastic and lumber.
Outbound traffic consists of refrigerators, unit grain trains, liquified
petroleum gas, aviation gas, scrap metal, auto parts and farm and food

18
<PAGE>
products. The assets of the Michigan Shore ("MS") were purchased from CMGN on
December 14, 1990. The line runs approximately 7 miles and is located in
Muskegon, Michigan. Outbound traffic consists of sand and chemicals. The assets
of the Grand Rapids Eastern ("GRE") were purchased from Central Michigan Railway
Company ("CMGN") on July 10, 1993. The line is approximately 45 miles long and
extends from Marne to Ionia, Michigan. Inbound traffic consists of chemicals.
Outbound traffic consists of auto parts. The assets of the MS and the GRE were
merged into the MMRR effective December 31, 1998.

The assets of the Missouri & Northern Arkansas were partially purchased and
partially leased from UP on December 13, 1992. The lease has a 20 year term with
three 20 year renewal options. The line is approximately 497 miles long and runs
from Kansas City, Missouri to Newport, Arkansas; from Fort Scott, Kansas to
Clinton, Missouri, from Carthage to Joplin, Missouri and from Springfield to
Wallis, Missouri. The M&NA operates over trackage rights on the UP from Pleasant
Hill to Kansas City, Missouri and from Diaz Junction to Newport, Arkansas.
Inbound traffic consists of coal, farm products, lumber, paper, fertilizer and
food products. Outbound traffic consists of grain products, roofing materials,
frozen food, minerals, chemicals, forest products and steel. The Branson Scenic
Railroad, Inc. ("BSR"), a passenger railroad operator which is not affiliated
with the Company, operates passenger excursion trains over a 44-mile segment of
the M&NA. The M&NA provides the crews to the BSR and, in turn, receives a flat
fee plus a specified percentage of the BSR's revenues over a base amount. In
addition, the White River Scenic Railroad, a passenger railroad operator which
is not affiliated with the Company, operates passenger excursion trains using
their own crews over certain segments of the M&NA and, in turn, the M&NA
receives a flat fee. On September 12, 1998, the M&NA purchased approximately 10
miles of track in two separate five mile sections from the Burlington Northern
and Santa Fe Railway. One section is in Carthage, Missouri and the other is in
Joplin, Missouri. Both sections are operated as part of the M&NA.

The assets of the New England Central Railroad were purchased from Grand
Trunk Corporation, an affiliate of CN, on February 4, 1995. The NECR operates
over approximately 330 miles of track, extending from East Alburg, Vermont to
New London, Connecticut. In addition, Amtrack provides passenger service over
track extending from St Albans, Vermont and Palmer, Massachusetts under a
trackage rights contract with the NECR. Inbound traffic consists primarily of
paper, plastic, lumber, copper and wood products. A significant portion of the
inbound lumber and paper products is received by transload facilities located on
the NECR. These facilities transload the commodities to truck for further
distribution throughout the New England area and beyond. The majority of these
transload operations are affiliated with the CN. Outbound traffic consists
primarily of corrugated paper and coal fly ash.

The assets of the New Orleans Lower Coast ("NOLR") were purchased from UP on
March 17, 1991. The line is approximately 24 miles long and runs from Gouldsboro
to Myrtle Grove, Louisiana. Inbound traffic consists of unit grain trains and
petroleum products. Outbound traffic consists of petroleum products.

The assets of the North Carolina & Virginia ("NCVA") were purchased from CSX
on November 1, 1987. The line is approximately 53 miles long and runs from
Boykins, Virginia, south to Kelford, North Carolina, then northeast to Tunis,
North Carolina. Inbound traffic consists of grain and chemicals. Outbound
traffic consists of woodchips, lumber, particle board, peanuts and peanut hulls.

The assets of the Northeast Kansas & Missouri were purchased from UP on
February 26, 1990. The railroad is approximately 125 miles long and extends west
from St. Joseph, Missouri to Upland, Kansas. Inbound traffic consists of
fertilizers. Outbound traffic consists of grain and food products.

The assets of the Ontario L'Orignal ("OLOR") were purchased from CN effective
November 2, 1996. The line is approximately 26 miles long and is located in
eastern Ontario, Canada. Traffic consists primarily of scrap iron and steel
products, which both originate and terminate on the line.

The assets of the Pittsburgh Industrial ("PIRR") were purchased from Conrail
on December 7, 1996. The line is approximately 42 miles long and is located in
the Pittsburgh metropolitan area. Inbound traffic consists of scrap metal,
plastics, asphalt, lubricating oils, chemicals and food products. Outbound
traffic consists of scrap metal, plastics and chemicals.

19
<PAGE>
The Salt Lake City Southern ("SLCS") began operating under operating
agreements with Union Pacific and the UTA on April 19, 1993. The operating
rights may be repurchased by the UTA for a nominal amount at any time. The line
is approximately 25 miles long and extends from Salt Lake City to Mount, Utah.
Inbound traffic consists of cement and lumber.

The San Diego & Imperial Valley began operations on October 15, 1984 under a
ten year contract with the San Diego Metropolitan Transit Development Board
("MTDB") in the San Diego, California area. Under the terms of this contract,
the SDIV provides freight service over trackage owned by a subsidiary of MTDB
and over which MTDB provides passenger service. In 1994, the SDIV exercised an
option to renew the contract until 2004. Additionally, this contract has three
remaining ten year renewal options. SDIV also has a trackage rights agreement
with Ferrocarriles Nacionales de Mexico Region Pacifico ("Ferrocarriles") to
operate between Tijuana and Tecate, Mexico. This is an open agreement that may
be cancelled at any time by either party. The SDIV has authority to operate 153
miles of track that extends from San Diego, California through Tijuana and
Tecate, Mexico, to Plaster City, California. Inbound traffic consists of
liquified petroleum gas, lumber, beverages, paper, plastics, lard and grain.
Outbound traffic consists of scrap metal, sand and scrap paper.

The assets of the South Carolina Central ("SCC") were purchased from CSX on
December 1, 1987. The railroad is composed of two line segments. One is
approximately 46 miles long and runs from Florence to Bishopville, South
Carolina. The other is approximately 12 miles long and runs from Cheraw to
Society Hill, South Carolina. Inbound traffic consists of scrap metal,
chemicals, coal, scrap paper and corn sweeteners. Outbound traffic consists of
finished steel and paper.

The assets of the Texas-New Mexico ("TNMR") were purchased from UP on
September 18, 1989. The line is approximately 107 miles long and runs from
Monahans, Texas north to Lovington, New Mexico. Inbound traffic consists of
crushed stone and hazardous waste. Outbound traffic consists of liquified
petroleum gas, chemicals, farm products, scrap metal and minerals.

The Texas Northeastern ("TNER") was leased from UP effective October 22, 1990
under a 20 year lease with three 20 year options to renew. The line is
approximately 107 miles long and runs from Texarkana to New Boston, Texas, from
Paris to Sherman, Texas, from Sherman north to Denison, Texas and from Bells
south to Trenton, Texas where it connects with the DGNO. Inbound traffic
consists of food, paper products and edible oils. Outbound traffic consists of
grain.

The Virginia Southern ("VSRR") was leased from NS on November 28, 1988 under
a 20 year lease agreement. The lease grants VSRR a right to purchase
substantially all of the line during the term of the lease for its net
liquidation value. The line is approximately 75 miles long and extends from
Burkeville, Virginia to Oxford, North Carolina. Inbound traffic consists of
coal, wool, fructose and chemicals. Outbound traffic consists of pulpwood and
woodchips.

In August 1995, the Company entered into a management agreement with
Tengizchevroil ("TCO"), a limited partnership of Chevron Overseas Company and
Tengizmunaygaz, to provide on-site technical and operating management of the TCO
railroad. The railroad runs from Kulsary, Kazakhstan to the TCO plant complex at
Tengiz, Kazakhstan, a distance of approximately 104 kilometers or 62 miles. The
initial term of the agreement was for two years with year-to-year extensions
after the initial term. Currently, the Company is operating under a
month-to-month extension of the initial two year agreement and is in the process
of renegotiating the contract.

TRACK

RailTex conducted its freight operations on 4,286 miles of track as of March
1, 1999, including 2,655 miles of owned track, 1,003 miles of leased track and
230 miles of track operated under long-term operating contracts. In addition,
the Company operated on 398 miles of track owned by other railroads pursuant to
trackage rights agreements.

20
<PAGE>
Because of the relatively short length of the typical RailTex railroad and
the stop-and-start nature of its switching activity, the majority of the
Company's freight operations are conducted at speeds of 25 miles per hour or
less. Of the track operated by RailTex, 67% was rated FRA Class II or higher and
22% was rated FRA Class I or lower at March 1, 1999. The remaining 11% was
located in Mexico or Canada and not subject to FRA inspection and regulation.

TRACK CONDITION
<TABLE>
<CAPTION>
FRA CLASS
---------------------------------------------
V IV III II I EXCEPTED OTHER TOTAL %
--- --- --- ----- --- -------- ----- ----- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Owned ................................ -- 124 463 1,150 353 224 341 2,655 62%
Leased ............................... -- -- 386 301 74 143 99 1,003 24%
Contract ............................. -- -- 33 75 78 -- 44 230 5%
Trackage Rights(1) ................... 144 143 15 63 33 -- -- 398 9%
--- --- --- ----- --- -------- ----- ----- ---
Total Miles ....................... 144 267 897 1,589 538 367 484 4,286 100%
=== === === ===== === ======== ===== ===== ===
FRA Track Class as Percentage of Miles 3% 6% 21% 37% 13% 9% 11% 100% --
Maximum speed in M.P.H ............... 80 60 40 25 10 10 N/A -- --
</TABLE>
(1) Includes trackage rights associated with owned or leased railroad
properties.

The Company's track maintenance strategy is to maintain its track, ties,
roadbed and structures consistent with safe operations and with the volume of
traffic transported over its lines. The Company believes its capital expenditure
requirements for track maintenance are lower than those incurred by the major
rail carriers which previously operated most of the Company's railroad
properties because such major rail carriers generally operated at higher speeds
over this track and, therefore, required greater levels of track maintenance.
Also, the labor costs incurred by major railroads for track maintenance are
typically higher than the Company's labor costs.

Safety-related maintenance needs receive the Company's highest maintenance
priority, followed by high density track segments on which the highest volume of
traffic is transported. Low-density segments, sidings and lines for which higher
transit speeds are not essential to providing timely and effective customer
service are maintained at lower FRA class conditions. Track maintenance is
performed by each railroad's operating personnel with local track contractors
supplementing this effort on an as-needed basis.

EQUIPMENT

At March 1, 1999, the Company's rolling stock consisted of 258 locomotives
and 3,329 freight cars, some of which it owned and some of which were leased
from others. All of the leased locomotives and freight cars were provided under
short-term operating lease agreements or per diem sharing agreements. The
following tables summarize the composition of the Company's equipment fleet at
March 1, 1999:

LOCOMOTIVES

HORSEPOWER/UNIT OWNED LEASED TOTAL
--------------- ----- ------ -----
1500 to 3500 ................................. 214 26 240
1499 and under ............................... 18 -- 18
----- ------ -----
Total ................................... 232 26 258
===== ====== =====

The average age of the Company's locomotive fleet is 33 years. Of the 232
locomotives owned by RailTex, most have been rebuilt, updated or overhauled.
Calculating locomotive age from the date of rebuild, the Company's locomotives
have an average age of 27 years. The Company's availability rate with respect to
its locomotive fleet was 95% in 1998.

21
<PAGE>
FREIGHT CARS

PER DIEM
SHARING
TYPE OWNED LEASED ARRANGEMENTS TOTAL
---- ----- ------ ------------ -----
Hopper cars .................. 32 673 103 808
Flat cars .................... 104 74 615 793
Gondola cars ................. -- 75 525 600
Box cars ..................... 24 108 996 1,128
---- ----- ------ ------------ -----
Total .................... 160 930 2,239 3,329
===== ====== ============ =====

The Company has entered into per diem sharing arrangements covering 2,239
freight cars as of March 1, 1999. Under these arrangements, the Company agrees
to place the freight cars on its railroads for prospective loading by customers
and, in exchange, the Company does not incur rent on these cars when these cars
are on one of its railroads. In addition, car owners pay the Company a portion
of the rents earned when the freight cars are on railroads other than the
Company's.

ITEM 3. LEGAL PROCEEDINGS

In October 1998, the Utah Transit Authority asserted a claim for contribution
against one of the Company's railroads under the Comprehensive Environmental
Response, Compensation and Liability Act relating to certain pollution existing
at one of UTA's rail yards over which the Company has an operating easement. The
Company believes it is not a potentially responsible party under CERCLA and
believes it is contractually indemnified against such claim. The amount of
contribution being sought by the UTA is unknown at this time.

In December 1996, a corporation filed a construction lien against one of the
Company's railroads in the amount of approximately $600,000. The alleged basis
for the construction lien is the provision by the plaintiff of labor and
materials to the Company's railroad in connection with a train derailment in
August 1996, which derailment the Company believes was caused primarily by the
plaintiff. In March 1997, the Company filed a complaint in Federal Court for
approximately $700,000 incurred by the Company in connection with such
derailment and the plaintiff's State claim was combined in the Federal
litigation. The Company is vigorously pursuing its claim and defending the
plaintiff's claim. Trial was originally scheduled for December 1998, but was
rescheduled to July 1999. The Company is unable to predict the outcome of the
trial; however, the Company believes it is adequately reserved to cover any
losses it may incur in connection with this matter. In addition, any loss in
excess of the Company's self-insured retention of $500,000 will be covered by
its insurance.

The Company is currently subject to a number of claims and legal actions that
arose in the ordinary course of business, including FELA claims by its employees
and personal injury claims (including wrongful death claims) by third parties.
The Company believes these claims, taking into account reserves and applicable
insurance, will not have a material adverse effect on the Company. However,
adverse judgments in these claims, individually or in the aggregate, in excess
of related reserves and applicable insurance, could have a materially adverse
effect on the Company's financial condition and results of its operations.

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

None.

22
<PAGE>
PART II

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

RailTex, Inc.'s ("RailTex" or the "Company") Common Stock is traded on the
Nasdaq National Market under the symbol "RTEX". The following table sets forth,
for the periods indicated, the high and low sales price per share of the
Company's Common Stock as quoted on the Nasdaq National Market.

PRICE PER SHARE
---------------------
HIGH LOW
------- -------
1998
First Quarter ............................. $17 3/4 $14 1/8
Second Quarter ............................ 16 3/4 13 1/8
Third Quarter ............................. 15 1/8 11
Fourth Quarter ............................ 13 3/4 7 1/2

1997
First Quarter ............................. $25 1/4 $16
Second Quarter ............................ 19 1/2 13 3/4
Third Quarter ............................. 20 1/4 15
Fourth Quarter ............................ 19 3/8 13 7/8

Since its inception, the Company has not paid, and it has no current plans to
pay, cash dividends on its Common Stock. The Company currently intends to retain
all earnings to support the Company's operations and future growth. The payment
of any future dividends will be determined by the Board of Directors based upon
the Company's earnings, financial condition and cash requirements, restrictions
in financing agreements, business conditions and other factors that the Board of
Directors may deem relevant. The Company's financing agreements prohibit the
payment of dividends. See Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources.

As of March 1, 1999, the Company had 9,273,963 shares of Common Stock
outstanding and there were 385 shareholders of record.

THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK.

23
<PAGE>
ITEM 6. SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA

<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------------------------------------
1998 1997 1996 1995 1994
--------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA)
<S> <C> <C> <C> <C> <C>
SUMMARY OF INCOME STATEMENT DATA:
Operating revenues ........................................... $ 161,020 $ 148,791 $ 121,106 $ 107,841 $ 74,528
Operating expenses ........................................... (133,368) (125,790) (99,065) (90,046) (61,351)
--------- --------- --------- --------- ---------
Operating income before Special Charge ....................... 27,652 23,001 22,041 17,795 13,177
Special Charge (1) ........................................... -- -- -- (2,140) --
--------- --------- --------- --------- ---------
Operating income ............................................. 27,652 23,001 22,041 15,655 13,177
Interest expense ............................................. (11,236) (10,527) (6,893) (5,696) (2,965)
Other income, net ............................................ 4,215 4,198 1,521 1,715 1,287
--------- --------- --------- --------- ---------
Income before income taxes ................................... 20,631 16,672 16,669 11,674 11,499
Income taxes ................................................. (7,853) (6,048) (6,708) (4,776) (4,618)
--------- --------- --------- --------- ---------
Net income before cumulative effect of a change in
accounting principle ...................................... 12,778 10,624 9,961 6,898 6,881
Cumulative effect of a change in accounting principle
(net of income taxes) (2) ................................. (1,703) -- -- -- --
--------- --------- --------- --------- ---------
Net income ................................................... $ 11,075 $ 10,624 $ 9,961 $ 6,898 $ 6,881
========= ========= ========= ========= =========
PER SHARE DATA (3):
Basic earnings per share:
Net income before cumulative effect of a change in
accounting principle ...................................... $ 1.39 $ 1.16 $ 1.09 $ 0.79 $ 0.96
Cumulative effect of a change in accounting principle
(net of income taxes) ..................................... (0.19) -- -- -- --
--------- --------- --------- --------- ---------
Net income ................................................... $ 1.20 $ 1.16 $ 1.09 $ 0.79 $ 0.96
========= ========= ========= ========= =========
Diluted earnings per share:
Net income before cumulative effect of a change in
accounting principle ...................................... $ 1.38 $ 1.15 $ 1.08 $ 0.78 $ 0.88
Cumulative effect of a change in accounting principle
(net of income taxes) ..................................... (0.18) -- -- -- --
--------- --------- --------- --------- ---------
Net income ................................................... $ 1.20 $ 1.15 $ 1.08 $ 0.78 $ 0.88
========= ========= ========= ========= =========
OPERATING DATA:
Total track mileage (4) ...................................... 4,002 3,884 3,431 3,390 2,713
Total carloads ............................................... 549,513 488,264 359,669 318,187 253,163
Total employees (4) .......................................... 931 873 720 681 505
Operating revenues per mile (4) .............................. $ 40,235 $ 38,309 $ 35,298 $ 31,812 $ 27,471
Operating revenues per carload ............................... $ 293 $ 305 $ 337 $ 339 $ 294
Operating revenues per employee .............................. $ 172,954 $ 170,436 $ 168,203 $ 158,357 $ 147,580
Carloads per mile (4) ........................................ 137 126 105 94 93
Carloads per employee (4) .................................... 590 559 500 467 501
Labor ratio (5) .............................................. 31.0% 30.9% 28.9% 30.3% 29.1%
Operating ratio before Special Charge (6) .................... 82.8% 84.5% 81.8% 83.5% 82.3%
Operating ratio after Special Charge (6) ..................... 82.8% 84.5% 81.8% 85.5% 82.3%

BALANCE SHEET DATA AS OF PERIOD END:
Total assets ................................................. $ 362,345 $ 319,908 $ 269,470 $ 204,982 $ 139,656
Long-term debt ............................................... 131,550 125,656 98,704 58,911 43,389
Total shareholders' equity ................................... 144,148 133,258 122,703 112,602 72,382
</TABLE>
(1) A result of the disposition of a railroad.

(2) This item resulted from the Company's adoption of Statement of Position
98-5, "Reporting on the Costs of Start-up Activities" for the year ended
December 31, 1998.

(3) The Company adopted Statement of Financial Accounting Standards No. 128,
"Earnings Per Share", effective December 15, 1997 and, as a result,
previously reported earnings per share for 1996, 1995 and 1994 were
restated.

(4) Total track mileage and total employees are calculated based on weighted
monthly averages over the respective periods.

(5) Labor ratio equals labor expenses divided by operating revenues. See
Management's Discussion and Analysis of Financial Condition and Results of
Operations--General.

(6) Operating ratio equals operating expenses divided by operating revenues. See
Management's Discussion and Analysis of Financial Condition and Results of
Operations--General.

24
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

The following discussion should be read in connection with the Company's
Consolidated Financial Statements, related notes and other financial information
included elsewhere in this Annual Report on Form 10-K.

FORWARD-LOOKING STATEMENTS

This section contains forward-looking statements that are based on current
expectations, estimates and projections. These statements are not guarantees of
future performance and involve risks, uncertainties and assumptions that are
difficult to predict. Therefore, actual outcome and results may differ
materially from what is expressed in such forward-looking statements.

GENERAL

The Company's growth to date has resulted primarily from implementation of
its expansion strategy. The number of miles of track operated by RailTex has
grown to almost 4,300 at March 1, 1999.

The Company has added railroad properties to its portfolio primarily through
purchase of track and roadbed, lease of such assets, contracts to operate such
assets under management agreements and purchase of railroad company common
stock, depending upon the economic and strategic considerations of the divesting
carriers. These arrangements typically relate only to the physical assets of the
railroad property; the Company typically does not contractually assume any of
the operations or liabilities of the divesting carriers. After acquiring the
right to operate a railroad property, the Company must arrange for the purchase
or lease of operating equipment and hire the workforce necessary to operate the
railroad. Accordingly, for any railroad property, the historical results of
operations of the railroad property as previously operated are not necessarily
indicative of the results of operations for the property following commencement
of operations by the Company.

Because of variations in the structure, timing and size of portfolio
additions and differences in economics among the Company's portfolio railroads
resulting from the unique terms, rates and other provisions for each railroad's
operation established through negotiation between RailTex and each divesting
carrier, the Company's results of operations in any reporting period may not be
directly comparable to (i) its results of operations in other reporting periods
or (ii) the results of operations of other railroad companies. Therefore, care
should be taken when using traditional measurements of railroad operating
performance, such as freight revenues per carload, operating ratio and labor
ratio, in assessing or comparing the Company's operating results.

"Comparable Railroad Properties" for each period are railroad properties
which the Company operated throughout both the full current year and the full
prior year, including any additions to those properties made during the year.
"New Railroad Properties" for each period are railroad properties which the
Company began operating after the start of the prior year.

For the year ended December 31, 1998 compared to the year ended December 31,
1997, New Railroad Properties include the Central Railroad of Indianapolis
("CERA") and the Central Railroad of Indiana ("CIND"). For the year ended
December 31, 1997 compared to the year ended December 31, 1996, New Railroad
Properties include the Indiana & Ohio Rail Corp. ("INOH"), the Connecticut
Southern Railroad ("CSOR"), the Ontario L'Orignal Railway, Inc. ("OLOR"), the
Pittsburgh Industrial Railroad, Inc. ("PIRR") and the Detroit, Toledo and
Ironton ("DTI").

25
<PAGE>
RECENT DEVELOPMENTS

In January 1999, the Brazilian government began to allow the Brazilian
currency (Real) to trade freely against the U.S. dollar. As of March 1, 1999,
the Real had devalued approximately 43% versus the U.S. dollar. As a result of
the devaluation, the Company may establish a non-cash reserve against the value
of its Brazilian investments at the end of the first quarter of 1999. The
Company will determine the amount of the reserve based upon a review of the
Brazilian railroad operations for the first quarter of 1999 and of the
devaluation of the Real at March 31, 1999. This reserve could adversely affect
the Company's financial position and the results of its operations.

In November 1998, a wholly-owned subsidiary of the Company, Goderich-Exeter
Railway ("GEXR") commenced operations on the Guelph Line under a lease
arrangement with Canadian National Railways ("CN"). The Guelph Line is a 99 mile
rail line that operates between Silver and London, Ontario and connects with the
GEXR at Stratford, Ontario.

In June 1998, the Company acquired 100% of the outstanding stock of Central
Properties, Inc. ("CPI") for approximately $14.3 million. CPI was a privately
held company which owned 100% of the stock of two railroads in Ohio and Indiana.
The Central Railroad of Indianapolis operates almost 92 miles of rail line in
north central Indiana under lease and trackage rights arrangements. The Central
Railroad of Indiana owns and operates 81 miles of rail line between Cincinnati,
Ohio and Shelbyville, Indiana. The Company began actively operating the two
railroads in August 1998.

26
<PAGE>
In October 1997, Entergy Services, Inc. ("Entergy") filed a lawsuit in the
United States District Court of the Middle District of Louisiana against Union
Pacific Railroad Company ("UP") for breach of contract as the result of service
issues. On January 28, 1999, the court decided in favor of Entergy and is in the
process of determining the materiality of the breach of contract. Should the
court decide that the breach of contract was material, Entergy may no longer be
obligated under its contract with UP. One of the Company's railroads recognizes
revenue as a result of Entergy's contract with UP and a decision in Entergy's
favor could have an adverse effect on the Company.

As a result of the acquisition of Consolidated Rail Corporation ("Conrail")
by CSX Transportation, Inc. ("CSX") and Norfolk Southern Railway Company ("NS"),
Conrail's rail lines will be divided between CSX and NS which may cause revenue
to be diverted from the New England Central Railroad, Inc. ("NECR") and the
Indiana Southern Railroad, Inc. ("ISRR"), wholly owned subsidiaries of RailTex.
In addition, the INOH, a wholly owned subsidiary of RailTex, believes the
division of rail lines between CSX and NS will cause operating inefficiencies
for INOH. The Company believes the effect on revenues and operating efficiencies
will be immaterial.

RESULTS OF OPERATIONS

YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997

The Company's net income increased by $451,000, or 4.2%, to $11.1 million in
1998 from $10.6 million in the prior year. Basic earnings per share increased by
3.4% to $1.20 from $1.16 in the prior year and diluted earnings per share
increased by 4.3% to $1.20 from $1.15 in the prior year.

OPERATING REVENUES. Operating revenues in 1998 increased by $12.2 million, or
8.2%, to $161.0 million from $148.8 million in the prior year. Operating
revenues attributable to New Railroad Properties accounted for 23.1% of this
increase. Operating revenues for Comparable Railroad Properties increased $9.1
million, or 6.1%. Carloads transported increased by 61,249 carloads, or 12.5%,
to 549,513 carloads from 488,264 carloads in the prior year. Carloads
attributable to New Railroad Properties accounted for 13.7% of this increase,
while carloads attributable to Comparable Railroad Properties increased by
52,850, or 10.8%, from the prior year.

Freight operating revenues in 1998 increased by $10.4 million, or 8.1%, to
$138.4 million from $128.0 million in the prior year. The following table
compares freight revenues, traffic volume (in carloads) and average freight
revenues per carload by commodity group for the years ended December 31, 1998
and 1997.

27
<PAGE>
<TABLE>
<CAPTION>
FREIGHT REVENUES AND CARLOADS COMPARISON BY COMMODITY GROUP

FREIGHT REVENUES CARLOADS
-------------------------------------- ------------------------------------
1998 1997 1998 1997 AVERAGE FREIGHT
----------------- ----------------- ---------------- ---------------- REVENUES PER
(DOLLARS IN THOUSANDS) CARLOAD (1)
% OF % OF % OF % OF ---------------
COMMODITY GROUP DOLLARS TOTAL DOLLARS TOTAL NUMBER TOTAL NUMBER TOTAL 1998 1997
- --------------- -------- ----- -------- ----- ------- ----- ------- ----- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Lumber and forest products ....... $ 26,699 19.3% $ 24,155 18.9% 66,684 12.1% 63,903 13.1% $ 400 $ 378
Coal ............................. 18,540 13.4 18,937 14.8 101,809 18.5 99,322 20.3 182 191
Chemicals ........................ 17,017 12.3 15,120 11.8 52,018 9.5 47,066 9.6 327 321
Scrap paper and paper products ... 11,551 8.3 12,113 9.5 35,374 6.4 33,996 7.0 327 356
Farm products .................... 11,344 8.2 10,269 8.0 47,417 8.6 40,276 8.2 239 255
Scrap metal and metal products ... 11,193 8.1 10,107 7.9 41,404 7.5 37,354 7.7 270 271
Railroad equipment ............... 8,071 5.8 3,900 3.0 63,404 11.5 24,901 5.1 127 157
Food products .................... 6,914 5.0 6,461 5.0 26,057 4.7 24,625 5.0 265 262
Non-metallic ores ................ 6,707 4.8 6,346 5.0 37,390 6.8 35,511 7.3 179 179
Minerals and stone ............... 6,001 4.3 5,228 4.1 17,244 3.1 15,457 3.2 348 338
Autos and auto parts ............. 5,446 3.9 5,385 4.2 29,947 5.4 31,003 6.3 182 174
Petroleum products ............... 4,204 3.0 5,375 4.2 12,421 2.3 14,162 2.9 338 380
Other ............................ 4,714 3.6 4,618 3.6 18,344 3.6 20,688 4.3 257 223
-------- ----- -------- ----- ------- ----- ------- -----
$138,401 100.0% $128,014 100.0% 549,513 100.0% 488,264 100.0% $ 252 $ 262
======== ===== ======== ===== ======= ===== ======= =====
</TABLE>
(1) Calculated as freight revenues divided by carloads.

Approximately $2.5 million, or 24.3%, of the $10.4 million increase in
freight operating revenues in 1998 is attributable to New Railroad Properties.
These properties added approximately 8,399 carloads consisting primarily of farm
products (3,805), chemicals (1,517) and non-metallic ores #14 and salt (931).
Freight revenues for Comparable Railroad Properties in 1998 increased by $7.9
million, or 6.1%, while carloadings for Comparable Railroad Properties increased
52,850, or 10.8%, consisting primarily of railroad equipment (38,454), chemicals
(3,435), scrap metal and metal products (3,387) and farm products (3,336).
Average freight revenues per carload decreased by $10, primarily due to the
transportation of empty coal freight cars for the UP at a lower average revenue
per carload.

Non-freight operating revenues in 1998 increased by $1.8 million, or 8.9%, to
$22.6 million from $20.8 million in the prior year. Non-freight operating
revenues include joint facilities, switching, demurrage, car hire and car repair
services performed for third parties and lease income. These revenues
contributed 14.0% of operating revenues in both 1998 and 1997. New Railroad
Properties contributed approximately 16.4% of the increase. Non-freight revenues
for Comparable Railroad Properties increased approximately $1.3 million, or
6.1%, primarily as a result of increased car repair, switching and demurrage.
This increase also reflects a one time transaction fee related to the Company's
Brazilian railroad investments and a special project for AT&T.

OPERATING EXPENSES. Operating expenses in 1998 increased by $7.6 million, or
6.0%, to $133.4 million from $125.8 million in the prior year. New Railroad
Properties represent 27.3% of the increase in expenses. Operating expenses for
Comparable Railroad Properties increased by $6.2 million, or 5.3%, and corporate
operating expenses decreased by approximately $118,000, or 0.6%. The Company's
operating ratio (operating expenses divided by operating revenues) decreased for
the year to 82.8% compared to 84.5% in the prior year, primarily as a result of
increased revenues and lower fuel prices. The Company's operating ratio for
Comparable Railroad Properties declined to 77.1%, compared to 77.6% in the prior
year.

28
<PAGE>
The following table sets forth a comparison of the Company's operating
expenses during 1998 and 1997, in dollars and as a percentage of operating
revenues.

OPERATING EXPENSES COMPARISON
(DOLLARS IN THOUSANDS)

1998 1997
--------------- ---------------
Labor and benefits ....................... $ 49,945 31.0% $ 45,973 30.9%
Equipment rents .......................... 17,405 10.8 16,192 10.9
Depreciation and amortization ............ 14,258 8.9 12,940 8.7
Purchased services ....................... 10,624 6.6 9,288 6.2
Diesel fuel .............................. 9,739 6.0 11,334 7.6
Casualties and insurance ................. 6,577 4.1 6,323 4.2
Materials ................................ 6,235 3.9 5,713 3.8
Joint facilities ......................... 5,079 3.2 4,912 3.3
Other .................................... 13,506 8.4 13,115 8.8
-------- ---- -------- ----
Total ............................... $133,368 82.8% $125,790 84.5%
======== ==== ======== ====

Labor and benefits in 1998 increased by $4.0 million, or 8.6%, to $49.9
million from $46.0 million in the prior year. Labor and benefits attributable to
New Railroad Properties accounted for 14.1% of the overall increase. Labor and
benefits for Comparable Railroad Properties increased by $3.4 million, or 8.9%,
reflecting an increase in employees and overtime related to higher traffic
volumes. The remainder of the increase reflects increased profit sharing
incentives to employees as a result of increased profitability.

Equipment rents in 1998 increased by $1.2 million, or 7.5%, to $17.4 million
from $16.2 million in the prior year. Equipment rents attributable to New
Railroad Properties accounted for 19.4% of this increase. Equipment rents for
Comparable Railroad Properties increased by $1.3 million, or 5.1%, due primarily
to additional locomotive leases as a result of increased traffic volumes.

Depreciation and amortization in 1998 increased by $1.3 million, or 10.2%, to
$14.3 million from $12.9 million in the prior year. New Railroad Properties
accounted for 20.9% of this increase. The remainder is due to depreciation
related to expansion of the vehicle fleet, rehabilitation of locomotives and
capital projects.

Purchased services in 1998 increased by $1.3 million, or 14.4%, to $10.6
million from $9.3 million in the prior year. Purchased services attributable to
New Railroad Properties accounted for 9.7% of this increase. Purchased services
for Comparable Railroad Properties increased by $1.2 million, or 16.1%,
primarily as a result of increased contract labor at several of the Company's
properties.

Diesel fuel expense in 1998 decreased by $1.6 million, or 14.1%, to $9.7
million from $11.3 million in the prior year. Diesel fuel expense for Comparable
Railroad Properties decreased by $2.2 million, or 19.3%, primarily due to lower
fuel prices during 1998.

Casualties and insurance expense in 1998 increased by approximately $254,000,
or 4.0%, to $6.6 million from $6.3 million in the prior year. Casualties and
insurance expense for Comparable Railroad Properties increased by $1.4 million,
or 28.1%, due to recording expenses for several large derailments in 1998.

Materials expense in 1998 increased by approximately $522,000, or 9.1%, to
$6.2 million from $5.7 million in the prior year. Materials costs associated
with New Railroad Properties accounted for 5.4% of the increase. Materials
expense for Comparable Railroad Properties increased by approximately $468,000,
or 9.2%, primarily as a result of increased locomotive repairs and increased car
repair activity.

29
<PAGE>
Joint facilities expense in 1998 increased by approximately $167,000, or
3.4%, to $5.1 million from $4.9 million in the prior year. Joint facilities
expense for Comparable Railroad Properties increased by approximately $160,000,
or 3.3%, due primarily to an increase in switching charges and haulage fees.

Other expenses in 1998 increased by approximately $390,000, or 3.0%, to $13.5
million from $13.1 million in the prior year. Other expenses for New Railroad
Properties totaled approximately $694,000 and were offset by a decrease in
Corporate other expenses of $830,000, or 22.5%. Other expenses for Comparable
Railroad Properties increased by approximately $582,000, or 6.2%, primarily due
to the write-down of certain operating assets.

INTEREST EXPENSE. Interest expense in 1998 increased by approximately
$709,000, or 6.7%, to $11.2 million from $10.5 million in the prior year due to
acquisition related borrowings totaling $21.2 million, primarily for the
purchase of the CPI and the completion of a track rehabilitation project at the
Company's DTI property.

OTHER INCOME, NET. Other income, net in 1998 increased by approximately
$17,000. Other income, net in 1998 consisted primarily of a gain from the sale
of 49.5% of the Company's two investments in Brazil and gains related to the
sale of certain railroad real estate. Other income, net in the prior year
consisted primarily of a $4.5 million gain due to the completion of the sale of
certain railroad real estate which was offset by a $2.1 million charge against
the Company's two investments in Brazil.

CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE, NET OF INCOME TAXES.
This line item resulted from the Company's adoption of Statement of Position
98-5 "Reporting on the Costs of Start-up Activities" ("SOP 98-5").
See further discussion in Accounting Matters below.

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

The Company's net income increased by $663,000, or 6.7%, to $10.6 million in
1997 from $10.0 million in the prior year. Basic earnings per share increased by
6.4% to $1.16 from $1.09 in the prior year and diluted earnings per share
increased by 6.5% to $1.15 from $1.08 in the prior year.

OPERATING REVENUES. Operating revenues in 1997 increased by $27.7 million, or
22.9%, to $148.8 million from $121.1 million in the prior year. Operating
revenues attributable to New Railroad Properties accounted for 79.4% of this
increase. Operating revenues for Comparable Railroad Properties increased $7.0
million, or 6.1%. Corporate operating revenues decreased by $904,000, or 106.0%.
Carloads transported increased by 128,595 carloads, or 35.8%, to 488,264
carloads from 359,669 carloads in the prior year. Carloads attributable to New
Railroad Properties accounted for 85.6% of this increase, while carloads
attributable to Comparable Railroad Properties increased by 19,642, or 5.7%,
from the prior year.

Freight operating revenues in 1997 increased by $25.0 million, or 24.3%, to
$128.0 million from $103.0 million in the prior year. The following table
compares freight revenues, traffic volume (in carloads) and average freight
revenues per carload by commodity group for the years ended December 31, 1997
and 1996.

30
<PAGE>
FREIGHT REVENUES AND CARLOADS COMPARISON BY COMMODITY GROUP
<TABLE>
<CAPTION>
FREIGHT REVENUES CARLOADS
-------------------------------------- ------------------------------------
1997 1996 1997 1996 AVERAGE FREIGHT
----------------- ----------------- ---------------- ---------------- REVENUES PER
(DOLLARS IN THOUSANDS) CARLOAD (1)
% OF % OF % OF % OF ---------------
COMMODITY GROUP DOLLARS TOTAL DOLLARS TOTAL NUMBER TOTAL NUMBER TOTAL 1997 1996
- --------------- -------- ----- -------- ----- ------- ----- ------- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Lumber and forest products ....... $ 24,155 18.9% $ 21,811 21.2% 63,903 13.1% 57,456 16.0% $ 378 $ 380
Coal ............................. 18,937 14.8 16,240 15.8 99,322 20.3 84,957 23.6 191 191
Chemicals ........................ 15,120 11.8 11,484 11.1 47,066 9.6 33,221 9.2 321 346
Scrap paper and paper products ... 12,113 9.5 9,758 9.5 33,996 7.0 24,075 6.7 356 405
Farm products .................... 10,269 8.0 8,986 8.7 40,276 8.2 34,767 9.7 255 258
Scrap metal and metal products ... 10,107 7.9 7,419 7.2 37,354 7.7 23,231 6.5 271 319
Food products .................... 6,461 5.0 5,944 5.8 24,625 5.0 22,049 6.1 262 270
Non-metallic ores ................ 6,346 5.0 6,898 6.7 35,511 7.3 36,365 10.1 179 190
Autos and auto parts ............. 5,385 4.2 478 0.5 31,003 6.3 738 0.2 174 647
Petroleum products ............... 5,375 4.2 4,767 4.6 14,162 2.9 11,623 3.2 380 410
Minerals and stone ............... 5,228 4.1 5,008 4.9 15,457 3.2 14,306 4.0 338 350
Railroad equipment ............... 3,900 3.0 1,374 1.3 24,901 5.1 7,284 2.0 157 189
Other ............................ 4,618 3.6 2,850 2.7 20,688 4.3 9,597 2.7 223 297
-------- ----- -------- ----- ------- ----- ------- -----
$128,014 100.0% $103,017 100.0% 488,264 100.0% 359,669 100.0% $ 262 $ 286
======== ===== ======== ===== ======= ===== ======= =====
</TABLE>
(1) Calculated as freight revenues divided by carloads.

Approximately $20.0 million, or 79.9%, of the $25.0 million increase in
freight operating revenues in 1997 is attributable to New Railroad Properties.
These properties added approximately 110,109 carloads consisting primarily of
auto and auto parts (30,239), railroad equipment (19,167), scrap metal and metal
products (13,377), chemicals (11,559), scrap paper and paper products (7,438),
farm products (6,423) and other (9,703). Freight revenues for Comparable
Railroad Properties in 1997 increased by $5.4 million, or 5.5%, while
carloadings for Comparable Railroad Properties increased 19,642, or 5.7%,
consisting primarily of coal due to a new customer at one of the Company's
properties.

Average freight revenues per carload decreased by $24, primarily due to more
bridge traffic, as a percent of total freight revenues in 1997. Bridge revenue,
as a percentage of total freight revenues, increased to 13.2% from 4.2% in 1996.
This increase reflects the higher level of bridge traffic at our New Railroad
Properties relative to Comparable Railroad Properties.

Non-freight operating revenues in 1997 increased by $2.7 million, or 14.9%,
to $20.8 million from $18.1 million in the prior year. Non-freight operating
revenues include joint facilities, switching, demurrage, car hire and car repair
services performed for third parties and lease income. These revenues
contributed 14.0% and 14.9% of operating revenues in 1997 and 1996,
respectively. New Railroad Properties contributed approximately 75.2% of the
increase. Non-freight revenues for Comparable Railroad Properties increased
approximately $1.6 million, or 10.0%, primarily as a result of increased car
repair, switching, car hire and other income which were partially offset by a
decrease in demurrage. In the prior year approximately $904,000 of other income
was recorded, primarily a result of a one time transaction fee income in
connection with the Company's investments in Brazil and higher logistics
contract income.

OPERATING EXPENSES. Operating expenses in 1997 increased by $26.7 million, or
27.0%, to $125.8 million from $99.1 million in the prior year. New Railroad
Properties represent 77.5% of the increase in expenses. Operating expenses for
Comparable Railroad Properties increased by approximately $665,000, or 0.8%, and
corporate operating expenses increased by $6.3 million, or 46.7%, primarily due
to increases in labor and benefits, casualties and insurance, depreciation and
amortization and other expenses. The Company's operating ratio (operating
expenses divided by operating revenues) increased for the year to 84.5% compared
to 81.8% in the prior year, primarily as a result of expenses associated with
the start-up of recently acquired railroad properties. The Company's operating
ratio for Comparable Railroad Properties improved to 74.2%, compared to 76.5% in
the prior year.

31
<PAGE>
The following table sets forth a comparison of the Company's operating
expenses during 1997 and 1996, in dollars and as a percentage of operating
revenues.

OPERATING EXPENSES COMPARISON
(DOLLARS IN THOUSANDS)

1997 1996
--------------- --------------
Labor and benefits ........................ $ 45,973 30.9% $35,025 28.9%
Equipment rents ........................... 16,192 10.9 13,845 11.5
Depreciation and amortization ............. 12,940 8.7 10,147 8.4
Diesel fuel ............................... 11,334 7.6 9,307 7.7
Purchased services ........................ 9,288 6.2 8,129 6.7
Casualties and insurance .................. 6,323 4.2 5,867 4.8
Materials ................................. 5,713 3.8 4,387 3.6
Joint facilities .......................... 4,912 3.3 2,430 2.0
Other ..................................... 13,115 8.8 9,928 8.2
-------- ---- ------- ----
Total ................................ $125,790 84.5% $99,065 81.8%
======== ==== ======= ====

Labor and benefits in 1997 increased by $10.9 million, or 31.3%, to $46.0
million from $35.0 million in the prior year. Labor and benefits attributable to
New Railroad Properties accounted for 63.5% of the overall increase. Labor and
benefits for Comparable Railroad Properties increased by $2.7 million, or 9.8%,
reflecting increased profit sharing incentives to employees of Comparable
Railroad Properties as a result of increased profitability of those railroads,
increased overtime related to increased traffic volumes on certain railroads and
the maintenance of track and signal by employees rather than contract forces on
certain railroads. The remainder of the increase is due to an increase in
employment at the Company's corporate headquarters.

Equipment rents in 1997 increased by $2.3 million, or 17%, to $16.2 million
from $13.8 million in the prior year. Equipment rents attributable to New
Railroad Properties increased $3.5 million. Equipment rents for Comparable
Railroad Properties decreased by $1.2 million, or 8.9%, due primarily to
decreased car hire expense.

Depreciation and amortization in 1997 increased by $2.8 million, or 27.5%, to
$12.9 million from $10.1 million in the prior year. New Railroad Properties
accounted for 47.5% of this increase. The remainder is due to capital projects
completed for Comparable Railroad Properties, increased locomotive depreciation
related to fleet expansion and depreciation of new computer hardware and
software.

Diesel fuel expense in 1997 increased by $2.0 million, or 21.8%, to $11.3
million from $9.3 million in the prior year. New Railroad Properties accounted
for 94.6% of this increase. Diesel fuel expense for Comparable Railroad
Properties remained relatively flat, due to a combination of increased
consumption related to increased carloadings and lower fuel prices during 1997.
The Company took several steps to reduce its exposure to fuel price
fluctuations, including entering into a fuel hedging collar for approximately
36.0% of the Company's estimated annual fuel consumption.

Purchased services in 1997 increased by $1.2 million, or 14.3%, to $9.3
million from $8.1 million in the prior year. Purchased services attributable to
New Railroad Properties accounted for 59.5% of this increase. Purchased services
for Comparable Railroad Properties decreased by approximately $104,000, or 1.7%.
The remainder is primarily due to increased headquarters' expense due in part to
certain non-recurring expenses.

Casualties and insurance expense in 1997 increased by approximately $456,000,
or 7.8%, to $6.3 million from $5.9 million in 1996. New Railroad Properties
increased by approximately $665,000, while casualties and insurance expense for
Comparable Railroad Properties decreased by $1.4 million, or 26.5%, due to fewer
incidents and derailments in 1997. Casualties and insurance expense increased by
$1.2 million in corporate self-insured retention and litigation liability
reserves.

32
<PAGE>
Materials expense in 1997 increased by $1.3 million, or 30.2%, to $5.7
million from $4.4 million in the prior year. Materials costs associated with New
Railroad Properties accounted for 42.9% of the increase. Materials expense for
Comparable Railroad Properties increased by approximately $438,000, or 11.6%,
primarily as a result of increased car repair activity in the current year. The
remainder of the increase is due to an increase in locomotive repair materials.

Joint facilities expense in 1997 increased by $2.5 million, or 102.1%, to
$4.9 million from $2.4 million in the prior year. Joint facilities expense
increased by $2.7 million reflecting the higher level of joint facilities
expense for New Railroad Properties relative to Comparable Railroad Properties.
Joint facilities expense for Comparable Railroad Properties decreased by
approximately $227,000, or 11.9%, due primarily to a decrease in switching
charges and haulage fees.

Other expenses in 1997 increased by $3.2 million, or 32.1%, to $13.1 million
from $9.9 million in the prior year. Other expenses for New Railroad Properties
accounted for 73.5% of this increase. Other expenses for Comparable Railroad
Properties increased by approximately $367,000, or 5.6%, primarily due to an
increase in property taxes and travel. Corporate other expenses increased by
approximately $826,000, or 28.6%, primarily due to an increase in corporate
travel and communications.

INTEREST EXPENSE. Interest expense in 1997 increased by $3.6 million, or
52.7%, to $10.5 million from $6.9 million in the prior year due to borrowings
totaling $42.0 million to fund the acquisition of New Railroad Properties and an
additional $21.2 million to fund the Company's equity investments in Brazil.

OTHER INCOME, NET. Other income in 1997 increased by $2.7 million, or 176.0%,
to $4.2 million from $1.5 million in the prior year primarily due to the
completion of the sale of certain railroad real estate which resulted in a gain
of $4.5 million which was offset by a $2.1 million charge against the Company's
two investments in Brazil.

LIQUIDITY AND CAPITAL RESOURCES

The Company has historically relied primarily on cash generated from
operations to fund working capital and capital expenditure needs relating to
ongoing operations while relying on contributed capital and borrowed funds to
finance its acquisitions.

During 1998, the Company generated cash flows from operations totaling $28.4
million which was primarily used to fund capital expenditures in 1998 as follows
(in thousands):

Track ...................................... $16,048
Locomotives ................................ 5,681
DTI track rehabilitation ................... 5,371
Technology ................................. 1,903
Other ...................................... 1,317
-------
$30,320
=======

In November 1998, RIHI signed an agreement to sell a 49.5% interest in its
Brazilian railroad investments to GEF for approximately $11.0 million. The
transaction closed on December 31, 1998. Proceeds from the transaction were used
to reduce amounts outstanding on the Company's senior credit facilities.

In September 1998, the Company amended the terms of its credit agreements to
increase its $10.0 million U.S. working capital facility to $15.0 million ("U.S.
Working Capital Facility") and decrease its $75.0 million U.S. acquisition
facility to $70.0 million ("U.S. Acquisition Facility").

33
<PAGE>
In September 1998, the Company acquired approximately 10 miles of track from
the BNSF for approximately $810,000. This acquisition was funded by borrowings
under the U.S. Acquisition Facility.

In June 1998, the Company acquired 100% of the outstanding stock of CPI. The
purchase price was $14.3 million, including a $14.0 million cash payment and the
assumption of approximately $266,000 of long-term debt. This acquisition was
funded by borrowings under the U.S. Acquisition Facility.

At December 31, 1998, the Company had long-term senior debt, capital leases
and senior subordinated debt outstanding totaling $131.6 million, which
constituted 47.7% of its total capitalization. Comparable figures at December
31, 1997 were $125.7 million and 48.5%, respectively.

At December 31, 1998, availability under the U.S. Working Capital Facility,
the U.S. Acquisition Facility, the CDN $5.0 million Canadian working capital
facility ("Canadian Working Capital Facility") and the CDN $25.0 million
Canadian acquisition agreement was, in U.S. dollars, $12.7 million, $51.4
million, $1.3 million and $16.3 million, respectively. The unused portion of all
of the Company's senior bank credit facilities is subject to a 0.25% commitment
fee.

The Company currently anticipates that its maintenance capital expenditure
requirements in 1999 for track, locomotives and equipment on properties it
currently operates will be approximately $20.0 million. Additionally, computer
hardware, software and related capital expenditures are currently expected to be
approximately $2.0 million in 1999.

In August 1995, the Company entered into a ten year Information Technology
Services Agreement ("ITS Agreement") with Electronic Data Systems Corporation
("EDS"). Under the ITS Agreement, EDS is responsible for the management
information systems of the Company, including developing, obtaining licenses for
and maintaining new software for the Company, coordinating the acquisition and
maintenance of computers and related equipment and coordinating the maintenance
of the Company's existing software. The Company currently pays EDS $1.8 million
annually which is subject to annual escalation based on the Consumer Price
Index. The ITS Agreement is subject to earlier termination under certain limited
conditions.

Covenants contained in the agreements evidencing the Company's senior bank,
senior unsecured and senior subordinated debt prohibit the Company from paying
dividends on its capital stock and limit its ability to incur additional
indebtedness, create liens on its assets, make capital expenditures and
repurchase shares of its capital stock or any outstanding options or other
rights to acquire capital stock of the Company. The Company is also limited in
its ability to make loans, investments or guarantees. Additionally, the Company
is required to maintain a minimum tangible net worth and certain ratios of
leverage and cash flow to debt service. At December 31, 1998, the Company was in
compliance with all covenants.

The Company believes its cash flow from operations, together with available
amounts under the U.S. Working Capital Facility and Canadian Working Capital
Facility, will allow it to meet its liquidity and capital expenditure
requirements for railroads it currently operates through the expiration of these
facilities in April 1999. The Company further believes that these facilities
will be renewed and extended upon expiration.

MARKET RISK

The Company's earnings and cash flows are subject to fluctuations due to
changes in foreign currency exchange rates, interest rates and diesel fuel
prices. At December 31, 1998, the Company did not hold and had not issued
financial instruments for trading purposes.

34
<PAGE>
FOREIGN CURRENCY

The Company's foreign currency risk arises from owning and operating
railroads in Canada and from its Brazilian railroad investments. At December 31,
1998, the Company had not entered into any transactions to manage this risk.

The financial position and results of operations of the Company's Canadian
subsidiaries are measured using the local currency as the functional currency.
Assets and liabilities are translated into U.S. dollars at exchange rates in
effect at year-end, while revenues and expenses are translated at average
exchange rates prevailing during the year. The resulting translation gains and
losses are charged directly to cumulative translation adjustment, a component of
shareholders' equity, and are not included in income until realized through the
sale or liquidation of the investment. At December 31, 1998 the Company's
cumulative translation adjustment totaled approximately $922,000, or less than
1% of total shareholders' equity. As such, the Company does not believe its
foreign currency risk arising from its Canadian operations is material to its
financial position.

The Company's Brazilian railroad investments are accounted for using the cost
method of accounting and are valued at the lower of cost or market. At December
31, 1998, the Company owned approximately 5.0% and 2.1% of the outstanding stock
of FCA and FSA, respectively, for a total net investment approximating $9.0
million. The Company believes its Brazilian railroad investments were
appropriately valued at that time. However, on January 13, 1999, the Brazilian
government began to allow the Brazilian currency (Real) to trade freely against
the U.S. dollar. As of March 1, 1999, the Real had devalued approximately 43%
versus the U.S. dollar. As a result of the devaluation, the Company may
establish a non-cash reserve against the value of its Brazilian investments at
the end of the first quarter of 1999. The Company will determine the amount of
the reserve based upon a review of the Brazilian railroad operations for the
first quarter of 1999 and of the devaluation of the Real at March 31, 1999. This
reserve could adversely affect the Company's financial position and the results
of its operations.

INTEREST RATES

The Company's interest rate risk results from holding variable rate debt
obligations, as an increase in interest rates would result in lower earnings and
increased cash outflows. At December 31, 1998, the Company had not entered into
any transactions to manage this risk.

At December 31, 1998, the Company's variable rate debt totaled approximately
$22.5 million, or 17% of the Company's total debt obligation. Assuming a 100
basis point increase in interest rates from the interest rates in effect at
December 31, 1998, the Company would incur approximately $225,000 in additional
interest expense, or 1.1% of its 1998 pre-tax net income before cumulative
effect of a change in accounting principle. As such, the Company does not
believe its interest rate risk arising from its variable rate debt obligations
is material to its results of operations.

DIESEL FUEL PRICES

The Company is exposed to fluctuations in diesel fuel prices, as an increase
in the price of diesel fuel would result in lower earnings and increased cash
outflows. At December 31, 1998, the Company had entered into two commodity
collar transactions to hedge market risks of diesel fuel prices. The first
collar was effective April 1, 1998 and terminates March 31, 1999 and represents
notional amounts totaling 225,000 gallons per month with a cap price of $0.5600
per gallon and a floor price of $0.4375 per gallon. This transaction hedges
approximately 18% of the Company's estimated monthly diesel fuel consumption.
The second collar is effective July 1, 1998 and terminates June 30, 1999 and
represents notional amounts totaling 225,000 gallons per month with a cap price
of $0.5600 per gallon and a floor price of $0.4490 per gallon. This transaction
hedges approximately 18% of the Company's estimated monthly diesel fuel
consumption. The unrealized loss on these transactions totaled approximately
$249,000 at December 31, 1998.

35
<PAGE>
In February 1999, the Company entered into two additional contracts to hedge
its market risk from diesel fuel prices. The first consists of three monthly
swap agreements which fix the price of 725,000 gallons of diesel fuel in April,
May and June 1999 at $0.3215, $0.3280 and $0.3375 per gallon, respectively. The
second is a cap which fixes the price of 725,000 gallons of diesel fuel per
month for the period July 1999 to June 2000 at $0.4500 per gallon. The cost of
the cap was approximately $209,000, which will be amortized over the period
covered by the cap. These transactions hedge approximately 57% of the Company's
estimated monthly diesel fuel consumption.

By entering into these transactions, the Company believes it has reduced its
exposure to increases in diesel fuel prices to a level that would not materially
affect its results of operations.

INFLATION

In recent years, inflation has not had a significant impact on the Company's
operations. The Company's contracts with connecting carriers typically include
clauses that adjust the Company's per car fees based on the STB's cost or
inflation indices.

SEASONALITY

Except for revenue from shipment of farm products, which represent less than
10.0% of revenues, the Company's operating revenues from existing operations
have not historically been subject to significant seasonal changes.

ACCOUNTING MATTERS

In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities.
It requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. This statement is effective for all fiscal quarters of fiscal
years beginning after June 15, 1999. Initial application of this statement
should be as of the beginning of an entity's fiscal quarter. Earlier application
of this statement is encouraged, but it is permitted only as of the beginning of
any fiscal quarter that begins after the issuance of this statement. The Company
believes the adoption of this statement will not have a material impact on the
financial condition or results of operations of the Company.

In April 1998, the Accounting Standards Executive Committee issued SOP 98-5.
SOP 98-5 requires costs associated with start-up activities to be expensed as
incurred. SOP 98-5 is effective for financial statements for fiscal years
beginning after December 15, 1998, although earlier application is encouraged.
The Company adopted SOP 98-5 for the year ended December 31, 1998. This adoption
resulted in the recognition of a non-recurring charge of approximately
$1,703,000 (net of income taxes) entitled, "Cumulative effect of a change in
accounting principle (net of income taxes)" in the accompanying consolidated
financial statements. Prior to the adoption of SOP 98-5, the Company capitalized
the costs associated with start-up activities, including the acquisition of new
railroad properties, and amortized those costs over five years. Prospectively,
the Company's results of operations will reflect higher costs associated with
the acquisition of new railroad properties in the period of acquisition.

In February 1998, the FASB issued Statement of Financial Accounting Standards
No. 132, "Employers' Disclosures about Pensions and Other Post-retirement
Benefits". The Company does not provide post-retirement or post-employment
benefits to its employees.

36
<PAGE>
In June 1997, the FASB issued Statement of Financial Accounting Standards No.
131, "Disclosures about Segments of an Enterprise and Related Information"
("SFAS 131"). SFAS 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. This statement is effective for financial
statements for periods beginning after December 15, 1997. The Company adopted
this statement for the year ended December 31, 1998.

In June 1997, the FASB issued Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income" ("SFAS 130"). SFAS 130 establishes
standards for reporting and display of comprehensive income and its components
in a full set of general-purpose financial statements. This statement is
effective for fiscal years beginning after December 15, 1997. The Company
adopted this statement for the year ended December 31, 1998.

In June 1996, the FASB issued Statement of Financial Accounting Standards No.
125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities" ("SFAS 125"). SFAS 125 provides accounting and
reporting standards for, among other things, the transfer and servicing of
financial assets, such as factoring receivables with recourse. This statement is
effective for transfers and servicing of financial assets occurring after
December 31, 1996, and is to be applied prospectively. Earlier or retroactive
application is not permitted. In December 1996, the FASB issued Statement of
Financial Accounting Standards No. 127, "Deferral of the Effective Date of
Certain Provisions of FASB Statement No 125" ("SFAS 127"). SFAS 127 moved the
effective date of the provisions under SFAS 125 to some, but not all, transfers
and servicing of assets occurring after December 31, 1997. The Company's
adoption of this statement did not have an impact on its financial condition or
results of operations.

YEAR 2000 COMPLIANCE

The Company has completed its assessment of its Year 2000 compliance. This
assessment included a review of all of the Company's information technology
systems. The Company currently believes that its largest information technology
applications are Year 2000 compliant. However, the Company will continue to
conduct testing on certain of those systems through July 1999. The Company has
determined that certain components of its information technology infrastructure
are not Year 2000 compliant. These components include servers, components of its
wide area network and certain personal computer software packages. The Company
plans to upgrade all of these non-compliant components to make them Year 2000
compliant by November 1999. The total estimated external cost associated with
these upgrades are approximately $300,000, of which approximately $175,000 has
already been incurred. Internal costs associated with these upgrades primarily
consist of payroll and related costs for Company employees and the portion of
the EDS information technology outsourcing fees allocated to Year 2000
remediation. Such costs total approximately $650,000, the majority of which has
not yet been incurred.

The Company has also evaluated its non-information technology systems that
use micro controllers, such as locomotives, railroad crossing signals, telephone
systems, dispatching systems and other railroad equipment, that may be subject
to Year 2000 risk. The Company believes that its locomotives, railroad crossing
signals and the majority of its telephone systems, dispatching systems and other
railroad equipment are Year 2000 compliant. However, the Company has determined
that certain telephone systems, dispatching systems and other railroad equipment
are not Year 2000 compliant. The Company plans to replace the non-compliant
telephone systems, dispatching systems and other railroad equipment by July 1999
at a total estimated external cost of $275,000, none of which has yet been
incurred. Internal costs associated with these upgrades are not expected to be
significant.

37
<PAGE>
All affected systems of the Company are scheduled to be Year 2000 compliant,
tested and verified by November 30, 1999; however, the Company cannot guarantee
that none of its systems will malfunction. As a precaution against railroad
crossing signals that may malfunction as a result of the Year 2000 problem, the
first train through all railroad crossings on RailTex tracks after 12/31/99 will
operate under a "Stop and Flag" order. This order requires the train to stop at
each railroad crossing, determine if the railroad crossing signal is working and
in the event that it is not working, have a person control traffic through the
crossing with the use of flags. Any malfunctioning railroad crossing signals
that are discovered as a result of this process will be replaced by the Company.

As an additional part of its assessment, the Company has been investigating
the Year 2000 compliance status of its vendors and customers. The Company has
completed its assessment of the status of its product vendors and the results of
that compliance are included in the above disclosures. The Company has not been
able to determine the compliance status of the majority of its service vendors
due to unresponsiveness from the vendors. Should any of its significant vendors
fail to become Year 2000 compliant, the Company plans to switch to vendors that
are Year 2000 compliant. The Company has determined that approximately 50% of
its customers are or expect to become Year 2000 compliant. The Company has been
unable to determine the status of the remaining 50% of its customers, again due
to unresponsiveness. However, the Company is continuing to contact the
unresponsive service vendors and customers in order to determine their Year 2000
compliance status. If any of the Company's significant vendors or customers fail
to successfully and timely achieve Year 2000 compliance, the Company's business
or operations may be adversely affected.

The Company is a member of the American Association of Railroad's Rail
Industry Year 2000 Coordination Task Force, which was formed to share Year 2000
issues related to the railroad industry, to help test for Year 2000 compliance
and to help implement Year 2000 compliance changes. The Company, and the
railroad industry as a whole, are susceptible to increased risks, including
significant business interruption, should any of the Class I railroads fail to
timely achieve Year 2000 compliance.

The above disclosure concerning the Company's Year 2000 compliance, and that
of its vendors and customers, contains "forward-looking" statements that are
based upon the beliefs of the Company's management and are subject to all of the
qualifications set forth at the beginning of Management's Discussion and
Analysis of Financial Condition and Results of Operations and this Form 10-K.

38
<PAGE>
ITEM 8. FINANCIAL STATEMENTS

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
RAILTEX, INC. AND SUBSIDIARIES:
Report of Independent Public Accountants.................................................................................. 40
Consolidated Statements of Income for the years ended December 31, 1998, 1997 and 1996.................................... 41
Consolidated Balance Sheets as of December 31, 1998 and 1997.............................................................. 42
Consolidated Statements of Shareholders' Equity for the years ended December 31, 1998, 1997
and 1996.............................................................................................................. 43
Consolidated Statements of Cash Flows for the years ended December 31, 1998, 1997 and 1996................................ 44
Notes to Consolidated Financial Statements................................................................................ 45
</TABLE>
QUARTERLY FINANCIAL DATA
(in thousands, except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
<S> <C> <C> <C> <C>
1998: (1)
Operating revenues .............................................. $38,412 $39,135 $40,027 $43,446
Operating income ................................................ 6,757 6,498 6,957 7,440
Net income before cumulative effect of a change in
accounting principle ....................................... 2,636 2,629 3,033 4,480
Net income ...................................................... 933 2,629 3,033 4,480
Net income before cumulative effect of a change in
accounting principle per basic share ....................... 0.29 0.29 0.33 0.49
Net income before cumulative effect of a change in
accounting principle per diluted share ..................... 0.29 0.28 0.33 0.48

1997:
Operating revenues .............................................. $34,175 $37,365 $37,970 $39,281
Operating income ................................................ 5,052 6,225 6,348 5,376
Net income ...................................................... 1,575 2,418 2,830 3,801
Basic earnings per share ........................................ 0.17 0.27 0.31 0.41
Diluted earnings per share ...................................... 0.17 0.26 0.31 0.41
</TABLE>
(1) Some components of the quarterly financial data disclosed for 1998 do not
agree with amounts previously reported in the Company's Quarterly Report on
Form 10-Q due to the Company's adoption of Statement of Position 98-5,
"Reporting on the Costs of Start-Up Activities". This adoption resulted in
the recognition of a non-recurring charge of approximately $1,703,000 (net of
income taxes) for the first quarter of 1998 and reductions in depreciation
and amortization expense totaling approximately $249,000, $264,000 and
$169,000 from the previously reported first, second and third quarter
amounts, respectively. See further discussion in Note 1 of Notes to
Consolidated Financial Statements.

39
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To RailTex, Inc.:

We have audited the accompanying consolidated balance sheets of RailTex, Inc.
(a Texas corporation) and subsidiaries as of December 31, 1998 and 1997, and the
related consolidated statements of income, shareholders' equity and cash flows
for each of the three years in the period ended December 31, 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 financial statements referred to above present fairly, in
all material respects, the financial position of RailTex, Inc. and subsidiaries
as of December 31, 1998 and 1997, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 1998, in
conformity with generally accepted accounting principles.

ARTHUR ANDERSEN LLP

San Antonio, Texas
January 27, 1999

40
<PAGE>
RAILTEX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
OPERATING REVENUES ............................................... $ 161,020 $ 148,791 $ 121,106

OPERATING EXPENSES:
Transportation ................................................ 56,852 54,361 39,006
General and administrative .................................... 26,675 26,367 20,948
Equipment ..................................................... 18,937 17,954 15,718
Maintenance of way ............................................ 16,646 14,168 13,246
Depreciation and amortization ................................. 14,258 12,940 10,147
--------- --------- ---------
Total operating expenses ................................... 133,368 125,790 99,065
--------- --------- ---------
OPERATING INCOME ................................................. 27,652 23,001 22,041

INTEREST EXPENSE ................................................. (11,236) (10,527) (6,893)

OTHER INCOME, NET ................................................ 4,215 4,198 1,521
--------- --------- ---------
INCOME BEFORE INCOME TAXES AND CUMULATIVE
EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE ....................... 20,631 16,672 16,669

INCOME TAXES ..................................................... (7,853) (6,048) (6,708)
--------- --------- ---------
NET INCOME BEFORE CUMULATIVE EFFECT OF A
CHANGE IN ACCOUNTING PRINCIPLE ................................... 12,778 10,624 9,961

CUMULATIVE EFFECT OF A CHANGE IN
ACCOUNTING PRINCIPLE (NET OF INCOME TAXES) ....................... (1,703) -- --
--------- --------- ---------
NET INCOME ....................................................... $ 11,075 $ 10,624 $ 9,961
========= ========= =========
BASIC EARNINGS PER SHARE:

NET INCOME BEFORE CUMULATIVE EFFECT
OF A CHANGE IN ACCOUNTING PRINCIPLE ........................... $ 1.39 $ 1.16 $ 1.09

CUMULATIVE EFFECT OF A CHANGE IN
ACCOUNTING PRINCIPLE (NET OF INCOME TAXES) .................... (0.19) -- --
--------- --------- ---------
NET INCOME .................................................... $ 1.20 $ 1.16 $ 1.09
========= ========= =========
WEIGHTED AVERAGE NUMBER OF BASIC SHARES
OF COMMON STOCK OUTSTANDING ...................................... 9,205 9,153 9,112

DILUTED EARNINGS PER SHARE:

NET INCOME BEFORE CUMULATIVE EFFECT
OF A CHANGE IN ACCOUNTING PRINCIPLE ........................... $ 1.38 $ 1.15 $ 1.08

CUMULATIVE EFFECT OF A CHANGE IN
ACCOUNTING PRINCIPLE (NET OF INCOME TAXES) .................... (0.18) -- --
--------- --------- ---------
NET INCOME .................................................... $ 1.20 $ 1.15 $ 1.08
========= ========= =========
WEIGHTED AVERAGE NUMBER OF DILUTED
SHARES OF COMMON STOCK OUTSTANDING ............................... 9,251 9,222 9,231
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.

41
<PAGE>
RAILTEX, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
ASSETS DECEMBER 31,
---------------------------
1998 1997
--------- ---------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents ................................................................... $ 1,243 $ 570
Accounts receivable, less doubtful receivables of $844 in 1998; $1,563 in 1997 .............. 33,866 32,171
Prepaid expenses and other current assets ................................................... 4,848 2,527
Deferred tax assets, net .................................................................... 1,906 1,777
--------- ---------
Total current assets ..................................................................... 41,863 37,045
--------- ---------
PROPERTY AND EQUIPMENT, NET .................................................................... 291,779 259,444
--------- ---------
OTHER ASSETS:
Investments in Brazilian railroad companies ................................................. 19,994 17,809
Other, net .................................................................................. 8,709 5,610
--------- ---------
Total other assets ....................................................................... 28,703 23,419
--------- ---------
Total assets ............................................................................. $ 362,345 $ 319,908
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES:
Short-term notes payable .................................................................... $ 215 $ 384
Current portion of long-term debt ........................................................... 8,568 7,763
Accounts payable ............................................................................ 20,574 18,829
Accrued liabilities ......................................................................... 17,729 17,434
--------- ---------
Total current liabilities ................................................................ 47,086 44,410

DEFERRED INCOME TAXES, NET ..................................................................... 30,294 20,521

LONG-TERM DEBT, LESS CURRENT PORTION ........................................................... 122,982 117,893

OTHER LIABILITIES .............................................................................. 6,835 3,826
--------- ---------
Total liabilities ........................................................................ 207,197 186,650
--------- ---------
COMMITMENTS AND CONTINGENCIES

MINORITY INTEREST IN BRAZILIAN INVESTMENT ...................................................... 11,000 --
--------- ---------
SHAREHOLDERS' EQUITY:
Preferred Stock; $1.00 par value; 10 million shares authorized;
no shares issued or outstanding ........................................................... -- --
Common Stock; $.10 par value; 30 million shares authorized;
issued and outstanding 9,273,963 in 1998; 9,160,924 in 1997 ............................... 927 916
Paid-in capital ............................................................................. 85,115 83,799
Retained earnings ........................................................................... 59,976 48,901
Deferred compensation ....................................................................... (948) --
Accumulated other comprehensive income ...................................................... (922) (358)
--------- ---------
Total shareholders' equity ............................................................... 144,148 133,258
--------- ---------
Total liabilities and shareholders' equity ............................................... $ 362,345 $ 319,908
========= =========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.

42
<PAGE>
RAILTEX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK
------------------- ACCUMULATED
SHARES $.10 OTHER TOTAL
ISSUED AND PAR PAID-IN RETAINED DEFERRED COMPREHENSIVE SHAREHOLDERS'
OUTSTANDING VALUE CAPITAL EARNINGS COMPENSATION INCOME EQUITY
----------- ----- ------- -------- ------------ ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, December 31, 1995 ............ 9,111 $ 911 $83,439 $ 28,316 $ -- $ (64) $ 112,602
Comprehensive income:
Net income ......................... -- -- -- 9,961 -- -- 9,961
Foreign currency translation ....... -- -- -- -- -- (51) (51)
----------- ----- ------- -------- ------------ ------------- -------------
Total comprehensive income ....... -- -- -- 9,961 -- (51) 9,910
Exercise of stock options .......... 13 1 190 -- -- -- 191
----------- ----- ------- -------- ------------ ------------- -------------
BALANCE, December 31, 1996 ............ 9,124 912 83,629 38,277 -- (115) 122,703
Comprehensive income:
Net income ......................... -- -- -- 10,624 -- -- 10,624
Foreign currency translation ....... -- -- -- -- -- (243) (243)
----------- ----- ------- -------- ------------ ------------- -------------
Total comprehensive income ....... -- -- -- 10,624 -- (243) 10,381
Exercise of stock options .......... 37 4 170 -- -- -- 174
----------- ----- ------- -------- ------------ ------------- -------------
BALANCE, December 31, 1997 ............ 9,161 916 83,799 48,901 -- (358) 133,258
Comprehensive income:
Net income ......................... -- -- -- 11,075 -- -- 11,075
Foreign currency translation ....... -- -- -- -- -- (564) (564)
----------- ----- ------- -------- ------------ ------------- -------------
Total comprehensive income ....... -- -- -- 11,075 -- (564) 10,511
Exercise of stock options .......... 33 3 326 -- -- -- 329
Restricted stock awards ............ 80 8 990 -- (998) -- --
Amortization of deferred compensation -- -- -- -- 50 -- 50
----------- ----- ------- -------- ------------ ------------- -------------
BALANCE, December 31, 1998 ............ 9,274 $ 927 $85,115 $ 59,976 $ (948) $ (922) $ 144,148
=========== ===== ======= ======== ============ ============= =============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.

43
<PAGE>
RAILTEX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
------------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income ............................................................................ $ 11,075 $ 10,624 $ 9,961
Adjustments to reconcile net income to net cash provided by operating activities:
Cumulative effect of a change in accounting principle .............................. 2,747 -- --
Depreciation and amortization ...................................................... 14,258 12,940 10,147
Deferred income taxes .............................................................. 5,432 2,182 3,424
Provision for losses on accounts receivable ........................................ 187 638 783
Amortization of deferred financing costs ........................................... 388 384 348
Gain on sale of assets ............................................................. (1,867) (6,771) (1,280)
Gain on sale of minority interest .................................................. (2,045) -- --
Write down of investments .......................................................... -- 2,100 --
Other .............................................................................. 82 (275) --
Changes in working capital--
Accounts receivable ............................................................. (952) (5,975) (6,950)
Prepaid expenses and other current assets ....................................... (1,635) (59) 51
Accounts payable and accrued liabilities ........................................ 777 10,109 7,035
-------- -------- --------
Net cash provided by operating activities .......................................... 28,447 25,897 23,519
-------- -------- --------

INVESTING ACTIVITIES:
Purchase of property and equipment .................................................... (30,320) (35,507) (21,393)
Proceeds from sale of property and equipment .......................................... 2,288 7,327 2,354
Purchase of new properties and related equipment and other costs ...................... (13,096) (25,978) (16,682)
Purchase of investments in Brazilian railroad companies and related costs ............. -- (1,362) (21,775)
Sale of preferred shares in Brazilian railroad company ................................ -- 2,758 --
Proceeds from sale of minority interest ............................................... 10,861 -- --
Organization and acquisition costs .................................................... (79) (97) (88)
Increase in other long-term assets .................................................... (1,617) (152) (917)
-------- -------- --------
Net cash used in investing activities .............................................. (31,963) (53,011) (58,501)
-------- -------- --------
FINANCING ACTIVITIES:
(Decrease) increase in short-term notes payable ....................................... (355) 218 (937)
Proceeds from long-term debt .......................................................... 21,900 75,000 41,569
Principal payments on long-term debt and capital leases ............................... (16,687) (53,398) (5,197)
Net (decrease) increase in working capital facilities ................................. (750) 4,000 --
Deferred financing costs .............................................................. (3) (369) (465)
Issuance of common stock .............................................................. 247 74 25
-------- -------- --------
Net cash provided by financing activities .......................................... 4,352 25,525 34,995
-------- -------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH .................................................. (163) 51 (35)
-------- -------- --------
NET CHANGE IN CASH AND CASH EQUIVALENTS .................................................. 673 (1,538) (22)

CASH AND CASH EQUIVALENTS, beginning of year ............................................. 570 2,108 2,130
-------- -------- --------
CASH AND CASH EQUIVALENTS, end of year ................................................... $ 1,243 $ 570 $ 2,108
======== ======== ========

The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>

44
<PAGE>
RAILTEX, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. NATURE OF THE COMPANY'S BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES

The accompanying consolidated financial statements include the accounts of
RailTex, Inc. and its wholly-owned subsidiaries. References to "RailTex" or the
"Company" mean RailTex, Inc. and, unless the context indicates otherwise, its
consolidated subsidiaries. All significant intercompany transactions and
accounts have been eliminated in consolidation.

The Company is an operator of short line railroads in North America. Its
holdings include short line railroads concentrated in the Southeastern and
Midwestern United States, in the Great Lakes and New England regions of the
United States and in Eastern Canada. The Company also owns investments in two
Brazilian railroads and provides management consulting services in Kazakhstan.

ESTIMATES IN FINANCIAL STATEMENTS

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 may differ from those estimates.

CASH AND CASH EQUIVALENTS AND CONSOLIDATED STATEMENTS OF CASH FLOWS

All short-term investments which mature in less than 90 days when purchased
are considered cash equivalents. Cash equivalents are stated at cost, which
approximates market value.

45
<PAGE>
RAILTEX, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)

Supplemental disclosures of cash flow information (in thousands):
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------
1998 1997 1996
------- ------ -------
<S> <C> <C> <C>
Cash paid during the year for:
Interest ............................................................................ $11,207 $8,962 $ 5,795
Income taxes ........................................................................ 2,514 2,604 2,008
Non-cash investing and financing activities:
Grants .............................................................................. 2,918 352 859
Capital leases ...................................................................... 1,959 1,844 599
Tax benefit from exercise of non-qualified stock options ............................ 76 100 83
Amortization of deferred compensation ............................................... 50 -- --

Liabilities and long-term debt assumed in connection with the acquisition of
railroad companies:
Fair value of assets acquired ...................................................... $15,809 $ -- $17,669
Cash paid for capital stock ........................................................ 14,003 -- 8,873
------- ------ -------
Liabilities and long-term debt assumed ............................................. $ 1,806 $ -- $ 8,796
======= ====== =======
</TABLE>

PROPERTY AND EQUIPMENT

Property and equipment are carried at historical cost. Acquired railroad
property is recorded at the purchased cost. Major renewals or betterments are
capitalized; routine maintenance and repairs, which do not improve the asset or
extend asset lives, are charged to expense when incurred. Gains or losses on
sales or other dispositions are credited or charged to income. Depreciation is
computed using the straight-line method over periods ranging from 8 to 30 years
for roadway and structures, 3 to 15 years for locomotives and other railroad
equipment and 3 to 10 years for other non-railroad equipment. Leasehold
improvements are amortized over the life of the lease or the service lives of
the improvements, whichever is shorter.

The Company has adopted Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets To Be Disposed Of". This
statement requires the recognition of an impairment loss on a long-lived asset
held for use when events and circumstances indicate that the estimate of
undiscounted future cash flows expected to be generated by the asset are less
than its carrying amount. The Company recorded an impairment loss totaling
approximately $375,000 related to one of its railroad properties for the year
ended December 31, 1998.

INVESTMENTS IN BRAZILIAN RAILROAD COMPANIES

Investments in Brazilian railroad companies represent minority interest in
Ferrovia Centro Atlantica, S.A. ("FCA") and Ferrovia Sul Atlantico, S.A. ("FSA")
(see Note 5), are accounted for using the cost method of accounting and are
valued at the lower of cost or market.

46
<PAGE>
RAILTEX, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)

OTHER ASSETS

At December 31, 1998, other assets primarily included deferred financing
costs, while at December 31, 1997 other assets also included organization and
acquisition costs. Financing costs are amortized over the related loan terms
using the effective interest method. Amortization of these costs is included in
interest expense. Organization and acquisition costs are direct costs incurred
in acquiring and licensing operating properties and consist of directly
attributable legal and other costs. Prior to the Company's adoption of Statement
of Position 98-5, "Reporting on the Costs of Start-up Activities" ("SOP 98-5")
(see further discussion below), these costs were amortized using the
straight-line method over five years. Amortization of financing and organization
and acquisition costs totaled approximately $0.4 million, $1.6 million and $1.3
million for the years ended December 31, 1998, 1997 and 1996, respectively.
Accumulated amortization of these costs was approximately $2.5 million and $7.1
million at December 31, 1998 and 1997, respectively.

REVENUE RECOGNITION

Freight revenues are recognized as shipments initially move onto the
Company's tracks, which, due to the relatively short length of haul, is not
materially different from the recognition of revenues as shipments progress.
Non-freight revenues, including joint facilities, switching, demurrage, car hire
and car repair services, are recognized as the service is performed.

INCOME TAXES

The Company files consolidated U.S. Federal income tax returns which include
all of its U.S. subsidiaries and separate Canadian federal income tax returns
for each Canadian subsidiary. Deferred income taxes are provided when certain
revenues and expenses are reported in periods which are different for financial
reporting purposes than for income tax reporting purposes.

Deferred tax liabilities and assets are recorded based on the enacted income
tax rates which are expected to be in effect in the periods in which the
deferred tax liability or asset is expected to be settled or realized. A change
in the tax laws or rates results in adjustments to the deferred tax liabilities
and assets. The effect of such adjustments is included in income in the period
in which the tax laws or rates are changed.

FOREIGN CURRENCY TRANSLATION

The financial position and results of operations of the Company's Canadian
subsidiaries are measured using the local currency as the functional currency.
Assets and liabilities of operations denominated in foreign currencies are
translated into U.S. dollars at exchange rates in effect at year-end, while
revenues and expenses are translated at average exchange rates prevailing during
the year. The resulting translation gains and losses are charged directly to
cumulative translation adjustment, a component of shareholders' equity, and are
not included in net income until realized through sale or liquidation of the
investment.

CURRENT VULNERABILITY DUE TO CERTAIN CONCENTRATIONS AND MAJOR CUSTOMERS

The Company regularly grants trade credit to all of its customers. In
addition, the Company grants trade credit to other railroads through the routine
interchange of traffic. The Company's accounts receivable are well diversified
except for a concentration of accounts receivable with some Class I railroads.
The Company's management believes these Class I railroads are large, financially
strong companies, and thus believe the Company's exposure to credit risk is
minimal. Approximately 16% and 20% of the Company's accounts receivable were due
from one Class I railroad at December 31, 1998 and 1997, respectively. No other
customer individually accounted for more than 10% of the Company's accounts
receivable balance at December 31, 1998 or 1997.

47
<PAGE>
RAILTEX, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)

During 1998, the Company served more than 1,100 customers who shipped and
received a wide variety of products. Although most of the Company's railroads
have a well-diversified customer base, several have one or two dominant
customers. The Company's largest customer in 1998 and 1997 was Canadian National
Railways ("CN"), representing 7.0% and 8.1% of operating revenues, respectively.
The Company's largest customer in 1996 was Indianapolis Power & Light Company,
representing 4.6% of operating revenues.

PRICE RISK MANAGEMENT ACTIVITIES

The Company historically has hedged certain anticipated transactions.
Interest rate swaps and diesel fuel price contracts with third parties are used
to hedge interest rates and diesel fuel costs. Hedges of anticipated
transactions are accounted for under the deferral method with gains and losses
on these transactions recognized in interest expense and operating expenses, as
applicable, when the hedged transaction occurs. The Company does not currently
hold or issue financial instruments for trading purposes.

NEW ACCOUNTING PRONOUNCEMENTS

In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities.
It requires that an entity recognize all derivatives as either assets or
liabilities in the Consolidated Balance Sheet and measure those instruments at
fair value. This statement is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999. Initial application of this statement should be
as of the beginning of an entity's fiscal quarter. Earlier application of this
statement is encouraged, but it is permitted only as of the beginning of any
fiscal quarter that begins after the issuance of this statement. The Company
believes the adoption of this statement will not have a material impact on the
financial condition or results of operations of the Company.

In June 1997, the FASB issued Statement of Financial Accounting Standards No.
131, "Disclosures about Segments of an Enterprise and Related Information"
("SFAS 131"). SFAS 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. This statement is effective for financial
statements for periods beginning after December 15, 1997. The Company adopted
this statement for the year ended December 31, 1998.

48
<PAGE>
RAILTEX, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)

In June 1996, the FASB issued Statement of Financial Accounting Standards No.
125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities" ("SFAS 125"). SFAS 125 provides accounting and
reporting standards for, among other things, the transfer and servicing of
financial assets, such as factoring receivables with recourse. This statement is
effective for transfers and servicing of financial assets occurring after
December 31, 1996, and is to be applied prospectively. Earlier or retroactive
application is not permitted. In December 1996, the FASB issued Statement of
Financial Accounting Standards No. 127, "Deferral of the Effective Date of
Certain Provisions of FASB Statement No. 125" ("SFAS 127"). SFAS 127 moved the
effective date of the provisions under SFAS 125 to some, but not all, transfers
and servicing of assets occurring after December 31, 1997. The Company's
adoption of this statement did not have an impact on its financial condition or
results of operations.

RECLASSIFICATIONS

Certain reclassifications have been made in the prior period financial
statements to conform with the current period presentation.

2. RELATED PARTY TRANSACTIONS

The Company purchases, in the normal course of business, various parts for
locomotives and grade crossing signals from certain subsidiaries of Harmon
Industries, Inc., of which the Company's Founder and Chairman Emeritus is a
director. Purchases from subsidiaries of Harmon Industries, Inc. for the years
ended December 31, 1998, 1997 and 1996 totaled approximately $1,219,000,
$462,000 and $586,000, respectively.

THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK.

49
<PAGE>
RAILTEX, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)

3. EARNINGS PER SHARE

In 1997, the Company adopted Statement of Financial Accounting Standards No.
128, "Earnings Per Share" ("SFAS 128"), which was effective for fiscal years
ending after December 15, 1997. As a result, the Company's reported earnings per
share for 1996 was restated. Basic earnings per share is determined by dividing
net income by the weighted average number of shares of common stock outstanding
during the period. Diluted earnings per share is determined by dividing net
income by the weighted average number of shares of common stock and common stock
equivalents outstanding during the period. Stock options with an exercise price
below fair market value for any of the periods presented are considered common
stock equivalents.

The following is a reconciliation of the numerators and the denominators of
the basic and diluted earnings per share computations (in thousands, except per
share amounts).
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
------------------------------------
1998 1997 1996
---------- ------- ------
<S> <C> <C> <C>
NUMERATOR:
Net income before cumulative effect of a change in accounting principle ............... $ 12,778 $10,624 $9,961

Cumulative effect of a change in accounting principle (net of income taxes) ........... (1,703) -- --
---------- ------- ------
Net income ............................................................................ $ 11,075 $10,624 $9,961
========== ======= ======
DENOMINATOR:
Weighted average number of basic share of common stock outstanding .................... 9,205 9,153 9,112

Effect of dilutive stock options ...................................................... 46 69 119
---------- ------- ------
Weighted average number of diluted shares of common stock outstanding ................. 9,251 9,222 9,231
========== ======= ======
BASIC EARNINGS PER SHARE:
Before cumulative effect of a change in accounting principle .......................... $ 1.39 $ 1.16 $ 1.09

Cumulative effect of a change in accounting principle (net of income taxes) ........... (0.19) -- --
---------- ------- ------
Total ................................................................................. $ 1.20 $ 1.16 $ 1.09
========== ======= ======
DILUTED EARNINGS PER SHARE:
Before cumulative effect of a change in accounting principle .......................... $ 1.38 $ 1.15 $ 1.08

Cumulative effect of a change in accounting principle (net of income taxes) ........... (0.18) -- --
---------- ------- ------
Total ................................................................................. $ 1.20 $ 1.15 $ 1.08
========== ======= ======
</TABLE>
The effect of this accounting change on previously reported earnings per
share ("EPS") data was as follows:

1996
--------
Primary EPS, as reported ................................ $ 1.08
Effect of SFAS 128 ...................................... .01
--------
Basic EPS, as restated .................................. $ 1.09
========
Fully diluted EPS, as reported .......................... $ 1.08
Effect of SFAS 128 ...................................... --
--------
Diluted EPS, as restated ................................ $ 1.08
========

50
<PAGE>
RAILTEX, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)

4. PROPERTY AND EQUIPMENT, NET

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

<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1998 1997
--------- ---------
<S> <C> <C>
Roadway and structures ...................................... $ 263,541 $ 227,455
Locomotives and other railroad equipment .................... 61,831 55,171
Office furniture and other equipment ........................ 13,751 11,487
Equipment and vehicles held under capital leases (see Note 7) 5,730 5,264
Vehicles .................................................... 1,120 1,189
--------- ---------
345,973 300,566
Less accumulated depreciation and amortization .............. (54,194) (41,122)
--------- ---------
$ 291,779 $ 259,444
========= =========
</TABLE>
5. INVESTMENTS IN BRAZILIAN RAILROAD COMPANIES

In June 1996, a newly formed wholly-owned subsidiary of the Company, RailTex
International Holdings, Inc. ("RIHI"), purchased an investment, totaling
approximately Brazilian Reals ("R") 16.0 million (U.S. $16.1 million), in FCA,
which was awarded a 30 year concession to operate the 4,400 mile Center Eastern
Network of the Brazilian federal railroad. The purchase price of the concession,
which was the government's minimum bid price, was approximately R316.9 million
(U.S. $318.0 million). The Brazilian government structured the transaction as a
30 year concession with a 20.0% down payment and future lease payments due in
quarterly installments after an initial two year grace period.

In December 1996, RIHI purchased an approximate 6% interest, for
approximately R5.4 million (U.S. $5.2 million), in FSA, which was awarded a
concession to operate the 4,200 mile Southern Network of the Brazilian federal
railroad. The purchase price of the concession was approximately R216.6 million
(U.S. $208.0 million). The Brazilian government structured the transaction as a
30 year concession with a down payment consisting of a 20.0% installment and a
payment consisting of 100.0% of the difference between the Brazilian
government's minimum bid price and the purchase price. The remainder of the
purchase price is structured as lease payments due in quarterly installments
after an initial two year grace period.

RIHI's initial investments in FCA and FSA were funded by borrowings under the
Company's U.S. Acquisition Facility, as defined in Note 7. In February 1997,
RIHI sold 2.8 million shares of preferred stock in FCA for approximately R2.9
million (U.S. $2.8 million), of which it used approximately R1.4 million (U.S.
$1.3 million) to fund a portion of the investments in FSA.

RIHI accounts for the FCA and FSA investments under the cost method of
accounting. In the fourth quarter of 1997, the Company recorded a write down of
its investments in FCA and FSA totaling approximately $2.1 million before tax
and approximately $1.4 million after tax, or $0.15 per basic and diluted share,
reflecting the effect of the devaluation in the Brazilian Real.

The continuing economic uncertainty existing in Brazil has impacted the
ability of FCA and FSA to finance short-term capital needs. As a result, during
1998 the Board of Directors of FSA implemented a call for additional capital
contributions from existing shareholders. The Company did not participate in the
capital call and, as a result, its equity percentage in FSA was diluted. The
respective Boards of Directors of FCA and FSA may implement additional capital
contribution calls from existing shareholders in the future. The Company may or
may not choose to participate in such capital calls. In the event that the
Company does not participate, its equity percentage could be further diluted.

51
<PAGE>
RAILTEX, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)

In November 1998, RIHI signed an agreement to sell a 49.5% interest in its
Brazilian railroad investments to Global Environment Fund ("GEF"), a Washington,
D.C. based investment fund, for approximately $11.0 million. RIHI will retain
the remaining 50.5% interest; however, under the related agreement RIHI can be
required to repurchase GEF's shares after five years at a price equal to the
lower of 95% of the appraised fair market value or certain collar amounts
provided for in the related agreement. The transaction closed on December 31,
1998 and RailTex recorded a gain totaling approximately $2.0 million before tax
and approximately $1.3 million after tax, or $0.14 per basic and diluted share,
on the transaction. This gain is included within "Other income, net" in the
accompanying consolidated statement of income. Proceeds from the transaction
were used to reduce amounts outstanding on the Company's senior credit
facilities.

Including the effects of the FSA capital call and the divestiture to GEF, at
December 31, 1998 RIHI owned approximately 5.0% and 2.1% of the outstanding
stock of FCA and FSA, respectively.

6. SHORT-TERM NOTES PAYABLE

As of December 31, 1998 and 1997, the Company had outstanding unsecured short
term notes payable to insurance companies totaling approximately $215,000 and
$384,000, respectively. The notes bear interest at 7.75% and 6.92%,
respectively, and are due in monthly installments of principal and interest
totaling approximately $37,000 and $67,000 through June 1999 and 1998,
respectively. For the years ended December 31, 1998 and 1997, the weighted
average interest rate for the short term notes payable was 7.2% and 6.7%,
respectively.

52
<PAGE>
RAILTEX, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)

7. LONG-TERM DEBT

Long-term debt consisted of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1998 1997
--------- ---------
<S> <C> <C>
Senior unsecured notes payable to two institutions; interest at 7.44%; interest only
due semiannually; principal balance payable through six annual mandatory
prepayments beginning July 2007 ............................................................. $ 50,000 $ 50,000
Senior unsecured notes payable to four institutions; interest at 7.23%; interest only
due semiannually; principal balance due September 2005 ...................................... 40,000 40,000
Senior unsecured notes payable to banks (U.S. Acquisition Facility); interest is
variable (LIBOR based weighted average interest rate of 6.46% on $18.3 million in
borrowings and U.S. prime based interest rate of 7.75% on $0.3 million in borrowings
at December 31, 1998; LIBOR based weighted average interest rate of 7.66% at
December 31, 1997); interest due monthly; principal partially due through quarterly
principal payments through April 2002, with remaining balance due April 2002 ............... 18,575 11,956
Senior unsecured notes payable to two institutions; interest at 9.21%; interest
only due semiannually; principal balance of $6.5 million and $3.3 million due
September 2005 and October 2005, respectively ................................................ 9,756 10,499
Senior unsecured subordinated notes; interest at 12.0%; interest only due semiannually;
principal balance of $2.5 million and $2.5 million due January 2001 and January 2002,
respectively ................................................................................ 5,000 5,000
Senior unsecured notes payable to banks (U.S. Working Capital Facility); interest is
variable (LIBOR based weighted average interest rate of 6.375% and 7.85% at
December 31, 1998 and 1997, respectively); interest only due monthly through April
1999, when all borrowings become due ........................................................ 2,000 4,000
Senior unsecured notes payable to banks (Canadian Working Capital Facility);
interest is variable (90 day Canadian BA rate of 6.145% and 5.25% at December 31,
1998 and 1997, respectively; interest only due monthly through April 1999, when
all borrowings become due ................................................................... 1,951 769
Senior unsecured notes payable to banks (Canadian Acquisition Facility); interest is
variable; interest due monthly; principal partially due through quarterly
principal payments through April 2002, with remaining balance due April 2002 ................ -- --
Capital lease obligations; interest at rates ranging from 7.25% to 8.5% at December
31, 1998; payable in variable monthly installments through September 2000 ................... 3,513 2,890
Other, primarily due to state agencies; interest at rates ranging from 5.0% to 7.9%
at December 31, 1998; payable in variable installments through January 2008 ................. 755 542
--------- ---------
Total long-term debt ........................................................................... 131,550 125,656
Less current portion ........................................................................... (8,568) (7,763)
--------- ---------
Long-term debt, less current portion ........................................................... $ 122,982 $ 117,893
========= =========
</TABLE>
At December 31, 1998, the Company had a $300,000 letter of credit ("LOC")
outstanding under its U.S. Working Capital Facility, as defined below. This LOC
collateralizes a loan under a state program to encourage railroad capital
improvement projects.

53
<PAGE>
RAILTEX, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)

In July 1997, the Company completed a $50.0 million private placement of
senior unsecured notes with two institutions. The proceeds were used to reduce
outstanding bank debt under the U.S. Acquisition Facility, as defined below.

In May 1996, the Company entered into a U.S. credit agreement consisting of
a $10.0 million U.S. working capital facility ("U.S. Working Capital Facility")
and a $75.0 million U.S. acquisition facility ("U.S. Acquisition Facility"). In
September 1998, the terms of the credit agreement were amended to increase the
U.S. Working Capital Facility to $15.0 million and decrease the U.S. Acquisition
Facility to $70.0 million. The Company may borrow under the U.S. Working Capital
Facility to provide working capital and may borrow under the U.S. Acquisition
Facility to finance acquisitions of property and equipment which meet criteria
as defined in the related credit agreement. The facilities expire on April 30,
1999. Interest is payable monthly under the U.S. Working Capital Facility until
April 30, 1999, when all borrowings become due. Interest only is payable monthly
on new borrowings under the U.S. Acquisition Facility until April 30 of each
year, when all such borrowings are rolled into a term note. Term notes are
amortized over a six year period; however, all borrowings are due not later than
April 30, 2002. Both the U.S. Working Capital Facility and U.S. Acquisition
Facility bear interest based on stated borrowing margins, as defined in the
related credit agreement, over the London Interbank Offered Rate ("LIBOR") or at
the U.S. prime rate. The borrowing margins are based on a matrix dependent upon
the Company's funded debt to EBITDA ratio and are adjusted quarterly. At
December 31, 1998, availability under the U.S. Working Capital Facility and U.S.
Acquisition Facility was approximately $12.7 million and $51.4 million,
respectively. The unused portion of these facilities is subject to a 0.25%
commitment fee.

In June 1996, a wholly-owned subsidiary of the Company, RailTex Canada, Inc.
("RCI") entered into a Canadian credit agreement consisting of a CDN $5.0
million Canadian working capital facility ("Canadian Working Capital Facility")
and a CDN $25.0 million Canadian acquisition facility ("Canadian Acquisition
Facility"). The Canadian credit agreements contain terms and conditions similar
to the U.S. agreements and expire April 30, 1999. The Canadian facilities bear
interest based on stated borrowing margins, as defined in the related credit
agreements, over the Canadian bankers acceptance rate ("BA Rate") or at the
Canadian prime rate. The borrowing margins are based on a matrix dependent upon
the Company's funded debt to EBITDA and are adjusted quarterly. RailTex, Inc.,
the parent company, is a guarantor of the Canadian credit facilities. At
December 31, 1998, availability under the Canadian Working Capital Facility was
approximately CDN $2.0 million (U.S. $1.3 million). There were no borrowings
under the Canadian Acquisition Facility at December 31, 1998. The unused portion
of these facilities is subject to a 0.25% commitment fee.

The Company believes that the U.S. Working Capital Facility, U.S. Acquisition
Facility, Canadian Working Capital Facility and Canadian Acquisition Facility
will be renewed and extended upon their expiration in April 1999.

54
<PAGE>
RAILTEX, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)

Maturities of long-term debt were as follows (in thousands):

FOR THE YEARS ENDED DECEMBER 31,

1999 .............. $ 8,568
2000 .............. 4,642
2001 .............. 6,981
2002 .............. 6,668
2003 .............. 4,553
Thereafter ........ 100,138
--------
Total ....... $131,550
========

8. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT

At December 31, 1998, the Company had entered into two commodity collar
transactions to hedge market risks of diesel fuel prices. The first collar was
effective April 1, 1998 and terminates March 31, 1999 and represents notional
amounts totaling 225,000 gallons per month with a cap price of $0.5600 per
gallon and a floor price of $0.4375 per gallon. This transaction hedges
approximately 18% of the Company's estimated monthly diesel fuel consumption.
The second collar is effective July 1, 1998 and terminates June 30, 1999 and
represents notional amounts totaling 225,000 gallons per month with a cap price
of $0.5600 per gallon and a floor price of $0.4490 per gallon. This transaction
hedges approximately 18% of the Company's estimated monthly diesel fuel
consumption. The Company realizes any gains or losses resulting from fuel price
fluctuations and related collar transactions each period. There is no carrying
value recorded on the balance sheet from the collar transactions.

In February 1999, the Company entered into two additional contracts to hedge
its market risk from diesel fuel prices. The first consists of three monthly
swap agreements which fix the price of 725,000 gallons of diesel fuel in April,
May and June 1999 at $0.3215, $0.3280 and $0.3375 per gallon, respectively. The
second is a cap which fixes the price of 725,000 gallons of diesel fuel per
month for the period July 1999 to June 2000 at $0.4500 per gallon. The cost of
the cap was approximately $209,000, which will be amortized over the period
covered by the cap. These transactions hedge approximately 57% of the Company's
estimated monthly diesel fuel consumption.

At December 31, 1998 and 1997, the Company had not entered into any interest
rate swaps contracts. In December 1997, the Company terminated a Canadian dollar
based interest rate swap agreement scheduled to expire in 1999 by paying
approximately CDN $420,000 (U.S. $303,000).

9. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS

The following methods and assumptions were used to estimate the fair value of
each class of financial instrument held by the Company:

Current assets and current liabilities: The carrying value approximates fair
value due to the short maturity of these items.

Accrued interest payable: The carrying amount approximates fair value as the
majority of interest payments are made monthly or semiannually.

Long-term investment: The carrying value approximates fair value based on
discounted cash flows.

55
<PAGE>
RAILTEX, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)

Long-term debt, senior subordinated debt and senior notes payable: The fair
value of the Company's long-term debt, senior subordinated debt and senior notes
payable is based on secondary market indicators. Since the Company's debt is not
quoted, estimates are based on each obligation's characteristics, including
remaining maturities, interest rates, credit rating, collateral, amortization
schedule and liquidity. The carrying amount approximates fair value.

Commodity collar transactions: The fair value of commodity collar
transactions is the amount at which they could be settled, based on estimates
obtained from dealers. The unrealized loss on the commodity collar transactions
at December 31, 1998 and 1997 was approximately $249,000 and $76,000,
respectively.

10. EMPLOYEE BENEFITS

STOCK OPTIONS

In October 1995, Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("FAS 123"), was issued. FAS 123
defines a fair value based method of accounting for employee stock options or
similar equity instruments and encourages all entities to adopt that method of
accounting for all of their employee stock compensation plans. Under the fair
value based method, compensation cost is measured at the grant date based on the
value of the award and is recognized over the service period of the award, which
is usually the vesting period. However, FAS 123 also allows entities to continue
to measure compensation costs for employee stock compensation plans using the
intrinsic value method of accounting prescribed by APB Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25"). The Company adopted FAS
123 effective January 1, 1996, and has elected to remain with the accounting
prescribed by APB 25. The Company has made the required disclosures prescribed
by FAS 123.

The Company grants non-qualified stock options to outside Directors and key
employees of the Company. In September 1993, the Board of Directors and
shareholders of the Company approved an equity incentive plan ("1993 Plan"). In
June 1996, the 1993 Plan was amended to (i) increase the maximum number of
shares of Common Stock issuable under the 1993 Plan from 750,000 to 1,250,000,
without reduction for the number of shares issued upon exercise of options
granted outside of the 1993 Plan; (ii) extend the exercise period for Outside
Director's Options from two to ten years and increase the number of shares which
may be purchased under Outside Director's Options from 2,000 to 3,000; (iii)
specify 1,250,000 shares as the maximum number of shares issuable under the 1993
Plan to any employee in any year; (iv) permit the 1993 Plan administrator to
specify shorter vesting periods for non-qualified options; and (v) clarify that
cashless exercises of stock rights are permitted under the 1993 Plan.

Under the Company's stock option plan, options have been granted to outside
directors and certain key employees of the Company at prices equal to or more
than the fair market value of the Company's stock on the date of grant and
expire 10 years from the date of grant. Stock options granted to outside
directors are exercisable immediately and stock options granted to key employees
vest at a rate of 20% per year, unless specified otherwise.

56
<PAGE>
RAILTEX, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)

A summary of the status of the Company's 1993 Plan, as amended, for the years
ended December 31, 1998, 1997 and 1996, and changes during the years ending on
those dates is presented below:

<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------------------------
1998 1997 1996
-------------------- -------------------- --------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding, beginning of the year ............................ 581,783 $ 18.07 743,954 $ 19.00 399,792 $ 13.94
Granted ....................................................... 710,216 13.42 188,973 19.31 455,750 24.08
Exercised ..................................................... (33,039) 7.49 (58,667) 4.71 (13,684) 7.92
Forfeited ..................................................... (404,346) 20.22 (292,477) 23.93 (97,904) 23.51
-------- -------- --------
Outstanding, end of year ...................................... 854,614 13.60 581,783 18.07 743,954 19.00
======== ======== ========
Options exercisable end of year ............................... 194,654 $ 13.33 245,940 $ 13.50 222,918 $ 8.95
======== ======== ======== ======== ======== ========

Weighted average fair value of options granted during year .... $ 8.41 $ 12.66 $ 15.64
======== ======== ========
</TABLE>
The following table summarizes the information about the 1993 Plan options
outstanding at December 31, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------ ----------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
EXERCISE PRICE OUTSTANDING LIFE PRICE EXERCISABLE PRICE
- -------------- ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$ 3.74 - 8.80 .................. 114,243 2.44 $ 5.93 114,243 $ 5.93
$11.94 - 18.50 ................. 661,214 9.67 13.37 19,040 15.20
$24.25 - 27.75 ................. 79,157 6.49 26.56 61,371 26.53
----------- -----------
854,614 8.41 $ 13.60 194,654 $ 13.33
=========== ===========
</TABLE>
In November 1998, the Board of Directors of the Company granted employee
stock options to its current employee option holders other than its then
Chairman of the Board and its Chief Executive Officer at an exercise price of
$11.9375 per share, the then current market value of the Company's common stock.
The options vest over five years in accordance with the Company's 1993 Plan, as
amended. In order to obtain the newly granted stock options the employees were
required to tender all previously granted employee options for cancellation. As
to any employee, the amount of shares included under the new options were
reduced from the number of shares covered by the canceled options by the same
percentage as the new option exercise price was less than the canceled option
exercise price. The reduction in the number of options outstanding and the
reduced exercise price is reflected in the tables above.

Because the Company has elected to remain with the accounting prescribed by
APB 25, no compensation cost has been recognized for its 1993 Plan. Had
compensation cost for the Company's stock-based compensation plans been
determined on the fair value of the grant dates for awards under those plans
consistent with the method of SFAS 123, the Company's net income, earnings per
basic share and earnings per diluted share would have decreased to the pro forma
amounts indicated below (in thousands, except per share amounts):

57
<PAGE>
RAILTEX, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)

FOR THE YEARS ENDED DECEMBER 31,
------------------------------------------
1998 1997 1996
---------- ---------- ----------
Net income:
As reported ............ $ 11,075 $ 10,624 $ 9,961
Pro forma .............. $ 9,362 $ 9,289 $ 8,173

Basic earnings per share:
As reported ............ $ 1.20 $ 1.16 $ 1.09
Pro forma .............. $ 1.02 $ 1.01 $ 0.90

Diluted earnings per share:
As reported ............ $ 1.20 $ 1.15 $ 1.08
Pro forma .............. $ 1.01 $ 1.01 $ 0.89

The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1998, 1997 and 1996, respectively:

Dividend yield of 0.0% for all years; expected volatility of 42.0%, 42.2% and
42.5%; risk-free interest rates of 5.6%, 6.5% and 6.1%; and expected lives of
10, 10, and 8.4 years.

In 1998, the Company, under the 1993 Plan, granted 80,000 restricted shares
in the form of the Company's common stock to key executives. Of the 80,000
restricted shares awarded in 1998, 30,000 vest ratably over three years and
50,000 vest ratably over five years. The restricted shares will also vest in the
event of a change in control or termination, not for cause. The unvested portion
of the restricted shares forfeit if the key executive is terminated for cause
during the restriction period. The awards were recorded at the fair market value
of the Company's common stock on the date of grant as deferred compensation and
will be amortized over the restriction period. For the year ended December 31,
1998, the Company recorded compensation expense of approximately $50,000.

EMPLOYEE BONUS PROGRAM

The Company has various performance-based, cash incentive compensation
programs which include all employees. Total cash incentive compensation of
approximately $3,591,000, $3,081,000 and $2,350,000 was awarded under the
various incentive compensation programs in 1998, 1997 and 1996, respectively.

In addition, headquarters' senior management, railroad general managers and
executive management are also awarded, through the 1993 Plan, stock options and
performance shares on an annual basis. Employees must be employed by the Company
at the end of three years from the date of the award to receive the performance
shares. During the three year period, the number of shares to be awarded can
increase by a maximum of 200.0% or decrease to zero as determined by the
Company's total shareholder return as compared to benchmarks, as defined in the
plan. As of December 31, 1998, a total of 20,457 performance shares were
outstanding for potential future distribution in the year 2001. At December 31,
1998, the Company had not recorded any compensation expense related to the
performance shares. In addition to stock options and performance shares, certain
key executives were also awarded restricted shares in the form of the Company's
common stock as discussed above.

58
<PAGE>
RAILTEX, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)

RETIREMENT PLANS

The Company has a 401(k) profit sharing plan ("401(k) Plan") for all eligible
employees of the Company, as defined in the 401(k) Plan document. The 401(k)
Plan qualifies under Section 401(k) of the Internal Revenue Code as a salary
reduction plan. Employees may elect to contribute a certain percentage of their
salary on a before-tax basis. Employees are immediately fully vested in their
contributions and begin vesting in employer contributions after one year of
service, as defined in the 401(k) Plan document. The 401(k) Plan is a defined
contribution plan with employer contributions made solely at the discretion of
the Board of Directors.

Effective July 1, 1995, the 401(k) Plan was amended to provide for a Company
matching contribution for certain employees of RailTex, Inc., the parent
company, who are not covered under the Railroad Retirement and Railroad
Unemployment Insurance Acts ("The Retirement Acts"). The Company matches
employee contributions, for these employees, at the rate of 200.0% on employee
contributions up to 5.0% of eligible compensation. Employees begin vesting in
the employer matching contributions after one year of service. Company matching
contributions to the 401(k) Plan totaled approximately $314,000, $230,000 and
$134,000 in 1998, 1997 and 1996, respectively.

EMPLOYEE OPEN MARKET STOCK PURCHASE PLAN

The Company has an Employee Open Market Stock Purchase Plan ("Stock Purchase
Plan"). The purpose of the Stock Purchase Plan is to allow employees of the
Company to participate in the Company's future. The Stock Purchase Plan is a
payroll deduction plan which permits employees who meet specified length of
service requirements to purchase shares, on an after-tax basis, of the Company's
common stock on the open market at prevailing market prices. The Company pays
the brokerage commissions on all purchases and incurs the administrative
expenses associated with the Stock Purchase Plan. Stock Purchase Plan expenses
in 1998, 1997 and 1996 were not material.

EXECUTIVE DEFERRED COMPENSATION

During 1995, the Company implemented an Executive Deferred Compensation Plan
wherein certain key employees are provided with life insurance protection in an
amount sufficient to provide supplemental income, based upon a percentage of the
employee's base salary, at retirement.

The Executive Deferred Compensation Plan is funded through the purchase of
split-dollar life insurance contracts. Upon death or retirement, the participant
or the participant's estate must reimburse the Company for all policy premiums
paid. Also, should employment terminate prior to death or retirement, the
participant may forfeit, at the discretion of the Compensation Committee, any
future rights in the insurance policy. Premiums paid under this Plan for 1998,
1997 and 1996 were approximately $407,000, $311,000 and $309,000, respectively.
The combined cash surrender value of these policies was approximately $859,000
and $468,000 at December 31, 1998 and 1997, respectively.

POST-RETIREMENT AND POST-EMPLOYMENT BENEFITS

The Company does not provide post-retirement or post-employment benefits to
its employees.

59
<PAGE>
RAILTEX, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)

11. INCOME TAXES

Income tax expense consisted of the following (in thousands):

FOR THE YEARS ENDED
DECEMBER 31,
--------------------------
1998 1997 1996
------- ------ ------
United States:
Federal--
Current ..................................... $ 1,486 $2,358 $1,702
Deferred .................................... 4,672 1,837 2,941
------- ------ ------
6,158 4,195 4,643
------- ------ ------
State--
Current ..................................... (180) 965 771
Deferred .................................... 970 36 140
------- ------ ------
790 1,001 911
------- ------ ------
Foreign:
Current ..................................... 635 543 811
Deferred .................................... 270 309 343
------- ------ ------
905 852 1,154
------- ------ ------
$ 7,853 $6,048 $6,708

Tax effect of change in accounting principle ...... (1,044) -- --
------- ------ ------
$ 6,809 $6,048 $6,708
======= ====== ======

The following summarizes the estimated tax effect of significant cumulative
temporary differences that are included in the net deferred income tax liability
(in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1998 1997
-------- --------
<S> <C> <C>
Differences in depreciation and amortization ..................... $ 33,009 $ 22,462
Accruals and reserves not deducted for tax purposes until paid
or realized ................................................... (1,333) (2,566)
Federal benefit of state taxes ................................... (890) (379)
Charitable contribution carryforward ............................. (1,291) (1,206)
AMT credit carryforward .......................................... (993) --
Valuation allowance .............................................. -- 450
Other items, net ................................................. (114) (17)
-------- --------
Net deferred tax liability .................................. $ 28,388 $ 18,744
======== ========
</TABLE>
There were no valuation allowances against deferred tax assets at December
31, 1998. However, the Company had recorded a valuation allowance of $450,000
against its charitable contribution carryforward at December 31, 1997, that was
fully reversed in 1998.

60
<PAGE>
RAILTEX, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)

The reconciliation of the U.S. statutory tax rate to the effective income tax
rate follows:
<TABLE>
<CAPTION>
FOR THE YEARS
ENDED DECEMBER 31,
----------------------------
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
United States statutory rate ............................ 35.0% 35.0% 34.3%
Effect of foreign operations ............................ 1.0 1.3 0.9
State income taxes, net of federal income tax benefit ... 4.8 5.0 5.0
Contribution for tax purposes, net of valuation allowance -- (5.0) --
Reversal of valuation allowance ......................... (2.5) -- --
Other, net .............................................. (0.2) -- --
------ ------ ------
38.1% 36.3% 40.2%
====== ====== ======
</TABLE>
12. LEASES

Operating lease expense for the years ended December 31, 1998, 1997 and 1996
totaled approximately $7,550,000, $6,080,000 and $4,929,000, respectively.

The minimum future lease payments for equipment and facilities under
non-cancelable leases are as follows (in thousands):

OPERATING CAPITAL
FOR THE YEARS ENDED DECEMBER 31, LEASES LEASES
--------- -------
1999 .................................................. $ 5,034 $ 1,390
2000 .................................................. 4,170 1,073
2001 .................................................. 2,844 885
2002 .................................................. 2,673 519
2003 .................................................. 2,557 150
Thereafter ............................................ 10,141 --
--------- -------
Total minimum payments ................................ $ 27,419 4,017
========= =======
Less amount representing interest at rates ranging
from 7.25% to 8.5% ................................ -- 504
--------- -------
Present value of minimum lease payments ............. -- $ 3,513
========= =======

The Company has entered into various lease agreements covering certain of its
railroad properties. For railroad properties it leases, the Company ordinarily
assumes all operating and financial responsibilities, including maintenance,
payment of property taxes and regulatory compliance, upon commencement date.
Lease payments on three railroad properties leased from one major railroad are
structured to ensure that the Company interchanges an agreed-upon percentage of
outbound carloads with the lessor railroad. Under these leases, no payments to
the lessor are required as long as a minimum percentage of traffic volume is
interchanged with the lessor; therefore, the Company controls, to some
extent, the amounts which may be payable under these leases. If the minimum
percentage of traffic volume interchanged with the lessor is not met, the
amounts which may be payable under these leases could be significant and have an
adverse effect on the Company. These leases are subject to an initial 20 year
term with one or more renewal terms at the Company's option. In addition, lease
payments on five properties leased from two other major railroads are subject to
reduction from the base rate, down to zero, depending upon the level of traffic
interchanged with the lessors. The maximum aggregate annual base rate lease
payments under these leases is approximately $1.7 million. These leases have
initial lease terms of 5 to 20 years and leases on four of the five properties
include purchase options which may be exercised by the Company after one to
three years of operation. To date, no payments have been required under any of
the Company's railroad property leases. Therefore, the above table
does not include any rentals pertaining to the Company's railroad property
leases.

61
<PAGE>
RAILTEX, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)

13. COMMITMENTS AND CONTINGENCIES

The Company has added railroad properties to its portfolio through the
purchase of track and roadbed, lease of such assets and contracts to operate
such assets under management agreements. These arrangements typically relate
only to the physical assets of the railroad property and, except for the
purchases of Central Properties, Inc. ("CPI") and Indiana & Ohio Rail Corp.
("IORC") (See Note 15), which were structured as acquisitions of stock, the
Company typically does not contractually assume any of the operations or
liabilities of the divesting carriers.

Rail properties operated by the Company under management agreements typically
have initial ten year terms followed by either a purchase option or one or more
renewal terms at the Company's option. These operating contracts typically
require that the Company assume all operating and financial responsibilities for
freight operations on the property, including maintenance, payment of property
taxes and regulatory compliance. Payments by the Company for the right to
conduct rail operations on these properties are typically calculated as a
percentage of revenues from the respective properties.

In October 1998, the Utah Transit Authority ("UTA") asserted a claim for
contribution against one of the Company's railroads under the Comprehensive
Environmental Response, Compensation and Liability Act ("CERCLA") relating to
certain pollution existing at one of UTA's rail yards over which the Company has
an operating easement. The Company believes it is not a potentially responsible
party under CERCLA and believes it is contractually indemnified against such
claim. The amount of contribution being sought by the UTA is unknown at this
time.

Under certain limited circumstances, two of the Company's railroads may be
repurchased by the selling carrier for their original purchase prices. It is
management's opinion that the likelihood of these properties being repurchased
is remote.

62
<PAGE>
RAILTEX, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)

The Company maintains insurance to cover costs associated with personal
injury, including death, and property damage, including derailments. The
Company's liability policies, which include third party property damage, are
currently subject to a self-insured retention of $500,000 per occurrence. With
respect to its transportation of hazardous commodities, the Company's liability
policies cover sudden releases of hazardous materials, including expenses
related to evacuation. Personal injuries associated with grade crossing
accidents and damage to property of shippers are also covered under the
Company's liability policies. The Company's property damage policies, which
cover owned/leased property, are currently subject to a self-insured retention
of $100,000 per occurrence.

14. FOREIGN AND DOMESTIC OPERATIONS

Financial information by geographic area is as follows (in thousands):

FOR THE YEARS ENDED DECEMBER 31,
-------------------------------
1998 1997 1996
-------- -------- --------
Operating revenues from unaffiliated customers:
United States ............................... $148,240 $135,992 $106,937
Canada ...................................... 12,780 12,799 14,169
-------- -------- --------
Total operating revenues ................. $161,020 $148,791 $121,106
======== ======== ========
Operating income:
United States ............................... $ 24,344 $ 19,096 $ 17,793
Canada ...................................... 3,308 3,905 4,248
-------- -------- --------
Total operating income ................... $ 27,652 $ 23,001 $ 22,041
======== ======== ========
Identifiable assets:
United States ............................... $311,498 $274,994 $220,857
Canada ...................................... 22,490 21,855 21,488
-------- -------- --------
Total identifiable assets ................ $333,988 $296,849 $242,345
======== ======== ========
15. ACQUISITIONS

In November 1998, a wholly-owned subsidiary of the Company, Goderich-Exeter
Railway ("GEXR") commenced operations on the Guelph Line under a lease
arrangement with CN. The Guelph Line is a 99 mile rail line that operates
between Silver and London, Ontario and connects with the GEXR at Stratford,
Ontario.

63
<PAGE>
RAILTEX, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)

In June 1998, the Company acquired 100% of the outstanding stock of CPI. The
stock was originally held in a voting trust pending Surface Transportation Board
("STB") approval, which was received effective July 1998. CPI was a privately
held company which owned 100% of the stock of two railroads in Ohio and Indiana.
The Central Railroad of Indianapolis ("CERA") operates almost 92 miles of rail
line in north central Indiana under lease and trackage rights arrangements. The
Central Railroad of Indiana ("CIND") owns and operates 81 miles of rail line
between Cincinnati, Ohio and Shelbyville, Indiana. The purchase price was
approximately $14.3 million including an approximately $14.0 million cash
payment and the assumption of approximately $266,000 of long-term debt. The
Company began actively operating the two railroads in August 1998. This
acquisition was funded by borrowings under the Company's U.S. Acquisition
Facility and was accounted for using the purchase method of accounting.

The following unaudited pro forma results of operations for the years ended
December 31, 1998 and 1997, assumes the acquisition of the CPI occured as of the
beginning of the respective periods (in thousands, except per share amounts).

FOR THE YEARS ENDED DECEMBER 31,
-------------------------------
1998 1997
----------- -----------
(Unaudited)
Operating revenues ....................... $ 163,953 $ 155,790
=========== ===========
Net income ............................... $ 10,214 $ 11,716
=========== ===========
Basic earnings per share ................. $ 1.11 $ 1.28
=========== ===========
Diluted earnings per share ............... $ 1.10 $ 1.27
=========== ===========

These pro forma results have been prepared for comparative purposes only and
include certain adjustments such as depreciation expense as a result of a
step-up in the basis of fixed assets and an adjustment of depreciable lives,
additional amortization expense as a result of organization costs and increased
interest expense on acquisition debt. The unaudited pro forma information is not
necessarily indicative of the results that would have occurred had such
transactions actually taken place at the beginning of the periods specified, nor
does such information purport to project the results of operations for any
future date or period.

In February 1997, a wholly-owned subsidiary of the Indiana & Ohio Rail Corp.,
Indiana & Ohio Railway Company ("IORY"), purchased substantially all of the
assets of the former DTI from the Grand Trunk Western Railroad, Inc., a
subsidiary of Canadian National Railways ("CN"). IORY acquired 146 miles of
track for approximately $22.0 million and, with trackage rights, operates over
255 miles of track between Detroit, Michigan and Cincinnati, Ohio. IORY
committed to return the former DTI track to Federal Railroad Administration
Class IV standards, over a three year period. This rehabilitation project was
completed during the year ended December 31, 1998. In addition, up to
approximately $5.0 million of the purchase price is subject to reimbursement if
certain levels of carloadings are not achieved within a specified time period,
as detailed in the purchase and sale agreement. The Company expects to recover
approximately $2.1 million plus interest related to this reimbursement agreement
during the first quarter of 1999. The DTI acquisition was funded through
borrowings under the Company's U.S. Acquisition Facility and was accounted for
as a purchase of assets.

64
<PAGE>
RAILTEX, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)

In December 1996, a wholly-owned subsidiary of the Company, the Pittsburgh
Industrial Railroad, Inc. ("PIRR"), purchased from Consolidated Rail Corporation
("Conrail") certain assets consisting of 42 miles of track located in the
Pittsburgh metropolitan area. The purchase price was approximately $3.0 million
and was funded by borrowings under the Company's U.S. Acquisition Facility. This
transaction was accounted for as a purchase of assets.

In November 1996, a newly formed wholly-owned subsidiary of the Company, the
Ontario L'Orignal Railway, Inc. ("OLOR"), purchased from CN certain assets
consisting of 26 miles of track in eastern Ontario, Canada. The OLOR was granted
rights by CN to operate the property and commenced operations in November 1996.
The acquisition closed in December 1996. The purchase price was approximately
CDN $1.1 million (U.S. $800,000) and was funded by borrowings under the
Company's Canadian Acquisition Facility. This transaction was accounted for as a
purchase of assets.

In September 1996, a newly formed wholly-owned subsidiary of the Company,
Connecticut Southern Railroad, Inc. ("CSOR"), purchased from Conrail certain
assets including 23 miles of rail segments located in Connecticut and six
locomotives. The CSOR was also granted rights to operate over an additional 55
miles of track, from just north of New Haven, Connecticut to Springfield,
Massachusetts, under a freight operating agreement with Amtrak. The purchase
price, approximately $3.5 million, was funded by borrowings under the Company's
U.S. Acquisition Facility. This transaction was accounted for as a purchase of
assets.

In June 1996, the Company acquired 100% of the outstanding stock of the
Indiana & Ohio Rail Corp. ("INOH"), an existing short line railroad
headquartered in Cincinnati, Ohio. Through its subsidiaries, the INOH operates
ten line segments totaling 230 miles of track in southwestern Ohio and
southeastern Indiana. The purchase price was approximately $12.4 million
including an approximate $8.9 million cash payment and the assumption of
approximately $3.5 million of long-term debt, of which approximately $2.1
million was paid down after completion of the acquisition. This acquisition was
funded by borrowings under the Company's U.S. Acquisition Facility and was
accounted for using the purchase method of accounting.

The following unaudited pro forma results of operations for the years ended
December 31, 1996 and 1995, assumes the acquisition of the INOH occurred as of
the beginning of the respective periods (in thousands, except per share
amounts).

FOR THE YEARS ENDED DECEMBER 31,
-------------------------------
1996 1995
----------- -----------
(Unaudited)

Operating revenues ....................... $ 123,848 $ 115,034
=========== ===========
Net income ............................... $ 9,828 $ 7,253
=========== ===========
Basic earnings per share ................. $ 1.08 $ 0.83
=========== ===========
Diluted earnings per share ............... $ 1.06 $ 0.82
=========== ===========

65
<PAGE>
RAILTEX, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)

16. COMPREHENSIVE INCOME

During 1998, the Company adopted Statement of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income" which establishes standards for
reporting and display of comprehensive income and its components in a full set
of general purpose financial statements. Comprehensive Income is defined as the
total of net income and all other changes in equity of an enterprise that result
from transactions and other economic events of a reporting period other than
transactions with owners. The Company has chosen to disclose comprehensive
income in the Consolidated Statements of Shareholders' Equity. For purposes of
SFAS 130, the Company's other comprehensive income or loss was comprised of net
currency translation adjustments. Paragraph 9(f) of Statement 109 "prohibits
recognition of a deferred tax liability or asset for differences related to
assets and liabilities that under FASB Statement No. 52, `Foreign Currency
Translation,' are remeasured from the local currency into the functional
currency using historical rates". Therefore, other comprehensive income is not
being shown net of tax.

17. SEGMENT INFORMATION

During 1998, the Company adopted SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information." SFAS No. 131 establishes new standards
for reporting information about operating segments in annual and interim
financial statements, requiring that public business enterprises report
financial and descriptive information about its reportable segments based on a
management approach. SFAS No. 131 also establishes standards for related
disclosures about products and services, geographic areas and major customers.
In applying the requirements of this statement, each of the Company's geographic
areas described below were determined to be an operating segment as defined by
the statement, but have been aggregated as allowed by the statement for
reporting purposes. As a result, the Company continues to have one reportable
segment, which is the operation of shortline railroads.

The following table presents information about the Company by geographic area
(in thousands).

FOR THE YEARS ENDED DECEMBER 31,
------------------------------------------
1998 1997 1996
-------- --------- --------
Total Revenues:
United States .......... $146,358 $ 134,496 $105,971
Canada ................. 13,841 13,855 14,230
Other foreign .......... 821 440 905
-------- --------- --------
Total ............. $161,020 $ 148,791 $121,106
======== ========= ========
Operating Income:
United States .......... $ 23,463 $ 19,225 $ 16,985
Canada ................. 3,307 3,906 4,243
Other foreign .......... 882 (130) 813
-------- --------- --------
Total ............. $ 27,652 $ 23,001 $ 22,041
======== ========= ========
Assets:
United States .......... $280,717 $ 244,034 $194,330
Canada ................. 18,855 19,293 19,587
Other foreign .......... 20,133 18,367 21,790
-------- --------- --------
Total ............. $319,705 $ 281,694 $235,707
======== ========= ========

66
<PAGE>
RAILTEX, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)

18. SUBSEQUENT EVENTS

On January 13, 1999, the Brazilian government began to allow the Brazilian
currency (Real) to trade freely against the U.S. dollar. As of March 1, 1999,
the Real had devalued approximately 43% versus the U.S. dollar. As a result of
the devaluation, the Company may establish a non-cash reserve against the value
of its Brazilian investments at the end of the first quarter of 1999. The
Company will determine the amount of the reserve based upon a review of the
Brazilian railroad operations and of the devaluation of the Real. This reserve
could adversely affect the Company's financial position and the results of its
operations.

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

None.

67
<PAGE>
PART III

ITEM 10. EXECUTIVE OFFICERS AND DIRECTORS OF THE REGISTRANT

The following table sets forth information regarding the executive officers
of the Company as of March 1, 1999.

NAME AGE POSITION
---- --- --------
Ronald A. Rittenmeyer.... 51 Chairman of the Board, President and
Chief Executive Officer
Thomas W. Arnst.......... 36 Vice President, General Counsel and
Secretary
John M. Hovis............ 46 Vice President-Operations
Joseph P. Jahnke......... 35 Vice President and Chief Financial
Officer
Michael A. Nosil......... 52 Vice President-Administration
Greg B. Petersen......... 36 Vice President-Strategic Planning and
Development

Mr. Rittenmeyer was elected Chairman of the Board of RailTex, Inc. in
February 1999 and served as a Director since August 1998. Mr. Rittenmeyer has
served as President and Chief Executive Officer of RailTex, Inc. since August
1998. Prior to joining RailTex, Mr. Rittenmeyer was President and Chief
Operating Officer of Ryder TRS, Inc. from 1996 to August 1998. From 1995 to
1996, Mr. Rittenmeyer was President and Chief Operating Officer of Merisel, Inc.
From 1994 to 1995, Mr. Rittenmeyer was with Burlington Northern, Inc. as
Executive Vice President and most recently, Chief Operating Officer. Prior to
1994, Mr. Rittenmeyer was with Frito-Lay, Inc. for almost 20 years where he rose
to become Vice President-Operations.

Mr. Arnst has served as Vice President, General Counsel and Secretary of
RailTex, Inc. since December 1998. Prior to joining RailTex, Mr. Arnst was Vice
President, General Counsel and Secretary of Ryder TRS, Inc. from 1996 to
December 1998. From 1987 to 1996, Mr. Arnst was with Ryder System, Inc., most
recently as Division Counsel for its Commercial Leasing and Services Division.

Mr. Hovis has served as Vice President-Operations of RailTex Service Co.,
Inc. ("RSC"), a subsidiary of RailTex, Inc., since December 1998. Prior to
joining RailTex, Mr. Hovis provided consulting services to various organizations
from May 1997 to November 1998. From October 1995 to February 1997, Mr. Hovis
was employed by Burlington Northern Santa Fe Railway, most recently as Vice
President-Merchandise Operations. From April 1970 to October 1995, Mr. Hovis was
employed by Burlington Northern, Inc., most recently as Vice President-West
Region.

Mr. Jahnke has served as Vice President and Chief Financial Officer of
RailTex, Inc. since November 1998. From May 1998 to November 1998, Mr. Jahnke
was Treasurer of RailTex, Inc. From February 1997 to May 1998, Mr. Jahnke was
Director of Finance and from September 1995 to February 1997, Mr. Jahnke was
Manager of Treasury. Prior to joining RailTex, Mr. Jahnke was employed by
Recognition International, Inc. as Manager of International Finance from October
1994 to September 1995. From December 1985 to October 1994, Mr. Jahnke was with
Greyhound Lines, Inc., most recently as Senior Manager, Financial Planning and
Analysis.

Mr. Nosil has served as Vice President-Administration of RSC since September,
1997. From June 1996 to September 1997, Mr. Nosil was Vice President-Human
Resources. Prior to joining RailTex, Mr. Nosil was a managing consultant for
Hewitt Associates, LLC, an international human resources consulting firm, from
1993 to 1996. From 1975 to 1992, Mr. Nosil was employed by La Quinta Motor Inns,
Inc., most recently as Vice President of Human Resources. Mr. Nosil was plant
personnel manager in Arlington, Texas for NCR Corporation from 1972 to 1975.

Mr. Petersen has served as Vice President-Strategic Planning and Development
of RSC since November 1998. From May 1997 to November 1998, Mr. Petersen served
as Vice President-Corporate Development. Prior to joining RailTex, from 1989 to
1997, Mr. Petersen served in a variety of corporate development positions with
AMR, Inc. and its subsidiary, American Airlines, most recently as Managing
Director, Corporate Development.

The executive officers of the Company serve at the discretion of the
Company's Board of Directors.

68
<PAGE>
Information regarding the directors of the Company is incorporated by
reference to the caption "Election of Directors" in the Company's definitive
Proxy Statement to be filed pursuant to Regulation 14A within 120 days after the
end of the Company's fiscal year covered by this Report on Form 10-K.

ITEM 11. EXECUTIVE COMPENSATION

Information regarding Executive Compensation is incorporated by reference to
the caption "Executive Compensation" in the Company's definitive Proxy Statement
to be filed pursuant to Regulation 14A within 120 days after the end of the
Company's fiscal year covered by this Report on Form 10-K.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Information regarding Security Ownership of Certain Beneficial Owners and
Management is incorporated by reference to the caption "Principal and Management
Shareholders" in the Company's definitive Proxy Statement to be filed pursuant
to Regulation 14A within 120 days after the end of the Company's fiscal year
covered by this Report on Form 10-K.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Information regarding Certain Relationships and Related Transactions is
incorporated by reference to the caption "Certain Relationships and Related
Transactions" in the Company's definitive Proxy Statement to be filed pursuant
to Regulation 14A within 120 days after the end of the Company's fiscal year
covered by this Report on Form 10-K.

The remainder of this page is intentionally left blank.

69
<PAGE>
PART IV

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

A. DOCUMENTS

The following documents are filed as part of this Report:

<TABLE>
<CAPTION>
1. FINANCIAL STATEMENTS PAGE
<S> <C>
Report of Independent Public Accountants..................................................................... 40
Consolidated Statements of Income for the years ended December 31, 1998, 1997 and 1996....................... 41
Consolidated Balance Sheets as of December 31, 1998 and 1997................................................. 42
Consolidated Statements of Shareholders' Equity for the years ended
December 31, 1998, 1997 and 1996........................................................................... 43
Consolidated Statements of Cash Flows for the years ended December 31, 1998, 1997 and 1996................... 44
Notes to Consolidated Financial Statements................................................................... 45
</TABLE>
2. FINANCIAL STATEMENT SCHEDULES
None

3. EXHIBITS

EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------ -----------------------
*3(i) Restated Articles of Incorporation of the Company.

3(ii) Amended and Restated Bylaws of the Company.

*4.1 Specimen Common Stock Certificate.

*4.2 Note Agreement, dated as of January 1, 1993, among the Company and
Massachusetts Mutual Life Insurance Company, MassMutual
Participation Investors and MassMutual Corporate Investors.

*4.3 Purchase Agreement, dated as of August 28, 1991, among the Company
and Banc One Capital Partners Corporation, Ventex Partners Ltd., and
First Century Partnership III.

++10.1 Credit Agreement, dated as of May 17, 1996, between the Company;
First Interstate Bank of Texas, N.A.; as Agent, and the several
financial institutions that are parties to the Credit Agreement.

++10.2 First Amendment to Credit Agreement dated as of June 11, 1996,
between the Company; Wells Fargo Bank (Texas), N.A.; as Agent and
the several financial institutions that are parties to the Credit
Agreement.

++10.3 Second Amendment to Credit Agreement dated as of July 22, 1996,
between the Company; Wells Fargo Bank (Texas), N.A.; as Agent, and
the several financial institutions that are parties to the Credit
Agreement.

++10.4 Loan Agreement, dated as of June 21, 1996, between RailTex Canada,
Inc. as borrower and National Bank of Canada and ABN AMRO Bank
Canada, as lenders and National Bank of Canada, as Agent.

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<PAGE>
+++10.5 Third Amendment to Credit Agreement, dated August 13, 1996, between
the Company; Wells Fargo Bank (Texas), N.A.; as Agent and the
several financial institutions that are parties to the Credit
Agreement.

#10.6 Fourth Amendment to Credit Agreement, dated December 5, 1996,
between the Company; Wells Fargo Bank (Texas), N.A.; as Agent and
the several financial institutions that are parties to the Credit
Agreement.

#10.7 Fifth Amendment to Credit Agreement, dated November 14, 1997,
between the Company; Wells Fargo Bank (Texas), N.A.; as Agent and
the several financial institutions that are parties to the Credit
Agreement.

*10.8 Contract for Rail Freight Service, dated July 31, 1986, by and
between the City of Austin, Capital Metropolitan Transportation
Authority and Austin Railroad Company, Inc.

*10.9 Indenture of Lease and Option to Purchase Agreement, dated February
28, 1990, by and between Southern Railway Company and Chesapeake and
Albemarle Railroad Company, Inc.

*10.10 Lease Agreement, dated February 9, 1992, by and between Missouri
Pacific Railroad Company and Dallas, Garland & Northeastern Railroad
Company, Inc.

*10.11 Line Sale Contract, dated February 5, 1992, by and between Missouri
Pacific Railroad Company and Dallas, Garland & Northeastern Railroad
Company, Inc.

*10.12 Smithville, GA to White Oak, AL Lease and Option to Purchase
Agreement, dated December 22, 1988, by and between Central of
Georgia Railroad Company, the South Western Rail Road Company and
South Carolina Central Railroad Company, Inc.

*10.13 Asset Purchase Agreement, dated October 29, 1990, by and between the
Goderich-Exeter Railway Company Limited and Canadian National
Railway Company.

*10.14 Operating and Marketing Agreement, dated October 29, 1990, between
Goderich-Exeter Railway Company Limited and Canadian National
Railway Company.

*10.15 Purchase and Sale Agreement, dated July 9, 1993, by and between
Central Michigan Railway Company and Grand Rapids Eastern Railroad.

*10.16 Purchase and Sale Agreement, dated March 19, 1992, by and between
Indiana Southern Railroad, Inc. and Consolidated Rail Corporation.

*10.17 Transportation Contract ICC-CR-C-4553, dated September 28, 1987, by
and between Consolidated Rail Corporation and Indianapolis Power &
Light Company and all amendments thereto.

*10.18 Lease Agreement, dated December 11, 1992, by and between Missouri
Pacific Railroad Company and Missouri & Northern Arkansas Railroad
Company, Inc.

*10.19 Line Sale Contract, dated December 11, 1992, by and between Missouri
Pacific Railroad Company and Missouri & Northern Arkansas Railroad
Company, Inc.

*10.20 Permanent Freight Railroad Operating Easement, dated March 31, 1993,
by and between the Union Pacific Railroad Company and the Salt Lake
City Southern Railroad Co., Inc.

71
<PAGE>
*10.21 Administration and Coordination Agreement, dated March 31, 1993, by
and between the Salt Lake City Southern Railroad Co., Inc. and the
Utah Transit Authority.

*10.22 Agreement for Operation of Freight Service and Control Through
Management of SD&AE, dated March 8, 1984, between San Diego and
Arizona Eastern Railway Company, San Diego Metropolitan Transit
Development Board and the Company.

*10.23 Agreement, dated July 15, 1986, between San Diego and Imperial
Valley Railroad and Ferrocarril Sonora-Baja California.

*10.24 Lease Agreement, dated March 2, 1990, between Missouri Pacific
Railroad Company and Mid-Michigan Railroad, Inc.

*10.25 Lease and Option to Purchase Agreement, dated November 10, 1988, by
and between Southern Railway Company and North Carolina & Virginia
Railroad.

*10.26 Asset Purchase Agreement, dated September 18, 1992, by and between
Cape Breton & Central Nova Scotia Railway Limited and Canadian
National Railway Company.

*10.27 Operating and Marketing Agreement, dated September 18, 1992, between
Cape Breton & Central Nova Scotia Railway Limited and Canadian
National Railway Company.

*10.28 Note Agreement, dated as of January 1, 1993, among the Company and
Massachusetts Mutual Life Insurance Company, MassMutual
Participation Investors and MassMutual Corporate Investors (included
as Exhibit 4.2).

*10.29 Purchase Agreement, dated as of August 28, 1991, among the Company
and Banc One Capital Partners Corporation, Ventex Partners Ltd., and
First Century Partners III (included as Exhibit 4.3).

10.30 Form of Amended 1993 Stock Plan of the Company.

*10.31 Form of Non-Statutory Stock Option Agreement between the Company and
its officers.

#10.32 Form of Severance Agreement between the Company and its executive
officers.

*10.33 Form of Indemnification Agreement between the Company and its
officers and directors.

*10.34 Form of Indemnification Agreement between RailTex Service Co., Inc.
and its officers and directors.

#10.35 Letter of Intent, dated February 11, 1998, confirming amendments to
Loan Agreement between RailTex Canada, Inc., National Bank of
Canada, as Agent and several financial institutions that are parties
to the loan agreement.

*10.36 Right of First Refusal Agreement, dated October 1, 1993, between
Cape Breton & Central Nova Scotia Railway Limited and Canadian
National Railway Company.

***10.37 Sale Agreement--Siskiyou Line, Coos Bay Branch and White City
Branch, dated as of November 21, 1994, by and between Southern
Pacific Transportation Company and Central Oregon & Pacific
Railroad, Inc.

***10.38 First Amendment to Sale Agreement--Siskiyou Line, Coos Bay Branch
and White City Branch, dated as of December 31, 1994, by and between
Southern Pacific Transportation Company and Central Oregon & Pacific
Railroad, Inc.

72
<PAGE>
***10.39 Lease Agreement, dated as of December 31, 1994, by and between
Southern Pacific Transportation Company and Central Oregon & Pacific
Railroad, Inc.

***10.40 Cooperative Marketing Agreement, dated as of December 31, 1994, by
and between Southern Pacific Transportation Company and Central
Oregon & Pacific Railroad, Inc.

*****10.41 The Note Agreement, dated as of September 1, 1995, between the
Company and the Purchasers named on Schedule I to the Note
Agreement.

##10.42 Sixth Amendment to Credit Agreement, dated September 4, 1998 between
the Company; Wells Fargo Bank (Texas), N.A.; as Agent and the
several financial institutions that are parties to the Credit
Agreement.

##10.43 Seventh Amendment to Credit Agreement, dated November 1, 1998
between the Company; Wells Fargo Bank (Texas), N.A.; as Agent and
the several financial institutions that are parties to the Credit
Agreement.

+10.44 Form of Non-Statutory Stock Option Agreement between the Company and
its outside directors.

***10.45 Letter of Intent, dated May 23, 1994, between Central Vermont
Railway, Inc. and RailTex Service Company, Inc.

****10.46 Lease and Sale Agreement, dated October 6, 1994, by and between New
England Central Railroad, Inc. and Central Vermont Railway, Inc.

*****10.47 The Note Agreement ("Canadian Note Agreement"), dated as of
September 1, 1995, between RailTex Canada, Inc. and the Purchasers
named on Schedule I to the Canadian Note Agreement.

*****10.48 Guaranty Agreement, dated as of September 1, 1995, by RailTex, Inc.
in favor of Purchasers named on Schedule I to the Canadian Note
Agreement.

10.49 Employment Agreement, dated as of January 1, 1998, between the
Company and its Chairman of the Board.

+10.50 Form of Split Dollar Insurance agreement between the Company and its
Executive Officers.

++10.51 Agreement of Sale among RailTex, Inc. and Indiana & Ohio Rail Corp.
and all of the shareholders of Indiana & Ohio Rail Corp.

++++10.52 The Note Agreement, dated as of July 22, 1997, between the Company
and the Purchasers named on Schedule I to the Note Agreement.

##10.53 Severance Agreement, dated as of July 29, 1998, between the Company
and its President and Chief Executive Officer.

##10.54 Employment Agreement, dated as of July 29, 1998, between the Company
and its President and Chief Executive Officer.

10.55 Form of Restricted Share Agreement.

10.56 Purchase Agreement, dated as of November 4, 1998 by and among
RailTex Global Investments, L.L.C., RailTex International Holdings,
Inc. and GEEMF II Latin America, L.L.C.

73
<PAGE>
21.1 Subsidiaries of the Company.

23.1 Consent of Arthur Andersen LLP.

27.1 Financial Data Schedule.

27.2 Restated Financial Data Schedule for the nine months ended September
30, 1998.

27.3 Restated Financial Data Schedule for the six months ended June 30,
1998.

27.4 Restated Financial Data Schedule for the three months ended March
31, 1998.

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

* These exhibits are incorporated by reference to the same Exhibit to
the Registrant's Registration Statement No. 33-68938 filed on Form
S-1 with the Securities and Exchange Commission ("Commission") on
September 16, 1993, as amended by Amendment No. 1 to Form S-1
Registration Statement filed with the Commission on November 1,
1993, Amendment No. 2 to Form S-1 Registration Statement filed with
the Commission on November 16, 1993 and Post-Effective Amendment No.
1 to Form S-1 Registration Statement filed with the Commission on
November 19, 1993.

*** These exhibits are incorporated by reference to the same Exhibit to
the Registrant's Registration Statement No. 33-80782 filed on Form
S-1 with the Commission on June 28, 1994, as amended by Amendment
No. 1 to Form S-1 Registration Statement filed with the Commission
on September 1, 1994, Amendment No. 2 to Form S-1 Registration
Statement filed with the Commission on February 17, 1995 and
Amendment No. 3 to Form S-1 Registration Statement filed with the
Commission on March 6, 1995.

**** These exhibits are incorporated by reference to the same Exhibit to
the Registrant's Quarterly Report on Form 10-Q for the quarterly
period ended September 30, 1994.

***** These exhibits are incorporated by reference to the same Exhibit to
the Registrant's Quarterly Report on Form 10-Q for the quarterly
period ended September 30, 1995.

+ These exhibits are incorporated by reference to the same Exhibit to
the Registrant's Annual Report on Form 10-K for the year ended
December 31, 1995.

++ These exhibits are incorporated by reference to the same Exhibit to
the Registrant's Quarterly Report on Form 10-Q for the quarterly
period ended June 30, 1996.

+++ These exhibits are incorporated by reference to the same Exhibit to
the Registrant's Quarterly Report on Form 10-Q for the quarterly
period ended September 30, 1996.

++++ These exhibits are incorporated by reference to the same Exhibit to
the Registrant's Quarterly Report on Form 10-Q for the quarterly
period ended June 30, 1997.

# These exhibits are incorporated by reference to the same Exhibit to
the Registrant's Annual Report on Form 10-K for the year ended
December 31, 1997.

## These exhibits are incorporated by reference to the same Exhibit to
the Registrant's Quarterly Report on Form 10-Q for the quarterly
period ended September 30, 1998.

B. REPORTS ON FORM 8-K:

No Reports on Form 8-K were filed by the Registrant during the last
quarter of the period covered by this report.

74
<PAGE>
SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of Securities Exchange
Act of 1934, as amended, the Registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized, in San
Antonio, Texas.
RAILTEX, INC.
(Registrant)

By:/s/ RONALD A. RITTENMEYER
Name: Ronald A. Rittenmeyer
Title: Chairman of the Board,
President and 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 indicated and on the dates indicated.

SIGNATURES TITLE

/s/ RONALD A. RITTENMEYER Chairman of the Board, President and
Ronald A. Rittenmeyer Chief Executive Officer

/s/ JOSEPH P. JAHNKE Vice President-Finance and Chief Financial Officer
Joseph P. Jahnke

/s/ JULIE B. HERBORT Controller and Chief Accounting Officer
Julie B. Herbort

/s/ BRUCE M. FLOHR Founder and Chairman Emeritus
Bruce M. Flohr

/s/ ROBERT M. AYRES, JR. Director
Robert M. Ayres, Jr.

/s/ LAURA D. DAVIES Director
Laura D. Davies

/s/ HEATHER J. GRADISON Director
Heather J. Gradison

/s/ ROBERT R. LENDE Director
Robert R. Lende

/s/ FERD. C. MEYER, JR. Director
Ferd. C. Meyer, Jr.

/s/ PALMER L. MOE Director
Palmer L. Moe

/s/ WILLIAM G. PAGONIS Director
William G. Pagonis

EXHIBIT 3(ii)

AMENDED AND RESTATED

BYLAWS

RAILTEX, INC.,

A TEXAS CORPORATION

<PAGE>
AMENDED AND RESTATED
BYLAWS OF RAILTEX, INC.
A TEXAS CORPORATION

PAGE

ARTICLE 1. Offices .........................................................1
1.1 Registered Office................................................1
1.2 Other Offices....................................................1

ARTICLE 2. Shareholders ....................................................1
2.1 Place Meetings...................................................1
2.2 Annual Meetings..................................................1
2.3 Voting List......................................................1
2.4 Special Meetings.................................................1
2.5 Notice...........................................................2
2.6 Quorum...........................................................2
2.7 Majority Vote; Withdrawal of Quorum..............................2
2.8 Method of Voting.................................................2
2.9 Record Date; Closing Transfer Books..............................3
2.10 Action Without Meeting...........................................3
2.11 Telephone and Similar Meetings...................................3
2.12 Order and Conduct of Business at Meetings........................3
2.13 Application of Exchange Act......................................6

ARTICLE 3. Directors........................................................6
3.1 Management.......................................................6
3.2 Number; Qualification; Election; Term............................6
3.3 Change in Number.................................................6
3.4 Removal..........................................................7
3.5 Vacancies........................................................7
3.6 Election of Directors............................................7
3.7 Place of Meetings................................................7
3.8 First Meeting....................................................7
3.9 Regular Meetings.................................................7
3.10 Special Meetings.................................................7
3.11 Quorum; Majority Vote............................................8
3.12 Compensation.....................................................8
3.13 Procedure........................................................8
3.14 Action Without Meeting...........................................8
3.15 Telephone and Similar Meetings...................................8
3.16 Interested Directors, Officers and Shareholders..................8

i
<PAGE>
ARTICLE 4. Committees.......................................................9
4.1 Designation......................................................9
4.2 Term.............................................................9
4.3 Authority........................................................9
4.4 Change in Number................................................10
4.5 Removal.........................................................10
4.6 Vacancies.......................................................11
4.7 Meetings........................................................11
4.8 Quorum; Majority Vote...........................................11
4.9 Compensation....................................................11
4.10 Procedure.......................................................11
4.11 Action Without Meeting..........................................11
4.12 Telephone and Similar Meetings..................................11
4.13 Responsibility..................................................11

ARTICLE 5. Notice..........................................................12
5.1 Method..........................................................12
5.2 When Notice Not Required........................................12
5.3 Waiver..........................................................12

ARTICLE 6. Officers and Agents.............................................13
6.1 Number; Qualification; Election; Term...........................13
6.2 Removal.........................................................13
6.3 Vacancies.......................................................13
6.4 Authority.......................................................13
6.5 Compensation....................................................13
6.6 Chairman of the Board...........................................13
6.7 President.......................................................14
6.8 Vice Presidents.................................................14
6.9 Secretary.......................................................14
6.10 Assistant Secretaries...........................................14
6.11 Treasurer.......................................................14
6.12 Assistant Treasurers............................................15
6.13 Controller......................................................15
6.14 Assistant Controllers...........................................15
6.15 Designation of an Officer as the Chief Executive Officer........15
6.16 Designation of an Officer as the Chief Operating Officer........15
6.17 Designation of an Officer as the Chief Financial Officer........15

ARTICLE 7. Certificates and Shareholders...................................15
7.1 Certificates....................................................15
7.2 Issuance........................................................16
7.3 Payment for Shares..............................................16

<PAGE>
7.4 Subscriptions...................................................16
7.5 Lien............................................................16
7.6 Lost, Stolen or Destroyed Certificates..........................16
7.7 Registration of Transfer........................................17
7.8 Registered Owner................................................18

ARTICLE 8. General Provisions..............................................18
8.1 Distributions; Share Dividends..................................18
8.2 Books and Records...............................................18
8.3 Annual Statement................................................19
8.4 Checks and Notes................................................19
8.5 Fiscal Year.....................................................19
8.6 Seal............................................................19
8.7 Indemnification; Insurance......................................19
8.8 Resignation.....................................................20
8.9 Amendments of Bylaws............................................20
8.10 Construction....................................................20
8.11 Table of Contents; Headings.....................................20
8.12 Relation to Articles of Incorporation...........................20

iii
<PAGE>
ARTICLE 1. OFFICES

1.1 REGISTERED OFFICE. The registered office of the Corporation shall be at 4040
Broadway, Suite 200, San Antonio, Texas 78209.

1.2 OTHER OFFICES. The Corporation may also have offices at other places in or
out of the State of Texas as the Board of Directors may determine or as the
business of the Corporation may require.

ARTICLE 2. SHAREHOLDERS

2.1 PLACE OF MEETINGS. Meetings of Shareholders shall be held at the time and
place, in or out of the State of Texas, stated in the notice of the meeting or
in a waiver of notice.

2.2 ANNUAL MEETINGS. An annual meeting of the Shareholders shall be held each
year on a day and at a time to be chosen by the Board of Directors. At the
annual meeting, the Shareholders shall elect Directors and transact such other
business as may properly be brought before the annual meeting by the Board of
Directors or, subject to the procedures set forth in Section 2.12, the holder or
holders of not less than one-tenth (1/10th) of all shares entitled to vote at
the annual meeting. Proposals submitted by the holder or holders of less than
one-tenth (1/10th) of all shares entitled to vote at the annual meeting or not
submitted in accordance with the procedures set forth in Section 2.12 may not
properly be brought before the annual meeting.

2.3 VOTING LIST. At least ten (10) days before each meeting of Shareholders
entitled to vote at the meeting, a complete list of the Shareholders entitled to
vote at the meeting, arranged in alphabetical order, with the address of each
and the number of voting shares held by each, shall be prepared by the officer
or agent having charge of the stock transfer books. The list, for a period of
ten (10) days prior to the meeting, shall be kept on file at the registered
office of the Corporation and shall be subject to inspection by any Shareholder
at any time during usual business hours. The list shall also be produced and
kept open at the time and place of the meeting during the whole time thereof,
and shall be subject to the inspection of any Shareholder during the whole time
of the meeting.

2.4 SPECIAL MEETINGS. Special meetings of the Shareholders, for any purpose or
purposes, including, without limitation, the election of directors, unless
otherwise prescribed by statute, by the Articles of Incorporation or by these
Bylaws, may be called by the Chairman of the Board, the President, the Board of
Directors, or, subject to the procedures set forth in Section 2.12, the holder
or holders of not less than one-tenth (1/10th) of all the shares entitled to
vote at the meetings. Proposals submitted by the holder or holders of less than
one-tenth (1/10th) of all shares entitled to vote at the special meeting or not
submitted in accordance with the procedures set forth in Section 2.12 may not
properly be brought before the special meeting. Business transacted at a special
meeting shall be confined to the purposes stated in the notice of the meeting.

<PAGE>
2.5 NOTICE. Written or printed notice stating the place, day and hour of the
meeting and, in case of a special meeting, the purpose or purposes for which the
meeting is called, shall be delivered not less than ten (10) nor more than sixty
(60) days before the date of the meeting, either personally or by mail, by or at
the direction of the Chairman of the Board, the President or, in the case of a
special meeting called by the Shareholder or Shareholders entitled to call a
special meeting pursuant to Section 2.4, the Secretary, to each Shareholder of
record entitled to vote at the meeting. If mailed, such notice shall be deemed
to be delivered when deposited in the United States mail addressed to the
Shareholder at his address as it appears on the stock transfer books of the
Corporation, with postage thereon prepaid.

2.6 QUORUM. The holders of a majority of the shares issued and outstanding and
entitled to vote thereat, present in person or represented by proxy, shall be
requisite and shall constitute a quorum at meetings of the Shareholders for the
transaction of business except as otherwise provided by statute, by the Articles
of Incorporation or by these Bylaws. If a quorum is not present or represented
at a meeting of the Shareholders, the Shareholders entitled to vote, present in
person or represented by proxy, shall have power to adjourn the meeting from
time to time, without notice other than announcement at the meeting, until a
quorum is present or represented. At an adjourned meeting at which a quorum is
present or represented, any business may be transacted which might have been
transacted at the meeting as originally notified.

2.7 MAJORITY VOTE; WITHDRAWAL OF QUORUM. When a quorum is present at a meeting,
the vote of the holders of a majority of the shares entitled to vote on, and
voted for or against, that matter shall decide any question brought before the
meeting, unless the question is one on which, by express provision of the
statutes, the Articles of Incorporation, or these Bylaws, a higher vote is
required, in which case the express provision shall govern. The Shareholders
present at a duly constituted meeting may continue to transact business until
adjournment, and the subsequent withdrawal from the meeting of any Shareholder
represented in person or by proxy to vote shall not affect the presence of a
quorum at a meeting.

2.8 METHOD OF VOTING. Each outstanding share, regardless of class, shall be
entitled to one (1) vote on each matter submitted to a vote at a meeting of
Shareholders, except to the extent that the voting rights of the shares of any
class or classes are limited or denied by the Articles of Incorporation. At any
meeting of the Shareholders, every Shareholder having the right to vote may vote
either in person, or by proxy executed in writing by the Shareholder or by his
duly authorized attorney-in-fact. No proxy shall be valid after eleven (11)
months from the date of its execution, unless otherwise provided in the proxy.
Each proxy shall be revocable unless expressly provided therein to be
irrevocable and unless otherwise made irrevocable by law. Each proxy shall be
filed with the Secretary of the Corporation prior to or at the time of the
meeting. Voting for Directors shall be in accordance with Section 3.6 of these
Bylaws. Any vote may be taken by voice or by show of hands unless someone
entitled to vote objects, in which case written ballots shall be used.

<PAGE>
2.9 RECORD DATE; CLOSING TRANSFER BOOKS. The Board of Directors may fix in
advance a record date for the purpose of determining Shareholders entitled to
notice of or to vote at a meeting of the Shareholders, such record date to be
not less than ten (10) nor more than sixty (60) days prior to the meeting; or
the Board of Directors may close the stock transfer books for such purpose for a
period of not less than ten (10) nor more than sixty (60) days prior to such
meeting. In the absence of any action by the Board of Directors, the date upon
which the notice of meeting is mailed shall be the record date.

2.10 ACTION WITHOUT MEETING. Any action required by statute to be taken at a
meeting of the Shareholders, or any action which may be taken at a meeting of
the Shareholders, may be taken without a meeting if a consent in writing,
setting forth the action so taken, shall be signed by all of the Shareholders
entitled to vote with respect to the subject matter thereof and such consent
shall have the same force and effect as a unanimous vote of the Shareholders.
The consent may be in more than one counterpart so long as each Shareholder
signs one of the counterparts. The signed consent, or a signed copy, shall be
placed in the Minute Book.

2.11 TELEPHONE AND SIMILAR MEETINGS. Shareholders may participate in and hold a
meeting by means of conference telephone or similar communications equipment by
means of which all persons participating in the meeting can hear each other.
Participation in such a meeting shall constitute presence in person at the
meeting, except where a person participates in the meeting for the express
purpose of objecting to the transaction of any business on the grounds that the
meeting is not lawfully called or convened.

2.12 ORDER AND CONDUCT OF BUSINESS AT MEETINGS.

A. GENERAL. The order of business at annual meetings and at all
other meetings of Shareholders shall be set by the Board of Directors. Meetings
of Shareholders shall be conducted in accordance with rules and regulations
adopted by the Board of Directors. Only such business shall be conducted at an
annual or special meeting of Shareholders as shall have been brought before the
meeting in accordance with the applicable procedures set forth in these Bylaws,
including, without limitation, Sections 2.2 and 2.4 and this Section 2.12, and
as is permitted by the Articles of Incorporation, these Bylaws and statute,
including, without limitation, Rule 14a-8, or any amended or successor rule
("Rule 14a-8"), promulgated by the Securities and Exchange Commission under the
Securities Exchange Act of 1934 (the "Exchange Act"). The Chairman of the
meeting, designated by the Board of Directors, shall have the power and duty to
determine whether any business proposed to be brought before the meeting was
properly brought before such meeting in accordance with the procedures set forth
in these Bylaws and if the Chairman shall determine that any proposed business
is not so brought in compliance with these Bylaws, to declare to the meeting
that such defective proposal shall be disregarded.

B. ADVANCE NOTICE OF NOMINATIONS OF DIRECTORS AT AN ANNUAL MEETING.
Nomination for election of any person to the Board of Directors at an annual
meeting may be made pursuant to Section 2.2 above by the holder or holders of
not less than one-tenth (1/10th) of all

<PAGE>
shares entitled to vote at the annual meeting if written notice by such holder
or holders of the nomination of such person shall have been delivered to and
received by the Secretary at the principal executive offices of the Corporation
(i) in the case of the 1999 annual meeting, within ten (10) days after these
Bylaws are filed as an exhibit to the Corporation's annual report on Form 10-K
with the Securities and Exchange Commission, and (ii) in the case of all other
annual meetings, not less than ninety (90) days nor more than one hundred and
twenty (120) days prior to the first anniversary of the date of the
Corporation's proxy statement for the Corporation's previous year's annual
meeting of Shareholders; provided, however, that in the event that the date of
the annual meeting is advanced by more than thirty (30) days or delayed by more
than sixty (60) days from anniversary date of the previous year's annual
meeting, such notice must be so delivered and received not earlier than the one
hundred and twentieth (120th) day prior to such annual meeting and not later
than the close of business on the later of (i) the ninetieth (90th) day prior to
such annual meeting or (ii) the tenth (10th) day following the day on which
public announcement of the date of such meeting is first made. Each such notice
shall set forth: (i) the name and address of the Shareholder who intends to make
the nomination, the beneficial owner, if any, on whose behalf the nomination is
made and the person or persons to be nominated; (ii) the class and number of
shares of stock of the Corporation that are owned beneficially and of record by
such Shareholder and such beneficial owner, and a representation that the
Shareholder intends to appear in person or by proxy at the meeting to nominate
the person or persons specified in the notice; (iii) a description of all
arrangements or understandings between the Shareholder and each nominee and any
other person or persons (naming such person or persons) pursuant to which the
nomination or nominations are to be made by the Shareholder; (iv) all other
information regarding each nominee proposed by such Shareholder as would be
required to be included in a proxy statement filed pursuant to the proxy rules
of the Securities and Exchange Commission if the nominee had been nominated by
the Board of Directors; and (v) the written consent of each nominee to serve as
director of the Corporation if so elected. The Chairman of the annual meeting
may refuse to acknowledge the nomination of any such person not made in
compliance with the foregoing procedure.

C. ADVANCE NOTICE OF GENERAL MATTERS AT AN ANNUAL MEETING. Business
other than the election of directors may be brought before an annual meeting
pursuant to Section 2.2 above by the holder or holders of not less than
one-tenth (1/10th) of all shares entitled to vote at the annual meeting if a
written notice by such holder or holders shall have been delivered to and
received by the Secretary at the principal executive offices of the Corporation
(i) in the case of the 1999 annual meeting, within ten (10) days after these
Bylaws are filed as an exhibit to the Corporation's annual report on Form 10-K
with the Securities and Exchange Commission, and (ii) in the case of all other
annual meetings, not less than ninety (90) days nor more than one hundred and
twenty (120) days prior to the first anniversary of the date of the
Corporation's proxy statement for the Corporation's previous year's annual
meeting of Shareholders; provided, however, that in the event that the date of
the annual meeting is advanced by more than thirty (30) days or delayed by more
than sixty (60) days from the anniversary date of the previous year's annual
meeting, such notice must be so delivered and received not earlier than the one
hundred and twentieth (120th) day prior to such annual meeting and not later
than the close of business on

4
<PAGE>
the later of (i) the ninetieth (90th) day prior to such annual meeting or (ii)
the tenth (10th) day following the day on which public announcement of the date
of such meeting is first made. Each such notice shall set forth as to each
matter the Shareholder proposes to bring before the annual meeting: (i) a brief
description of the business desired to be brought before the annual meeting and
the reasons for bringing such business before the annual meeting; (ii) the name
and address, as they appear on the Corporation's books, of each Shareholder
proposing such business; (iii) the classes and number of shares of the
Corporation that are owned of record and beneficially by such Shareholder; and
(iv) any material interest of such Shareholder in such business other than his
or her interest as Shareholder of the Corporation.

D. ADVANCE NOTICE OF MATTERS AT A SPECIAL MEETING. Business,
including, without limitation, the election of directors, may be brought at a
special meeting pursuant to Section 2.4 above by the holder or holders of not
less than one-tenth (1/10th) of all shares entitled to vote at the special
meeting if a written request by such holder or holders shall have been delivered
to and received by the Secretary at the principal executive offices of the
Corporation. The request shall state: (i) a brief description of the purpose or
purposes for which the meeting is called and the reasons for bringing such
business before the special meeting; (ii) the name and address, as they appear
on the Corporation's books, of each Shareholder proposing such meeting; (iii)
the classes and number of shares of the Corporation that are owned of record and
beneficially by such Shareholder; (iv) any material interest of such Shareholder
in such business other than his or her interest as Shareholder of the
Corporation; (v) the name and address of the Shareholder who intends to make the
nomination, the beneficial owner, if any, on whose behalf the nomination is made
and of the person or persons to be nominated; (vi) a representation that the
Shareholder intends to appear in person or by proxy at the meeting to nominate
the person or persons specified in the notice; (vii) a description of all
arrangements or understandings between the Shareholder and each nominee and any
other person or persons (naming such person or persons) pursuant to which the
nomination or nominations are to be made by the Shareholder; (viii) all other
information regarding each nominee proposed by such Shareholder as would be
required to be included in a proxy statement filed pursuant to the proxy rules
of the Securities and Exchange Commission if the nominee had been nominated by
the Board of Directors; and (ix) the written consent of each nominee to serve as
director of the Corporation if so elected. Upon receipt of a request that
complies with this Section 2.12 by the Secretary, and provided the purpose is
permitted by statute, the Articles of Incorporation and these Bylaws, the Board
of Directors shall determine a place and time for such meeting, which time shall
not be less than ninety (90) nor more than one hundred and twenty (120) days
after the receipt and determination of the validity of such request, and a
record date for the determination of Shareholders entitled to vote at such
meeting in the manner set forth in Section 2.9 hereof. Following such receipt
and determination, the Secretary shall cause notice to be given to the
Shareholders entitled to vote at such meeting in the manner set forth in Section
2.5 hereof that a meeting will be held at the time and place so determined.

E. DEFINITIONS. For purposes of this Section 2.12, "public
announcement" shall mean disclosure in a press release reported by the Dow Jones
News Service, Associated Press or

<PAGE>
comparable news service or in a document publicly filed by the Corporation with
the Securities and Exchange Commission pursuant to Sections 13, 14 or 15(d) of
the Exchange Act.

2.13. APPLICATION OF EXCHANGE ACT. Notwithstanding anything in this Article 2 of
these Bylaws, a Shareholder shall also comply with all applicable requirements
of state law and of the Exchange Act, and the rules and regulations promulgated
thereunder, with respect to the matters set forth in this Article 2 of these
Bylaws.

ARTICLE 3. DIRECTORS

3.1 MANAGEMENT. The business and affairs of the Corporation shall be managed by
the Board of Directors who may exercise all such powers of the Corporation and
do all such lawful acts and things as are not (by statute or by the Articles of
Incorporation or by these Bylaws) directed or required to be exercised or done
by the Shareholders.

3.2 NUMBER; QUALIFICATION; ELECTION; TERM. The Board of Directors shall consist
of the number of Directors set by resolution of the Board of Directors, but
shall consist of no fewer than three (3) nor more than ten (10) Directors, none
of whom need to be a Shareholder or a resident of any particular state. The
Directors of the Corporation shall be divided into three classes as nearly equal
in size as is practicable, hereby designated Class I, Class II and Class III.
The term of office of the initial Class I Directors shall expire at the next
succeeding annual meeting of the Shareholders after the 1995 annual meeting of
Shareholders, the term of office of the initial Class II Directors shall expire
at the second succeeding annual meeting of Shareholders after the 1995 annual
meeting of Shareholders and the term of office of the initial Class III
Directors shall expire at the third succeeding annual meeting of the
Shareholders after the 1995 annual meeting of Shareholders. All of the initial
Class I, Class II and Class III Directors shall be elected at the Corporation's
1995 annual meeting of Shareholders. At each annual meeting after the 1995
annual meeting of Shareholders, Directors elected to replace those of a Class
whose terms expire at such annual meeting shall be elected to hold office until
the third succeeding annual meeting and until their respective successors shall
have been duly elected and shall qualify. If the number of Directors is
hereafter changed, any newly created directorships or decrease in directorships
shall be so appointed among the classes as to make all classes as nearly equal
in number as is practicable.

3.3 CHANGE IN NUMBER. The number of Directors set by the Board of Directors
pursuant to Section 3.2 may be increased or decreased from time to time by (i) a
resolution adopted by the Board of Directors pursuant to Section 3.2 above or
(ii) an amendment to the Bylaws by the Shareholders pursuant to Section 8.9
below, but no decrease shall have the effect of shortening the term of any
incumbent Director. Any directorship to be filled by reason of an increase in
the number of Directors may be filled (i) by the Board of Directors for a term
of office continuing only until the next election of one or more directors by
the Shareholders, provided that the Board of Directors may not fill more than
two (2) such directorships during the period between any two successive annual
meetings of Shareholders, or (ii) by election at an annual meeting or at a
special

<PAGE>
meeting of Shareholders called for that purpose.

3.4 REMOVAL. A Director may be removed for cause at any special or annual
meeting of Shareholders, by the affirmative vote of a majority in number of
shares of the Shareholders present, in person or by proxy, at such meeting and
entitled to vote for the election of such Director if notice of intention to act
upon such matter shall have been given in the notice calling such meeting. No
Director may be removed except for cause. For purposes of this Section 3.4, the
term "cause" shall mean a circumstance in which a Director, in a proceeding by a
court of competent jurisdiction after exhaustion of all appeals therefrom, is
found (i) liable to the Corporation or (ii) guilty of unlawful conduct as a
Director. The termination of a proceeding by judgment, order, settlement, or
conviction, or a plea of nolo contendere or its equivalent is not of itself
determinative that the person met the requirements for "cause" set forth above.

3.5 VACANCIES. Any vacancy occurring in the Board of Directors (by death,
resignation, removal or otherwise) may be filled by majority vote of the
remaining Directors though less than a quorum of the Board of Directors. A
Director elected to fill a vacancy shall be elected for the unexpired term of
his predecessor in office.

3.6 ELECTION OF DIRECTORS. Directors shall be elected by a plurality of the
votes cast by the holders of shares entitled to vote in the election of
Directors at a meeting of Shareholders at which a quorum is present. Cumulative
voting shall not be permitted. Only persons who are nominated by the Board of
Directors or a Nominating Committee of the Board of Directors or, subject to the
procedures set forth in Section 2.12, by the holder or holders of not less than
one-tenth (1/10th) of all shares entitled to vote at the annual or special
meeting of the Shareholders shall be eligible to be elected as directors at an
annual or special meeting of the Shareholders.

3.7 PLACE OF MEETINGS. Meetings of the Board of Directors, regular or special,
may be held in or out of the State of Texas.

3.8 FIRST MEETING. The first meeting of a Board of Directors shall be held
without further notice immediately following the annual meeting of Shareholders,
and at the same place, unless by unanimous consent of the Directors then elected
and serving the time or place is changed.

3.9 REGULAR MEETINGS. Regular meetings of the Board of Directors may be held
without notice of such time and place as shall from time to time be determined
by the Board of Directors.

3.10 SPECIAL MEETINGS. Special meetings of the Board of Directors may be called
by the Chairman of the Board or President on three (3) days' notice to each
Director, either personally or by mail or by telegram. Special meetings shall be
called by the Chairman of the Board, the President or Secretary in like manner
and on like notice on the written request of two Directors. Except as otherwise
expressly provided by statute, the Articles of Incorporation, or these Bylaws,
neither the business to be transacted at, nor the purpose of, any special
meeting need be specified in a notice or waiver of notice.

<PAGE>
3.11 QUORUM; MAJORITY VOTE. At meetings of the Board of Directors a majority of
the Directors shall constitute a quorum for the transaction of business. The act
of a majority of the Directors present at a meeting at which a quorum is present
shall be the act of the Board of Directors, except as otherwise specifically
provided by statute, the Articles of Incorporation, or these Bylaws. If a quorum
is not present at a meeting of the Board of Directors, the Directors present may
adjourn the meeting from time to time, without notice other than announcement at
the meeting, until a quorum is present.

3.12 COMPENSATION. By resolution of the Board of Directors, the Directors may be
paid their expenses, if any, of attendance at each meeting of the Board of
Directors and may be paid a fixed sum for attendance at each meeting of the
Board of Directors or a stated salary as Director. No such payment shall
preclude any Director from serving the Corporation in any other capacity and
receiving compensation therefore. Members of special or standing committees may,
by resolution of the Board of Directors, be allowed like compensation for
attending committee meetings.

3.13 PROCEDURE. The Board of Directors shall keep regular Minutes of its
proceedings. The Minutes shall be placed in the Minute Book of the Corporation.

3.14 ACTION WITHOUT MEETING. Any action required or permitted to be taken at a
meeting of the Board of Directors may be taken without a meeting if a consent in
writing, setting forth the action so taken, is signed by all the members of the
Board of Directors. Such consent shall have the same force and effect as a
unanimous vote at a meeting. The signed consent, or a signed copy, shall be
placed in the Minute Book. The consent may be in more than one counterpart so
long as each Director signs one of the counterparts.

3.15 TELEPHONE AND SIMILAR MEETINGS. Directors may participate and hold a
meeting by means of conference telephone or similar communications equipment by
means of which all persons participating in the meeting can hear each other.
Participation in such a meeting shall constitute presence in person at the
meeting, except where a person participates in a meeting for the express purpose
of objecting to the transaction of any business on the grounds that the meeting
is not lawfully called or convened.

3.16 INTERESTED DIRECTORS, OFFICERS AND SHAREHOLDERS.

A. VALIDITY. If paragraph B of this Section 3.16 is satisfied, no
contract or other transaction between the Corporation and any of its Directors,
officers or Shareholders, or any corporation or firm in which any of them are
directly or indirectly interested, shall be invalid solely because of this
relationship or because of the presence of the Director, officer or Shareholder
at the meeting authorizing the contract or transaction, or his participation or
vote in the meeting or authorization.

B. DISCLOSURE, APPROVAL; FAIRNESS. Paragraph A of this Section shall
apply only if:

<PAGE>
1. the material facts of the relationship or interest of each such
Director, officer or Shareholder are known or disclosed:

(a) to the Board of Directors and it nevertheless authorizes
or ratifies the contract or transaction by a majority of the Directors present,
each such interested Director to be counted in determining whether a quorum is
present but not in calculating the majority necessary to carry the vote; or

(b) to the Shareholders and they nevertheless authorize or
ratify the contract or transaction by a majority of the shares present, each
such interested person to be counted for quorum and voting purposes; or

2. the contract or transaction is fair to the Corporation as
of the time it is authorized or ratified by the Board of Directors or the
Shareholders.

C. NON-EXCLUSIVE. This provision shall not be construed to
invalidate a contract or transaction which would be valid in the absence of this
provision.

ARTICLE 4. COMMITTEES

4.1 DESIGNATION. The Board of Directors may, by resolution adopted by a majority
of the full Board of Directors, designate from among its members one or more
committees, each of which shall be comprised of one or more of its members, and
may designate one or more of its members as alternate members of any committee,
who may, subject to the limitations imposed by the Board of Directors, replace
absent or disqualified members at any meeting of that committee.

4.2 TERM. All committees shall serve at the pleasure of the Board of Directors.

4.3 AUTHORITY. All committees, to the extent provided in such resolution, shall
have and may exercise all of the authority of the Board of Directors in the
management of the business and affairs of the Corporation. However, no committee
shall have the authority of the Board of Directors in reference to:

(a) amending the Articles of Incorporation, except that a
committee may, to the extent provided in the resolution
designating the committee or if permitted in the Articles of
Incorporation or these Bylaws, exercise the authority of the
Board of Directors vested in it in accordance with Article
2.13 of the Texas Business Corporation Act (the "TBCA");

(b) proposing a reduction of the stated capital of the Corporation
in the manner permitted by Article 4.12 of the TBCA;

<PAGE>
(c) approving a plan of merger or share exchange of the
Corporation;

(d) recommending to the Shareholders the sale, lease or exchange
of all or substantially all of the property and assets of the
Corporation otherwise than in the usual and regular course of
its business;

(e) recommending to the Shareholders a voluntary dissolution of
the Corporation or a revocation thereof;

(f) amending, altering, or repealing these Bylaws or adopting new
Bylaws of the Corporation;

(g) filling vacancies in the Board of Directors;

(h) filling vacancies in or designating alternate members of any
such committee;

(i) filling any directorship to be filled by reason of an increase
in the number of Directors;

(j) electing or removing officers of the Corporation or members or
alternate members of any such committee;

(k) fixing the compensation of any member of such committee;

(l) altering or repealing any resolution of the Board of Directors
which by its terms provides that it shall not be so amendable
or repealable;

(m) authorizing a distribution, unless the resolution designating
the particular committee or the Articles of Incorporation or
these Bylaws expressly so provide; or

(n) authorizing the issuance of shares of the Corporation, unless
the resolution designating the particular committee or the
Articles of Incorporation or these Bylaws expressly so
provide.

4.4 CHANGE IN NUMBER. The number of committee members of a particular committee
may be increased or decreased from time to time by resolution adopted by a
majority of the whole Board of Directors.

4.5 REMOVAL. Any member of a committee may be removed by the Board of Directors
by the affirmative vote of a majority of the whole Board of Directors, whenever
in its judgment the best interests of the Corporation will be served thereby.

<PAGE>
4.6 VACANCIES. A vacancy occurring on a committee (by death, resignation,
removal or otherwise) may be filled by the Board of Directors in the manner
provided for original designation by Section 4.1 of these Bylaws.

4.7 MEETINGS. Time, place and notice (if any) of a committee meeting shall be
determined by the committee.

4.8 QUORUM; MAJORITY VOTE. At meetings of a committee, a majority of the number
of members designated by the Board of Directors shall constitute a quorum for
the transaction of business. The act of a majority of the members present at any
meeting at which a quorum is present shall be the act of the committee, except
as otherwise specifically provided by statute, the Articles of Incorporation or
these Bylaws. If a quorum is not present at a meeting of a committee, the
members present may adjourn the meeting from time to time, without notice other
than an announcement at the meeting, until a quorum is present.

4.9 COMPENSATION. By resolution of the Board of Directors, the members of a
committee may be paid their expenses, if any, of attendance at each meeting of
the committee and may be paid a fixed sum for attendance at each meeting of the
committee or a stated salary as a member of the committee. No such payment shall
preclude any committee member from serving the Corporation in any other capacity
and receiving compensation therefore.

4.10 PROCEDURE. Each committee shall keep regular Minutes of its proceedings and
report the same to the Board of Directors when required. The Minutes of the
proceedings of a committee shall be placed in the Minute Book of the
Corporation.

4.11 ACTION WITHOUT MEETING. Any action required or permitted to be taken at a
meeting of a committee may be taken without a meeting if a consent in writing,
setting forth the action so taken, is signed by all the members of the
committee. Such consent shall have the same force and effect as a unanimous vote
at a meeting. The signed consent, or a signed copy, shall be placed in the
Minute Book.

4.12 TELEPHONE AND SIMILAR MEETINGS. Committee members may participate in and
hold a meeting by means of conference telephone or similar communications
equipment by means of which all persons participating in the meeting can hear
each other. Participation in such meeting shall constitute presence in person at
the meeting, except where a person participates in the meeting for the express
purpose of objecting to the transaction of any business on the grounds that the
meeting is not lawfully called or convened.

4.13 RESPONSIBILITY. The designation of a committee and the delegation of
authority to it shall not operate to relieve the Board of Directors, or any
member thereof, of any responsibility imposed upon it or him by law; however, a
director shall not be liable for the acts of a committee to the maximum extent
permitted by law and shall not be liable if, in good faith and with ordinary

11
<PAGE>
care, the director relies upon the statements, valuations, information,
opinions, reports or statements prepared or presented by a committee of which
the director is not a member.

ARTICLE 5. NOTICE

5.1 METHOD. Whenever by statute, the Articles of Incorporation, these Bylaws, or
otherwise, notice is required to be given to a Director, committee member, or
Shareholder, and no provision is made as to how the notice shall be given, it
shall not be construed to mean personal notice, but any such notice may be
given: (a) in writing, by mail, postage prepaid, addressed to the Director,
committee member, or Shareholder at the address appearing on the books of the
Corporation; or (b) in any other method permitted by law. Any notice required or
permitted to be given by mail shall be deemed given at the time when the same is
deposited in the United States mail.

5.2 WHEN NOTICE NOT REQUIRED. Any notice required to be given to any
Shareholder, under any provision of any statute or the Articles of Incorporation
or these Bylaws, need not be given to a Shareholder if (i) notice of two
consecutive annual meetings and all notices of meetings held during the period
between those annual meetings, if any, or (ii) all (but in no event less than
two) payments (if sent by first class mail) of distributions or interest on
securities during a twelve-month period have been mailed to that person,
addressed at his address as shown on the records of the Corporation, and have
been returned undeliverable. Any action or meeting taken or held without notice
to such a person shall have the same force and effect as if the notice had been
duly given and, if the action taken by the Corporation is reflected in any
Articles or document filed with the Secretary of State, those Articles or that
document may state that notice was duly given to all persons to whom notice was
required to be given. If such a person delivers to the Corporation a written
notice setting forth his then current address, the requirement that notice be
given to that person shall be reinstated.

5.3 WAIVER. Whenever, by statute or the Articles of Incorporation or these
Bylaws, notice is required to be given to a Shareholder, committee member, or
Director, a waiver thereof in writing signed by the person or persons entitled
to such notice, whether before or after the time stated in such notice, shall be
equivalent to the giving of such notice. Attendance at a meeting shall
constitute a waiver of notice of such meeting, except where a person attends for
the express purpose of objecting to the transaction of any business on the
grounds that the meeting is not lawfully called or convened.

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<PAGE>
ARTICLE 6. OFFICERS AND AGENTS

6.1 NUMBER; QUALIFICATION; ELECTION; TERM.

A. The Corporation shall have: (1) a President and a Secretary; and
(2) such other officers (including Chairman of the Board, Vice President,
Treasurer and additional Vice Presidents) and assistant officers and agents as
the Board of Directors may deem necessary.

B. No officer or agent need be a Shareholder, a Director or a
resident of the Corporation's state of incorporation.

C. Officers named in Section 6.1(A)(1) shall be elected by the Board
of Directors on the expiration of an officer's term or whenever a vacancy
exists. Officers and agents named in Section 6.1(A)(2) may be elected by the
Board of Directors at any meeting.

D. Unless otherwise specified by the Board of Directors at the time
of election or appointment, or in an employment contract approved by the Board
of Directors, each officer's and agent's term shall end at the first meeting of
Directors after the next annual meeting of Shareholders. He shall serve until
the end of his term or, if earlier, his death, resignation, or removal.

E. Any two or more offices may be held by the same person.

6.2 REMOVAL. Any officer or agent elected or appointed by the Board of Directors
may be removed by the Board of Directors whenever in its judgment the best
interest of the Corporation will be served thereby. Such removal shall be
without prejudice to the contract rights, if any, of the person so removed.
Election or appointment of an officer or agent shall not of itself, nor shall
anything in these Bylaws, create contract rights.

6.3 VACANCIES. Any vacancy occurring in any office of the Corporation (by death,
resignation, removal or otherwise) may be filled by the Board of Directors.

6.4 AUTHORITY. Officers and agents shall have such authority and perform such
duties in the management of the Corporation as are provided in these Bylaws or
as may be determined by resolution of the Board of Directors not inconsistent
with these Bylaws.

6.5 COMPENSATION. The compensation of officers and agents shall be fixed from
time to time by the Board of Directors.

6.6 CHAIRMAN OF THE BOARD. The Chairman of the Board shall preside at all
meetings of the Board of Directors, and shall perform such duties and have such
authority and powers as the Board of Directors may from time to time prescribe.

<PAGE>
6.7 PRESIDENT. The President shall perform such duties and have such authority
and powers as the Board of Directors may from time to time prescribe.

6.8 VICE PRESIDENTS. The Vice Presidents, in the order of their seniority,
unless otherwise determined by the Board of Directors, shall, in the absence or
disability of the President, perform the duties and have the authority and
exercise the powers of the President. They shall perform such other duties and
have such other authority and powers as the Board of Directors may from time to
time prescribe or as the President may from time to time delegate.

6.9 SECRETARY.

A. The Secretary shall attend all meetings of the Board of Directors
and all meetings of the Shareholders and record all votes, actions and Minutes
of all proceedings in a Book to be kept for that purpose and shall perform like
duties for any committees when required.

B. He shall give, or cause to be given, notice of all meetings of
the Shareholders and special meetings of the Board of Directors.

C. He shall keep in safe custody the seal of the Corporation, if
any, and, when authorized by the Board of Directors or any committee, affix it
to any instrument requiring it. When so affixed, it shall be attested by his
signature or by the signature of the Treasurer or an Assistant Secretary.

D. He shall be under the supervision of the officer and shall
perform such other duties and have such other authority and powers as the Board
of Directors may from time to time prescribe or as the Board of Directors may
from time to time delegate.

6.10 ASSISTANT SECRETARIES. The Assistant Secretaries, in the order of their
seniority, unless otherwise determined by the Board of Directors, shall, in the
absence or disability of the Secretary, perform the duties and have the
authority to exercise the powers of the Secretary. They shall perform such other
duties and have such other powers as the Board of Directors may from time to
time prescribe or as the President may from time to time delegate.

6.11 TREASURER.

A. The Treasurer shall have the custody of the corporate funds and
securities, shall keep full and accurate accounts of receipts and disbursements
of the Corporation, and shall deposit all funds and other valuables in the name
and to the credit of the Corporation in depositories designated by the Board of
Directors.

B. He shall disburse the funds of the Corporation as ordered by the
Board of Directors, and prepare financial statements as they direct.

<PAGE>
C. If required by the Board of Directors, he shall give the
Corporation a bond (in such form, in such sum, and with such surety or sureties
as shall be satisfactory to the Board of Directors) for the faithful performance
of the duties of his office and for the restoration of the Corporation, in case
of his death, resignation, retirement or removal from office, of all books,
papers, vouchers, money and other property of whatever kind in his possession or
under his control belonging to the Corporation.

D. He shall perform such other duties and have such other authority
and powers as the Board of Directors may from time to time prescribe or as the
President may from time to time delegate.

6.12 ASSISTANT TREASURERS. The Assistant Treasurers, in the order of their
seniority, unless otherwise determined by the Board of Directors, shall, in the
absence or disability of the Treasurer, perform the duties and have the
authority and exercise the powers of the Treasurer. They shall perform such
other duties and have such other powers as the Board of Directors may from time
to time prescribe or the President may from time to time delegate.

6.13 CONTROLLER. The Controller shall be in charge of the accounts of the
Company. The Controller shall have such other powers and perform such other
duties as may be assigned by the Board of Directors and shall submit such
reports and records to the Board of Directors as it may request.

6.14 ASSISTANT CONTROLLERS. Each Assistant Controller shall have such powers and
perform such duties as may be assigned by the Controller or the Board of
Directors.

6.15 DESIGNATION OF AN OFFICER AS THE CHIEF EXECUTIVE OFFICER. The Board of
Directors shall designate one of the elected officers as the chief executive
officer of the Company. The chief executive officer shall be in general and
active charge of the business and affairs of the Company.

6.16 DESIGNATION OF AN OFFICER AS THE CHIEF OPERATING OFFICER. The Board of
Directors may designate one of the elected officers the chief operating officer
of the Company with such powers and duties as may be assigned by the Board of
Directors.

6.17 DESIGNATION OF AN OFFICER AS THE CHIEF FINANCIAL OFFICER. The Board of
Directors may designate one of the elected officers the chief financial officer
of the Company with such powers and duties as may be assigned by the Board of
Directors.

ARTICLE 7. CERTIFICATES AND SHAREHOLDERS

7.1 CERTIFICATES. Certificates in the form determined by the Board of Directors
shall be delivered representing all shares to which Shareholders are entitled.
Certificates shall be consecutively numbered and shall be entered in the books
of the Corporation as they are issued. Each certificate shall state on its face
the holder's name, the number and class of shares, the par value of shares

<PAGE>
or a statement that such shares are without par value, and such other matters as
may be required by law. It shall be signed by the Chairman of the Board, the
President or a Vice President and such other officer or officers as the Board of
Directors shall designate, and may be sealed with the seal of the Corporation or
a facsimile thereof, if any. If a certificate is countersigned by a transfer
agent or an assistant transfer agent or registered by a registrar (either of
which is other than the Corporation or an employee of the Corporation), the
signature of any officer may be facsimile.

7.2 ISSUANCE. Shares (both treasury and authorized but unissued) may be issued
for such consideration (not less than par value) and to such persons as the
Board of Directors may determine from time to time. Shares may not be issued
until the full amount of the consideration, fixed as provided by law, has been
paid.

7.3 PAYMENT FOR SHARES.

A. KIND. Subject to any provision of the Constitution of the State
of Texas to the contrary, the Board of Directors may authorize shares to be
issued for consideration consisting of any tangible or intangible benefit to the
Corporation, including cash, promissory notes, services performed, contracts for
services to be performed, or other securities of the Corporation.

B. VALUATION. In the absence of fraud in the transaction, the
judgment of the Board of Directors as to the value of consideration received
shall be conclusive.

C. EFFECT. When consideration, fixed as provided by law, has been
paid, the shares shall be deemed to have been issued and shall be considered
fully paid and nonassessable.

D. ALLOCATION OF CONSIDERATION. The consideration received for
shares shall be allocated by the Board of Directors, in accordance with the law,
between stated capital and capital surplus accounts.

7.4 SUBSCRIPTIONS. Unless otherwise provided in the subscription agreement,
subscriptions for shares, whether made before or after organization of the
Corporation, shall be paid in full at such time or in such installments and at
such times as shall be determined by the Board of Directors. Any call made by
the Board of Directors for payment on subscriptions shall be uniform as to all
shares of the same series. In case of default in the payment on any installment
or call when payment is due, the Corporation may proceed to collect the amount
due in the same manner as any debt due to the Corporation.

7.5 LIEN. For any indebtedness of a Shareholder to the Corporation, the
Corporation shall have a first and prior lien on all shares of its stock owned
by him and on all dividends or other distributions declared thereon.

7.6 LOST, STOLEN OR DESTROYED CERTIFICATES. The Corporation shall issue a new
certificate in place of any certificate for shares previously issued if the
registered owner of the certificate:

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A. CLAIM. Makes proof in affidavit form that it has been lost,
destroyed or wrongfully taken; and

B. TIMELY REQUEST. Requests the issuance of a new certificate before
the Corporation has notice that the certificate has been acquired by a purchaser
for value in good faith and without notice of an adverse claim; and

C. BOND. Gives a bond in such form, and with such surety or
sureties, with fixed or open penalty, as the Corporation may direct, to
indemnify the Corporation (and its transfer agent and registrar, if any) against
any claim that may be made on account of the alleged loss, destruction or theft
of the certificate; and

D. OTHER REQUIREMENTS. Satisfies any other reasonable requirements
imposed by the Corporation. When a certificate has been lost, apparently
destroyed or wrongfully taken, and the holder of record fails to notify the
Corporation within a reasonable time after he has notice of it, and the
Corporation registers a transfer of the shares represented by the certificate
before receiving such notification, the holder of record is precluded from
making any claim against the Corporation for the transfer or for a new
certificate.

7.7 REGISTRATION OF TRANSFER. The Corporation shall register the transfer of a
certificate for shares presented to it for transfer if:

A. ENDORSEMENT. The certificate on a separate stock power is
properly endorsed by the registered owner or by his duly authorized attorney;
and

B. GUARANTEE AND EFFECTIVENESS OF SIGNATURE. The signature of such
person has been guaranteed by a national banking association or member of the
New York Stock Exchange, and reasonable assurance is given that such
endorsements are effective; and

C. ADVERSE CLAIMS. The Corporation has no notice of an adverse claim
or has discharged any duty to inquire into such a claim; and

D. COLLECTION OF TAXES. Any applicable law relating to the
collection of taxes has been complied with.

<PAGE>
7.8 REGISTERED OWNER. Prior to due presentment for registration of transfer of a
certificate for shares, the Corporation may regard the person in whose name any
shares issued by the Corporation or registered in the share transfer records of
the Corporation at any particular time as the owner of those shares at that time
for purposes of voting those shares, receiving distributions thereon or notices
in respect thereof, transferring those shares, exercising rights of dissent with
respect to those shares, exercising or waiving any preemptive right with respect
to those shares, if any, entering into agreements with respect to those shares
in accordance with Article 2.22 or 2.30 of the TBCA, or giving proxies with
respect to those shares.

ARTICLE 8. GENERAL PROVISIONS

8.1 DISTRIBUTIONS; SHARE DIVIDENDS.

A. DECLARATION AND PAYMENT. Subject to statute and the Articles of
Incorporation, distributions and share dividends may be declared by the Board of
Directors at any regular or special meeting. The declaration and payment shall
be at the discretion of the Board of Directors.

B. RECORD DATE. The Board of Directors may fix in advance a record
date for the purpose of determining Shareholders entitled to receive a
distribution (other than a distribution involving a purchase or redemption by
the Corporation of any of its own shares) or a share dividend, the record date
to be not more than sixty (60) days prior to the payment date of such
distribution or share dividend, or the Board of Directors may close the stock
transfer books for such purpose for a period of not more than sixty (60) days
prior to the payment date of such distribution or share dividend. In the absence
of any action by the Board of Directors, the date upon which the Board of
Directors adopts the resolution declaring the distribution or share dividend
shall be the record date.

C. RESERVES. By resolution the Board of Directors may create such
reserve or reserves out of the earned surplus of the Corporation as the
Directors from time to time, in their discretion, think proper to provide for
contingencies, or to equalize distributions or share dividends, or to repair or
maintain any property of the Corporation, or for any other purpose they think
beneficial to the Corporation. The Directors may modify or abolish any such
reserve in the manner in which it is created.

8.2 BOOKS AND RECORDS. The Corporation shall keep books and records of account,
shall keep Minutes of the proceedings of its Shareholders, its Board of
Directors, and each committee of its Board of Directors, and shall keep at its
registered office or principal place of business, or at the office of its
transfer agent or registrar, a record of the original issuance of shares issued
by the Corporation and a record of each transfer of those shares that have been
presented to the Corporation for registration of transfer. Such records shall
contain the names and addresses of all past and current Shareholders of the
Corporation and the number and class of shares held by each of them. Any books,
records, Minutes, and share transfer records may be in written form

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<PAGE>
or in any other form capable of being converted into written form within a
reasonable time. The principal place of business of the Corporation, or the
office of its transfer agent or registrar, may be located outside the State of
Texas.

8.3 ANNUAL STATEMENT. Upon the written request of any Shareholder of the
Corporation, the Board of Directors shall mail to such Shareholder its annual
statements for the last fiscal year showing in reasonable detail its assets and
liabilities and the results of its operations and the most recent interim
statements, if any, which have been filed in a public record or otherwise
published. The Corporation shall be allowed a reasonable time to prepare such
annual statements.

8.4 CHECKS AND NOTES. Checks, demands for money, and notes of the Corporation
shall be signed by officer(s) or other person(s) designated from time to time by
the Board of Directors.

8.5 FISCAL YEAR. The fiscal year of the Corporation shall be the calendar year.

8.6 SEAL. If the Corporation has a corporate seal, the corporate seal (of which
there may be one or more exemplars) shall contain the name of the Corporation
and the name of the state of incorporation. The seal may be used by impressing
it or reproducing a facsimile of it, or otherwise.

8.7 INDEMNIFICATION; INSURANCE.

A. DEFINITIONS. For purposes of this Section 8.7, the term:

1. "Person" means

(a) Any person who is or was a Director, officer, employee or
agent of the Corporation; and

(b) Any person who serves or served at the Corporation's
request as a director, officer, partner, venturer, proprietor, trustee,
employee, agent or similar functionary of another foreign or domestic
corporation, partnership, joint venture, sole proprietorship, trust, employee
benefit plan, or other enterprise.

2. "Director" means any person who is or was a Director of the
Corporation and any person who, while a Director of the Corporation, is or was
serving at the request of the Corporation as a director, officer, partner,
venturer, proprietor, trustee, employee, agent or similar functionary of another
foreign or domestic corporation, partnership, joint venture, sole
proprietorship, trust, employee benefit plan, or other enterprise.

B. GENERAL. The Corporation shall indemnify and may insure its
Directors, officers, agents and other persons to the maximum extent permitted
under the TBCA, as such Act exists or shall from time to time be amended.

<PAGE>
8.8 RESIGNATION. A Director, committee member, officer or agent may resign by
giving written notice to the Chairman of the Board, the President or the
Secretary. The resignation shall take effect at the time specified in it, or
immediately if no time is specified. Unless it specifies otherwise, the
resignation takes effect without being accepted.

8.9 AMENDMENTS OF BYLAWS.

A. These Bylaws may be altered, amended, or repealed at any meeting
of the Board of Directors at which a quorum is present, by the affirmative vote
of a majority of the Directors present at such meeting, provided notice of the
proposed alteration, amendment, or repeal is contained in the notice of the
meeting.

B. These Bylaws may also be altered, amended or repealed at any
meeting of the Shareholders at which a quorum is present or represented, by (i)
with respect to an amendment of Section 2.2, 2.4, 2.5, 2.7, 2.12, 3.2, 3.3, 3.4,
3.6 or 8.9, the affirmative vote of the holders of at least two thirds (2/3rds)
of the outstanding shares, and (ii) with respect to all other amendments, the
affirmative vote of the holders of a majority of the shares present or
represented at the meeting and entitled to vote thereat, provided notice of the
proposed alteration, amendment or repeal is contained in the notice of the
meeting.

8.10 CONSTRUCTION. Whenever the context so requires, the masculine shall include
the feminine and neuter, and the singular shall include the plural, and
conversely. If any portion of these Bylaws shall be invalid or inoperative,
then, so far as is reasonable and possible:

A. The remainder of these Bylaws shall be considered valid and
operative, and

B. Effect shall be given to the intent manifested by the portion
held invalid or inoperative.

8.11 TABLE OF CONTENTS; HEADINGS. The table of contents and headings are for
organization, convenience and clarity. In interpreting these Bylaws, they shall
be subordinated in importance to the other written material.

8.12 RELATION TO ARTICLES OF INCORPORATION. These Bylaws are subject to, and
governed by, the Articles of Incorporation.

EXHIBIT 10.30

RAILTEX, INC.
1993 STOCK PLAN

1. PURPOSE. This 1993 Stock Plan, as amended, (the "Plan") is intended to
provide incentives (a) to the officers and other employees of RailTex, Inc. (the
"Company"), its parent (if any) and any present or future subsidiaries of the
Company (collectively, "Related Corporations") by providing them with
opportunities to purchase stock in the Company pursuant to options granted
hereunder which qualify as "incentive stock options" under Section 422A(b) of
the Internal Revenue Code of 1986 (the "Code") ("ISO" or "ISOs"); (b) to
directors, officers, employees and consultants of the Company and Related
Corporations, or any other person or entity, by providing them with
opportunities to purchase stock in the Company pursuant to options granted
hereunder which do not qualify as ISOs ("Non-Qualified Option" or "Non-Qualified
Options"); (c) to directors, officers, employees and consultants of the Company
and Related Corporations, or any other person or entity, by providing them with
awards of stock in the Company ("Awards"); (d) to directors, officers, employees
and consultants of the Company and Related Corporations, or any other person or
entity, by providing them with Stock Appreciation Rights ("SAR" or "SARs") in
tandem with, or independently of, options granted hereunder; (e) to directors,
officers, employees and consultants of the Company and Related Corporations, or
any other person or entity, by providing them with performance awards in the
form of units ("Units") representing phantom shares of stock ("phantom share" or
"phantom shares"), each Unit representing one phantom share; (f) to directors,
officers, employees and consultants of the Company and Related Corporations, or
any other person or entity, by providing them with opportunities to make direct
purchases of stock in the Company ("Purchases"); and (g) to outside directors by
providing each of them with annual grants of ten-year options to purchase 3,000
shares of Common Stock ("Outside Directors' Options").

ISOs, Non-Qualified Options and Outside Directors' Options are referred to
hereafter individually as an "Option" and collectively as "Options." Options,
Awards, SARs, Units and authorizations to make Purchases are referred to
hereafter collectively as "Stock Rights." Recipients of such Stock Rights are
hereafter referred to individually as an "Optionee" and collectively as
"Optionees." As used herein, the terms "parent" and "subsidiary" mean "parent
corporation" and "subsidiary corporation" respectively, as those terms are
defined in Section 425 of the Code.

2. ADMINISTRATION OF THE PLAN. The Plan shall be administered by (i) to
the extent required by Section 162(m) of the Code and Rule 16b-3, or any
successor or amended rule ("Rule 16b-3") promulgated under the Securities
Exchange Act of 1934, as amended (the "1934 Act"), by two or more outside
directors of the Board of Directors (the "Board") or (ii) in all other cases by
such administrator or administrators as the Board may designate (collectively,
the "Administrators"). The term "outside director" shall mean (i) for purposes
of the preceding sentence, "outside director" as defined in Section 162(m) of
the Code, and the rules and regulations promulgated thereunder, and a
"non-employee director" as defined under Rule 16b-3, and (ii) for all other
purposes of the Plan, as a director who is not a full-time employee of the

<PAGE>
Company or any of the Related Corporations. Subject to terms of the Plan, the
applicable Administrator shall have the authority to (i) determine the employees
of the Company and Related Corporations (from among the class of employees
eligible under paragraph 1 to receive ISOs) to whom ISOs may be granted and to
determine (from among the class of individuals and entities eligible under
paragraph 1 to receive Non-Qualified Options, Awards, SARs and Units and to make
Purchases) to whom Non-Qualified Options, Awards, SARs, Units and authorizations
to make Purchases may be granted; (ii) determine the time or times at which
Options, Awards, SARs or Units may be granted or Purchases made; (iii) determine
the option price of shares subject to each Option (subject to the requirements
of paragraph 4 with respect to ISOs and paragraph 5 with respect to
Non-Qualified Options); (iv) determine the purchase price of shares subject to
each Purchase; (v) determine whether each Option granted shall be an ISO or a
Non-Qualified Option; (vi) determine the time or times when each Option shall
become exercisable and the duration of the exercise period (subject to paragraph
4 with respect to ISOs and paragraph 5 with respect to Non-Qualified Options);
(vii) determine whether restrictions such as repurchase options are to be
imposed on shares subject to Stock Rights and the nature of such restrictions,
if any; and (viii) interpret the Plan and prescribe and rescind rules and
regulations relating to it; however, neither the Board nor the applicable
Administrator shall have any authority to determine whether or when an outside
director shall receive or exercise Outside Directors' Options (or to determine
the exercise price of such Outside Directors' Options) other than to ensure
compliance with the terms of the Plan with respect to Outside Directors'
Options. With respect to persons subject to Section 16 of the 1934 Act,
transactions under the Plan are intended to comply with all applicable
conditions of Rule 16b-3. To the extent any provision of the Plan or action by
the applicable Administrator fails to so comply, it shall be deemed null and
void, to the extent permitted by law and deemed advisable by the applicable
Administrator. The interpretation and construction by the applicable
Administrator of any provisions of the Plan or of any Stock Right granted under
it shall be final unless otherwise determined by the Board. Administrators or
the Board may from time to time adopt such rules and regulations for carrying
out the Plan as they may deem best. No member of the Board, any Administrator
nor the Company shall be liable for any action or determination made in good
faith with respect to the Plan or any Stock Right granted under it.

3. STOCK. The stock subject to the Stock Rights shall be authorized but
unissued shares of the Company's Common Stock, par value $.10 per share (the
"Common Stock"), or shares of Common Stock reacquired by the Company in any
manner. The aggregate number of shares of Common Stock which may be issued
pursuant to the Plan is 1,250,000; PROVIDED, HOWEVER, that in no event shall the
number of shares of Common Stock subject to, and issued upon the exercise of,
ISOs exceed 1,250,000 in the aggregate; PROVIDED, FURTHER that the aggregate
number of shares of Common Stock subject to, and issuable or issued under, the
Plan and the shares of Common Stock subject to the Company's outstanding options
to purchase 306,168 shares of Common Stock that were granted outside of the Plan
shall not exceed 1,250,000; and PROVIDED FURTHER, that the maximum number of
shares of Common Stock issuable under the Plan to any employee in any calendar
year shall not exceed 1,250,000. The number of shares authorized for the grant
of Stock Rights under the Plan shall be subject to adjustment as provided in
paragraph 10. If any Option or any other Stock Right granted under the Plan
shall expire or terminate for any reason without

<PAGE>
having been exercised in full or shall cease for any reason to be exercisable in
whole or in part, or if the Company shall reacquire any unvested shares issued
pursuant to any Stock Right the unpurchased shares subject to such Options or
Stock Rights and any unvested shares so reacquired by the Company shall again be
available for grants of Stock Rights under the Plan to the extent permitted by
Rule 16b-3.

4. ISO PROVISIONS. Any of the following provisions shall have no force or
effect if its inclusion in the Plan is not necessary for Options issued as ISOs
to qualify as ISOs pursuant to the Code and the regulations issued thereunder.

A. GRANT OF ISO. All ISOs shall be granted under the Plan within ten
(10) years of the date of the Plan's adoption by the Board or the date the Plan
receives the requisite shareholder approval, whichever is earlier.

B. MINIMUM OPTION PRICE FOR ISOS.

(i) The price per share specified in the agreement
relating to each ISO granted under the Plan shall not be less
than the fair market value per share of Common Stock on the
date of such grant. In the case of an ISO to be granted to an
employee owning stock representing more than ten percent of
the total combined voting power of all classes of stock of the
Company or any Related Corporation, the price per share
specified in the agreement relating to such ISO shall not be
less than 110 percent of the fair market value per share of
Common Stock on the date of grant.

(ii) In no event shall the aggregate fair market value
(determined at the time an ISO is granted) of Common Stock for
which ISOs granted to any employee are exercisable for the
first time by such employee during any calendar year (under
all stock option plans of the Company and any Related
Corporation) exceed $100,000.

(iii) If, at the time an ISO is granted under the Plan,
the Company's Common Stock is publicly traded, "fair market
value" shall be determined as of the last business day for
which the prices or quotes discussed in this sentence are
available prior to the date such Option is granted and shall
mean (a) the last reported sales price of the Common Stock on
the principal national securities exchange on which the Common
Stock is traded, if the Common Stock is then traded on a
national securities exchange; or (b) the last reported sale
price (on that date) of the Common Stock on the NASDAQ
National Market List, if the Common Stock is not then traded
on a national securities exchange; or (c) the closing bid
price (or the average of bid prices) last quoted (on that
date) by an established quotation service for over-the-counter
securities, if the Common Stock is not reported on the NASDAQ
National Market List. However, if the Common Stock is not

3
<PAGE>
publicly traded at the time an ISO is granted under the Plan,
"fair market value" shall be deemed to be the fair market
value of the Common Stock as determined by the applicable
Administrator after taking into consideration all factors
which it deems appropriate, including, without limitation,
recent sale and offer prices of the Common Stock in private
transactions negotiated at arm's length.

C. DURATION OF ISOS. Subject to earlier termination as provided in
subparagraphs F and G hereunder, each ISO shall expire on the date specified by
the applicable Administrator, but not more than (i) ten years from the date of
grant in the case of ISOs generally, and (ii) five years from the date of grant
in the case of ISOs granted to an employee owning stock possessing more than ten
percent of the total combined voting power of all classes of stock of the
Company or any Related Corporation. Subject to the foregoing provisions and such
earlier termination as provided in said subparagraphs E and F, the term of each
ISO shall be the term set forth in the original instrument granting such ISO,
except with respect to any part of such ISO that is converted into a
Non-Qualified Option pursuant to subparagraph K below.

D. ELIGIBLE EMPLOYEES. ISOs may be granted to any employee of the
Company or any Related Corporation. Those officers and directors of the Company
who are not employees may not be granted ISOs under the Plan.

E. ACCELERATION OF EXERCISE OF ISOS. The Administrator shall not,
without the consent of the Optionee, accelerate the exercise date of any
installment of any ISO granted to any employee (and not previously converted
into a Non-Qualified Option pursuant to subparagraph K below) if such
acceleration would violate the annual vesting limitation contained in Section
422A(d) of the Code, as described in subparagraph B(ii) hereinabove.

F. EFFECT OF TERMINATION OF EMPLOYMENT ON ISOS. If an ISO Optionee
ceases to be employed by the Company or any Related Corporation other than by
reason of death or disability (as such term is defined in subparagraph I
hereunder), any ISO granted to such Optionee within the six-month period
immediately preceding such termination shall be cancelled forthwith. With
respect to any ISOs granted to such Optionee more than six months prior to such
termination, no further installments of such ISOs shall become exercisable and
his ISOs shall terminate after the passage of 60 days from the date of
termination of his employment, but in no event later than on their specified
expiration dates, except to the extent that such ISOs (or unexercised
installments thereof) have been converted into Non-Qualified Options pursuant to
subparagraph K below. Leave of absence with the written approval of the
applicable Administrator shall not be considered an interruption of employment
under the Plan, provided that such written approval contractually obligates the
Company or any Related Corporation to continue the employment of the employee
after the approved period of absence. Employment shall also be considered as
continuing uninterrupted during any other bona fide leave of absence (such as
those attributable to illness, military obligations or governmental service)
provided that the period of

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<PAGE>
such leave does not exceed 90 days or, if longer, any period during which such
Optionee's right to reemployment is guaranteed by statute. ISOs granted under
the Plan shall not be affected by any change of employment within or among the
Company and Related Corporations, so long as the Optionee continues to be an
employee of the Company or any Related Corporation.

G. EFFECT OF DEATH OR DISABILITY ON ISOS. If an Optionee ceases to
be employed by the Company or any Related Corporation by reason of his death,
any ISO of his may be exercised, to the extent of the number of shares with
respect to which he could have exercised it on the date of his death, by his
estate, personal representative or beneficiary who has acquired the ISO by will
or by the laws of descent and distribution, at any time prior to the earlier of
the date specified in the ISO agreement, the ISO's specified expiration date or
one year of the death of the Optionee.

If an Optionee ceases to be employed by the Company and all Related
Corporations by reason of his disability, he shall have the right to exercise
any ISO held by him on the date of termination of employment, to the extent of
the number of shares with respect to which he could have exercised it on that
date, at any time prior to the earlier of the date specified in the ISO
agreement, the ISO's specified expiration date or one year from the date of the
termination of the Optionee's employment. For the purposes of the Plan, the term
"disability" shall mean "permanent and total disability" as defined in Section
22(e)(3) of the Code or successor statute.

H. ADJUSTMENTS. Any adjustment made pursuant to paragraphs 10(A) or
(B) with respect to ISOs shall be made only after the applicable Administrator,
after consulting with counsel for the Company, determines whether such
adjustments would constitute a "modification" of such ISOs (as that term is
defined in Section 425 of the Code) or would cause any adverse tax consequences
for the holders of such ISOs. If the applicable Administrator determines that
such adjustments made with respect to ISOs would constitute a modification of
such ISOs, it may refrain from making such adjustments.

I. NOTICE TO COMPANY OF DISQUALIFYING DISPOSITIONS. Each employee
who receives an ISO must agree to notify the Company in writing immediately
after the employee makes a "disqualifying disposition" of any Common Stock
acquired pursuant to the exercise of an ISO. A "disqualifying disposition" is
any disposition (including any sale) of such Common Stock before the later of
(a) two years after the date the employee was granted the ISO or (b) one year
after the date the employee acquired Common Stock by exercising the ISO. If the
employee has died before such stock is sold, these holding period requirements
do not apply and no Disqualifying Disposition can occur thereafter.

J. OTHER REQUIREMENTS. ISOs shall be issued subject to such
additional requirements as may be imposed from time to time by the Code or the
regulations issued thereunder.

K. CONVERSION OF ISOS INTO NON-QUALIFIED OPTIONS; TERMINATION OF
ISOS. The applicable Administrator, at the written request of any Optionee, may
in its discretion take such

5
<PAGE>
actions as may be necessary to convert such Optionee's ISOs (or any installments
or portions of installments thereof) that have not been exercised on the date of
conversion into Non-Qualified Options at any time prior to the expiration of
such ISOs, regardless of whether the Optionee is an employee of the Company or a
Related Corporation at the time of such conversion. Such actions may include,
but not be limited to, extending the exercise period or reducing the exercise
price of the appropriate installments of such Options. At the time of such
conversion, the applicable Administrator (with the consent of the Optionee) may
impose such conditions on the exercise of the resulting Non-Qualified Options as
the applicable Administrator in its discretion may determine, provided that such
conditions shall not be inconsistent with the provisions of paragraph 5 or any
other paragraph of the Plan. Nothing in the Plan shall be deemed to give any
Optionee the right to have such Optionee's ISOs converted into Non-Qualified
Options, and no such conversion shall occur until and unless the Administrator
takes appropriate action. The applicable Administrator, with the consent of the
Optionee, may also terminate any portion of any ISO that has not been exercised
at the time of such termination.

5. NON-QUALIFIED OPTIONS.

A. MINIMUM OPTION PRICE. The price per share specified in the
agreement relating to each Non-Qualified Option granted under the Plan shall not
be less than the fair market value per share of Common Stock on the date of such
grant. If, at the time a Non-Qualified Option is granted under the Plan, the
Company's Common Stock is publicly traded, "fair market value" shall be
determined as of the last business day for which the prices or quotes discussed
in this sentence are available prior to the date such Non-Qualified Option is
granted and shall mean (i) the last reported sales price of the Common Stock on
the principal national securities exchange on which the Common Stock is traded,
if the Common Stock is then traded on a national securities exchange; or (ii)
the last reported sale price (on that date) of the Common Stock on the NASDAQ
National Market List, if the Common Stock is not then traded on a national
securities exchange; or (iii) the closing bid price (or the average of bid
prices) last quoted (on that date) by an established quotation service for
over-the-counter securities, if the Common Stock is not reported on the NASDAQ
National Market List. However, if the Common Stock is not publicly traded at the
time a Non-Qualified Option is granted under the Plan, "fair market value" shall
be deemed to be the fair market value of the Common Stock as determined by the
applicable Administrator after taking into consideration all factors which it
deems appropriate, including, without limitation, recent sale and offer prices
of the Common Stock in private transactions negotiated at arm's length.

B. DURATION OF NON-QUALIFIED OPTIONS. Each Non-Qualified Option
shall expire on the date specified by the applicable Administrator, but not more
than ten (10) years from the date of grant.

C. VESTING OF NON-QUALIFIED OPTIONS. Subject to any longer or
shorter vesting period and any termination provisions which the applicable
Administrator may impose, a Non-Qualified Option shall be exercisable as
follows: (i) 20% of the shares under the Non-Qualified

6
<PAGE>
Option shall be exercisable one calendar year after the date of its grant, (ii)
an additional 20% of the shares under the Non-Qualified Option shall be
exercisable two calendar years after the date of its grant, (iii) an additional
20% of the shares under the Non-Qualified Option shall be exercisable three
calendar years after the date of its grant, (iv) an additional 20% of the shares
under the Non-Qualified Option shall be exercisable four calendar years after
the date of its grant, and (v) the last 20% of the shares under the
Non-Qualified Option shall be exercisable five calendar years after the date of
its grant.

D. MAINTAIN NON-ISO STATUS. If the applicable Administrator
determines to issue a Non-Qualified Option, it shall take whatever actions it
deems necessary, under Section 422A of the Code and the regulations promulgated
thereunder, to ensure that such Non-Qualified Option is not treated as an ISO.

6. STOCK APPRECIATION RIGHTS. At the discretion of the applicable
Administrator, Options granted under this Plan may be granted in tandem with
SARs ("tandem SARS"), or SARs may be granted independently of and not in tandem
with any Option ("naked SARs"). SARs will become exercisable at such time or
times, and on such conditions, as the applicable Administrator may specify; the
applicable Administrator may impose conditions upon the grant or exercise of any
SAR, which conditions may include a condition that the SAR may only be exercised
in accordance with rules and regulations adopted by the applicable Administrator
from time to time. Such rules and regulations may govern the right to exercise
the SAR granted prior to the adoption or amendment of such rules and regulations
as well as SAR rights granted thereafter.

A. TANDEM SARS.

(i) Any tandem SAR granted with an ISO may be granted
only at the date of grant of such ISO. Any tandem SAR granted
with a Non-Qualified Option may be granted either at or after
the time such Option is granted. A tandem SAR is the right of
an Optionee, without payment to the Company (except for
applicable withholding taxes), to receive the excess of the
fair market value (as defined in subparagraph 4(B)(iii)) per
share on the date on which such SAR is exercised over the
option price per share as provided in the relating underlying
Option. A tandem SAR granted with an ISO may be exercised only
when the fair market value (as defined in subparagraph
4(B)(iii)) per share of the Common Stock subject to the ISO
exceeds the per share exercise price of the ISO. A tandem SAR
granted with an Option shall pertain to, and be granted only
in conjunction with, the related underlying Option granted
under this Plan and shall be exercisable and exercised only to
the extent that the underlying Option is exercisable. The
number of shares of Common Stock subject to such tandem SAR
shall be all or part of the shares subject to such Option as
determined by the applicable Administrator. The tandem SAR
shall either become fully or partially non-exercisable and
shall then be fully or partially forfeited if the

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<PAGE>
exercisable portion, or any part thereof, of the underlying
Option is exercised and vice versa.

(ii) Subject to any restrictions or conditions imposed
by the applicable Administrator, a tandem SAR may be exercised
by the Optionee as to a number of shares of Common Stock under
its related Option only upon the surrender of the
then-exercisable portion of the related Option covering a like
number of shares of Common Stock. Upon the exercise of a
tandem SAR and the surrender of the exercisable portion of the
related Option, the Optionee shall be awarded cash, shares of
Common Stock or a combination of shares and cash at the
discretion of the applicable Administrator. The award shall
have a total value equal to the product obtained by
multiplying (1) the excess of the fair market value per share
on the date on which such tandem SAR is exercised over the
Option price per share by (2) the number of shares subject to
the exercisable portion of the related Option so surrendered.

B. NAKED SARS.

(i) A naked SAR may be granted irrespective of whether
the recipient holds, is being granted, or has been granted any
options under any stock plan of the Company. A naked SAR may
be granted irrespective of whether the recipient holds, is
being granted, or has been granted any tandem SARs. A naked
SAR may be made exercisable without regard to the
exercisability of any option.

(ii) With respect to the exercise of any naked SAR, the
term "Spread" as used in this paragraph 6 shall mean an amount
equal to the product computed by multiplying (1) the excess of
(A) the fair market value per share of Common Stock of the
Company on the date such naked SAR is exercised over (B) the
price designated by the applicable Administrator (the "Award
Price") by (2) the number of shares with respect to which such
naked SAR is being exercised.

C. GENERAL PROVISIONS.

(i) The applicable Administrator may specify that a SAR
shall be exercisable for cash, for shares, for a combination
of cash or shares, or in cash or shares at the holder's
option. On the exercise of a SAR, the holder thereof, except
as provided in subparagraphs (ii) and (iii) of this paragraph
6(C), shall be entitled to receive either:

(a) if the exercise is for shares, a number of shares
equal to the

8
<PAGE>
quotient computed by dividing the Spread by the fair
market value per share on the date of exercise of the
SAR, PROVIDED, HOWEVER, that in lieu of fractional
shares the Company shall pay cash equal to the same
fraction of the fair market value per share on the date
of exercise of the SAR; or

(b) if the exercise is for cash, an amount in cash equal
to the Spread; or

(c) if the exercise is partly for cash and partly for
shares, a combination of cash in the amount specified in
such SAR holder's notice of exercise, and a number of
shares calculated as provided in clause (a) of this
subparagraph (i), after reducing the Spread by such cash
amount, plus cash in lieu of any fractional share as
provided above.

(ii) Notwithstanding the provisions of subparagraph (i)
of this paragraph 6(C) the applicable Administrator shall have
sole discretion to consent to or disapprove, in whole or in
part, any permitted election or the right without election of
a holder of a SAR to receive cash upon the exercise of a SAR
("Cash Election"). Such consent or disapproval may be given at
any time after the Cash Election to which it relates. If the
applicable Administrator shall disapprove a Cash Election, in
lieu of paying the cash (or any portion thereof) specified in
such Cash Election, the Administrator shall determine the
amount of cash, if any, to be paid pursuant to such Cash
Election and shall issue a number of shares calculated as
provided in clause (a) of subparagraph (i) of this paragraph
6(C), after reducing the Spread by such cash to be paid plus
cash in lieu of any fractional share.

(iii) SARs granted or to be granted to officers or
directors of the Company under the Plan shall be subject to
the following additional provisions: (a) no grant shall be
made unless and until the Company has been subject to the
reporting requirements of Section 13(a) of the 1934 Act for at
least a year and has filed all reports and statements required
to be filed pursuant to such Section for that year; and (b) no
Cash Election may be made (and no related Option exercised)
during the six months after grant, except in the event of the
death or disability of the holder. The Company intends that
this subparagraph (iii) shall comply with the requirements of
Rule 16b-3. Should any provision of this subparagraph (iii) be
unnecessary to comply with the requirements of the said Rule
16b-3, the Board may amend this Plan to add to or modify the
provisions of this Plan accordingly.

9
<PAGE>
(iv) Except as otherwise provided by the applicable
Administrator, no SAR shall be transferable except by will or
by the laws of descent and distribution. During the life of a
holder of a SAR, the SAR shall be exercisable only by him or
his guardian or legal representative.

(v) A person exercising a SAR for shares shall not be
treated as having become the registered owner of any shares
issued on such exercise until such shares are delivered to
him.

(vi) Each SAR shall be on such terms and conditions
(including additional terms and conditions) not inconsistent
with this Plan as the applicable Administrator may determine.

(vii) To exercise a SAR, the holder shall (i) give
written notice thereof to the Company addressed to the
Secretary of the Company by delivery to RailTex, Inc. at 4040
Broadway, Suite 200, San Antonio, Texas 78209, and by
specifying therein the amount he elects (if such election is
permitted under the terms of the SAR) to receive in cash, if
any, and the amount he elects (if such election is permitted
under the terms of the SAR) to receive in shares and (ii)
deliver to the Company such written representations,
warranties and covenants as may be required by the Company or
Company counsel. The date of exercise of a SAR shall be the
date on which the Company shall have received the notice
referred to in the first sentence of this subparagraph (vii).

(viii) The number of shares awardable to an Optionee
with respect to the noncash portion of a SAR shall be
determined by dividing such noncash portion by the fair market
value per share (as determined in accordance with subparagraph
4(B)(iii)) on the exercise date. No fractional shares shall be
issued. Any fractional shares which, but for this subparagraph
(viii), would have been issued to an Optionee pursuant to a
SAR, shall be deemed to have been issued and immediately sold
to the Company for their fair market value, and the Optionee
shall receive from the Company cash in lieu of such fractional
shares.

7. UNITS. At the discretion of the applicable Administrator, performance
awards in the form of Units may be granted either independently of or in tandem
with a Stock Right granted hereunder, to such extent as determined by the
applicable Administrator, except that such Units shall not be granted in tandem
with ISOs granted under the Plan. Units granted hereunder may be based on such
factors as changes in the market price for shares of Common Stock of the
Company, personal performance of the recipient of such Units or of his division
or department, the performance of the Related Corporation by which he is
employed, or any other factors or

<PAGE>
criteria set by the applicable Administrator. Units shall have such other terms
and conditions as the applicable Administrator shall determine and shall be
payable in such form as such Administrator may determine including, for example,
payment in shares of the Company's Common Stock.

8. OUTSIDE DIRECTORS' OPTIONS.

A. GRANT. On January 1 of each calendar year after the date the Plan
is approved by the shareholders of the Company, each outside director then
serving shall receive an option to purchase 3,000 shares of Common Stock
(individually, an "Outside Director's Option," and collectively, "Outside
Directors' Options").

B. MINIMUM PURCHASE PRICE. The exercise price per share of the
Outside Directors' Options shall not be less than the fair market value per
share of Common Stock on the date of such grant. If, at the time an Outside
Director's Option is granted under the Plan, the Company's Common Stock is
publicly traded, "fair market value" shall be determined as of the last business
day for which the prices or quotes discussed in this sentence are available
prior to the date such Outside Director's Option is granted and shall mean (i)
the last reported sales price of the Common Stock on the principal national
securities exchange on which the Common Stock is traded, if the Common Stock is
then traded on a national securities exchange; or (ii) the last reported sale
price (on that date) of the Common Stock on the NASDAQ National Market List, if
the Common Stock is not then traded on a national securities exchange; or (iii)
the closing bid price (or the average of bid prices) last quoted (on that date)
by an established quotation service for over-the-counter securities, if the
Common Stock is not reported on the NASDAQ National Market List. However, if the
Common Stock is not publicly traded at the time an Outside Director's Option is
granted under the Plan, "fair market value" shall be the average of the three
most recent sale and offer prices of the Common Stock in private transactions
negotiated at arm's length.

C. DURATION OF OUTSIDE DIRECTORS' OPTIONS. Each Outside Director's
Option shall expire ten (10) years from the date of grant; otherwise, an Outside
Director's Option shall not be subject to forfeiture or termination.

D. EXERCISE. An outside director may exercise an Outside Director's
Option, if exercisable, by providing written notice to the Company addressed to
the Secretary of the Company at 4040 Broadway, Suite 200, San Antonio, Texas
78209. The written notice shall specify the number of options being exercised,
and by paying the full exercise price. The written notice shall also include
such written representations, warranties and covenants as may be required by the
Company, Company counsel or the applicable Administrator.

E. MAINTAIN NON-ISO STATUS. The applicable Administrator shall take
whatever actions it deems necessary, under Section 422A of the Code and the
regulations promulgated thereunder, to ensure that any such Outside Director's
Option is not treated as an ISO.

<PAGE>
F. HOLDING PERIOD AND TERMINATION. An outside director may not
dispose of any shares acquired as a result of the exercise of an Outside
Director's Option until six months after the date of the "grant" of the Outside
Director's Option, as determined in accordance with Rule 16(b)-3. Upon the
termination of the Plan or the unavailability of shares of Common Stock for
issuance under the Plan, no additional Outside Directors' Options shall be
granted.

9. WRITTEN AGREEMENTS. Stock Rights shall be evidenced by instruments
(which need not be identical) in such forms as the applicable Administrator may
from time to time approve. Such instruments shall conform to such terms,
conditions and provisions as are applicable hereunder and may contain such other
terms and conditions and provisions as the applicable Administrator deems
advisable which are not inconsistent with the Plan, including restrictions
applicable to shares of Common Stock issuable upon exercise of Stock Rights and
the payment, if applicable, of any legal form of consideration (including,
without limitation, whether payment must be in cash or by tendering shares of
Common Stock). A Stock Right may provide for acceleration of exercise in the
event of a change in control of the Company, in the discretion of and as defined
by the applicable Administrator. The applicable Administrator may from time to
time confer authority and responsibility on one or more of its own members
and/or one or more officers of the Company to execute and deliver such
instruments. The proper officers of the Company are authorized and directed to
take any and all action necessary or advisable from time to time to carry out
the terms of such instruments.

10. ADJUSTMENTS. Upon the happening of any of the following described
events, an Optionee's rights with respect to Options granted to him hereunder,
and the recipient's rights with respect to Common Stock to be acquired (or used
for measurement purposes) pursuant to the exercise of SARs or Units, or to be
acquired pursuant to a Purchase or Award hereunder, shall be adjusted as
hereinafter provided, unless otherwise specifically provided, in addition or to
the contrary, in the written agreement between the recipient and the Company
relating to such Stock Right.

A. CERTAIN CORPORATE EVENTS. In the event shares of Common Stock
shall be subdivided or combined into a greater or smaller number of shares or
if, upon a merger, consolidation, reorganization, split-up, liquidation,
combination, recapitalization or the like of the Company, the shares of Common
Stock shall be exchanged for other securities of the Company or of another
corporation, each grantee of a Stock Right shall be entitled, subject to the
conditions herein stated, to purchase (or have used for measurement purposes)
such number of shares of Common Stock or amount of other securities of the
Company or such other corporation as were exchangeable for the number of shares
of Common Stock which such grantee would have been entitled to purchase (or have
used for measurement purposes) except for such action, and appropriate
adjustments shall be made in the purchase price per share to reflect such
subdivision, combination or exchange.

B. STOCK DIVIDENDS. In the event the Company shall issue any of its
shares as

12
<PAGE>
a stock dividend upon or with respect to the shares of stock of the class which
at the time shall be subject to a Stock Right hereunder, each grantee upon
exercising a Stock Right shall be entitled to receive (for the purchase price
paid upon such exercise) (or have used for measurement purposes) the shares or
other consideration as to which he is exercising his Stock Right and, in
addition thereto (at no additional cost), such number of shares of the class or
classes in which such stock dividend or dividends were declared or paid, and
such amount of cash in lieu of fractional shares, or other consideration as he
would have received if he had been the holder of the shares as to which he is
exercising (or which are used for measurement in connection with) his Stock
Right at all times between the date of grant of such Stock Right and the date of
its exercise.

C. NEW SECURITIES. If any person or entity owning restricted Common
Stock obtained by exercise of a Stock Right made hereunder receives new or
additional or different shares or securities ("New Securities") in connection
with a corporate transaction described in subparagraph A above or a stock
dividend described in subparagraph B above as a result of owning such restricted
Common Stock, such New Securities shall be subject to all of the conditions and
restrictions applicable to the restricted Common Stock with respect to which
such New Securities were issued.

D. CASH DIVIDENDS. No adjustments shall be made for dividends paid
in cash or in property other than securities of the Company, unless specified to
the contrary by the applicable Administrator in the instrument evidencing such
Stock Right.

E. FRACTIONAL SHARES. No fractional shares shall actually be issued
under the Plan. Any fractional shares which, but for this subparagraph E, would
have been issued to a grantee pursuant to a Stock Right shall be deemed to have
been issued and immediately sold to the Company for their fair market value, and
the grantee shall receive from the Company cash in lieu of such fractional
shares.

F. ADJUSTMENTS. Upon the happening of any of the foregoing events
described in subparagraphs A or B above, the class and aggregate number of
shares set forth in paragraph 3 hereof that are subject to Stock Rights which
previously have been or subsequently may be granted under the Plan shall also be
appropriately adjusted to reflect the events described in such subparagraphs.
The Board shall determine the specific adjustments to be made under this
paragraph 10 and, subject to paragraph 4(H), its determination shall be
conclusive.

11. MEANS OF EXERCISING STOCK RIGHTS. A Stock Right (or any part or
installment thereof) shall be exercised as specified in the written instrument
granting such Stock Right, which instrument may specify any legal method of
exercise and any method of payment of the exercise price, including, without
limitation, the payment of the exercise price by tendering outstanding shares of
Common Stock or shares of Common Stock received upon exercise of a Stock Right.
The holder of a Stock Right exercisable for shares shall not have the rights of
a shareholder with respect to the shares covered by his Stock Right until the
date of issuance of a stock certificate to him for such shares. Except as
expressly provided above in paragraph 10 with respect to changes in

<PAGE>
capitalization and stock dividends, no adjustment shall be made for dividends or
similar rights for which the record date is before the date such stock
certificate is issued.

12. TRANSFERABILITY OF STOCK RIGHTS. Except as otherwise provided in the
Plan or by the applicable Administrator, no Stock Right granted under the Plan
shall be transferrable by an Optionee other than by (i) will or the laws of
descent and distribution, or (ii) pursuant to a qualified domestic relations
order as defined by the Code or Title I of the Employee Retirement Income
Security Act, or the rules thereunder.

13. TERM OF THE PLAN. This Plan was adopted by the Board on September 13,
1993, effective September 13, 1993, subject to approval of the Plan by the
holders of a majority of the outstanding shares of the Company at the next
meeting of shareholders present in person or by proxy at the next meeting of
shareholders. Stock Rights may be granted under the Plan at any time after
September 13, 1993, even if prior to the date of shareholder approval of the
Plan; PROVIDED, HOWEVER, that such date shall not be prior to the date on which
the applicable Administrators acts to approve the grant or award. If the
requisite shareholder approval is not obtained by September 13, 1994, any grants
of ISOs under the Plan and any grants of Stock Rights to officers and directors,
as the case may be, made prior to that date will be automatically rescinded.

14. TERMINATION; AMENDMENT. The Board may terminate or amend the Plan in
any respect at any time, except that no amendment requiring shareholder approval
under provisions of the Code and related regulations relating to ISOs or under
the law will be effective without approval of shareholders as required and
within the times set by such rules.

15. APPLICATION OF FUNDS. The proceeds received by the Company from the
sale of shares pursuant to Stock Rights authorized under the Plan shall be used
for general corporate purposes.

16. GOVERNMENTAL REGULATION. The Company's obligation to sell and deliver
shares of the Common Stock under this Plan is subject to the approval of any
governmental authority required in connection with the authorization, issuance
or sale of such shares.

17. WITHHOLDING OF ADDITIONAL INCOME TAXES. Upon the exercise of a
Non-Qualified Option, an Outside Director's Option, the grant of an Award, the
making of a Purchase of Common Stock for less than its fair market value, the
making of a Disqualifying Disposition (as defined in paragraph 4(I)), the
vesting of restricted Common Stock acquired on the exercise of a Stock Right
hereunder, or any other event in connection with a Stock Right, the Company, in
accordance with Section 3402(a) of the Code, may require the Optionee, Award
recipient, purchaser, or holder or exerciser of a Stock Right to pay additional
withholding taxes in respect of the amount that is considered compensation
includable in such person's gross income.

18. GOVERNING LAW; CONSTRUCTION. The validity and construction of the Plan
and the

<PAGE>
instruments evidencing Stock Rights shall be governed by the laws
of the State of Texas. In construing this Plan, the singular shall include the
plural and the masculine gender shall include the feminine and neuter, unless
the context otherwise requires.

EXHIBIT 10.49

EMPLOYMENT AGREEMENT

This EMPLOYMENT AGREEMENT (this "Agreement") is made and entered into as
of the 1st day of January, 1998, by and between RAILTEX, INC., a Texas
corporation (the "Company"), and BRUCE M. FLOHR (the "Employee").

1. PREAMBLE: The Employee founded the Company and currently serves as its
Chief Executive Officer ("CEO") and Chairman of the Board. The Employee is now
desirous of reducing his daily management responsibilities of the Company, and
the Company and the Employee are now desirous of the Company hiring another CEO;
however, the Company and the Employee are also desirous of retaining the
Employee's advice and services, on the terms and conditions set forth below,
through August 31, 2004. Accordingly, in consideration of the covenants and
agreements hereinafter set forth and the mutual benefits to be derived
therefrom, the Company and the Employee hereby agree to the following
provisions.

2. EMPLOYMENT:

2.1 The Company hereby agrees to employ the Employee, and the
Employee does hereby accept employment with the Company and agrees to
serve the Company, in the capacities, for the term and subject to and upon
the terms and conditions as herein contained.

2.2 During the term of the Employee's employment with the Company,
as set forth below, the Employee's duties shall be as follows:

(a) for the period from the employment of a new CEO until
August 31, 1999, the Employee shall provide orientation and
introductions of the new CEO, coordinate the Company's Brazilian
investment activities and maintain industry relations, all with the
concurrence of the CEO as to strategy, direction and financial
commitment, and the Employee shall provide such consulting and other
services as may be delegated by the Board; and

(b) for the period from September 1, 1999, until the end of
the term hereof, the Employee shall provide such consulting,
industry relations and other services as may be delegated by the
Board.
<PAGE>
3. TERM:

3.1 The term of the Employee's employment hereunder shall be for the
period from the date of this Agreement through August 31, 2004, subject to
earlier termination only as provided for in Section 9 hereof.

4. DUTIES:

4.1 In performing the services required by this Agreement, the
Employee shall use his best efforts, skills, and abilities.

4.2 The Employee shall be required to perform such other duties as
may be designated from time to time by the Board of Directors.

4.3 Notwithstanding the foregoing or anything else in this Agreement
to the contrary, the Employee shall in no event be assigned any services
or duties, or be expected to perform any services or duties, that require
the Employee to work, in the aggregate, (i) from January 1, 1998, through
August 31, 1999, more than eight (8) hours per business day or forty (40)
hours per calendar week, or (ii) thereafter, more than eight (8) hours per
business day or fifteen (15) hours per calendar week. However, nothing in
the foregoing shall preclude the Employee, at the Employee's option, from
spending more time than set forth above in the performance of the services
and duties required under this Agreement. All such additional time spent
by the Employee shall be without additional compensation from the Company,
unless previously agreed to in writing by the Company.

5. COMPENSATION:

5.1 In addition to such other compensation as the Company may from
time to time determine to pay for services rendered and to be rendered by
the Employee to the Company, the Company shall pay the Employee, and the
Employee hereby agrees to accept as compensation for all services rendered
hereunder, a salary at the monthly rates for the periods set forth below,
less applicable deductions required by law. The applicable monthly salary
shall be payable on the last business day of each month during the periods
set forth below:

PERIOD APPLICABLE MONTHLY SALARY

01-01-98 to 08-31-99 $29,166.67

09-01-99 to 08-31-04 $ 8,333.33

2
<PAGE>
Beginning on September 1, 1999 and on each September 1 during the Term of this
Agreement ("Adjustment Date"), the Applicable Monthly Salary shall be increased
by one-hundred percent (100%) of the percentage of increase, if any, shown by
the United States Department of Labor, Bureau of Labor Statistics, Consumer
Price Index, Subgroup "All Items," entitled "Consumer Price Index, Urban Wage
Earners and Clerical Workers (Revised Series) U.S. City Average (1982-1984 =
100) (Index), for the month immediately preceding the Adjustment Date as
compared with the Index for December 1997. The Company shall calculate the
amount of this increase in Applicable Monthly Salary after the United States
Department of Labor publishes the statistics on which the amount of the increase
is based.

In addition, the Applicable Monthly Salary payable hereunder, commencing
September 1, 1999 shall be paid through RailTex Service Co., Inc. so as to
qualify such payments for railroad retirement benefits.

5.2 The Employee shall continue to be entitled to participate under the
Company's 401(k) plan pursuant to its terms, as it may be amended from time to
time by the Company; however, except as expressly set forth in this Agreement,
it is not contemplated that the Employee shall receive any additional grants,
awards or payments as an employee after the date hereof under the Company's 1993
Stock Plan, as amended, or under any other incentive compensation program or
plan of the Company and it is not contemplated that the Employee shall receive
any additional cash compensation for serving as a director during the term of
the Employee's employment with the Company; provided, however, after September
1, 1999, the Employee will receive the same stock and other non-cash
compensation paid to directors of the Company.

6. INSURANCE:

6.1 The Company agrees to provide to the Employee the opportunity to
participate in health, disability and life insurance plans to the extent made
available by the Company to other executive employees on the same terms and
conditions as such other employees.

6.2 The Company agrees that, in addition to any group life insurance plan
in which the Employee may be able to participate under Section 6.1, it shall
maintain, at its expense and subject to a lien in the Company's favor for all
premiums paid by the Company, a Nine Hundred Ten Thousand Eight Hundred Ninety
Dollars ($910,890.00) split dollar life insurance contract (No.9761871) with
Mass Mutual on the Employee's life, payable to the Employee's estate and/or
beneficiaries as designated by the Employee. The Company may obtain additional
life insurance on the Employee payable to the benefit of the Company, and the
Employee agrees to cooperate in the obtaining of any such insurance.

7. VACATION; OFFICE; SECRETARIAL SERVICES; CAR; EXPENSES:

3
<PAGE>
7.1 During each twelve month period that the Employee is employed by the
Company, the Employee shall be entitled to six (6) weeks paid vacation, which
shall be taken and scheduled by the Employee as the Employee shall deem
desirable. Any vacation time not taken during any twelve month period, or upon
the termination of the Employee's employment pursuant to this Agreement, shall
be forfeited.

7.2 During the term of this Agreement, the Company shall provide the
Employee with office space at the Company's main offices in San Antonio, Texas,
secretarial services (as needed), luncheon club dues reimbursement, financial
planning services and an automobile, which shall be comparable to the automobile
currently provided to him by the Company.

7.3 Upon presentation of expense statements or vouchers and such other
supporting information as it may from time to time request, the Company shall
pay or reimburse the Employee for all reasonable travel and other expenses
incurred by the Employee in connection with the performance of his services
under this Agreement. The Employee shall provide annually to the Company, during
the Company's normal budgeting process, an estimate of the expenses he
anticipates he will incur for the next fiscal year. Expenses shall be reasonable
and customary for performing "duties."

8. SEVERANCE:

8.1 If this Agreement is terminated pursuant to Section 9.1(a) or 9.1(d),
then all compensation payable to the Employee pursuant to Section 5 shall cease
as of the effective date of such termination.

8.2 If this Agreement is terminated pursuant to Section 9.1(b) or 9.2, the
Employee shall be entitled to receive from the Company the next six (6) months'
salary from the time of such termination payable, at the Employee's option, in
either (i) six (6) monthly installments from the effective date of such
termination or (ii) a lump sum payment upon the effective date of such
termination.

8.3 If this Agreement is terminated pursuant to Section 9.1(c), the
Employee shall be entitled to receive from the Company:

(a) a lump sum payment on the date of such termination in an amount
equal to all amounts then unpaid pursuant to Section 5.1, without regard
to the monthly payment schedule contained in Section 5.1 but after making
the applicable deductions required by law as set forth in Section 5.1.

4
<PAGE>
(b) for the remaining period of the term of the Employee's
employment with the Company if this Agreement had not been terminated
pursuant to Section 9.1 (c) (the "Continuation Period"), the Company will
arrange to provide the Employee with employee benefits that are welfare
benefits (but not stock option, performance share, performance unit, stock
purchase, stock appreciation or similar compensatory benefits)
substantially similar to those that the Employee was receiving or entitled
to receive immediately prior to the termination date) required to be
provided pursuant to Section 6.1 above, including, but not limited to,
health care, dental, group life and group long-term disability benefits,
and the term life equivalent benefit for any split-dollar insurance
program. If and to the extent that any benefit described in this Paragraph
(b) is not or cannot be paid or provided under any policy, plan, program
or arrangement of the Company or any Subsidiary, as the case may be, then
the Company will itself pay or provide for the payment to the Employee,
his dependents and beneficiaries, of such employee benefits.
Notwithstanding the foregoing, or any other provision of this Agreement,
for purposes of determining the period of continuation coverage to which
the Employee or any of his dependents is entitled pursuant to Section
4980B of the Code (or any successor provision thereto) under the Company's
medical, dental and other group health plans, or successor plans, the
Employee's "qualifying event" shall be the termination of the Continuation
Period and the Employee shall be considered to have remained actively
employed through that date. Employee benefits otherwise receivable by the
Employee pursuant to this Paragraph (b) will be reduced to the extent
comparable welfare benefits are actually received by the Employee from
another employer during the Continuation Period following the Employee's
termination date, and any such benefits actually received by the Employee
shall be reported by the Employee to the Company.

(c) the Company will convey title to the Company car then being used
by the Employee to the Employee without additional consideration therefor.

(d) in addition, notwithstanding anything in this Agreement to the
contrary, the Employee shall be entitled to receive the amounts required
to be paid the Employee pursuant to the terms set forth on Exhibit "A"
attached hereto.

8.4 If this Agreement is terminated pursuant to Section 9.1(e), the
Employee shall be entitled to receive from the Company the remaining amounts due
the Employee pursuant to Section 5.1 as if the Agreement had not been
terminated, which payments shall be made in accordance with the monthly payment
schedule contained in Section 5.1 but after making the applicable deductions
required by law as set forth in Section 5.1. In addition, notwithstanding
anything in this Agreement to the contrary, the Employee shall be entitled to
receive the amounts required to be paid the Employee pursuant to the terms set
forth on Exhibit "A" attached hereto

9. TERMINATION:

9.1 This Agreement and the employment of the Employee hereunder shall
terminate on the first to occur of the following events or conditions:

(a) The expiration of the term specified in Section 3 hereof;
or

5
<PAGE>
(b) The death or total and permanent disability of the Employee (as
defined in the Company's Long-Term Disability Benefit Plan available to
senior executive officers at the time the Employee's disability is
incurred) ("Permanent Disability"); or

(c) A change of control, which shall be deemed to have taken place
upon, and only upon, the occurrence of any of the following events:

(i) the acquisition by any individual, entity or group (within
the meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act of
1934, as amended)(a "Person") of beneficial ownership (within the
meaning of Rule 13d-3 promulgated under the Exchange Act of 1934, as
amended) of 20% or more of the combined voting power of the then
outstanding securities entitled to voted generally in the election
of directors (the "Voting Stock") of the Company; provided, however,
that for purposes of this Section 9, the following acquisitions of
Voting Stock of the Company shall not constitute a change of
control: (A) any issuance of Voting Stock of the Company directly
from the Company that is approved by the Incumbent Board (as defined
below), the consideration for which constitutes principally of
property other than cash, (B) any acquisition by the Company of
Voting Stock of the Company, (C) any acquisition of Voting Stock of
the Company by any employee benefit plan (or related trust)
sponsored or maintained by the Company or any entity in which the
Company directly or indirectly owns 50% or more of the outstanding
Voting Stock (a "Subsidiary"); or (D) any acquisition of Voting
Stock of the Company by any Person pursuant to a Business
Combination, as defined below, that complies with clauses (A), (B)
and (C) of Section 9(c)(iii) below; or

(ii) individuals who, as of the date hereof, constitute
the Board of Directors of the Company (the "Incumbent Board")
cease for any reason to constitute at least a majority of the
Board; provided, however, that any individual becoming a
Director subsequent to the date hereof whose election, or
nomination for election by the Company's shareholders, was
approved by a vote of at least two-thirds of the Directors
then comprising the Incumbent Board (either by a specific vote
or by approval of the proxy statement of the Company in which
such person is named as a nominee for director, without
objection to such nomination) shall be deemed to have been a
member of the Incumbent Board; or

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<PAGE>
(iii) consummation of a reorganization, merger or
consolidation, a sale or other disposition of all or
substantially all of the assets of the Company, or other
transaction (each, a "Business Combination"), unless, in each
case, immediately following such Business Combination, (A) all
or substantially all of the individuals and entities who were
beneficial owners of Voting Stock of the Company immediately
prior to such Business Combination beneficially own, directly
or indirectly, more than two-thirds of the combined voting
power of the then outstanding shares of Voting Stock of the
entity resulting from such Business Combination (including,
without limitation, an entity which as a result of such
transaction owns the Company or all or substantially all of
the Company's assets either directly or through one or more
subsidiaries), (B) no Person (other than the Company, such
entity resulting from such Business Combination, or any
employee benefit plan (or related trust) sponsored or
maintained by the Company, any Subsidiary or such entity
resulting from such Business Combination) beneficially owns,
directly or indirectly, 20% or more of the combined voting
power of the then outstanding shares of Voting Stock of the
entity resulting from such Business Combination, and (C) at
least a majority of the members of the Board of Directors of
the entity resulting from such Business Combination were
members of the Incumbent Board at the time of the execution of
the initial agreement or of the action of the Board providing
for such Business Combination; or

(iv) approval by the shareholders of the Company of a
complete liquidation or dissolution of the Company, except
pursuant to a Business Combination that complies with clauses
(A), (B) and (C) of Section 9(c)(iii) above; or

(d) The Employee's providing written notice to the Company of
his voluntary resignation from employment with the Company.

(e) The termination of the Employee from employment with the
Company by the Company "without cause". For purposes of this
Agreement, the term "without cause" shall mean for any reason not
specified in Section 9.1 (a),(b),(c) or (d) or in Section 9.2
hereof. In addition, if during the term of this Agreement the
Employee is not reelected a director of the Company or is not
elected as Chairman of the Board of the Board, the Employee may, as
his option, terminate his employment with the Company and such
termination shall be considered as a termination by the Company
without cause. Also, the Employee will be treated for purposes of
this Agreement as having been terminated by the Company "without
cause" if during the Term the Employee terminates his employment
with the Company prior to termination for cause for any of the
following reasons (each, a "Good Reason"): without the Employee's
written consent, the Company has breached any material provision of
this Agreement and within 30 days after notice thereof from the
Employee, the Company fails to cure such breach.

9.2 The Board of Directors of the Company may elect to terminate the
employment of the Employee hereunder for "cause". "Cause" means that,
prior to any termination pursuant to this Section 9.2, the Board of
Directors determines that:

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<PAGE>
(a) The Executive has been convicted by a court of
competent jurisdiction of the commission of a felony;

(b) The Executive has willfully and continuously failed to
perform material assigned duties after written notice from the Board
of Directors of such failure and the Executive fails to cure such
failure within a reasonable period after receipt of such notice;

(d) the Employee intentionally and wrongfully disclosed secret
processes or confidential information of the Company or any
Subsidiary.

Notwithstanding the foregoing, the Employee shall not be deemed to have
been terminated for "Cause" hereunder unless and until, in the case of
termination pursuant to Section 9.2(b), there shall have been delivered to
the Employee a copy of a resolution duly adopted by the affirmative vote
of not less than three quarters of the Board (excluding the Employee) then
in office at a meeting of the Board called and held for such purpose,
after reasonable notice to the Employee and an opportunity for the
Employee, together with the Employee's counsel (if the Employee chooses to
have counsel present at such meeting), to be heard before the Board,
finding that, in the good faith opinion of the Board, the Employee had
committed an act constituting "Cause" as herein defined and specifying the
particulars thereof in detail. Nothing herein will limit the right of the
Employee or his beneficiaries to contest the validity or propriety of any
such determination.

10. INDEMNIFICATION: The Company hereby agrees to indemnify and hold
harmless the Employee against any liability, cost or expense arising out of the
Employee's association with the Company to the full extent legally permissible
under the Texas Business Corporation Act, as such act may be amended from time
to time. Solely in consideration for the Company's agreement to indemnify and
hold harmless the Employee pursuant to this Section, after the termination of
the Employee's employment with the Company the Employee agrees to fully assist,
consult and cooperate in good faith with the Company, as requested by the
Company, in connection with (i) any pending or threatened or completed action,
suit, or proceeding, whether civil, criminal, administrative, arbitrative, or
investigative and whether the Employee is a named or threatened party to such
action, suit or proceeding, (ii) any appeal in such an action, suit or
proceeding, and (iii) any inquiry or investigation that could lead to such an
action, suit or proceeding.

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<PAGE>
11. COVENANT NOT TO COMPETE: As an independent covenant, the Employee
further agrees to refrain during his employment by the Company and for a period
of one (1) calendar year thereafter, without written permission from the
Company, from becoming interested in any way in the business of owning, leasing
or operating freight railroads or freight cars as an employee, consultant,
partner, proprietor, director or in any other capacity, except as a "passive"
shareholder of the publicly-traded corporation, with the further understanding
that the Employee shall not own more than one percent (1%) of any class of
capital stock of such a publicly-traded corporation without advance approval of
the Board of Directors of the Company, which may be withheld for any reason
whatsoever ; provided, however, nothing herein shall prevent Employee from
serving as a director of or consultant to Harmon Industries.

The parties agree that this covenant is supported by (independent)
valuable consideration and because of the nature of the business of the Company
is reasonable in its limitation as to time and scope of activity and that even
though no geographic area is specified since the Company's operations are, will
be, and/or may be worldwide no such geographic limitation is possible and that
such covenant is absolutely necessary to protect the good will and/or other
legitimate business interests of the Company. The parties specifically agree
that the provisions of said covenant are in complete and absolute compliance
with Section 15.50, subchapter E of Chapter 15, Texas Business and Commerce
Code.

12. ACTION BY COMPANY: Any action by the Company or the Board of Directors
under this Agreement shall be approved by a majority of the members of the Board
of Directors of the Company, not including the Employee.

13. AGREEMENT NOT TO LIMIT REMEDIES: The terms and provisions of this
Agreement shall not be construed as any limitation upon the remedies the Company
might have at law or in equity in the absence of this Agreement. The Employee
hereby represents to the Company that he is aware of no legal obligation
inconsistent with the terms of this Agreement or with the Employee's undertaking
of his employment with Company.

14. SUCCESSORSHIP: This Agreement shall inure to the benefit of and be
binding upon the Company, its successors and assigns, including any corporate
successor by merger or consolidation, and as used herein, the term "Company"
shall include any such successors or assigns. As used herein, the term "Company"
shall mean the Company and any corporate subsidiary or affiliated Company.

15. ENTIRE AGREEMENT: This Agreement contains the entire Agreement of the
parties relating to and supersedes all prior oral or written agreements relating
to the subject matter hereof, and the parties hereto have no agreements,
representations or warranties relating to the subject matter of this Agreement
which are not set forth herein. No modification of this Agreement shall be valid
unless made in writing and signed by the parties hereto.

16. NOTICE: Any notice or request required or permitted under this Agreement
shall be in writing and given or made by postage paid, registered or certified
mail, return receipt requested, addressed to the Company at its then principal
place of business, or the Employee at his address last given to the Company, or
to either party hereto at such other address last given to the Company, or to
either party hereto at such other address or addresses as such party may from
time to time specify for such purpose in a notice similarly given to the other
party.

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<PAGE>
17. APPLICABLE LAWS: This Agreement is made and is to be performed in the
State of Texas and shall be construed and enforced in accordance with the laws
of the State of Texas.

18. INJUNCTIONS: The parties hereby acknowledge and agree that the Company
may be irreparably damaged in the event that Section 11 of this Agreement is not
specifically enforced. Upon a breach or threatened breach of the terms,
covenants and/or conditions of Section 11 of this Agreement by the Employee, the
Company shall, in addition to all other remedies, be entitled to a temporary or
permanent injunction, without showing any actual damage, and/or a decree for
specific performance, in accordance with the provisions hereof.

19. ARBITRATION: Any and all claims, disputes, or controversies arising out
of or related to this Agreement, or the breach thereof, shall be resolved by
arbitration in accordance with the rules of the American Arbitration Association
then in existence. Such arbitration shall be conducted by a single arbitrator in
San Antonio, Texas.

20. SURVIVABILITY: The representations, warranties, covenants and agreements
set forth in Sections 8, 10, 11, 13, 18, 19, 20 and 21 shall survive the
termination of this Agreement.

21. LEGAL FEES AND EXPENSES: It is the intent of the Company that the
Employee not be required to incur legal fees and the related expenses associated
with the negotiation, interpretation, enforcement or defense of the Employee's
rights under this Agreement by litigation or otherwise because the cost and
expense thereof would substantially detract from the benefits intended to be
extended to the Employee hereunder. Consequently, the Company shall pay the
reasonable legal fees and related expenses of the Employee in the negotiation of
this Agreement. Additionally, if it should appear to the Employee that the
Company has failed to comply with any of its obligations under this Agreement or
in the event that the Company or any other person takes or threatens to take any
action to declare this Agreement void or unenforceable, or institutes any
litigation or other action or proceeding designed to deny, or to recover from,
the Employee the benefits provided or intended to be provided to the Employee
hereunder, the Company irrevocably authorizes the Employee from time to time to
retain counsel of the Employee's choice, at the reasonable expense of the
Company as hereafter provided, to advise and represent the Employee in
connection with any such interpretation, enforcement or defense, including
without limitation the initiation or defense of any litigation or other legal
action, whether by or against the Company or any Director, officer, stockholder
or other person affiliated with the Company, in any jurisdiction.
Notwithstanding any existing or prior attorney-client relationship between the
Company and such counsel, the Company irrevocably consents to the Employee's
entering into an attorney-client relationship with such counsel, and in that
connection the Company and the Employee agree that a confidential relationship
shall exist between the Employee and such counsel. Without respect to whether
the Employee prevails, in whole or in part, in connection with any of the
foregoing, the Company will pay and be solely financially responsible for any
and all reasonable attorneys' and related fees and expenses incurred by the
Employee in connection with any of the foregoing; provided that, in regard to
such matters, the Employee has not acted in bad faith or with no colorable claim
of success.

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<PAGE>
22. OPTION TO PURCHASE THE EMPLOYEE'S STOCK: In the event the Employee
should die during the term of this Agreement, the Employee grants the Company
the option to purchase, within ninety (90) days of the Employee's death, any and
all of shares of Common Stock, par value $.10 per share, of the Company owned by
the Employee at the time of the Employee's death, including the Employee's right
to acquire shares of Common Stock under any stock option (collectively, the
"Employee's Shares"). The purchase price for the Employee's Shares shall be the
average of the high and low trading prices of the Company Common Stock on NASDAQ
during the twenty (20) consecutive trading days immediately preceding the
Employee's death. In order to exercise such option, the Company must give the
Employee's estate written notice of the Company's intent to purchase such shares
prior to the expiration of the ninety (90) day period. Closing of the purchase
shall take place within ten (10) business days after the Company has given
written notice that it intends to exercise its option to purchase the Employee's
Shares. At closing, the Company shall pay the Employee's Estate cash, or the
equivalent thereof, for the Employee's Shares.

23. ACKNOWLEDGMENT: IN WITNESS WHEREOF, the Company has caused this
Agreement to be executed by its officer thereunder duly authorized, and the
Employee has hereunder set his hand, all of the day and year first written.

RAILTEX, INC.

BY:_________________________________
Its:________________________________

EMPLOYEE

____________________________________
Bruce M. Flohr

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<PAGE>
EXHIBIT "A"

CERTAIN ADDITIONAL PAYMENTS BY THE COMPANY

(a) Anything in this Agreement to the contrary notwithstanding, but subject to
paragraph (h), in the event that Section 8.3 or Section 8.4 of this Agreement
shall become operative and it shall be determined (as hereafter provided) that
any payment (other than the Gross-Up payments provided for in this exhibit) or
distribution by the Company or any of its affiliates to or for the benefit of
the Employee, whether paid or payable or distributed or distributable pursuant
to the terms of this Agreement or otherwise pursuant to or by reason of any
other agreement, policy, plan, program or arrangement, including without
limitation any stock option, performance share, performance unit, stock
appreciation right or similar right, or the lapse or termination of any
restriction on or the vesting or exercisability of any of the foregoing (a
"Payment"), would be subject to the excise tax imposed by Section 4999 of the
Internal Revenue Code of 1986, as amended (the "Code") (or any successor
provision thereto) by reason of being considered "contingent on a change in
ownership or control" of the Company, within the meaning of Section 280G of the
Code (or any successor provision thereto) or to any similar tax (such tax or
taxes, together with any such interest and penalties, being hereafter
collectively referred to as the "Excise Tax"), then the Employee shall be
entitled to receive an additional payment or payments (collectively, a "Gross-Up
Payment"). The Gross-Up Payment shall be in an amount such that, after payment
by the Employee of all taxes (including any interest or penalties imposed with
respect to such taxes), including any Excise Tax imposed upon the Gross-Up
Payment, the Employee retains an amount of the Gross-Up Payment equal to the
Excise Tax imposed upon the Payment.
<PAGE>
(b) Subject to the provisions of paragraph (f), all determinations required to
be made under this exhibit, including whether an Excise Tax is payable by the
Employee and the amount of such Excise Tax and whether a Gross-Up Payment is
required to be paid by the Company to the Employee and the amount of such
Gross-Up Payment, if any, shall be made by a nationally recognized accounting
firm (the "Accounting Firm") selected by the Employee in his sole discretion.
The Employee shall direct the Accounting Firm to submit its determination and
detailed supporting calculations to both the Company and the Employee within 30
calendar days after the date of the termination of the Employee's employment
pursuant to Section 8.3 of this Agreement, if applicable, and any such other
time or times as may be requested by the Company or the Employee. If the
Accounting firm determines that any Excise Tax is payable by the Employee, the
Company shall pay the required Gross-Up Payment to the Employee within five
business days after receipt of such determination and calculations with respect
to any Payment to the Employee. If the Accounting Firm determines that no Excise
Tax is payable by the Employee, it shall, at the same time as it makes such
determination, furnish the Company and the Employee an opinion that the Employee
has substantial authority not to report any Excise Tax on his federal, state or
local income or other tax return. As a result of the uncertainty in the
application of Section 4999 of the Code (or any successor provision thereto) and
the possibility of similar uncertainty regarding applicable state or local tax
law at the time of any determination by the Accounting Firm hereunder, it is
possible that Gross-Up Payments which will not have been made by the Company
should have been made (an "Underpayment"), consistent with the calculations
required to be made hereunder. In the event that the Company exhausts or fails
to pursue its remedies pursuant to paragraph (f) and the Employee thereafter is
required to make a payment of any Excise Tax, the Employee shall direct the
Accounting Firm to determine the amount of the Underpayment that has occurred
and to submit its determination and detailed supporting calculations to both the
Company and the Employee as promptly as possible. Any such Underpayment shall be
promptly paid by the Company to, or for the benefit of, the Employee within five
business days after receipt of such determination and calculations.

(c) The Company and the Employee shall each provide the Accounting Firm access
to and copies of any books, records and documents in the possession of the
Company or the Employee, as the case may be, reasonably requested by the
Accounting Firm, and otherwise cooperate with the Accounting Firm in connection
with the preparation and issuance of the determinations and calculations
contemplated by paragraph (f). Any determination by the Accounting Firm as to
the amount of the Gross-Up Payment shall be binding upon the Company and the
Employee.

(d) The federal, state and local income or other tax returns filed by the
Employee shall be prepared and filed on a consistent basis with the
determination of the Accounting Firm with respect to the Excise Tax payable by
the Employee. The Employee shall make proper payment of the amount of any Excise
Payment and, at the request of the Company, provide to the Company true and
correct copies (with any amendments) of his federal income tax return as filed
with the Internal Revenue Service and corresponding state and local tax returns,
if relevant, as filed with the applicable taxing authority, and such other
documents reasonably requested by the Company, evidencing such payment. If prior
to the filing of the Employee's federal income tax return, or corresponding
state or local tax return, if relevant, the Accounting Firm determines that the
amount of the Gross-Up Payment should be reduced, the Employee shall within five
business days pay to the Company the amount of such reduction.

(e) The fees and expenses of the Accounting Firm for its services in connection
with the determinations and calculations contemplated by paragraph (b) shall be
borne by the Company. If such fees and expenses are initially paid by the
Employee, the Company shall reimburse the Employee the full amount of such fees
and expenses within five business days after receipt from the Employee of a
statement therefor and reasonable evidence of his payment thereof.

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<PAGE>
(f) The Employee shall notify the Company in writing of any claim by the
Internal Revenue Service or any other taxing authority that, if successful,
would require the payment by the Company of a Gross-Up Payment. Such
notification shall be given as promptly as practicable but no later than ten
business days after the Employee actually receives notice of such claim and the
Employee shall further apprise the Company of the nature of such claim and the
date on which such claim is requested to be paid (in each case, to the extent
known by the Employee). The Employee shall not pay such claim prior to the
earlier of (i) the expiration of the 30-calendar-day period following the date
on which he gives such notice to the Company and (ii) the date that any payment
of amount with respect to such claim is due. If the Company notifies the
Employee in writing prior to the expiration of such period that it desires to
contest such claim, the Employee shall:

(i) provide the Company with any written records or documents in his
possession relating to such claim reasonably requested by the Company;

(ii) take such action in connection with contesting such claim as the Company
shall reasonably request in writing from time to time, including without
limitation accepting legal representation with respect to such claim by an
attorney competent in respect of the subject matter and reasonably
selected by the Company;

(iii) cooperate with the Company in good faith in order to effectively contest
such claim; and

(iv) permit the Company to participate in any proceedings relating to such
claim;

PROVIDED, HOWEVER, that the Company shall bear and pay directly all costs and
expenses (including interest and penalties) incurred in connection with such
contest and shall indemnify and hold harmless the Employee, on an after-tax
basis, for and against any Excise Tax or income tax, including interest and
penalties with respect thereto, imposed as a result of such representation and
payment of costs and expenses. Without limiting the foregoing provisions of this
paragraph (f), the Company shall control all proceedings taken in connection
with the contest of any claim contemplated by this paragraph (f) and, at its
sole option, may pursue or forego any and all administrative appeals,
proceedings, hearings and conferences with the taxing authority in respect of
such claim (provided, however, that the Employee may participate therein at his
own cost and expense) and may, at its option, either direct the Employee to pay
the tax claimed and sue for a refund or contest the claim in any permissible
manner, and the Employee agrees to prosecute such contest to a determination
before any administrative tribunal, in a court of initial jurisdiction and in
one or more appellate courts, as the Company shall determine; PROVIDED, HOWEVER,
that if the Company directs the Employee to pay the tax claimed and sue for a
refund, the Company shall advance the amount of such payment to the Employee on
an interest-free basis and shall indemnify and hold the Employee harmless, on an
after-tax basis, from any Excise Tax or income or other tax, including interest
or penalties with respect thereto, imposed with respect to such advance; and
PROVIDED FURTHER, HOWEVER, that any extension of the statute of limitations
relating to payment of taxes for the taxable year of the Employee with respect
to which the contested amount is claimed to be due is limited solely to such
contested amount. Furthermore, the Company's control of any such contested claim
shall be limited to issues with respect to which a Gross-Up Payment would be
payable hereunder and the Employee shall be entitled to settle or contest, as
the case may be, any other issue raised by the Internal Revenue Service or any
other taxing authority.

3
<PAGE>
(g) If, after the receipt by the Employee of an amount advanced by the Company
pursuant to paragraph (f), the Employee receives any refund with respect to such
claim, the Employee shall (subject to the Company's complying with the
requirements of paragraph (f) promptly pay to the Company the amount of such
refund (together with any interest paid or credited thereon after any taxes
applicable thereto). If, after the receipt by the Employee of an amount advanced
by the Company pursuant to paragraph (f), a determination is made that the
Employee shall not be entitled to any refund with respect to such claim and the
Company does not notify the Employee in writing of its intent to contest such
denial or refund prior to the expiration of 30 calendar days after such
determination, then such advance shall be forgiven and shall not be required to
be repaid and the amount of any such advance shall offset, to the extent
thereof, the amount of Gross-Up Payment required to be paid by the Company to
the Employee pursuant to this paragraph (f).

(h) Notwithstanding any provision of this Agreement to the contrary, if (i) but
for this sentence, the Company would be obligated to make a Gross-Up Payment to
the Employee, (ii) the aggregate "present value" of the "parachute payments" to
be paid or provided to the Employee under this Agreement or otherwise does not
exceed 1.15 multiplied by three times the Employee's "base amount," and (iii)
but for this sentence, the net after-tax benefit to the Employee of the Gross-Up
Payment would not exceed $50,000 (taking into account both income taxes and any
Excise Tax) as compared to the maximum net after-tax benefit to the employee of
parachute payments the present value of which is not equal to or greater than
three times the Employee's base amount, then the payments and benefits to be
paid or provided under this Agreement will be reduced to the minimum extent
necessary (but in no event to less than zero) so that no portion of any payment
or benefit to the Employee, as so reduced, constitutes an "excess parachute
payment." For purposes of this paragraph (h), the terms "excess parachute
payment" "present value," "parachute payment," and "base amount" will have the
meanings assigned to them by Section 280G of the Code. The determination of
whether any reduction in such payments or benefits to be provided under this
Agreement is required pursuant to the preceding sentence will be made at the
expense of the Company, if requested by the Employee or the Company, by the
Accounting Firm. The fact that the Employee's right to payments or benefits may
be reduced by reason of the limitations contained in this paragraph (h) will not
of itself limit or otherwise affect any other rights of the Employee other than
pursuant to this Agreement. In the event that any payment or benefit intended to
be provided under this Agreement or otherwise is required to be reduced pursuant
to this paragraph (h), the Employee will be entitled to designate the payments
and/or benefits to be so reduced in order to give effect to this paragraph (h).
The Company will provide the Employee with all information reasonably requested
by the Employee to permit the Employee to make such designation. In the event
that the Employee fails to make such designation within 10 business days of the
Termination Date, the Company may effect such reduction in any manner it deems
appropriate.

EXHIBIT 10.55

RESTRICTED SHARE AGREEMENT

THIS RESTRICTED SHARE AGREEMENT is made and entered into as of the Date of
Award specified herein, by and between RAILTEX, INC., a Texas corporation (the
"Company"), and ______________________ (the "Grantee").

WITNESSETH

WHEREAS, the Company maintains the 1993 Stock Plan, as amended (the
"Plan"), under which the Compensation Committee of the Company's Board of
Directors (the "Compensation Committee") may, among other things, grant awards
of restricted shares in the form of shares of the Company's Common Stock, $.10
par value per share ("Common Stock"), subject to such terms, conditions and
restrictions as the Compensation Committee may deem appropriate; and

WHEREAS, pursuant to the Plan, the Compensation Committee has granted an
award of restricted shares conditioned upon the execution by the Company and the
Grantee of a Restricted Share Agreement setting forth all the terms, conditions
and restrictions relating to the restricted shares.

NOW, THEREFORE, in consideration of the foregoing recitals and the
covenants set forth herein, the parties hereto hereby agree as follows:

1. AWARD OF RESTRICTED SHARES. Pursuant to the terms of the Plan,
the Compensation Committee has granted to the Grantee a restricted share
award as of ______, __, ____ (the "Date of Award"), covering _________
(________) shares of Common Stock (the "Restricted Shares"), subject to
the terms, conditions and restrictions set forth in this Agreement.

2. RESTRICTIONS. Until a Restricted Share vests, it may not
be sold, assigned, conveyed, gifted, pledged, hypothecated or otherwise
transferred in any manner whatsoever.

3. VESTING OF RESTRICTED SHARES. Subject to accelerated vesting in
accordance with the provisions of Sections 4, 5 and 6 hereof and subject
to forfeiture in accordance with the provisions of Section 6 hereof,
_________ (_____) of the Restricted Shares shall vest on the first
anniversary of the Date of Award, ________ (________) of the Restricted
Shares shall vest on the second anniversary of the Date of Award, _______
(_______) of the Restricted Shares shall vest on the third anniversary of
the Date of Award, _______ (______) of the Restricted Shares shall vest on
the fourth anniversary of the Date of Award, and the remaining __________
(______) of the Restricted Shares shall vest on the fifth anniversary of
the Date of Award.
<PAGE>
4. ACCELERATION OF VESTING UPON DEATH, DISABILITY. If the employment
of the Grantee shall terminate by reason of the Grantee's death or
Disability (as hereinafter defined), all of the Restricted Shares granted
hereunder and not previously vested hereunder shall vest in full upon such
termination. For purposes of this Agreement, "Disability" shall have the
same meaning as "permanent and total disability" set forth in Section
22(e)(3) of the Internal Revenue Code of 1986, as amended (the "Code").

5. ACCELERATION OF VESTING UPON CHANGE OF CONTROL. Upon a Change of
Control (as hereinafter defined), all Restricted Shares granted hereunder
shall immediately vest in full. For purposes hereof, a "Change of Control"
shall be deemed to have taken place upon the occurrence of any of the
following events:

(i) the acquisition by any individual, entity or group (within
the meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act of
1934, as amended)(a "Person") of beneficial ownership (within the
meaning of Rule 13d-3 promulgated under the Exchange Act of 1934, as
amended) of 20% or more of the combined voting power of the then
outstanding securities entitled to vote generally in the election of
directors (the "Voting Stock") of the Company; provided, however,
that for purposes of this Section 5, the following acquisitions of
Voting Stock of the Company shall not constitute a Change of
Control: (A) any issuance of Voting Stock of the Company directly
from the Company that is approved by the Incumbent Board (as defined
below), the consideration for which constitutes principally of
property other than cash, (B) any acquisition by the Company of
Voting Stock of the Company, (C) any acquisition of Voting Stock of
the Company by any employee benefit plan (or related trust)
sponsored or maintained by the Company or any entity in which the
Company directly or indirectly owns 50% or more of the outstanding
Voting Stock (a "Subsidiary"); or (D) any acquisition of Voting
Stock of the Company by any Person pursuant to a Business
Organization, as defined below, that complies with clauses (A), (B)
and (C) of Section 5(iii) below; or

(ii) individuals who, as of the date hereof, constitute the
Board of Directors of the Company (the "Incumbent Board") cease for
any reason to constitute at least a majority of the Board; provided,
however, that any individual becoming a Director subsequent to the
date hereof whose election, or nomination for election by the
Company's shareholders, was approved by a vote of at least
two-thirds of the Directors then comprising the Incumbent Board
(either by a specific vote or by approval of the proxy statement of
the Company in which such person is named as a nominee for director,
without objection to such nomination) shall be deemed to have been a
member of the Incumbent Board; or

(iii) consummation of a reorganization, merger or
consolidation, a sale or other disposition of all or substantially
all of the assets of the Company, or other transaction (each, a
"Business Combination"), unless, in each case, immediately following
such Business Combination, (A) all or substantially all of the
individuals and entities who were beneficial owners of Voting Stock
of the Company immediately prior to such Business Combination
beneficially own, directly or indirectly, more than two-thirds of
the combined voting power of the then outstanding shares of Voting
Stock of the entity resulting from such Business Combination
(including, without limitation, an entity which as a result of such
transaction owns the Company or all or substantially all of the
Company's assets either directly or through one or more
subsidiaries), (B) no Person (other than the Company, such entity
resulting from such Business Combination, or any employee benefit
plan (or related trust) sponsored or maintained by the Company, any
Subsidiary or such entity resulting from such Business Combination)
beneficially owns, directly or indirectly, 20% or more of the
combined voting power of the then outstanding shares of Voting Stock
of the entity resulting from such Business Combination, and (C) at
least a majority of the members of the Board of Directors of the
entity resulting from such Business Combination were members of the
Incumbent Board at the time of the execution of the initial
agreement or of the action of the Board providing for such Business
Combination; or
<PAGE>
(iv) approval by the shareholders of the Company of a complete
liquidation or dissolution of the Company, except pursuant to a
Business Combination that complies with clauses (A), (B) and (C) of
Section 5(iii) above.

6. FORFEITURE OF RESTRICTED SHARES; LAPSE OF RESTRICTIONS. All
restrictions pertaining to the Restricted Shares will lapse, and all Restricted
Shares granted hereunder shall immediately vest in full, upon any of the
following circumstances: (i) upon the death or Disability of the Grantee in
accordance with the terms and conditions of Section 4 of this Agreement, or (ii)
upon a Change of Control in accordance with the terms and conditions of Section
5 of this Agreement. Except as set forth in the preceding sentence, in the event
the Grantee shall cease to be an employee of the Company for any reason, or for
no reason, the then unvested portion of the award of Restricted Shares shall be
forfeited, the Grantee shall have no further rights under this Agreement and the
Common Stock covered by the Restricted Shares shall revert to the Company.

7. CHANGE IN COMMON STOCK OR CORPORATE STRUCTURE. In the event of any
stock dividend, stock split, combination or exchange of shares of Common Stock,
recapitalization or other change in the capital structure of the Company,
corporate separation or division (including, but not limited to, split-up,
spin-off or distribution to Company shareholders other than a normal cash
dividend), sale by the Company of all or a substantial portion of its assets,
rights offering, merger, consolidation, reorganization or partial or complete
liquidation, or any other corporate transaction or event having an effect
similar to any of the foregoing, the number of Restricted Shares subject to the
award granted hereunder shall be equitably and appropriately adjusted, as
determined by the Compensation Committee or the Company's Board of Directors in
its discretion. Any such adjustment made by the Compensation Committee or the
Company's Board of Directors shall be conclusive and binding upon the Grantee,
the Company and all other interested persons.

8. PAYMENT OF WITHHOLDING TAXES. If the Company becomes obligated to
withhold an amount of any federal, state or local tax imposed as a result of the
issuance of the Restricted Shares to the Grantee pursuant to this Agreement or
the vesting of Restricted Shares hereunder, including without limitation, any
federal, state or other income tax, or any F.I.C.A., state disability insurance
tax or other employment tax (the date upon which the Company becomes so
obligated shall be referred to herein as the "Withholding Date"), then the
Grantee shall pay such amount (the "Withholding Liability") to the Company on
the Withholding Date in cash or by check payable to the Company. The Grantee
hereby consents to the Company withholding the full amount of the Withholding
Liability from any compensation or other amounts otherwise payable to the
Grantee if the Grantee does not pay the Withholding Liability to the Company on
the Withholding Date, and the Grantee agrees that the withholding and payment of
any such amount by the Company to the relevant taxing authority shall constitute
full satisfaction of the Company's obligation to pay such compensation or other
amounts to the Grantee. The Grantee shall be entitled to elect to have the
Company withhold from any vested Restricted Shares to be delivered to the
Grantee a sufficient number of shares to satisfy the Withholding Liability.
<PAGE>
9. STOCK CERTIFICATES. Upon the vesting of any part of the Restricted
Shares (and subject to payment by the Grantee of the Withholding Liability
pursuant to Section 8 hereof), the Company shall cause a stock certificate
covering the appropriate number of shares registered on the Company's books in
the name of the Grantee to be delivered to the Grantee. All Restricted Shares
which vest under this Agreement shall be fully paid and non-assessable.

10. VOTING, DIVIDENDS. The Grantee shall have all of the rights as a
stockholder (including the right to vote or receive dividends or distributions)
with respect to any Restricted Shares unless and until such Restricted Shares
are forfeited in accordance with the terms and provisions of this Agreement.

11. EMPLOYMENT RIGHTS. Nothing in this Agreement shall be deemed to confer
on the Grantee the right to continue in the employ of the Company or any of its
subsidiaries or affect the right of the Company to terminate the employment of
the Grantee at any time with or without cause.

12. NONTRANSFERABILITY. The rights of the Grantee with respect to the
Restricted Shares may not be assigned or transferred otherwise than by will or
the laws of descent and distribution.

13. IMPACT ON OTHER BENEFITS. The value of the Restricted Shares awarded
hereunder (either on the Date of Award or at the time of vesting) shall not be
includable as compensation or earnings for purposes of any other benefit plan
offered by the Company.

14. INTERPRETATION. This Agreement and the Restricted Shares awarded
hereunder are subject to all of the terms and provisions of the Plan. In the
event of any conflict or inconsistency between the terms and provisions of this
Agreement and the Plan, the terms and provisions of the Plan shall govern. The
Compensation Committee and/or the Company's Board of Directors shall have the
sole and complete authority and discretion to decide any questions concerning
the application, interpretation or scope of any of the terms and conditions of
this Agreement and the Plan, and its decisions shall be binding and conclusive
upon all interested parties.

15. AMENDMENT. This Agreement shall be subject to the terms of the Plan,
as amended, except that the award of Restricted Shares that is the subject of
this Agreement may not in any way be restricted or limited by any Plan amendment
or termination approved after the Date of Award without the Grantee's written
consent.

16. FORCE AND EFFECT. The various provisions of this Agreement are
severable in their entirety. Any determination of invalidity or unenforceability
of any one provision shall have no effect on the continuing force and effect of
the remaining provisions.
<PAGE>
17. GOVERNING LAW. This Agreement shall be construed and enforced in
accordance with and governed by the laws of the State of Texas.

18. SUCCESSORS. This Agreement shall be binding upon and inure to the
benefit of the successors, assigns and heirs of the respective parties.

19. ENTIRE AGREEMENT. This Agreement contains the entire understanding of
the parties and shall not be modified or amended except by written instrument
duly signed by the parties. No waiver by either party of any default under this
Agreement shall be deemed a waiver of any later default.

IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement
as of the Date of Award stated above.

RAILTEX, INC.

By:_______________________________________
Joseph P. Jahnke
Vice President-Chief Financial
Officer

GRANTEE

_________________________________________

EXHIBIT 10.56

PURCHASE AGREEMENT

Dated as of November 4, 1998

by and among

RAILTEX GLOBAL INVESTMENTS L.L.C.

RAILTEX INTERNATIONAL HOLDINGS, INC.,

and

GEEMF II LATIN AMERICA, L.L.C.

<PAGE>
PURCHASE AGREEMENT...........................................................1

RECITALS.....................................................................1

1. AGREEMENT TO PURCHASE AND SELL MEMBERSHIP INTEREST.....................1

1.1 LLC AUTHORIZATION................................................1
1.2 AGREEMENT TO PURCHASE AND SELL...................................1

2. CLOSING................................................................1

2.1 THE CLOSING......................................................1

3. REPRESENTATIONS AND WARRANTIES OF LLC, COMPANY AND RAILTEX.............2

3.1 ORGANIZATION, GOOD STANDING AND QUALIFICATION....................2
3.2 OWNERSHIP........................................................2
(A) COMPANY....................................................2
(B) LLC........................................................2
(C) OPTIONS, WARRANTS, RESERVED SHARES.........................2
(D) OUTSTANDING SECURITY HOLDERS...............................2
3.3 SUBSIDIARIES.....................................................2
3.4 DUE AUTHORIZATION................................................4
3.5 VALID ISSUANCE OF MEMBERSHIP INTERESTS...........................4
3.6 GOVERNMENTAL CONSENTS............................................5
3.7 LITIGATION.......................................................5
3.8 COMPLIANCE WITH LAW AND CHARTER DOCUMENTS........................5
3.9 MATERIAL AGREEMENTS..............................................6
(A) LIST OF MATERIAL AGREEMENTS................................6
(B) NO BREACH..................................................6
3.10 REGISTRATION RIGHTS..............................................6
3.11 CERTIFICATE; BYLAWS; MINUTES.....................................7
3.12 TITLE TO PROPERTY AND ASSETS.....................................7
3.13 FINANCIAL STATEMENTS.............................................7
3.14 CERTAIN ACTIONS..................................................8
3.15 ACTIVITIES SINCE BALANCE SHEET DATE..............................8
3.16 ERISA PLANS......................................................9

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<PAGE>
3.17 TAX RETURNS AND PAYMENTS.........................................9
3.18 EMPLOYEE MATTERS................................................10
(A) COLLECTIVE BARGAINING.....................................10
(B) EMPLOYEES AND CONSULTANTS.................................10
3.19 ENVIRONMENTAL MATTERS...........................................10
3.20 REAL PROPERTY HOLDING CORPORATION STATUS........................11
3.21 USE OF PROCEEDS.................................................11
3.22 DISCLOSURE......................................................11
3.23 NO MATERIAL UNDISCLOSED LIABILITIES.............................12

4. REPRESENTATIONS AND WARRANTIES OF INVESTOR............................12

4.1 ORGANIZATION, GOOD STANDING.....................................12
4.2 AUTHORIZATION...................................................12
4.3 LEGENDS.........................................................12
4.4 LITIGATION......................................................13
4.5 GOVERNMENTAL CONSENTS...........................................13
4.6 COMPLIANCE WITH LAW AND CHARTER DOCUMENTS.......................13
4.7 FUNDS AVAILABLE.................................................13
4.8 INVESTMENT......................................................13
4.9 DISCLOSURE......................................................14

5. CONDITIONS TO INVESTOR'S OBLIGATIONS AT CLOSING.......................14

5.1 REPRESENTATIONS AND WARRANTIES TRUE.............................14
5.2 PERFORMANCE.....................................................14
5.3 COMPLIANCE CERTIFICATE..........................................14
5.4 PROCEEDINGS AND DOCUMENTS.......................................14
(A) SECRETARY'S INCUMBENCY CERTIFICATE........................15
(B) COMPANY/CORPORATE ACTIONS.................................15
(C) GOOD STANDING CERTIFICATES................................15
5.5 NO MATERIAL CHANGE..............................................15
5.6 OPINION OF SELLER'S COUNSEL.....................................15
5.7 OPIC APPROVAL...................................................15
5.8 GOVERNMENT APPROVAL.............................................15
5.9 COMPLIANCE WITH UNDERLYING DOCUMENTS............................15

6. CONDITIONS TO THE LLC'S AND SELLER'S OBLIGATIONS AT CLOSING...........16

6.1 REPRESENTATIONS AND WARRANTIES..................................16

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<PAGE>
6.2 PAYMENT OF PURCHASE PRICE.......................................16
6.3 PROCEEDINGS AND DOCUMENTS.......................................16
6.4 COMPLIANCE CERTIFICATE..........................................16
6.5 PROCEEDINGS AND DOCUMENTS.......................................16
6.6 GOVERNMENTAL APPROVAL...........................................16
6.7 COMPLIANCE WITH UNDERLYING DOCUMENTS............................17

7. COVENANTS REGARDING PARTICIPATION RIGHTS..............................17

7.1 PARTICIPATION RIGHTS............................................17

8. MISCELLANEOUS.........................................................17

8.1 SURVIVAL OF WARRANTIES..........................................17
8.2 LIMITATION OF LIABILITIES.......................................17
8.3 SUCCESSORS AND ASSIGNS..........................................18
8.4 GOVERNING LAW...................................................18
8.5 COUNTERPARTS....................................................18
8.6 HEADINGS........................................................18
8.7 NOTICES ........................................................18
8.8 NO FINDER'S FEE.................................................19
8.9 ATTORNEYS' FEES.................................................19
8.10 DISPUTE RESOLUTION..............................................20
8.11 AMENDMENTS AND WAIVERS..........................................20
8.12 SEVERABILITY.
8.13 ENTIRE AGREEMENT................................................21
8.14 FURTHER ASSURANCES..............................................21

iii
<PAGE>
PURCHASE AGREEMENT

THIS PURCHASE AGREEMENT (this "AGREEMENT") is made and entered into as of
November 4, 1998, by and among RAILTEX GLOBAL INVESTMENTS L.L.C., a Delaware
limited liability company, (the "LLC"), and RAILTEX INTERNATIONAL HOLDINGS, INC.
a Delaware corporation (the "COMPANY" or the "Seller"), and GEEMF II LATIN
AMERICA, L.L.C., a Delaware limited partnership, (the "Investor").

RECITALS

WHEREAS, the Company is a wholly-owned subsidiary of RailTex, Inc., a
Texas corporation, and the Company is the sole member of the LLC.

WHEREAS, the LLC is the owner of minority interests in the two
Brazilian consortia known as: Ferrovia Centro-Atlantica, S.A. ("FCA") and
Ferrovia Sul-Atlantico, S.A. ("FSA") (FCA and FSA are collectively referred
to as the "Brazilian Investments").

WHEREAS, the Seller desires to sell to the Investor, and the Investor
desires to purchase from the Seller, a membership interest in the LLC on the
terms and conditions set forth in this Agreement.

NOW, THEREFORE, in consideration of the foregoing, and for other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto intending to be legally bound hereby agree as
follows:

1. AGREEMENT TO PURCHASE AND SELL MEMBERSHIP INTEREST.

1.1. LLC AUTHORIZATION. At the Closing, the Seller and the Investor
shall execute and deliver the Operating Agreement in the form attached as
EXHIBIT A (the "Operating Agreement") and they will have Membership Interests,
as defined in the Operating Agreement, having the rights, preferences,
privileges and restrictions set forth in the Operating Agreement.

1.2. AGREEMENT TO PURCHASE AND SELL. The Seller, as the sole member
of the LLC, agrees to sell to the Investor at the Closing, and the Investor
agrees to purchase from the Seller, at the Closing, forty-nine and one-half
percent (49.5%) of the Membership Interests in the LLC, at a price of Eleven
Million Dollars ($11,000,000.00) (the "Purchase Price"). The interests purchased
and sold pursuant to this Agreement will be collectively referred to as the
"PURCHASED INTERESTS".

2. CLOSING.

2.1. THE CLOSING. The purchase and sale of the Purchased Interests
will take place at a time and place mutually agreed upon by the parties as soon
as all the conditions to closing have been met, but in no event later than March
31, 1999 (which time and place are referred to in this Agreement as the
"CLOSING"). At the Closing, the Seller will deliver to the

1
<PAGE>
Investor the Operating Agreement with exhibits showing the percentage of
interests that Investor has agreed to purchase hereunder as shown on EXHIBIT B
against delivery to the Seller by Investor of the full purchase price of such
Purchased Interests, paid by (i) a check payable to the Seller's order, (ii)
wire transfer of funds to the Seller or (iii) any combination of the foregoing,
as determined by the Seller.

3. REPRESENTATIONS AND WARRANTIES OF LLC AND THE SELLER. The LLC and the
Seller (collectively referred to as the "Warrantors"), jointly and severally
hereby represent and warrant to Investor that the statements in the following
paragraphs of this SECTION 3 are all true and correct.

3.1. ORGANIZATION, GOOD STANDING AND QUALIFICATION. The LLC is a
limited liability company, duly organized, validly existing and in good standing
under the laws of Delaware. The Company is a corporation duly organized, validly
existing and in good standing under the laws of Delaware. The LLC and the Seller
have all requisite company and corporate power and authority to own their
properties and assets and to carry on their business as now conducted and as
currently proposed to be conducted. The LLC and the Seller are duly qualified
and in good standing to do business as a foreign limited liability company and
foreign corporation, respectively, in each jurisdiction where failure to be so
qualified would have a material adverse effect on their respective financial
condition, business, prospects or operations.

3.2. OWNERSHIP.

(A) COMPANY. RailTex, Inc. is the sole shareholder of the
Seller.

(B) LLC. At the Closing, the LLC is the record-holder of the
minority interests in FSA and FCA.

(C) OPTIONS, WARRANTS, RESERVED SHARES. Other than as
contemplated in this Agreement, there are not outstanding any options, warrants,
rights (including conversion or preemptive rights) or agreements for the
purchase or acquisition from the LLC of any of the LLC's membership interests,
or any securities convertible into or ultimately exchangeable or exercisable for
any membership interest of the LLC. Other than as contemplated in this
Agreement, no membership interest of the Seller or interest issuable upon
exercise or exchange of any outstanding options, warrants or rights, are subject
to any rights of first refusal or other rights to purchase such interest
(whether in favor of the LLC or any other person), pursuant to any agreement or
commitment of the LLC.

(D) OUTSTANDING SECURITY HOLDERS. Attached to this Agreement
as SCHEDULE 3.2(D) is a complete list of all outstanding members, option
holders, warrant holders, convertible note holders and other security holders of
the LLC, if any, as of immediately prior to the Closing.

2
<PAGE>
3.3. SUBSIDIARIES. The LLC does not currently own or control,
directly or indirectly, any interest in any other corporation, partnership,
trust, joint venture, association, or other entity, except for the Brazilian
Investments.

(a) To the knowledge of the Warrantors, the Brazilian
Investments are corporations duly organized, validly existing and in good
standing under the laws of Brazil and have all requisite corporate power and
authority to own their property and assets and to carry on their business as now
conducted and as currently proposed to be conducted. For purposes of this
Agreement, the phrase "to the knowledge of the Warrantors", "to the Warrantor's
knowledge", "to the knowledge of the Investor", or "to the Investor's knowledge"
or any similar phrase shall mean only, unless expressly indicated otherwise in
this Agreement, the actual knowledge of a particular fact or matter by an
individual who is serving as an executive officer of the Warrantors or the
Investor, as the case may be, without attribution to such executive officer or
the Warrantors or the Investor, as the case may be, of facts or matters within
the personal knowledge of any other person and without any obligation whatsoever
of inquiry or independent investigation by any of the executive officers or the
Warrantors or the Investor, as the case may be. No executive officer or the
Warrantors or the Investor shall have any liability to any party of this
Agreement as a result of any actual knowledge or the disclosure of such actual
knowledge herein. For purposes of this Agreement, executive officers of the
Warrantors shall mean those persons holding the following offices of RailTex,
Inc., the Seller or the LLC: Chief Executive Officer, Chief Financial Officer,
Chief Operating Officer, Vice President - Acquisition, Chairman of the Board, or
any other officer or person whose responsibilities include those customarily
associated with the foregoing offices or who would be deemed "officers" under
Section 16(b) of the Securities and Exchange Act of 1933. The names of
individuals who have held such offices or positions of the Warrantors on or
after July 16, 1998, are set forth on SCHEDULE 3.3(A).

(b) To the knowledge of the Warrantors, the capitalization of
the Brazilian Investments consists of the following:

(i) FCA: 67,317,148 outstanding shares of Preferred
Stock and 66,567,020 outstanding shares of Common Stock, of which the LLC will
own at Closing 5,578,639 shares of Preferred Stock and 7,761,250 shares of
Common Stock.

(ii) FSA: 9,885,610,625 outstanding shares of
Preferred Stock and 6,440,257,909 outstanding shares of Common Stock, of which
the LLC will own at Closing 1,627,797 shares of Preferred Stock and 681,984,043
shares of Common Stock.

(c) Except as set forth on SCHEDULE 3.3(C), to the
knowledge of the Warrantors, the Warrantors are in full compliance with the
terms of the Brazilian Investments Privatization Prospectus (the "Prospectus")
previously delivered to the Investor, and the Warrantors are not aware of
non-compliance by any party with the terms of the Prospectus that

3
<PAGE>
would have a material adverse effect upon the business and operations of the
Brazilian Investments, or which would be deemed to be material by the Brazilian
Government.

(d) At the time the Company purchased the Brazilian
Investments, the acquisition was, and to the knowledge of Warrantors remains, in
compliance with the Prospectus and with all applicable laws of the United
States, its states and localities and of Brazil, its states and localities. The
Company has provided to Investor all documents evidencing the Company's
acquisition of the Brazilian Investment, and at the Closing will provide
evidence of the transfer of such interests to the LLC.

(e) Except as set forth on SCHEDULE 3.3(E), to the knowledge
of the Warrantors, nothing in this Agreement, the Operating Agreement or the
transactions contemplated hereby or thereby, will violate any provision of any
of the Brazilian Investments' Articles of Incorporation, By-laws, Shareholders'
Agreements (copies of which are attached as Exhibit 8.5 to the Operating
Agreement) or similar documents of organization, or the terms of the Prospectus,
nor shall they trigger any default or other rights of refusal under such
documents.

3.4. DUE AUTHORIZATION. Except as set forth on SCHEDULE 3.6, all
action on the part of the LLC and the Seller, the members, officers, directors
and shareholders necessary for the authorization, execution, delivery of, and
the performance of all obligations of the LLC and the Seller under this
Agreement, the Operating Agreement (as defined in SECTION 1.1), when executed,
and for the authorization, issuance, and delivery of all of the Purchased
Interests being sold under this Agreement has been taken or will be taken prior
to the Closing, and this Agreement constitutes, and the Operating Agreement,
when executed, will constitute, valid and legally binding obligations of the
LLC, the Company and RailTex, enforceable in accordance with their respective
terms, except as may be limited by (i) applicable bankruptcy, insolvency,
reorganization or others laws of general application relating to or affecting
the enforcement of creditors' rights generally and (ii) the effect of rules of
law governing the availability of equitable remedies.

3.5. VALID ISSUANCE OF MEMBERSHIP INTERESTS.

(a) The Purchased Interests, when issued, sold and delivered
in accordance with the terms of this Agreement for the consideration provided
for herein, will be duly and validly issued, fully paid and nonassessable.

(b) The Purchased Interests will be issued in full compliance
with applicable exemptions of the U.S. Securities Act of 1933, as amended (the
"1933 ACT"), and in compliance with applicable exemptions or the registration
and qualification requirements of all securities laws of those states of the
United States in which are located the addresses shown on EXHIBIT B or in full
compliance with the registration and prospectus delivery requirements of the
1933 Act.

(c) The outstanding interests of the LLC are duly and validly
issued, fully paid and nonassessable, and such interests of the LLC, and all
outstanding options,

4
<PAGE>
warrants, convertible notes and other securities of the LLC, if any, have been
issued in full compliance with applicable exemptions of the 1933 Act, or in full
compliance with the registration and prospectus delivery requirements of the
1933 Act, the registration and qualification requirements of all applicable
securities laws of states of the United States and all other provisions of
applicable securities laws of states of the United States, including, without
limitation, anti-fraud provisions.

3.6. GOVERNMENTAL CONSENTS. No consent, approval, order or
authorization of, or registration, qualification, designation, declaration or
filing with, any federal, state, local or foreign governmental authority on the
part of the Warrantors or the Brazilian Investments is required in connection
with the consummation of the transactions contemplated by this Agreement or the
Operating Agreement, EXCEPT FOR such qualifications or filings, if required,
under the 1933 Act and the regulations thereunder and all other applicable
securities laws of states of the United States as may be required in connection
with the transactions contemplated by this Agreement and except as set forth on
SCHEDULE 3.6. All such qualifications and filings will, in the case of
qualifications, be effective on the Closing and will, in the case of filings, be
made within the time prescribed by law.

3.7. LITIGATION.

(a) There is no action, suit, proceeding, claim, arbitration
or investigation ("ACTION") pending (or, to the Warrantors' knowledge, currently
threatened) against the LLC or the Seller, their activities, properties or
assets that would have a materially adverse effect on the LLC or the Brazilian
Investments or against any member, officer, director or employee of the LLC or
the Seller in connection with such officer's, director's or employee's
relationship with, or actions taken on behalf of, the LLC or the Seller. To the
knowledge of the Warrantors, there is no factual or legal basis for any such
Action that might result, individually or in the aggregate, in any material
adverse change in the business, properties, assets, financial condition, affairs
or prospects of the LLC. Neither the LLC nor the Seller is a party to or subject
to the provisions of any order, writ, injunction, judgment or decree of any
court or government agency or instrumentality and there is no Action by the LLC
currently pending or which the LLC intends to initiate.

(b) Except as set forth on SCHEDULE 3.7(B), to the knowledge
of the Warrantors, there is no Action pending or currently threatened against
the Brazilian Investments, their activities, properties or assets that would
have a materially adverse effect on the Brazilian Investments or, to the
knowledge of the Warrantors, against any officer, director, or employee of the
Brazilian Investments in connection with such officer's, director's or
employee's relationship with, or actions taken on behalf of the Brazilian
Investments. Except as set forth on SCHEDULE 3.7(B), to the knowledge of the
Warrantors, there is no factual or legal basis for any such Action that might
result, individually or in the aggregate, in any material adverse change in the
business, properties, assets, financial condition, affairs or prospects of the
Brazilian Investments. To the knowledge of the Warrantors, the Brazilian
Investments are not a party to or subject to the provisions of any order, writ,
injunction, judgment or decree of any court or government agency

5
<PAGE>
or instrumentality and there is no Action by the Brazilian Investments currently
pending, or which the Brazilian Investments intend to initiate.

3.8. COMPLIANCE WITH LAW AND CHARTER DOCUMENTS. The LLC, the Seller
and, to the knowledge of the Warrantors, the Brazilian Investments are not in
violation or default of any provisions of their respective Articles of
Organization, Articles of Incorporation, Bylaws, or similar organizational
documents, all as amended, and the LLC, the Seller and, to the knowledge of the
Warrantors, the Brazilian Investments, are in compliance with all applicable
statutes, laws, regulations and executive orders of the United States of America
and all states, foreign countries or other governmental bodies and agencies
having jurisdiction over the LLC's, the Seller's or the Brazilian Investments'
business or properties as the case may be, except to the extent such
non-compliance would not have a material adverse effect upon the LLC, the Seller
or the Brazilian Investments. The LLC, the Seller and, to the knowledge of the
Warrantors, the Brazilian Investments have not received any notice of any
violation of such statutes, laws, regulations or orders that has not been
remedied prior to the date hereof, except to the extent such non-compliance
would not have a material adverse effect upon the LLC, the Seller or the
Brazilian Investments. Except as set forth on SCHEDULE 3.8, the execution,
delivery and performance of this Agreement, the Operating Agreement and the
consummation of the transactions contemplated hereby or thereby will not result
in any such violation or default, or be in conflict with or constitute, with or
without the passage of time or the giving of notice or both, either a default
under the LLC's, the Seller's or, to the knowledge of the Warrantors, the
Brazilian Investments' Articles of Organization, Articles of Incorporation,
Bylaws, or similar organizational documents, or any agreement or contract of the
LLC, the Company or the Brazilian Investments, or, to the knowledge of the
Warrantors, a violation of any statutes, laws, regulations or orders, or an
event which results in the creation of any lien, charge or encumbrance upon any
assets of the LLC, the Seller or the Brazilian Investments.

3.9 MATERIAL AGREEMENTS.

(A) LIST OF MATERIAL AGREEMENTS. Attached to this Agreement as
SCHEDULE 3.9(A) is a complete list of all agreements, contracts, leases,
licenses, instruments and commitments (oral or written) to which the LLC is a
party or is bound that, individually or in the aggregate, are material to the
business, properties, financial condition, results of operation, affairs or
prospects of the LLC ("MATERIAL AGREEMENTS"); PROVIDED that for purposes of this
SECTION ONLY, no agreement under which the only remaining obligation of the LLC,
is to make a payment of money in the amount of Twenty-Five Thousand Dollars
($25,000.00) or less will be deemed to be material to its business, properties,
financial condition or results of operations if the failure to make such payment
will not result in the loss by the LLC of any rights that are material to the
conduct of its business.

Also attached to this Agreement as SCHEDULE 3.9(A) - 1 is a list of
documents evidencing the Company's ownership in the Brazilian Investments and
the transfer of such interests to the LLC.

(B) NO BREACH. The LLC has not breached, nor do the Warrantors
have any knowledge of any claim or threat that the LLC has breached, any term or
condition of (i) any Material Agreement or (ii) any other agreement, contract,
lease, license, instrument or commitment that, individually or in the aggregate,
would have a material adverse effect on the business, properties, financial
condition, results of operations or affairs or prospects of the LLC. Each of the
LLC's Material Agreements is in full force and effect and, to the knowledge of
the Warrantors, no other party to such Material Agreement is in default
thereunder.

3.10. REGISTRATION RIGHTS. Except as contemplated in the Operating
Agreement, the LLC has not granted or agreed to grant to any person or entity
any rights (including piggyback registration rights) to have any securities of
the LLC registered with the United States Securities and Exchange Commission
("SEC") or any other governmental authority.

3.11. CERTIFICATE; BYLAWS; MINUTES. The Articles of Organization,
the Articles of Incorporation and the Bylaws, or other similar organizational
documents, of the LLC and the Seller are in the form previously provided to the
Investor. The records of actions or minute books of the LLC provided to the
Investor contain a complete summary of all meetings, consents and actions of the
members, board of directors and the shareholders of the LLC and since the time
of its respective organization or incorporation, accurately reflecting all
transactions referred to in such minutes in all material respects.

3.12. TITLE TO PROPERTY AND ASSETS. The LLC owns its properties and
assets free and clear of all mortgages, deeds of trust, liens, encumbrances,
security interests and claims except for statutory liens for the payment of
current taxes that are not yet delinquent and liens, encumbrances and security
interests which arise in the ordinary course of business and which do not affect
material properties and assets of the LLC and except as set forth on SCHEDULE
3.12. With respect to the property and assets it leases, the LLC is in
compliance with such leases and the LLC holds valid leasehold interests in such
assets free of any liens, encumbrances, security interests or claims of any
party other than the lessors of such property and assets.

3.13. FINANCIAL STATEMENTS.

(a) Attached to this Agreement as SCHEDULE 3.13(A) are the
unaudited balance sheet of the Seller for the nine months ended September 30,
1998, a related unaudited income statement of the Seller for such period, and a
proforma unaudited balance sheet of the LLC dated September 30, 1998 (the
"BALANCE SHEET DATE") (all such financial statements being collectively referred
to herein as the "FINANCIAL STATEMENTS"). Such financial statements (i) are in
accordance with the books and records of the LLC and the Seller, (ii) are true,
correct and complete and present fairly the financial condition of the LLC and
the Seller at the date or dates therein indicated and the results of operations
for the period or periods therein specified, and (iii) have been prepared in
accordance with generally accepted accounting principles applied on a consistent
basis. Specifically, but not by way of limitation, the respective balance sheets
of the Financial Statements disclose all of the LLC's and the Seller's material
debts, liabilities and obligations of any nature, whether due or to become due,
as of their respective dates (including,

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without limitation, absolute liabilities, accrued liabilities, and contingent
liabilities) to the extent such debts, liabilities and obligations are required
to be disclosed in accordance with generally accepted accounting principles. The
LLC and the Seller have good and marketable title to all assets set forth on the
balance sheets of the Financial Statements, except for such assets as have been
spent, sold or transferred in the ordinary course of business since their
respective dates or to be transferred in accordance with the terms and
conditions of this Agreement.

(b) Seller has provided Investor the opportunity to
review all documents relating to the Brazilian Investments that are in their
custody and control, including but not limited to financial statements of the
Brazilian Investments.

3.14. CERTAIN ACTIONS. Other than as contemplated in this Agreement,
since the Balance Sheet Date, neither the LLC nor the Seller has: (i) declared
or paid any dividends, or authorized or made any distribution upon or with
respect to any membership interest of the LLC or class or series of the Seller's
capital stock; (ii) incurred any indebtedness for money borrowed or incurred any
other liabilities individually in excess of $25,000 or in excess of $50,000 in
the aggregate; (iii) made any loans or advances to any person, other than
ordinary advances for travel expenses; (iv) sold, exchanged or otherwise
disposed of any material assets or rights other than the sale of inventory in
the ordinary course of its business; or (v) entered into any transactions with
any of its members, officers, directors or employees or any entity controlled by
any of such individuals.

3.15..ACTIVITIES SINCE BALANCE SHEET DATE. Other than as
contemplated in this Agreement, since the Balance Sheet Date, neither the LLC
nor the Seller has:

(a) formed or acquired or disposed of any interest in any
corporation, partnership, joint venture, or other entity;

(b) written up, written down, or written off the book value of
any amount of assets;

(d) redeemed, purchased, or otherwise acquired, or sold,
granted, or otherwise disposed of, directly or indirectly, any of its capital
stock or securities or any rights to acquire such capital stock or securities,
or agreed to changes in the terms and conditions of any such rights;

(e) increased the compensation of or paid or accrued any bonus
to any employee or contributed or accrued or contributed to any employee benefit
plan, other than in accordance with policies, practices, or requirements
established and in effect on the Balance Sheet Date;

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(f) entered into any employment, compensation, consulting or
collective bargaining agreement with any person or group, other than in the
ordinary course of business;

(g) entered into, adopted, or materially amended any employee
benefit plan; or

(h) entered into any other material commitment or transaction
not disclosed elsewhere herein.

In addition to the foregoing, since the Balance Sheet Date, there has not
been:

(i) any damage, destruction or loss, whether or not covered by
insurance, materially and adversely affecting the assets, properties, financial
condition, operating results, prospects or business of the LLC or the Seller (as
currently conducted and as currently proposed to be conducted);

(j) any waiver by the LLC or the Seller of a valuable right or
of a material debt owed to it;

(k) any satisfaction or discharge of any lien, claim or
encumbrance or payment of any obligation by the LLC or the Seller, except such a
satisfaction, discharge or payment made in the ordinary course of business that
is not material to the assets, properties, financial condition, operating
results or business of the LLC or the Seller;

(l) any material change or amendment to a material agreement
or arrangement by which the LLC or the Seller or any of their assets or
properties are bound or subject, except for changes or amendments which are
expressly provided for or disclosed in this Agreement;

(m) to the Seller's knowledge, any other event or condition of
any character which would materially and adversely affect the assets,
properties, financial condition, operating results or business of the LLC or the
Seller.

3.16. ERISA PLANS. There are no employee benefit plans or
arrangements applicable to the employees of the LLC.

3.17. TAX RETURNS AND PAYMENTS. Except as set forth on SCHEDULE
3.17, neither the LLC nor the Seller, nor any entity to whose liabilities the
LLC or the Seller has succeeded, have filed or been included in a consolidated,
unitary, or combined tax return with another person. Except as set forth on
SCHEDULE 3.17, the LLC and the Seller represent and warrant that: (a) the LLC
and the Seller have filed all tax returns and reports required to have been
filed by or for it; including but not limited to those with respect to income,
payroll, property, employee withholding, social security, unemployment,
franchise, excise, use, and sales taxes, and has either paid in full all taxes
that have become due as reflected on any such return or

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report (including any interest and penalties with respect thereto shown to be
due) or have fully accrued on their books or have established adequate reserves
for all taxes payable but not yet due; (b) all material information set forth in
such returns or reports is accurate and complete; (c) the LLC and the Seller has
paid or made adequate provision for all taxes, additions to tax, penalties, and
interest payable by the LLC or the Seller; (d) to the best of the Seller's
knowledge, no unpaid tax deficiency has been asserted against or with respect to
the LLC and the Seller by any taxing authority, and neither the LLC nor the
Seller has received written notice of any such assertion; (e) the LLC and the
Seller have collected or withheld all amounts required to be collected or
withheld by it for any taxes, and to the extent required by law, all such
amounts have been paid to the appropriate governmental agencies or set aside in
appropriate accounts for future payment when due; (f) the LLC and the Seller are
in compliance with, and its records contain all information and documents
necessary to comply with, all applicable information reporting and tax
withholding requirements; (g) the balance sheets contained in the Financial
Statements fully and properly reflect, as of the dates thereof, the liabilities
of the LLC and the Seller for all accrued taxes, additions to tax, penalties,
and interest; (h) for periods ending after the date of the most recent Financial
Statements, the books and records of the LLC and the Seller fully and properly
reflect their liability for all accrued taxes, additions to tax, penalties, and
interest; (i) neither the LLC nor the Seller has granted, nor are they subject
to, any waiver of the period of limitations for the assessment of tax for any
currently open taxable period; (j) the LLC and the Seller have not made or
entered into, and hold (no asset subject to, a consent filed pursuant to Section
341(f) of the U.S. Internal Revenue Code of 1986, as amended (the "CODE") and
the regulations thereunder or a "safe harbor lease" subject to former Section
168(f)(8) of the Internal Revenue Code of 1954, as amended before the Tax Reform
Act of 1986, and the regulations thereunder; (k) neither the LLC nor the Seller
is required to include in income any amount for an adjustment pursuant to
Section 481 of the Code or the regulations thereunder; and (l) neither the LLC
nor the Seller is a party to, or obligated under, any agreement or other
arrangement providing for the payment of any amount that would be an "excess
parachute payment" under Section 280G of the Code.

3.18. EMPLOYEE MATTERS.

(A) COLLECTIVE BARGAINING. Except as set forth on SCHEDULE
3.18, the LLC is not bound by or subject to any contract, commitment or
arrangement with any labor union, and to the best knowledge of Warrantors, no
labor union has requested, sought or attempted to represent any employees,
representatives or agents of the LLC. There is no strike or other labor dispute
involving the LLC pending nor, to the Warrantors' best knowledge, threatened,
nor are the Warrantors aware of any labor organization activity involving the
LLC's employees.

(B) EMPLOYEES AND CONSULTANTS. The LLC is (i) in full
compliance with all applicable laws respecting employment and employment
practices, terms and conditions of employment, and wages and hours; (ii) in full
compliance with all of their respective obligations under applicable workers
compensation laws, rules, and regulations; and (iii) not engaged in any unfair
labor practice.

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3.19. ENVIRONMENTAL MATTERS.

(a) During the period that the LLC has leased or owned its
properties or owned or operated any facilities, there have been no disposals,
releases or threatened releases of Hazardous Materials (as defined below) on,
from or under such properties or facilities. The LLC has no knowledge of any
presence, disposals, releases or threatened releases of Hazardous Materials on,
from or under any of such properties or facilities, which may have occurred
prior to the LLC having taken possession of any of such properties or
facilities. For purposes of this Agreement, the terms "DISPOSAL," "RELEASE," and
"THREATENED RELEASE" shall have the definitions assigned thereto by the
Comprehensive Environmental Response, Compensation and Liability Act of 1980, 42
U.S.C. ss. 9601 et seq., as amended ("CERCLA"). For the purposes of this Section
"HAZARDOUS MATERIALS" shall mean any hazardous or toxic substance, material or
waste which is or becomes prior to the Closing regulated under, or defined as a
"hazardous substance," "pollutant," "contaminant," "toxic chemical," "hazardous
material," "toxic substance," or "hazardous chemical" under (1) CERCLA; (2) the
Emergency Planning and Community Right-to-Know Act, 42 U.S.C. Section 11001 ET
SEQ.; (3) the Hazardous Materials Transportation Act, 49 U.S.C. Section 1801, ET
seq.; (4) the Toxic Substances Control Act, 15 U.S.C. Section 2601 ET SEQ.; (5)
the Occupational Safety and Health Act of 1970, 29 U.S.C. Section 651 ET SEQ.;
(6) regulations promulgated under any of the above statutes; or (7) any
applicable state or local statute, ordinance, rule, or regulation that has a
scope or purpose similar to those statutes identified above.

(b) The LLC's properties and facilities are not in violation
of any federal, state, or local law, ordinance, regulation, or order relating to
industrial hygiene or to the environmental conditions on, under or about such
properties or facilities, including, but not limited to, soil and ground water
condition. During the time that the LLC has owned or leased their properties and
facilities, neither the LLC nor to the Warrantors' knowledge, any third party,
has used, generated, manufactured or stored on, under or about such properties
or facilities or transported to or from such properties or facilities any
Hazardous Materials.

(c) During the time that the LLC has owned or leased its
properties and facilities, there has been no litigation brought or threatened
against the LLC, or any settlement reached by the LLC with any party or parties
alleging the presence, disposal, release or threatened release of any Hazardous
Materials on, from or under any of such properties or facilities.

(d) During the period that the LLC has owned or leased its
properties and facilities, no Hazardous Materials have been transported from
such properties or facilities to any site or facility now listed or proposed for
listing on the National Priorities List, at 40 C.F.R. Part 300, or any list with
a similar scope or purpose published by any state authority.

3.20. REAL PROPERTY HOLDING CORPORATION STATUS. Since its inception,
neither the LLC, nor the Company has been a "United States real property holding
corporation," as defined in Section 897(c)(2) of the Code, and in Section
1.897-2(b) of the Treasury Regulations issued thereunder (the "REGULATIONS"),
and the Company has filed with the Internal Revenue

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Service all statements, if any, with its United States income tax returns which
are required under Section 1.897-2(h) of the Regulations.

3.21. USE OF PROCEEDS. The Company shall use the proceeds from the
sale of the Purchased Interests for the purposes identified on SCHEDULE 3.21.

3.22. DISCLOSURE. This Agreement and the Schedules and Exhibits
hereto (when read together) do NOT contain any untrue statement of a material
fact and do not omit to state a material fact necessary to make the statements
therein or herein not misleading.

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3.23. NO MATERIAL UNDISCLOSED LIABILITIES.

(a) There is no liability or obligation of the LLC of any
nature, whether absolute, accrued, contingent, or otherwise, other than:

(i) the liabilities and obligations that are fully
reflected, accrued or reserved against on the balance sheets of the Financial
Statement, for which the reserves are appropriate and reasonable, or incurred in
the ordinary course of business and consistent with past practices;

(ii) the contractual obligations disclosed on the
Schedules attached hereto; and

(iii) the litigation and claims described on the
Schedules attached hereto.

(b) The LLC is not a signatory to, nor is in any manner a
guarantor, endorser, assumptor or otherwise primarily or secondarily liable for
or responsible for the payment of, any notes payable or other obligations other
than those set forth in the Financial Statements.

4. REPRESENTATIONS AND WARRANTIES OF INVESTOR. Investor hereby represents
and warrants to the Seller and the LLC that:

4.1 ORGANIZATION, GOOD STANDING. The Investor is a limited liability
company duly organized, validly existing and in good standing under the laws of
the State of Delaware and has all requisite power and authority to own it
properties and assets and to carry on its business as now conducted and as
presently proposed to be conducted. The Investor is duly qualified and in good
standing to do business as a foreign limited liability company in each
jurisdiction where failure to be so qualified would have a material adverse
effect on its financial condition, business, prospects or operations.

4.2 AUTHORIZATION. This Agreement constitutes, and the Operating
Agreement, when executed, will constitute the Investor's valid and legally
binding obligation, enforceable in accordance with its terms except as may be
limited by (i) applicable bankruptcy, insolvency, reorganization or other laws
of general application relating to or affecting the enforcement of creditors'
rights generally and (ii) the effect of rules of law governing the availability
of equitable remedies. The Investor represents that it has full power and
authority to enter into this Agreement and the Operating Agreement.

4.3 LEGENDS. It is understood that any evidence of the Purchased
Interests and Operating Agreement will bear the legends set forth below:

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THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED (THE "ACT"), OR UNDER THE SECURITIES LAWS OF CERTAIN
STATES. THESE SECURITIES ARE SUBJECT TO RESTRICTIONS ON TRANSFERABILITY AND
RESALE AND MAY NOT BE TRANSFERRED OR RESOLD EXCEPT AS PERMITTED UNDER THE ACT
AND THE APPLICABLE STATE SECURITIES LAWS, PURSUANT TO REGISTRATION OR EXEMPTION
THEREFROM. INVESTOR SHOULD BE AWARE THAT IT MAY BE REQUIRED TO BEAR THE
FINANCIAL RISKS OF THIS INVESTMENT FOR AN INDEFINITE PERIOD OF TIME. THE ISSUER
OF THESE SECURITIES MAY REQUIRE AN OPINION OF COUNSEL IN FORM AND SUBSTANCE
SATISFACTORY TO THE ISSUER TO THE EFFECT THAT ANY PROPOSED TRANSFER OR RESALE IS
IN COMPLIANCE WITH THE ACT AND ANY APPLICABLE STATE SECURITIES LAWS.

4.4 LITIGATION. There is no Action pending or, to the knowledge of
the Investor, threatened against the Investor, its activities, properties or
assets that would delay, prevent, hinder or materially adversely effect
Investor's consummation of the transactions contemplated in this Agreement and
the Operating Agreement.

4.5 GOVERNMENTAL CONSENTS. To the knowledge of the Investor, no
consent, approval, order or authorization of, or registration, qualification,
designation, declaration or filing with, any federal, state, local or foreign
governmental authority on the part of the Investor is required in connection
with the consummation of the transactions contemplated by this Agreement or the
Operating Agreement, except for such qualifications or filings, if required,
under the 1993 Act and the regulations thereunder and all other applicable
securities laws of the states of the United States as may be required in
connection with the transactions contemplated by this Agreement. All such
qualifications and filing required of the Investor will, in the case of
qualification, be effective on the Closing and will, in the case of filings, be
made within the time prescribed by law.

4.6 COMPLIANCE WITH LAW AND CHARTER DOCUMENTS. The execution,
delivery and performance of this Agreement, the Operating Agreement and the
consummation of the transactions contemplated hereby or thereby will not result
in any violation or default, or be in conflict with or constitute, with or
without the passage of time or the giving of notice or both, either a default
under the Investor's Articles of Organization, Operating Agreement or similar
organizational documents or any agreement or contract of the Investor or, to the
knowledge of the Investor, a violation of any statutes, laws, regulations or
orders.

4.7 FUNDS AVAILABLE. The Investor has, or will have prior to the
Closing, sufficient cash, available lines of credit or other sources of
immediately available funds to enable it to make payment of the Purchase Price.

4.8 INVESTMENT. The Investor (i) understands that the Purchased
Interests have not been, and will not be, registered under the 1993 act and the
regulations thereunder or under any state securities laws, and that the
Purchased Interests are being offered and sold in

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reliance upon federal and state exemptions for transactions not involving a
public offering; (ii) is acquiring the Purchased Interests solely for its own
account and for investment purposes, and not with a view to the distribution
thereof, (iii) is a sophisticated investor with knowledge and experience in
business and financial matters, (iv) has had the opportunity to obtain such
information concerning the LLC, the Seller, and the Brazilian Investments from
the LLC, the Seller and the Brazilian Investments as it desired to evaluate the
risks of purchasing and owning the Purchased Interests, including without
limitation, any currency exchange risks, (v) has obtained the advice of its own
investment advisers, legal counsel and accountants in determining whether to
enter into this Agreement or to purchase the Purchased Interests pursuant to
this Agreement, (vi) is able to bear the economic risk and the lack of liquidity
inherent in owning and holding the Purchased Interests, and (vii) has not
received or relied upon any information, whether written or oral, that would
guarantee any return on the Investor's investment or indicate that the
Investor's investment does not involve a high degree of risk or that the
Investor may suffer a complete loss of its Investment.

4.9 DISCLOSURE. To the knowledge of Investor, this Agreement and the
Schedules and Exhibits hereto (when read together) do not contain any untrue
statement of material fact and do not omit to state a material fact necessary to
make the statements therein or herein not misleading.

5. CONDITIONS TO INVESTOR'S OBLIGATIONS AT CLOSING. The obligations of the
Investor to the LLC and the Company under SECTION 2 of this Agreement are
subject to the fulfillment or waiver, on or before the Closing, of each of the
following conditions, the waiver of which shall not be effective against the
Investor without Investor's consent to such waiver, which consent may be given
by written, oral or telephone communication to the LLC or its counsel:

5.1 REPRESENTATIONS AND WARRANTIES TRUE. Each of the representations
and warranties of the LLC and the Seller contained in SECTION 3 shall be true
and correct in all material respect on and as of the Closing with the same
effect as though such representations and warranties had been made on and as of
the date of the Closing.

5.2 PERFORMANCE. The LLC and the Company shall have performed and
complied in all material respects with all agreements, obligations and
conditions contained in this Agreement that are required to be performed or
complied with by them on or before the Closing and shall have obtained all
approvals, consents and qualifications necessary to complete the purchase and
sale described herein.

5.3 COMPLIANCE CERTIFICATE. The LLC and the Seller shall have
delivered to the Investor at the Closing a certificate signed on its behalf by
its Members, President, Chief Executive Officer, or Chief Financial Officer, as
the case may be, certifying that the conditions specified in SECTIONS 5.1 and
5.2 have been fulfilled and stating that there shall have been no material
adverse change in the business, affairs, prospects, operations, properties,
assets or condition of the LLC or Seller not previously disclosed to the
Investor in writing.

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5.4 PROCEEDINGS AND DOCUMENTS. All corporate and other proceedings
in connection with the transactions contemplated at the Closing and all
documents incident thereto shall be reasonably satisfactory in form and
substance to the Investor and to the counsel for Investor, and Investor shall
have received all such counterpart originals and certified or other copies of
such documents as may reasonably be requested. Such documents shall include (but
not be limited to) the following:

(A) SECRETARY'S INCUMBENCY CERTIFICATE. A certificate of the
Members, the Secretary or an Assistant Secretary or other officer of the LLC and
the Seller certifying the names of the members of the LLC and officers of the
Seller authorized to sign this Agreement, and the other documents, instruments
or certificates to be delivered pursuant to this Agreement by the LLC, the
Seller or any of its members, or officers, together with the true signatures of
such members or officers.

(B) COMPANY/CORPORATE ACTIONS. A copy of the resolutions of
the Members of the LLC and the Board of Directors and the shareholders of the
Seller evidencing the approval of this Agreement, the Operating Agreement, the
issuance of the Purchased Interests and the other matters contemplated hereby,
and a copy of the Operating Agreement of the LLC and Bylaws of the Seller,
certified by the Members and Secretary of the Seller to be true, complete and
correct.

(C) GOOD STANDING CERTIFICATES. Good standing certificates for
the LLC and the Seller issued by the appropriate government authority dated
within five (5) days of the Closing.

5.5 NO MATERIAL CHANGE. There shall have been no material adverse
change in the business, affairs, prospects, operations, properties, assets or
condition of the LLC or the Brazilian Investments; however, changes in currency
exchange rates, devaluations or other material changes in the Brazilian currency
shall not be deemed to constitute a material adverse change in the business,
affairs, prospects, operations, properties, assets or condition of the LLC or
the Brazilian Investments.

5.6 OPINION OF SELLER'S COUNSEL. The Investor shall have received an
opinion from Matthews & Branscomb, A Professional Corporation, counsel for the
LLC and the Seller, dated as of the date of the Closing, acceptable to Investor,
in substantially the form attached hereto as EXHIBIT C.

5.7 OPIC APPROVAL. The Investor shall have received from OPIC
approval of the transactions contemplated by the terms of this Agreement.

5.8 GOVERNMENT APPROVAL. The Government of Brazil shall have
approved the transfer of the FCA shares and the FSA shares to the LLC and the
subsequent sale of the Purchased Interests pursuant to this Agreement.

5.9 COMPLIANCE WITH UNDERLYING DOCUMENTS. The Investor is satisfied
in its sole discretion that the transaction contemplated by this Agreement or
any action that is required

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or permitted by this Agreement or the Operating Agreement (i) is not prohibited
under any agreement or law pursuant to which the Brazilian Investments were
issued or subject, including, without limitation, the related Shareholders'
Agreements for FCA and FSA (which are attached to the Operating Agreement as
Exhibit 8.5) and the Brazilian Investments Privatization Prospectuses
(collectively the "Underlying Documents") or (ii) would not trigger a right of
first refusal in any other person to acquire the Brazilian Investments from the
Company or the LLC under the Underlying Documents or otherwise (items identified
in (i) and (ii) above are hereafter collectively referred to as "Adverse
Effects"). Pursuant to its right to satisfy itself under this Section 5.9 before
Closing, the Investor anticipates that it will require an opinion of counsel
from the Company's Brazilian counsel for the benefit of the LLC and its members
that the transactions contemplated will not have any Adverse Effects.

6. CONDITIONS TO THE LLC'S AND SELLER'S OBLIGATIONS AT CLOSING. The
obligations of the LLC and the Seller to the Investor under this Agreement are
subject to the fulfillment or waiver on or before the Closing of each of the
following conditions by such Investor:

6.1 REPRESENTATIONS AND WARRANTIES. The representations and
warranties of such Investor contained in SECTION 4 shall be true and correct on
the date of the Closing with the same effect as though such representations and
warranties had been made on and as of the Closing.

6.2 PAYMENT OF PURCHASE PRICE. The Investor shall have delivered to
the Company the purchase price in accordance with the provisions of SECTION 2,
and the Investor shall have performed and complied with all agreements,
obligations and conditions contained in this Agreement that are required to be
performed or complied with by it on or before the Closing and shall have
obtained all approvals, consents and qualifications necessary to complete the
purchase described herein.

6.3 PROCEEDINGS AND DOCUMENTS. All corporate and other proceedings
in connection with the transactions contemplated at the Closing and all
documents incident thereto shall be reasonably satisfactory in form and
substance to the LLC and the Company and to the LLC's and the Company's legal
counsel, and the LLC and the Company shall have received all such counterpart
originals and certified or other copies of such documents as it may reasonably
request.

6.4 COMPLIANCE CERTIFICATE. The Investor shall have delivered to the
Seller at the Closing a certificate signed on its behalf by its President, Chief
Executive Officer or Chief Financial Officer, as the case may be, certifying
that the conditions specified in SECTIONS 6.1, 6.2 and 6.3 have been fulfilled.

6.5 PROCEEDINGS AND DOCUMENTS. All corporate and other proceedings
in connection with the transactions contemplated at the Closing and all
documents incident thereto shall be reasonably satisfactory in form and
substance to the Seller and to their counsel, and the

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Seller shall have received all such counterpart originals and certified or other
copies of such documents as may reasonably be requested.

6.6 GOVERNMENTAL APPROVAL. The Government of Brazil shall have
approved the transfer of the FCA shares and the FSA shares to the LLC and the
subsequent sale of the Purchased Interests pursuant to this Agreement.

6.7 COMPLIANCE WITH UNDERLYING DOCUMENTS. The LLC and Seller are
satisfied in their sole discretion that the transaction contemplated by this
Agreement or any action that is required or permitted by this Agreement or the
Operating Agreement (i) is not prohibited under any agreement or law pursuant
to which the Brazilian Investments were issued or subject, including, without
limitation, the Underlying Documents or (ii) would not trigger a right of first
refusal in any other person to acquire the Brazilian Investments from the
Company or the LLC under the Underlying Documents or otherwise.

7. COVENANTS REGARDING PARTICIPATION RIGHTS

7.1 PARTICIPATION RIGHTS. Each party to this Agreement jointly and
severally, agree and covenant to the other parties the following: in the event a
party to this Agreement, or any one of them or their affiliates, is offered the
right to participate in a consortium, bidding group or any other similar
arrangement, for the purpose of bidding for the purchase of any direct or
indirect interest in any Brazilian rail assets in addition to the Brazilian
Investments shall provide the other parties the opportunity to participate in
such bidding process, PARI PASSU, to the extent of the other parties' interest
in the LLC at the time of such bidding process. This covenant shall survive the
Closing.

8. MISCELLANEOUS.

8.1 SURVIVAL OF WARRANTIES. The representations, warranties and
covenants of the Warrantors and the Investor contained in or made pursuant to
this Agreement shall survive for two (2) years from the execution and delivery
of this Agreement and the Closing, but shall thereafter terminate and be of no
further force or effect except to the extent they relate to claims made in
writing prior to or on such date; provided, however, that the covenant contained
in SECTION 7.1 shall survive in accordance with its terms for a five (5) year
period following the Closing. EXCEPT AS SET FORTH IN THIS AGREEMENT, NO
REPRESENTATIONS OR WARRANTIES WHATSOEVER ARE MADE BY ANY PARTY TO THIS AGREEMENT
TO ANY OTHER PARTY TO THIS AGREEMENT, AND ALL PARTIES TO THIS AGREEMENT DISCLAIM
ALL LIABILITY AND RESPONSIBILITY WITH RESPECT TO ANY REPRESENATION, WARRANTY,
STATEMENT OR INFORMATION MADE OR COMMUNICATED (ORALLY OR IN WRITING) TO ANY
OTHER PARTY TO THIS AGREEMENT (INCLUDING, BUT NOT LIMITED TO, ANY OPINION,
INFORMATION OR ADVICE WHICH MAY HAVE BEEN PROVIDED TO ANY PARTY TO THIS
AGREEMENT BY ANY OFFICER, STOCKHOLDER,

18
<PAGE>
PARTNER, DIRECTOR, EMPLOYEE, AGENT, AFFILIATE, CONSULTANT, TRUSTEE OR
REPRESENTATIVE OF ANY OTHER PARTY).

8.2 LIMITATION OF LIABILITIES. Notwithstanding any other provision
in this Agreement, no party to this Agreement shall have any liability to any
other party to this Agreement for a breach of representation, warranty or
covenant after the Closing unless the party alleging a breach of a
representation, warranty or covenant (the "Injured Party") gives written notice
to the party who allegedly breached a representation, warranty or covenant (the
"Injuring Party") within two (2) years after the Closing (except with respect to
a breach of a covenant contained in SECTION 7.1 above, the Injured Party may
give a written notice to the Injuring Party within five (5) calendar years after
the Closing); PROVIDED, HOWEVER, no Injured Party may assert a claim against an
Injuring Party unless and until Damages, as defined below, the Injured Party
actual incurs Damages, individually or in the aggregate, in excess of $25,000
and PROVIDED FURTHER, no Injured Party may assert a claim for Damages in any
amount, individually or in the aggregate, in excess of the Purchase Price. THE
REMEDY SET FORTH IN THIS SECTION 8.2 IS THE SOLE AND EXCLUSIVE REMEDY AVAILABLE
TO AN INJURED PARTY FOR ANY CLAIM ARISING UNDER THIS AGREEMENT AFTER THE
CLOSING, including without limitation, any breach or inaccuracy of any of the
representations, warranties, covenants or agreements set forth in this Agreement
or in any exhibit, schedule or other document delivered pursuant hereto, and ANY
OTHER CLAIM OR REMEDY IS HEREBY WAIVED. For purposes of this Agreement,
"Damages" shall include, without limitation, all losses, costs, liabilities,
damages and expenses (including, without limitation, attorneys' fees) that arise
from all actions, suits, proceedings, demands and judgments.

8.3 SUCCESSORS AND ASSIGNS. The terms and conditions of this
Agreement shall inure to the benefit of and be binding upon the respective
successors and assigns of the parties.

8.4 GOVERNING LAW. This Agreement shall be governed by and construed
under the internal laws of the State of Texas, without reference to principles
of conflict of laws or choice of laws.

8.5 COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.

8.6 HEADINGS. The headings and captions used in this Agreement are
used for convenience only and are not to be considered in construing or
interpreting this Agreement. All references in this Agreement to sections,
paragraphs, exhibits and schedules shall, unless otherwise provided, refer to
sections and paragraphs hereof and exhibits and schedules attached hereto, all
of which exhibits and schedules are incorporated herein by this reference.

8.7 NOTICES. Any notice, request or other communication required or
permitted hereunder shall be in writing and shall be deemed to have been duly
given if personally

19
<PAGE>
delivered or if deposited in the U.S. mail by registered or certified mail,
return receipt requested, postage prepaid, as follows:

(a) If to Investor, at

GEEMF II LATIN AMERICA, L.L.C.
1225 Eye Street, N.W.
Suite 900
Washington, D.C. 20005
Attention: Wendell W. Robinson

with a copy to

20
<PAGE>
Jackson & Campbell, P.C.
1120-20th Street, N.W.
South Tower
Washington, D.C. 20036
Attention: Robert E. Rider, Esquire

(b) if to the LLC, or the Seller, at

RailTex, Inc.
4040 Broadway
Suite 200
San Antonio, TX 78209
Attention: Vice President - Corporate Development

with a copy to:

Matthews & Brancomb
106 S. St. Mary's Street
Suite 200
San Antonio, TX 78205
Attention: Mark A. Phariss, Esquire

Any party hereto (and such party's permitted assigns) may by notice so given
change its address for future notices hereunder. Notice shall conclusively be
deemed to have been given when personally delivered or when deposited in the
mail in the manner set forth above.

8.8 NO FINDER'S FEES. Neither the Investor nor any officer,
director, or employee of the Seller or RailTex (i) employed any broker or
finder, or (ii) incurred any liability whatsoever, for any brokerage fees,
commissions, or finders' fees in connection with the transactions contemplated
hereby. The Investor agrees to indemnify and to hold harmless the Seller from
any liability for any commission or compensation in the nature of a finders' or
broker's fee (and any asserted liability) for which the Investor or any of its
officers, partners, employees, or representatives is responsible. The Seller
agree to indemnify and hold harmless the Investor from any liability for any
commission or compensation in the nature of a finder's or broker's fee (and any
asserted liability) for which the Company, RailTex or any of their officers,
employees or representatives is responsible.

8.9 ATTORNEYS' FEES. If any action at law or in equity, or mediation
is necessary to enforce or interpret the terms of this Agreement, the Operating
Agreement, the prevailing party shall be entitled to reasonable attorneys' fees,
costs and necessary disbursements in addition to any other relief to which such
party may be entitled.

21
<PAGE>
8.10 DISPUTE RESOLUTION.

(a) In the event any dispute shall arise under this Agreement, or in
the Operating Agreement, the party raising the dispute shall notify the other
party in writing of the dispute or disagreement and provide the other party with
all pertinent information and state its position on the matter. The parties
shall then meet to agree upon a mediator. The parties shall submit the dispute
to the mediator so chosen and mediation shall take place within thirty (30) days
of the date of the original notice. Unless the parties agree otherwise, if the
dispute is not resolved for any reason, including but not limited to failure to
agree on the choice of a mediator, within sixty (60) days from the date the
original notice of the dispute was sent, the parties shall submit the dispute to
binding arbitration in accordance with SECTIONS 8.10(B), (C) and (D) hereof.

(b) Subject to the prior requirement of mediation pursuant to
SECTION 8.10(A), any claim or controversy arising out of or relating to this
Purchase Agreement, the Operating Agreement, or the breach of this Purchase
Agreement, or the Operating Agreement shall be settled by final and binding
arbitration in New York, NY in accordance with the Commercial Arbitration Rules
of the American Arbitration Association in effect on the date of the event
giving rise to the claim or controversy.

(c) All claims or controversies subject to arbitration shall be
submitted to arbitration within six (6) months from the date that a written
notice of a request for arbitration is effective. All claims or controversies
shall be resolved by a panel of three (3) arbitrators who are licensed to
practice law in the State of New York and who are experienced in the arbitration
of commercial matters. These arbitrators shall be selected in accordance with
the Commercial Arbitration rules of the American Arbitration Association in
effect at the time the claim or controversy arises. Either party may request
that the arbitration proceeding be stenographically recorded by a Certified
Shorthand Reporter. The arbitrators shall issue a written decision with respect
to all claims or controversies within thirty (30) days from the date the claims
or controversies are submitted to arbitration. The parties shall be entitled to
be represented by legal counsel at any arbitration proceedings. Each party to
the arbitration shall bear their PRO RATA cost of the arbitration proceeding,
and each party shall be responsible for paying its own attorneys' fees, if any,
unless the arbitrators determine otherwise.

(d) The arbitration provisions in this Purchase Agreement may be
specifically enforced by either party, and submission to arbitration proceedings
may be compelled by any court of competent jurisdiction. The decision of the
arbitrators may be specifically enforced by either party in any court of
competent jurisdiction.

8.11 AMENDMENTS AND WAIVERS. Any term of this Agreement may be
amended and the observance of any term of this Agreement may be waived (either
generally or in a particular instance and either retroactively or
prospectively), only with the written consent of the Seller and the Investor.

22
<PAGE>
8.12 SEVERABILITY. If one or more provisions of this Agreement are
held to be unenforceable under applicable law, such provision(s) shall be
excluded from this Agreement and the balance of the Agreement shall be
interpreted as if such provision(s) were so excluded and shall be enforceable in
accordance with its terms.

8.13 ENTIRE AGREEMENT. This Agreement, together with all exhibits
and schedules hereto, constitutes the entire agreement and understanding of the
parties with respect to the subject matter hereof and supersedes any and all
prior negotiations, correspondence, agreements, understandings duties or
obligations between the parties with respect to the subject matter hereof.

8.14 FURTHER ASSURANCES. From and after the date of this Agreement,
upon the request of the Investor, the LLC or the Seller, the LLC, the Seller and
the Investor shall execute and deliver such instruments, documents or other
writings as may be reasonably necessary or desirable to confirm and carry out
and to effectuate fully the intent and purposes of this Agreement.

[BALANCE OF PAGE INTENTIONALLY LEFT BLANK]

23
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first above written.

THE COMPANY:

RAILTEX INTERNATIONAL HOLDINGS, INC.,
a Texas corporation

By:___________________________________

ADDRESS: 4040 Broadway, Suite 200
San Antonio, Texas 78209

THE LLC:

RAILTEX GLOBAL INVESTMENT L.L.C.
a Delaware limited liability company

By: _______________________________

ADDRESS: 4040 Broadway, Suite 200
San Antonio, Texas 78209

THE INVESTOR:

GEEMF II LATIN AMERICA. L.L.C.
a Delaware limited liability company

24
<PAGE>
By: GEEMF II HOLDING, L.L.C., its
Managing Member

By: GLOBAL ENVIRONMENT EMERGING MARKETS
FUND, II, L.P., its Managing Member

By: GLOBAL ENVIRONMENT INVESTMENT
MANAGEMENT COMPANY, L.L.C., its General
Partner

By: _______________________________
Wendell W. Robinson, Vice President

ADDRESS: Suite 900
1225 Eye Street, N.W.
Washington, DC 20005

EXHIBIT 21.1
RAILTEX, INC. AND SUBSIDIARIES

LIST OF SUBSIDIARIES

RailTex Service Co., Inc.
San Diego & Imperial Valley Railroad Company, Inc.
Austin & Northwestern Railroad Company, Inc.
North Carolina & Virginia Railroad Company, Inc.
South Carolina Central Railroad Company, Inc.
Mid-Michigan Railroad, Inc.
Chesapeake and Albemarle Railroad Company, Inc.
Michigan Shore Railroad, Inc.
New Orleans Lower Coast Railroad Company, Inc.
Dallas, Garland & Northeastern Railroad, Inc.
Goderich-Exeter Railway Company Limited
Indiana Southern Railroad, Inc.
RailTex Distribution Services, Inc.
RailTex Trac Co., Inc.
Missouri & Northern Arkansas Railroad Company, Inc.
Salt Lake City Southern Railroad Company, Inc.
Cape Breton & Central Nova Scotia Railway Limited
RailTex Canada, Inc.
New England Central Railroad, Inc.
Central Oregon & Pacific Railroad, Inc.
Georgia Southwestern Railroad, Inc.
RailTex International Services, Inc.
Connecticut Southern Railroad, Inc.
Indiana & Ohio Rail Corp.
Ontario L'Orignal Railway, Inc.
Pittsburgh Industrial Railroad, Inc.
RailTex Logistics, Inc.
RailTex International Holdings, Inc.
Boston Central Freight Railroad, Inc.
Indiana & Ohio Central Railroad, Inc.
Indiana & Ohio Railway Company
RailTex Acquisition Corp.
Central Properties, Incorporated
Central Railroad Company of Indiana
Central Railroad Company of Indianapolis
RailTex Global Investments, LLC

EXHIBIT 23.1

CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS

As independent public accountants, we hereby consent to the incorporation of
our report included in this Form 10-K into the Company's previously filed
Registration Statement on Form S-8 (File No. 33-79174).

ARTHUR ANDERSEN LLP

San Antonio, Texas
March 26, 1999

<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 1998 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 1,243
<SECURITIES> 0
<RECEIVABLES> 34,710
<ALLOWANCES> 844
<INVENTORY> 0
<CURRENT-ASSETS> 41,863
<PP&E> 345,973
<DEPRECIATION> 54,194
<TOTAL-ASSETS> 362,345
<CURRENT-LIABILITIES> 47,086
<BONDS> 131,550
0
0
<COMMON> 927
<OTHER-SE> 143,221
<TOTAL-LIABILITY-AND-EQUITY> 362,345
<SALES> 0
<TOTAL-REVENUES> 161,020
<CGS> 0
<TOTAL-COSTS> 133,368
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 187
<INTEREST-EXPENSE> 11,236
<INCOME-PRETAX> 20,631
<INCOME-TAX> 7,853
<INCOME-CONTINUING> 12,778
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 1,703
<NET-INCOME> 11,075
<EPS-PRIMARY> 1.20
<EPS-DILUTED> 1.20

</TABLE>

<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 1,932
<SECURITIES> 0
<RECEIVABLES> 30,306
<ALLOWANCES> 1,262
<INVENTORY> 0
<CURRENT-ASSETS> 37,063
<PP&E> 338,694
<DEPRECIATION> 50,981
<TOTAL-ASSETS> 350,085
<CURRENT-LIABILITIES> 41,521
<BONDS> 150,272
0
0
<COMMON> 921
<OTHER-SE> 138,848
<TOTAL-LIABILITY-AND-EQUITY> 350,085
<SALES> 0
<TOTAL-REVENUES> 117,574
<CGS> 0
<TOTAL-COSTS> 97,362
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 13
<INTEREST-EXPENSE> 8,316
<INCOME-PRETAX> 13,476
<INCOME-TAX> 5,178
<INCOME-CONTINUING> 8,298
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 1,703
<NET-INCOME> 6,595
<EPS-PRIMARY> 0.72
<EPS-DILUTED> 0.71

</TABLE>

<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 1,595
<SECURITIES> 0
<RECEIVABLES> 27,595
<ALLOWANCES> 1,605
<INVENTORY> 0
<CURRENT-ASSETS> 31,344
<PP&E> 317,016
<DEPRECIATION> 47,469
<TOTAL-ASSETS> 335,712
<CURRENT-LIABILITIES> 37,558
<BONDS> 145,348
0
0
<COMMON> 919
<OTHER-SE> 136,025
<TOTAL-LIABILITY-AND-EQUITY> 335,712
<SALES> 0
<TOTAL-REVENUES> 77,547
<CGS> 0
<TOTAL-COSTS> 64,293
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 6
<INTEREST-EXPENSE> 5,356
<INCOME-PRETAX> 8,446
<INCOME-TAX> 3,181
<INCOME-CONTINUING> 5,265
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 1,703
<NET-INCOME> 3,562
<EPS-PRIMARY> 0.39
<EPS-DILUTED> 0.39

</TABLE>

<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 1,354
<SECURITIES> 0
<RECEIVABLES> 31,435
<ALLOWANCES> 1,536
<INVENTORY> 0
<CURRENT-ASSETS> 35,870
<PP&E> 307,632
<DEPRECIATION> 44,194
<TOTAL-ASSETS> 320,041
<CURRENT-LIABILITIES> 40,819
<BONDS> 131,597
0
0
<COMMON> 919
<OTHER-SE> 133,600
<TOTAL-LIABILITY-AND-EQUITY> 320,041
<SALES> 0
<TOTAL-REVENUES> 38,412
<CGS> 0
<TOTAL-COSTS> 31,655
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 103
<INTEREST-EXPENSE> 2,688
<INCOME-PRETAX> 4,414
<INCOME-TAX> 1,778
<INCOME-CONTINUING> 2,636
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 1,703
<NET-INCOME> 933
<EPS-PRIMARY> 0.10
<EPS-DILUTED> 0.10

</TABLE>