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

Critical Accounting Policies

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

The Company's significant accounting policies are described in Note 1 of the Notes to Financial Statements in its Annual Report on Form 10-K. Not all of these significant accounting policies require management to make difficult, subjective or complex judgments or estimates. Management believes that the Company's policy for the evaluation of long-lived asset impairment is a critical accounting policy.

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

Results of Operations
---------------------

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


                 Three Months Ended September 30,Nine Months Ended September 30,
                      ---------------------------- -----------------------------
                           2007            2006         2007           2006
                      -------------  ------------- -------------- --------------
                                  (In thousands, except percentages)
Freight Revenues:
 Conventional
  carloads ......     $6,517   89.3%  6,484  83.3% $16,731  86.0% $17,884  82.7%
 Containers .....        539    7.4     995  12.8    1,960  10.1    2,708  12.5
 Other freight
  related .......        174    2.4     221   2.8      543   2.8      609   2.8
Other Operating
 Revenues .......         66     .9      86   1.1      219   1.1      435   2.0
                      ------  -----  ------ -----  ------- -----  ------- -----
   Total ........     $7,296  100.0%  7,786 100.0% $19,453 100.0% $21,636 100.0%
                      ======  =====  ====== =====  ======= =====  ======= =====

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

Three Months Ended September 30,Nine Months Ended September 30,

                      ---------------------------- -----------------------------
                           2007            2006         2007           2006
                      -------------  ------------- -------------- --------------
                                  (In thousands, except percentages)
Salaries, wages,
 payroll taxes and
 employee benefits $3,898   53.4% $3,768   48.4% $11,367   58.4% $11,306   52.3%
Casualties and
 insurance .......    226    3.1     228    2.9      691    3.6      595    2.7
Depreciation .....    707    9.7     690    8.9    2,122   10.9    2,071    9.6
Diesel fuel ......    672    9.2     594    7.6    1,733    8.9    1,836    8.5
Car hire, net ....    282    3.9     349    4.5      651    3.4      875    4.0
Purchased
 services,
 including legal
 and professional
 fees ............    531    7.3     408    5.2    1,436    7.4    1,400    6.5
Repair and
 maintenance of
 equipment .......    389    5.3     362    4.6    1,309    6.7    1,382    6.4
Track and signal
 materials .......    601    8.2     728    9.4    1,591    8.2    2,142    9.9
Track usage fees .    253    3.5     278    3.6      554    2.8      614    2.8
Other materials
 and supplies ....    324    4.4     312    4.0      930    4.8      863    4.0
Other ............    400    5.5     491    6.3    1,440    7.4    1,384    6.4
                   ------  -----  ------  -----  -------  -----   ------  -----
 Total ...........  8,283  113.5   8,208  105.4   23,824  122.5   24,468  113.1
 Less capitalized
  and recovered
  costs ..........  1,109   15.2   1,074   13.8    2,656   13.7    3,066   14.2
                   ------  -----  ------  -----  -------  -----   ------  -----
   Total ......... $7,174   98.3% $7,134   91.6% $21,168  108.8% $21,402   98.9%
                   ======  =====  ======  =====  =======  =====  =======  =====

Nine Months Ended September 30, 2007 Compared to Nine Months Ended September 30, 2006

Operating Revenues:

Operating revenues decreased $2.2 million, or 10.1%, to $19.4 million in the nine months ended September 30, 2007 from $21.6 million in 2006. This decrease is the combined result of a $1.2 million (6.4%) decrease in conventional freight revenues, a $748,000 (27.6%) decrease in container freight revenues, a $66,000
(10.8%) decrease in other freight-related revenues and a $216,000 (49.7%)
decrease in other operating revenues. It should be noted that $1.4 million of this decrease in operating revenues occurred during the first quarter of the year.

The decrease in conventional freight revenues results from an 11.0% reduction in traffic volume partially offset by a 5.2% increase in the average revenue received per carloading. The Company's conventional carloadings decreased by 2,826 to 22,769 in the nine months ended September 30, 2007 from 25,595 in 2006. While declines in carloadings of coal, steel ingots and contaminated soil were particularly heavy during the first quarter of 2007 they have returned to more normal levels during the second and third quarters of the year. Year-to-date traffic for these commodities has not yet caught up to their 2006 levels, however. In addition the Company has experienced a significant reduction in construction aggregate traffic during the period. Reductions in the volume of other commodities handled has pretty much mirrored the experience of the rest of the North American railroad industry which has seen a 2.6% decline in conventional traffic volume during 2007. On a more positive, note the Company began handling shipments of ethanol and automobiles during the third quarter of the year and anticipates that these commodities will contribute to future traffic growth. The increase in the average revenue received per conventional carloading is largely attributable to a shift in the mix of traffic away from lower rated commodities such as construction aggregates, as well as modest rate increases.

The decrease in container freight revenues is the result of a 30.9% reduction in traffic volume somewhat offset by a 4.7% increase in the average revenue received per container. Container traffic volume decreased by 14,867 containers to 33,250 in the nine months ended September 30, 2007 from 48,117 in 2006. Significant rate increases imposed by western United States rail carriers have resulted in steamship lines using "all water" routings to the East Coast for a larger portion of the traffic thereby significantly reducing the volume of containers shipped cross country by rail. The Company is unable to predict if and when this trend will be reversed. The increase in the average revenue received per container is attributable to contractual rate adjustments based upon railroad industry cost indices.

The decrease in other freight related revenues is attributable to reduced billings for demurrage resulting from the reduction in conventional traffic.

The decrease in other operating revenues results from a reduction in maintenance department billings. Revenues of this nature can vary from period to period depending upon the needs of freight customers and other third parties.

Other Income:

Other income for the nine-month period decreased by $354,000 to $752,000 in 2007 from $1.1 million in 2006. This decrease is largely attributable to a reduction in gains from the sale and disposal of property equipment and easements which can vary significantly from period to period.

Operating Expenses:

Operating expenses for the nine month period ended September 30, 2007 decreased by $234,000, or 1.1%, to $21.2 million from $21.4 million in 2006. As discussed in Note 2 to the financial statements the Company has restated its Statement of Operations for the nine months ended September 30, 2006 to reflect its liability for accrued compensated time off and related payroll taxes. The impact of this restatement was to increase operating expenses (salaries, wages, payroll taxes and employee benefits) by $82,000. The Company's operating expenses are of a relatively fixed nature and do not fluctuate proportionally with changes in operating revenues.

Provision for Income Taxes (Benefit):

The income tax benefit for the nine months ended September 30, 2007 was calculated at 35.5% of the pre-tax loss after excluding non-tax deductible expense items. This is the effective tax rate which the Company expects to realize for all of 2007 before giving effect to any track maintenance credits to which it may be entitled. The provision for income taxes for the nine months ended September 30, 2007 was reduced by $29,000 as part of the restatement previously noted.

Three Months Ended September 30, 2007 Compared to Three Months Ended September 30, 2006

Operating Revenues:

Operating revenues decreased $490,000, or 6.3%, to $7.3 million in the third quarter of 2007 from $7.8 million in the third quarter of 2006. This decrease is the net result of a $456,000 (45.8%) decrease in container freight revenues, a $47,000 (21.3%) decrease in other freight-related revenues and a $20,000 (23.3%) decrease in other operating revenues offset to a limited degree by a $33,000 (.5%) increase in conventional freight revenues.

The significant decrease in container freight revenues experienced during the third quarter results from a 48.1% decrease in traffic volume slightly offset by a 4.4% increase in the average revenue received per container. Container traffic volume decreased by 8,383 containers to 9,043 in the third quarter of 2007 from 17,426 in 2006. As previously discussed this decrease is primarily due to a substantial increase in container traffic being transported to the east coast of the United States by ship rather than being brought overland from the west coast by rail. The increase in the average revenue received per container is attributable to contractual rate adjustments based upon railroad industry cost indices.

The relatively small increase in conventional freight revenues results from a 3.2% increase in the average revenue received per conventional carloading largely offset by a 2.6% decrease in traffic volume. The Company's conventional carloadings decreased by 255 to 9,423 in the third quarter of 2007 from 9,678 in 2006. This decline in conventional traffic is virtually identical to that experienced by the railroad industry in North America as a whole. While the Company experienced a reduction in construction aggregate traffic during the quarter it was largely offset by carloadings of other commodities including ethanol and automobiles. The shift in traffic volume away from construction aggregates to higher rated commodities largely accounts for the increase in the average revenue received per carloading.

The decrease in other freight-related revenues is primarily related to a decrease in demurrage billings.

The decrease in other operating revenues is the result of a reduction in maintenance department billings.

Other Income:

Other income for the third quarter decreased by $523,000 to $159,000 in 2007 from $682,000 in 2006. The decrease is largely attributable to the fact that no significant gains from the sale of property and easements were realized during the third quarter of 2007.

Operating Expenses:

Operating expenses for the third quarter increased by $40,000, or .6%, to $7.2 million in 2007 from $7.1 million in 2006. As disclosed in Note 2 to the financial statements the Company has restated its Statement of Operations for the third quarter of 2006 to reflect its liability for accrued compensated time off and related payroll taxes. The impact of this restatement was to increase operating expenses (salaries, wages, payroll taxes and employee benefits) by $28,000.

Provision for Income Taxes:

The income tax provision for the third quarter of 2007 is 35.6% of pre tax income which is the approximate effective rate which the Company expects to realize for the year. The income tax provision for the third quarter of 2007 was increased by $10,000 as a result of the restatement of the Statement of Operations as previously discussed.

Liquidity and Capital Resources

During the first nine months of 2007 the Company generated $1.4 million of cash from its operations. Total cash and cash equivalents decreased by $1.1 million for the period. The principal utilization of cash during the period, other than for operations, was for expenditures for property and equipment and for the payment of dividends.

During the second quarter of 2007, the Company borrowed $1.2 million under its revolving line of credit, at interest rates ranging from 6.82% to 8.25%, for working capital purposes. In November 2007 the Company repaid $200,000 of these borrowings and intends to make additional repayments as sufficient surplus cash is generated.

In management's opinion, cash generated from operations during the remainder of 2007 will be sufficient to enable the Company to meet its operating expenses and capital expenditure and dividend requirements, as well as to make repayments on the borrowings under its revolving line of credit.

Seasonality

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