The following discussion should be read in connection with the Company's audited financial statements and notes thereto included elsewhere in this annual report.

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 the 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. 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 meets the SEC definition of critical.

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 determining whether the carrying amounts of the assets are recoverable. If an impairment exists, the impairment is measured by comparing the carrying value to the fair value.

Overview

The Company is a regional freight railroad operating in Massachusetts, Rhode Island, Connecticut and New York.

The Company generates operating revenues primarily from the movement of freight in both conventional freight cars and in intermodal containers on flat cars over its rail lines. Freight revenues are recorded at the time delivery is made to the customer or the connecting carrier. Modest freight-related operating revenues are derived from demurrage, switching, weighing, special train and other transportation services. Other operating revenues are derived from services rendered to freight customers and other outside parties by the Company's Maintenance of Way, Communications & Signals, and Maintenance of Equipment Departments. Operating revenues also include amortization of deferred grant income.

The Company's operating expenses consist of salaries and wages and related payroll taxes and employee benefits, depreciation, insurance and casualty claim expense, diesel fuel, car hire, property taxes, materials and supplies, purchased services, track usage fees and other expenses. Many of the Company's operating expenses are of a relatively fixed nature and do not increase or decrease proportionately with increases or decreases in operating revenues unless the Company's management were to take specific actions to restructure the Company's operations.

When comparing the Company's results of operations from one year to another, the following factors should be taken into consideration. First, the Company has historically experienced fluctuations in operating revenues and expenses due to unpredictable events such as one-time freight moves and customer plant expansions and shutdowns. Second, the Company's freight volumes are susceptible to increases and decreases due to changes in international, national and regional economic conditions. Third, the volume of capitalized track or recollectible projects performed by the Company's Maintenance of Way and Communications & Signals Departments can vary significantly from year to year, thereby impacting total operating expenses. Fourth, diesel fuel comprises a significant portion of the Company's operating costs. As fuel prices increase the Company attempts to recover these costs through surcharges and increased fees; however, the Company's profitability can be impacted by changes in fuel prices.

The Company also generates income through sales of properties, grants of easements and licenses, and leases of land and tracks. Income or loss from sale, condemnation and disposal of property and equipment and grants of easements is recorded at the time the transaction is consummated and collectibility is assured. This income varies significantly from year to year.

One of the Company's customers which ships construction aggregates from three separate quarries on the Company's rail system to asphalt production plants in Connecticut and New York, accounted for 10.0%, 13.8% and 14.8% of its operating revenues in 2008, 2007 and 2006, respectively. The Company does not believe that this customer will cease to be a rail shipper or will substantially decrease its freight volume in the foreseeable future. In the event that this customer should cease or substantially reduce its rail freight operations, management believes that the Company could restructure its operations to reduce operating costs by an amount sufficient to largely offset the decrease in operating revenues.

Results of Operations

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

                                           Years Ended December 31,
                                -----------------------------------------------
                                     2008            2007              2006
                                -------------   --------------    -------------
                                      (in thousands, except percentages)
Freight Revenues:
 Conventional carloads ......  $27,113   91.2%  $22,682   86.7%  $23,443   82.4%
 Containers .................    1,341    4.5     2,389    9.1     3,572   12.5
 Other freight-related ......      837    2.8       774    3.0       876    3.1
Other operating revenues.....      445    1.5       319    1.2       560    2.0
                               -------  -----   -------  -----   -------  -----
  Total .....................  $29,736  100.0%  $26,164  100.0%  $28,451  100.0%
                               =======  =====   =======  =====   =======  =====

The following table sets forth conventional carload freight revenues by commodity group in dollars and as a percentage of such revenues:

                                           Years Ended December 31,
                                -----------------------------------------------
                                     2008            2007              2006
                                -------------   --------------    -------------
                                      (in thousands, except percentages)

Chemicals and plastics
 (including ethanol) .........    $ 9,761   36.0% $ 8,387  37.0% $ 7,759   33.1%
Construction aggregate .......      3,389   12.5    3,840  16.9    4,359   18.6
Coal .........................      3,281   12.1    1,818   8.0    1,651    7.0
Metal products ...............      2,793   10.3    2,132   9.4    2,488   10.6
Food and agricultural products      2,522    9.3    2,777  12.2    2,749   11.7
Forest and paper products ....      2,467    9.1    2,756  12.2    3,181   13.6
Other (including automobiles)       2,900   10.7      972   4.3    1,256    5.4
                                  -------  -----  ------- -----  -------  -----
  Total ......................    $27,113  100.0% $22,682 100.0% $23,443  100.0%
                                  =======  =====  ======= =====  =======  =====

                                      II-5

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

                                           Years Ended December 31,
                                -----------------------------------------------
                                     2008            2007              2006
                                -------------   --------------    -------------
                                      (in thousands, except percentages)
Salaries, wages, payroll taxes
 and employee benefits .......   $15,631   52.6% $15,204  58.1% $14,945   52.5%
Casualties and insurance .....       867    2.9      919   3.5      956    3.4
Depreciation .................     2,941    9.9    2,884  11.0    2,829    9.9
Diesel fuel ..................     3,986   13.4    2,524   9.6    2,495    8.8
Car hire, net ................       928    3.1      818   3.1    1,096    3.9
Purchased services, including
 legal and professional fees .     2,304    7.7    2,037   7.8    1,947    6.8
Repairs and maintenance of
 equipment ...................     1,993    6.7    1,711   6.5    1,943    6.8
Track and signal materials ...     1,716    5.8    2,135   8.2    2,949   10.4
Track usage fees .............       633    2.1      615   2.4      829    2.9
Other materials and supplies..     1,265    4.3    1,222   4.7    1,239    4.4
Other ........................     1,894    6.4    1,833   7.0    1,891    6.6
                                 -------  -----  ------- -----  -------  -----
 Total .......................    34,158  114.9   31,902 121.9   33,119  116.4
 Less capitalized and
  recovered costs ...........      3,673   12.4    4,046  15.4    4,897   17.2
                                 -------  -----  ------- -----  -------  -----
  Total ......................   $30,485  102.5% $27,856 106.5% $28,222   99.2%
                                 =======  =====  ======= =====  =======  =====

Year Ended December 31, 2008 Compared to Year Ended December 31, 2007

Operating Revenues

Operating Revenues increased $3.6 million, or 13.7%, to $29.8 million in 2008 from $26.2 million in 2007. This increase is the net result of a $4.4 million (19.5%) increase in conventional freight revenues, a $63,000 (8.1%) increase in other freight-related revenues and a $126,000 (39.5%) increase in other operating revenues partially offset by a $1.0 million (44.8%) decrease in container freight revenues.

The increase in conventional freight revenues is attributable to a 10.2% increase in traffic volume and an 8.4% increase in the average revenue received per carloading. The Company's conventional carloadings increased by 3,156 to 33,953 in 2008 from 30,797 in 2007. Shipments of ethanol, coal, automobiles and steel ingots accounted for substantially all of the increase in traffic volume. Ethanol and automobiles are commodities which the Company began hauling during the third quarter of 2007. These increases were somewhat offset by decreases in shipments of construction aggregates, chemicals (other than ethanol), building materials and certain other commodities during the year. These decreases appear to result from the current economic downturn in the United States economy. The increase in the average revenue received per conventional carloading is attributable to a shift in the mix of freight hauled toward higher-rated commodities, as well as some rate increases, including diesel fuel surcharges.

The decrease in container freight revenues is the result of a 48.3% decline in traffic volume somewhat offset by an 8.6% increase in the average revenue received per container. Container traffic volume decreased by 19,567 containers to 20,938 in 2008 from 40,505 in 2007. During the second quarter of 2007 the Company began to experience a steady decrease in the volume of its container traffic which continued throughout 2008. Among other factors, rate increases imposed by western rail carriers in the United States resulted in steamship lines using "all water" routings to the East Coast for an increasingly larger portion of container traffic, thereby significantly reducing the volume of such traffic shipped cross-country by rail. In addition, the current economic downturn has added to the decline in container traffic volume. The Company is unable to predict if and when container traffic may significantly increase.

The increase in the average revenue received per container is attributable to contractual rate adjustments based upon railroad industry cost indices as well as a change in the mix of containers handled.

The increase in other freight-related revenues is primarily due to an increase in secondary switching services provided to freight customers. This is directly related to the increase in conventional traffic volume during the year.

The increase in other operating revenues reflects greater maintenance department billings for services rendered to freight customers and outside parties.

Other Income

Other income increased by $160,000 to $1.1 million in 2008 from $890,000 in 2007. The most significant change was an increase in gains realized from the sale of property, equipment and easements, which revenues can vary significantly from year to year.

Operating Expenses

Operating expenses increased by $2.6 million, or 9.4%, to $30.5 million in 2008 from $27.9 million in 2007. Higher expenditures for diesel fuel accounted for $1.5 million of this increase. This is primarily the result of significantly higher prices for petroleum products which were in effect for most of the year. The price of diesel fuel decreased during the fourth quarter of 2008 and such lower prices have continued into 2009.

Provision for Income Taxes (Benefit)

The provision for income taxes for 2008 is $135,000, or 45%, of pre-tax income compared to 19% in 2007. The rate in 2008 reflects normal nondeductible expenses compared to a relatively small pre-tax income. The 2007 effective rate reflects the utilization of track maintenance credits that were freed up by the operating loss.

Year Ended December 31, 2007 Compared to Year Ended December 31, 2006

Operating Revenues

Operating Revenues decreased $2.3 million, or 8.0%, to $26.2 million in 2007 from $28.5 million in 2006. This decrease resulted from a $1.2 million (33.1%) decrease in container freight revenues, a $761,000 (3.2%) decrease in conventional freight revenues, a $102,000 (11.6%) decrease in other freight-related revenues and a $241,000 (43.0%) decrease in other operating revenues.

The decrease in container freight revenues is attributable to a 35.9% decline in traffic volume partially offset by a 4.3% increase in the average revenue received per container. Intermodal containers handled decreased by 22,678 to 40,505 in 2007 from 63,183 in 2006. Among other factors, rate increases imposed by western rail carriers in the United States resulted in steamship lines using "all water" routings to the East Coast for a larger portion of container traffic, thereby significantly reducing the volume of such traffic shipped cross-country by rail. This trend began during the second quarter of the year and the Company is unable to predict if and when this trend will be reversed. The increase in the average revenue received per container is primarily due to contractual rate adjustments based upon railroad industry cost indices.

The decrease in conventional freight revenues is the result of an 8.8% reduction in traffic volume partially offset by a 6.1% increase in the average revenue received per carloading. The Company's conventional carloadings decreased by 2,983 to 30,797 in 2007 from 33,780 in 2006. The largest single reduction in conventional traffic volume was construction aggregates which declined by more than a half million dollars. Declines in other commodities were largely offset by increases in coal, ethanol and automobiles. Shipments of these latter two commodities commenced during the second half of the year and the Company anticipates that they will contribute to future traffic growth. The increase in the average revenue received per conventional carloading results from a shift in the mix of traffic away from construction aggregates, a lower rated commodity, as well as modest rate increases, including diesel fuel surcharges.

The decrease in other freight-related revenues is attributable to reduced billings for demurrage charges which is related to the decrease in conventional traffic volume.

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

Other Income

Other income decreased by $483,000 to $890,000 in 2007 from $1.4 million in 2006. This decrease is due to a reduction in gains from the sale of property, equipment and easements, which revenue can vary significantly from year to year.

Operating Expenses

Operating expenses decreased $366,000, or 1.3%, to $27.9 million in 2007 from $28.2 million. The Company's operating expenses are of a fixed nature to a very high degree and, therefore, do not fluctuate proportionally with increases or decreases in operating revenues. The decrease in track and signal materials expense of $814,000 was offset by a $1.0 million decrease in reimbursements received from the states for non-capitalized crossing signals and other public improvements.

Provision for Income Taxes (Benefit)

The Company's federal income tax benefit for 2007 was reduced by $113,000 of railroad track maintenance credits which were utilized in 2005 and 2006. These credits were "freed up" by carrying back a portion of the net operating loss incurred in 2007 to those years.

Liquidity and Capital Resources

On January 10, 2008, the Company entered into an agreement with GATX Corporation ("GATX") whereby GATX acquired 239,523 newly-issued shares of the Company's common stock (4.99%) for approximately $5.5 million which was and is being utilized for capital improvements to enhance the Company's operations. The Company and GATX also entered into an Exclusive Railcar Supply Agreement whereby GATX has the exclusive right to supply the Company with railcars for certain rail traffic on market-competitive terms. In addition, the Company exchanged 72 of its mill gondolas for 137 open-top hoppers owned by GATX. The Company is leasing the 72 mill gondolas from GATX under operating leases for a period of up to 7 years at minimum annual rentals of $248,000. This amount is not significantly different from the rentals previously paid to GATX for the open-top hoppers which have been used by the Company to transport coal.

The Company generated $832,000, $3.3 million and $3.8 million of cash from operations in 2008, 2007 and 2006, respectively. The Company's total cash and cash equivalents increased by $695,000 in 2008 and decreased by $1.1 million in 2007 and $810,000 in 2006. The principal utilization of cash during the three-year period was for expenditures for property and equipment acquisitions and improvements and payment of dividends.

During 2008, 2007 and 2006 the Company generated $583,000, $288,000 and $863,000, respectively, from the sale of properties not considered essential for railroad operations and from the granting of easements and licenses. The Company holds various properties which could be made available for sale, lease or grants of easements and licenses. Revenues from sales of properties, easements and licenses can vary significantly from year to year.

The Company has a revolving line of credit of $5.0 million with its principal bank, which line expires on May 31, 2009. Borrowings under this line of credit are unsecured, due on demand and bear interest at either the bank's prime rate or one and one-half percent over either the one or three month London Interbank Offered Rates. The Company pays no commitment fee on this line and has no compensating balance requirements. The Company repaid the $900,000 of borrowings outstanding as of December 31, 2007 in January 2008 and had no advances against this line during the year.

Substantially all of the mainline track owned by the Company meets FRA Class 3 standards (permitting freight train speeds of 40 miles per hour), and the Company intends to continue to maintain this track at this level. The Company expended $2.6 million, $3.5 million and $3.4 million for additions and

improvements to its track structure in 2008, 2007 and 2006, respectively. Deferred grant income of $172,000 in 2008, $520,000 in 2007 and $121,000 in 2006 financed a portion of these additions and improvements. Improvements to the Company's track structure are made, for the most part, by the Company's Maintenance of Way Department personnel.

In 2008, the Company paid dividends in the amount of $5.00 per share, aggregating $3,000, on its outstanding noncumulative preferred stock and $0.16 per share, aggregating $767,000, on its outstanding common stock. Continued payment of such dividends is contingent upon the Company's continuing to have the necessary financial resources available.

The Company is a defendant in certain lawsuits relating to casualty losses, many of which are covered by insurance subject to a deductible. The Company believes that adequate provision has been made in the financial statements for any expected liabilities which may result from disposition of such lawsuits.

On January 29, 2002, the Company received a "Notice of Potential Liability" from the United States Environmental Protection Agency ("EPA") regarding an existing Superfund Site (the "Site") that includes the J.M. Mills Landfill in Cumberland, Rhode Island. EPA sends these "Notice" letters to potentially responsible parties ("PRPs") under the Comprehensive Environmental Response, Compensation, and Liability Act ("CERCLA"). EPA identified the Company as a PRP based on its status as an owner and/or operator because its railroad property traverses the Site. Via these Notice letters, EPA makes a demand for payment of past costs (identified in the letter as $762,000) and future costs associated with the response actions taken to address the contamination at the Site, and requests PRPs to indicate their willingness to participate and resolve their potential liability at the Site. The Company has responded to EPA by stating that it does not believe it has any liability for this Site, but that it is interested in cooperating with EPA to address issues concerning liability at the Site. At this point, two other parties have already committed via a consent order with EPA to pay for the Remedial Investigation/Feasibility Study ("RI/FS") phase of the clean-up at the Site, which will take approximately two or more years to complete. After that, EPA will likely seek to negotiate the cost of the Remedial Design and implementation of the remedy at the Site with the PRPs it has identified via these Notice Letters (which presently includes over sixty parties, and is likely to increase after EPA completes its investigation of the identity of PRPs). On December 15, 2003, the EPA issued a second "Notice of Potential Liability" letter to the Company regarding the Site. EPA again identified the Company as a PRP, this time because EPA "believes that [the Company] accepted hazardous substance for transport to disposal or treatment facilities and selected the site for disposal." The Company responded again to EPA stating that it is interested in cooperating with EPA but that it does not believe it has engaged in any activities that caused contamination at the Site. The Company believes that none of its activities caused contamination at the Site, and will contest this claim by EPA and therefore no liability has been accrued for this matter.

In connection with the EPA claim described above, the two parties who have committed to conduct the RI/FS at the Site filed a complaint in the U.S. District Court of Rhode Island against the Company, in an action entitled CCL Custom Manufacturing, Inc. v. Arkwright Incorporated, et al (consolidated with Unilever Bestfoods v. American Steel & Aluminum Corp. et al), C.A. No. 01-496/L, on December 18, 2002. The Company was one of about sixty parties named by Plaintiffs in this suit, to recover response costs incurred in investigating and responding to the releases of hazardous substances at the Site. Plaintiffs alleged that the Company is liable under 42 U.S.C. ss. 961(a)(3) of CERCLA as an "arranger" or "generator" of waste that ended up at the Site. The Company entered into a Generator Cooperation Agreement with other defendants to allocate costs in responding to this suit, and to share technical costs and information in evaluating the Plaintiffs' claims. Although the Company does not believe it generated any waste that ended up at this Site, or that its activities caused contamination at the Site, the Company paid $45,000 to settle this suit in March 2006.

Pursuant to permits issued by the United States Department of the Army Corps of Engineers and the Rhode Island Coastal Resources Management Council, the Company created 33 acres of waterfront land in East Providence, Rhode Island ("South Quay"). The permits for the property, which have been extended to December 2009 and May 2009, respectively, also allow for construction of a dock along the west face of the South Quay. The property, which has a carrying value of $12.0 million, is adjacent to a 12 acre site also owned by the Company.

The property is located one-half mile from I-195. In 2006, the Rhode Island Department of Transportation ("RIDOT") awarded a contract to construct Waterfront Drive, which provides direct vehicular access from the interstate highway system to the South Quay, which project was completed in 2007. The planned extension by RIDOT of Waterfront Drive northward toward an industrial area in which the Company owns two additional waterfront parcels comprising 11 acres, creating direct access to such property, is in the design stage.

The City of East Providence has created a waterfront redevelopment area with a zoning overlay that would encourage development of offices, hotels, restaurants, shops, marinas, apartments and other "clean" employment. The Company has been cooperating with the City of East Providence in these efforts.

Selected Quarterly Financial Data

Historically, the Company has experienced lower operating revenues in the first quarter of the year. The following table sets forth selected financial data for each quarter of 2008 and 2007. The information for each of these quarters is unaudited but includes all normal recurring adjustments that the Company considers necessary for a fair presentation. These results, however, are not necessarily indicative of results for any future period.

                                               Year Ended December 31, 2008
                                          --------------------------------------
                                           First    Second     Third    Fourth
. . .