This management's discussion and analysis of financial condition and results of operations contains forward-looking statements that involve risks, uncertainties and assumptions. You should read the following discussion in conjunction with our historical consolidated financial statements and the notes thereto. The results of operations for the periods reflected herein are not necessarily indicative of results that may be expected for future periods. Except where the context otherwise requires, the terms "we," "us," or "our" refer to the business of RailAmerica, Inc. and its consolidated subsidiaries.

Certain statements in this Quarterly Report on Form 10-Q and other information we provide from time to time may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 including, but not necessarily limited to, statements relating to future events and financial performance. Words such as "anticipates," "expects," "intends," "plans," "projects," "believes," "appears," "may," "will," "would," "could," "should," "seeks," "estimates" and variations on these words and similar expressions are intended to identify such forward-looking statements. These statements are based on management's current expectations and beliefs and are subject to a number of factors that could lead to actual results materially different from those described in the forward-looking statements. We can give no assurance that its expectations will be attained. Accordingly, you should not place undue reliance on any forward-looking statements contained in this report. Factors that could have a material adverse effect on our operations and future prospects or that could cause actual results to differ materially from our expectations include, but are not limited to, prolonged capital markets disruption and volatility, general economic conditions and business conditions, our relationships with Class I railroads and other connecting carriers, our ability to obtain railcars and locomotives from other providers on which we are currently dependent, legislative and regulatory developments including rulings by the Surface Transportation Board or the Railroad Retirement Board, strikes or work stoppages by our employees, our transportation of hazardous materials by rail, rising fuel costs, goodwill assessment risks, acquisition risks, competitive pressures within the industry, risks related to the geographic markets in which we operate; and other risks detailed in our filings with the Securities and Exchange Commission ("Commission"), including our Annual Report on Form 10-K filed with the Commission on February 23, 2012. In addition, new risks and uncertainties emerge from time to time, and it is not possible for us to predict or assess the impact of every factor that may cause actual results to differ from those contained in any forward-looking statements. Such forward-looking statements speak only as of the date of this report. We expressly disclaim any obligation to release publicly any updates or revisions to any forward-looking statements contained herein to reflect any change in expectations with regard thereto or change in events, conditions or circumstances on which any statement is based.

General

Our Business

We are a leading owner and operator of short line and regional freight railroads in North America, operating a portfolio of 45 individual railroads with approximately 7,500 miles of track in 28 states and three Canadian provinces. In addition, we provide non-freight services such as engineering services, railcar switching and storage, demurrage, leases of equipment and real estate leases and use fees.

During the second quarter of 2012, we engaged Deutsche Bank Securities Inc. as our financial advisor and to assist in the evaluation of strategic alternatives for the Company. As a result of this evaluation, on July 23, 2012, we announced that we entered into an agreement with Genesee & Wyoming Inc. (GWI) under which GWI will acquire 100% of the Company for an all cash purchase price of $27.50 per share. The acquisition is subject to United States Surface Transportation Board ("STB") formal approval of GWI's control of our railroads. GWI expects to close the transaction into a voting trust as early as the third quarter of 2012 while it awaits formal STB approval of GWI's application to control our railroads.

Recent Acquisitions and Business Development

On April 9, 2012, we acquired a 70% controlling interest in the Wellsboro and Corning Railroad ("WCOR") and TransRail North America ("TNA") from the Myles Group for approximately $18.0 million, subject to final adjustments for working capital. The WCOR operates 38 miles of track running from Wellsboro, PA to Corning, NY handling a variety of industrial products primarily used in the natural resources industry. TNA performs transload, storage, and other value-added services for customers in the energy and waste management industries through four transloading facilities located in Wellsboro, PA; Corning, NY; Toledo, OH; and Amelia, VA. The results of operations of WCOR and TNA have been included in our consolidated financial statements since April 9, 2012, the acquisition date. Amounts attributable to our noncontrolling interest are identified in the consolidated financial statements.

On May 1, 2012, the Company acquired 100% of Marquette Rail LLC ("Marquette") for $41.0 million including final adjustments for working capital. Headquartered in Ludington, MI, Marquette operates 126 miles of track running from Grand Rapids, MI to Ludington and Manistee, MI. Marquette interchanges with CSXT in Grand Rapids and serves customers primarily in the chemical, pulp & paper, and non-metallics industries. Marquette hauled approximately fifteen-thousand carloads of freight during the fiscal year ended 2011. The results of operations of Marquette have been included in our consolidated financial statements since May 1, 2012, the acquisition date.

On May 11, 2011, the Company acquired three short-line freight railroads in the state of Alabama for a total purchase price of $12.7 million. The acquisition was funded from existing cash on hand. The three railroads, known individually as the Three Notch Railroad (TNHR), the Wiregrass Central Railroad (WGCR), and the Conecuh Valley Railroad (COEH), comprise approximately 70 miles and primarily haul agricultural and chemical products. The railroads were acquired from affiliates of Gulf and Ohio Railways, Inc. The results of operations of the railroads have been included in the Company's consolidated financial statements since May 11, 2011, the acquisition date.

Assuming these transactions had been made at the beginning of any period presented, the consolidated pro forma results would not be materially different from reported results.

In August 2010, our New England Central Railroad, ("NECR") was awarded a federal government grant of $50 million through the State of Vermont to improve and upgrade the track on its property. As part of the agreement, the NECR has committed to contribute up to approximately $19.0 million of capital funds to the project. In September 2011, the grant agreement was amended and the NECR was awarded an additional $2.7 million to extend and improve its centralized traffic control system, upgrade communications systems, improve culverts and ditching, and provide passenger bussing in lieu of Amtrak service. The amendment did not require any additional monetary commitment by the NECR. The project is expected to be completed by the end of 2012.

In May 2012, our Kyle Railroad ("KYLE") was awarded a government grant of $8.2 million through the State of Kansas to improve the track on its property. The grant agreement provides for the replacement of 50,400 ties over 84 miles of track. As part of the agreement, the KYLE will commit to contribute up to approximately $1.2 million of capital funds. The project is expected to be completed by April 30, 2013.

Managing Business Performance

We manage our business performance by (i) growing our freight and non-freight revenue, (ii) driving financial improvements through a variety of cost savings initiatives, and (iii) continuing to focus on safety to lower the costs and risks associated with operating our business.

Changes in carloads and revenue per carload have a direct impact on freight revenue. Carloads increased 4% in the three months ended June 30, 2012 as compared to three months ended June 30, 2011, due to severe weather in the Northeast and Midwest during 2011 and overall strength among several of our commodity groups. We continue implementing more effective pricing by carefully analyzing pricing decisions to improve our freight revenue per carload.

Non-freight services offered to our customers include switching (or managing and positioning railcars within a customer's facility), storing customers' excess or idle railcars on inactive portions of our rail lines, engineering infrastructure services, third party railcar repair, car hire, demurrage (allowing our customers and other railroads to use our railcars for storage or transportation in exchange for a daily fee) and transload services. Each of these services leverages our existing business relationships and generates additional revenue with minimal capital investment. Management also focuses on growing non-freight revenue from users of our land holdings.

Our operating costs include labor and benefits, equipment rents (locomotives and railcars), purchased services (contract labor and professional services), diesel fuel, casualties and insurance, materials, joint facilities and other expenses.

Management is focused on improving operating efficiency and lowering costs. Many functions such as pricing, purchasing, capital spending, finance, insurance, real estate and other administrative functions are centralized, which enables us to achieve cost efficiencies and leverage the experience of senior management in commercial, operational and strategic decisions. A number of cost savings initiatives have been broadly implemented at all of our railroads targeting lower fuel consumption, safer operations, more efficient equipment utilization and lower costs for third party services, among others.

Commodity Mix

Each of our 45 railroads operates independently with its own customer base. Our railroads are spread out geographically and carry diverse commodities. The diversity in our customer base helps mitigate our exposure to severe downturns in local economies. For the three months ended June 30, 2012, agricultural products, coal and chemicals accounted for 17%, 15% and 11%, respectively, of our carloads. As a percentage of our freight revenue, agricultural products, chemicals, and metallic ores and metals generated 17%, 15%, and 10%, respectively, for the three months ended June 30, 2012. Freight revenue per carload is impacted by several factors including the length of haul.

Overview

Three months ended June 30, 2012 and 2011

Operating revenue in the three months ended June 30, 2012, was $156.1 million, compared with $139.2 million in the three months ended June 30, 2011. The 12% increase in our operating revenue was primarily due to non-freight revenue, rate increases, change in commodity mix, an increase in fuel surcharge and increased carloads.

Freight revenue increased $8.0 million, or 8%, in the three months ended June 30, 2012, compared with the three months ended June 30, 2011, due to rate increases, an increase in fuel surcharges and higher carloads. Non-freight revenue increased $8.9 million, or 26%, in the three months ended June 30, 2012, compared with the three months ended June 30, 2011, primarily due to increases in engineering services, transload services and storage.

Our operating ratio, defined as total operating expenses divided by total operating revenue, was 78.1% in the three months ended June 30, 2012 compared to 79.4% in the three months ended June 30, 2011. This decrease was primarily due to favorable operating leverage, improved efficiencies and the absence of impairment charges, partially offset by the absence of track maintenance credits in the second quarter of 2012. Operating expenses were $121.9 million in the three months ended June 30, 2012 compared with $110.5 million in the three months ended June 30, 2011 an increase of $11.4 million, or 10%.

In 2011, we entered into a track maintenance agreement with an unrelated third-party customer ("Shipper"). Under the agreement, the Shipper paid for qualified railroad track maintenance expenditures during 2011 in exchange for the assignment of railroad track miles which permitted the Shipper to claim certain tax credits pursuant to Section 45G of the Internal Revenue Code. For the three months ended June 30, 2011, the Shipper paid for $5.3 million of maintenance expenditures and $4.1 million of capital expenditures and we incurred $0.2 million of consulting fees related to the agreement. The track maintenance tax credit has not been renewed by Congress for 2012.

Net income attributable to the Company in the three months ended June 30, 2012 was $11.4 million compared with net income of $8.7 million in the three months ended June 30, 2011. The net income for the three months ended June 30, 2012 included $5.7 million of expenses associated with the redemption of the remaining $74.0 million of our senior secured notes in June 2012.

Six months ended June 30, 2012 and 2011

Operating revenue in the six months ended June 30, 2012, was $299.5 million, compared with $264.2 million in the six months ended June 30, 2011. The 13% increase in our operating revenue was primarily due to rate increases, change in commodity mix, an increase in fuel surcharge, higher non-freight revenue, and the increase in carload volume.

Freight revenue increased $18.2 million, or 9%, in the six months ended June 30, 2012, compared with the six months ended June 30, 2011, due to rate increases, an increase in fuel surcharges and higher carloads. Non-freight revenue increased $17.2 million, or 28%, in the six months ended June 30, 2012, compared with the six months ended June 30, 2011, primarily due to increases in engineering services, demurrage, car repair and transload services.

Our operating ratio, defined as total operating expenses divided by total operating revenue, was 77.9% in the six months ended June 30, 2012 compared to 80.0% in the six months ended June 30, 2011. This decrease was primarily due to favorable operating leverage, improved efficiencies, lower depreciation expense and the absence of impairment charges, partially offset by the absence of track maintenance credits in the first six months of 2012. Operating expenses were $233.5 million in the six months ended June 30, 2012 compared with $211.3 million in the six months ended June 30, 2011 an increase of $22.2 million, or 11%. Operating expenses included an impairment charge of $3.2 million in 2011.

For the six months ended June 30, 2011, the Shipper paid for $9.5 million of maintenance expenditures and $4.1 million of capital expenditures and we incurred $0.3 million of consulting fees related to the agreement. The track maintenance tax credit has not been renewed by Congress for 2012.

Net loss attributable to the Company in the six months ended June 30, 2012 was $28.8 million compared with net income of $12.8 million in the six months ended June 30, 2011. The net loss for the six months ended June 30, 2012 was primarily due to $88.1 million of expenses associated with the tendering for and refinancing of our senior secured notes during 2012.

Results of Operations

Comparison of Operating Results for the Three Months Ended June 30, 2012 and
2011

The following table sets forth the results of operations for the three months
ended June 30, 2012 and 2011 (dollars in thousands):



                                                               Three Months Ended June 30,
                                                           2012                          2011
Operating revenue                                 $ 156,096         100.0 %     $ 139,215         100.0 %
Operating expenses:
Labor and benefits                                   43,228          27.7 %        41,859          30.1 %
Equipment rents                                       9,939           6.4 %         8,889           6.4 %
Purchased services                                   15,550          10.0 %        11,327           8.1 %
Diesel fuel                                          13,210           8.4 %        14,578          10.5 %
Casualties and insurance                              5,306           3.4 %         4,955           3.5 %
Materials                                             9,746           6.2 %         5,928           4.3 %
Joint facilities                                      2,755           1.8 %         2,550           1.8 %
Other expenses                                       10,588           6.8 %        10,672           7.7 %
Track maintenance expense reimbursement                  -            0.0 %        (5,133 )        (3.7 %)
Net loss (gain) on sale of assets                         5           0.0 %           (64 )        (0.0 %)
Impairment of assets                                     -            0.0 %         3,220           2.3 %
Depreciation and amortization                        11,594           7.4 %        11,736           8.4 %

Total operating expenses                            121,921          78.1 %       110,517          79.4 %
Operating income                                     34,175          21.9 %        28,698          20.6 %
Interest expense, including amortization costs      (10,267 )                     (18,143 )
Other (loss) income                                  (5,476 )                         495

Income before income taxes                           18,432                        11,050
Provision for income taxes                            7,235                         2,350

Net income                                        $  11,197                     $   8,700

Operating Revenue

The following table compares our operating revenue for the three months ended
June 30, 2012 and 2011:



                                                   Three Months Ended June 30,                           Change
                                               2012                          2011                   Amount          %
                                              (Dollars in thousands, except average freight revenue per carload)
Freight revenue                        $             113,555         $             105,567       $      7,988         8 %
Non-freight revenue                                   42,541                        33,648              8,893        26 %

Total operating revenue                $             156,096         $             139,215       $     16,881        12 %

Carloads                                             219,766                       212,095              7,671         4 %

Average freight revenue per carload    $                 517         $                 498       $         19         4 %

Operating revenue increased by $16.9 million, or 12%, to $156.1 million in the three months ended June 30, 2012 from $139.2 million in the three months ended June 30, 2011. The net increase in operating revenue was due to higher non-freight revenue, rate increases, change in commodity mix, an increase in fuel surcharge, which increased $2.2 million from prior year and increased carloads.

Total carloads during the three months ended June 30, 2012 increased 4% to 219,766 from 212,095 in the three months ended June 30, 2011. The increase in the average revenue per carload to $517 in the three months ended June 30, 2012, from $498 in the comparable period in 2011 was primarily due to rate increases, commodity mix and fuel surcharge.

The following table compares our freight revenue, carloads and average freight revenue per carload by product type for the three months ended June 30, 2012 and 2011:

                                              Three Months Ended                                Three Months Ended
                                                 June 30, 2012                                     June 30, 2011
                                                              Average Freight                                   Average Freight
                                  Freight                       Revenue per         Freight                       Revenue per
                                  Revenue      Carloads           Carload           Revenue      Carloads           Carload
                                               (Dollars in thousands, except average freight revenue per carload)
Industrial Products              $  58,141        97,787     $             595     $  53,781        93,584     $             575
Agricultural Products               26,641        50,122                   532        25,622        48,399                   529
Construction Products               21,290        38,374                   555        18,362        35,430                   518
Coal                                 7,483        33,483                   223         7,802        34,682                   225

Total                            $ 113,555       219,766     $             517     $ 105,567       212,095     $             498

Freight revenue was $113.6 million in the three months ended June 30, 2012 compared to $105.6 million in the three months ended June 30, 2011, an increase of $8.0 million or 8%. This increase was primarily due to the net effect of the following:

• Industrial products revenue increased $4.4 million, or 8%, primarily due to motor vehicle carload growth of 113%, which was driven by increased production at multiple automobile manufacturing plants we serve in Indiana, Michigan, California and Washington. The increase in the motor vehicles category was partially offset by a 9% decrease in metallic ores and metals carloads and a 6% decrease in waste and scrap materials traffic;

• Agricultural Products revenue increased $1.0 million, or 4%, primarily due to agricultural products carload increases of 6% as a result of increased shipments of corn and soybeans, and slightly higher revenue per carload due to higher rates and mix. This increase in the agricultural products was partially offset by a 3% decrease in carloads for food and kindred products which was driven by soft demand for tomato products;

• Construction Products revenue increased $2.9 million, or 16%, primarily due to increased forest products carloads of 18% which was driven by an increase in lumber traffic, as well as woodchip carloads in the Northeast. Also contributing to the revenue increase was higher revenue per carload due to higher rates and mix; and

• Coal revenue decreased $0.3 million, or 4%, primarily due to a 3% decrease in carloads, driven by lower demand for Powder River Basin coal. These losses were offset, however, by several Class 1 detour trains routed over one of our lines due to maintenance on the Class 1 mainline.

The following table compares our Non-freight revenue for the three months ended June 30, 2012 and 2011:

                                            Three Months Ended                  Three Months Ended
                                              June 30, 2012                       June 30, 2011                     Change
                                         Amount          % of Total          Amount          % of Total       Amount         %
                                                            (Dollars in thousands)
Railcar switching                     $      2,392                 6 %    $      1,881                 6 %    $   511         27 %
Car hire                                       866                 2 %           1,038                 3 %       (172 )      -17 %
Car repair services                          4,728                11 %           3,918                12 %        810         21 %
Real estate lease income                     3,500                 8 %           3,135                 9 %        365         12 %
Engineering services                        11,504                27 %           8,771                26 %      2,733         31 %
Demurrage                                    5,123                12 %           4,278                13 %        845         20 %
Car storage                                  5,453                13 %           4,448                13 %      1,005         23 %
Other non-freight revenue                    8,975                21 %           6,179                18 %      2,796         45 %

Total non-freight revenue             $     42,541               100 %    $     33,648               100 %    $ 8,893         26 %

Non-freight revenue increased by $8.9 million, or 26%, to $42.5 million in the three months ended June 30, 2012 from $33.6 million in the three months ended June 30, 2011 primarily due to increases in engineering services, transload services and storage.

Operating Expenses

Operating expenses increased to $121.9 million in the three months ended June 30, 2012 from $110.5 million in the three months ended June 30, 2011. The operating ratio was 78.1% in 2012 compared to 79.4% in 2011. The improvement in the operating ratio was primarily due to favorable operating leverage, improved efficiencies and the absence of impairment charges, partially offset by the absence of track maintenance credits in the second quarter of 2012.

The net increase in operating expenses was due to the following:

• Labor and benefits expense increased $1.4 million, or 3%, primarily due to increased wages as a result of acquisitions ($1.2 million) and profit sharing ($0.6 million), partially offset by a decrease in stock compensation costs ($0.7 million);

• Equipment rents expense increased $1.0 million, or 12%, primarily due to higher railcar lease expenses ($1.0 million);

• Purchased services expense increased $4.2 million, or 37%, primarily due to increased transport services related to the acquisition of TNA ($1.0 million), professional services in connection with our evaluation of strategic alternatives ($1.7 million) and other contract labor and consulting services ($1.2 million);

• Diesel fuel expense decreased $1.4 million, or 9%, primarily due to lower consumption and lower average fuel costs of $3.32 per gallon in 2012 compared to $3.43 per gallon in 2011;

• Casualties and insurance expense increased $0.4 million, or 7%, primarily due to unfavorable reserve adjustments related to crossing accidents ($0.6 million) and increases in personal injury reserves and insurance ($0.6 million), partially offset by a decrease in derailment costs ($0.9 million);

• Materials expense increased $3.8 million, or 64%, primarily due to increased engineering services activity ($2.4 million) and an increase in car repair material purchases ($0.8 million) resulting from increased car repair activities;

• Joint facilities expense increased $0.2 million, or 8% due to an increase in carloads;

• Other expenses decreased $0.1 million, or less than 1%, primarily due to . . .