NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE A - NATURE AND ORGANIZATION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

New York Regional Rail Corporation (the "Company"), formerly known as Bestsellers Group, Inc. ("BSLR") was incorporated on April 19, 1994 under the laws of the state of Florida.

In May 1996, BSLR acquired all of the common stock of New York Regional Rail Corporation ("NYRR") pursuant to an Agreement to Exchange Stock dated May 20, 1996 by and between BSLR and the stockholders of NYRR (the "Exchange Agreement"). Under terms of the Exchange Agreement, the stockholders of NYRR exchanged all of outstanding shares of common stock of NYRR for approximately 87,000,000 shares of the Company's common stock, representing 84.57% of the Company's common stock after the transaction. The Company then changed its name to New York Regional Rail Corporation and its state of incorporation to Delaware. The exchange of shares has been accounted for as a reverse acquisition under the purchase method for business combinations. Accordingly, the combination of the two companies is recorded as a recapitalization of NYRR to which NYRR is treated as the continuing entity.

The Company operates an ICC certified railroad through its majority-owned subsidiary, New York Cross Harbor Railroad Terminal Corporation ("NYCH"). NYCH's business is to transport and deliver rail traffic via barges across New York Harbor and the East River, thus connecting the Long Island Railroad and other lines. In addition, it receives and delivers railcars at certain industrial facilities located on partially owned and partially leased track located in Brooklyn, New York and Jersey City, New Jersey. Another majority-owned subsidiary, CH Proprietary, Inc., formerly CH Partners, Inc. ("CHP") holds title to the railroad, marine and terminal equipment used in the business. At December 31, 2003 the Company owned 93.4% and 94.5% of NYCH and CHP, respectively.

In April 1999, the Company purchased a 51% interest in J.S. Transportation, Inc. ("JST") in exchange for 5,000,000 shares of unregistered common stock and escrowed an additional 1,000,000 shares to settle outstanding JST liabilities. JST, formed in 1998, is a regional trucking company in the business of short-haul freight transportation and landfill management. In 1999, the Company used 160,000 of these shares for liability payments and the balance of 860,000 shares was returned to treasury in February 2004. The acquisition has been accounted for as a purchase and accordingly the acquired assets and liabilities have been recorded at their estimated fair values. In September 2000, JST acquired the assets of MHT, Inc., a small regional trucking company engaged in waste transportation. In February 2004, the Company acquired the remaining 49% interest in JST held by minority shareholders. (See Note - M "Subsequent Events" for further detail.)

In February 2000, the Company purchased a 100% interest in OSK Capital I Corp. ("OSK") in exchange for 480,000 shares of common stock and $18,000 in cash. The acquisition has been accounted for as a purchase and accordingly the acquired assets and liabilities have been recorded at their estimated fair values. The $205,200 excess of purchase price over net assets acquired was recorded as goodwill

The consolidated financial statements include the accounts of the Company and its majority owned subsidiaries, NYCH, CHP, JST, and OSK. All inter-company transactions and balances have been eliminated.

The Company has a working capital deficiency of $4,751,218 at December 31, 2003, and has incurred significant recurring operating losses which raise substantial doubt about its ability to continue as a going concern without the raising of additional debt and/or equity financing to fund operations. Since February 2004, the Company has received equity financing in the amount of $750,000 and a commitment to purchase 1,750 shares of Series D Preferred Stock at a purchase price of $1,000 per share. Additionally, the Company is continually evaluating its plan to attain profitability; however any results cannot be assured. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

The Company's railroad operations recognize revenue on the date of the freight delivery to the consignee or the other commercial carrier.

The Company's trucking operations recognize revenue in three ways depending upon the scope of work performed.

1) Transportation Services - Revenue is recognized on the date the freight is delivered to the customer consignee.

2) Transportation and Landfill Services - Revenue is recognized on a per ton basis, subject to a minimum charge when the freight is delivered to the Company's contracted landfill.

3) Landfill Services - Revenue is recognized on a per ton basis when the freight is delivered to one of the Company's contracted landfills. The Company recognizes revenue as earned on the date of freight delivery to the consignee or other commercial carrier or waste to the landfill.

Property and equipment are stated at cost, less accumulated depreciation. The cost of additions and improvements are capitalized, while maintenance and repairs are charged to expense when incurred.

Depreciation and amortization is calculated using the straight-line method over the estimated useful lives of the assets.

The estimated depreciable lives are:

5 years for machinery and transportation equipment, 20 years for marine assets, 10 to 40 years for track and roadbed, and 10 to 20 years for operating equipment.

At December 31, 2003, 16.0% of accounts receivable was concentrated in one customer while 10.2% was concentrated in a second customer. Credit is extended to customers based on an evaluation of each customer's financial condition, generally without requiring collateral or other security. Due to the historical

concentration of receivables and relatively small customer base, the Company could be exposed to a large loss if one of its major customers were not able to fulfill its financial obligations.

The minority interest accounts representing the investments in NYCH, CHP and JST have been reduced to zero for all periods presented as a result of cumulative operating losses. Accordingly, the portion of the losses that would normally be assigned to the minority interest stockholders' ("excess losses") for NYCH, CHP and JST are recognized by the Company. The Company will recognize 100% of any subsequent profits until such time as the excess losses previously recognized by the Company have been recovered.

The Company accounts for its income taxes using the liability method, which requires the establishment of a deferred tax asset or liability for the recognition of future deductible or taxable amounts and operating loss carry forward. Deferred tax expense or benefit is recognized as a result of the changes in the assets and liabilities during the year. Valuation allowances are established when necessary to reduce deferred tax assets to amounts expected to be realized. At December 31, 2003 a full valuation allowance has been established.

In accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of", the Company records impairment losses on long-lived assets used in operations, when events and circumstances indicate that the assets might be impaired and the undiscounted cash flows estimated to be generated by those assets are less than the carrying amounts of those assets.

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amount 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 year. Actual results could differ from those estimates.

Basic loss per share is computed using the weighted average number of shares of outstanding common stock. Diluted loss per share for the years ended December 31, 2003 and 2002 is based on the weighted average number of common shares outstanding during that period including common stock equivalents. Common stock equivalents are not included in the calculation of diluted earnings per share because such inclusion would have been anti-dilutive. Common stock equivalents consist of stock options, convertible preferred stock, and convertible debt.

Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation," ("SFAS 123"), encourages, but does not require, companies to

record compensation cost for stock-based employee compensation plans at fair value. The Company has chosen to account for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees", and related Interpretations. Accordingly, compensation cost for the Company's stock at the date of the grant over the amount of an employee must pay to acquire the stock. The Company has adopted the "disclosure only" alternative described in SFAS 123 and SFAS 148, which require pro forma disclosures of net income and earnings per share as if the fair value method of accounting had been applied.

In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation -- Transition and Disclosure -- an Amendment of FASB Statement No. 123." SFAS No. 148 provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. The Company does not currently intend to adopt the fair value based method of measuring compensation associated with stock awards and grants. As a consequence of continuing to utilize the intrinsic value method of measuring such compensation, the Company will be required to provide additional disclosures in its quarterly financial statements which will reflect the impact on net income and earnings per share on a pro forma basis as if the Company had applied the fair value method to stock-based employee compensation.

In December 2002, the Emerging Issues Task Force issued a consensus on Issue No. 00-21, "Revenue Arrangements with Multiple Deliverables" (EITF 00-21). EITF 00-21 mandates how to identify whether goods or services or both are delivered separately in a bundled sales or licensing arrangement should be accounted for as separate units of accounting. The consensus is effective for revenue arrangements entered into in reporting periods beginning after June 15, 2003. The adoption of EITF 00-21 did not have a significant effect on the Company's financial position or results of operations.

In January 2003, the Financial Accounting Standards Board issued Interpretation No. 46, "Consolidation of Variable Interest Entities," ("FIN 46"). The interpretation provides guidance for determining when a primary beneficiary should consolidate a variable interest entity, or equivalent structure that functions to support the activities of the primary beneficiary. The interpretation is effective as of the beginning of the first interim or annual reporting period beginning after June 15, 2003, for variable interest entities created before February 1, 2003. The adoption of this statement is not expected to impact the Company's financial position, results of operations or cash flows.

In April 2003, the FASB issued SFAS Statement No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities," which amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities under FASB Statement No. 133, Accounting for Derivative instruments and Hedging Activities. This Statement is effective for contracts entered into or modified after June 30, 2003, except for certain hedging relationships designated after June 30, 2003. Most provisions of this Statement should be applied prospectively. The Company does not expect the adoption of SFAS No. 149 to have a material impact on its financial statements.

In May 2003, the FASB issued SFAS Statement No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity." This Statement establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). This

statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003, except for mandatory redeemable financial instruments of nonpublic entities, if applicable. It is to be implemented by reporting the cumulative effect of a change in an accounting principle for financial instruments created before the issuance date of the Statement and still existing at the beginning of the interim period of adoption. The Company does not expect the adoption of SFAS No. 150 to have a material impact on its financial statements.

Marine equipment and dock facilities     $2,726,144
Railroad locomotive cars and equipment      172,898
Track and related land improvements       1,278,898
Transportation equipment                  1,628,910
Other                                       666,501
                                      ---------------
                                          6,473,351
 Less: Accumulated depreciation           3,205,420
                                     ---------------
                                         $3,267,931
                                     ===============

Fixed assets include certain railroad operating assets acquired under a Lease and Asset Agreement dated January 20, 1993 between Consolidated Rail Corporation ("Conrail") CRC Properties, Inc., an affiliate of Conrail ("CRCP") and NYCH. Under terms of the agreement, Conrail sold to NYCH for $1.00 all of the assets located on Conrail-owned property in Greenville, New Jersey that NYCH is renting pursuant to a 30-year lease. (See Note H - "COMMITMENTS and Contingencies" for further details). The assets, consisting principally of float bridges, roadbeds and track, and marine mooring cells, were recorded on the Company's books at the $1.00 purchase price. In the event that it cancels or otherwise terminates the lease, the Company will be obligated to remove the assets from the property. Conrail, however, may elect at its sole option to repurchase the assets for $1.00, in which case the Company would be relieved of the removal obligation.

Depreciation expense totaled $ 546,921 and $596,464 for the years ended December 31, 2003 and 2002, respectively.

Deposits                               $  4,484
Permits and licenses                     45,307
Goodwill from acquisitions, net         274,872
                                       --------
                                       $324,663
                                       ========

NOTE D - PAYROLL TAXES PAYABLE

Payroll taxes payable includes overdue federal, state and local taxes, plus estimated penalties and interest. The Company has been current on its federal taxes since October 2002.

Accrued interest                                  $  330,912
Property taxes - City of New York                    548,700
Property taxes - New Jersey                          536,390
Other accrued expenses                             1,863,785
                                                   ---------
Total                                             $3,279,787
                                                   =========

The Company is involved in a long-standing dispute with the City of New York over property tax assessments dating back to 1984. (See Note H - COMMITMENTS and Contingencies for further details).

New Jersey property tax accruals as of December 31, 2003 cover the periods from 1996 to 2003. The Company has estimated the annual assessment to be $63,000 and has accrued $38,390 in interest. (See Note H - COMMITMENTS and Contingencies for further details).

Accrued other includes Reserves for Contingency Liabilities including potential legal settlements. (See Note -I "Legal Matters")

NOTE F - SHORT-TERM DEBT

Notes payable in the amount of $445,000 bearing interest at 10% per annum are currently in default. The notes are convertible into shares of common stock at the lower of various set conversion prices or at 90% of the average closing price of the common shares for the ten trading days preceding the date of conversion. In the event of conversion, certain of the notes grant the holder an option to purchase from one half to three quarters of an additional share of common stock, at exercise prices ranging from $0.12 to $0.18 per share, for each share acquired in the conversion. These options will expire 90 days from the effective date of a registration statement registering the shares of common stock underlying the options. In February 2004, notes in the original principal amount of $210,000 were the subject of a settlement agreement. (See NOTE- M "Subsequent Events" for further detail.)

Other lenders

NOTE G - LONG-TERM DEBT

Note Payable in the amount of $47,114 of which $35,114 is long-term, payable to the Seafarers Union for dues in arrears; monthly payments of $1,000 due through October 2006. Interest is payable at 5% per annum.

Note Payable in the amount of $48,777 of which $12,777 is long-term, payable to Platinum Funding; monthly payments of $3,000 due through March 2005 and $4,000 final payment in April 2005.

Various leases payable in the amount of $382,755, of which $359,892 is long-term; collateralized by transportation equipment; interest payable at rates between 5% to 18%; monthly payments vary.

Long-term debt also includes estimated accrued interest on settlements of $308,978.

Notes payable, related parties in the totaling $689,700 in principal plus accrued interest. These Notes were converted into shares of common stock in February 2004. (See Note - M "Subsequent Events" for further details.)

Long-term debt also includes deposits held by Company of $7,500 relating to a September 2001 Option Agreement. (See Item 12. "Certain Relationships and Related Transactions.")

Note Payable in the amount of $ 346,598 of which $298,598 is long-term, payable to the Port Authority; bi-monthly payments vary based on 5% revenue collected by Norfolk Southern Corporation. (See Note H - "Commitments and Contingencies".)

Maturities of long-term debt are as follows:

Year ending
December 31,

2005          1,129,869
2006             71,114
2007             48,000
2008            463,576

NOTE H - COMMITMENTS and Contingencies

On October 1, 2003 the employment agreement with the Company's President, Wayne Eastman, was automatically renewed. This agreement provides for annual compensation of $84,000. In addition, he is eligible for incentive bonuses. The bonus is in the form of cash and stock options. The incentive bonus is based upon performance related to sales increases of NYCH. This agreement is for a period of one year and is renewable for one year upon mutual agreement.

(See Note - M "Subsequent Events" for additional Employment Contracts entered into in 2004.)

On August 1, 2001 the Company entered into a long-term union contract with the Seafarers International Union of North America. The contract expires July 31, 2005, but is automatically renewed for one-year periods unless either party submits 60-day written notification. Under the contract the Company is required

to pay health benefits for all its union employees at the rate of approximately $540 per person per month. At December 31, 2003 the Company had five union employees.

The lease portion of the 2003 Agreement signed with Conrail (see Note B) provides a 20-year land lease, with a 10 year option, to the Company for the use of Conrail's railroad operating property and water rights in Greenville, New Jersey. In September 2003, the Company increased the size of the railroad operating property by exercising an option. As a result the Company now rents approximately 28 acres and its rent increased 25%, from $50,000 to $62,500 for the year ending December 31, 2004. The agreement contains rent concessions early in the lease term then bases at $168,750 annually in 2008.

Rent expense under the lease has been recognized on a straight-line basis to account for the rent concessions provided during the lease term, resulting in an $88,750 deferred rent liability as of December 31, 2003.

Estimated future rents payments utilizing the straight-line basis under this lease as of December 31, 2003 are as follows:

Year ending
December 31,

 2004       $  149,605
 2005          149,605
 2006          149,605
 2007          149,605
 2008          149,605
 Thereafter  2,183,225
             ---------
            $2,931,250
            ==========

NYCH leases its Bush Terminal property in Brooklyn, New York from the Economic Development Corporation of New York City on a month-to-month basis at $2,200 per month.

Aggregate rent expense for the year ended December 31, 2003 and 2002 was $145,950 and $26,400, respectively.

The City of New York has billed the Company in excess of $3,200,000 for property taxes dating back to 1984. The Company claims that the tax assessments are for the most part erroneous because they relate either to real property that the Company does not own or lease, or to property, which is not subject to the real property tax. The Company further claims that New York City taxing authorities have assessed taxes based on flawed valuations, resulting in substantial overcharges. The New York State Board of Equalization and Assessment has proposed significant reductions to these valuations, subject to the approval of the New York City Corporation Counsel. Preliminary negotiations are underway between the Company's representatives, the New York City Real Estate Tax Assessor, and the Corporation Counsel's office. Pending a settlement of the tax arrears, the Company has recorded a liability on its books of $548,700, representing the tax due on the Bush Terminal property, the only parcel currently used in the rail operations. Management expects, but there can be no assurance, that the outstanding liabilities will be settled for a lesser amount.

The State of New Jersey has assessed the Company approximately $63,000 per year since 1996 for real estate taxes. The Company believes that the assessment is incorrect and the proper tax should be approximately $17,000 annually. Pending a settlement the Company has recorded a liability on its books of approximately $536,390 for these real estate taxes. The Company is working to resolve this dispute. However, there can be no assurance that the Company will be able to do so.

In April 2002 and in October 2003, the Company entered into agreements with the Port Authority of New York and New Jersey ("PANYNJ"). Under the agreement the Port Authority will be paid five percent (5%) of the Company's revenues collected by Norfolk Southern Corporation. All payments will be applied to the amounts owed to PANYNJ by virtue of judgments which totaled $442,129. As of December 31, 2003, the balance remaining is estimated to be $347,000 and assumes no interest charges. The current term of the repayment agreement is twelve months. The parties intend to continue negotiations on a final settlement. However, there can be no assurance that the Company will be able to reach a final settlement.

In September 2002, the Company entered into a settlement agreement with Platinum Funding ("Platinum"), its former factoring agent. Under the agreement Platinum was paid $85,000 upon signing, plus the release of the 300,000 shares of the Company's common stock held in escrow, an additional 250,000 shares of donated treasury stock and $3,000 paid monthly for 33 months with a final payment of $4,000 in April 2005. The Company is current on all payments under this settlement.

NOTE I - LEGAL MATTERS

A) The City of New York v. New York Cross Harbor Railroad Terminal Corp., Robert R. Crawford and New York Regional Rail Corporation". United States District Court Southern District of New York, bearing Case No. 98 Civ. 7227. Action commenced November 19, 1998. The City makes allegations in this case that Robert Crawford, the Company's former President, and the Company are required to indemnify the City for its cost of removal and cleanup of certain hazardous substances and petroleum at the Company's Bush Terminal facility. The suit alleges that certain parties were instructed by the Company to dispose of hazardous and toxic materials in an illegal manner. The plaintiff is seeking recovery of approximately $850,000, which it claims to have spent on the investigation and cleanup of the alleged disposal, as well as all future investigation and cleanup costs, and the cost of this litigation. The lawsuit is presently in mediation. No provision has been made in the financial statements related to this matter.

B) On November 2, 2001, NYCEDC filed an adverse abandonment petition with the Surface Transportation Board (the "STB") against the Company's rail subsidiary NYCH. NYCEDC acting on behalf of the City of New York seeks to remove NYCH, from the Bush Terminal Yard in Brooklyn, New York. The reasons stated within the City's STB filing are (i) the Company's financial condition, specifically that it has had late fees on rent since 1995 of over $20,000,(ii) the alleged dumping of pesticides and oil on the Bush Terminal property by Robert Crawford, which is the subject of ongoing litigation and (iii) ongoing failure to install a properly working sprinkler system at the Bush Terminal office building. On May 9, 2003, the STB granted the request of the City of New York's Economic Development Corporation for adverse abandonment. On August 27, 2003, NYCH petitioned for a stay pending judicial review of the STB's decision for abandonment which was granted by the STB. In its decision the STB stated,

"A stay would also preserve the status quo for NYCH and the affected shippers during the pendency of judicial review proceedings, thereby avoiding any disruption to their current operations that would be needless if the Board's decision were not to withstand judicial review. Nor would a stay irreparably harm the City. The City, while eager to remove NYCH from the tracks and facilities as soon as possible, should also have an interest in an orderly process and in avoiding the difficult-to-remedy situation that could result if the Board's decision is later overturned by a reviewing court. Furthermore, during this period, the parties may be able to reach agreement resolving some of their differences, most notably, access for NYCH to the 65th Street floatbridge facility."

In September 2003, the Company filed an appeal of the STB's May 9, 2003 decision in Federal Court. As of March 31, 2004, the matter has been set for a mediation conference expected to be held during the second quarter of 2004 and normal operations continue at Bush Terminal in Brooklyn.

C) Fraser, McIntyre and Spartz v NYCH. Supreme Court of the State of New York, County of Kings, Index No. 45966/99 action commenced November 23, 1999. This lawsuit was filed by three persons alleging ownership in NYCH. One of the individuals, Stephen H. Fraser is a shareholder of NYCH. The other two individuals sold their interest to Robert R. Crawford in 1993. These two individuals claim that Mr. Crawford did not pay them. They allege that NYCH has guaranteed the performance of Mr. Crawford. The plaintiffs are seeking the restoration of their equitable interest in NYCH and unspecified monetary damages to be determined by the court. The term "restoration of their equitable interest" is the exact wording used in the "claim for relief" section of the complaint. The term is not defined within the complaint. The Company intends to vigorously defend this action. The Company has satisfied its retained portion of the costs of this litigation, any additional litigation costs will be borne by the Company's insurance carrier.

D) Ben-Ami Friedman v NYCH, CH Partners, a Limited Partnership. Supreme Court, New York County Index No. 602932/96. The plaintiff alleges breach of employment agreements in 1990, 1991 and 1994 and is seeking $261,390. Depositions have yet to be scheduled. The Company intends to vigorously defend this action. The ultimate resolution of this matter is not ascertainable at this time. Mediation and/or trial are presently scheduled for May 7, 2004. No provision has been made in the financial statements related to this matter.

E) Crawford v New York Regional Rail Corporation, Supreme Court of the State of New York, County of Kings, Index No. 27431/03, commenced July 24, 2003. The plaintiff alleges amounts owing of approximately $314,000 and 10,000,000 shares of common stock. The plaintiff sought summary judgment for the amounts allegedly owed on promissory notes. The Company moved to disqualify the plaintiffs' attorney, Lawrence Lonergan, for conflict of interest. Mr. Lonergan was a partner in the firm that served as the Company's primary legal counsel prior to August 1999. On January 13, 2004, judgment was entered in favor of the Company, denying the plaintiffs' claim for summary judgment on the amounts allegedly owed on the promissory notes. In addition, the Company's motion was granted to disqualify Mr. Lonergan on the grounds of his conflict of interest. The Company has asserted counterclaims and independent claims against Robert Crawford, Arline Crawford, Bruce Crawford and Citrus Springs Trust, beneficially owned by the Crawford family and others, for, among other things, alleged theft of corporate assets, including an equity interest in North American Software Associates and alleged fraud in the issuance of more than 24,000,000 shares of common stock to Robert Crawford, Arline Crawford, Bruce Crawford and Citrus Springs Trust. The Company does not anticipate that there will be any adverse material effects on its financial statement as a result of this matter.

F) New York Cross Harbor Railroad Terminal Corp. v Jersey City, Federal District Court, Index No. 02-cv-1884 and Jersey City Health Division v New York Cross Harbor Terminal Corp., Superior Court of New Jersey. These two related matters concern the Company's intermodal operations in Jersey City and the recent land

filling and leveling activities. Jersey City seeks an injunction alleging a public nuisance and violations of certain environmental statutes including the New Jersey Solid Waste Management Act. Both matters continue to be litigated with NYCH vigorously defending the affirmative claims of Jersey City and in pursuing counterclaims for various causes of action. The Company has stipulated in the suit that it has not illegally dumped hazardous waste and the results of all soil samples taken by Jersey City and the Company, while supervised by the NJ DEP have validated this contention. At the suggestion of the magistrate hearing the main case, the Company and Jersey City have begun settlement discussions. As of March 31, 2004, no settlement has been reached. If unsuccessful in these discussions, the Company intends to vigorously defend this action and believes it will be exonerated of all charges. NYCH's attorneys are of the position that the claims of Jersey City are without merit and believes there is a significant likelihood of success in these matters.

G) Ameril Corp. v New York Regional Rail Corporation, bearing Case No. 03-02254 CA 04, 11th Judicial Circuit, Dale County, Florida. In this case the plaintiff alleges that it is owed $338,983 plus interest by virtue of three promissory notes from 1995. The Company will contest these allegations as it has never received the funds and additionally that Florida's statute of limitations is five years. The Company intends to vigorously defend itself in this action. Discovery is underway. The Company has moved to dismiss the complaint and is waiting the scheduling of a hearing on the motion to dismiss. The ultimate resolution of this matter is not ascertainable at this time.

H) The Company is also a party to routine claims and suits brought against it in the ordinary course of business. Some of these matters are covered by insurance. In the opinion of management, the outcome of these claims is not expected to have a material adverse effect on the Company's business, financial condition, or results of operations.

NOTE J - CAPITAL TRANSACTIONS

PREFERRED STOCK

In December 1999, the Board of Directors designated 500,000 shares of the Company's blank check preferred stock as Series C Preferred Stock. The shares of Series C Preferred Stock provide for an annual dividend of $0.10 per share. Dividends which are not paid are cumulative at a rate 10% per annum. Upon liquidation or dissolution, each share of Series C Preferred Stock is entitled to a distribution of $1.20 plus unpaid dividends prior to any distribution to the Company's common stockholders. Each share of Series C Preferred Stock is entitled to 300 votes on any matter submitted to a vote of the stockholders. Each share of Series C Preferred Stock and the accrued dividends thereon are convertible into shares of common stock in an amount equal to the greater of (i) for each $1.00 of the face amount of each share of Series C Preferred Stock and the accrued dividends thereon, 12.82 shares of common stock or (ii) the quotient of the face amount of a share of Seri es C Preferred Stock or each $1.00 of accrued dividends thereon and 90% of the five day average closing price of the Company's common stock. For each share of common stock received upon conversion of shares of Series C Preferred Stock, the holder is entitled to a warrant to purchase 1.042 shares of the Company's common stock at an exercise price $0.12 per share.

In June 2000, 500,000 shares of Series C Preferred Stock were issued to John Marsala in exchange for $500,000 in delinquent notes. On February 21, 2002, $60,000 face value of Series C Preferred Stock plus accrued dividends of $86,301 were converted into 4,358,099 shares of common stock. Upon conversion the holder received a warrant to purchase an additional 4,555,085 shares of common stock at an exercise price of $0.12 per share.

In December 2003, accrued dividends on the Series C Preferred Stock in the amount of $118,131 were converted into 2,050,887 shares of common stock. Upon conversion the holder received a warrant to purchase an additional 2,828,968 shares at an exercise price of $0.12 per share.

In February 2004, the Board of Directors designated 2,500 shares of preferred stock as Series D Preferred Stock. The shares of Series D Preferred Stock have no annual dividend. Upon liquidation or dissolution, each share of Series D Preferred Stock is entitled to a distribution of 110% of the face amount. Each share of Series D Preferred Stock is entitled to 120,000 votes on any matter submitted to a vote of the stockholders provided that at least 1,700 shares of Series D Preferred Stock have been issued and there are no shares of Series C Preferred Stock outstanding. The shares can convert into the shares of common stock under various terms. (See Note - M "Subsequent Events" and the Company's 8-K filed February 19, 2004 for further details.) As of March 31, 2004, 750 shares of Series D Preferred Stock have been issued.

In December 2003, accrued dividends on 440,000 shares of Series C Preferred Stock totaling $118,131 were converted into 2,050,887 shares of common stock. Upon conversion the holder of the shares of Series C Preferred Stock received a warrant to purchase an additional 2,828,968 shares of common stock at an exercise price of $0.12 per share.

On December 15, 2003, the Company's chief financial officer exercised warrants to purchase 26,411 shares of common stock, which were granted in accordance with the terms of his employment agreement. The warrant exercise prices ranged from $.0495 per share to $0.066 per share. The warrants were exercised through the use of $1,500 of accrued consulting fees.

Between October 20, 2003 and November 12, 2003 the Company sold 6,187,500 shares of common stock for an aggregate of $247,500, to 10 unrelated third parties.

On October 28, 2003 the Company sold 625,000 shares of common stock for $25,000 to a director of the Company.

On September 30, 2003, the Company's chief financial officer exercised warrants to purchase 21,898 shares of common stock, which were granted in accordance with the terms of his employment agreement. The warrant exercise prices ranged from $.057 per share to $0.077 per share. The warrants were exercised through the use of $1,500 of accrued consulting fees.

On June 30, 2003, the Company's chief financial officer exercised warrants to purchase 19,869 shares of common stock, which were granted in accordance with the terms of his employment agreement. The warrant exercise prices ranged from $0.052 per share to $0.077 per share. The warrants were exercised through the use of $1,500 of accrued consulting fees.

On March 31, 2003, the Company's chief financial officer exercised warrants to purchase 43,225 shares of common stock, which were granted in accordance with the terms of his employment agreement. The warrant exercise prices ranged from $0.066 per share to $0.088 per share. The warrants were exercised through the use of $3,000 of accrued consulting fees.

On March 29, 2003, three unrelated third parties converted $15,587 of principal and interest into 311,745 shares of common stock at a conversion price of $.05 per share, the closing price of the common stock on such date.

On March 29, 2003, a principal stockholder converted $187,146 of principal and interest into 3,742,914 shares of common stock at a conversion price of $.05 per share, the closing price of the common stock on such date.

On March 7, 2003, approximately $67,000 of accrued legal fees was converted into 800,000 shares of common stock, on such date the closing price of the common stock was $.053.

In March 2003, the Company issued the remaining 333,334 shares to W. Robert Bentley in accordance with the terms of his 2000 settlement agreement with the Company.

On February 7, 2003, two unrelated third parties converted $21,257 of principal and interest into 342,860 shares of common stock at a conversion price of $.062 per share, the closing price of the common stock on such date.

In September 2002, the Company received donated treasury stock of 250,000 shares of common stock, which was then reissued in settlement of the Platinum Funding lawsuit. (See Note I of the Financial Statements for further information.)

In September 2002, convertible notes in the principal amount of $33,729 plus the accrued interest thereon was converted into 393,505 shares of common stock at a conversion price of $.09 per shares, the closing price of the common stock on such date.

On June 30, 2002, approximately $146,000 of accrued legal fees was converted into 1,220,033 shares of common stock valued at $97,602 the fair value of the stock on the date of issuance.

On June 30, 2002, 165,667 shares of common stock were issued to Tad Mahoney, a former officer of the Company, in accordance with the terms of his employment and settlement agreements.

On February 21, 2002, convertible notes in the principal amount of $18,733 plus the accrued interest thereon were converted into 655,741 shares of common stock; upon conversion the holder received an option to purchase an additional 685,381 shares at an exercise price of $0.12 per share.

On February 21, 2002, convertible notes in the principal amount of $105,000 plus the accrued interest thereon were converted into 3,963,340 shares of common stock; upon conversion the holders received an option to purchase an additional 1,981,671 shares at an exercise price of $0.18 per share.

On February 21, 2002, shares of Series C Preferred Stock in the face amount of $60,000 and accrued dividends in the amount of $86,301 were converted into 4,358,099 shares of common stock. Upon conversion the holder received a warrant to purchase an additional 4,555,085 shares at an exercise price of $0.12 per share.

The Company's 1999 Stock Option Plan (the "Plan") provides for granting to the Company's employees, directors and consultants, qualified incentive and nonqualified options to purchase common shares of stock. The plan provides options exercisable for a maximum of 4,000,000 shares of common stock to be granted. Both incentive and nonqualified stock options may be granted under the Plan. The exercise price of options granted pursuant to this plan is determined by a committee but may not be less than 100% of the fair market value on the day of grant. The term of each option is fixed by the committee; provided, however, that the term of an Incentive Stock Option shall not exceed ten years from the date of grant.

For holders of 10% or more of the combined voting power of all classes of the Company's capital stock, options may not be granted at an exercise price of less than 110% of the fair value of the common stock at the date of grant and the term of the option may not exceed five years from the date of grant.

During 2003, the Company granted options to purchase 120,000 shares of common stock to the Chief Financial Officer of the Company. The options are exercisable at per share prices ranging from $.0495 to $.088, which in each case was 110% of the fair market value of the common stock on the date of grant. During 2003, the Company also granted options to purchase 41,955 shares of common stock to the President of the Company. The options are exercisable at $0.055 per share, which was 100% of the fair market value of the common stock on the date of grant. Accordingly, under APB 25, no compensation expense was recognized. These options vest immediately from the date of grant.

During 2002, the Company granted options to purchase 30,000 shares of common stock to the Chief Financial Officer of the Company. The options are exercisable at per share prices ranging from $.066 to $.088 per share, which in each case was 110% of the fair market value of the common stock on the date of grant. Accordingly, under APB 25, no compensation expense was recognized. These options vest immediately from the date of grant.

Stock option activity for the years ended December 31, 2003 and 2002 is summarized as follows:

                                        Number of     Weighted average
                                         shares        exercise price
                                        --------      ----------------
 Outstanding at December 31, 2001      10,268,433          $0.17
            Granted                     7,222,136           0.14
            Exercised                       -               0.00
            Canceled                    (461,367)           0.14
                                       -----------          ----
Outstanding at December 31, 2002       17,029,202           0.16
            Granted                     2,990,923           0.12
            Exercised                  (4,547,519)          0.05
            Canceled                     (616,776)          0.16
                                       -----------          ----
Outstanding at December 31, 2003       14,855,830           0.15
                                       ==========          =====

The following table summarizes the Company's stock options outstanding at December 31, 2003:

                    Options outstanding                   Options exercisable
                   -----------------------                -------------------
                                 Weighted     Weighted                  Weighted
                                  average     average                   average
    Range of                     remaining    exercise                  exercise
 exercise price      Number        life (1)    price        Number       price
----------------    ---------    ----------   --------    ----------    -------

     $ 0.05             8,597         1        $ 0.05         8,597     $  0.05
       0.06            71,955         1        $ 0.06        71,955     $  0.06
       0.07            10,000         1        $ 0.07        10,000     $  0.07
       0.12         9,183,853         1        $ 0.12     9,031,764     $  0.12
       0.18         3,895,511         1        $ 0.18     3,895,511     $  0.18
       0.20         1,198,704         1        $ 0.20     1,198,704     $  0.20
       0.25           287,360         1        $ 0.25       287,360     $  0.25
       0.60           209,850         1        $ 0.60       209,850     $  0.60
                   -----------                 ------     ----------    --------
                   14,855,830                  $ 0.15    14,855,830     $  0.15
                   ===========                 ======    ==========     ========
                                      F-19

(1) The Company used the "Weighted average remaining life" of one year for purposes of this table, however the terms for the expiration of the majority of the options is 90 days after the effective date of a registration statement of the shares of common stock underlying the options.

The Company applies APB No. 25, "Accounting for Stock Issued to Employees," and related interpretations in accounting for its stock options. As a result no compensation expense has been recognized for employee and director stock options. Had the Company determined compensation cost based on the fair value on the date of grant for its stock options under SFAS No. 123, "Accounting for Stock-Based Compensation," the Company's net loss would have increased from the amount reported by $1,524 in 2003 and there would have been no change in 2002.

                                     2003        2002

Computed "expected" tax benefit    $(285,000)  $(17,000)
State income tax benefit, net of
 federal income tax benefit          (49,000)   ( 3,000)
Change in valuation allowance
 for deferred tax assets allocated
 to income tax expense               334,000     20,000
                                    ---------   ---------
                                   $     -     $    -
                                    =========   =========

The sources and tax effects of temporary differences giving rise to the Company's deferred tax assets (liabilities) at December 31, 2003 are as follows:

Net operating losses                     $ 4,065,800

Valuation allowance                       (4,065,800)
                                        -------------
Total deferred tax asset                 $     -
                                        =============

As a result of significant pretax losses, management cannot conclude that it is more likely than not that the deferred tax asset will be realized. Accordingly, a valuation allowance has been established against the total net deferred tax asset for all periods presented. The Company has net operating losses of approximately $10,700,000 available to offset future taxable income. The losses expire at various dates ranging between 2004 and 2020. Utilization of these losses may be limited based on IRS and state change-of-ownership rules.

The Company and its subsidiaries file separate federal and state income tax returns.

NOTE L - SEGMENT INFORMATION

The following information is presented in accordance with SFAS No. 131, "Disclosure About Segments of an Enterprise and Related Information", which was adopted by the Company during 1999.

NYCH operates in the transportation and delivery of rail traffic via barges segment. During 1999 the Company acquired a 51% interest in JST which operates in the regional trucking business of short-haul freight transportation and landfill management segment. In February 2004, the Company acquired the remaining 49% interest in JST held by minority shareholders. (See Note - M "Subsequent Events" for further detail.)

The Company's reportable segments are strategic business units that offer different services. They are managed separately because each business requires different technology and marketing strategies.

The accounting policies of the segments are the same as those described in the summary of significant accounting policies.

The following tables provide summarized information concerning the Company's reportable segments.

                                     Railroad         Trucking
                                    Operations       Operations       Total
                                  ---------------    ------------  ------------

Year ended December 31, 2003

  Operating revenues               $    1,368,832   $   4,254,793  $ 5,753,119

  Gross profit                            885,872         427,183    1,442,549

  Segment (loss)                         (651,385)       (187,373)    (838,758)

  Interest expense                         97,579          84,970      182,549

  Depreciation and                        243,493         315,055      558,548
   amortization


Year ended December 31, 2002

  Operating revenues               $  1,685,899      $ 3,745,972   $ 5,431,871

  Gross profit                        1,090,655          636,655     1,727,310

  Segment (loss)                       (126,231)          74,704       (51,527)

  Interest expense                      109,498          102,233       211,731

  Depreciation and                      288,886          307,578       596,464
   amortization

                                                      Year ended December 31,
                                                      -----------------------

                                                          2003       2002
                                                          ------    ------
                   Transload Services                      10%        10%
                   Unified Services/CLT                    46%        45%


NOTE M -    SUBSEQUENT EVENTS

In February 2004, Convertible Notes in the amount of $210,000 plus accrued interest were settled at a discount.

On February 4, 2004, the Company entered into an employment agreement with Donald Hutton. The agreement provides for annual compensation of $115,000 plus other benefits. In addition, he is eligible for incentive bonuses.

In January 2004, the Company entered into an employment agreement with Joel Marcus, the Company's chief financial officer. The agreement provides for compensation of $1,500 per month. In addition Mr. Marcus received 250,000 shares of common stock In February 2004, the Mr. Marcus exercised the remaining 38,597 options granted in accordance with the terms of his employment agreement. The exercise prices ranged from $.0495 per share to $0.074 per share. Mr. Marcus exercised these warrants using $2,384 of accrued consulting fees.

Notes payable, related parties totaling $689,700 in principal plus accrued interest were converted into 6,890,700 shares of common stock in February 2004.

Notes payable, related parties totaling $42,000 in principal plus accrued interest were converted into 420,000 shares of common stock in February 2004.

In February 2004, the Company purchased the remaining 49% of the stock of JS Transportation, Inc. in exchange for 4,000,0000 shares of common stock and the return to treasury of 840,000 shares of the Company's common stock.

Pursuant to an agreement dated February 4, 2004 Transit Rail, LLC purchased 750 shares of Series D Preferred Stock at a purchase price of $1,000 per share and agreed to purchase up to 1,750 additional shares of Series D Preferred Stock. In connection with the transaction Transit Rail LLC received a proxy from the holder of the shares of Series C Preferred Stock granting it the right to vote approximately 39.8% of the Company's voting securities. Upon the purchase of 1,700 shares of Series D Preferred Stock and the conversion of all of the outstanding shares of Series C Preferred Stock each share of Series D Preferred Stock shall be entitled to 120,000 votes, which would represent 50.5% of the Company's voting securities based upon the number of shares of common stock presently outstanding. Gordon Reger controls Transit Rail, LLC. Reger Enterprises, LLC, an affiliate of Transit Rail LLC, holds an option to develop a two and one-half acre site at the Company's Bush Terminal Facility which it may exercise if the Company's lease dispute with the City of New York is settled and the City of New York approves the contemplated use of the site. The use and transportation fees payable to the Company, if the option is exercised, will be established at fair market value and subject to approval of the majority of the Company's disinterested directors.

See Form 8-K "Items 1, 5, and 7. CHANGES IN CONTROL OF REGISTRANT, OTHER EVENTS AND REGULATION FD DISCLOSURE and FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS", respectively filed February 19, 2004, with date of report February 4, 2004, incorporated by reference.

NOTE N - RELATED PARTY TRANSACTIONS

In September 2002, John Marsala, the holder of 440,000 shares of Series C Preferred Stock, contributed 250,000 shares of common stock, which was reissued by the Company in settlement of the Platinum Funding lawsuit. (See Note I of the Financial Statements for the year ended December 31, 2002 for further information.) On February 21, 2002, convertible notes in the principal amount of $18,733 and the accrued interest thereon were converted by Mr. Marsala into 655,741 shares of common stock and options to purchase 685,381 shares of common stock at an exercise price of $0.12 per share. On February 21, 2002, Mr. Marsala converted shares of Series C Preferred Stock in the face amount of $60,000 plus accrued dividends thereon in the amount of $86,000 into 4,358,099 shares of common stock and an option to purchase 4,555,085 shares of common stock at an

exercise price of $0.12 per share. Mr. Marsala has guaranteed lease obligations of the Company to Citibank and All Points Capital with outstanding amounts of $37,000 and $18,000, respectively, as of December 31, 2003. In December 2003, accrued dividends on 440,000 shares of Series C Preferred Stock held by Mr. Marsala totaling $118,131 were converted into 2,050,887 shares of common stock and a warrant to purchase an additional 2,828,968 shares of common stock at an exercise price of $0.12 per share.

In February 2004 in connection with the transaction with Transit Rail, LLC, the Company, Transit Rail, LLC and John Marsala entered into an agreement (the "Tri-Party Agreement"), pursuant to which Mr. Marsala (i) granted Transit Rail an irrevocable proxy with respect to 440,000 shares of Series C Preferred Stock for a period of up to 12 months and (ii) agreed to convert 440,000 shares of Series C Preferred Stock into shares of common stock upon Transit Rail purchasing 1,700 shares of Series D Preferred Stock. Under the terms of the Series C Preferred Stock, each share of Series C Preferred Stock is entitled to 300 votes per share. Based upon the shares of common stock issued and outstanding, the proxy represents the right to vote approximately 39.8 % of the Company's voting securities. As part of such transactions, the Company and Mr. Marsala entered into an agreement pursuant to which Mr. Marsala agreed to waive his rights to certain additional shares of Series C Preferred Stock under the terms and conditions of the Series C Preferred Stock provided that the Company has a sufficient number of authorized shares of common stock with respect to all outstanding options, warrants and conversion rights no later than June 3, 2004. Pursuant to the Tri-Party Agreement, in the event that the Company does not have a sufficient number of authorized shares of common stock with respect to all outstanding options, warrants and conversion rights by June 3, 2004, then Mr. Marsala has agreed to assign to Transit Rail 50% of the shares which Mr. Marsala is entitled to receive pursuant to the agreement between Mr. Marsala and the Company.

In February 2004, promissory notes and accrued interest in the amount of $689,700 were converted into 6,890,700 shares of common stock, of which John Marsala held $225,600 and converted into 2,250,600 shares of common stock. In February 2004, the Company purchased the remaining 49% of the capital stock of JS Transportation, Inc. in exchange for 4,000,0000 shares of common stock, of which for 9% of JST held by John Marsala he received 734,694 shares of common stock.

From December 2001 through October 2002, Ronald Bridges (a director and the Company's President and chief executive officer at such times, and currently a director) made short-term loans to the Company. Of such loans and other obligations to Mr. Bridges, $42,000 was outstanding as of December 31, 2003 and converted into 420,000 shares of common stock in February 2004. In November 2001, the Company purchased a tractor for $44,000. Mr. Bridges then loaned the Company $48,000, which was utilized for the purchase of the tractor and such amount was payable in eight equal monthly installments. After the Company made payments in the amount of $15,000, the Company failed to meet its current obligations to Mr. Bridges and transferred the tractor to Mr. Bridges in exchange for the cancellation of the outstanding loan balance. The Company then leased the tractor from Mr. Bridges at the rate of $2,200 per month. For the year ended December 31, 2003, the Company paid $6,600 in connection with the lease and in December 31, 2003, the Company paid an additional $28,000 to Blue Ribbon Group, an affiliate of Mr. Bridges for the leasing of equipment. In November 2001, the Company purchased two trailers for a purchase price $40,000. Mr. Bridges loaned the Company $40,000 for the purchase which was repaid over a period of 14 months ending in August 2002. In October 2003 Mr. Bridges purchased 625,000 shares of common stock for an aggregate purchase price of $25,000.

In September 2002 the Company granted an option to National Transportation Services, LLC ("NTS"), an unaffiliated third party to lease five acres at the Company's Greenville Yard in New Jersey. Pursuant to the option, the Company was to be guaranteed a minimum of eight rail cars a day at a cost of $500 per rail car. NTS was obligated to install the track and equipment on the property and was receive to receive a credit of $50 per rail car until NTS recouped its costs. The option was for a term of 24 months and provided for payments of $3,000 per month. Upon NTS' failure to make the payments pursuant to the option, the option was cancelled. Mr. Bridges became a principal of NTS in March 2003 and the Company granted an option to NTS to lease five acres at the Company's Greenville Yard in New Jersey. NTS intends to use the facility for the intermodal transfer of municipal solid waste with the Company's rail operations. The term of the option is 24 months and the option payments are $2,500 per month. The term of the lease will be 20 years and NTS will guarantee the Company a minimum of eight rail cars a day at a cost of $350 to $450 per rail car. NTS is obligated to install the track and equipment on the property and will receive a credit of $80 per rail car until NTS has recouped its costs.

On May 1, 2001, the Company the Company entered into an agreement with Construction and Marine Equipment ("CME"), which became an affiliate of Ronald Bridges in the first half of 2003, to provide loading and unloading of intermodal containers of railcars at the Greenville Yard in Jersey City, New Jersey. The term of the agreement is through April 30, 2006. Pursuant to the agreement, the Company has guaranteed CME a minimum of 540 rail cars per annum at a cost of $325-375 per car. CME directly bills customers for its services.

Since October 2003, Consolidated Logistics and Transportation, Inc., an affiliate of Ronald Bridges, provides brokerage services to the Company and leases equipment to the Company at competitive rates. During the year ended December 31, 2003, the Company paid Consolidated Logistics and Transportation, Inc. $40,000 in connection with the brokerage services and leasing of equipment. For the year ended December 31, 2003, Consolidated Logistics and Transportation, Inc. paid the Company $507,000 for trucking services and the Company had an account receivable from Consolidated Logistics and Transportation, Inc. for $95,000 with respect to trucking revenues.

Reger Enterprises, LLC, an affiliate of Transit Rail LLC, holds an option to develop a two and one-half acre site at the Company's Bush Terminal Facility which it may exercise if the Company's lease dispute with the City of New York is settled and the City of New York approves the contemplated use of the site. The use and transportation fees payable to the Company, if the option is exercised, will be established at fair market value and subject to approval of the majority of the Company's disinterested directors.