PROVIDENCE & WORCESTER RAILROAD CO/RI/
Providence  and Worcester  Railroad  Company  ("P&W" or "the Company") is a class II regional freight  railroad  operating in  Massachusetts,  Rhode Island, Connecticut  and New York. The Company is the only  interstate  freight  carrier serving the State of Rhode Island and  possesses  the  exclusive  and  perpetual right to conduct  freight  operations  over the Northeast  Corridor  between New Haven,  Connecticut and the Massachusetts/Rhode  Island border. Since commencing independent operations in 1973, the Company, through a series of acquisitions of connecting  lines,  has grown  from 45 miles of track to its  current  system of approximately  516 miles.  P&W  operates  the largest  double  stack  intermodal terminal  facilities  in New England in  Worcester,  Massachusetts,  a strategic location for regional transportation and distribution enterprises.       The Company  transports a wide variety of  commodities  for its  customers, including construction aggregate,  iron and steel products,  chemicals,  lumber, scrap metals, plastic resins, cement, coal,  construction and demolition debris, processed  foods and edible food stuffs,  such as frozen  foods,  corn syrup and animal and vegetable oils. Its customers include Cargill, Inc., The Dow Chemical Company,   Exxon-  Mobil   Corporation,   Frito-Lay,   Inc.,  Gateway  Terminal, International  Paper  Company,  Northeast  Utilities,   Smurfit-Stone  Container Corporation and Tilcon Connecticut,  Inc. In 2005, P&W transported approximately 33,000 carloads of freight and 63,000  intermodal  containers.  The Company also generates  income through sales of properties,  grants of easements and licenses and leases of land and tracks.       P&W's connections to multiple Class I railroads, either directly or through connections  with regional and short-line  carriers,  provide the Company with a competitive  advantage  by  allowing  it to offer  creative  pricing and routing alternatives  to  its  customers.  In  addition,  the  Company's  commitment  to maintaining  its track and  equipment to high  standards  enables P&W to provide fast, reliable and efficient service.   Industry Overview   General       Railroads are divided into three classes based on operating revenues: Class I, $289.4 million or more; Class II, $23.1 million to $289.4 million;  and Class III, less than $23.1 million. As a result of mergers and  consolidations,  there are now only seven  Class I  railroads  in the  country.  The Class I  railroads handle 93% of the nation's rail freight business.       The rail freight industry  underwent a revitalization  after the passage of the  Staggers  Rail Act,  which  deregulated  the  pricing and types of services provided by railroads.  As a result,  railroads were able to achieve significant productivity   gains  and  operating  cost  decreases   while  gaining   pricing flexibility.   Rail  freight   service  became  more   competitive   with  other transportation  modes with  respect  to both  quality  and price.  The volume of freight moved by rail has risen  dramatically  since 1980 and  profitability has improved significantly.       One result of the  revitalization  of the  industry  has been the growth of regional (over 350 miles) and short-line  railroads,  which has been fueled by a trend among Class I railroads to divest  certain  branch lines in order to focus on their long-haul core systems.  There are now nearly 550 of these regional and short-line railroads. They operate in all 50 states, account for 30% of all rail track, employ 11% of all rail workers and generate about 7% of all rail revenue.       Generally,  freight  railroads  handle two types of  traffic:  conventional carloads and intermodal  containers  used in the shipment of goods via more than one  mode  of  transportation,  e.g.,  by  ship,  rail  and  truck.  By  using a hub-and-spoke approach to shipping,  multiple containers can be moved by rail to and  from an  intermodal  terminal  and then  either  delivered  to their  final destinations  by truck or transferred to ship for export.  Over the past decade, commodity  shippers  have  increasingly  turned  to  intermodal   transportation principally  as an  alternative to long-haul  trucking.  The  development of new intermodal  technology,  which  allows  containers  to be moved  by rail  double stacked (i.e.,  stacked one on top of the other) in specially designed railcars, together  with  increasing  highway  traffic  congestion  and  the  shortage  of long-haul truck drivers have contributed to this trend.   Regional Developments       There are a number of  development  projects  underway  in New  England  to increase  port  capacity  along  the  extensive  coastline  and to  improve  the intermodal  transportation and distribution  infrastructure in the region. These projects  present  significant  opportunities  for the Company to  increase  its business.                                        I-1     Quonset/Davisville       The State of Rhode Island and the federal  government are progressing  with the  redevelopment  of a 1,000  acre  portion of the former  Naval  facility  at Quonset/Davisville  to a more active port and  industrial  park.  This  facility already  houses  a  number  of  rail  oriented  industries  and  an  auto  port. Construction of a freight rail improvement  project to provide  additional track capacity  and  double  stack  clearance  on  the  Northeast   Corridor   between Quonset/Davisville and the connection of the Corridor to the Company's main line at  Central  Falls,  R.I  commenced  in 2002 at a cost of $148  million to Rhode Island and the federal  government and is scheduled to be completed by the third quarter of 2006.    Massachusetts Highway Improvement Program       In 2005 work was completed on a significant expansion of the Company's bulk transload  and   intermodal   yards  in  Worcester  in   conjunction   with  the Massachusetts  Highway  Department's  $250  million  project  creating  a direct Worcester connection to the Massachusetts  Turnpike. This project adds six acres and  over  4,000  feet  of  track  storage  space  to  the  Company's  transload facilities,  and a major petrochemical distribution company is in the process of relocating  its local  plastics  distribution  business to Worcester in order to utilize this facility.    Middletown/Hartford Line       In cooperation with the state of Connecticut,  the Company has been engaged in the  restoration  of the rail line  extending  from  Middletown  to Hartford, Connecticut.  In April 2000, the state of Connecticut appropriated $1.85 million to fund their portion of the project  (approx 70%).  The  restoration of this 11 mile  segment  is now  complete  and the  line  is in  service.  With a  planned industrial  park  along  this line and a new  connection  to other  carriers  in Hartford,  the Company believes restoration of this line presents  opportunities for future revenue growth.    New London Interchange       Through its New London  interchange with the New England Central  Railroad, P&W has been able to develop significant new business with the Canadian National Railway ("CN") and the Canadian Pacific Railway.  P&W has worked aggressively to leverage its  extensive  bulk  transload  facilities  in  developing  additional chemical and plastics traffic with CN and has developed a significant  volume of steel traffic with CN that had previously moved via truck.    Port of Providence       The  Port  of  Providence,  in  conjunction  with  the  Company,  has  made investments  in its  infrastructure,  including  paving,  lighting and "on dock" rail, to  accommodate  growth in the movement of imported coal to inland markets and to handle that  product more  efficiently.  This is expected to be a growing source of revenue for the Company over the next few years. Approximately 350,000 tons of coal were handled through the Port of Providence in 2005.   Railroad Operations       The Company's rail freight system extends over  approximately  516 miles of track.  The  Company   interchanges  freight  traffic  with  CSX  at  Worcester, Massachusetts  and at New  Haven,  Connecticut;  with the  Springfield  Terminal Railway Company at Gardner, Massachusetts; with the New England Central Railroad at New London, Connecticut; and with the New York and Atlantic Railroad at Fresh Pond Junction on Long Island.  Through its  connections,  P&W links more than 80 communities  on  its  lines.  It  operates  four  classification   yards  (areas containing tracks used to group freight cars destined for a particular  industry or interchange), located in Worcester,  Massachusetts,  Cumberland, Rhode Island and Plainfield and New Haven, Connecticut.       The Company is  dependent  upon the  railroads  with which it  interchanges freight  traffic to enable it to properly  service its customers at  competitive rates.  Failure of any of these connecting railroads to provide adequate service at reasonable rates can result in a loss of freight customers and revenues.       By agreement  with a private  operator,  the Company  operates two approved customs  intermodal  yards in Worcester.  A customs  intermodal  yard is an area containing tracks used for the loading and unloading of containers.  These yards are U.S.  Customs  bonded,  and  international  traffic  must be  inspected  and                                         I-2   approved by U.S. Customs officials.  The intermodal facility serves primarily as a terminal  for movement of  container  traffic  from the Far East  destined for points in New England.  Several major  container ship lines utilize double stack train  service  through  this  terminal.  P&W works  closely  with the  terminal operator to develop and  maintain  strong  relationships  with  steamship  lines involved in international intermodal transportation.    Customers       The Company  serves  approximately  165 customers in  Massachusetts,  Rhode Island, Connecticut and New York. The Company's 10 largest customers account for nearly half of its operating revenues. In 2005, Tilcon Connecticut,  Inc., which ships  construction  aggregate from three  separate  quarries on P&W's system to asphalt   production   plants  in  Connecticut  and  New  York,   accounted  for approximately  13.3% of the  Company's  operating  revenues.  No other  customer accounted for 10% or more of its total operating revenues in 2005.    Markets       The Company transports a wide variety of commodities for its customers.  In recent years,  chemicals and plastics and  construction  aggregate  were the two largest commodity groups  transported by the Company,  constituting 31% and 16%, respectively,  of conventional  carload freight  revenues in 2005. The following table  summarizes  the  Company's   conventional  carload  freight  revenues  by commodity group as a percentage of such revenues:  Commodity                              2005     2004     2003     2002     2001 - ---------                              ----     ----     ----     ----     ---- Chemicals and plastics ............      31%      32%      33%      35%      34% Construction aggregate ............      16       15       16       20       19 Metal products ....................      14       11       10        7        7 Forest and paper products .........      13       15       12       13       16 Food and agricultural products ....      11       11       12       12       13 Other, including coal .............      10        9        8        5        5 Scrap metal and waste .............       5        7        9        8        6                                         ---      ---      ---      ---      ---    Total ..........................     100%     100%     100%     100%     100%                                         ===      ===      ===      ===      ===    Sales and Marketing       P&W's sales and marketing staff of three people has substantial  experience in pricing  and  marketing  railroad  services.  The sales and  marketing  staff focuses on  understanding  and  addressing  the raw  material  requirements  and transportation  needs of its existing customers and businesses on its lines. The staff grows existing  business by maintaining close working  relationships  with both customers and connecting carriers. The sales and marketing staff strives to generate new business for the Company through (i) targeting companies already on P&W's rail lines but not  currently  using  rail  services  or not using them to their full capacity,  (ii) working with state and local  development  officials, developers and real estate  brokers to encourage the  development of industry on the  Company's  rail lines and (iii)  identifying  and  targeting  the  non-rail transportation  of  goods  into  and out of the  region  in  which  the  Company operates.  Unlike many other regional and short-line  railroads,  the Company is able to offer its customers creative pricing and routing alternatives because of its multiple connections to other carriers.    Safety       An important  component of the Company's  operating  strategy is conducting safe railroad operations for the benefit and protection of employees,  customers and the communities served by its rail lines. Since commencing active operations in 1973, the Company has committed significant resources to track maintenance to minimize  the  risk of  derailments  and  believes  its rail  system  is in good condition.       Safety of the  Company's  operations  is of  paramount  importance  for the benefit and protection of the Company's employees, customers and the communities served by its rail lines.  The Company and its employees  have continued to make improvements in preventing injuries while at the same time increasing operations and expanding the work force.                                         I-3    Rail Traffic       Rail traffic is classified as on-line or overhead traffic.  On-line traffic is traffic that  originates or terminates  with shippers  located on a railroad. Overhead  traffic  passes  from one  connecting  carrier to another  and neither originates nor terminates with shippers located on a railroad. Presently, P&W is solely an on-line  carrier  but may provide  overhead  service in the future for certain rail traffic to and from Long Island.       Rail freight rates can be in various forms. Generally,  customers are given a "through"  rate, a single figure  encompassing  the rail  transportation  of a commodity from point of origin to point of destination, regardless of the number of carriers  which handle the car.  Rates are developed by the carriers based on the commodity,  volume,  distance and  competitive  market  considerations.  The entire freight bill is paid either to the originating  carrier ("prepaid") or to the  destination  carrier  ("collect")  and divided  between all carriers  which handle the move.  The basis for the division  varies and can be based on factors (or  revenue  requirements)  independently  established  by each  carrier  which comprise the through  rate,  or on a percentage  basis  established  by division agreements among the carriers.  A carrier such as P&W, which actually places the car at the  customer's  location and attends to the customer's  daily  switching requirements,  receives  revenue  greater than an amount based simply on mileage hauled.    Employees       As of January 1, 2005, the Company had 147 full-time employees, 115 of whom are  represented  by three  railroad  labor  organizations  that are national in scope. The Company's employees have been represented by unions since the Company commenced independent operations in 1973.       The  Company's  initial  agreement  with the  United  Transportation  Union covering the trainmen was unusual in the railroad industry since it provided the Company with discretion in determining crew sizes, eliminated craft distinctions and provided a guaranteed annual wage for a maximum number of hours worked.  The Company's  collective  bargaining  agreements have been in effect since February 1973 for trainmen,  since May 1974 for clerical  employees and  dispatchers  and since June 1974 for maintenance employees. These contracts do not expire but are subject to re-negotiation after the agreed-upon moratoriums. The labor agreement may next be amended at July 1, 2006 for the  Brotherhood  of Railroad  Signalmen (maintenance),  while the Transportation Communications Union (clerical) filed a notice  regarding its desire for  re-negotiation  prior to the end of the agreed upon  moratorium  which ended on December 31, 2005.  The Company signed an eight year agreement with the United  Transportation Union (trainmen) in October 2005. The Company considers its employee and labor relations to be good.   Competition       The Company is the only rail carrier serving  businesses  located on- line. However,  the  Company  competes  with other  carriers  in the  location  of new rail-oriented businesses in the region. Certain rail competitors,  including CSX Transportation and Norfolk Southern,  are larger and better capitalized than the Company.   The  Company  also  competes  with  other  modes  of  transportation, particularly   long-haul   trucking   companies,   for  the   transportation  of commodities.  Any improvement in the cost or quality of these alternate modes of transportation,  for example,  legislation  granting material increases in truck size  or  allowable  weight,  could  increase  competition  and  may  materially adversely affect the Company's business and results of operations. As a means of competing,  P&W strives to offer  greater  convenience  and better  service than competing  rail  carriers  and at  costs  lower  than  some  competing  non-rail carriers.  The Company also competes by  participating in efforts to attract new industry to the areas which it serves.       The Company  believes that its ability to grow depends,  in part,  upon its ability to acquire additional connecting rail lines. In making acquisitions, P&W competes with other  short-line and regional rail  operators,  some of which are larger and have greater financial resources than the Company.                                        I-4    Governmental Regulation       The  Company is subject to  governmental  regulation  by the United  States Surface  Transportation  Board ("the STB"), the Federal Railroad  Administration ("the  FRA") and other  federal,  state and local  regulatory  authorities  with respect  to  certain  rates and  railroad  operations,  as well as a variety  of health,  safety,  labor,  environmental  and other  matters,  all of which could potentially  affect the competitive  position and  profitability of the Company. Additionally,  the Company is subject to STB  regulation  and may be required to obtain STB approval  prior to its  acquisition  of any new railroad  properties. Management of the Company  believes that the regulatory  freedoms granted by the Staggers Rail Act have been  beneficial to the Company by giving it  flexibility to adjust  prices  and  operations  to respond  to market  forces  and  industry changes.  However,  various interests,  and certain members of the United States Congress (which has  jurisdiction  over federal  regulation of railroads),  have from time to time expressed  their intention to support  legislation  that would eliminate or reduce significant freedoms granted by the Staggers Rail Act.   Environmental Matters       The Company's railroad  operations and real estate ownership are subject to extensive   federal,   state  and  local   environmental  laws  and  regulations concerning,  among other things,  emissions to the air, discharges to waters and the handling, storage, transportation and disposal of waste and other materials. The Company  handles,  stores,  transports  and disposes of petroleum  and other hazardous   substances  and  wastes.  The  Company  also  transports   hazardous substances  for third parties and arranges for the disposal of hazardous  wastes generated by the Company. The Company believes that it is in material compliance with applicable environmental laws and regulations.  Internet Address and SEC Reports       We maintain a website with the address  www.pwrr.com.  We are not including the information  contained on our website as a part of, or  incorporating  it by reference  into,  this Annual  Report on Form 10-K.  We make  available  free of charge through our website our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current  Reports on Form 8-K, and amendments to these reports,  as soon as reasonably  practicable after we electronically file such material with, or furnish such material to, the  Securities  and Exchange  Commission.  We also include on our website our corporate governance  guidelines and the charters for each of the major committees of our board of directors.  In addition,  we intend to  disclose  on our website any  amendments  to, or waivers  from,  our code of business conduct and ethics that are required to be publicly  disclosed pursuant to rules of the SEC.
Fluctuations in Operating Revenues       Historically,  the Company's  operating revenues have been tied to national and regional economic  conditions,  especially those impacting the manufacturing sector,   while  the  Company's   expenses  have  been   relatively   inelastic. Increasingly,  the Company's  business is impacted by global economic  events. A downturn in general economic  conditions  could materially  adversely affect the Company's  business and results of  operations.  In addition,  shifts in the New England  economy  between  manufacturing  and service  sectors could  materially affect the Company's performance.  The Company's operating revenues and expenses have also  fluctuated  due to  unpredictable  events,  such as  adverse  weather conditions and customer  plant  closings.  While  generally the Company has been able to  replace  revenues  lost  due to plant  closings  through  expansion  of existing  business or replacement with new customers,  there can be no assurance that it could do so in the future. The occurrence of such  unpredictable  events in the future  could  cause  further  fluctuations  in  operating  revenues  and expenses and materially adversely affect the Company's financial performance.    Availability of Acquisition and Growth Opportunities and Associated Risks       The Company  believes that its ability to grow depends,  in part,  upon its ability to acquire additional  connecting rail lines. There are a limited number of  acquisition  targets  in  the  Company's  market.  In  addition,  in  making acquisitions,  the Company  competes  with other short- line and  regional  rail operators,  some of which are larger and have greater  financial  resources than the Company. The growing competition for such acquisitions may cause an increase in  acquisition  prices  and  related  costs,   resulting  in  fewer  attractive acquisition opportunities, which could materially adversely affect the Company's                                         I-5   growth.  No  assurance  can be given  that the  Company  will be able to acquire suitable  additional rail lines or that, if acquired,  the Company would be able to successfully operate such additional rail lines.       Acquisitions of additional  rail lines may be subject to regulatory  review and  approval by the  Surface  Transportation  Board.  The Company is a Class II railroad  and  acquisitions  made  by  Class  II  railroads  are  subject  to  a requirement  that  employees  affected by an  acquisition be paid up to one year severance.    Competition       For customers  located  directly on line,  which constitute the majority of the Company's freight  business,  the Company is the only rail carrier providing direct service.  However,  the Company competes with other freight  railroads in the location of new  businesses  in the region.  The Company also  competes with other modes of transportation,  particularly  long-haul trucking companies.  Any improvement in the cost or quality of these alternate  modes of  transportation, for example,  legislation  granting increases in truck size or allowable weight, could increase this competition and materially affect the Company's business and results of operations.    Customer Concentration       The Company's ten largest customers  accounted for approximately 50% of the Company's operating revenues for 2005 with one customer accounting for more than 13%. The Company's  business  could be materially  adversely  affected if any of these  customers  reduces  shipments of commodities  transported by the Company. Although in the past the Company has been able to replace revenues lost due to a reduction in existing customers' rail service requirements,  no assurance can be given that it could do so in the future.    Labor Issues       Substantially all of the Company's non-management employees are represented by  national   railroad  labor   organizations.   The  Company's   inability  to satisfactorily  conclude  negotiations  with unions could  materially  adversely affect the  Company's  operations  and  financial  performance.  Similarly,  any protracted  work  stoppages  against the Company's  connecting  railroads  could materially  adversely  affect the Company's  business and results of operations. Historically,  Congress has  intervened in such events to avoid  disruptions  in interstate  commerce,  but there can be no assurance  that it would do so in the future.       All railroad industry employees are covered by the Railroad  Retirement Act and the Railroad Unemployment Insurance Act in lieu of Social Security and other federal and state  unemployment  insurance  programs,  and the Federal Employers Liability Act in lieu of state workers'  compensation.  Significant increases in the taxes payable  pursuant to the Railroad  Retirement  Act would  increase the Company's costs of operations.    Relationships with Other Railroads       The railroad  industry in the United  States is dominated by a small number of large Class I carriers that have  substantial  market control and negotiating leverage. A majority of the Company's carloadings is interchanged with a Class I carrier,  CSX  Transportation.  A decision by CSX  Transportation to discontinue serving routes or transporting  certain  commodities could materially  adversely affect the Company's business.       The Company's  ability to provide rail service to its customers  depends in large part upon its ability to maintain  cooperative  relationships with all its connecting  carriers with respect to, among other matters,  freight  rates,  car supply,  interchange  and trackage  rights.  A  deterioration  in the  operating relationships  with or  service  provided  by those  connecting  carriers  could materially adversely affect the Company's business.    Rail Infrastructure and Availability of Government Programs       Certain  of  the  Company's  growth   opportunities   are  contingent  upon anticipated improvements to P&W's existing rail infrastructure. No assurance can be given that the  Company  will be able to complete  such  projects as planned. Unforeseen   delays  or  other  problems   which  prevent   completion  of  such improvements  could  materially  adversely  affect the  Company's  business  and results of  operations.  In  addition,  the Company has worked with  federal and state  agencies to improve its rail  infrastructure  and has been  effective  in obtaining federal and state financial support for such projects.  However, there                                         I-6   can be no  assurance  that such  federal  and state  programs  or funds  will be available in the future or that the Company will be eligible to  participate  in such  programs.  Failure to  participate  in federal  and state  programs  or to receive  federal or state  funding for rail  infrastructure  improvements  would cause the Company to incur the full cost of rail infrastructure improvements and significantly increase its costs of rail maintenance.    Potential for Increased Governmental Regulation and Mandated Upgrade   to Property       The  Company  is  subject  to   governmental   regulation  by  the  Surface Transportation  Board,  the Federal Railroad  Administration  and other federal, state and  local  regulatory  authorities  with  respect  to  certain  rates and railroad  operations,   as  well  as  a  variety  of  health,   safety,   labor, environmental  and other  matters,  all of which  could  potentially  affect the competitive position and profitability of the Company. Management of the Company believes that the regulatory  freedoms  granted by the Staggers Rail Act of 1980 (the  "Staggers  Rail Act")  have been  beneficial  to the  Company by giving it flexibility  to adjust  prices and  operations  to respond to market  forces and industry changes.  However,  various interests and certain members of the United States House of  Representatives  and Senate (which have  jurisdiction  over the federal  regulation  of  railroads)  have  from  time  to time  expressed  their intention to support  legislation  that would  eliminate  or reduce  significant freedoms granted by the Staggers Rail Act. If enacted, these proposals, or court or administrative rulings to the same effect under current law, could materially adversely affect the Company's business and results of operations.    Casualty Losses       The  Company  has  obtained  insurance  coverage  for losses  arising  from personal  injury and for property  damage in the event of  derailments  or other accidents or occurrences.  The Company  believes that its insurance  coverage is adequate based on its experience. However, under catastrophic circumstances such as accidents involving passenger trains or spillage of hazardous materials,  the Company's  liability could exceed its insurance limits.  The Company  transports hazardous  chemicals  throughout  its  system  and  conducts  operations  on the Northeast  Corridor  on which there is heavy  passenger  traffic.  Insurance  is available from only a limited number of insurers,  and there can be no assurance that  insurance  protection at the Company's  current levels will continue to be available  or, if  available,  will be  obtainable  on terms  acceptable  to the Company.  Losses or other  liabilities  incurred  by the  Company  which are not covered by  insurance  or which  exceed the  Company's  insurance  limits  could materially  adversely affect the Company's  financial  condition,  liquidity and results of operation.    Environmental Matters       The Company's railroad  operations and real estate ownership are subject to extensive   federal,   state  and  local   environmental  laws  and  regulations concerning,  among other things,  emissions to the air, discharges to waters and the handling, storage, transportation and disposal of waste and other materials. The Company  transports  hazardous  materials and  periodically  uses  hazardous material  in its  operations.  While the Company  believes it is in  substantial compliance  with  all  applicable   environmental  laws  and  regulations,   any allegations or findings to the effect that the Company had violated such laws or regulations could materially adversely affect the Company's business and results of operations.  The Company  operates on properties that have been used for rail operations for over a century.  There can be no assurance that historic releases of hazardous waste or materials will not be discovered, requiring remediation of Company properties, and that the cost of such remediation would not be material.
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Track       P&W's rail system extends over  approximately  516 miles of track, of which it owns  approximately 163 miles. The Company has the right to use the remaining 353 miles  pursuant  to  perpetual  easements  and long-  term  trackage  rights agreements.  Under certain of these  agreements,  the Company pays fees based on usage.       Virtually  all of the main lines on which the Company  operates  are in FRA class 3 condition (allowing 40 m.p.h.  speeds) or better. The Company intends to maintain the main line tracks which it owns in such excellent condition.       Of the approximately 516 miles of the Company's system,  306 miles, or 59%, are located in Connecticut,  95 miles, or 19%, are located in Massachusetts,  87 miles,  or 17%, are located in Rhode Island and 28 miles,  or 5%, are located in New York.                                        I-7     Rail Facilities       P&W owns land and a building with approximately 69,500 square feet of floor space in Worcester,  Massachusetts.  The building houses the Company's executive and   administrative   offices  and  some  of  the  Company's   storage   space. Approximately 2,600 square feet are leased to outside tenants.       The Company owns and operates three principal  classification yards located in  Worcester,   Massachusetts,   Cumberland,   Rhode  Island  and   Plainfield, Connecticut and also operates a classification  yard in New Haven,  Connecticut. In addition,  the Company has  maintenance  facilities in Putnam and Plainfield, Connecticut and in Worcester, Massachusetts. P&W believes that its executive and administrative   office   facilities,   classification   yards  and  maintenance facilities are adequate to support its current level of operations.    Other Properties       The Company owns or has the right to use a total of approximately 130 acres of real  estate  located  along  the  principal  railroad  lines  from  downtown Providence   through   Pawtucket,   Rhode  Island.  Of  this  amount,  P&W  owns approximately eight acres in Pawtucket and has a perpetual easement for railroad purposes over the remaining 122 acres.       The Company has invested nearly $12 million in the development of the South Quay,  which  is  adjacent  to 12  acres  of land  owned  by the  Company.  This investment has resulted in the creation of  approximately 33 acres of waterfront land which is being held for future development.       P&W actively manages its real estate assets in order to maximize  revenues. The  income  from  property  management  is derived  from  sales and  leasing of properties  and tracks and grants of easements to government  agencies,  utility companies  and other  parties for the  installation  of overhead or  underground cables,  pipelines and transmission  wires as well as recreational  uses such as bike paths.    Rolling Stock       The following schedule sets forth the rolling stock owned by the Company as of December 31, 2005:       Description                                                    Number      -----------                                                    ------      Locomotive ..................................................      31      Gondola .....................................................      77      Flat Car ....................................................       5      Ballast Car .................................................      30      Passenger Equipment .........................................       7      Caboose .....................................................       2                                                                     ------           Total ..................................................     152                                                                     ======       The 31 diesel  electric  locomotives,  which include nine  pre-owned  3,900 horsepower GE B39-8 locomotives acquired in 2002 and 2003 and three pre-owned GE B40-8  locomotive  acquired  in 2004 and 2005,  are used on a daily  basis,  are maintained to a high standard,  comply with all FRA and  Association of American Railroads  rules and regulations and are adequate for the needs of the Company's freight  operations.  The gondolas and flat cars are considered modern rail cars and are used by certain P&W  customers.  Other rail freight  customers use their own freight cars or obtain such equipment  from other sources.  The ballast cars are used in track maintenance. From time to time, the Company has leased ballast cars to other adjoining  railroads.  The passenger equipment and caboose are not utilized in P&W's rail freight  operations  but are used on an occasional  basis for Company functions, excursions and charter trips.                                        I-8     Equipment       P&W has a state-of-the-art  digital touch control dispatching system at its Worcester  operations center  permitting  two-way radio contact with every train crew and  maintenance  vehicle on its lines.  The system also enables each train crew to maintain radio contact with other crew members.  The Company maintains a computer facility in Worcester with back-up computer facilities in Worcester and Plainfield,  Connecticut to assure the Company's ability to operate in the event of  disruption of service in  Worcester.  The Company also has  state-of-the-art automatic  train defect  detectors at strategic  locations which inspect passing trains and audibly  communicate  the results to train crews and  dispatchers  in order to protect against equipment failure en route.       The Company  maintains a modern fleet of track  maintenance  equipment  and aggressively  pursues  available  opportunities  to work with  federal and state agencies for the  rehabilitation  of bridges,  grade  crossings  and track.  The Company's  locomotives are equipped with the cab signal technology necessary for operations on the Northeast Corridor and are equipped with automatic civil speed enforcement  systems  which  were  required  by the  introduction  of high speed passenger service on the Northeast Corridor.
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 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 Superfund 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).  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.       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.       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 is one of about sixty  parties named thus far by Plaintiffs,  who seek to recover response costs incurred in investigating and responding  to the  releases of  hazardous  substances  at the Site.  Plaintiffs allege 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 has 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  has  agreed  to settle  this suit for $45,000 and has accrued a liability  for this amount as of December 31, 2004 and 2005. A settlement  agreement  was  finalized  and the $45,000 was paid in March 2006.
Not applicable.                                         I-9                                          Part II
The Common Stock is quoted on the American  Stock  Exchange  ("AMEX")  under the trading symbol "PWX". The following table sets forth, for the periods indicated, the high and low sale  prices per share for the Common  Stock as reported on the AMEX.  Also included are dividends paid per share of Preferred  Stock and Common Stock during these quarterly periods.                                          Common Stock                                        ------------                                       Trading Prices         Dividends Paid                                       --------------         --------------                                   High            Low     Preferred      Common                                   ----            ---     ---------      ------ 2004 - ----      First Quarter ........       9.75           8.89      $  5.00       $ .04      Second Quarter .......      10.91           9.25          -0-         .04      Third Quarter ........      11.38           9.63          -0-         .04      Fourth Quarter .......      13.50          10.75          -0-         .04   2005 - ----      First Quarter ........      16.16          12.10      $  5.00       $ .04      Second Quarter .......      14.97          12.50          -0-         .04      Third Quarter ........      15.20          13.20          -0-         .04      Fourth Quarter .......      15.40          12.52          -0-         .04     As of March 3,  2006,  there  were  approximately  681  holders of record of the Company's common stock.  The  declaration of cash dividends on both the preferred and the common stock is made  at the  discretion  of the  Board  of  Directors  based  on the  Company's earnings,  financial condition,  capital requirements and other relevant factors and restrictions.                                        II-1
The  selected  financial  data set forth  below has been  derived  from the Company's audited financial  statements.  The data should be read in conjunction with  the  Company's  audited   financial   statements  and  notes  thereto  and "Management's  Discussion  and  Analysis of Financial  Condition  and Results of Operations" and the other information  included  elsewhere in this annual report on Form 10-K.                                                 Years Ended December 31,                                    2005      2004      2003      2002      2001                                  -------   -------   -------   -------   -------                                      (in thousands, except per share amounts) Income Statement Data:  Operating revenues ..........   $26,734   $24,943   $23,961   $22,868   $22,598  Other income ................     1,208     1,547       661       877     1,003                                  -------   -------   -------   -------   -------  Total Revenues ..............    27,942    26,490    24,622    23,745    23,601  Operating expenses ..........    26,044    24,802    23,554    23,698    22,245                                  -------   -------   -------   -------   -------  Income before income taxes        1,898     1,688     1,068        47     1,356  Provision for income taxes          640       650       400        25       505                                  -------   -------   -------   -------   -------  Net income ..................     1,258     1,038       668        22       851  Preferred Stock dividend ....         3         3         3         3         3                                  -------   -------   -------   -------   -------   Net income available to   common shareholders ........   $ 1,255   $ 1,035   $   665   $    19   $   848                                  =======   =======   =======   =======   =======   Basic income per common   share ......................   $   .28   $   .23   $   .15   $    --   $   .19                                  =======   =======   =======   =======   =======   Diluted income per common   share ......................   $   .28   $   .23   $   .15   $    --   $   .19                                  =======   =======   =======   =======   =======   Weighted average   shares--basic ..............     4,496     4,470     4,449     4,429     4,390                                  =======   =======   =======   =======   =======   Weighted average   shares--diluted ............     4,574     4,548     4,516     4,497     4,458                                  =======   =======   =======   =======   =======   Cash dividends declared on   Common Stock ...............   $   720   $   715   $   712   $   710   $   702                                  =======   =======   =======   =======   =======                                                      December 31,                                    2005      2004      2003      2002      2001                                  -------   -------   -------   -------   -------                                             (in thousands) Balance Sheet Data:  Total assets ................   $93,348   $91,471   $90,619   $90,500   $89,161   Shareholders' equity ........   70,091    69,228    68,691    68,641    69,073                                        II-2
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 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 it 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 shut-downs. 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.                                        II-3   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,   Tilcon  Connecticut,   Inc.,  which  ships construction  aggregate from three separate  quarries on the Company's system to asphalt   production   plants  in  Connecticut  and  New  York,   accounted  for approximately  13.3%,  12.6% and 13.3% of its operating  revenues in 2005, 2004, and 2003,  respectively.  The Company does not believe that this  customer  will cease to be a rail shipper or will significantly  decrease its freight volume in the  foreseeable  future.  In the  event  that  this  customer  should  cease or significantly  reduce its rail freight operations,  management believes that the Company could  restructure its operations to reduce operating costs by an amount sufficient to substantially offset the decrease in operating revenues.  Results of Operations  The following tableF sets forth the Company's operating revenues by category in dollars and as a percentage of operating revenues:                                            Years Ended December 31,                                 -----------------------------------------------                                      2005            2004              2003                                 -------------   --------------    -------------                                       (in thousands, except percentages) Freight Revenues:  Conventional carloads ....... $22,082   82.6%  $20,705   83.0%  $19,795   82.6%  Containers ..................   3,201   12.0     2,778   11.1     2,953   12.3  Other freight related........     850    3.2       836    3.4       727    3.1 Other operating revenues......     601    2.2       624    2.5       486    2.0                                -------  -----   -------  -----   -------  -----   Total ...................... $26,734  100.0%  $24,943  100.0%  $23,961  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,                                 -----------------------------------------------                                      2005            2004              2003                                 -------------   --------------    -------------                                       (in thousands, except percentages)  Chemicals and plastics .......    $ 6,923   31.4% $ 6,684  32.3% $ 6,463   32.7% Construction aggregate .......      3,485   15.8    3,102  15.0    3,086   15.6 Metal products ...............      2,985   13.5    2,222  10.7    1,966    9.9 Forest and paper products ....      2,917   13.2    3,036  14.7    2,454   12.4 Food and agricultural products      2,391   10.8    2,325  11.2    2,480   12.5 Coal and other ...............      2,219   10.0    1,868   9.0    1,652    8.3 Scrap metal and waste ........      1,162    5.3    1,468   7.1    1,694    8.6                                   -------  -----  ------- -----  -------  -----   Total ......................    $22,082  100.0% $20,705 100.0% $19,795  100.0%                                   =======  =====  ======= =====  =======  =====                                        II-4   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 December 31,                                 -----------------------------------------------                                      2005            2004              2003                                 -------------   --------------    -------------                                       (in thousands, except percentages) Salaries, wages, payroll taxes  and employee benefits .......   $14,401   53.9  $13,758  55.2% $13,550   56.5% Casualties and insurance .....     1,084    4.1    1,409   5.6    1,031    4.3 Depreciation .................     2,764   10.3    2,764  11.1    2,754   11.5 Diesel fuel ..................     2,014    7.5    1,348   5.4    1,203    5.0 Car hire, net ................     1,123    4.2      954   3.8      753    3.1 Purchased services, including  legal and professional fees .     1,564    5.8    1,357   5.4    1,313    5.5 Repairs and maintenance of  equipment ...................     1,280    4.8    1,046   4.2      947    4.0 Track and signal materials ...     2,428    9.1    1,862   7.5    1,985    8.3 Track usage fees .............       827    3.1      899   3.6      812    3.4 Other materials and supplies .     1,016    3.8    1,060   4.3    1,056    4.4 Other ........................     1,680    6.3    1,628   6.5    1,596    6.7                                  -------  -----  ------- -----  -------  -----  Total .......................    30,181  112.9   28,085 112.6   27,000  112.7  Less capitalized and   recovered costs ............     4,137   15.5    3,283  13.2    3,446   14.4                                  -------  -----  ------- -----  -------  -----   Total ......................   $26,044   97.4% $24,802  99.4% $23,554   98.3%                                  =======  =====  ======= =====  =======  =====   Year Ended December 31, 2005 Compared to Year Ended December 31, 2004  Operating Revenues  Operating  Revenues  increased  $1.8 million,  or 7.2%, to $26.7 million in 2005 from  $24.9  million in 2004.  This  increase  was the result of a $1.4  million (6.7%) increase in conventional freight revenues, a $423,000 (15.2%) increase in container  freight  revenues  and a $14,000  (1.7%)  increase  in other  freight related  revenues  partially  offset  by a  $23,000  (3.7%)  decrease  in  other operating revenues.  The increase in conventional  freight  revenues  results from a 6.8% increase in the average revenue  received per  conventional  carload.  Conventional  traffic volume  decreased  slightly  (.1%) between  years.  The  Company's  conventional carloadings  decreased  by 41 to  33,203  in 2005  from  33,244  in  2004.  Rate increases,  including  diesel  fuel  surcharges,  and a  shift  in  the  mix  of commodities  hauled  account for the increase in the average  rate  received per conventional  carload.  Increases in carloadings of metal products and coal were largely offset by smaller decreases in carloadings of various other commodities.  The increase in container freight revenues results from an 18.7% increase in the average revenue  received per container  partially  offset by a 3.0% decrease in container traffic volume. Intermodal containers handled during 2005 decreased by 1,913 to 62,905  from  64,818  in 2004.  The  increase  in the  average  revenue received per container is attributable to contractual  rate  adjustments as well as a shift in the mix of containers handled.  The increase in other freight revenues results from increased demurrage billings largely  offset by decreases  in secondary  switching  and other  charges.  This increased  demurrage  revenue  offsets the increased  car hire expense  incurred during the year.  The decrease in other operating  revenues  results from an overall  reduction in maintenance  department  billings.  Revenues of this type vary from year to year depending upon the needs of freight customers and other outside parties.  Other Income  Other income  decreased by $339,000 to $1.2 million in 2005 from $1.5 million in 2004.  The  decrease  results from the fact that 2004  included a $948,000  gain realized on the disposal of a portion of a branch line which the Commonwealth of Massachusetts  acquired by eminent domain during the year,  whereas 2005 did not include any gains of that magnitude. Revenues of this nature typically vary from year to year.                                         II-5   realized on the disposal of a portion of a branch line which the Commonwealth of Massachusetts  acquired  by eminent  domain  during the year.  Revenues  of this nature typically vary from year to year.  Operating Expenses  Operating expenses increased by $1.2 million,  or 4.8%, to $26.0 million in 2005 from $24.8  million in 2004.  Expressed as a percentage  of operating  revenues, however,  operating  expenses  decreased  to 97.4% in 2005  compared to 99.4% in 2004. Diesel fuel expense for the year increased by $666,000 reflecting the high cost of  petroleum  products in effect in 2005.  Car hire  expense  increased by $169,000 during the year which costs were largely offset by increased  demurrage revenue as previously discussed.  Provision for Income Taxes  The  Company's  income tax  provision  for 2005 amounts to 34% of income  before income taxes compared to 39% in 2004. The largest  component of this decrease is $65,000 of  railroad  tax  maintenance  credits  which the  Company  was able to utilize in 2005 to reduce its current income tax  provision.  utilize in 2005 to reduce its current income tax provision.  Year Ended December 31, 2004 Compared to Year Ended December 31, 2003  Operating Revenues  Operating  Revenues increased  $982,000,  or 4.1%, to $24.9 million in 2004 from $24.0  million in 2003.  This  increase was the net result of a $910,000  (4.6%) increase in conventional  freight revenues, a $109,000 (15.0%) increase in other freight  related  revenues and a $138,000  (28.4%)  increase in other  operating revenues  partially  offset by a $175,000 (5.9%)  decrease in container  freight revenues.  The increase in conventional  freight  revenues  results from a 4.1% increase in carloadings.  The average revenue received per carloading increased by less than one percent between years. The Company's  conventional  carloadings increased by 1,296 to 33,244 in 2004 from 31,948 in 2003.  The  increase in  carloadings  was spread  throughout  the  mix of  commodities  handled  by the  Company  with  no particular  commodity  experiencing a  disproportionate  increase or decrease in volume.  The small  increase in the average  revenue per  carloading  reflects a slight shift in the mix of commodities  from  construction  aggregates to higher rated commodities.  The  decrease in container  freight  revenues  results  from a 1.0%  decrease in traffic  volume  and a  4.9%  decrease  in  the  average  revenue  received  per container. Intermodal containers handled decreased by 667 to 64,818 in 2004 from 65,485 in 2003.  The  decrease in the average  revenue  received  per  container results  from  contractual  rate  adjustments,  as well as a shift in the mix of containers handled.  The  increase  in other  freight  related  revenues is largely  attributable  to increased demurrage charges, secondary switching fees, weighing charges, special train charges, etc. Revenues of this nature can vary from year to year depending upon the needs of freight customers.  The  increase  in other  operating  revenues  is due to  maintenance  department billings to freight  customers and other outside parties.  Revenues of this type typically vary from year to year depending upon customer requirements.  Other Income  Other  income  increased  by $886,000 to $1.5  million in 2004 from  $661,000 in 2003. This increase is the result of a $948,000 gain realized on the disposal of a portion of a branch line which the Commonwealth of  Massachusetts  acquired by eminent domain during the year.  Operating Expenses  Operating  expenses  increased  $1.2 million,  or 5.3%, to $24.8 million in 2004 from $23.6  million in 2003.  Operating  expenses as a  percentage  of operating revenues  increased  to 99.4% from  98.3% in 2003.  Operating  expenses  in 2004 includes a $425,000  provision  for  casualty  losses,  $208,000 of which was to settle a lawsuit  judgment  against the  Company.  In  addition,  the  Company's profit-sharing expense for 2004 was $188,000 compared to $119,000 in 2003.                                        II-6   Liquidity and Capital Resources  The Company  generated $4.9 million,  $3.1 million and $2.4 million of cash from operations in 2005,  2004 and 2003,  respectively.  The Company's total cash and cash equivalents  increased by $328,000 in 2005,  $503,000 in 2004 and decreased by $1.7 million in 2003. The principal utilization of cash during the three year period was for expenditures for property and equipment  acquisitions and payment of dividends.  During  2005,  2004 and 2003 the Company  generated  $691,000,  $1.5 million and $237,000,   respectively,  from  the  sales  and  disposals  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.  In June 2005,  the Company's  principal  bank renewed the Company's $3.0 million revolving line of credit for a two year period through May 31, 2005.  Borrowings under this line are  unsecured and bear interest at either the prime rate or one and one half per cent  over  either  the one or  three  month  London  Interbank Offered Rates.  The Company does not pay any commitment fee on this line and has no compensating balance  requirements.  The Company had no advances against this line of credit during 2005 and 2004.  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  $2.9  million,  $2.5 million and $2.5 million for track  structure and bridge improvements in 2005, 2004 and 2003, respectively.  Deferred grant income of $411,000 in 2005,  $39,000 in 2004 and $399,000 in 2003 financed a portion of these  improvements.  Management  estimates that $2.5 million to $3.0 million of improvements  to the Company's track structure and bridges will be made in 2006, provided  that  sufficient  funds,  including  grant  proceeds,  are  available. Improvements  to the Company's  track  structure are made, for the most part, by the Company's Maintenance of Way Department personnel.  During  2004 the  Company  entered  into a contract  for the  construction  of a building for its  Communications and Signals Department on land which it owns in Plainfield, Connecticut.  Construction costs of $44,000 were incurred under this contract  through  December 31, 2004.  The building was  completed and placed in service during 2005 at a total cost of $506,000  In  2005,  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  $721,000,  on its outstanding  common stock.  Continued payment of such  dividends is contingent  upon the Company's  continuing to have the necessary financial resources available.  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 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 Superfund 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).  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.  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                                        II-7   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.   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 is one of about sixty  parties named thus far by Plaintiffs,  who seek to recover response costs incurred in investigating and responding  to the  releases of  hazardous  substances  at the Site.  Plaintiffs allege 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 has 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  has  agreed  to settle  this suit for $45,000 and has accrued a liability  for this amount as of December 31, 2004 and 2005. A settlement  agreement  was  finalized  and the $45,000 was paid in March 2006.  Land Held for Development  Pursuant to permits issued by the United States  Department of the Army Corps of Engineers  ("ACE") and the Rhode Island  Coastal  Resources  Management  Council ("CRMC"),  the Company created 33 acres of waterfront  land in East  Providence, Rhode Island ("South  Quay").  The permits for the property,  both of which have been extended to 2009, also allow for construction of a dock along the west face of the South Quay.  The property is adjacent to a 12 acre site also owned by the Company.  The  property  is  located a half mile from  I-195.  In 1999,  the Rhode  Island Department of Transportation entered into a contract for engineering services to undertake  roadway  improvements  to provide  direct  vehicular  access from the interstate  highway  system to the South Quay.  The project is anticipated to be substantially complete by 2007.  The City of East Providence has created a large  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. In  addition,  the  State of Rhode  Island  is  moving  forward  with the  plan, described above,  that will provide a direct  connection from I-195 to the South Quay.  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 2005 and 2004.  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.                                         II-8                                                  Year Ended December 31, 2005                                           --------------------------------------                                            First    Second     Third    Fourth                                           Quarter   Quarter   Quarter   Quarter                                           -------   -------   -------   -------                                         (in thousands, except per share amounts) Operating Revenues ....................   $ 5,640   $ 6,588   $ 7,449   $ 7,057 Other income ..........................       195       164       133       716                                           -------   -------   -------   ------- Total revenues ........................     5,835     6,752     7,582     7,773 Operating expenses ....................     6,205     6,435     6,475     6,929                                           -------   -------   -------   ------- Income (loss) before income taxes  (benefits) ...........................      (370)      317     1,107       844 Provision for income taxes  (benefits) ...........................      (115)      110       405       240                                           -------   -------   -------   ------- Net income (loss) .....................   $  (255)  $   207   $   702   $   604                                           -------   -------   -------   -------  Basic income (loss) per common  share ................................   $  (.06)  $   .05   $   .16   $   .13                                           -------   -------   -------   -------  Diluted income (loss) per common  share ................................   $  (.06)  $   .05   $   .16   $   .13                                           -------   -------   -------   -------                                                  Year Ended December 31, 2004                                           --------------------------------------                                            First    Second     Third    Fourth                                           Quarter   Quarter   Quarter   Quarter                                           -------   -------   -------   -------                                         (in thousands, except per share amounts) Operating Revenues ....................   $ 5,067   $ 6,493   $ 7,036   $ 6,347 Other income ..........................       121       142     1,169       115                                           -------   -------   -------   ------- Total revenues ........................     5,188     6,635     8,205     6,462 Operating expenses ....................     5,875     6,293     6,193     6,441                                           -------   -------   -------   ------- Income (loss) before income taxes  (benefits) ...........................      (687)      342     2,012        21 Provision for income taxes  (benefits) ...........................      (225)      120       715        40                                           -------   -------   -------   ------- Net income (loss) .....................   $  (462)  $   222   $ 1,297   $   (19)                                           -------   -------   -------   -------  Basic income (loss) per common  share ................................   $  (.10)  $   .05   $   .29   $    --                                           -------   -------   -------   -------  Diluted income (loss) per common  share ................................   $  (.10)  $   .05   $   .28   $    --                                           -------   -------   -------   -------   Inflation  In recent years,  inflation  has not had a  significant  impact on the Company's operations.  Seasonality  Historically,  the Company's operating revenues are lowest for the first quarter due to the absence of construction aggregate shipments during this period and to winter weather conditions.                                        II-9    Recent Accounting Pronouncements  In December 2004, the Financial  Accounting  Standards Board issued Statement on Financial  Accounting  Standards  No. 123R,  "Share-Based  Payment."  ("SFAS No. 123R").  This  Statement  is  a  revision  of  SFAS  No.  123,  "Accounting  for Stock-Based Compensation" ("SFAS No. 123"), and supersedes Accounting Principles Board  Opinion No. 25,  "Accounting  for Stock Issued to  Employees",  ("APB No. 25"), and its related implementation  guidance.  SFAS No. 123R focuses primarily on accounting for transactions in which an entity obtains  employee  services in share- based payment transactions.  The Statement requires entities to recognize compensation  expense for awards of equity instruments to employees based on the grant-date fair value of those awards (with limited  exceptions).  In April 2005 the  Securities and Exchange  Commission  issued a revision to SFAS No. 123R and the effective date for this  pronouncement  is the first annual reporting period that begins after June 15, 2005, although earlier adoption is encouraged.  Effective  January 1, 2006, we adopted the provisions of SFAS No. 123R using the statement's  modified-prospective  transition method.  Adoption of SFAS No. 123R will not affect the  Company's  cash flows or  financial  position,  but it will reduce  periodically  reported  income and  earnings  per share.  We  previously applied the  intrinsic  value based method  prescribed  in APB Opinion No. 25 in accounting  for  employee  stock-based  compensation.  Going  forward,  we  will recognize  stock-based  compensation costs ratably over the service period. This statement  also amends SFAS No. 95,  "Statement of Cash Flows",  to require that excess tax benefits be reflected as financing cash inflows rather than operating cash inflows.  In March 2005, the SEC issued Staff Accounting  Bulletin,  or SAB No.  107  regarding  the  Staff's   interpretation   of  SFAS  No.  123R.   This interpretation  provides the Staff's views regarding  interactions  between SFAS No. 123R and certain SEC rules and regulations and provides  interpretations  of the valuation of share- based payments for public  companies.  The  interpretive guidance is intended to assist  companies in applying the provisions of SFAS No. 123R and  investors  and users of the  financial  statements  in  analyzing  the information  provided.  We will follow the guidance prescribed in SAB No. 107 in connection  with our  adoption of SFAS No.  123R.  The impact of the adoption of SFAS No. 123R and SAB No. 107 is  estimated to result in a  compensation  charge for 2006 which is not material.
Cash and Equivalents  As of December 31, 2005, the Company is exposed to market risks which  primarily include changes in U.S. interest rates.  The  Company  invests  cash  balances  in excess of  operating  requirements  in short-term  securities,  generally  with  maturities  of 90  days  or  less.  In addition,  the  Company's  revolving  line  of  credit  agreement  provides  for borrowings  which bear interest at variable  rates based on either prime rate or one and one half  percent  over either the one or three month  London  Interbank Offered  Rates.  The  Company  had no  borrowings  outstanding  pursuant  to the revolving line of credit  agreement at December 31, 2005.  The Company  believes that the effect,  if any, of reasonably  possible  near-term changes in interest rates on the Company's financial position, results of operations, and cash flows should not be material.                                       II-10
PROVIDENCE AND WORCESTER RAILROAD COMPANY                             INDEX TO FINANCIAL STATEMENTS                                                            Page                                                         ---- Report of Independent Registered Public Accounting  Firm................................................   II-12  Balance Sheets as of December 31, 2005 and 2004......   II-13  Statements of Income for the Years Ended December 31,  2005, 2004 and 2003.................................   II-14  Statements of Shareholders' Equity for the Years Ended  December 31, 2005, 2004 and 2003....................   II-15  Statements of Cash Flows for the Years Ended  December 31, 2005, 2004 and 2003....................   II-16  Notes to Financial Statements........................   II-17                                       II-11   Report of Independent Registered Public Accounting Firm - -------------------------------------------------------   To the Board of Directors and Shareholders  of Providence and Worcester Railroad  Company Worcester, Massachusetts   We have audited the accompanying balance sheets of Providence and Worcester Railroad Company (the "Company") as of December 31, 2005 and 2004, and the related statements of income, shareholders' equity and cash flows for each of the three years in the period ended December 31, 2005. Our audits also included the financial statement schedule listed in the Index at Item 15(a)(2). These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statements and financial statement schedule based on our audits.  We conducted our audits in accordance with auditing standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness on the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.  In our opinion, such financial statements present fairly, in all material respects, the financial position of Providence and Worcester Railroad Company as of December 31, 2005 and 2004, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2005, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.   /s/ Deloitte & Touche LLP  Boston, Massachusetts March 24, 2006                                        II-12   PROVIDENCE AND WORCESTER RAILROAD COMPANY BALANCE SHEETS (Dollars in Thousands Except Per Share Amounts)                                                                   December 31,                                                                2005        2004                                                              -------     ------- ASSETS Current Assets:  Cash and cash equivalents .............................     $ 2,063     $ 1,735  Accounts receivable, net of allowance for   doubtful accounts of $175 in 2005 and $125 in 2004....       3,202       3,564  Materials and supplies ................................       1,654       1,889  Prepaid expenses and other current assets .............         152         239  Deferred income taxes .................................         193         212                                                              -------     -------   Total Current Assets .................................       7,264       7,639  Property and Equipment, net ............................      74,126      71,874 Land Held for Development ..............................      11,958      11,958                                                              -------     ------- Total Assets ...........................................     $93,348     $91,471                                                              =======     =======  LIABILITIES AND SHAREHOLDERS' EQUITY  Current Liabilities:  Accounts payable ......................................     $ 1,905     $ 1,679  Accrued expenses ......................................       1,471       1,284                                                              -------     -------   Total Current Liabilities ............................       3,376       2,963                                                              -------     ------- Profit-Sharing Plan Contribution .......................         211         188                                                              -------     ------- Deferred Income Taxes ..................................      11,530      11,129                                                              -------     ------- Deferred Grant Income ..................................       8,140       7,963                                                              -------     -------  Commitments and Contingencies (Note 8)  Shareholders' Equity:  Preferred stock, 10% noncumulative, $50 par   value; authorized, issued and outstanding 645   shares in 2005 and 2004 ..............................          32          32  Common stock, $.50 par value; authorized   15,000,000 shares; issued and outstanding   4,507,056 shares in 2005 and 4,481,007 shares   in 2004 ..............................................       2,254       2,241  Additional paid-in capital ............................      30,230      29,914  Retained earnings .....................................      37,575      37,041                                                              -------     -------   Total Shareholders' Equity ...........................      70,091      69,228                                                              -------     ------- Total Liabilities and Shareholders' Equity .............     $93,348     $91,471                                                              =======     =======      The accompanying notes are an integral part of the financial statements.                                       II-13   PROVIDENCE AND WORCESTER RAILROAD COMPANY STATEMENTS OF INCOME (Dollars in Thousands Except Per Share Amounts)                                                         Years Ended December 31,                                                     2005       2004       2003                                                  --------   --------   --------  Revenues:  Operating Revenues ...........................   $26,734    $24,943    $23,961  Other Income .................................     1,208      1,547        661                                                  --------   --------   --------    Total Revenues .............................    27,942     26,490     24,622                                                  --------   --------   --------  Expenses:  Operating:   Maintenance of way and structures ...........     3,739      3,404      3,639   Maintenance of equipment ....................     2,886      2,627      2,421   Transportation ..............................     7,892      7,335      6,701   General and administrative ..................     4,333      4,205      3,876   Depreciation ................................     2,764      2,764      2,754   Taxes, other than income taxes ..............     2,045      2,209      2,258   Car hire, net ...............................     1,123        954        753   Employee retirement plans ...................       435        405        340   Track usage fees ............................       827        899        812                                                  --------   --------   --------    Total Operating Expenses ...................    26,044     24,802     23,554                                                  --------   --------   --------  Income before Income Taxes ....................     1,898      1,688      1,068  Provision for Income Taxes ....................       640        650        400                                                  --------   --------   --------  Net Income ....................................     1,258      1,038        668  Preferred Stock Dividends .....................         3          3          3                                                  --------   --------   --------  Net Income Available to Common Shareholders ...   $ 1,255     $1,035      $ 665                                                   =======    =======    =======  Basic and Diluted Income Per Common Share .....   $   .28    $   .23    $   .15                                                   =======    =======    =======      The accompanying notes are an integral part of the financial statements.                                       II-14   PROVIDENCE AND WORCESTER RAILROAD COMPANY STATEMENTS OF SHAREHOLDERS' EQUITY (Dollars in Thousands Except Per Share Amounts)                                  Years Ended December 31, 2005, 2004 and 2003                                                    Additional            Share-                               Preferred  Common     Paid-in   Retained  holders'                                  Stock    Stock     Capital   Earnings   Equity                                 -------  -------   -------    -------   ------- Balance, January 1, 2003 .      $    32  $ 2,222   $29,619    $36,768   $68,641  Issuance of 14,114 common  shares for stock options  exercised, employee stock  purchases, and other ....                     7        90                   97 Dividends paid:  Preferred stock, $5.00 per   share ..................                                         (3)       (3)  Common stock, $.16 per share                                    (712)     (712) Net income for the year ..                                        668        668                                 -------  -------   -------    -------   ------- Balance, December 31, 2003.          32    2,229    29,709     36,721    68,691  Issuance of 12,628 common  shares to fund the Company's  2003 profit sharing plan  contribution ............                     6       113                  119 Issuance of 10,885 common  shares for stock options  exercised, employee stock  purchases, and other ....                     6        92                   98 Dividends paid:  Preferred stock, $5.00 per   share ..................                                         (3)       (3)  Common stock, $.16 per share                                    (715)     (715) Net income for the year ..                                      1,038     1,038                                 -------  -------   -------    -------   ------- Balance, December 31, 2004           32    2,241    29,914     37,041    69,228  Issuance of 13,980 common  shares to fund the Company's  2004 profit sharing plan  contribution ............                     7       181                  188 Issuance of 12,069 common  shares for stock options  exercised, employee stock  purchases, and other ....                     6       135                  141 Dividends paid:  Preferred stock, $5.00 per   share ..................                                         (3)       (3)  Common stock, $.16 per share                                    (721)     (721) Net income for the year ..                                      1,258     1,258                                 -------  -------   -------    -------   ------- Balance, December 31, 2005      $    32  $ 2,254   $30,230    $37,575   $70,091                                 =======  =======   =======    =======   =======      The accompanying notes are an integral part of the financial statements.                                       II-15   PROVIDENCE AND WORCESTER RAILROAD COMPANY STATEMENTS OF CASH FLOWS (Dollars in Thousands)                                                        Years Ended December 31,                                                   2005        2004        2003                                                 -------     -------     ------- Cash Flows from Operating  Activities:  Net income ................................... $ 1,258      $1,038       $ 668  Adjustments to reconcile net income to net   cash flows from operating activities:    Depreciation ...............................   2,764       2,764       2,754    Amortization of deferred grant income ......    (234)       (229)       (224)    Profit-sharing plan contribution to be      funded with common stock .................     211         188         119    Gains from sale, condemnation and      disposal of property, equipment and      easements, net ...........................    (691)     (1,081)       (206)    Deferred income taxes ......................     420         850         295    Other, net .................................      32           7          32    Increase (decrease) in cash and      equivalents from:      Accounts receivable ......................     422         118        (559)      Materials and supplies ...................     235        (118)       (137)      Prepaid expenses and other ...............      87        --           297      Accounts payable and accrued expenses ....     405        (396)       (604)                                                 -------     -------     -------  Net cash flows from operating activities .....   4,909       3,141       2,435                                                 -------     -------     ------- Cash Flows from Investing Activities:  Purchase of property and equipment ...........  (5,011)     (3,659)     (4,127)  Proceeds from sale and condemnation of   property, equipment and easements ...........     691       1,488         237  Proceeds from deferred grant income ..........     351         156         427                                                 -------     -------     -------  Net cash flows used in investing activities     (3,969)     (2,015)     (3,463)                                                 -------     -------     ------- Cash Flows from Financing Activities:  Dividends paid ...............................    (724)       (718)       (715)  Issuance of common shares for stock options   exercised and employee stock purchases ......     112          95          87                                                 -------     -------     -------  Net cash flows used in financing activities ..    (612)       (623)       (628)                                                 -------     -------     ------- Increase (Decrease) in Cash and Cash  Equivalents ..................................     328         503      (1,656) Cash and Cash Equivalents, Beginning of Year ..   1,735       1,232       2,888                                                 -------     -------     ------- Cash and Cash Equivalents, End of Year ........ $ 2,063     $ 1,735     $ 1,232                                                 =======     =======     =======  Supplemental Disclosures:  Cash paid during year for income taxes ....... $  --       $  --       $    35                                                 =======     =======     =======      The accompanying notes are an integral part of the financial statements.                                       II-16   PROVIDENCE AND WORCESTER RAILROAD COMPANY NOTES TO FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003 (Dollars in Thousands Except Per Share Amounts)  1.   Description of Business and Summary of Significant Accounting Policies       Description of Business      -----------------------       Providence and Worcester  Railroad Company (the "Company") is an interstate      freight carrier  conducting  railroad  operations in  Massachusetts,  Rhode      Island,  Connecticut  and New York.  Through its  connecting  carriers,  it      services customers located throughout North America.       One  customer  accounted  for  13.3%,  12.6%  and  13.3%  of the  Company's      operating revenues in 2005, 2004 and 2003, respectively.       Cash and Cash Equivalents      -------------------------       The Company  considers  all highly  liquid  investments  with a maturity of      three months or less when purchased to be cash  equivalents for purposes of      classification  in the balance  sheets and  statements of cash flows.  Cash      equivalents are stated at cost, which approximates fair market value.       Materials and Supplies      ----------------------       Materials and  supplies,  which  consist of items for the  improvement  and      maintenance  of  track  structure  and  equipment,   are  stated  at  cost,      determined on a first-in,  first-out  basis,  and are charged to expense or      added to the cost of property and equipment when used.       Property and Equipment      ----------------------       Property and equipment,  including land held for development,  is stated at      historical  cost (including  self-construction  costs).  Acquired  railroad      property is recorded at the purchased  cost.  Major renewals or betterments      are capitalized while routine maintenance and repairs, which do not improve      or extend  asset  lives,  are charged to expense  when  incurred.  Gains or      losses on sales or other  dispositions  are  credited or charged to income.      Depreciation is provided using the straight-line  method over the estimated      useful lives of the assets as follows:                 Track structure                  20 to 67 years                Buildings and other structures   33 to 45 years                Equipment                         4 to 25 years       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 it is measured by comparing the carrying value to the      fair value.       Deferred Grant Income      ---------------------       The  Company  has  availed  itself of various  federal  and state  programs      administered by the states of Connecticut,  Massachusetts  and Rhode Island      for  reimbursement  of expenditures for capital  improvements.  In order to      receive  reimbursement,  the Company must submit requests for the projects,      including  cost  estimates.  The Company  receives  from 70% to 100% of the      costs of such projects,  which have included  bridges,  track structure and      public  improvements.  To the extent that such grant  proceeds  are used to      fund capital improvements to bridges and track structure, they are recorded      as  deferred  grant  income and  amortized  into  operating  revenues  on a      straight-line  basis  over  the  estimated  useful  lives  of  the  related      improvements ($234 in 2005, $229 in 2004 and $224 in 2003).                                       II-17        Grant  proceeds  utilized  to finance  public  improvements,  such as grade      crossings  and signals,  are recorded as a direct offset to the cost of the      improvements, which are not capitalized.       Revenue Recognition      -------------------       Freight  revenues are recorded at the time delivery is made to the customer      or the connecting carrier.       Other freight related revenues and other operating revenues are recorded at      the time the services are rendered to the customer.       Gain or loss from sale, condemnation and disposal of property and equipment      and easements is recorded at the time the  transaction is  consummated  and      collectibility is assured.       Income Taxes      ------------       Deferred  income taxes are recorded  based on the  differences  between the      financial statement and tax basis of assets and liabilities.  Such deferred      income taxes are also adjusted to reflect changes in the U.S. tax laws when      enacted and changes in state tax rates.  Valuation  allowances are recorded      against deferred tax assets that are not expected to be realized.       Income per Common Share      -----------------------       Basic income per common share is computed using the weighted average number      of common shares  outstanding  during each year.  Diluted income per common      share  reflects  the  effect  of  the  Company's  outstanding   convertible      preferred stock and options (using the treasury stock method), except where      such items would be antidilutive.       A reconciliation  of weighted average shares used for the basic computation      and that used for the diluted computation is as follows:                                                         Years Ended December 31,                                                    2005        2004        2003                                                ---------   ---------   ---------       Weighted average shares for basic ......  4,495,683   4,470,332   4,448,627      Dilutive effect of convertible preferred       stock and options .....................     77,975      77,278      67,050                                                ---------   ---------   ---------      Weighted average shares for diluted ....  4,573,658   4,547,610   4,515,677                                                =========   =========   =========       Options to purchase 5,029, 11,110 and 118,517 shares of common stock were      outstanding during 2005, 2004 and 2003, respectively, but were not included      in the computation of diluted earnings per common share because their      effect would be antidilutive.       Use of Estimates      ----------------       The  preparation of the Company's  financial  statements in conformity with      accounting  principles  generally  accepted in the United  States  requires      management  to make  estimates  and  assumptions  that affect the  reported      amounts of assets and liabilities  and disclosure of contingent  assets and      liabilities  at the  date of the  financial  statements  and  the  reported      amounts of  revenues  and  expenses  during the  reporting  period.  Actual      results may differ from those estimates.  The Company's principal estimates      include the allowance for doubtful  accounts,  useful lives of  properties,      accrued  liabilities  including health insurance claims and legal and other      contingencies, and income taxes.       o    The Company has a self funded  medical plan with  stop-loss  insurance           which covers all of its full time  employees.  Medical claims are paid           from a claims  fund which the  Company  contributes  to  monthly.  The           estimated  liability for unpaid claims incurred is adjusted at the end                                        II-18             of each reporting period based upon historical  experience modified by           actual claim  payments made through the date the financial  statements           are issued.       o    Liabilities  for  casualty  claims,  legal  judgments  and other  loss           contingencies  are recorded when it is probable that an asset has been           impaired or a liability  has been  incurred and the amount of the loss           can be  reasonably  estimated.  The Company does not accrue  estimated           legal fees for appeals of legal judgments since we do not believe that           such costs meet the  definition  of a liability and thus are accruable           only at such time as legal services have been provided.       Stock Based Compensation      ------------------------       The Company accounts for stock-based compensation awards to employees using      the intrinsic value method in accordance with Accounting  Principles  Board      Opinion No. 25, "Accounting for Stock Issued to Employees". Had the Company      used the fair value method to value compensation, as set forth in Statement      of Financial  Accounting  Standards No. 123,  "Accounting  for  Stock-Based      Compensation", the Company's net income and net income per share would have      been reported as follows:                                                      Years Ended December 31,                                                   2005        2004        2003                                                 -------     -------     -------      Net income (loss) available to common shareholders:       As reported ............................. $ 1,255     $ 1,035     $   665       Less impact of stock option expense,        net of tax effects .....................      42          40          38                                                 -------     -------     -------       Pro forma ............................... $ 1,213     $   995     $   627                                                 =======     =======     =======       Basic income per share:       As reported ............................. $   .28     $   .23     $   .15       Less impact of stock option expense,        net of tax effects .....................     .01         .01         .01                                                 -------     -------     -------       Pro forma ............................... $   .27     $   .22     $   .14                                                 =======     =======     =======      Diluted income per share:       As reported ............................. $   .28     $   .23     $   .15       Less impact of stock option expense,        net of tax effects ....................      .01         .01         .01                                                 -------     -------     -------       Pro forma ............................... $   .27     $   .22     $   .14                                                 =======     =======     =======       The fair  value of  options  on their  grant  date is  measured  using  the      Black/Scholes  option pricing model.  The estimated  weighted  average fair      value of options granted during 2005,  2004 and 2003 were $ . , $5.24,  and      $4.49,  respectively.  Key assumptions used to apply this pricing model are      as follows:                                               2005       2004       2003                                           ---------  ---------  ---------      Average risk-free interest rate          3.94%      3.90%      3.62%      Expected life of option grants           7.0 years  7.0 years  7.0 years      Expected volatility of underlying stock   65%        70%        73%      Expected dividend payment rate, as       a percentage of the share price       on the date of grant                   1.19%       1.80%      2.06%       Comprehensive Income      --------------------       Comprehensive Income equals net income for 2005, 2004 and 2003.       Segment Reporting      -----------------       The  Company  organizes  itself  as one  segment  reporting  to  the  chief      operating  decision  maker.  Products  and  services  consist  primarily of      interstate freight rail services.  These include the movement of freight in      both  conventional  freight cars and in intermodal  containers on flat cars      over the Company's rail lines, as well as freight related  services such as      switching,  weighing  and  special  trains and other  services  rendered to                                       II-19       freight customers and other outside parties by the Company's Maintenance of      Way, Communications & Signals and Maintenance of Equipment Departments.       Recently Issued Financial Accounting Standards      ----------------------------------------------       In December 2004, the Financial Accounting Standards Board issued Statement      on Financial Accounting Standards No. 123R,  "Share-Based  Payment." ("SFAS      No. 123R").  This Statement is a revision of SFAS No. 123,  "Accounting for      Stock-Based  Compensation"  ("SFAS No.  123"),  and  supersedes  Accounting      Principles   Board  Opinion  No.  25,   "Accounting  for  Stock  Issued  to      Employees",  ("APB No. 25"), and its related implementation  guidance. SFAS      No. 123R  focuses  primarily on  accounting  for  transactions  in which an      entity obtains employee services in share-based payment  transactions.  The      Statement requires entities to recognize compensation expense for awards of      equity instruments to employees based on the grant-date fair value of those      awards (with limited exceptions). In April 2005 the Securities and Exchange      Commission  issued a revision to SFAS No. 123R and the  effective  date for      this  pronouncement  is the first annual reporting period that begins after      June 15, 2005, although earlier adoption is encouraged.       Effective January 1, 2006, we adopted the provisions of SFAS No. 123R using      the statement's  modified-prospective  transition method.  Adoption of SFAS      No. 123R will not affect the  Company's  cash flows or financial  position,      but it will reduce periodically  reported income and earnings per share. We      previously  applied the  intrinsic  value based  method  prescribed  in APB      Opinion No. 25 in accounting for employee stock-based  compensation.  Going      forward, we will recognize stock-based  compensation costs ratably over the      service period.  This statement also amends SFAS No. 95, "Statement of Cash      Flows",  to require that excess tax benefits be reflected as financing cash      inflows rather than  operating cash inflows.  In March 2005, the SEC issued      Staff   Accounting   Bulletin,   or  SAB  No.  107  regarding  the  Staff's      interpretation of SFAS No. 123R. This  interpretation  provides the Staff's      views  regarding  interactions  between SFAS No. 123R and certain SEC rules      and   regulations  and  provides   interpretations   of  the  valuation  of      share-based  payments for public  companies.  The interpretive  guidance is      intended to assist  companies in applying the  provisions  of SFAS No. 123R      and  investors  and users of the  financial  statements  in  analyzing  the      information provided. We will follow the guidance prescribed in SAB No. 107      in  connection  with our  adoption  of SFAS No.  123R.  The  impact  of the      adoption  of SFAS No.  123R and SAB No.  107 is  estimated  to  result in a      compensation charge for 2006 which is not material.   2.   Property and Equipment       Property and equipment consists of the following:                                                               December 31,                                                            2005           2004                                                          -------        -------      Land and improvements ....................          $10,938        $10,609      Track structure ..........................           70,445         67,368      Buildings and other structures ...........            8,363          7,916      Equipment ................................           26,052         25,577                                                          -------        -------                                                          115,798        111,470      Less accumulated depreciation ............           41,672         39,596                                                          -------        -------      Total property and equipment, net.........          $74,126        $71,874                                                          =======        =======                                        II-20  3.   Land Held for Development       Pursuant  to permits  issued by the United  States  Department  of the Army      Corps  of  Engineers   ("ACE")  and  the  Rhode  Island  Coastal  Resources      Management  Council  ("CRMC"),  the Company  created 33 acres of waterfront      land in East Providence,  Rhode Island ("South Quay").  The permits for the      property,  both of which  have  been  extended  to  2009,  also  allow  for      construction  of a dock along the west face of the South Quay. The property      is  adjacent  to a 12 acre site also owned by the  Company  with a carrying      value of $11,958.       The property is located a half mile from I-195.  In 1999,  the Rhode Island      Department  of  Transportation  entered  into a  contract  for  engineering      services to undertake  roadway  improvements  to provide  direct  vehicular      access from the interstate highway system to the South Quay. The project is      anticipated to be substantially complete by 2007.       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. In addition,  the State of Rhode Island is moving forward with the      plan,  described above, that will provide a direct connection from I-195 to      the South Quay.  4.   Revolving Line of Credit       The Company has a revolving  line of credit with its principal  bank in the      amount of $3,000  expiring  May 31,  2007.  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.  There  were no loans      outstanding under the line at any time during 2005 or 2004.  5.   Accrued Expenses       Accrued expenses consist of the following:                                                               December 31,                                                             2005           2004                                                          -------        -------      Simplified employee pension plan      contributions ........................              $   229        $   210      Health insurance plan claims .........                  375            150      Casualty loss claims .................                  370            473      Other ................................                  497            451                                                          -------        -------                                                          $ 1,471        $ 1,284                                                          =======        =======  6.   Other Income       Other income consists of the following:         Years Ended December 31,                                                     2005        2004        2003                                                   ------      ------      ------       Gains from sale, condemnation and       disposal of property, equipment and       easements, net ......................       $  691      $1,081      $  206      Rentals and license fees under       various operating leases ............          486         454         443      Interest .............................           31          12          12                                                   ------      ------      ------                                                   $1,208      $1,547      $  661                                                   ======      ======      ======                                       II-21        Gains from sale,  condemnation  and  disposal of  property,  equipment  and      easements  for 2004  includes a $948,000 gain realized on the disposal of a      portion of a branch line which the Commonwealth of  Massachusetts  acquired      by eminent domain.  7.   Income Taxes       The provision for income taxes consists of the following:                                                       Years Ended December 31,                                                    2005        2004       2003                                                   ------      ------     ------       Current:       Federal ..........................          $  202      $ (210)    $  105       State ............................              18          10         --                                                   ------      ------     ------                                                      220        (200)       105      Deferred, Federal and State .......             420         850        295                                                   ------      ------     ------                                                   $  640      $  650     $  400                                                   ======      ======     ======       The following summarizes the estimated tax effect of temporary  differences      that are included in the net deferred income tax provision:                                                      Years Ended December 31,                                                   2005        2004       2003                                                   -----       -----      -----       Depreciation ...........................     $ 462       $ 462      $ 431      Deferred grant income ..................       (63)         68        (62      Gains from sale, condemnation and       disposal of property and equipment.....        --         348         (8)      Accrued casualty and other claims ......        37         (14)       (74)      Other ..................................       (16)        (14)         8                                                   -----       -----      -----                                                   $ 420       $ 850      $ 295                                                   =====       =====      =====       In 2005 the Company  generated  Railroad Track  Maintenance  Credits in the      amount of  $1,124.  These  credits  may be  utilized,  subject  to  certain      limitations,  to offset the Company's current federal income tax liability.      Any  credits  not  utilized  in the year  earned may be carried  forward to      offset future income tax liabilities for a period of 20 years.  The Company      utilized  $65 of these  credits to reduce its  current  federal  income tax      liability in 2005. The unused credits,  in the amount of $1,059  constitute      deferred income tax assets. Such assets,  however, have been fully reserved      since their future realization is not assured.                                       II-22        Deferred income taxes reflect the net tax effects of temporary differences      between the carrying amount of assets and liabilities for financial      reporting purposes anFd the amounts used for income tax purposes. The tax      effects of significant items comprising the Company's net deferred income      tax liability as of December 31, 2005 and 2004 are as follows:                                                                 December 31,                                                              2005          2004                                                            -------       -------      Deferred income tax liabilities -       Differences between book and tax basis       of property and equipment .......................   $14,420       $13,956                                                           -------       -------      Deferred income tax assets:       Deferred grant income ...........................     2,890         2,827       Accrued casualty and other claims ...............       131           168       Allowance for doubtful accounts and other........        62            44                                                           -------       -------                                                             3,083         3,039                                                           -------       -------       Net deferred income tax liability ................   $11,337       $10,917                                                           =======       =======       A  reconciliation  of  the  U.S. federal  statutory  rate  to  the      effective tax rate is as follows:                                                        Years Ended December 31,                                                      2005       2004       2003                                                      ----       ----       ----      Federal statutory rate .......................    34%        34%        34%      Depreciation of properties acquired from       bankrupt railroads having a tax basis       in excess of cost ...........................    (1)        (2)        (6)      Railroad track maintenance credits ...........    (3)        --         --      Non deductible expenses, state income       taxes, etc ..................................     4          7          9                                                      ----       ----       ----      Effective tax rate ...........................    34%        39%       37%                                                      ====       ====       ====  8.   Commitments and Contingencies       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  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  Superfund  Site.  Via these Notice      letters,  EPA makes a demand for payment of past costs  (identified  in the      letter as $762) 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). The Company believes that none                                       II-23       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.       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.       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 is one of about      sixty parties named thus far by  Plaintiffs,  who seek to recover  response      costs incurred in investigating and responding to the releases of hazardous      substances at the Site.  Plaintiffs allege 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  has  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 has agreed to settle this suit for      $45 and has accrued a liability for this amount as of December 31,  2004and      2005. A settlement  agreement  was  finalized and the $45 was paid in March      2006.  9.   Employee Benefit Plans       Stock Option Plan      -----------------       The Company has a  non-qualified  stock  option plan  ("SOP")  covering all      management  personnel  who have a minimum of one year of  service  with the      Company  and who are not  holders of a majority  of either its  outstanding      common stock or its outstanding preferred stock. In addition, the Company's      outside  directors  are  eligible to  participate  in the SOP.  The SOP has      authorized  50,000  common  shares  or 5% of the  shares  of  common  stock      outstanding,  whichever is greater  (225,353  shares at December 31, 2005).      Options  granted under the SOP,  which are fully vested when  granted,  are      exercisable  over a ten year period at the market  price for the  Company's      common stock as of the date the options are granted.                                       II-24         Changes in stock options outstanding are as follows:                                                            Weighted Average                                                             ----------------                                              Number         Exercise   Fair                                              of shares        Price    Value                                              ------          ------   ------      Outstanding at January 1, 2003 ....     48,759          $ 9.35       Granted ...........................      8,270            7.75   $ 4.49      Exercised .........................     (2,344)           7.21      Expired ...........................     (3,379)           7.34                                              ------          ------   ------      Outstanding and exercisable at       December 31, 2003.................     51,306            9.32       Granted ...........................      8,340            8.89   $ 5.24      Exercised .........................     (3,242)           8.04      Expired ...........................    (10,181)           8.68                                              ------          ------   ------      Outstanding and exercisable at       December 31, 2004.................     46,223            9.47       Granted ...........................      8,260           13.49   $ 8.02      Exercised .........................     (4,006)          10.35      Expired ...........................     (5,809)           8.95                                              ------          ------   ------      Outstanding and exercisable at       December 31, 2005.................     44,668          $10.20                                              ======          ======   ======       The following table sets forth  information  regarding  options at December      31, 2005:                                                      Weighted Average                      Range of       Number         ----------------          Number      Exercise      Currently    Exercise   Remaining         of Options    Prices      Exercisable     Price   Life (in years)        ---------    ----------    ----------    ---------- -----------          28,773    $6.88 - 8.84     28,773         $7.71        6          15,895    12.38 - 18.38    15,895         14.72        6       Defined Contribution Retirement Plans      -------------------------------------       The Company has a deferred profit-sharing plan ("Plan") which covers all of      its  employees  who  are  members  of  its  collective   bargaining  units.      Contributions  to the Plan are  required  in years in which the Company has      income from "railroad operations" as defined in the Plan. Contributions are      to be equal to at least 10% but not more than 15% of the  greater of income      before income taxes or income from railroad operations subject to a maximum      contribution of $3.5 per eligible  employee.  Contributions to the Plan may      be made in cash or in shares of the  Company's  common  stock valued at the      closing market price on the day  contributed.  Contributions  accrued under      this  Plan  amounted  to $211 in 2005,  $188 in 2004 and $119 in 2003.  The      Company made its 2003 and 2004  contributions  and intends to make its 2005      contribution in newly issued shares of its common stock.       The Company also has a Simplified  Employee  Pension  Plan  ("SEPP")  which      covers  substantially  all  employees  who  are not  members  of one of its      collective  bargaining  units.  Contributions to the SEPP are discretionary      and are  determined  annually as a percentage  of each  covered  employee's      compensation  up to the  maximum  amount  allowable  by law.  Contributions      accrued under the SEPP  amounted to $208 in 2005,  $203 in 2004 and $204 in      2003 which,  in each year,  was less than the maximum  amount  allowable by      law.       Employee Stock Purchase Plan      ----------------------------       The  Company has an  Employee  Stock  Purchase  Plan  ("ESPP")  under which      eligible employees may purchase registered shares of common stock at 85% of      the market price for such shares.  An aggregate of 200,000 shares of common      stock are authorized  for issuance under the ESPP which was  established in                                       II-25        1997.  Any  shares  purchased  under  the  ESPP are  subject  to a two year      lock-up.  ESPP purchases  amounted to 5,928 shares in 2005, 7,439 shares in      2004 and 10,665 shares in 2003.  10.  Preferred Stock       The Company's $50 par value preferred stock is convertible  into 100 shares      of common stock at the option of the shareholder.  The noncumulative  stock      dividend is fixed by the  Company's  Charter at an annual rate of $5.00 per      share, out of funds legally available for the payment of dividends.       The holders of preferred  stock and holders of common stock are entitled to      one vote per share,  voting as separate  classes,  upon matters voted on by      shareholders.  The holders of common  stock elect one third of the Board of      Directors; the voters of preferred stock elect the remainder of the Board.                                        II-26    Item  9.  Changes  in and  Disagreements  with  Accountants  on  Accounting  and - -------------------------------------------------------------------------------- Financial Disclosure - --------------------  None.
As required by Rule 13a-15 under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), the Company carried out an evaluation of the effectiveness of the design and operation of the Company's  disclosure controls and procedures as of the end of the year covered by this annual  report.  This  evaluation  was carried out under the  supervision and with the  participation  of the Company's management,  including the Company's Chief  Executive  Officer and the Company's Treasurer.  Based upon that  evaluation,  the Chief  Executive  Officer  and the Treasurer  concluded that the Company's  disclosure  controls and procedures are effective to ensure that information  required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded,  processed, summarized and reported within the time periods  specified in the Securities and Exchange Commission rules and forms.  There was no significant change in the Company's internal control over financial reporting  that occurred  during the Company's  most recent fiscal year that has materially  affected,  or is reasonably likely to affect, the Company's internal control over financial reporting.
None.                                       II-27                                       PART III
For  information  with  respect to the  directors  of the  Company,  see Pages 3 through  6 of the  Company's  definitive  proxy  statement  for the 2005  annual meeting of its shareholders, which pages are incorporated herein by reference.  The following are the executive officers of the Company:                                                  Date of First Name                       Age      Position  Election to Office - ----                       ---      --------  ------------------ Robert H. Eder              73      Chairman         1980 P. Scott Conti              48      President        2005 David F. Fitzgerald         55      Vice President   2005 Frank K. Rogers             44      Vice President   2005 Robert J. Easton            62      Treasurer        1988 Mary A. Tanona              48      Secretary        2000  Any officer  elected or appointed  by the  Company's  Board of Directors  may be removed  at any  time by the  affirmative  vote of a  majority  of the  Board of Directors.  Mr. Conti served as Vice  President  from 1999 until his election as President in 2005. Prior to that he served first as Engineering Manager and then Chief  Engineer  after joining the Company in 1988.  Mr.  Fitzgerald  joined the Company  in 1973 and served as  Superintendent  of  Transportation  prior to his election as Vice  President in 2005.  Mr.  Rogers joined the Company in 1994 and served as Director of Marketing prior to his election as Vice President in 2005. Ms.  Tanona  joined the  Company as  Assistant  General  Counsel  and  Assistant Secretary in 1999 and was named secretary and General Counsel in 2000.  Prior to joining  the  Company  she was  Associate  General  Counsel  of  Arbor  National Commercial Mortgage Corporation in Boston.  The  Company has  adopted a written  code of ethics  that  applies to all of its employees including its Chief Executive Officer and its Chief Financial Officer. A copy of the Company's code of ethics,  entitled  "Business Conduct Policy," is available  on the  Company's  website  at  http://www.pwrr.com,  and/  or may be obtained without charge by contacting:  Investor Relations Attention: Wendy Lavely Providence and Worcester Railroad Company 75 Hammond Street Worcester, Massachusetts 01610 (800) 447-2003 Internet Address: http://www.pwrr.com; wlavely@pwrr.com
See pages 6 through 10 of the Company's  definitive proxy statement for the 2006 annual  meeting of its  shareholders,  which  pages are  incorporated  herein by reference.
See pages 12 and 13 of the  Company's  definitive  proxy  statement for the 2006 annual  meeting of its  shareholders,  which  pages are  incorporated  herein by reference.
See page 5 of the  Company's  definitive  proxy  statement  for the 2006  annual meeting of its shareholders which page is incorporated herein by reference.                                       III-1
See pages 14 and 15 of the  Company's  definitive  proxy  statement for the 2006 annual  meeting  of its  shareholders  which  pages are  incorporated  herein by reference.
(a)  (1)  All financial statements:             An index of financial statements is included in Item 8, page II- 11 of           this annual report       (2)  Financial Statement schedule:            Schedule II Valuation and Qualifying AccountsPage........ III-4            All other schedules are omitted because they are not applicable or not           required,  or because the required  information is shown either in the           financial statements or the notes thereto.       (3)  Listing of Exhibits.            (10A)Material  Contracts  (incorporated  by reference to Exhibit 10 to                the  registration  statement of the Registrant on Form 10, to the                Non-Qualified  Stock Option Plan and Employee Stock Purchase Plan                of the Registrant on Forms S-8 and to the registration statements                of the Registrant on Form S-1).       (23) Consent of Independent Registered Public Accounting Firm       (31)  Certifications  Pursuant to Section 302 of The  Sarbanes-Oxley Act of            2002       (32) Certification  pursuant to 18 U.S.C. Section 1350, as adopted pursuant           to Section 906 of the Sarbanes-Oxley Act of 2002.  (b) Not applicable.  (c) Exhibits (annexed).  Financial Statement Schedule.  See item (a) (2) above                                       III-2                                      SIGNATURES                                    ----------       Pursuant  to the  requirements  of  Section  13 or 15(d) of the  Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.                       PROVIDENCE AND WORCESTER RAILROAD COMPANY                                 /s/ Robert H. Eder                                ------------------                                  By Robert H. Eder                              Chief Executive Officer                               Dated: March 24, 2006         Pursuant to the  requirements of the Securities  Exchange Act of 1934, this report  has  been  signed  below  by the  following  persons  on  behalf  of the Registrant and in the capacities and on the dates indicated:       Signature                Title                  Date      ---------                -----                  ---- /s/ Robert H. Eder ________________________ Chief Executive        March 24, 2006 Robert H. Eder           Officer                          and Chairman                          (Principal                          Executive Officer) /s/ P. Scott Conti ________________________ President and          March 24, 2006 P. Scott Conti           Director                          (Chief Operating                          Officer) /s/ Robert J. Easton ________________________ Treasurer              March 24, 2006 Robert J. Easton         (Principal financial                          officer and principal                          accounting officer) /s/ Richard W. Anderson ________________________ Director               March 24, 2006 Richard W. Anderson /s/ Frank W. Barrett ________________________ Director               March 24, 2006 Frank W. Barrett /s/ J. Joseph Garrahy ________________________ Director               March 24, 2006 J. Joseph Garrahy                                        III-3                                                                        SCHEDULE II                      PROVIDENCE AND WORCESTER RAILROAD COMPANY                          VALUATION AND QUALIFYING ACCOUNTS                     YEARS ENDED DECEMBER 31, 2005, 2004, AND 2003                               (IN THOUSAND DOLLARS)           Column A        Column B    Column C Additions    Column D   Column E          --------        --------    ------------------    --------   --------                                       (1)        (2)                          Balance   Charged to Charged to              Balance                             at     costs and    other                  at end        Description      beginning   expenses   accounts   Deductions     of                         of period              describe      (A)       period Allowance for doubtful  accounts: Year ended  December 31, 2005.....   $125         $ 50                  $  0        $175                           ====         ====                  ====        ==== Year ended  December 31, 2004.....   $125         $  8                  $  8        $125                           ====         ====                  ====        ==== Year ended  December 31, 2003.....   $125                                           $125                           ====                                           ====  (A) Bad debts written off.                                        III-4                                                                           EXHIBIT 23     Consent of Independent Registered Public Accounting Firm   We consent to the incorporation by reference in Registration Statement Nos. 333-65937, 333-65949, and 333-21617 of Providence and Worcester Railroad Company on Form S-8 of our report dated March , 2006 relating to the financial statements and financial statement schedule of Providence and Worcester Railroad Company, appearing in this Annual Report on Form 10-K of Providence and Worcester Railroad Company for the year ended December 31, 2005.   /s/ Deloitte & Touche LLP  Boston, Massachusetts March 24, 2006                                                                        EXHIBIT 31.1                      Providence and Worcester Railroad Company                             Certification Pursuant to                   Section 302 of the Sarbanes-Oxley Act of 2002  I, ROBERT H. EDER, certify that:  I, ROBERT H. EDER, certify that:  1. I have reviewed  this annual report on Form 10-K of Providence  and Worcester Railroad Company;  2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact  necessary to make the statements made, in light of the  circumstances  under which such statements were made, not misleading with respect to the period covered by this report;  3.  Based  on my  knowledge,  the  financial  statements,  and  other  financial information  included  in this annual  report,  fairly  present in all  material respects the financial  condition,  results of operations  and cash flows of the registrant as of, and for, the periods presented in this annual report;  4.  The  registrant's  other  certifying  officer  and  I  are  responsible  for establishing and maintaining  disclosure  controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15 (e)) for the registrant and we have:       a)   Designed  such  disclosure  controls  and  procedures,  or caused such           disclosure   controls  and   procedures  to  be  designed   under  our           supervision,  to ensure  that  material  information  relating  to the           registrant,  is made  known to us by  others  within  those  entities,           particularly during the period in which this report is being prepared;       b)   Evaluated the  effectiveness of the registrant's  disclosure  controls           and procedures and presented in this report our conclusions  about the           effectiveness of the disclosure controls and procedures, as of the end           of the period covered by this report, based on our evaluation; and       c)   Disclosed  in this  report  any  change in the  registrant's  internal           control over financial reporting that occurred during the registrant's           most  recent  fiscal  quarter  that  has  materially  affected,  or is           reasonably  likely to materially  affect,  the  registrant's  internal           control over financial reporting; and  5. The registrant's other certifying officer and I have disclosed,  based on our most recent  evaluation of internal  control over  financial  reporting,  to the registrant's   auditors  and  the  audit  committee  of  registrant's  board  of directors:       a)   All significant  deficiencies and material weaknesses in the design or           operation  of internal  control  over  financial  reporting  which are           reasonably  likely to  adversely  affect the  registrant's  ability to           record, process, summarize and report financial information; and       b)   Any fraud, whether or not material,  that involves management or other           employees who have a  significant  role in the  registrant's  internal           control over financial reporting.  DATE:  March 24, 2006                                           /s/ Robert H. Eder                                      By:                                          ______________________________                                          Robert H. Eder                                          Chairman of the Board                                           and Chief Executive Officer                                                                       EXHIBIT 31.2                      Providence and Worcester Railroad Company                             Certification Pursuant to                   Section 302 of the Sarbanes-Oxley Act of 2002  I, ROBERT J. EASTON certify that:  1. I have reviewed  this annual report on Form 10-K of Providence  and Worcester Railroad Company;  2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact  necessary to make the statements made, in light of the  circumstances  under which such statements were made, not misleading with respect to the period covered by this report;  3.  Based  on my  knowledge,  the  financial  statements,  and  other  financial information  included  in this annual  report,  fairly  present in all  material respects the financial  condition,  results of operations  and cash flows of the registrant as of, and for, the periods presented in this annual report;  4.  The  registrant's  other  certifying  officer  and  I  are  responsible  for establishing and maintaining  disclosure  controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15 (e)) for the registrant and we have:       a)   Designed  such  disclosure  controls  and  procedures,  or caused such           disclosure   controls  and   procedures  to  be  designed   under  our           supervision,  to ensure  that  material  information  relating  to the           registrant,  is made  known to us by  others  within  those  entities,           particularly during the period in which this report is being prepared;       b)   Evaluated the  effectiveness of the registrant's  disclosure  controls           and procedures and presented in this report our conclusions  about the           effectiveness of the disclosure controls and procedures, as of the end           of the period covered by this report, based on our evaluation; and       c)   Disclosed  in this  report  any  change in the  registrant's  internal           control over financial reporting that occurred during the registrant's           most  recent  fiscal  quarter  that  has  materially  affected,  or is           reasonably  likely to materially  affect,  the  registrant's  internal           control over financial reporting; and  5. The registrant's other certifying officer and I have disclosed,  based on our most recent  evaluation of internal  control over  financial  reporting,  to the registrant's   auditors  and  the  audit  committee  of  registrant's  board  of directors:       a)   All significant  deficiencies and material weaknesses in the design or           operation  of internal  control  over  financial  reporting  which are           reasonably  likely to  adversely  affect the  registrant's  ability to           record, process, summarize and report financial information; and       b)   Any fraud, whether or not material,  that involves management or other           employees who have a  significant  role in the  registrant's  internal           control over financial reporting.  DATE:  March 24, 2006                                          /s/ Robert J. Easton                                      By:                                          ______________________________                                          Robert J. Easton                                          Treasurer and Principal                                           Financial Officer                                                                          EXHIBIT 32                        PROVIDENCE AND WORCESTER RAILROAD COMPANY                             CERTIFICATION PURSUANT TO                              18 U.S.C. SECTION 1350,                              AS ADOPTED PURSUANT TO                   SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002  In  connection  with the Annual  Report of  Providence  and  Worcester  Railroad Company (the  Company) on form 10-K for the year ended  December  31,  2005,  as filed with the  Securities  and  Exchange  Commission  on the date  hereof  (the Report),  I, Robert H. Eder,  Chief Executive  Officer of the Company,  certify, pursuant  to 18 U.S.C.  ss.  1350,  as adopted  pursuant  to Section  906 of the Sarbanes-Oxley Act of 2002, that:       (1)The Report fully complies with the  requirements of Section 13 (a) or 15           (d) of the Securities Exchange Act of 1934; and       (2)The information contained in the Report fairly presents, in all material           respects,  the  financial  condition  and results of operations of the           Company.                                      /s/ Robert H. Eder                                  _____________________________                                 Robert H. Eder,                                 Chairman of the Board and Chief                                 Executive Officer                                 March 24, 2006  In  connection  with the Annual  Report of  Providence  and  Worcester  Railroad Company (the  Company) on form 10-K for the year ended  December  31,  2005,  as filed with the  Securities  and  Exchange  Commission  on the date  hereof  (the Report), I, Robert J. Easton,  Chief Financial Officer of the Company,  certify, pursuant  to 18 U.S.C.  ss.  1350,  as adopted  pursuant  to Section  906 of the Sarbanes-Oxley Act of 2002, that:       (1)The Report fully complies with the  requirements  of Section 13(a) or 15           (d) of the Securities Exchange Act of 1934; and       (2)The information contained in the Report fairly presents, in all material           respects,  the  financial  condition  and results of operations of the           Company.                                      /s/ Robert J. Easton                                  _____________________________                                 Robert J. Easton,                                 Treasurer and Chief Financial Officer                                 March 24, 2006     -----END PRIVACY-ENHANCED MESSAGE-----