Restructuring Agreement

Note Cancellation and Restructuring Agreement


                  NOTE CANCELLATION AND RESTRUCTURING AGREEMENT


                  THIS  NOTE  CANCELLATION  AND  RESTRUCTURING  AGREEMENT  (this
"Agreement"),  made and  entered  into as of the  20th day of June,  1996 by and
among MK Rail Corporation,  a Delaware corporation ("MK Rail"), Morrison Knudsen
Corporation,  an Ohio corporation ("MKO"),  and Morrison Knudsen Corporation,  a
Delaware corporation ("MKC").

                              W I T N E S S E T H:

                  WHEREAS,  MKO owns approximately  sixty-three percent (63%) of
the issued and outstanding Common Stock of MK Rail; WHEREAS, MKC owns all of the
outstanding Common Stock of MKO;

                  WHEREAS,  pursuant  to  a  Global  Settlement  Agreement  (the
"Global  Settlement  Agreement")  dated as of June 15, 1995  between MKO and MKC
(collectively,  "MK") and MK Rail, MKO and MK Rail entered into a Note Agreement
dated as of June 26,  1995 (the "Note  Agreement")  under which MK Rail issued a
Note to MKO dated June 26, 1995 in the original  principal amount of $52,200,000
(the "Note");

                  WHEREAS,  the Note is  subordinate to MK Rail's current credit
facilities with its senior lenders as well as any replacement  financing thereof
(the "Senior Debt")  pursuant to and in accordance  with the Note Agreement and,
in  connection  with its  current  credit  facilities,  pursuant to the Loan and
Security  Agreement  (the "BABC  Loan  Agreement")  dated as of August 31,  1995
between MK Rail and its subsidiaries and BankAmerica Business Credit, Inc.
("BABC"),
as agent for the financial institutions named therein, as amended, and a related
Subordination  Agreement  (the  "Subordination  Agreement")  among MKC, BABC, as
agent, and MK Rail;

                  WHEREAS,  MK Rail has not made any cash payment under the Note
due to restrictions  contained in the BABC Loan Agreement and the  Subordination
Agreement;

                  WHEREAS,  as a result of certain  adjustments,  as of the date
hereof the principal amount of the Note is $52,094,568.

                  WHEREAS,  as of  May  24,  1996,  interest  in the  amount  of
$4,120,101  had accrued on the Note and such interest plus all interest  accrued
on the Note since said date has not been paid;

                  WHEREAS,   MK   is   presently   planning   to   implement   a
recapitalization  of  MK  (the   "Recapitalization")   pursuant  to  a  Plan  of
Reorganization (the "Plan") to be filed with the United


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States Bankruptcy Court for the District of Delaware (the "Bankruptcy Court"), a
draft of which plan (the "Draft Plan") dated June 10, 1996 has been delivered to
MK Rail;

                  WHEREAS,  pursuant  to the Plan,  among  other  things,  it is
contemplated  that the  Common  Stock of MK Rail  presently  held by MKO will be
distributed to certain  holders of debt  obligations of MKO and to a liquidating
trust to be established as a part of the Plan;

                  WHEREAS, MK has requested that MK Rail make certain amendments
to the  Rights  Agreement  between  MK  Rail  and  Chemical  Mellon  Shareholder
Services,  L.L.C.  (the "Rights Agent") dated as of January 19, 1996, as amended
(the "Rights  Plan"),  to  facilitate  the  obtaining  by MK of the  acceptances
required to confirm the Plan;

                  WHEREAS,  in  connection  with  the  Recapitalization  and  to
facilitate the obtaining by MK of the acceptances needed to confirm the Plan, MK
has  requested  that  certain  registration  rights  be  granted  MKO  that  are
assignable to the parties that receive  common stock of MK Rail as a part of the
Plan;

                  WHEREAS,  MK Rail is willing to grant such registration rights
and to make the requested amendments to the Rights Plan in consideration for the
agreement of MKO to certain corporate governance  provisions that are binding on
its transferees and in consideration  for the agreement of MK to cancel the Note
in full  pursuant  and  subject  to the terms and  conditions  set forth in this
Agreement;

                  NOW,  THEREFORE,  in  consideration of the premises and of the
covenants and agreements set forth below,  the parties  hereto,  intending to be
legally bound, covenant and agree
as follows:

                  1.  Concurrent  Actions.  Concurrently  with the execution and
delivery hereof, the following have occurred:

                  1.1 Stockholders  Agreement. MK Rail and MKO have executed and
delivered a Stockholders  Agreement (the  "Stockholders  Agreement") in the form
attached hereto as Exhibit A.

                  1.2  Rights  Amendment.  MK has  received  a copy of a  Second
Amendment to Rights Agreement (the "Rights Plan Amendment") in the form attached
hereto as Exhibit B executed by MK Rail and the Rights Agent.





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                  2. Conditions to Effectiveness and Actions Relating Thereto.

                  2.1  Conditions  to  Effectiveness.  This  Agreement  and  the
Stockholders  Agreement  shall  not be in force or effect  until  the  following
conditions  have been  satisfied  (at which time they shall,  automatically  and
without necessity of any further action by MK, MK Rail
or any other person or entity, be in full force and effect):

                  (a) MK Rail has received a written consent or written consents
(the "MK Creditor Consent") in form and substance reasonably  satisfactory to MK
Rail  containing  language  substantially  similar to the  language set forth in
Exhibit C hereto  executed by the MK  Requisite  Creditors  (as defined  herein)
whereby the MK Requisite  Creditors consent to the execution and delivery by MKC
and MKO of this Agreement and the Stockholders Agreement and to the consummation
of the  transactions  contemplated  hereby and thereby and  undertake to support
said transactions.  For purposes hereof, the term "MK Requisite Creditors" shall
mean the  following  creditors  of MK: (a)  creditors  in each of the classes of
creditors  referenced as Classes MK-3,  MK-6,  MKO-3,  MKO-6, S-3 and S-6 in the
Draft  Plan  that  constitute  a  majority  in  number  and  that  hold at least
two-thirds  (2/3) in amount of the claims of each such class voting to accept or
reject the Draft Plan and (b) the  Majority  Lenders,  as defined in the Amended
and Restated  Override  Agreement  dated on October 10, 1995 among MKC, MKO, the
Banks and Other  Financial  Institutions  Named Therein,  Mellon Bank,  N.A., as
agent for said banks and  financial  institutions  and Bank of America  National
Trust and Savings Association, as Metra Agent (the "Override Agreement").

                  (b) Consent of BABC. MKC and MKO shall have received a written
consent in form and substance reasonably  satisfactory to MKC and MKO (the "BABC
Consent")  executed  by BABC,  acting as agent for MK  Rail's  secured  lenders,
whereby MK Rail's secured  lenders consent to the execution and delivery of this
Agreement  and  the  Stockholders  Agreement  and  to  the  consummation  of the
transactions contemplated hereby and thereby.

                  (c) MKO shall have  presented  or caused to be presented to MK
Rail the certificate or certificates evidencing the shares of Common Stock of MK
Rail owned by MKO and a legend shall have been placed thereon in accordance with
the Stockholders Agreement.

                  2.2 Best Efforts to Obtain Consents.  Each party agrees to use
its best efforts to obtain the consents  required to satisfy the  conditions set
forth in Section 2.1 hereof as promptly as practicable.

                  3. Motion to Bankruptcy Court. MK shall,  within ten (10) days
after  filing  its  initial  petition  in the  Bankruptcy  Court,  submit to the
Bankruptcy  Court a motion  (the  "Motion")  in form and  substance  approved in
writing  by MK  Rail,  (which  approval  shall  not  be  unreasonably  withheld)
requesting an order of the  Bankruptcy  Court in form and substance  approved in
writing by MK Rail assuming this  Agreement and the  Stockholders  Agreement and
approving  the  transactions  contemplated  hereby and thereby (the  "Bankruptcy
Court Approval"), and shall use

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its best  efforts to obtain such order as promptly  as  practicable  thereafter.
Among other  things,  the  Bankruptcy  Court  Approval  shall  approve an escrow
arrangement  in  form  and  substance   satisfactory  to  MKO  and  MK  Rail  as
contemplated by Section 5.2 hereof.

                  4.  Cancellation of Note.  Subject to the terms and conditions
contained herein, the Note, including all principal thereof and interest accrued
thereon,  shall be canceled and retired in full. The aggregate  amount that must
be paid to so cancel  and retire  the Note in full (the  "Cancellation  Amount")
shall be Thirty-Four  Million Five Hundred Thousand Dollars  ($34,500,000).  The
Cancellation Amount shall be paid in two installments as set forth herein.

                  5.       First Closing of Note Cancellation.

                  5.1 Reduction  Payment.  On the First Closing Date (as defined
herein),  MK Rail shall make a payment (the "Reduction  Payment") in immediately
available  funds in the amount of Six  Million  Nine  Hundred  Thousand  Dollars
($6,900,000) plus interest accrued on said amount from the date hereof until the
First Closing Date, calculated at a rate per annum equal to the rate of interest
(the "Prime Rate") announced from time to time by PNC Bank, National Association
as its Prime Rate (which rate shall automatically change with and as of the date
of each announced change thereof).

                  5.2  Manner  of  Payment.  If on the  First  Closing  Date the
Distribution  Condition (as defined  herein) has been  satisfied or waived by MK
Rail, the Reduction Payment shall be paid to or upon the order of MKO. If on the
First Closing Date, the Distribution  Condition has not been satisfied or waived
by MK Rail, MK Rail shall pay the amount of the  Reduction  Payment to an escrow
agent  reasonably  satisfactory  to MK Rail and MKO to be held in escrow for the
benefit of MKO and MK Rail in accordance with an escrow arrangement (the "Escrow
Arrangement")  approved as a part of the  Bankruptcy  Court Approval under which
arrangement the amount held in escrow, including interest accrued thereon, shall
not be subject to any right of offset,  claim,  demand, cause of action or other
right any other  party may have  thereto,  and under which  arrangement  (a) the
amount of the  Reduction  Payment,  together with all interest  accrued  thereon
while it is held in escrow,  will be disbursed to MKO upon  satisfaction  of the
Distribution  Condition  or  waiver  thereof  by MK Rail  and (b)  said  amount,
including  all interest  accrued  thereon,  will be disbursed to MK Rail if this
Agreement  is  terminated  in  accordance  with its terms  prior to the time the
Distribution  Condition is satisfied or so waived,  in which case there shall be
no Debt Reduction (as defined in Section 5.4 below).

                  5.3 Distribution Condition. For purposes of this Agreement:

                  (a) The term "Distribution  Condition" shall mean satisfaction
of any one of the following conditions:

               (i)  The  Bankruptcy  Court  Approval shall have been entered and
                    shall be a Final Order (as defined herein); or

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               (ii) The  first  business  day both (A) that is at least ten (10)
                    days after entry of an order by the  Bankruptcy  Court which
                    has not been  stayed  or set  aside  confirming  a Plan that
                    contains in all  substantial  respects the  provisions  (the
                    "Mandatory Plan  Provisions")  set forth in Exhibit D hereto
                    and  that  does  not   contain  any   provisions   that  are
                    inconsistent   with  the  terms  hereof,   the  Stockholders
                    Agreement or the Mandatory  Plan  Provisions (a  "Conforming
                    Plan")  and (B)  upon  which  all  other  conditions  to the
                    Effective  Date of the  Conforming  Plan,  other  than those
                    relating to the transactions  contemplated hereby, have been
                    satisfied or waived.

                  (b) The Distribution Condition may be waived by MK Rail in its
sole  discretion by a written notice or by payment of the Final  Installment (as
defined herein) to MKO.

                  (c)  The  term  "Final  Order"  shall  mean  an  order  of the
Bankruptcy Court which has not been reversed,  stayed,  modified or amended, and
as to which the time to appeal or seek certiorari has expired,  and with respect
to which no appeal or petition for  certiorari  has been timely taken,  or as to
which any appeal that has been taken or any  petition  for  certiorari  that has
been or may be filed has been  dismissed  or resolved  by the  highest  court to
which the order was appealed or from which certiorari was sought.

                  5.4 Effect of Disbursement of Reduction  Payment to MKC. After
the Reduction  Payment is paid to MKO either  directly by MK Rail or pursuant to
the  Escrow  Arrangement,  it shall  constitute  the  first  installment  of the
Cancellation  Amount and shall, with no further action on the part of any party,
be  applied  to  cancel  Seven  Million  Six  Hundred  Sixty  Thousand   Dollars
($7,660,000)  of the  principal  amount of the Note,  together with all interest
accrued on said principal amount (the "Debt Reduction").

                  6. First Closing Date.  The closing of the Debt Reduction (the
"First  Closing") shall occur at the corporate  headquarters of MK Rail at 10:00
a.m. local time on earliest of the following  dates (the "First Closing  Date"):
(a) the first  business day to occur after ten (10) days have elapsed  following
the issuance of the Bankruptcy  Court  Approval,  (b) the date the  Distribution
Condition  is  satisfied  or  waived  by MK Rail,  or (c) such  other  day as is
designated by MK Rail by at least three business days advance  written notice to
MKO;  provided,  however,  that in any such case,  the  obligation of MK Rail to
close the Debt Reduction  shall be conditioned on  satisfaction  or waiver by MK
Rail on the First  Closing Date of all of the MK Rail First  Closing  Conditions
(as defined herein) and the obligations of MKO to close the Debt Reduction shall
be conditioned upon satisfaction or waiver on said date of the MKO First Closing
Conditions (as defined herein).

                  7. Second Closing of Note Cancellation.  On the Second Closing
Date (as defined herein),  MK Rail shall pay to or upon the order of MKO the sum
of Twenty Seven Million Six Hundred Thousand Dollars  ($27,600,000)

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in  immediately  available  funds (the "Final  Installment"),  representing  the
second and final  installment  of the  Cancellation  Amount,  which  shall fully
satisfy all  obligations  of MK Rail under the Note,  and MKO shall  deliver the
Note marked canceled to MK Rail (the "Note  Cancellation").  In addition, in the
event the Second  Closing has not occurred on or before  September  30, 1996 and
such failure to close has not been caused by the default of MKC or MKO of any of
their  material  obligations  hereunder,  MK Rail  shall also pay to or upon the
order of MKO, with the Final Installment,  interest accrued on the amount of the
Final  Installment  from  September  30,  1996  through  the  date  of  payment,
calculated  at a per  annum  rate  equal to the  Prime  Rate  from  time to time
announced during said period.  Upon such payment of the Final Installment,  plus
interest accrued thereon,  if any, all obligations of the parties under the Note
and the Note Agreement shall terminate and be of no further force or effect.

                  8. Second Closing Date.  The closing of the Note  Cancellation
(the "Second  Closing") shall occur at the corporate  headquarters of MK Rail at
10:00 a.m.  local time on the later of (a) the date the  Distribution  Condition
has been  satisfied or waived by MK Rail or (b) the date two (2)  business  days
after the MK Rail Second Closing Conditions (as defined herein),  other than the
Distribution  Condition,  have been  satisfied  or waived by MK Rail and the MKO
Second Closing Conditions have been satisfied or waived by MKO, or on such other
date or at such other time or place as is mutually  agreed by the parties hereto
(the "Second Closing Date").

                  9. MK Rail First Closing  Conditions.  The  obligations  of MK
Rail to consummate the  transactions  contemplated to occur at the First Closing
are subject to the  satisfaction  on or prior to the First Closing Date,  unless
waived by MK Rail, in its sole discretion,  of each of the following  conditions
(collectively  referred to as the "MK Rail First  Closing  Conditions"),  all of
which shall be deemed to be waived by consummation by MK Rail of its obligations
with respect to the said closing to the extent not satisfied:

                  9.1   Accuracy  of   Representations   and   Warranties.   The
representations and warranties of MKO and MKC herein contained shall be true and
correct on and as of the First Closing Date in all material  respects,  with the
same  force and effect as though  made on and,  except for any set forth as of a
specific date, as of such date, except as affected by the transactions
contemplated hereby.

                  9.2  Performance  of  Agreements.   MKO  and  MKC  shall  have
performed all  obligations  and  agreements  and complied with all covenants and
conditions  contained in this Agreement to be performed or complied with by them
at or prior to the First Closing Date.

                  9.3 Bankruptcy  Court Action.  The  Bankruptcy  Court Approval
shall have been issued or the Distribution Condition shall have been satisfied.

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                  9.4 No  Injunctions.  No judgment,  order or decree shall have
been issued by a court of competent  jurisdiction,  governmental agency or other
tribunal  that has the  effect  of  enjoining,  prohibiting  or  forbidding  the
consummation of the transactions contemplated hereby.

                  10. MKO First Closing  Conditions.  The  obligations of MKO to
consummate the transactions  contemplated to be consummated at the First Closing
are subject to the  satisfaction  on or prior to the First  Closing  Date unless
waived  by MKO,  in its sole  discretion,  of each of the  following  conditions
(collectively  referred to as the "MKO First Closing Conditions"),  all of which
shall be  deemed to be waived by  consummation  by MKO of its  obligations  with
respect to the said closing to the extent not satisfied:

                  10.1  Accuracy  of   Representations   and   Warranties.   The
representations  and  warranties of MK Rail herein  contained  shall be true and
correct on and as of the First Closing Date in all material  respects,  with the
same  force and effect as though  made on and,  except for any set forth as of a
specific  date,  as of  such  date,  except  as  affected  by  the  transactions
contemplated hereby.

                  10.2  Performance of Agreements.  MK Rail shall have performed
all  obligations  and  agreements and complied with all covenants and conditions
contained in this  Agreement to be performed or complied  with by it on or prior
to the First Closing Date.

                  10.3 No Injunctions.  No judgment,  order or decree shall have
been issued by a court of  competent  jurisdiction,  government  agency or other
tribunal  that  has  effect  of  enjoining,   prohibiting   or  forbidding   the
consummation of the transactions contemplated hereby.

                  11. MK Rail Second Closing  Conditions.  The obligations of MK
Rail to consummate the transactions  contemplated to occur at the Second Closing
are subject to the  satisfaction on or prior to the Second Closing Date,  unless
waived by MK Rail, in its sole discretion,  of each of the following  conditions
(collectively  referred to as the "MK Rail Second Closing  Conditions"),  all of
which shall be deemed to be waived by consummation by MK Rail of its obligations
with respect to the said closing to the extent not satisfied:

                  11.1  Accuracy  of   Representations   and   Warranties.   The
representations  and warranties of MK herein contained shall be true and correct
on and as of the Second  Closing  Date in all material  respects,  with the same
force  and  effect  as  though  made on and,  except  for any set  forth as of a
specified  date,  as of  such  date,  except  as  affected  by the  transactions
contemplated hereby.

                  11.2  Performance  of  Agreements.  MKO  and  MKC  shall  have
performed all  obligations  and  agreements  and complied with all covenants and
conditions  contained in this Agreement to be performed or complied with by them
at or prior to the Second Closing.


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                  11.3 Sale of Alert Mfg.  and Supply  Co.,  Inc.  MK Rail shall
have  consummated  the sale, on terms and at a price  satisfactory to MK Rail in
its sole discretion,  of all of the stock or substantially  all of the assets of
Alert Mfg. & Supply  Co.,  Inc.,  an  Illinois  corporation  and a  wholly-owned
subsidiary of Power Parts Company,  an Illinois  corporation  and a wholly-owned
subsidiary of MK Rail.

                  11.4  Sale of MK  Gain,  S.A.  de  C.V..  MK Rail  shall  have
consummated  the sale,  on terms and at a price  satisfactory  to MK Rail in its
sole discretion,  of all of the stock or  substantially  all of the assets of MK
Gain,  S.A. de C.V.,  a  wholly-owned  subsidiary  of MK Rail that  conducts its
business and operations in Mexico.

                  11.5 No Injunctions.  No judgment,  order or decree shall have
been issued by a court of  competent  jurisdiction,  government  agency or other
tribunal  that has the  effect  of  enjoining,  prohibiting  or  forbidding  the
consummation of the transactions contemplated to occur at the Second Closing.

                  11.6 Distribution Condition.  The Distribution Condition shall
have been satisfied.

                  11.7 First  Closing.  The First  Closing  shall have  occurred
prior to or concurrently with the Second Closing.

                  12. MKO Second Closing  Conditions.  The obligations of MKO to
consummate  the  transactions  contemplated  to occur at the Second  Closing are
subject to the  satisfaction  on or prior to the  Second  Closing  Date,  unless
waived  by MKO,  in its sole  discretion,  of each of the  following  conditions
(collectively referred to as the "MKO Second Closing Conditions"),  all of which
shall be  deemed  to be waived by  consummation  by MK of its  obligations  with
respect to the said closing to the extent not satisfied:

                  12.1  Accuracy  of   Representations   and   Warranties.   The
representations  and  warranties of MK Rail herein  contained  shall be true and
correct on and as of the Second Closing Date in all material respects,  with the
same  force and effect as though  made on and,  except for any set forth as of a
specific  date,  as of  such  date,  except  as  affected  by  the  transactions
contemplated hereby.

                  12.2  Tender by MK Rail.  MK Rail shall  tender for payment to
MKO the full amount of the Final Installment.

                  12.3 No  Injunction.  No judgment,  order or decree shall have
been issued by any court of competent  jurisdiction,  government agency or other
tribunal  that has the  effect  of  enjoining,  prohibiting  or  forbidding  the
consummation  of the  transactions  contemplated  hereby or by the  Stockholders
Agreement.


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                  12.4 First  Closing.  The First  Closing  shall have  occurred
prior to or concurrently with the Second Closing.

                  13.      Affirmative Covenants.

                  13.1  Mandatory  Plan  Provisions.  The Plan,  when it becomes
effective, shall contain the Mandatory Plan Provisions and shall not contain any
provision  that is  inconsistent  with the  terms  hereof,  of the  Stockholders
Agreement or of the Mandatory Plan Provisions.
                  13.2 Best Efforts to Satisfy  Certain Closing  Conditions.  MK
Rail shall use its best efforts to cause the MK Rail Second  Closing  Conditions
set  forth  in  Sections  11.3  and  11.4 to be  satisfied  or,  if in its  sole
discretion  it  determines  that it is not in the best  interests  of MK Rail to
consummate   either  of  such   transactions,   to  obtain  financing  on  terms
satisfactory to MK Rail in its sole discretion that will enable MK Rail to waive
said  conditions;  provided,  however,  that MK Rail shall not be  obligated  to
effect any  transaction  if in its sole  discretion  it determines in good faith
that such transaction is not in its best interests.

                  13.3 Copies of  Bankruptcy  Court  Actions.  MKO shall give MK
Rail  copies  of the  motion  requesting  the  Bankruptcy  Court  Approval,  the
Bankruptcy Court Approval,  the Plan and amendments thereto, any order issued by
the  Bankruptcy  Court  confirming  the Plan promptly  after the filing or entry
thereof,   and  any  other  pleadings  or  filings  affecting  MK  Rail  or  the
transactions contemplated herein.

                  13.4  Distribution  of MK Rail  Common  Stock  At the time any
Common - Stock of MK Rail is distributed by MKO to any party,  MKO shall provide
to MK Rail  an  accurate  list  setting  forth  the  name  and  address  of each
beneficial owner known to MK receiving said stock from MKO, the number of shares
of Common  Stock  received  by such owner and the number or numbers of the stock
certificates representing such shares and the names of any custodians,  nominees
or  agents  holding  shares  for  such  beneficial  owner  (including,   without
limitation, street names in which any such certificates are held).


                  14. Representations and Warranties of MKO and MKC. MKO and MKC
hereby jointly and severally represent and warrant to MK Rail as follows:

                  14.1 Organization;  Power; Good Standing. MKO is a corporation
duly  organized,  validly  existing and in good  standing  under the laws of the
State of Ohio. MKC is a corporation  duly  organized and validly  existing under
the laws of the  State of  Delaware.  MKO and MKC have all  requisite  corporate
power and  authority to enter into this  Agreement  and, in the case of MKO, the
Stockholders  Agreement,  and to perform their respective  obligations hereunder
and thereunder.

                  14.2 Authority Relative to Agreement. The execution,  delivery
and  performance  of this  Agreement  by MKO  and  MKC  and of the  Stockholders
Agreement by MKO have been duly

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and effectively authorized by all necessary corporate action. This Agreement and
the  Stockholders  Agreement have been duly executed by MKO and MKC, as the case
may be, and this Agreement and the Stockholders Agreement are the valid, legally
binding and enforceable obligations of
MKO
and MKC, as the case may be, except as they may be limited or otherwise affected
by applicable bankruptcy,  reorganization,  insolvency,  moratorium,  fraudulent
transfer  and other  similar  laws of general  application  from time to time in
effect  relating to or affecting  creditors'  rights.  Copies of the Articles of
Incorporation,  Code of Regulations and Resolutions of the Board of Directors of
MKO  authorizing  the  execution  and delivery by MKO of this  Agreement and the
Stockholders Agreement and consummation of the transactions  contemplated hereby
and thereby,  certified by the Secretary or Assistant Secretary of MKO, together
with a Good Standing  Certificate  issued by the Secretary of State of Ohio with
respect to MKO within thirty (30) days of the date hereof and a  certificate  of
the Secretary or Assistant Secretary of MKO setting forth the names,  signatures
and offices held by the officers  authorized  to execute this  Agreement and the
Stockholders  Agreement,   have  been  delivered  to  MK  Rail.  Copies  of  the
Certificate of Incorporation,  By-Laws and Resolutions of the Board of Directors
of MKC  approving  this  Agreement  and the  transactions  contemplated  hereby,
certified by the Secretary or Assistant  Secretary of MKC,  together with a Good
Standing  Certificate  issued by the Secretary of State of Delaware with respect
to MKC  within  thirty  (30) days of the date  hereof and a  certificate  of the
Secretary or Assistant Secretary of MKC setting forth the names,  signatures and
offices of the officers  duly  authorized  to execute this  Agreement  have been
delivered to MK Rail.

                  14.3  Effect  of  Agreement.   The  execution,   delivery  and
performance of this Agreement and the Stockholders  Agreement by MKO and MKC, as
the case may be, and the  consummation of the transactions  contemplated  hereby
and thereby will not (a) require the consent, approval, authorization,  license,
order, or permit of any person, corporation, partnership, joint venture or other
business  association  or public  authority,  other  than the  Bankruptcy  Court
Approval and the MK Creditor Consent; (b) violate, with or without the giving of
notice or the passage of time, or both,  any provisions of law or any statute or
any  rule,  regulation,  order,  award,  judgment  or  decree  of any  court  or
governmental  authority  now  applicable  to MKO or MKC; or (c) conflict with or
result in a breach or  termination  of any provision of, or constitute a default
under, or result in the creation of any lien,  charge or encumbrance upon any of
the properties or assets of MKO or MKC pursuant to any corporate charter, bylaw,
indenture,  mortgage,  deed  of  trust,  lease,  contract,  agreement  or  other
instrument,  or  any  order,  judgment,   award,  decree,  statute,   ordinance,
regulation or any other  restriction  of any kind or character,  to which MKO or
MKC is a party, or by which MKO or MKC is bound.

                  14.4 Title to Note; No Prior Transfer. MKO is the owner of the
Note free and clear of any and all liens, claims and encumbrances of any kind or
nature  whatsoever  other than the pledge (the  "Pledge")  of the Note to Mellon
Bank, N.A. as agent under the Amended and Restated Credit  Agreement dated as of
July 31, 1995 among MKC, MKO, the Banks and Other Financial  Institutions  Named
Therein and Mellon Bank as agent for said banks and financial  institutions  and
the Override  Agreement.  MKO has and will continue to have at the First Closing
Date and at the  Second  Closing  Date good  title to the Note and,  subject  to
satisfaction of the

                                                        10





Distribution Condition, the absolute right, power and authority to sell, assign,
transfer,  cancel and deliver the Note to MK Rail,  free and clear of all liens,
pledges,  encumbrances,  security  interests or other  restrictions,  other than
those set forth in the Note Agreement and  Subordination  Agreement.  Other than
the Pledge, MKO has not previously sold,  assigned or otherwise  transferred any
interest in the Note and no other party has any right,  title or interest in and
to the Note. The Note constitutes Collateral identified in the Asset Disposition
Programs  (as defined in the Override  Agreement)  and,  accordingly,  under the
Override  Agreement,  its release may be authorized by the Majority  Lenders (as
defined therein).

                  15.  Representations and Warranties of MK Rail. MK Rail hereby
represents and warrants to MKO and MKC as follows:

                  15.1  Organization;   Power;  Good  Standing.  MK  Rail  is  a
corporation duly organized, validly existing and in good standing under the laws
of the  State  of  Delaware.  MK Rail  has all  requisite  corporate  power  and
authority to enter into this  Agreement  and the  Stockholders  Agreement and to
perform its obligations hereunder and thereunder.

                  15.2 Authority Relative to Agreement. The execution,  delivery
and performance of this Agreement and the Stockholders Agreement by MK Rail have
been duly and  effectively  authorized by all necessary  corporate  action by MK
Rail. This Agreement and the  Stockholders  Agreement have been duly executed by
MK Rail and are the valid,  legally  binding and  enforceable  obligations of MK
Rail  except  as  they  may be  limited  or  otherwise  affected  by  applicable
bankruptcy,  reorganization,  insolvency,  moratorium,  fraudulent  transfer and
other similar laws of general  application  from time to time in effect relating
to or affecting  creditors' rights.  Copies of the Certificate of Incorporation,
By-Laws and  Resolutions  of the Board of  Directors of MK Rail  approving  this
Agreement,  the  Rights  Plan  Amendment,  the  Stockholders  Agreement  and the
transactions  contemplated  hereby and thereby,  certified  by the  Secretary or
Assistant Secretary of MK Rail, together with a Good Standing Certificate issued
by the Secretary of State of Delaware with respect to MK Rail within thirty (30)
days  of the  date  hereof  and a  certificate  of the  Secretary  or  Assistant
Secretary  of MK Rail  setting  forth the names,  signatures  and offices of the
officers  duly  authorized  to  execute  this  Agreement  and  the  Stockholders
Agreement, have been delivered to MKO.

                  15.3  Effect  of  Agreement.   The  execution,   delivery  and
performance of this Agreement and the Stockholders  Agreement by MK Rail and the
consummation of the  transactions  contemplated  hereby and thereby will not (i)
require the consent, approval,  authorization,  license, order, or permit of any
person, corporation, partnership, joint venture or other business association or
public authority other than the BABC Consent;  (ii) violate, with or without the
giving of notice or the passage of time, or both,  any  provisions of law or any
statute or any rule,  regulation,  order, award, judgment or decree of any court
or  governmental  authority now applicable to MK Rail; or (iii) conflict with or
result in a breach or  termination  of any provision of, or constitute a default
under, or result in the creation of any lien,  charge or encumbrance upon any of
the properties or assets of MK Rail,  pursuant to any corporate charter,  bylaw,
indenture,

                                                        11





mortgage, deed of trust, lease, contract,  agreement or other instrument, or any
order,  judgment,  award, decree,  statute,  ordinance,  regulation or any other
restriction of any kind or character, to
which MK Rail is a party, or by which MK Rail is bound.
                  15.4 Rights Plan Amendments. The Board of Directors of MK Rail
has adopted and approved the Rights Plan Amendment and such amendment is in full
force and effect, subject to its terms.

                  16.  Termination.  This  Agreement may be  terminated  only as
follows:

                  16.1  Termination  by Mutual  Consent.  By the mutual  written
agreement of the parties  entered  into at any time prior to the Second  Closing
Date, in which case all of the obligations of the parties not performed prior to
the date of termination shall be of no further force or effect.

                  16.2  Termination by MK Rail. By MK Rail, by written notice to
MKO, if the Second Closing has not occurred on or before  December 31, 1996, and
such  failure to close has not been  caused by the  default by MK Rail of any of
its material representations, warranties,
agreements or covenants under this Agreement.

                  16.3 Termination by MKO. By MKO, by written notice to MK Rail,
if either of the following occurs:

                  (a) If the Second  Closing  has not  occurred on or before the
latest of (i) August 30, 1996, (ii) the date sixty (60) days after the filing by
MK of a petition  under Title 11 of the United States  Bankruptcy  Code and of a
Conforming  Plan which has received the consents of the  creditors  described in
clause (a) of the  definition  of MK  Requisite  Creditors or (iii) the date the
Distribution  Condition  and the condition set forth in Section 11.5 hereof have
been  satisfied  or waived by MK Rail,  and such  failure  to close has not been
caused  by the  default  by MKO or  MKC  of  any of  their  respective  material
representations, warranties, agreements or covenants under this Agreement.

                  (b) Effective on any date after December 31, 1996, if both (i)
the Second Closing has not occurred on or before the  termination  date and such
failure  to close by said date has not been  caused by a breach by MKO or MKC of
any of their  respective  material  representations,  warranties,  agreement  or
covenants  under this  Agreement  and (ii) MKO has given MK Rail at least thirty
(30) days  advance  written  notice of its  intention  to  terminate  under this
subsection  (b), which notice sets forth the proposed  termination  date, and MK
Rail (A) has not prior to the proposed termination date given MKO written notice
that it  waives  any MK Rail  Second  Closing  Conditions  that  have  not  been
satisfied  and (B) has not  tendered  for  payment to MKO the full amount of the
Final  Installment  (and,  to the  extent not  previously  paid,  the  Reduction
Payment) within five (5) business days after giving such written notice to MKO.


                                                        12





                  16.4  Effect  of  Termination.  (a) Upon a  termination  under
Section  16.2  or  16.3,  any  party  who  is  not in  default  of its  material
representations, warranties, agreements and covenants under this Agreement shall
have no further obligations hereunder. A failure to obtain a consent or approval
or to  consummate  a  transaction  that is a  condition  to a closing  shall not
constitute  such a  default  by a party  provided,  in the case of  consents  or
approvals,  that the party has complied with any obligation  expressly set forth
hereunder  with respect to  attempting  to obtain such  consent or  approval.  A
termination under Section 16.2 or 16.3 hereof shall not excuse any party that is
in default of any of its material  representations,  warranties,  agreements  or
covenants  under this  Agreement  from any  liability  the party may have to any
other party as a result of such default.

                  (b) A termination hereunder shall have no effect on the Rights
Plan Amendment,  which shall be governed by its terms, or on the Debt Reduction,
if the Reduction Payment has been delivered to MKC.

                  17.  Transfer  of  Note.  MKO  shall  not  convey,  negotiate,
endorse,  assign or otherwise  transfer its right, title or interest in the Note
to any party prior to the  termination of this  Agreement  unless such party has
agreed by a written  agreement in form and substance  satisfactory to MK Rail in
its  reasonable  discretion to assume and be bound by all of the  obligations of
MKO under this Agreement.  Notwithstanding the foregoing,  it is understood that
MKO has pledged and will  continue to pledge the Note to secure its  obligations
to certain  of its  lenders  that have  expressly  consented  in writing to this
Agreement and to the  transactions  contemplated  hereby and the  conditions and
restrictions  set forth herein,  a copy of which consent has been provided to MK
Rail as described in Section 1 hereof.

                  18. Further  Assurances.  MKO, MKC and MK Rail hereby agree to
execute and  deliver  such other  instruments,  and take such other  action,  as
either party may reasonably request of the other party hereto in connection with
the transactions contemplated by this Agreement and the Stockholders Agreement.

                  19.  Status of Note and Note  Agreement.  Unless and until the
Second  Closing  occurs,  and  notwithstanding  termination of this Agreement in
accordance with its terms, the Note (reduced as provided herein if the Reduction
Payment has been delivered to MKO) and the Note  Agreement  shall continue to be
in full force and effect.

                  20.  Restriction  on  Ownership  Changes of MK Rail and MK. MK
shall  not,  until  after the Second  Closing  Date or the  termination  of this
Agreement in accordance with its terms,  transfer any Common Stock of MK Rail or
permit any party to take, or to permit any other party to take, any other action
or enter,  or permit any other  party to enter,  into any  agreement  that could
cause there to be an  ownership  change of MK Rail or MK for purposes of Section
382 of the Internal Revenue Code of 1986, as amended. Nothing herein that states
that MK shall  not  permit a third  party to act in a  certain  manner  shall be
deemed to require MK to take any action with respect to a third party over which
it does not have control unless by contract or otherwise the

                                                        13





action in  question  cannot be taken by the third  party  without the consent or
approval or other action of either MK or a party which is controlled by MK.

                  21.  No  Effect  on Other  Rights  and  Obligations  Among the
Parties.  Except as expressly provided herein, in the Stockholders  Agreement or
the Rights Amendment, neither this Agreement nor the Stockholders Agreement, nor
the consummation of the  transactions  contemplated  hereby or thereby,  nor the
Plan, shall in any way affect or impair or constitute a waiver or release of any
rights or obligations of the parties hereto.

                  22.  Governing  Law.  This  Agreement  shall be deemed to be a
contractual  obligation  under,  and  shall  be  governed  by and  construed  in
accordance  with, the laws of the State of Delaware  without regard to conflicts
of laws principles.

                  23.  Notices.  All  notices,   requests,   demands  and  other
communications  which are required or may be given under this Agreement shall be
in writing and shall be deemed to have been duly given if  delivered  personally
or by registered or certified  mail or recognized  overnight  delivery  service,
return  receipt   requested,   charges  prepaid,   or  by  confirmed   facsimile
transmission:

                           (a)      If to MK Rail, to:

                                    MK Rail Corporation
                                    1200 Reedsdale Street
                                    Pittsburgh, Pennsylvania 15233
                                    Attention:  Chairman
                                    FAX:  (412) 321-0111
                                    Confirm:  (412) 237-2250

                                    With a copy to:

                                    Michael A. Weiss, Esq.
                                    Doepken Keevican & Weiss
                                    37th Floor, USX Tower
                                    600 Grant Street
                                    Pittsburgh, Pennsylvania 15219
                                    FAX:  (412) 355-2609
                                    Confirm:  (412) 355-2614



                                                        14





                           (b)      If to MKO or MKC, to:

                                    Morrison Knudsen Corporation
                                    720 Park Boulevard
                                    Boise, Idaho  83712
                                    Attention:  President
                                    FAX:    [(208) 386-7186]
                                    Confirm: [(208) 386-5000]

                                    With a copy to:

                                    Robert Dean Avery, Esq.
                                    Jones, Day, Reavis & Pogue
                                    Suite 4600
                                    555 West Fifth Street
                                    Los Angeles, California  90013-1025
                                    FAX:  (213) 243-2539
                                    Confirm: (213) 489-3939

                                       and

                                    Mellon Bank, N.A.
                                    One Mellon Bank Center
                                    Pittsburgh, PA  15219-1886
                                    Attention:  Alan Kopolow
                                    FAX:  (412) 234-0286
                                    Confirm: (412) 236-1013

                  24.  Interpretation.  The  headings  of the  various  sections
hereof are for convenience of reference only and shall not affect the meaning or
construction  of any  provision  hereof.  Unless the  context of this  Agreement
otherwise clearly requires,  references to the plural include the singular,  the
singular  the plural and the part the whole and "or" has the  inclusive  meaning
represented by the phrase "and/or".  The words "hereof",  "herein",  "hereunder"
and similar terms in this  Agreement  refer to this Agreement as a whole and not
to any particular provision of this Agreement.

                  25. Entire Agreement;  Amendment;  Waiver.  This Agreement and
the  Stockholders  Agreement  and the  exhibits  hereto  constitute  the  entire
agreement  between the parties  regarding the subject matter hereof.  Subject to
Section  16.4(b) hereof and Section 12.8 of the  Stockholders  Agreement,  it is
acknowledged and agreed that said documents evidence and effect one and the same
integrated  transaction and that the  consideration  for any and all agreements,
releases,  promises,  or  obligations  of one  party  to the  other  under  said
documents consists of all of the agreements,  releases,  covenants, promises and
obligations of the other party contained in all of

                                                        15





said  documents.  This  Agreement  may not be  amended  or altered in any manner
unless such amendment or alteration is in writing and signed by each of MKO, MKC
and MK Rail. No covenant or condition or any other part of this Agreement may be
waived  except by written  instrument  signed and made a part hereof by MKO, MKC
and MK Rail. The failure of any party hereto to enforce any of the provisions of
this  Agreement or the waiver thereof in any instance will not be construed as a
general waiver or  relinquishment  on its part of any such  provisions,  but the
same will be and remain in full force and effect. Notwithstanding the foregoing,
it is understood and agreed that the Note and the transactions  relating thereto
are also  governed  by the Note  Purchase  Agreement  and the Global  Settlement
Agreement.

                  26.  Successors and Assigns.  This Agreement  shall be binding
upon MKO, MKC and MK Rail and their respective successors and assigns, and shall
inure to the benefit of MKO, MKC and MK Rail and their respective successors and
assigns.  No party  hereto shall have any right to assign its rights or delegate
its  duties  under this  Agreement  without  the other  parties'  prior  written
consent.

                  27. Counterparts. This Agreement may be executed in any number
of counterparts and by different parties hereto on separate  counterparts,  each
of which,  when so executed and  delivered,  shall be an original,  but all such
counterparts shall together constitute one and the same instrument.


                                                        16





                  IN WITNESS WHEREOF,  the undersigned,  intending to be legally
bound hereby,  have duly executed and  delivered  this  Agreement as of the date
first above written.

                             MK RAIL CORPORATION

                             By:_________________________

                             John C. Pope, Chairman

                             MORRISON KNUDSEN CORPORATION
                             an Ohio corporation


                             By:_________________________

                             Name:
                             Title:



                             MORRISON KNUDSEN CORPORATION 
                             a Delaware corporation


                             By:_________________________

                             Name:
                             Title: