PIONEER RAILCORP, 10QSB, 1998-08-06

PIONEER RAILCORP
10QSB, 1998-08-06
RAILROADS, LINE-HAUL OPERATING

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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-QSB

Quarterly Report Pursuant to Section 13 or 15 (d) of the
Securities Exchange Act of 1934

For the quarter ended June 30, 1998

Commission File Number 33-6658-C

Pioneer Railcorp
------------------------------------------------------
(Exact name of Registrant as specified in its charter)

Iowa 37-1191206
- ------------------------------- -------------------
(State or other jurisdiction of (IRS Employer ID #)
incorporation or organization)

1318 S. Johanson Rd Peoria, IL 61607
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip code)

Registrant's telephone number: 309-697-1400

Securities registered pursuant to Section 12(g) of the Act:

Title of each Class Name of each exchange on which registered
- --------------------- -----------------------------------------
Common Stock, Class A NASDAQ , Chicago Stock Exchange

Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. YES X NO.

4,610,447
-----------------------------------------------------
(Shares of Common Stock outstanding on June 30, 1998)
<PAGE>

PIONEER RAILCORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME
Quarters Ended June 30, 1998 and 1997

UNAUDITED
<TABLE>

Second Quarter First Six Months
----------------------------- -----------------------------
1998 1997 1998 1997
----------------------------- -----------------------------
<S> <C> <C> <C> <C>
Operating revenue .......................................... $ 3,653,418 $ 3,509,995 $ 6,890,265 $ 6,323,230
----------------------------- -----------------------------
Operating expenses
Maintenance of way ...................................... 411,733 354,099 708,762 581,776
Maintenance of equipment ................................ 416,010 391,095 818,311 759,351
Transportation expense .................................. 796,949 782,996 1,533,543 1,492,085
Administrative expense .................................. 944,794 782,011 1,764,681 1,576,742
Depreciation & amortization ............................ 394,601 376,438 786,864 744,024
----------------------------- -----------------------------
2,964,087 2,686,639 5,612,161 5,153,978
----------------------------- -----------------------------
Operating income ........................................... 689,331 823,356 1,278,104 1,169,252
----------------------------- -----------------------------

Other income & expense
Other (income) expense .................................. (36,421) (60,902) (105,563) (194,820)
Interest expense, equipment ............................. 199,235 195,459 399,068 397,617
Interest expense, other ................................. 111,199 148,717 256,822 294,892
Net (gain) loss on sale of fixed assets ................. (68,579) (35,612) (75,695) (64,564)
----------------------------- -----------------------------
205,434 247,662 474,632 433,125
----------------------------- -----------------------------

Income before income taxes ................................. 483,897 575,694 803,472 736,127
Provision for income taxes ................................. 180,500 209,350 294,400 268,250
----------------------------- -----------------------------
Income before minority interest in preferred
stock dividends of consolidated subsidiaries ............ $ 303,397 $ 366,344 $ 509,072 $ 467,877

Minority interest in preferred stock dividends of
consolidated subsidiaries .............................. $ 31,308 $ 31,308 $ 62,615 $ 62,615

Net income ................................................. $ 272,089 $ 335,036 $ 446,457 $ 405,262
============================= =============================

Basic earnings per common share ............................ $ 0.06 $ 0.07 $ 0.10 $ 0.07
============================= =============================

Diluted earnings per common share .......................... $ 0.06 $ 0.07 $ 0.10 $ 0.07
============================= =============================

Cash dividends per common share ............................ $ 0.02 $ 0.00 $ 0.02 $ 0.00
============================= =============================
</TABLE>
<PAGE>
PIONEER RAILCORP AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
June 30, 1998 and December 31, 1997

UNAUDITED
<TABLE>

June 30, December 31,
1998 1997
--------------------------
<S> <C> <C>
ASSETS
Current Assets
Cash .............................................. $ 891,695 $ 407,428
Accounts receivable, less allowance
for doubtful accounts 1998 $102,450; 1997 $82,375 2,453,695 2,367,509
Inventories ....................................... 353,479 351,331
Prepaid expenses .................................. 116,829 192,952
Income tax refund claims .......................... 74,478 74,602
Deferred taxes .................................... 66,400 66,400
-------------------------
Total current assets ......................... 3,956,576 3,460,222
-------------------------
Property and Equipment less accumulated
depreciation 1998 $5,266,164; 1997 $4,602,015 ...... 19,828,831 19,974,702
-------------------------
Intangible Assets, less accumulated amortization
1998 $223,888; 1997 $140,109 ....................... 1,092,591 1,117,205
-------------------------

Investments, cash value of life insurance ............ 104,883 95,547
-------------------------
Total assets ......................................... $24,982,881 $24,647,676
=========================

LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable .................................. $ 2,895,107 $ 2,518,190
Notes payable ..................................... 224,987 250,034
Income taxes payable .............................. 234,149 61,749
Current maturities of long-term debt .............. 1,967,298 1,836,132
Accrued liabilities ............................... 412,780 432,145
-------------------------
Total current liabilities .................... 5,734,321 5,098,250
-------------------------

Long-term debt, net of current maturities ............ 11,809,577 12,465,498
Deferred income taxes ................................ 2,250,700 2,250,700
-------------------------
Total liabilities & debt ..................... 19,794,598 19,814,448
-------------------------

Minority interest in subsidiaries .................... 1,186,000 1,186,000

Stockholders' Equity
Common stock ...................................... 4,607 4,607
Additional paid-in capital ........................ 2,041,003 2,040,203
Retained earnings ................................. 1,956,673 1,602,418
-------------------------
Total stockholders' equity ................... 4,002,283 3,647,228
-------------------------

Total liabilities and equity ......................... $24,982,881 $24,647,676
=========================
</TABLE>
<PAGE>

PIONEER RAILCORP AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CASH FLOWS
Quarters Ended June 30, 1998 and 1997

UNAUDITED
<TABLE>
Second Quarter
--------------------------
1998 1997
--------------------------
<S> <C> <C>
Cash Flows From Operating Activities
Net income ................................................ $ 446,457 $ 405,262
Adjustments to reconcile net income to net cash
provided by operating activities:
Minority interest in preferred stock dividends of
consolidated subsidiaries ....................... 62,615 62,615
Depreciation ................................. 760,700 712,815
Amortization ................................. 26,164 31,209
Increase in cash value life insurance ........... (9,336) (9,776)
(Gain) on sale of property & equipment .......... (75,695) (64,564)
Deferred taxes ................................. -0- -0-
Change in assets and liabilities, net of effects from
acquisition of subsidiaries
(Increase) decrease accounts receivable ......... (86,186) (298,053)
(Increase) decrease inventories ................. (2,148) 18,089
(Increase) decrease prepaid expenses ............ 76,123 151,330
(Increase) decrease intangible assets ........... (279) (4,294)
Increase (decrease) accounts payable ............ 376,917 (161,316)
(Increase) decrease income tax refund claims .... 124 11,635
Increase (decrease) income tax payable .......... 172,400 229,200
Increase (decrease) accrued liabilities ......... (19,365) 108,310
--------------------------
Net cash provided by operating activities ....... 1,728,491 1,192,462
--------------------------

Cash Flows From Investing Activities
Proceeds from sale of property & equipment ...... 305,709 137,957
Purchase of property & equipment, net of property
and equipment from acquisition of subsidiaries .. (846,115) (407,951)
Acquisition of subsidiaries, net of cash acquired -0- -0-
--------------------------
Net cash (used in) investing activities ......... (540,406) (269,994)
--------------------------

Cash Flows From Financing Activities
Proceeds from short-term borrowings, net of debt
assumed in acquisition of subsidiaries .......... 2,097,918 1,283,301
Proceeds from long-term borrowings, net of debt
assumed in acquisition of subsidiaries .......... 3,692,181 119,700
Payments on short-term borrowings ............... (2,122,965) (1,007,863)
Payments on long-term borrowings ................ (4,216,936) (927,124)
Repurchase of minority interest
Cash dividends paid ............................. (92,201) -0-
Proceeds from warrants and options exercised .... 800 29,090
Payments to minority interest ................... (62,615) (62,615)
--------------------------
Net cash provided by financing activities: ...... (703,818) (565,511)
--------------------------

Net increase (decrease) in cash ........................... 484,267 356,957

Cash, beginning of period ................................. 407,428 501,212
--------------------------
Cash, end of period ....................................... $ 891,695 $ 858,169
==========================
</TABLE>
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PIONEER RAILCORP AND SUBSIDIARIES

NOTE 1. STATEMENTS

The accompanying unaudited interim financial statements have been prepared
pursuant to the rules and regulations for reporting on Form 10-QSB. Accordingly,
certain disclosures required by generally accepted accounting principles are not
included herein. These interim statements should be read in conjunction with the
latest financial statements and notes thereto included in the Company's latest
Annual Report on Form 10-KSB and subsequent Form 10-QSB filings.

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principals of consolidation:

The consolidated financial statements include Pioneer Railcorp (Pioneer) and its
wholly-owned and controlled subsidiaries (collectively, "the Company"). The
significant subsidiaries are as follows: West Michigan Railroad Co. (WMI),
Wabash & Western Railway Co. d/b/a Michigan Southern Railroad (MSO), Fort Smith
Railroad Co. (FSR), Alabama Railroad Co. (ALAB), Mississippi Central Railroad
Co. (MSCI), Alabama & Florida Railway Co., Inc. (AF), Decatur Junction Railway
Co. (DT), Vandalia Railroad Company (VRRC), Minnesota Central Railroad Co.
(MCTA), Keokuk Junction Railway Co. (KJRY), Rochelle Railroad Co. (RRCO),
Shawnee Terminal Railway Company (STR), Pioneer Industrial Railway Co. (PRY),
Pioneer Resources, Inc. (PIR), Pioneer Railroad Equipment Co., Ltd. (PREL),
Pioneer Air, Inc. (PAR), and Pioneer Railroad Services, Inc. (PRS). All
significant intercompany balances and transactions have been eliminated in
consolidation.

Inventories:

Inventories consisting of various mechanical parts, track materials and
locomotive supplies are stated at the lower of cost (determined by the average
cost method) or market.

Property and equipment:

Property and equipment are stated at cost. Depreciation is computed principally
on a straight-line basis over the following estimated useful lives:

Roadbed - 20 years
Transportation equipment - 10 to 15 years
Railcars - 10 to 15 years
Buildings - 20 to 40 years
Machinery and equipment - 5 to 10 years
Office equipment - 5 to 10 years

Maintenance and repair expenditures, which keep the rail facilities in proper
operating condition, are charged to operations as incurred. Expenditures
considered to be renewals and betterments are capitalized if such expenditures
improve track conditions and benefit future operations with more efficient use
of rail facilities.

Intangible assets:

Intangible assets consist principally of goodwill which is being amortized by
the straight-line method over a forty-year period. The Company reviews
intangible assets quarterly to determine potential impairment by comparing the
carrying value of the intangible with the undiscounted anticipated future cash
flows of the related property before interest charges. If future cash flows are
less than the carrying value, the Company will determine the fair market value
of the property and adjust the carrying value of the intangibles if the fair
market value is less than the carrying value.

Earnings per share:

Basic per-share amounts are computed by dividing net income (the numerator) by
the weighted average number of common shares outstanding (the denominator).
Diluted per-share amounts assume the conversion, exercise or issuance of all
potential common stock instruments unless the effect is to reduce the loss or
increase the net income per share.
<PAGE>

NOTE 3. ESTIMATED IMPACT OF THE ADOPTION OF RECENT ACCOUNTING STANDARDS

The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards (FAS 128), "Earnings Per Share." FAS 128 requires the
presentation of both basic earnings per share and diluted earnings per share.
Basic per-share amounts are computed by dividing net income (the numerator) by
the weighted average number of common shares outstanding (the denominator).
Diluted per-share amounts assume the conversion, exercise or issuance of all
potential common stock instruments unless the effect is to reduce the loss or
increase the net income per share. The Company initially applied FAS 128 for the
year ended December 31, 1997, and as required by this statement has restated all
per share information for the prior year to conform to the statement.

In July 1997, Statement of Financial Accounting Standard No. 130, "Reporting
Comprehensive Income" (FAS 130), was issued by the Financial Accounting
Standards Board. The standard establishes reporting of comprehensive income for
general purpose financial statements. Comprehensive income is defined as the
change in equity of a business enterprise during a period and all other events
and circumstances from non-owner sources. The standard is effective for
financial statement periods beginning after December 15, 1997. The Company does
not believe the adoption of the standard will have a material impact on its
consolidated financial statements.

In July 1997, Statement of Financial Accounting Standard No. 131, "Disclosure
about Segments of an Enterprise and Related Information" (FAS 131), was issued
by the Financial Accounting Standards Board. The standard requires the Company
to disclose the factors used to identify reportable segments including the basis
of organization, differences in products and services, geographic areas, and
regulatory environments. FAS 131 additionally requires financial results to be
reported in the financial statements for each reportable segment. The standard
will be effective for the Company's 1998 annual report and interim financial
statements following the 1998 annual report. The Company does not believe the
adoption of the standard will have a material impact on its consolidated
financial statements.

The Company is not aware of any other recent accounting standard issued, but not
yet required to be adopted by the Company, that would have a material effect on
its financial position or results of operations.

NOTE 4. STOCK OPTION PLANS

On April 12, 1994, Pioneer adopted, with the subsequent approval of its
shareholders, a stock option plan permitting the issuance of up to 836,000
shares of common stock. Options granted under the plan were incentive based. The
options became exercisable on July 5, 1995 at a price equal to the market value
of the common stock at the date of grant, and the effect on earnings per share
has been reflected in the accompanying financial statements. As of June 30,
1998, a total of 238,759 options are outstanding under this plan after
forfeitures and exercises.

On June 26, 1996, the Company's shareholders approved a stock option plan
permitting the issuance of 407,000 shares of common stock. Options granted under
the plan are incentive based except for the options granted to the CEO whose
options are non-qualified. The options are fully vested and will be exercisable
as of July 1, 2001, and the effect on earnings per share has been reflected in
the accompanying financial statements. The exercise date can be accelerated if
Pioneer Railcorp common shares reach a closing price of $7.25 per share, or
higher, for any consecutive 10-day period, as reported in The Wall Street
Journal. The options will be exercisable at the market price of the common
shares at the date the options were granted, in whole or in part, within 10
years from the date of grant. As of June 30, 1998, a total of 272,000 options
are outstanding under this plan after forfeitures of 135,000 shares.

NOTE 5. STOCK SPLIT AND STOCK WARRANTS ISSUED AS DIVIDENDS

On May 16, 1995 the Board of Directors authorized a 2 for 1 stock split to
shareholders of record June 30, 1995, payable July 1, 1995. This increased the
outstanding common shares to 4,198,084 from 2,099,042. In addition, on June 24,
1995 the shareholders ratified an amendment to the Articles of Incorporation
authorizing the issuance of stock warrants as a dividend to shareholders
immediately after the stock split. Each shareholder received one warrant for
each share of common stock owned. Each warrant permits shareholders to purchase
an additional share of common stock at a predetermined price of $2 per share.
The warrants expire on July 1, 2015, and the effect of the warrants on earnings
per share has been reflected in the accompanying financial statements. As of
June 30, 1998, a total of 67,244 warrants had been exercised since their
issuance on June 24, 1995.
<PAGE>

NOTE 6. MINORITY INTERESTS IN SUBSIDIARIES

Three of the Company's subsidiaries have preferred stock outstanding. This stock
is accounted for as minority interest in subsidiaries, and dividends on the
stock are accounted for as a current expense.

Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

The Company operated the following thirteen railroads during the second quarter
of 1998: West Michigan Railroad Co. (WMI), Wabash & Western Railway Co. d/b/a
Michigan Southern Railroad (MSO), Fort Smith Railroad Co. (FSR), Alabama
Railroad Co. (ALAB), Mississippi Central Railroad Co. (MSCI), Alabama & Florida
Railway Co., Inc. (AF), Decatur Junction Railway Co. (DT), Vandalia Railroad
Company (VRRC), Minnesota Central Railroad Co. (MCTA), Keokuk Junction Railway
Co. (KJRY), Rochelle Railroad Co. (RRCO), Shawnee Terminal Railway Company
(STR), and Pioneer Industrial Railway Co.(PRY). The Company also operated four
railroad-related subsidiaries, Pioneer Resources, Inc. (PIR), Pioneer Railroad
Equipment Co., Ltd. (PREL), Pioneer Railroad Services, Inc. (PRSI), and Pioneer
Air, Inc. (PAR).

Summary: Second Quarter 1998 Compared to Second Quarter 1997.

The Company's net income in the second quarter 1998 decreased by 19% to $272,089
down from $335,036 in the same period last year. Operating revenue in the second
quarter 1998 increased by $143,000 or 4% to $3.65 million from $3.51 million in
the same period last year. Operating expense increased in the second quarter
1998 by approximately $277,000 or 10% to $2.96 million from $2.69 million in the
same period last year. Operating income decreased in the second quarter 1998 by
$134,000 or 16% to $689,000 down from $823,000 in the same period last year.

The following factors adversely affected second quarter 1998 net income:

The Minnesota Central Railroad had a decrease in operating income of $163,000,
recording an operating loss of $7,000 in the second quarter 1998 compared to
operating income of $156,000 in the same period last year. Most of the decrease
in MCTA operating income resulted from additional switching revenues recorded in
1997 due to adjustments involving time limits for the settlement of freight and
switching liabilities required by railway accounting rules as established by the
Association of American Railroads, the governing body of all North American
railroads. The MCTA also was adversely effected by a decrease in loadings of
grain resulting from market conditions and reduced loadings of clay resulting
from a delay in the arrival of empty cars for clay loading from the Union
Pacific.

In addition, the Fort Smith Railroad had a decrease in operating income of
$92,000 in the second quarter 1998, reporting operating income of $266,000
compared to $358,000 in the same period last year. This decrease resulted from
the absence of military car loads and also a reduction in overhead traffic
handled from the Union Pacific Railroad to the AM and KCS.

Several factors positively affected second quarter 1998 net income:

Pioneer Railroad Equipment operating income increased approximately $198,000 in
the second quarter 1998, recording operating income of $227,000 compared to
$28,000 in the same period last year. The PREL revenue increase resulted from
Company efforts to increase utilization of its rail car fleet and the addition
of higher earning boxcars to its fleet in late 1997.

The Alabama Railroad operating income increased approximately $54,000 in the
second quarter 1998, recording operating income of $102,000 compared to $48,000
in the same period last year. The ALAB's increase resulted from increased
loadings on the line.

The Alabama & Florida Railway operating income increased approximately $39,000
in the second quarter 1998, recording operating income of $184,000 compared to
$145,000 in the same period last year. The AF's increase resulted primarily from
a transportation mix that resulted in the handling of higher dollar revenue
loads.

The Decatur Junction Railway operating income increased approximately $37,000 in
the second quarter 1998, recording operating income of $68,000 compared to
$31,000 in the same period last year. The DT's increase resulted not only from
increases in grain loadings but also increases of non- agricultural commodities.
<PAGE>

The Rochelle Railroad operating income increased approximately $57,000, in the
second quarter 1998, recording operating income of $109,000 compared to $52,000
in the same period last year. The RRCO increase resulted from both increased
rail loadings and freight rates in the quarter. As reported in the Company's
Form 8-K filed June 18, 1998, it is anticipated that within a short period of
time rail shipments to and from the Total Logistics Control facility will be
handled by the city and not RRCO. TLC's traffic represents approximately 75% of
the business on the line. The RRCO anticipates it will continue to handle
traffic for the other two customers on the line. The loss of the Total Logistics
Control business will have a significant negative impact on RRCO revenue and
operating income and subsequently the operating revenue, operating income and
net income of the consolidated operating results of Company.

Operating Revenue:

The increase in operating revenue in the second quarter 1998 of $143,000 was
positively affected by a $288,000 increase in revenue from Pioneer Railroad
Equipment resulting from increased revenue from the Company's railcar fleet
which recorded revenues of $681,000 compared to $393,000 in the same period last
year. In addition, the Alabama Railroad had an increase of approximately $38,000
in operating revenue in the second quarter of 1998 to $214,000 compared to
$176,000 in the same period last year; the Alabama & Florida Railway had an
increase of approximately $28,000 in operating revenue in the second quarter of
1998 to $392,000 compared to $364,000 in the same period last year; the Decatur
Junction Railway had an increase of approximately $25,000 in operating revenue
in the second quarter of 1998 to $100,000 compared to $75,000 in the same period
last year; and the Michigan Southern had an increase of approximately $68,000 in
operating revenue in the second quarter of 1998 to $322,000 compared to $254,000
in the same period last year. Increased car loadings in the period was the
primary reason for the operating revenue increases on these railroads. Also, the
Rochelle Railroad had an increase of approximately $77,000 in operating revenue
in the second quarter of 1998 to $183,000 compared to $106,000 in the same
period last year. The Rochelle increases resulted from increases in both rail
loadings and freight rates in the quarter.

The increases in operating revenue from these subsidiaries was offset by a
$256,000 operating revenue decrease by the Minnesota Central Railroad, which had
operating revenue of $241,000 in the second quarter 1998 compared to $497,000 in
the same period last year. Most of the decrease in MCTA operating revenue
resulted from additional switching revenues recorded in 1997 due to adjustments
involving time limits for the settlement of freight and switching liabilities
required by railway accounting rules as established by the Association of
American Railroads, the governing body of all North American railroads. The MCTA
also was adversely effected by a decrease in loadings of grain resulting from
market conditions and reduced loadings of clay resulting from a delay in the
arrival of empty cars for clay loading from the Union Pacific. Also, the Fort
Smith Railroad operating revenue decreased $77,000 in the second quarter 1998,
recording revenues of $431,000 compared to $508,000 in the same period last
year. This decrease resulted from the abscence of military car loads and also a
reduction in overhead traffic handled from the Union Pacific Railroad to the AM
and KCS.

The remaining operating subsidiaries had immaterial changes in revenue in the
second quarter 1998 compared to the same period last year.

Operating Expense:

The increase in operating expense of $277,000 in the second quarter 1998 was the
result of the following factors:

In the second quarter 1998, Pioneer Railroad Equipment Co., Ltd. had increased
operating expense of $82,000, recording $476,000 compared to $394,000 in the
same period last year, as a result of increased maintenance expense on the
railcar fleet, increased depreciation expense and increased freight expense to
relocate the railcar fleet in a manner that would maximize usage. The Michigan
Southern Railroad had an increase in operating expense of $76,000, recording
operating expense of $217,000 in the second quarter 1998 compared to $141,000 in
the same period last year. Most of this increase resulted from increased
personnel and transportation costs resulting from increased rail traffic.
Support services provided by the parent company, Pioneer Railcorp, and also
support services provided by Pioneer Railroad Services, increased operating
expense $160,000 in the second quarter 1998. Most of this increase is related to
increased payroll expenses related to hiring and retaining support personnel.

The remaining operating subsidiaries had no material changes in operating
expense in the second quarter 1998 compared to the same period last year.
<PAGE>

Other Income and Expense Income Statement Line Item Discussion:

Other income of $36,000 in the second quarter 1998 and $61,000 for the second
quarter 1997 consists of real estate lease income, scrap income and other
miscellaneous items. None of the other income transactions are material in
nature when considered alone.

The Company experienced a decrease in interest expense of $34,000 in the second
quarter 1997 compared to the same period last year as the result of the
reduction in long term-debt from scheduled principal payments, and refinancing
activities.

Net gain on fixed asset dispositions during the second quarter 1998 of $69,000
included a gain of $97,000 from the sale of railcars and a loss of $28,000
resulting from the sale of the Company's old corporate building in Chillicothe,
Illinois. Net gain on fixed asset dispositions during the second quarter 1997 of
$36,000 included $5,500 from the sale of an excess locomotive, $11,000 from the
sale of a small parcel of land and $20,000 from the sale of a crane that was
used sparingly in Company operations.

Summary: First Six Months 1998 Compared to First Six Months 1997.

The Company's net income in the first six months 1998 increased by 10% to
$446,457 up from $405,262 in the same period last year. Operating revenue in the
first six months 1998 increased by $567,000 or 9% to $6.8 million from $6.3
million in the same period last year. Operating expense increased in the first
six months 1998 by $458,000 or 9% to $5.6 million from $5.1 million in the same
period last year. Operating income increased in the first six months 1998 by
$108,000 or 9% to $1,278,000 from $1,169,000 in the same period last year.

Several factors positively affected first six months 1998 net income:

Pioneer Railroad Equipment operating income increased $306,000, recording
operating income of $675,000 compared to $369,000 in the same period last year.
The PREL revenue increase resulted from Company efforts to increase utilization
of its rail car fleet and the addition of higher earning boxcars to its fleet in
late 1997.

The Alabama Railroad operating income increased approximately $30,000 in the
first six months 1998, recording operating income of $116,000 compared to
$86,000 in the same period last year. The ALAB's increase resulted from
increased loadings on the line.

The Decatur Junction Railway operating income increased approximately $33,000 in
the first six months 1998, recording operating income of $91,000 compared to
$58,000 in the same period last year. The DT's increase resulted not only from
increases in grain loadings but also increases of non- agricultural commodities.
The Rochelle Railroad operating income increased approximately $115,000 in the
first six months 1998, recording operating income of $204,000 compared to
$89,000 in the same period last year. This increase resulted from increases in
both rail loadings and freight rates in the period. As reported in the Company's
Form 8-K filed June 18, 1998, it is anticipated that within a short period of
time rail shipments to and from the Total Logistics Control facility will be
handled by the city and not RRCO. TLC's traffic represents approximately 75% of
the business on the line. The RRCO anticipates it will continue to handle
traffic for the other two customers on the line. The loss of the Total Logistics
Control business will have a significant negative impact on RRCO revenue and
operating income and subsequently the operating revenue, operating income and
net income of the consolidated operating results of Company.

The Michigan Southern Railroad had an increase in operating income of $25,000 in
the first six months 1998, recording operating income of $191,000 compared to
$166,000 in the same period last year. The increase is a direct result of
increased loadings on the line.

Several factors adversely affected the first six months 1998 net income:

In the first six months 1998, the Minnesota Central Railroad had a decrease in
operating income of $63,000, recording an operating loss of $66,000 compared to
operating loss of $3,000 in the same period last year. Most of the decrease in
MCTA operating income resulted from additional switching revenues recorded in
1997 due to adjustments involving time limits for the settlement of freight and
switching liabilities required by railway accounting rules as established by the
Association of American Railroads, the governing body of all North American
railroads. The MCTA also was adversely effected by a decrease in loadings of
grain resulting from market conditions and reduced loadings of clay resulting
from a delay in the arrival of empty cars for clay loading from the Union
Pacific.
<PAGE>

In addition, the Fort Smith Railroad had a decrease in operating income of
$143,000 in the first six months 1998, reporting operating income of $477,000
compared to $620,000 in the same period last year. This decrease resulted from
the absence of military car loads and also a reduction in overhead traffic
handled from the Union Pacific Railroad to the AM and KCS.

The Alabama & Florida Railway operating income decreased approximately $55,000
in the first six months 1998, recording operating income of $282,000 in the
first six months 1998 compared to $337,000 in the same period last year. The
AF's decrease in operating income resulted from the railroad being out of
service for approximately 10 days in March as a result of severe flooding in
southern Alabama. Several sections of the line remain out of service as
described in more detail in Part II Item 5 of this report.

Operating Revenue:

The increase in operating revenue in the first six months 1998 of $567,000 was
positively affected by a $440,000 increase in carhire revenue from PREL's
railcar fleet which recorded revenue of $1,352,000 compared to $912,000 in the
same period last year. In addition, increased car loadings resulted in increased
revenues by the Keokuk Junction Railway of $118,000, recording operating revenue
of $1,663,000 compared to $1,545,000 in the same period last year; the Rochelle
Railroad which had $136,000 of increased operating revenue in the first six
months 1998 recording $339,000 compared to $203,000 in the same period last
year; and the Michigan Southern Railroad which had increased operating revenue
of $98,000 in the first six months 1998 recording $568,000 compared to $470,000
in the same period last year.

Operating revenue in the first six months 1998 was adversely affected by a
$157,000 operating revenue decrease by the Minnesota Central Railroad, which had
operating revenue of $353,000 in the first six months 1998 compared to $510,000
in the same period last year. Most of the decrease in MCTA operating income
resulted from additional switching revenues recorded in 1997 due to adjustments
involving time limits for the settlement of freight and switching liabilities
required by railway accounting rules as established by the Association of
American Railroads, the governing body of all North American railroads. The MCTA
also was adversely effected by a decrease in loadings of grain resulting from
market conditions and reduced loadings of clay resulting from a delay in the
arrival of empty cars for clay loading from the Union Pacific. Also, the Fort
Smith Railroad operating revenue decreased $111,000 in the first six months
1998, recording revenues of $811,000 compared to $922,000 in the same period
last year. This decrease resulted from the abscence of military car loads and
also a reduction in overhead traffic handled from the Union Pacific Railroad to
the AM and KCS.

The Alabama & Florida Railway operating revenue decreased approximately $33,000
in the first six months 1998, recording operating revenue of $685,000 compared
to $718,000 in the same period last year. The AF's decrease in operating income
resulted from the railroad being out of service for approximately 10 days in
March as a result of severe flooding in southern Alabama. Several sections of
the line remain out of service as described in more detail in Part II Item 5 of
this report

The remaining operating subsidiaries had no material changes in operating
revenues in the first six months 1998 compared to the same period last year.

Operating Expense:

The increase in operating expense of $458,000 in the first six months 1998
resulted from the following factors:

Pioneer Railroad Equipment Co., Ltd. had increased operating expense of
$157,000, recording operating expense of $944,000 compared to $787,000 in the
same period last year as a result of increased maintenance expense on the
railcar fleet, increased depreciation expense and increased freight expense to
relocate the railcar fleet in a manner that would maximize usage. The Michigan
Southern Railroad had an increase in operating expense of $73,000, recording
operating expense of $377,000 compared to $304,000 in the same period last year.
Most of this increase resulted from increased personnel and transportation costs
resulting from increased rail traffic. Support services provided by the parent
company, Pioneer Railcorp, and also support services provided by Pioneer
Railroad Services, increased operating expense $198,000 in the first six months
1998. Most of this increase is related to increased payroll expenses related to
hiring and retaining support personnel.

The remaining operating subsidiaries had no material changes in operating
expenses in the first six months 1998 compared to the same period last year.
<PAGE>

Other Income and Expense Income Statement Line Item Discussion:

Other income of $105,000 for the first six months 1998 consists of real estate
lease income, scrap income and other miscellaneous items. None of the other
income transactions are material in nature when considered alone. Other income
of $195,000 for the first six months 1997 consists of real estate lease income,
scrap income and other miscellaneous items. None of the other income
transactions are material in nature when considered alone.

The Company experienced a decrease in interest expense of $35,000 in the first
six months 1998 compared to the same period last year as the result of the
reduction in long term-debt from scheduled principal payments, and refinancing
activities. Net gain on fixed asset dispositions during the first six months
1998 of $76,000 included a gain of $105,000 from the sale or disposition of
railcars and a loss of $28,000 resulting from the sale of the Company's former
corporate headquarters building in Chillicothe, Illinois.

Year 2000 Compliance:

The Year 2000 compliance issue exists because many computer systems and
applications currently use two-digit fields to designate a year. As the century
date change occurs, date-sensitive systems may either fail or not operate
properly unless the underlying programs are modified or replaced.

The Company has initiated a program to ensure that all computer applications
will be Year 2000 compliant by the year-end 1998. The program includes engaging
an outside consultant to review all of the Company's computer hardware and
software, as well as to confirm with outside vendors that their products are
Year 2000 compliant. Although final cost estimates have not been determined, it
is not expected that these expenses will have a material impact on the Company's
financial condition, liquidity, or results of operations.

Liquidity and Capital Resources:

The Company primarily uses cash generated from operations to fund working
capital needs and relies on long-term financing for Railcars, new operating
subsidiaries, and other significant capital expenditures.

The Company has working capital facilities totaling $1,100,000 of which $875,000
was available for use at the end of the second quarter 1998. In addition, the
Company has seen the market value of its railcar fleet increase significantly
over the last several years. This increase in value has resulted from the short
supply of railcars compared to the increased demand for their use. The Company
believes it could refinance or sell part of its railcar fleet and generate at
least $1 million in cash.

Long-term equipment financing has historically been readily available to the
Company for its railcar acquisition program. The Company believes it will be
able to continue obtaining long-term equipment financing should the need arise.
The Company's plans for new debt in the foreseeable future is contingent upon
new railroad acquisitions and increased needs and/or opportunities for railcars.
The Company does not expect to make significant additions to its railcar fleet
in 1998.

In the second quarter 1998 the Company took advantage of the favorable interest
rate environment and refinanced approximately $3.3 million of debt which had
interest rates averaging 10% and replaced it with debt having fixed rate
interest of approximately 8.3%. Over the next 5 years this transaction is
projected to reduce interest expense by $250,000 and increase cashflow by
$200,000.
<PAGE>

On July 1, 1995, the Company's stock split and warrant issuance became payable
to shareholders. The 2-for-1 stock split increased the number of shares issued
and outstanding from 2,099,042 to 4,198,084. At the same time shareholders
became entitled to purchase an additional 4,198,084 shares through stock
warrants issued by the Company as dividends. One warrant was issued for each
share of common stock held after the split, entitling the holder to purchase 1
share of common stock for $2.00 per share. The shares purchased through the
exercise of the warrants must be held for 1 year from date of purchase. In 1998
400 warrants have been exercised. As of June 30, 1998, a total of 67,244
warrants originally issued had been exercised, and the Company realized $134,488
on the issuance of the warrants. The Company expects additional capital to be
generated by the continued exercise of warrants but is uncertain as to the
amount.

The Company granted 836,000 options to certain employees under its 1994
incentive stock option plan. The options are exercisable at prices equal to the
market value of the Company's stock at the date of grant. The exercise price
ranges from $1.50 to $4.40 per share. No options have been exercised in 1998.
Since the plans inception a total of 69,700 options had been exercised and the
Company has realized $104,550 on the exercise of the options. On June 15, 1998,
the Company, acting upon a resolution approved by its Board of Directors,
entered into agreements with employees to repurchase all of the outstanding
stock options with exercise prices equal to or less than $1.65. In exchange for
forfeiting the options, employees received a one-time adjustment to their base
salary equal to $.15 per option share. In total, 441,512 options were forfeited
as a result of these agreements. A total of 20,000 options remain exercisable at
$1.50 and are held by an outside director. The primary reason this action was
taken by the Board of Directors was to lessen the potential dilution to all
common share holders from the exercise of the options based on the trading
volume of the Company stock. As of June 30, 1998, a total of 238,759 options are
outstanding under this plan.

On June 26, 1996, the Company's shareholders approved a stock option plan
permitting the issuance of 407,000 shares of common stock. Options granted under
the plan are incentive based except for the options granted to the CEO whose
options are non-qualified. The options will be fully vested and will be
exercisable as of July 1, 2001. The exercise date can be accelerated if Pioneer
Railcorp common shares reach a closing price of $7.25 per share, or higher, for
any consecutive 10-day period, as reported in The Wall Street Journal. The
options will be exercisable at $2.75, the market price of the common shares at
the date the options were granted, in whole or in part, within 10 years from the
date of grant. As of June 30, 1998, a total of 272,000 options are outstanding
under this plan.

The Company is currently negotiating with the Minnesota Department of
Transportation for approximately $6.0 million of interest-free financing to
rehabilitate the Minnesota Central Railroad. The Company is reviewing loan
documents and as of the date of this report negotiations are still in process
with no certainty as to what the outcome will be.

The City of Rochelle, Illinois terminated the Rochelle Railroad Co.'s lease
agreement effective January 19, 1998. The City is seeking to replace the
Rochelle Railroad as operator of the line with one of the on-line customers. The
Rochelle Railroad is seeking damages, seeking relief from the Surface
Transportation Board, and is also seeking to condemn the property. The outcome
of these actions is uncertain. If the Rochelle Railroad ceases operating the
railroad, it would have a material adverse effect on the Company's results of
operation. In 1997 the Rochelle Railroad Co. generated $408,000 in revenue and
$250,000 of operating income. In the second quarter of 1998 the Rochelle
Railroad Co. generated $183,000 in revenue and $106,000 of operating income. In
the first six months 1998 the Rochelle Railroad Co. generated $339,000 in
revenue and $204,000 in operating income.

The Michigan Southern Railroad's lease expires in December 1998, and the Company
has an option to purchase the stock and leased personal property of the railroad
for $2.6 million. The Company believes it will exercise this purchase option in
early October 1998. The purchase will be funded with long-term debt. In 1997 the
Michigan Southern Railroad generated $1 million in revenue and $326,000 of
operating income. In the second quarter of 1998 the Michigan Southern Railroad
generated $322,000 in revenue and $105,000 of operating income, and in the first
six months 1998 the Michigan Southern Railroad generated $568,000 of revenue and
$191,000 of operating income.

Except for the uncertainties of the Rochelle Railroad Co. litigation, the
Company anticipates favorable outcomes involving current legal proceedings. The
Company does not anticipate any material judgements against it or any of its
subsidiaries will arise out of the current proceedings.

The Company believes its cash flow from operations and its available working
capital credit lines will be more than sufficient to meet liquidity needs for at
least the next twelve months.
<PAGE>

Balance Sheet and Cash Flow Items:

The Company generated net cash from operating activities of $1,729,000 in the
first six months 1998 compared to $1,192,000 in the same period last year. Net
cash from operating activities for the first six months 1998 resulted primarily
from $446,457 of net income, $786,864 of depreciation and amortization and an
increase in accounts payable of $377,000. Most of the increase in accounts
payable relates to repairs to the Company's railcars which were made by
non-affiliated railroads late in the first six months 1998. This increase is a
direct result of increased utilization of the Company's railcar fleet.

In the first six months 1998 the Company purchased approximately $846,000 of
fixed assets and capital improvements. The capital additions included the
purchase of 38 railcars at a total cost of $437,000 which were financed with
long-term fixed-rate financing. In addition, the Company capitalized
approximately $228,000 of track and structure repair primarily related to severe
flooding in Alabama and Mississippi. Also, $40,000 in railcar and locomotive
betterments, $53,000 of leasehold improvements to the Pioneer Industrial Railway
track, $33,000 for the purchase of industrial development land, and
miscellaneous capital expenditures of approximately $55,000 for equipment and
other assets were capitalized in the first six months 1998. All capital
expenditures other than the purchase of railcars were financed with working
capital cash flow.

PART II. OTHER INFORMATION

Item 1. LEGAL PROCEEDINGS

There are a number of legal actions pending between the Rochelle Railroad Co.
("RRCO"), the City of Rochelle, Illinois, and other entities, arising out of the
City's termination of RRCO's lease agreement. The City is seeking to replace
RRCO as operator of the line with one of the on-line customers. RRCO is seeking
damages, seeking relief from the Surface Transportation Board, and is also
seeking to condemn the property. The outcome of these actions is uncertain. If
RRCO were to cease operating the railroad, it would have a material adverse
effect on the Company's results of operation. In the course of business, the
Company experiences crossing accidents, employee injuries, delinquent and/or
disputed accounts, and other incidents, which give rise to claims that may
result in litigation. Management vigorously pursues settlement and release of
such claims, but at any one time, some such incidents, which could result in
lawsuits by and against the Company, remain unresolved. Management believes it
has valid claims for, or good defenses to, these actions. Management considers
such claims to be a routine part of the Company's business.

As of the date of this Form 10-QSB, management is not aware of any incident
which is likely to result in a liability that would materially affect the
Company's consolidated financial position or results of operation.

Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

The Annual Meeting of the Shareholders was held on June 16, 1998 at the
Company's headquarters in Peoria, Illinois. All five seats on the Board of
Directors were up for election at this meeting. Directors Guy L. Brenkman, J.
Michael Carr, Orvel L. Cox, Timothy F. Shea, and John S. Fulton were re-elected
for a one year term.

In addition to the election of the Board of Directors, shareholders ratified the
appointment of McGladrey & Pullen, LLP, Certified Public Accountants and
Consultants, as the Company's independent public accountants for the coming
year.
<PAGE>

The vote totals for the matters voted upon at the Annual Meeting were as
follows:
<TABLE>
Proposal Votes For Votes Withheld Abstained
- ------------------------------------------------ --------- -------------- ---------
<S> <C> <C> <C>
Nomination of Guy L. Brenkman
to the Board of Directors ...................... 4,205,822 81,600 35,919

Nomination of Orvel L. Cox
to the Board of Directors ...................... 4,287,372 50 35,919

Nomination of Timothy F.Shea
to the Board of Directors ...................... 4,203,072 83,850 35,919

Nomination of John S. Fulton
to the Board of Directors ...................... 4,206,172 81,250 35,919

Nomination of J. Michael Carr
to the Board of Directors ...................... 4,287,422 0 35,919

Ratification of McGladrey & Pullen, LLP
as Independent Auditor ......................... 4,295,572 12,100 5,950
</TABLE>

Item 5. OTHER INFORMATION

The Alabama & Florida Railway had five miles of track washed out as a result of
severe floods and heavy rains in March 1998. This damage has cut off rail
service between Andalusia and the end of the line in Geneva, Alabama. The
customers affected by the washout had not previously been heavy users of the
railroad, although several opportunities for significantly increased loads which
had just begun to be realized in the first quarter of 1998 have been lost until
such time the railroad is repaired. The total estimated cost to repair the flood
damage is approximately $2 million. Federal legislation has been passed and
signed by the President, which may result in allocation of grant funds
sufficient to repair the railroad. If such grant funds do not become available,
the Company will have to consider alternative plans to restore rail usage to the
affected customers. This event will not have a material adverse effect on the
Company's operating results.

On April 2, 1998, Pioneer Railcorp's Board of Directors declared a $.02 per
common share dividend payable to shareholders of record as of April 30, 1998,
and was paid June 5, 1998. The total dividend paid out was $92,200.94 to
4,610,047 shareholders.

Item 6. EXHIBITS AND REPORTS ON FORM 8-K

Exhibit # 11 - Statement re computation of per share earnings.

Exhibit # 27 - Financial data schedule.

Exhibit # 20.1 Notice of Annual Meeting and Proxy Statement used to solicit
votes for the Annual Meeting of Shareholders, held June 16, 1998.

Exhibit # 20.2 Form of Ballot used at the Annual Meeting on June 16, 1997.

Exhibit # 20.3 Annual Report for 1997 sent to shareholders with the Notice of
Annual Meeting and Proxy Statement.

The following reports were filed on Form 8-K during the second quarter 1998:

(1) Form 8-K filed June 18, 1998 regarding the Rochelle Railroad operating
situation.

(2) Form 8-K filed June 18, 1998 regarding the repurchase of employee stock .
<PAGE>

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on it's behalf by the
undersigned thereunto duly authorized.

PIONEER RAILCORP
(Registrant)

/s/ Guy L. Brenkman
8/05/98 ---------------------------------------
DATE GUY L. BRENKMAN
PRESIDENT & CEO

/s/ J. Michael Carr
8/05/98 ----------------------------------------
DATE J. MICHAEL CARR
TREASURER & CHIEF
FINANCIAL OFFICER

Following is information about the computation of the earnings per share (EPS)
data for the quarter ended June 30, 1998 and 1997:

<TABLE>
For the Quarter Ended June 30, 1998
-------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
-------------------------------------
<S> <C> <C> <C>
Basic EPS
Income available to common stockholders ..... $ 272,089 4,610,592 $ 0.06
========
Effect of Diluted Securities

Employee stock options ...................... -- 64,150
----------------------

Diluted EPS
Income available to common stockholders
plus assumed conversions ................ $ 272,089 4,674,742 $ 0.06
==================================

For the Quarter Ended June 30, 1997
-----------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
-----------------------------------

Basic EPS
Income available to common stockholders ..... $ 335,036 4,588,895 $ 0.07
========
Effect of Diluted Securities
Employee stock options ...................... -- 5,918
----------------------
Diluted EPS
Income available to common stockholders
plus assumed conversions ................ $ 335,036 4,594,813 $ 0.07
==================================
</TABLE>

Following is information about the computation of the earnings per share (EPS)
data for the first 6 months ended June 30, 1998 and 1997:
<TABLE>

For the 6 months Ended June 30, 1998
------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
------------------------------------
<S> <C> <C> <C>
Basic EPS
Income available to common stockholders ........... $ 446,457 4,610,520 $ 0.10
========

Effect of Diluted Securities (none in 1st Qtr 1998) -- --

Employee stock options ............................ 36,373
----------------------
Diluted EPS
Income available to common stockholders
plus assumed conversions ...................... $ 446,457 4,646,893 $ 0.10
=================================

For the 6 months Ended June 30, 1997
------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
------------------------------------
Basic EPS
Income available to common stockholders ..... $ 335,036 4,586,447 $ 0.07
========

Effect of Diluted Securities
Employee stock options ...................... 88,858
-------------------------
Diluted EPS
Income available to common stockholders
plus assumed conversions ................ $ 335,036 4,675,305 $ 0.07
==================================

</TABLE>

NOTICE OF ANNUAL MEETING TO BE HELD JUNE 16, 1998

PIONEER RAILCORP
Peoria, Illinois 61607

To the Stockholders:

The Annual Meeting of Stockholders will be held at Pioneer Railcorp's Corporate
Office, 1318 S. Johanson Road, Peoria, Illinois, on Tuesday, June 16, 1998,
commencing at 9:00 a.m. local time, for the purpose of considering and voting on
the following matters as described in the attached Proxy Statement:

- - To elect five directors for a one year term;

- - To consider and act upon a proposal to ratify the appointment of
independent public accountants for 1998;

- - Any other matters that may properly come before the meeting.

Only stockholders of record at the close of business on April 30, 1998, will be
entitled to vote at this meeting. A copy of the Company's Annual Report
containing financial data and a summary of operations for 1997 is being mailed
to the Company's stockholders with this Proxy Statement.

In order that your stock may be represented at the meeting in case you are not
personally present, please complete, sign and date the enclosed proxy/voting
instruction card and return it promptly in the accompanying addressed envelope.

By order of the Board of Directors

Daniel A. LaKemper
Secretary

May 11, 1998
<PAGE>

Railcorp
1318 S. Johanson Road
Peoria, Illinois 61607
309-697-1400

Proxy Statement

This Proxy Statement and the accompanying proxy will be sent to stockholders of
Pioneer Railcorp on or about May 11, 1998, in connection with the solicitation
by the Board of Directors of proxies to be used at the Annual Meeting of
Stockholders of the Company to be held at Pioneer Railcorp's corporate office,
1318 S. Johanson Road, Peoria, Illinois 61607, on Tuesday, June 16, 1998,
commencing at 9:00 a.m. local time. The Company's Annual Report for 1997,
including financial statements, is also included herein.

The record date for stockholders entitled to vote at the Annual Meeting is April
30, 1998. As of April 30, 1998, the Company had issued and outstanding 4,609,513
shares of common stock, of which 4,609,513 are entitled to one vote per share.

The presence, in person or by proxy, of the holders of a majority of the total
number of shares entitled to vote constitutes a quorum for the transaction of
business at the meeting. Assuming that a quorum is present, the affirmative vote
of a majority of the shares of the Company present in person or represented by
proxy at the Meeting, and entitled to vote, is required for the election of
directors and for the ratification of McGladrey & Pullen, LLP as the independent
auditors of the Company for the fiscal year ending December 31, 1998.

Votes cast by proxy or in person at the meeting will be tabulated by an
appointed employee of the Company and will determine if a quorum is present.
Abstentions will be treated as shares that are present and entitled to vote for
purposes of determining the presence of a quorum, but as unvoted for purposes of
determining the approval of any matter submitted to the shareholders for a vote.
If a broker indicates on the proxy that it does not have discretionary authority
as to certain shares to vote on a particular matter, those shares will not be
considered as present and entitled to vote with respect to that matter.

It is the Company's policy that all proxies, ballots, and voting tabulations
that identify shareholders will be kept confidential, except where disclosure
may be required by applicable law, where shareholders write comments on their
proxy cards, or where disclosure is expressly requested by a shareholder.

The Proxy

Any person giving a proxy has the power to revoke it at any time before it is
voted, upon written notice to J. Michael Carr, Chief Financial Officer of the
Company.

Any proxy cards returned without specification will be voted as to each proposal
in accordance with the recommendations of the Board of Directors. The Company
will bear the costs of solicitation of proxies. Following the mailing of proxy
soliciting material, proxies may be solicited by directors, officers and regular
employees of the Company in person or by telephone or fax. The Company will also
reimburse persons holding stock for others in their names or in those of their
nominees for their reasonable expenses in sending proxy material to their
principals and obtaining their proxies.

Beneficial Ownership of Stock

There are no shareholders, as of March 20, 1998, known by the Company to be
beneficial owners of more than 5% of its outstanding common stock other than
Company directors and officers.

Nominees for Election as Directors

Guy L. Brenkman, age 51, Chairman of the Board of Directors and President of
Pioneer Railcorp and its subsidiaries was the incorporator of the Company and
has been a member of the Board of Directors and President of the Company since
its formation. Mr. Brenkman's past business experience includes real estate
sales and management, securities sales, and seven years of operational railroad
industry experience before managing the day-to-day railroad operations of
Pioneer in 1988. Mr. Brenkman, acting as agent of the Issuer, conducted the
public offering of Pioneer Railcorp, which raised its initial capital, and
secondary capital for expansions.
<PAGE>

Orvel L. Cox, age 55, Director, also serves as same for each of the Company's
subsidiaries and Superintendent of Transportation for same. Mr. Cox has 38 years
of active railroading experience with 31 of those years working for Class I
railroads. Mr. Cox has been a director and officer of Pioneer Railcorp since its
inception and has been involved in all phases of the development and growth of
the Company.

John S. Fulton, age 65, Director, was elected to the Board in 1993. Mr. Fulton
has 25 years experience in real estate development and industrial appraising.
Mr. Fulton holds a BS degree in Public Administration from Bradley University in
Peoria, Illinois.

J. Michael Carr, age 34, Treasurer, also serves as Treasurer for each of the
Company's subsidiaries and Chief Financial Officer for same. Mr. Carr has been
employed by the Company since March 1993. Before joining the Company, Mr. Carr
worked in public accounting and banking for seven years, most recently as
Controller for United Federal Bank. Mr. Carr is a CPA and holds a BS-Accounting
from Illinois State University, Normal, Illinois.

Timothy F. Shea, age 49, owns RE/MAX Property Management and has been a real
estate property manager with RE/MAX since 1984. Mr. Shea has a BS-Business
Management from Bradley University, Peoria, Illinois.

General Information Relating to the Board of Directors

The Board of Directors of the Corporation consists of five members, each elected
for a term of one year. The board met a total of 4 times in 1997, at which time
all directors were present.

Compensation of Directors

Directors of the Company were each compensated $1,000 in 1997 and received
reimbursement for out of pocket expenses.

Committees

The Audit Committee is the only standing committee of the Board of Directors.
The purpose of the Audit Committee is to recommend to the Board of Directors the
engagement of, and the fee to be paid to, the independent public accountants.
The Audit Committee also reviews with the independent accountants as deemed
necessary, the Corporation's accounting policies, conflict of interest policy,
internal control systems, and financial operations and reporting. The committee
met once in 1997. Current members of this committee are Timothy F. Shea, John S.
Fulton, and Orvel L. Cox.

Security Ownership of Directors and Executive Officers

The following table sets forth information, as of March 20, 1998, regarding the
beneficial ownership of all directors and officers of the Company as a group.
These figures include shares of Common Stock that the executive officers have
the right to acquire within 60 days of March 20, 1998 pursuant to the exercise
of stock options and warrants.

Title of Class: Common Stock ($.001 par value)

Beneficial Percent
Name Of Beneficial Owner Ownership Of Class
- ------------------------------------------ ---------- --------

Guy L. Brenkman (2) ...................... 3,517,039 36.21%
Orvel L. Cox (3) ......................... 235,165 2.42%
Daniel A. LaKemper (4) ................... 144,604 1.49%
John S. Fulton (5) ....................... 43,600 .45%
J. Michael Carr (6) ...................... 67,716 .70%
Kevin Williams (7) ....................... 11,100 .11%
Tim Shea ................................. 5,000 .05%
--------- ------
Directors and Executive
Officers as a Group: ................... 4,018,001 41.43%(1)

FOOTNOTES:

(1) Based on 9,714,024 shares of Common Stock and Equivalents outstanding as of
March 20, 1998. (2) Of the total number of shares shown as owned by Mr.
Brenkman, 60,606 shares represent the number of shares Mr. Brenkman has the
right to acquire within 60 days upon the exercise of options granted under
the Company's 1994 Stock Option Plan, and 1,740,800 shares represent the
number of shares Mr. Brenkman has the right to acquire within 60 days
through the exercise of Warrants. Mr. Brenkman owns all shares in joint
tenancy with his wife. In addition, 13,233 shares are held by
<PAGE>

Mr. Brenkman under the Pioneer Railcorp Retirement Savings Plan and 2,340 shares
are held by Mr. Brenkman's wife, in which he disclaims beneficial ownership. (3)
Of the total number of shares shown as owned by Mr. Cox, 66,666 shares represent
the number of shares Mr. Cox has the right to acquire within 60 days upon the
exercise of options granted under the Company's 1994 Stock Option Plan, and
101,770 shares represent the number of shares Mr. Cox has the right to acquire
within 60 days through the exercise of Warrants. In addition, 1,859 shares are
held by Mr. Cox under the Pioneer Railcorp Retirement Savings Plan. Mr. Cox's
shares are owned in joint tenancy with his wife. Mr. Cox and his wife own one
Preferred Share in the Mississippi Central Railroad Co. (4) Of the total number
of shares shown as owned by Mr. LaKemper, 66,666 shares represent the number of
shares Mr. LaKemper has the right to acquire within 60 days upon the exercise of
options granted under the Company's 1994 Stock Option Plan, and 40,000 shares
represent the number of shares Mr. LaKemper has the right to acquire within 60
days through the exercise of Warrants. In addition, 938 shares are held by Mr.
LaKemper under the Pioneer Railcorp Retirement Savings Plan. Mr. LaKemper's
shares are owned in joint tenancy with his wife. (5) Of the total number of
shares shown as owned by Mr. Fulton, 22,000 shares represent the number of
shares Mr. Fulton has the right to acquire within 60 days upon the exercise of
options granted under the Company's 1994 Stock Option Plan, and 10,200 shares
represent the number of shares Mr. Fulton has the right to acquire within 60
days upon the exercise of Warrants. (6) Of the total number of shares shown as
owned by Mr. Carr, 66,666 shares represent the number of shares Mr. Carr has the
right to acquire within 60 days upon the exercise of options granted under the
Company's 1994 Stock Option Plan, and 1,000 shares represent the number of
shares Mr. Carr has the right to acquire within 60 days through the exercise of
Warrants. (7) Of the total number of shares shown as owned by Mr. Williams,
11,000 shares represent the number of shares Mr. Williams has the right to
acquire within 60 days upon the exercise of options granted under the Company's
1994 Stock Option Plan, and 100 shares represent the number of shares Mr.
Williams has the right to acquire within 60 days through the exercise of
Warrants.

There are no shareholders known by the Registrant to be beneficial owners of
more than 5% of its outstanding common stock other than Mr. Brenkman.

Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
directors, executive officers, and any persons holding more than ten percent of
the Company's common stock to report their initial ownership of the Company's
common stock and any subsequent changes in that ownership to the Securities and
Exchange Commission and to provide copies of such reports to the Company. Based
upon the Company's review of the copies of such reports received by the Company
and written representations of its directors and executive officers, the Company
believes that during the year ended December 31, 1997, all Section 16(a) filing
requirements were satisfied with the following exceptions: Timothy Shea,
Director, filed 1997 Form 5 after the deadline date.
<PAGE>

Compensation of the Chief Executive Officer

Summary Compensation Table
- ------------------------------------

Annual
Compensation Long Term Compensation
--------------- -------------------------------------
Restricted
Name & Stock Other
Position Year Salary Award Options/SARs Compensation
- -------------------- ---- -------- ------- ------------ -----------
Guy L. Brenkman, CEO 1997 $419,695 -- -- $ 4,750 (a)
1996 $350,098 -- 80,000 $ 4,750 (a)
1995 $310,546 -- 37,000 $ 4,500 (a)

(a) - Registrant's contribution to the Company's defined contribution plan.

Option/SAR Grants in Last Fiscal Year
- -------------------------------------
None

Aggregated Option/SAR Exercises in Last Fiscal Year
and FY-End Option/SAR Values
- ---------------------------------------------------
<TABLE>
Value of
Unexercised
Number of Securities In-the-Money
Underlying Unexercised Options/SARs
Options/SARs at FY-End At FY-End
Shares Acquired Value Exercisable/ Exercisable/
Name On Exercise Realized Unexercisable Unexercisable
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Guy Brenkman-CEO 0 0 60,606/ 165,515 $0/$0
</TABLE>

In December 1993, the Company entered into a five-year executive employment
contract with the Company's president. The five-year agreement provides for a
base salary with annual inflation adjustments based upon the Consumer Price
Index. Should the Company acquire or form additional railroads, the base salary
will increase $25,000 for the acquisition of railroads of 125 miles or less, and
$50,000 for railroads over 125 miles. At January 1, 1998, the president's base
salary was $400,803. Should the president's employment be terminated, the
contract requires a lump sum payment equal to three years of his then current
salary. Should the president retire, he is entitled to a lump sum payment of one
year's salary.

Although Mr. Brenkman is authorized by his contract to receive an increase in
compensation immediately upon the start of a new railroad, he has generally
declined these increases, until in his opinion, the railroad appears to be self
supporting and can absorb the cost of such raise. In several instances, Mr.
Brenkman has not taken a raise at all. A detailed list of these raises since
1993 is listed as follows:
Date Raise
Subsidiary Date Acquired Effective
- -------------------------------------------- ------------- --------------

Vandalia Railroad Company .................. 10/07/94 10/07/94
Minnesota Central Railroad Co. ............. 12/12/94 02/01/95
West Michigan Railroad Co. ................. 07/11/95 No Raise Taken
Columbia & Northern Railway ................ 02/21/96 No Raise Taken
Keokuk Junction Railway Co. ................ 03/12/96 04/16/96
Rochelle Railroad Co. ...................... 03/25/96 04/16/96
Shawnee Terminal Railway Co. ............... 11/12/96 01/01/98
Michigan Southern Railroad ................. 12/18/96 01/01/97
Pioneer Industrial Railway Co. ............. 02/20/98 No Raise Taken
<PAGE>

Proposal 1 - Ratification of Appointment of Independent Public Accountants

The Board of Directors, upon recommendation of its Audit Committee, has
appointed McGladrey & Pullen, LLP, Certified Public Accountants and Consultants,
as independent public accountants of the Company with respect to its operations
for the year 1998, subject to ratification by the holders of common stock of the
Company. In taking this action, the members of the Board and the Audit Committee
considered carefully McGladrey's performance for the Company with respect to
services performed in the years 1994-1997 and its general reputation for
adherence to professional auditing standards. The Board of Directors anticipates
that representatives of McGladrey & Pullen, LLP will be present at the Meeting,
will have the opportunity to make a statement if they desire, and will be
available to respond to appropriate questions.

The Board of Directors recommends a vote FOR this proposal.

Stockholder Proposals

Stockholders are entitled to submit proposals on matters appropriate for
stockholder action consistent with regulations of the Securities and Exchange
Commission. In order for a stockholder proposal for the 1999 Annual Meeting of
Stockholders to be eligible for inclusion in the Corporation's Proxy Statement
and form of proxy, it must be received by the Corporate Secretary no later than
December 31, 1998.

Other Matters

The Board of Directors does not know of any matters to be presented at the
Annual Meeting other than as set forth above. However, if any other matters come
before the Meeting, the proxies received pursuant to this solicitation will be
voted thereon in accordance with the judgment of the person or persons acting
under the proxies.

Pioneer Railcorp, May 11, 1998

PIONEER RAILCORP

PROXY FOR ANNUAL MEETING OF STOCKHOLDERS
JUNE 16, 1998

ELECTION OF DIRECTORS:

Guy L. Brenkman, J. Michael Carr, Orvel L. Cox, John S. Fulton, Timothy F. Shea

________ FOR all nominees listed above

________ FOR all nominees listed above, except ________________________________

________ WITHHOLD authority to vote for all nominees listed above

PROPOSAL 1 - Ratification of Appointment of Independent Public Accountants

________ FOR the appointment of McGladrey & Pullen, LLP as the Company's 1998
independent public accountants

________ AGAINST the appointment of McGladrey & Pullen, LLP as the Company's
1998 independent public accountants

THE UNDERSIGNED APPOINTS GUY L. BRENKMAN AS PROXY, TO VOTE THEIR SHARES AS
DIRECTED ABOVE AT THE 1998 ANNUAL MEETING OF STOCKHOLDERS AND ANY ADJOURNMENT
THEREOF. IF NOT OTHERWISE SPECIFIED, THIS PROXY WILL BE VOTED FOR THE ELECTION
OF THE PERSONS NOMINATED FOR DIRECTORS AND FOR BOTH PROPOSALS SUBMITTED BY THE
COMPANY AS OUTLINED IN THE PROXY STATEMENT.

Dated: ______________, 1998

___________________________
Signature

___________________________
Signature if Held Jointly

To Our Valued Shareholders, Customers and Friends:

We are pleased to report our accomplishments and continued progress towards
furthering Pioneer Railcorp's long-term objective of being a premiere provider
of rail services through its portfolio of short line railroads. To that end,
Pioneer Railcorp will remain focused on generating profitable growth through the
continued development of our existing subsidiaries, augmented by the acquisition
of additional operating railroads and railroad related businesses.

Indicative of our recent growth is the continuing improvement of our operating
results. For 1997, net income increased to $366,245 or 8 cents per share
compared to net income of $102,145 or 2 cents per share in 1996. Revenues
increased to $12.8 million in 1997 from $11 million in 1996. Many of the 1997
increases are attributable to operations of recently acquired railroad
subsidiaries and leases which include the Keokuk Junction Railway, Shawnee
Terminal Railway, Michigan Southern Railroad, and Rochelle Railroad. In
addition, positive contributions to our operating results were obtained through
continued marketing efforts involving our core customer base.

As we reflect over the past 12 years, we are reminded of the many challenges and
successes at Pioneer Railcorp. While most of those challenges are now history
and new challenges are always ahead of us, Pioneer Railcorp's dedicated
management team and sound business practices will meet those new challenges and
opportunities with the same optimism and hard work that has always been our
hallmark in the industry.

In closing, I would like to take this opportunity to welcome our new
shareholders, thank our loyal long-term existing shareholders, and extend my
sincere appreciation to our employees and management team for their dedication,
and to our loyal customers for allowing us to serve them.

Sincerely,

/s/ Guy L. Brenkman
- -----------------------
Guy L. Brenkman
Chairman, President and
Chief Executive Officer
<PAGE>

Company Background

Pioneer Railcorp, an Iowa corporation, is a railroad holding company. As used in
this annual report, unless the context requires otherwise, the term "Company" or
"PRC" refers to the parent, Pioneer Railcorp and its subsidiaries: West Michigan
Railroad Co. (WMI), Wabash & Western Railway Co. d/b/a Michigan Southern
Railroad (MSO), Fort Smith Railroad Co. (FSR), Alabama Railroad Co. (ALAB),
Mississippi Central Railroad Co. (MSCI), Alabama & Florida Railway Co., Inc.
(AF), Decatur Junction Railway Co. (DT), Vandalia Railroad Company (VRRC),
Minnesota Central Railroad Co. (MCTA), Keokuk Junction Railway Co. (KJRY),
Rochelle Railroad Co. (RRCO), Shawnee Terminal Railway Company (STR), Pioneer
Railroad Equipment Co., Ltd. (PREL), Pioneer Air, Inc. (PAR), Pioneer Resources,
Inc. (PRI), and Pioneer Railroad Services, Inc. (PRS).

The Company operates in two business activities - railroad transportation and
railroad equipment leasing. PRC's rail system provides shipping links for
customers along its routes and interchanges with six major railroads, Burlington
Northern Santa Fe Railroad (BNSF), Conrail, Inc. (CR), CSX Transportation (CSX),
Illinois Central Railroad (IC), Norfolk Southern Railway (NS) and Union Pacific
Railroad (UP). Additionally, the Company has interchanges with five smaller
railroads, the Kansas City Southern Railway (KCS), the Arkansas & Missouri
Railroad (AM), the Twin Cities & Western Railway (TCWR), the Toledo Peoria &
Western Railway Corporation (TPW), and Indiana Northeastern Railroad Company
(IN). PRC's rail system is devoted to carrying freight. PRC also seeks to
encourage development on or near, and utilization of, its real estate right of
way by potential shippers as a source of additional revenue. The Company also
generates revenue by granting to various entities, such as utilities, pipeline
and communications companies and non-industrial tenants, the right to occupy its
railroad right of way and other real estate property. The Company also leases
rail equipment to, and repairs rail equipment owned by, others.

Pioneer Railcorp Subsidiaries

Fort Smith Railroad Co.
On July 7, 1991, the Fort Smith Railroad Co. (FSR), a wholly-owned subsidiary of
Pioneer Railcorp, entered into a twenty-year lease (with three twenty-year
renewals) with the Missouri Pacific Railroad Company (now Union Pacific
Railroad)) and operates 18 miles of track from Fort Smith to Barling, Arkansas.
The FSR's primary interchange is with the Union Pacific Railroad Company (UP).
FSR also interchanges with the Arkansas & Missouri Railroad Co. (AM) and the
Kansas City Southern Railway (KCS). The railroad's principal commodities are
iron, steel, scrap, baby food, fiberglass, particle board, charcoal, grains,
frozen poultry, meal, chemicals, alcoholic beverages, industrial sand, lumber,
paper, pulpboard, fiberboard, peanuts, fertilizer and military movements.

Alabama Railroad Co.

On October 25, 1991, the Alabama Railroad Co., a wholly-owned subsidiary of
Pioneer Railcorp, purchased 60 miles of railroad facilities and real estate from
CSX Transportation (CSX). The line runs from Flomaton to Corduroy, Alabama, and
interchanges with CSX in Flomaton. The railroad's principal commodities are
pulpwood, particle board, and finished lumber.

Mississippi Central Railroad Co.

On April 1, 1992, Pioneer Railcorp purchased the common stock of the Natchez
Trace Railroad from Kyle Railways, Inc. The railroad runs from Oxford,
Mississippi to Grand Junction, Tennessee, a total of 56.5 miles, 51 of which are
located in Mississippi. The railroad interchanges with the Norfolk Southern
Railway (NS) at Grand Junction, Tennessee and the Burlington Northern Santa Fe
(BNSF) at Holly Springs, Mississippi. The Company changed the name of this
wholly-owned subsidiary to Mississippi Central Railroad Co. (MSCI) in January
1993. The railroad's principal commodities include outbound finished wood
products as well as the resins, chemicals and pulpwood for production of the
finished wood products, scrap steel and cottonseed.

Alabama & Florida Railway Co.

On November 23, 1992, the Alabama & Florida Railway Co. (AF), a wholly-owned
subsidiary of Pioneer Railcorp, purchased the tangible assets of the A&F Inc.,
d/b/a the Alabama & Florida Railroad Company. This line runs from Georgiana to
Geneva, Alabama, a distance of 76 miles and interchanges with CSX at Georgiana.
The railroad's principal commodities are resins, plastics, fertilizer, peanuts,
and pulpwood.
<PAGE>

Decatur Junction Railway Co.

On September 23, 1993, the Decatur Junction Railway Co. (DT), a wholly-owned
subsidiary of Pioneer Railcorp, signed a lease agreement with Cisco Co-op Grain
Company (Cisco) and on September 24, 1993 with Central Illinois Shippers,
Incorporated (CISI), for the lease of two segments of track in east central
Illinois. Approximately 38 miles of railroad is operated including 8 miles of
trackage rights on the Illinois Central Railroad (IC) through Decatur, Illinois.
The leases run through December 31, 2006. The railroad's principal commodities
are primarily agriculture products.

Vandalia Railroad Company

On October 7, 1994, Pioneer Railcorp acquired all the outstanding common stock
of the Vandalia Railroad Company. The line located in Vandalia, Illinois,
interchanges with Conrail (CR) and is approximately 3.45 miles long. The
railroad's principal commodities are steel pipe, plastic pellets, fertilizer,
and feed ingredients.

Minnesota Central Railroad Co.

On December 12, 1994, Pioneer Railcorp's wholly-owned subsidiary Minnesota
Central Railroad Co., acquired certain assets of MNVA Railroad, Inc. The assets
purchased included approximately 94 miles of operating railroad in southwest
Minnesota, 7 locomotives, 33 railcars, an engine house in Morton, Minnesota,
several vehicles, pieces of maintenance equipment, and miscellaneous parts,
materials and supplies. The railroad interchanges with the Burlington Northern
Santa Fe (BNSF) at Hanley Falls and the Twin Cities and Western Railroad (TCWR)
at Norwood. The railroad's principal commodities are grain, clay, fertilizer,
canned goods, dairy products, and particle board.

West Michigan Railroad Co.

On July 11, 1995, Pioneer Railcorp signed an agreement with the Trustee of the
Southwestern Michigan Railroad Company, Inc., d/b/a Kalamazoo, Lakeshore &
Chicago Railroad (KLSC), to purchase all of the tangible assets of KLSC. Those
assets include approximately 15 miles of track and right-of-way, extending from
Hartford to Paw Paw, Michigan. Pioneer Railcorp then assigned its right to
purchase to the West Jersey Railroad Co., a wholly owned subsidiary of Pioneer,
which had been operating the former KLSC tracks under a Interstate Commerce
Commission Directed Service Order since June 24, 1995. West Jersey Railroad Co.
amended its articles of incorporation to change its name to "West Michigan
Railroad Co." effective October 2, 1995. The sale was approved by the Interstate
Commerce Commission by order served October 18, 1995, and the West Michigan
Railroad Co. took title to the property on October 24, 1995. The railroad's
principal commodities are frozen and canned foods.

Keokuk Junction Railway Co.

On March 12, 1996, Pioneer Railcorp purchased 93% of the common stock of KNRECO,
Inc., an Iowa corporation d/b/a Keokuk Junction Railway (hereinafter "KJRY")
from the shareholders, and purchased all of the remaining common shares of KJRY
in April of 1996. KJRY operates a common carrier railroad line within the City
of Keokuk, Iowa, from Keokuk to LaHarpe, Illinois, and a branch line from
Hamilton to Warsaw, Illinois, a total of approximately 38 miles. In addition,
KJRY owns all of the common stock of Keokuk Union Depot Company, an Iowa
corporation, that owns the former Keokuk Union Depot building, along with
surrounding track and real estate. KNRECO, Inc. changed its corporate name to
Keokuk Junction Railway Co. effective April 10, 1996. The KJRY interchanges with
the Burlington Northern Santa Fe (BNSF) at Keokuk, Iowa and the Toledo Peoria &
Western Railway Corporation (TPW) at LaHarpe, Illinois. The railroad's principal
commodities are corn, corn germ, corn syrup, meal, gluten feed, calcined coal,
ferro silicon, scrap iron, and railroad wheels.

Rochelle Railroad Co.

On March 25, 1996, Pioneer Railcorp through its wholly-owned subsidiary Rochelle
Railroad Co. (RRCO), signed a one year lease with a five-year renewal option,
signed in March 1997, with the City of Rochelle, Illinois, to operate
approximately 2 miles of track serving the Rochelle Industrial Park. The line
interchanges with the Burlington Northern Santa Fe (BNSF) and the Union Pacific
Railroad Company (UP) Train operations began April 15, 1996. The railroad's
principal commodity is frozen foods. The City of Rochelle, Illinois, terminated
the Rochelle Railroad Co.'s lease agreement effective January 19, 1998, however,
Rochelle Railroad Co. continues to operate on the trackage pending the outcome
of certain legal proceedings. The City is seeking to replace the Rochelle
Railroad as operator of the line, with one of the on-line customers. The
Rochelle Railroad is seeking damages, seeking relief from the Surface
Transportation Board, and is also seeking to condemn the property. The outcome
of these actions is uncertain.
<PAGE>

Shawnee Terminal Railway Company

On November 13, 1996, Pioneer Railcorp purchased 100% of the common stock of the
Shawnee Terminal Railway Company. The line located in Cairo, Illinois,
interchanges with the Illinois Central Railroad (IC) and is approximately 2.5
miles long. The railroad's principal commodities are glycol and railroad freight
cars for cleaning.

Michigan Southern Railroad

On December 19, 1996, Pioneer Railcorp through its wholly-owned subsidiary
Wabash & Western Railway Co. d/b/a Michigan Southern Railroad, signed a two year
lease with the Michigan Southern Railroad Company, Inc., Morris Leasing Co. Ltd.
and Gordon D. Morris to operate 53 miles of track and certain railroad related
assets. The lease contains an exclusive option to purchase the stock of the
Michigan Southern Railroad Company, Inc. and the railroad assets of Morris
Leasing Co., Ltd. and Gordon D. Morris within the lease term. The railroad is
comprised of three separate non-contiguous lines, one located in southern
Michigan and two located in northern Indiana. All lines have separate
interchanges with Conrail (CR). The Michigan line also interchanges with the
Indiana Northeastern Railroad Company (IN). The railroad's principal commodities
are scrap paper, scrap iron, fertilizer, plastics, plywood, sugar and corn
syrup.

Other Operations

Other operations engaged in by the Company are performed by its wholly owned
subsidiaries, Pioneer Railroad Equipment Co., Ltd. (PREL) which was formed on
April 1, 1990 and Pioneer Railroad Services, Inc. (PRS) which began operations
on October 1, 1993. PREL leases equipment to the Company's subsidiary railroads
and also purchases, sells and leases equipment to and from unrelated parties.
PREL also earns income from non-company railroads on its fleet of approximately
900 railcars (as of December 31, 1997) while carrying freight on non-company
railroads. PREL also engages in retail sales of promotional items. PRS provides
accounting, management, marketing, operational and agency services to the
Company's subsidiary railroads. Pioneer Resources, Inc. was formed on December
30, 1993 to manage real estate and auxiliary resources for Company subsidiaries.
Pioneer Air, Inc. was formed on August 5, 1994 and currently owns a Cessna 421B
aircraft which is used by Pioneer Railcorp subsidiaries exclusively for Company
business travel.

Management's Discussion and Analysis of Financial Condition and Results of
Operations

The following discussion should be read in connection with the Company's
consolidated financial statements. related notes and other financial information
included elsewhere in this annual report.

Results of Operations

The Company's 1997 operating results include full year operations of the 1996
acquisitions of the Keokuk Junction Railway and the Shawnee Terminal Railway and
also leases commencing in 1996 of the Michigan Southern Railroad and the
Rochelle Railroad. These subsidiaries are referred to collectively as "new
operating subsidiaries".

The Company's net income in 1997 increased by 259% to $366,245 up from $102,145
in 1996. Operating revenue increased by $1.8 million, or 16% to $12.8 million
from $11 million in 1996. Operating expense increased in 1997 by $1.2 million,
or 13%, to $10.8 million from $9.6 million in the prior year. Operating income
increased in 1997 by $570,000, or 41% to $1.97 million from $1.4 million in the
prior year.

Several operating subsidiaries performances were responsible for the increase in
operating income in 1997. The new operating subsidiaries increased operating
income in 1997 by approximately $1 million. The Mississippi Central Railroad had
a decrease in operating income of $121,000 in 1997 as a result of a reduction in
revenues from lost local pulpwood loadings which is attributed to increased
competition for the local pulpwood supply to destinations not served by rail.
Mississippi Central Railroad operating income was also affected by a reduction
in cotton seed loadings in 1997 due to a decrease in local acreage of cotton
seed planting resulting from the "Freedom to Farm Act" passed by Congress. In
addition, Fort Smith Railroad operating income decreased $109,000 in 1997
primarily resulting from a decrease in demurrage revenue due to a reduction in
paper car loadings.
<PAGE>

Pioneer Railroad Equipment Co., Ltd. had a decrease in operating income in 1997
of approximately $233,000 as a direct result of a decrease in non-affiliated
lease income in 1997 compared to 1996. The decrease is primarily attributable to
the expiration in May 1996 of a short term lease of 150 covered hopper cars.
PREL continues to seek opportunities for income generation from non-affiliates
and it is likely that additional lease revenues will be realized in future
periods depending on demand for railcars and locomotives.

The remaining operating subsidiaries had overall operating income in 1997 that
was comparable to 1996.

Operating Revenue

Operating revenue increased in 1997 by $1.8 million, or 16%, to $12.8 million
from $11 million in the prior year. The new operating subsidiaries increased
operating revenue by approximately $2.1 million in 1997. The Company had a
$216,000 decrease in revenue in 1997 from the lease of its railcars and excess
locomotives to non-affiliated entities. The decrease is primarily attributable
to the expiration in May 1996 of a short term lease of 150 covered hopper cars.
The Company continues to seek opportunities for the generation of equipment
lease income from non-affiliates and it is likely that additional lease revenue
will be realized in future periods depending on demand for railcars and
locomotives. The Mississippi Central Railroad had a decrease in revenue of
$183,000 in 1997 as a direct result of a reduction in local pulpwood and
cottonseed loadings previously described. The Minnesota Central Railroad had a
decrease in revenue of $109,000 in 1997 primarily resulting from decreased first
quarter 1997 loadings due to severe winter weather in the region.

The remaining operating subsidiaries had overall revenue in 1997 which was
comparable to 1996.

Operating Expense

Operating expense increased in 1997 by $1.2 million, or 13%, to $10.8 million
from $9.6 million in the prior year. Substantially all of the increased
operating expense is attributable to the new operating subsidiaries which
increased operating expense approximately $1.1 million in 1997.

Maintenance of way and structures expense (MOW) increased $409,000, or 44% to
$1,341,000 from $932,000 in the prior year. The new operating subsidiaries were
responsible for 67% or approximately $274,000 of the increased MOW expense in
1997. The Minnesota Central was responsible for $81,000 or 20% of the increase
in MOW expense in 1997 primarily because the MCTA MOW expense was reduced in
1996 from the capitalization of $150,000 of labor related to the MCTA track
rehabilitation project in 1996. Other operating subsidiaries had insignificant
changes in MOW expense in 1997 compared to 1996.

Maintenance of equipment expense (MOE) increased $193,000, or 14% to $1,535,000
from $1,342,000 in the prior year. The new operating subsidiaries were
responsible for 64% or approximately $122,000 of the increased MOE expense in
1997. Most of the remaining increase in MOE expense is attributable to increase
costs associated with managing and maintaining the Company's railcar fleet.
Other operating subsidiaries had insignificant changes in MOE expense in 1997
compared to 1996.

Transportation expense (TRAN) increased $300,000, or 11% to $3.1 million from
$2.8 million in the prior year. The new operating subsidiaries increased TRAN
expense by approximately $493,000. The Minnesota Central had a decrease in TRAN
expense of $140,000 in 1997 primarily attributable to decreased fuel and payroll
expense, resulting from both the reduction in operations in the first quarter
1997 because of severe winter weather, and also reductions resulting from
improved operating procedures that sought to maximize efficient train handling
while considering track conditions and shipping demands. In addition, reduction
in corporate management reduced TRAN expense approximately $95,000 in 1997.
Other operating subsidiaries had insignificant changes in TRAN expense in 1997
compared to 1996.

Administration expense (ADMIN) increased $216,000 in 1997 to $3,283,000, or 7%
from $3,067,000 in 1996. The new operating subsidiaries were responsible for 72%
or approximately $155,000 of the increased ADMIN expense in 1997. Expenses
related to professional services, public relations, and other corporate support
expenditures increased ADMIN expense by approximately $100,000 in 1997. Other
operating subsidiaries had signficant changes in ADMIN expense in 1997 compared
to 1996.

Depreciation and amortization expense increased $104,000, or 7%, to $1,497,000
compared to $1,393,000 in the prior year. Approximately $58,000 or 56% of the
increase is related to the new operating subsidiaries, approximately $27,000 or
26% of the increase is related to the growth of the Company's railcar fleet.
<PAGE>

Other Income and Expense Income Statement Line Item Discussion

Other income and expense, excluding interest expense and gain on sale of assets,
decreased $41,000 to $205,000 compared to $246,000 in the prior year. In 1997,
approximately $225,000 of lease income was generated from the granting of
easements and leases for the use of railroad right of way property, compared to
$125,000 of lease income in 1996, an increase of $100,000. This increase was the
direct result of increased efforts and strong emphasis on identifying and
collecting revenues from third parties occupying Company property. In addition
to lease income, other income and expense includes revenues generated from scrap
sales, and other miscellaneous non-operating revenues and expenses. In 1996, the
Fort Smith Railroad received $93,000 of revenue representing its interest in
track removed and scrapped from its Paris Branch line. No other item in 1997 or
1996 included in this category is individually material.

Interest expense increased $49,000 in 1997 to $1,384,000 compared to $1,335,000
in 1996. Most of this increased interest expense is related to the financing of
the Keokuk Junction Railway acquisition and the debt assumed in the transaction.

Net gain on fixed asset dispositions increased $47,000 in 1997 to $105,000
compared to $58,000 in 1996. In 1997, approximately $11,000 of the net gain on
fixed asset dispositions was attributable to the sale of 5 acres of land at the
Alabama Railroad. Also in 1997, a gain of $62,000 was realized from the sale of
three locomotives, a gain of $19,000 was realized from the sale of a crane, and
a gain of $13,000 was realized from the disposition of three railcars. In 1996,
approximately $30,000 of the net gain on fixed asset dispositions was
attributable to the sale of 5.3 miles of Alabama Railroad right of way. In
addition, a gain of $20,000 was realized from the sale of a locomotive and
$10,000 was realized from the sale of two trolley cars. The remainder of the net
gain in 1996 resulted from the disposition of other miscellaneous pieces of
equipment, none of which was disposed of at a significant gain or loss.

Impact of New Accounting Pronouncements:

In July 1997, Statement of Financial Accounting Standard No. 131, "Disclosure
about Segments of an Enterprise and Related Information" (FAS 131), was issued
by the Financial Accounting Standards Board. The standard requires the Company
to disclose the factors used to identify reportable segments including the basis
of organization, differences in products and services, geographic areas, and
regulatory environments. FAS 131 additionally requires financial results to be
reported in the financial statements for each reportable segment. The standard
is effective for financial statement periods beginning after December 15, 1997.
The Company does not believe the adoption of the standard will have a material
impact on its consolidated financial statements.

Year 2000 Compliance:

The Year 2000 compliance issue exists because many computer systems and
applications currently use two-digit fields to designate a year. As the century
date change occurs, date- sensitive systems may either fail or not operate
properly unless the underlying programs are modified or replaced.

The Company has initiated a program to assure that all computer applications
will be Year 2000 compliant by the year-end 1998. The program includes engaging
an outside consultant to review all of the Company's computer hardware and
software, as well as to confirm with outside vendors that their products are
Year 2000 compliant. Although final cost estimates have not been determined, it
is not expected that these expenses will have a material impact on the Company's
financial condition, liquidity, or results of operations.

Liquidity and Capital Resources

The Company primarily uses cash generated from operations to fund working
capital needs and relies on long-term financing for railcars, new operating
subsidiaries, and other significant capital expenditures.
<PAGE>

The Company has working capital facilities totaling $1,175,000 of which
$1,027,000 was available for use at the end of 1997. In addition, the Company
has seen the market value of its railcar fleet increase significantly over the
last several years. This increase in value has resulted from the short supply of
railcars compared to the increased demand for their use. The Company believes it
could refinance or sell part of its railcar fleet and generate up to $1 million
in cash.

On November 26, 1997, the Company entered into a financing agreement with First
of America Bank - Illinois, N.A. borrowing $3 million at a fixed interest rate
of 9.5%, subject to adjustment after five years to equal the Five-Year Treasury
+ 250 basis points. The loan proceeds were used to pay off the Company's
acquisition line of credit and other long-term debt assumed through the Keokuk
Junction Railway Co. acquisition. The loan is primarily collateralized by all
assets of the Keokuk Junction Railway.

In March 1996, the Company negotiated a credit facility with its primary bank to
provide a $2.5 million annual revolving acquisition line of credit. This
facility is collateralized by the common stock of the Alabama Railroad Co. and
the Mississippi Central Railroad Co., as well as the Company's investment in
stock of any subsidiaries acquired under the line. The interest rate for the
line is currently 11%. The interest rate is adjustable quarterly to 2.5% over
New York Prime, limited to a one percent annual increase or decrease, not to
exceed 13.5% or be reduced below 10%. Any amounts drawn on the line must be
repaid monthly over a seven year period. The line was fully drawn upon in
connection with the Company's March 12, 1996 acquisition of a controlling
interest of KNRECO, Inc. d/b/a Keokuk Junction Railway, common stock, and
subsequently repaid in full on November 26, 1997 through the new debt financing
agreement with First of America Bank - Illinois, N.A., as described in the
previous paragraph, and is available for use through March 8, 1999.

The Company plans to take advantage of the favorable interest rate environment
by refinancing some of its present equipment debt in the first half of 1998.

On July 1, 1995, the Company's stock split and warrant issuance became payable
to shareholders. The 2 for 1 stock split increased the number of shares issued
and outstanding from 2,099,042 to 4,198,084. At the same time shareholders
became entitled to purchase an additional 4,198,084 shares through stock
warrants issued by the Company as dividends. One warrant was issued for each
share of common stock held after the split, entitling the holder to purchase 1
share of common stock for $2.00 per share. The shares purchased through the
exercise of the warrants must be held for 1 year from date of purchase. In 1997,
a total of 9,670 warrants were exercised and the Company realized $19,340 as a
result of their exercise. As of December 31, 1997, a total of 66,844 warrants
originally issued had been exercised, and the Company realized $133,688 on the
issuance of the warrants. The Company expects additional capital to be generated
by the continued exercise of warrants but is uncertain as to the amount.

On June 26, 1996, the Company's shareholders approved a stock option plan
permitting the issuance of 407,000 shares of common stock. Options granted under
the plan are incentive based except for the options granted to the CEO whose
options are non-qualified. The options will be fully vested and will be
exercisable as of July 1, 2001. The exercise date can be accelerated if Pioneer
Railcorp common shares reach a closing price of $7.25 per share, or higher, for
any consecutive 10-day period, as reported in the Wall Street Journal. The
options will be exercisable at $2.75, the market price of the common shares at
the date the options were granted, in whole or in part within 10 years from the
date of grant. As of December 31, 1997, a total of 282,000 options are
outstanding under this plan.
<PAGE>

The Company plans to continue efforts to rehabilitate the Minnesota Central
Railroad and has is currently negotiating with the State of Minnesota Department
of Transportation (MNDOT) for approximately $6 million of interest free
financing to rehabilitate the entire line. The Company believes the outcome of
these negotiations will be know by the end of the second quarter 1998. The
Company believes that there is strong support for the project from local
economic development agencies and a majority of the railroad's customers.

The Michigan Southern Railroad lease expires in December 1998, and the Company
has an option to purchase the stock and leased personal property of the railroad
for $2.6 million. The Company has not yet determined if it will exercise its
purchase option. If the purchase option is exercised the transaction would be
funded with long-term debt. In 1997, the Michigan Southern Railroad generated $1
million in revenue and $326,000 of operating income.

The City of Rochelle, Illinois, terminated the Rochelle Railroad Co.'s lease
agreement effective January 19, 1998. The City is seeking to replace the
Rochelle Railroad as operator of the line, with one of the on-line customers.
The Rochelle Railroad is seeking damages, seeking relief from the Surface
Transportation Board, and is also seeking to condemn the property. The outcome
of these actions is uncertain. If the Rochelle Railroad ceases operating the
railroad, it would have a material adverse effect on the Company's results of
operation. In 1997, the Rochelle Railroad Co. generated $408,000 in revenue and
$250,000 of operating income.

The Company believes its cash flow from operations and its available working
capital credit lines, will be more than sufficient to meet liquidity needs
through at least 1998.

Balance Sheet and Cash Flow Items

The Company generated net cash from operating activities of $1.8 million in 1997
and $1.8 million in 1996. Net cash from operating activities for 1997 was
generated from $366,000 of net income, $1,497,000 of depreciation and
amortization, $243,000 of deferred income taxes, and $275,000 of income tax
refunds received, reduced by a decrease in accounts payable of $455,000 and by
$126,000 net cash used by changes in various other operating assets and
liabilities.

In 1997, the Company purchased approximately $1.4 million of fixed assets and
capital improvements which included the purchase of approximately 89 railcars at
a total cost of $740,000. The Company capitalized approximately $149,000 in
leasehold improvements relating to side tracks constructed on the Decatur
Junction Railway and the Rochelle Railroad. Capital expenditures for track
totaled $111,000 in 1997 of which $37,000 was for the Minnesota Central Railroad
and $65,000 for a yard extension at the Keokuk Junction Railway. In addition,
$149,000 of transportation equipment was capitalized in 1997 which included
$30,000 for the purchase of a locomotive, $68,000 of capital expenditure to
rebuild locomotives and $51,000 of capital expenditures for the Company's
corporate aircraft. A parcel of land in Fort Smith, Arkansas was purchased for
$42,000 for use as a reload facility. In addition, a parcel of land in the
township of Babbie, Alabama was purchased for $18,000 and is leased to a large
wood yard that has long-term contracts in place for rail delivery of its
product. Other capital expenditures in 1997 include $92,000 for vehicles and
equipment and $179,000 of other miscellaneous capital expenditures. The
purchases of railcars for $740,000, vehicles for $54,000, and the locomotive for
$30,000, were financed with long-term fixed rate financing. The remaining
$576,000 of capital expenditures were initially funded through working capital
of which $406,000 was replenished through the refinancing of 75 covered hopper
railcars in December 1997.

During 1997, the Company was awarded a $396,000 grant from the Minnesota
Department of Transportation which is funded with federal disaster funds from
the Federal Railroad Administration pursuant to the Federal Fiscal Year 1997
Supplemental Appropriations Act. The grant is designed to aid the Company with
the labor and material costs of rehabilitating and repairing track and bridge
structures of the Minnesota Central Railroad Co. which were damaged by severe
weather conditions during the 1996-1997 winter. As of December 31, 1997, the
Company had expended approximately $234,000 and had receivables of $112,000 and
payables of $112,000 pursuant to the grant.
<PAGE>

Pioneer Railcorp sold all of the outstanding stock of the Columbia & Northern
Railway to a non- affiliated entity on July 26, 1997 for $15,000. The
transaction did not have a material effect on the Company's financial position
or results of operation.

On February 20, 1998, Pioneer Railcorp through its wholly-owned subsidiary
Pioneer Industrial Railway Co., was assigned a lease by the Peoria Pekin & Union
Railway Company (PPU) to operate approximately 9 miles of railroad located in
Peoria County, Illinois. The PRY interchanges with the PPU at Peoria, Illinois.
The railroad's principal commodities are steel, lumber, and salt.

As of December 31, 1997, the Company had a commitment to purchase 37 railcars at
a total cost of $301,000. The Company closed the transaction on February 17,
1998 and funded the entire amount with fixed rate long-term financing.
<PAGE>

PIONEER RAILCORP AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
December 31, 1997 and 1996
<TABLE>

ASSETS
1997 1996
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Current Assets
Cash ........................................................................ $ 407,428 $ 501,212
Accounts receivable, less allowance for doubtful
accounts 1997 $82,375; 1996 $45,291 ...................................... 2,367,509 2,071,289
Inventories ................................................................. 351,331 420,952
Prepaid expenses ............................................................ 192,952 261,427
Income tax refund claims .................................................... 74,602 349,881
Deferred taxes .............................................................. 66,400 25,901
------------------------
Total current assets ................................................... 3,460,222 3,630,662

Investments, cash value of life insurance ...................................... 95,547 74,962

Property and Equipment, net .................................................... 19,974,702 20,131,566

Intangible Assets, less accumulated amortization
1997 $197,724; 1996 $140,109 ................................................ 1,117,205 1,171,114
------------------------
$24,647,676 $25,008,304
========================

LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Notes payable ............................................................... $ 250,034 $ 769,535
Current maturities of long-term debt ........................................ 1,836,132 1,813,246
Accounts payable ............................................................ 2,518,190 2,973,258
Accrued expenses ............................................................ 432,145 491,610
Income taxes payable ........................................................ 61,749 18,978
------------------------
Total current liabilities .............................................. 5,098,250 6,066,627
------------------------
Long-Term Debt, net of current maturities ...................................... 12,465,498 12,564,133
------------------------

Deferred Taxes ................................................................. 2,250,700 1,967,651
------------------------

Minority Interest in Subsidiaries .............................................. 1,186,000 1,188,000
------------------------

Commitments and Contingencies (Note 12)

Stockholders' Equity
Common stock, Class A (voting), par value $.001 per share, authorized
20,000,000 shares, issued and outstanding
1997 4,609,513 shares; 1996 4,573,343 shares ............................. 4,607 4,571
Additional paid-in capital .................................................. 2,040,203 1,981,149
Retained earnings ........................................................... 1,602,418 1,236,173
------------------------
3,647,228 3,221,893
------------------------
$24,647,676 $25,008,304
========================
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>

PIONEER RAILCORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 1997 and 1996

1997 1996
- --------------------------------------------------------------------------------

Railway operating revenue .......................... $12,779,249 $10,979,218
-------------------------

Operating expenses
Maintenance of way and structures ............... 1,340,940 931,574
Maintenance of equipment ........................ 1,534,999 1,342,059
Transportation .................................. 3,155,099 2,851,485
General and administrative ...................... 3,282,602 3,067,191
Depreciation .................................... 1,439,010 1,343,377
Amortization .................................... 57,878 49,966
-------------------------
10,810,528 9,585,652
-------------------------

Operating income ............................. 1,968,721 1,393,566
-------------------------

Other income (expenses)
Interest income ................................. 5,522 7,709
Interest expense ................................ (1,384,325) (1,335,304)
Lease income .................................... 224,569 125,295
Gain on sale of property and equipment .......... 105,113 57,820
Provision for unamortized interest discounts
due to debt refinancing ...................... (101,245) --
Other, net ...................................... 76,297 112,584
-------------------------
(1,074,069) (1,031,896)
-------------------------

Income before provision for income taxes
and minority interest in preferred stock
dividends of consolidated subsidiaries ..... 894,652 361,670

Provision for income taxes ......................... 405,687 135,960
-------------------------

Income before minority interest in preferred
stock dividends of consolidated subsidiaries 488,965 225,710

Minority interest in preferred stock dividends of
consolidated subsidiaries ....................... 122,720 123,565
-------------------------

Net income ................................... $ 366,245 $ 102,145
=========================

Basic earnings per common share .................... $ .08 $ .02
=========================

Diluted earnings per common share .................. $ .08 $ .02
=========================

Weighted average number of common shares used in
computing earnings per common share ............. 4,593,750 4,530,379
=========================

See Notes to Consolidated Financial Statements.
<PAGE>

PIONEER RAILCORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended December 31, 1997 and 1996
<TABLE>
Common Stock
---------------------
Class A (voting) Additional
--------------------- Paid-In Retained
Shares Amount Capital Earnings
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at December 31, 1995 .... 4,487,881 $ 4,487 $1,832,353 $1,134,028
Common stock issued to acquire
property, equipment, and
inventory ................. 2,342 2 8,238 --
Common stock issued upon
exercise of stock warrants
and options ............... 83,120 82 140,558 --
Net income ................... -- -- -- 102,145
-----------------------------------------------

Balance at December 31, 1996 .... 4,573,343 4,571 1,981,149 1,236,173
Common stock issued upon
exercise of stock warrants
and options ............... 36,170 36 59,054 --
Net income ................... -- -- -- 366,245
-----------------------------------------------
Balance at December 31, 1997 .... 4,609,513 $ 4,607 $2,040,203 $1,602,418
==============================================
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>

PIONEER RAILCORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
1997 1996
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash Flows From Operating Activities
Net income ................................................................ $ 366,245 $ 102,145
Adjustments to reconcile net income to net cash provided
by operating activities:
Minority interest in preferred stock dividends of consolidated
subsidiaries ......................................................... 122,720 123,565
Depreciation ........................................................... 1,439,010 1,343,377
Amortization ........................................................... 57,878 49,966
(Increase) in cash value life insurance ................................ (20,585) (5,085)
(Gain) on sale of property and equipment ............................... (105,113) (57,820)
Deferred taxes ......................................................... 242,550 185,625
Provision for unamortized interest discounts due to debt refinancing ... 101,245 --
Changes in assets and liabilities:
(Increase) decrease in assets:
Accounts receivable ............................................... (296,220) (103,068)
Income tax refund claims .......................................... 275,279 (202,292)
Inventories ....................................................... 69,621 1,991
Prepaid expenses .................................................. 68,475 (104,113)
Increase (decrease) in liabilities:
Accounts payable .................................................. (455,068) 538,375
Accrued expenses .................................................. (59,465) (39,900)
Income taxes payable .............................................. 42,771 1,611
-------------------------
Net cash provided by operating activities ......................... 1,849,343 1,834,377
-------------------------
Cash Flows From Investing Activities
Proceeds from sale of property and equipment .............................. 194,959 108,650
Purchase of property and equipment ........................................ (1,371,992) (2,179,547)
Intangible assets ......................................................... (3,969) (26,659)
Acquisition of subsidiaries, net of cash acquired ......................... -- (2,795,644)
-------------------------
Net cash (used in) investing activities ........................... (1,181,002) (4,893,200)
-------------------------
Cash Flows From Financing Activities
Proceeds from short-term borrowings ....................................... 3,915,971 1,443,750
Proceeds from long-term borrowings ........................................ 4,608,427 5,715,100
Principal payments on short-term borrowings ............................... (4,435,472) (754,547)
Principal payments on long-term borrowings ................................ (4,785,421) (3,130,573)
Proceeds from common stock issued upon exercise of
stock warrants and options ............................................. 59,090 140,640
Preferred stock dividend payments to minority interest .................... (122,720) (123,565)
Repurchase of minority interest ........................................... (2,000) (7,000)
-------------------------
Net cash provided by (used in) financing activities ............... (762,125) 3,283,805
-------------------------

Net increase (decrease) in cash ................................... $ (93,784) $ 224,982
Cash, beginning of year ...................................................... 501,212 276,230
-------------------------
Cash, end of year ............................................................ $ 407,428 $ 501,212
=========================
Supplemental Disclosures of Cash Flow Information
Cash payments for:
Interest ............................................................... $1,415,858 $1,324,640
=========================

Income taxes (net of refunds 1997 $232,251; 1996 $112,471) ............. $ (154,913) $ 151,448
=========================
</TABLE>
<PAGE>

PIONEER RAILCORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
1997 1996
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Supplemental Schedule of Noncash Investing
and Financing Activities
Railroad acquisitions:
Fair value of assets acquired, net of cash of $338,714 ................. $ -- $5,686,890
Cash paid for stock and assets ......................................... -- (2,795,644)
-------------------------
Liabilities and debt assumed and stock issued .......................... $ -- 2,891,246
=========================

Reconciliation:
Liabilities assumed .................................................... $ -- $2,444,442
Debt assumed ........................................................... -- 445,564
Issuance of 342 shares of common stock ................................. -- 1,240
-------------------------
$ -- $2,891,246
=========================
Additional property, equipment and inventory acquired
upon issuance of 2,000 shares of common stock .......................... $ -- $ 7,000
=========================

Accounts receivable applied to acquire equipment .......................... $ -- $ 4,741
=========================
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>

PIONEER RAILCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------

Note 1. Nature of Business and Significant Accounting Policies

Nature of business: Pioneer Railcorp is the parent company of twelve short-line
common carrier railroad operations, an equipment leasing company, a subsidiary
which owns an airplane, and two service companies. Pioneer Railcorp and its
subsidiaries (the "Company") operate in the following states: Alabama, Arkansas,
Illinois, Indiana, Iowa, Michigan, Minnesota, Mississippi, and Tennessee.

The Company's subsidiaries include the following:

West Michigan Railroad Co. Pioneer Air, Inc.
Minnesota Central Railroad Co. Pioneer Railroad Services, Inc.
Vandalia Railroad Company Keokuk Junction Railway Co. and its
Decatur Junction Railway Co. subsidiary, Keokuk Union Depot Company
Alabama & Florida Railway Co., Inc. Wabash & Western Railway Co., d/b/a
Mississippi Central Railroad Co. Michigan Southern Railroad
Alabama Railroad Co. Rochelle Railroad Co.
Fort Smith Railroad Co. Shawnee Terminal Railway Company
Pioneer Railroad Equipment Co., Ltd. Pioneer Resources, Inc.

Pioneer Railroad Equipment Co., Ltd. holds title to a majority of the Company's
operating equipment, and Pioneer Air, Inc. owns an airplane utilized by the
Company for business purposes. Pioneer Railroad Services, Inc. provides
management, administrative and agency services to the Company's subsidiary
railroads. Pioneer Resources, Inc. holds title to certain real estate adjacent
to one of the Company's railroads. All other subsidiaries are active short-line
common carrier railroad operations.

Significant accounting policies:

Principles of consolidation: The consolidated financial statements include the
accounts of Pioneer Railcorp and its wholly-owned subsidiaries. All significant
intercompany transactions and balances have been eliminated in consolidation.

Presentation of cash flows: For the purposes of reporting cash flows, the
Company considers all highly liquid debt instruments purchased with maturity of
three months or less to be cash equivalents. There are no cash equivalents as of
December 31, 1997 and 1996.

Use of estimates in the preparation of financial statements: The preparation of
financial statements in conformity with generally accepted accounting principles
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 could differ
from those estimates.

Revenue recognition: Freight revenue, generally derived on a per car basis from
on-line customers and connecting carriers with whom the Company interchanges, is
considered earned at the time a shipment is either delivered to or received from
the connecting carrier at the point of interchange.

Inventories: Inventories consisting of various mechanical parts, track
materials, locomotive supplies and diesel fuel, are stated at the lower of cost
(determined by the average cost method) or market. Inventories are used on a
daily basis for normal operations and maintenance.

Property and equipment: Property and equipment is stated at cost. Depreciation
is computed principally on a straight-line basis over the following estimated
useful lives:

Years
--------
Roadbed .................................................... 20
Transportation equipment ................................... 10-15
Railcars ................................................... 10-15
Buildings .................................................. 20-40
Machinery and equipment .................................... 5-10
Office equipment ........................................... 5-10

Leasehold improvements are depreciated over the lesser of the lease term or life
of the improvements.
<PAGE>

Maintenance and repair expenditures, which keep the rail facilities in operating
condition, are charged to operations as incurred. Expenditures considered to be
renewals and betterments are capitalized if such expenditures improve the track
conditions and benefit future operations with more efficient use of the rail
facilities.

The Company reviews applicable assets on a quarterly basis to determine
potential impairment by comparing carrying value of underlying assets with the
anticipated future cash flows and does not believe that impairment exists as of
December 31, 1997 and 1996.

Intangible assets: Intangible assets consist principally of goodwill which is
being amortized by the straight-line method over a forty-year period. The
Company reviews intangible assets quarterly by subsidiary to determine potential
impairment by comparing the carrying value of the intangible with the
undiscounted anticipated future cash flows of the related property before income
taxes and management fees generated by Pioneer Railroad Services, Inc. If future
cash flows are less than the carrying value, the Company will determine the fair
market value of the property and adjust the carrying value of the intangibles if
the fair market value is less than the carrying value. The Company does not
believe that impairment exists as of December 31, 1997 and 1996.

Earnings per common share: The Financial Accounting Standards Board (FASB) has
issued Statement No. 128, "Earnings per Share," which supersedes Accounting
Principles Board (APB) Opinion No. 15. State- ment No. 128 requires the
presentation of earnings per share by all entities that have common stock or
potential common stock, such as options, warrants, and convertible securities,
outstanding that trade in a public market. Those entities that have only common
stock outstanding are required to present basic earnings per-share amounts.
Basic per-share amounts are computed by dividing net income (the numerator) by
the weighted-average number of common shares outstanding (the denominator). All
other entities are required to present basic and diluted per-share amounts.
Diluted per-share amounts assume the conversion, exercise or issuance of all
potential common stock instruments unless the effect is to reduce the loss or
increase the net income per common share.

The Company initially applied Statement No. 128 for the year ended December 31,
1997, and, as required by the Statement, has restated all per share information
for the prior year to conform to the Statement.

Income taxes: Deferred taxes are provided on a liability method whereby deferred
tax assets are recognized for deductible temporary differences and operating
loss and tax credit carryforwards and deferred tax liabilities are recognized
for taxable temporary differences. Temporary differences are the differences
between the reported amounts of assets and liabilities and their tax bases.
Deferred tax assets are reduced by a valuation allowance when, in the opinion of
management, it is more likely than not that some portion or all of the deferred
tax assets will not be realized. Deferred tax assets and liabilities are
adjusted for the effects of changes in tax laws and rates on the date of
enactment.

Government grant: During 1997, the Company was awarded a $395,688 grant from the
Minnesota Department of Transportation which is funded with federal disaster
funds from the Federal Railroad Administration pursuant to the Federal Fiscal
Year 1997 Supplemental Appropriations Act. The grant is designed to aid the
Company with the labor and material costs of rehabilitating and repairing track
and bridge structures belonging to the Minnesota Central Railroad Co. which were
damaged by severe weather conditions in late 1996 and early 1997. As of December
31, 1997, the Company had expended approximately $234,000 and had recorded
receivables of $112,000 and accounts payable to vendors of $112,000 pursuant to
the grant.

The grant funds are applied as a reduction of the related capital additions for
rehabilitating and repair of the applicable track and bridge structures in
determining the carrying value of the assets. The grant is recognized as income
by way of reduced depreciation charges over the estimated useful lives of the
underlying property and equipment.

Self-insurance: The Company self-insures a portion of the risks associated with
medical expenses incurred by its employees and their dependents. Under the terms
of the self-insurance agreement, the Company is responsible for the first
$20,000 of qualifying medical expenses per person on an annual basis and limited
to an aggregate excess amount computed under the terms of the insurance contract
using specified participant rates. An insurance contract with a life insurance
company covers individual claims in excess of $20,000 on an annual basis and
total claims exceeding the aggregate excess, subject to a maximum lifetime
reimbursement of $2,000,000 per person.
<PAGE>

Note 2. Property and Equipment

Property and equipment consist of the following:

December 31,
-----------------------------
1997 1996
-----------------------------
Land ....................................... $ 1,412,388 $ 1,352,965
Roadbed .................................... 7,567,135 7,455,782
Transportation equipment ................... 2,202,965 2,235,551
Railcars ................................... 9,963,828 9,659,443
Buildings .................................. 1,090,207 1,078,122
Machinery and equipment .................... 933,034 873,279
Office equipment ........................... 395,122 379,171
Leasehold improvements ..................... 211,371 67,511
Capital projects ........................... 800,667 324,352
-----------------------------
24,576,717 23,426,176
Less accumulated depreciation .............. 4,602,015 3,294,610
-----------------------------
$19,974,702 $20,131,566
=============================

Note 3. Pledged Assets, Notes Payable, and Long-Term Debt

The Company has a $75,000 line of credit with Citizens Bank and Trust Company,
Chillicothe, Missouri, that expires April 1998, bears interest at 10.5%, and is
collateralized by transportation equipment. The Company had outstanding balances
under this line of credit of none and $75,000 as of December 31, 1997 and 1996,
respectively.

The Company has a $500,000 line of credit with First of America Bank - Illinois,
N.A., Peoria, Illinois, that expires June 1998, bears interest at prime, as
published in The Wall Street Journal, plus 1%, and is collateralized by accounts
receivable and general intangibles of certain subsidiaries. The Company has no
outstanding balance under this line of credit as of December 31, 1997.

The Company has a $600,000 line of credit with First of America Bank - Illinois,
N.A., Peoria, Illinois, that expires July 1998, bears interest at prime, as
published in The Wall Street Journal, plus 1%, and is collateralized by accounts
receivable and general intangibles of certain subsidiaries. The Company had
outstanding balances under this line of credit of $148,050 and $347,276 as of
December 31, 1997 and 1996, respectively.

The Company has various unsecured notes payable totaling $101,984 and $142,861
as of December 31, 1997 and 1996, respectively, for the financing of insurance
premiums. These notes are due in monthly installments from $2,198 to $26,141,
including interest ranging from 8.5% to 11.11%, with final install- ments due
from April to May 1998.

The Company had a $400,000 line of credit with Keokuk Savings Bank and Trust
Company, Keokuk, Iowa, which was renegotiated with First of American Bank -
Illinois, N.A., in July 1997, bore interest at prime, as published in The Wall
Street Journal, plus 1.5%, and was collateralized by accounts receivable,
inventory, and general intangibles. The Company had an outstanding balance under
this line of credit of $204,398 as of December 31, 1996.
<PAGE>

Long-term debt at December 31, 1997 and 1996, consists of the following:
<TABLE>
1997 1996
------------------------
<S> <C> <C>
Mortgage payable, First of America Bank - Illinois, N.A., due in monthly
installments of $3,775, including interest at 8.5%, through October 1, 1999
At that date and every five years thereafter, the interest rate may be
adjusted based on the Bank's base rate, final installment due June 2008,
collateralized by Pioneer
Railcorp's corporate headquarters building ................................... $ 406,299 $ 416,112
Mortgage payable, First of America Bank - Illinois, N.A., due in
monthly installments of $19,314, including interest at 9.25%, through
December 2001. At that date, the interest rate adjusts to a U.S. Treasury
index (5-year constant maturity) plus 3.5%, final installment due December
2006, collateralized by real estate, rail facilities, and other assets of
Alabama & Florida Railway Co., Inc. .......................................... 1,398,669 1,500,000
Mortgage payable, Camden National Bank, due in monthly install-
ments of $4,304, including interest at 12%, final installment due
July 2001, collateralized by Alabama Railroad Co. real estate and
rail facilities .............................................................. 161,785 192,019
Notes payable, Norwest Equipment Finance, Inc., due in monthly
installments of $2,184 to $8,743, including interest ranging from 8.85% to
10.75%, final installments due from May 2002 to November 2004,
collateralized by railcars and equipment ..................................... 1,638,397 1,597,880
Note payable, Keycorp, due in monthly installments of $22,744,
including interest at 8.86%, final installment due December 2003,
collateralized by railcars ................................................... 1,266,399 1,419,675
Notes payable, Nations Bank, due in monthly installments from
$8,524 to $23,305, including interest ranging from 8.75% to 9.35%, final
installments due from December 2002 to December
2003, collateralized by railcars ............................................. 1,929,281 1,315,557
Notes payable, FBS Leasing, due in monthly installments from
$510 to $12,998, including interest ranging from 8.37% to 9.6%, final
installments due from August 2001 to October 2004, collateralized by railcars. 1,087,819 1,218,244
Notes payable, US Bancorp, due in monthly installments from $637
to $11,995, including interest ranging from 9% to 10.9%, final installments
due from September 2001 to December 2002, collateralized by railcars ......... 1,023,926 1,687,445
Notes payable, Concord Commercial Group, due in monthly install-
ments from $1,105 to $4,516, final installments due from June 1998
to March 1999, including interest at 9%, collateralized by railcars .......... 108,950 234,132
Notes payable, Minnesota Valley Bank, due in monthly installments
of $4,700, including interest at prime plus 2-2.75%, final installment due
December 2001, collateralized by equipment acquired from MNVA Railroad, Inc. . 168,603 204,667
Note payable, U.S. Small Business Administration, due in monthly
installments of $7,577, including interest at 4%, final installment due
October 2000, collateralized by track acquired from MNVA
Railroad, Inc. ............................................................... 235,197 314,956
Note payable, Rail Authority, interest only payments required through
October 1998, then due in monthly installments of $3,975, including interest
at 7.5%, final installment due January 2011, collateralized
by rail line acquired from MNVA Railroad, Inc. ............................... 380,000 380,000
Note payable, LDI Corporation, due in monthly installments of
$16,731, including interest at 10.25%, final installment due
December 2003, collateralized by locomotives ................................. 896,982 1,000,000
Various notes payable, due in monthly installments from $404
to $2,630, including interest ranging from 6.75% to 10.25%, final
installments due from April 1998 to December 2001,
collateralized by vehicles and railcars ...................................... 109,591 147,078
Note payable, First of America Bank - Illinois, N.A., due in
monthly installments of $39,041, including interest at 9.5%,
through September 2002. At that date, the interest rate will
be adjusted to 250 basis points over the weekly average yield
on U.S. Treasury Securities, final installment due September
2007, collateralized by Keokuk Junction Railway Co. stock
and assets ................................................................... 3,000,000 --
Notes payable, Center Capital Corporation, due in monthly
installments from $1,453 to $2,489, including interest from 9.05% to 9.75%,
final installments due from January 2002 to
September 2004, collateralized by 70 ton box cars ............................ 188,732 --
Note payable, Pulman Bank & Trust Company, due in monthly
installments of $4,933, including interest at 9.45%, final
installment due December 2004, collateralized by covered hoppers ............. 301,000 --
<PAGE>

1997 1996
------------------------

Mortgage payable, State of Illinois Department of Transportation,
due in annual installments of $40,581, including interest at 2%,
final installment due December 2004, collateralized by railroad
and railroad ties (net of unamortized discount of $79,521) ................... -- 217,751
Note payable, Citizens Bank and Trust Company, due in monthly
installments of $4,410, including interest at 9.5%, final install-
ment due June 1997, collateralized by locomotives ............................ -- 29,984
Note payable, U.S. Small Business Administration, due in monthly
installments of $3,062, including interest at 4%, final installment due
January 2004, collateralized by second mortgage on all subsidiary-owned real
estate and a personal guarantee of the subsidiary's former president which
the Company has indemnified (net of unamortized discount of $35,529) ......... -- 187,655
Note payable, Citizens Bank and Trust Company, due in monthly
installments of $42,483, including interest adjustable quarterly to New York
prime plus 2.5%, final installment due March 2003, collateralized by common
stock in Alabama Railroad Co., Mississippi Central Railroad Co., and any
property later acquired with these loan proceeds ............................. -- 2,314,224
------------------------
14,301,630 14,377,379
Less current portion ............................................................ 1,836,132 1,813,246
------------------------
$12,465,498 $12,564,133
========================
</TABLE>

Aggregate maturities required on long-term debt as of December 31, 1997, are due
in future years as follows:

Years ending December 31: Amount
- -----------------------------------------------------------------
1998 .............................. $ 1,836,132
1999 .............................. 1,919,483
2000 .............................. 2,054,848
2001 .............................. 2,444,922
2002 .............................. 1,787,504
Thereafter ........................ 4,258,741
-----------
$14,301,630
===========

Note 4. Income Tax Matters

The Company and all but three of its subsidiaries file a consolidated federal
income tax return. Those three subsidiaries file separate federal income tax
returns.

The provision (credit) for income taxes charged to operations for the years
ended December 31, 1997 and 1996, was as follows:

1997 1996
----------------------
Current:
Federal ...................................... $115,432 $ (57,678)
State ........................................ 47,705 8,013

Deferred ........................................ 242,550 185,625
----------------------
$405,687 $135,960
======================

The income tax provision differs from the amount of income tax determined by
applying the federal income tax rate to pretax income from operations for the
years ended December 31, 1997 and 1996, due to the following:

1997 1996
-------------

Computed "expected" tax expense .............................. 35.0% 35.0%
Increase (decrease) in income taxes
resulting from:
State income taxes, net of federal tax benefit ............ 6.0 8.8
Other ..................................................... 4.3 (6.2)
------------
45.3% 37.6%
============
<PAGE>

Deferred tax assets and liabilities consist of the following components as of
December 31, 1997 and 1996:

1997 1996
------------------------------
Deferred tax assets:
AMT credit carryforwards .............. $ 434,500 $ 401,000
NOL carryforwards ..................... 1,037,100 832,000
Deferred compensation ................. 29,800 25,000
Other ................................. 66,400 25,901
------------------------------
1,567,800 1,283,901
Deferred tax liabilities:
Property and equipment ................ (3,752,100) (3,181,000)
Other ................................. -- (44,651)
------------------------------
$(2,184,300) $(1,941,750)
==============================

The components giving rise to the deferred tax assets and liabilities described
above have been included in the consolidated balance sheets as of December 31,
1997 and 1996 as follows:

1997 1996
----------------------------

Current deferred tax assets .................. $ 66,400 $ 25,901
Net noncurrent deferred tax liabilities ...... (2,250,700) (1,967,651)
----------------------------
Net deferred tax liability ................... $(2,184,300) $(1,941,750)
============================

The Company and its subsidiaries have Alternative Minimum Tax (AMT) credit
carryforwards of approxi- mately $435,000 and $401,000 at December 31, 1997 and
1996, respectively. This excess of AMT over regular tax can be carried forward
indefinitely to reduce future federal income tax liabilities. Certain
subsidiaries of the Company also have net operating loss carryforwards totaling
approximately $2,811,000 at December 31, 1997, which can be used to offset
future taxable income of those subsidiaries. Net operating loss carryforwards
expire as follows:

Years ending December 31: Amount
- ---------------------------------------------------------------
2008 $ 8,000
2009 16,000
2010 352,000
2011 1,656,000
2012 779,000
----------
$2,811,000
==========

Note 5. Retirement Plan

The Company has a defined contribution plan covering substantially all
employees, except employees who are members of a union which has bargained
separately for retirement benefits. Employees are eligible to participate in the
plan upon employment and may elect to contribute, on a tax deferred basis, up to
15% of their salary, or $9,500, whichever is least. Company contributions are
discretionary, and during 1997 and 1996, the Company elected to match 50% of the
first 8% of each employee's contributions. Expenses under the plan were $43,769
and $34,778 for the years ended December 31, 1997 and 1996, respectively.

Note 6. Deferred Compensation Agreements

The Company has deferred compensation agreements with two Keokuk Junction
Railway Co. employees. The agreements provide monthly benefits for 15 years
beginning with the month immediately following the employees' normal retirement
date, as defined in the agreements. If an employee terminates employment with
the Company for any reason other than death prior to the employees' normal
retirement date, benefits are rendered on a pro rata basis. The present value of
the estimated liability under the agreements is being accrued ratably over the
remaining years to the date when the employees are first eligible for benefits
using a discount rate of 7%. Deferred compensation expense totaled $12,638 and
$10,541 for the years ended December 31, 1997 and 1996, respectively.
<PAGE>

Note 7. Stock Options and Warrants

In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (SFAS 123). SFAS 123 prescribes a fair-value based measurement of
accounting for stock-based compensation plans with employees, including the
Company's stock option plans which are described below. The fair-value based
measurement prescribed by SFAS 123 results in the recognition of compensation
for all awards of stock to employees. The Company's present accounting is in
accordance with APB Opinion No. 25 and related interpretations which generally
requires that the amount of compensation cost that must be recognized, if any,
is the quoted market price of the stock at the measurement date, less the amount
the grantee is required to pay to acquire the stock. SFAS 123 provides that its
recognition and measurement provisions may be adopted on or after the beginning
of the fiscal year in which it was issued, but does not require an entity to
adopt those provisions. The Company has elected not to adopt the recognition and
measurement provisions of SFAS 123.

On April 12, 1994, the Board of Directors approved a stock option plan under
which the Company granted options to key management, other employees, and
outside directors for the purchase of 760,000 shares of its common stock. The
plan was approved by the Company's stockholders on June 11, 1994. The options
became exercisable when the Company's stock reached a $4 trading price for a ten
day period in July 1995, as specified in the stock option plan. The exercise
price is equal to the trading price on the date of the grants and ranges from
$1.50 to $3.92 per share. Since the target price was reached by December 31,
1995, in accordance with the provisions of the plan, additional options for
76,000 shares were granted. The exercise price for these options is equal to or
greater than the trading price on the date of the grants and ranges from $4.00
to $4.40 per share. The options expire at various dates from April 12, 1999 to
July 5, 2000.

On May 28, 1996, the Board of Directors approved a stock option plan under which
the Company granted options to key management, other employees, and outside
directors for the purchase of 407,000 shares of its common stock. The plan was
approved by the Company's stockholders on June 26, 1996. The options become
fully vested and exercisable as of July 1, 2001, except that the vesting and
exercise date are accelerated to the tenth consecutive business day that the
Company's stock trades at a price of at least $7.25. Vested options may be
exercised in whole or in part within 10 years from the date of grant. The
exercise price for these options is $2.75, the trading price on the date of the
grants.

Other pertinent information related to the plans is as follows:

Weighted- Weighted-
Average Average
Exercise Exercise
Shares Price Shares Price
------------------------------------------
Outstanding at beginning of year .. 1,099,800 $2.35 836,000 $2.15
Granted ........................... -- -- 407,000 2.75
Forfeited ......................... (100,029) 2.56 (100,000) 2.75
Exercised ......................... (26,500) 1.50 (43,200) 1.50
------------------------------------------
Outstanding at end of year ........ 973,271 $2.36 1,099,800 $2.35
==========================================

Exercisable at end of year ........ 691,271 792,800
========= =========

Weighted-average fair value per
option of options granted during
the year ........................ $ -- $ 1.97
======== =========
<PAGE>

A further summary about stock options outstanding as of December 31, 1997, is as
follows:

Options Outstanding Options Exercisable
---------------------------------- ---------------------------
Weighted-
Average Weighted Weighted
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life Price Exercisable Price
- --------------------------------------------------------------------------------
$1.50 - $1.65 461,512 2.2 years $ 1.55 461,512 $ 1.55

$2.38 - $3.56 435,850 6.4 years 2.94 153,850 3.30

$3.92 - $4.40 75,909 2.5 years 4.01 75,909 4.01
---------- ---------
973,271 691,271
========== =========

Grants under the above plans are accounted for following APB Opinion No. 25 and
related interpretations as permitted under generally accepted accounting
principles. Accordingly, no compensation cost has been recognized. Had
compensation cost for the stock-based compensation plans been determined based
on the grant date fair values of awards (the method described in FASB Statement
No. 123) reported net income, and earnings per common share would have been
reduced to the proforma amounts shown below:

1997 1996
-------------------
Net income:
As reported ........................ $366,245 $102,145
Proforma ........................... $294,245 $ 27,145

Earnings per common share:
As reported ........................ $ .08 $ .02
Proforma ........................... $ .06 $ .01

In determining the proforma amounts above, the fair value of each option was
estimated at the grant date using the Black-Scholes option-pricing model with
the following assumptions:

1997 1996
-------------------

Dividend rate ......................... $ -- $ --
Expected life (years) ................. 7.5 7.5
Risk-free interest rate ............... 6.55% 6.55%
Price volatility ...................... 66% 66%

On June 24, 1995, the stockholders authorized the issuance of stock warrants as
a dividend to stockholders of record, resulting in the issuance of 4,198,084
warrants. Each warrant permits stockholders a right to purchase an additional
share of stock at a predetermined price of $2 per share. Stock acquired by
exercise of each warrant must be held for a one year period of time. The
warrants expire July 1, 2015. There are 4,131,240 and 4,140,910 warrants
outstanding as of December 31, 1997 and 1996, respectively.

Note 8. Lease Commitments and Total Rental Expense

The Company has entered into six lease agreements covering certain of its
railroad properties. For rail- road properties it leases, the Company ordinarily
assumes, upon the commencement date, all operating and financial
responsibilities, including maintenance, payment of property taxes, and
regulatory compliance. Lease payments on five railroad properties are based on a
per car basis, ranging from $10 to $25 on all cars over a range of 300 to 4,000
cars per year on each segment. The leases expire between December 1998 and July
2011 and four of these railroads have five to twenty year renewal options. One
lease has an option to purchase the stock and leased personal property of the
railroad upon expiration of its lease in December 1998.

The Company has a land lease for the corporate office building. This lease
expires in 2008 and is renewable for five successive periods of five years with
annual rents equal to ten percent of the appraised value of the land, payable in
monthly installments, and with appraisal value reviews every five years
following the origination date. The Company is responsible for costs of
maintenance, utilities, taxes, and insurance.
<PAGE>

The total approximate minimum rental commitment as of December 31, 1997,
required under noncancelable leases, and excluding executory costs and per car
rentals, is due in future years as follows:

Years Ending December 31: Amount
- ----------------------------------------------------

1998 $187,400
1999 46,300
2000 46,300
2001 46,300
2002 42,000
Thereafter 315,900
--------
$684,200
========

The total rental expense under the leases was $440,986 and $273,433 for the
years ended December 31, 1997 and 1996, respectively.

Note 9. Major Customer

Revenue earned from a major customer amounted to approximately $1,760,000 and
$1,465,000 during the years ended December 31, 1997 and 1996, respectively.
Accounts receivable as of December 31, 1997 and 1996, include approximately
$427,000 and $344,000, respectively, from this customer.

Note 10. Purchase of Railroad Facilities

During March and April 1996, the Company acquired all the outstanding common
stock of KNRECO, Inc., d/b/a Keokuk Junction Railway, in exchange for $3,124,358
cash, the assumption of liabilities and debt of $2,890,006, and the issuance of
342 shares of common stock, at $3 5/8 per share, for a total acquisition cost of
$6,015,604. The excess of the acquisition cost over the fair value of the net
assets acquired was allocated to goodwill and is being amortized over 40 years
by the straight-line method.

The above acquisition was accounted for by the purchase method of accounting
and, accordingly, operating results of Keokuk Junction Railway Co. is included
in the consolidated statements of income from the date of acquisition.

Unaudited pro forma consolidated results of operations for the year ended
December 31, 1996, as though Keokuk Junction Railway Co. had been acquired as of
January 1, 1996, follows:

1996
-----------

Railway operating revenue .............................. $11,873,809
Net income ............................................. 57,811
Earnings per common share .............................. 0.01

The above amounts reflect adjustments for amortization of goodwill, additional
depreciation on revalued purchased assets, and interest on borrowed funds.

In December 1996, the Company acquired all of the outstanding common stock of
Shawnee Terminal Railway Company in exchange for $10,000. To include the results
of operations of Shawnee Terminal Railway Company from January 1, 1996 through
the acquisition date would not have a significant effect on the consolidated
results of operations for the year ended December 31, 1996.

Note 11. Minority Interest in Subsidiaries

Three of the Company's subsidiaries have preferred stock outstanding. This stock
is accounted for as minority interest in subsidiaries and dividends on the stock
are accounted for as a current expense.
<PAGE>

Following is a summary of the minority interest in subsidiaries as of December
31, 1997 and 1996:
<TABLE>

1997 1996
-----------------------
<S> <C> <C>
Preferred stock at Alabama Railroad Co.
Par value - $1,000 per share
Authorized - 700 shares
Issued and outstanding - 424 and 425 shares (cumulative 12% dividend;
callable at Company's option at 150% of face value)
at December 31, 1997 and 1996, respectively .............................. $ 424,000 $ 425,000
Preferred stock of Alabama & Florida Railway Co., Inc.
Par value - $1,000 per share
Authorized - 500 shares
Issued and outstanding - 421 and 422 shares (cumulative 9% dividend; callable
at Company's option after June 22, 1995, at 150% of face value) at
December 31, 1997 and 1996, respectively ................................. 421,000 422,000
Preferred stock of Mississippi Central Railroad Co.
Par value - $1,000 per share
Authorized - 1,000 shares
Issued and outstanding - 341 shares (cumulative 10% dividend; convertible at
a rate of $10 per common share, callable at Company's option after
March 1, 1996, at 110% of face value) .................................... 341,000 341,000
-----------------------
$1,186,000 $1,188,000
=======================
</TABLE>
Note 12. Commitments and Contingencies

Commitments: In December 1993, the Company entered into a five-year executive
employment contract with the Company's president. The five-year agreement
provides for a base salary with annual inflation adjustments based upon the
Consumer Price Index. Should the Company acquire or form additional railroads,
the base salary will increase $25,000 for the acquisition of railroads of 125
miles or less, and $50,000 for railroads over 125 miles. Should the president's
employment be terminated, the contract requires a lump sum payment equal to
three years of his then current salary. Should the president retire, he is
entitled to a lump sum payment of one year's salary.

As of December 31, 1997, the Company was committed to purchase 37 railcars at a
cost of $301,000. Management expects to fund this transaction with available
long-term financing.

Contingencies: In the course of its business, the Company's subsidiaries
experience crossing accidents, employee injuries, delinquent or disputed
accounts and other incidents, which give rise to claims that may result in
litigation. Management vigorously pursues settlement of such claims, but at any
one time, some such incidents, which could result in lawsuits by and against the
Company and its subsidiary railroads, remain unresolved. Management believes it
has valid claims for, or good defenses to, these actions. Management considers
such claims to be a routine part of the Company's business and, as of the date
of this statement, management believes that no incident has the potential to
result in a liability that would materially effect the Company's consolidated
financial position or results of operations.

As discussed in Note 1, the Company was awarded a grant from the Minnesota
Department of Trans- portation in 1997 for the repair and rehabilitation of
weather damaged railroad track and related structures the Company owns in
Minnesota. The Company's obligations under this grant expire two years after the
completion of the repairs. In the unlikely event the Company should discontinue
using the underlying Minnesota Railroad Co. track prior to the expiration of the
aforementioned two-year commitment period, the Company is contingently liable to
repay to the Federal Railroad Administration the value of materials installed
pursuant to the grant. Management estimates that materials installed pursuant to
the grant will approximate $123,000.
<PAGE>

Note 13. Earnings Per Share

Following is information about the computation of the earnings per share (EPS)
data for the years ended December 31, 1997 and 1996:

For the Year Ended
-----------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
-----------------------------------
December 31, 1997
-----------------------------------

Basic EPS
Income available to common stockholders ... $ 366,245 4,593,750 $ .08
=======
Effect of Dilutive Securities
Employee stock options .................... -- 57,576
----------------------
Diluted EPS
Income available to common stockholders
plus assumed conversions ............... $ 366,245 4,651,326 $ .08
=================================

December 31, 1996
-----------------------------------
Basic EPS
Income available to common stockholders . $ 102,145 4,530,379 $ .02
=======
Effect of Dilutive Securities
Warrants ............................... -- 1,346,659
Employee stock options ................. -- 281,938
----------------------
Dilutive EPS
Income available to common stockholders
plus assumed conversions ............ $ 102,145 6,158,976 $ .02
===================================

Stock warrants totaling 4,131,240 as of December 31, 1997, were not included in
the computation of 1997 diluted EPS because the warrants' exercise price was
greater than the average market price of the common shares. However, 4,140,910
warrants as of December 31, 1996, were utilized in the computation of the 1996
diluted EPS as the exercise price of such warrants was less than the average
market price for shares of common stock during 1996.

Options to purchase 282,000 shares of common stock at $2.75 per share were
outstanding as of December 31, 1997, but were not included in the computation of
diluted EPS because the options' exercise price was greater than the average
1997 market price of the common shares. The 1996 calculation of diluted EPS
includes 159,000 options to purchase common stock which represents the
weighted-average effect of 307,000 options to purchase common stock at $2.75 per
share which were issued during 1996 and outstanding as of December 31, 1996. The
exercise price on such options was less than the 1996 average market price;
thus, these options are included in the 1996 calculation of diluted EPS.

Options to purchase 340,300 shares of common stock at $1.50 per share and
121,212 shares of common stock at $1.65 per share were outstanding as of
December 31, 1997, and are included in the computation of diluted EPS since the
exercise price was less than the 1997 average market price. As of December 31,
1996, the following additional options to purchase shares of common stock were
utilized in the calculation of diluted EPS, as the exercise price was less than
the 1996 average market price.

Number Option
of Options Price
- ------------------------------------------------------------

150,000 $ 1.65
386,800 1.50
40,000 2.58
<PAGE>

Note 14. Fair Value of Financial Instruments

The following methods and assumptions were used by the Company in estimating the
fair value of its financial instruments:

The carrying value of cash, cash value of life insurance, notes payable, and
variable rate long-term debt approximates fair value.

The remaining carrying value of fixed rate long-term debt collectively
approximates fair value based upon the similarity of interest rates negotiated
on debt instruments in 1997 and 1996 as compared to existing interest rates.

In addition, other assets and liabilities of the Company that are not defined as
financial instruments are not included in the above disclosures, such as
property and equipment. Also, nonfinancial instruments typically not recognized
in financial statements nevertheless may have value but are not included in the
above dis- closures. These include, among other items, the trained work force,
customer goodwill, and similar items.
<PAGE>

Market for Pioneer Railcorp Common Stock.

The Company's common stock trades on the Nasdaq SmallCap Market tier of the
Nasdaq Stock Market under the symbol "PRRR" and the Chicago Stock Exchange under
the trading symbol "PRR". The quarterly high and low sales price of the
Company's common stock for the periods below are as follows:

96-1Q 96-2Q 96-3Q 96-4Q 97-1Q 97-2Q 97-3Q 97-4Q
-------------------------------------------------------------------

High $4.13 $4.00 $3.13 $3.13 $2.63 $2.13 $1.88 $1.88
Low $3.38 $2.75 $2.00 $1.88 $1.75 $1.13 $1.38 $1.32

As of December 31, 1997, the Company had 1,798 common stockholders of record,
including brokers who hold stock for others. No common stock cash dividends have
been declared or paid.

Board of Directors

Guy L. Brenkman, CEO and President, Pioneer Railcorp
J. Michael Carr, Chief Financial Officer, Pioneer Railcorp
Orvel L. Cox, Superintendent Car Department, Pioneer Railroad Services, Inc.
John S. Fulton, Purple Reality
Timothy F. Shea, President, RE/MAX Property Management

Officers

Guy L. Brenkman, Chief Executive Officer and President
J. Michael Carr, Treasurer
Daniel A. LaKemper, Secretary
Kevin L. Williams, Assistant Secretary

Corporate Information

The Corporate offices of Pioneer Railcorp and its subsidiaries are located at
1318 S. Johanson Road, Peoria, Illinois, 61607; Telephone number 309-697-1400.

Reports and Publications

A copy of Pioneer Railcorp's 1997 Form 10-KSB to the Securities and Exchange
Commission (without exhibits) can be obtained without charge by contacting the
Company's Investor Relations Department

Quarterly financial reports and other publications and news releases can also be
obtained through the Investor Relations Department or accessed through the
Company's web page located at www.Pioneer-Railcorp.com.

<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Registrant's 2nd Quarter Form 10-QSB and is qualified in its entirety by
reference to such financial statements.
</LEGEND>

<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 891,695
<SECURITIES> 0
<RECEIVABLES> 2,556,145
<ALLOWANCES> 102,450
<INVENTORY> 353,479
<CURRENT-ASSETS> 3,956,576
<PP&E> 25,094,995
<DEPRECIATION> 5,266,164
<TOTAL-ASSETS> 24,982,881
<CURRENT-LIABILITIES> 5,734,321
<BONDS> 0
0
0
<COMMON> 4,607
<OTHER-SE> 3,997,676
<TOTAL-LIABILITY-AND-EQUITY> 24,982,881
<SALES> 0
<TOTAL-REVENUES> 6,890,265
<CGS> 0
<TOTAL-COSTS> 5,612,161
<OTHER-EXPENSES> 0<F1>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 655,890
<INCOME-PRETAX> 803,472
<INCOME-TAX> 294,400
<INCOME-CONTINUING> 509,072
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 446,457<F2>
<EPS-PRIMARY> .10
<EPS-DILUTED> .10
<FN>
<F1>Other Expenses are netted with other income in the period and the result was
income of $181,258. The edgarlink program does not allow an income number to
be entered in this field.
<F2>The difference between Income Continuing and Net Income relates to Minority
Interests in Preferred Stock Dividends of consolidated subsidiaries.
</FN>

</TABLE>