SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549

                                   FORM 10-KSB

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

                   For the fiscal year ended December 31, 2002

                        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 SmallCap Market , Chicago Stock Exchange

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

Common stock, Class A ($.001 par value)
Common Stock, Class B (no par value)
------------------------------------
(Title of Class)

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.

Check if there is no disclosure of delinquent  filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure  will be contained,  to
the best of the  registrant's  knowledge,  in  definitive  proxy or  information
statements  incorporated  by  reference  in Part III of this Form  10-KSB or any
amendment to this Form 10-KSB. X

Issuer's revenues for the fiscal year ended December 31, 2002 were $14,969,833

The  aggregate  market  value of  voting  stock  held by  non-affiliates  of the
Registrant on March 25, 2003 was $3,819,708

                                    4,492,412

             -------------------------------------------------------
             (Shares of Common Stock outstanding on March 25 , 2003)


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This Form 10-KSB contains certain  "forward-looking"  statements as such term is
defined in The Private Securities  Litigation Reform Act of 1995 and information
relating to the Company  and its  subsidiaries  that are based on the beliefs of
the  Company's  management.  When used in this report,  the words  "anticipate,"
"believe,"  "estimate,"  "expect,"  and "intend" and words or phrases of similar
import, as they relate to the Company or its subsidiaries or Company management,
are intended to identify forward-looking statements. Such statements reflect the
current  risks,   uncertainties  and  assumptions  related  to  certain  factors
including, without limitation, competitive factors, general economic conditions,
customer relations,  relationships with vendors,  the interest rate environment,
governmental  regulation and supervision,  seasonality,  distribution  networks,
product introductions and acceptance,  technological change, changes in industry
practices,  one-time  events  and other  factors  described  herein and in other
filings made by the Company with the Securities and Exchange  Commission.  Based
upon changing conditions, should any one or more of these risks or uncertainties
materialize,  or should  any  underlying  assumptions  prove  incorrect,  actual
results  may  vary  materially  from  those  described  herein  as  anticipated,
believed,  estimated,  expected,  or  intended.  The Company  does not intend to
update these forward looking statements.

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PART I

Item 1.  Business

General

Pioneer Railcorp, an Iowa corporation, is a railroad holding company. As used in
this Form 10-KSB,  unless the context requires otherwise,  the term "Company" or
"PRC" refers to the parent, Pioneer Railcorp and its subsidiaries: West Michigan
Railroad  Co.  (WMI),  Michigan  Southern  Railroad  Company  (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),  Keokuk Junction Railway Co. (KJRY),
Shawnee Terminal Railway Company (STR),  Pioneer  Industrial  Railway Co. (PRY),
The Garden City Western Railway,  Inc. (GCW),  Indiana  Southwestern Railway Co.
(ISW),  Kendallville  Terminal Railway Co. (KTR), Elkhart & Western Railroad Co.
(EWR), Gettysburg & Northern Railroad Co. (GET), Pioneer Resources,  Inc. (PRI),
Pioneer  Railroad  Equipment  Co., Ltd.  (PREL),  Pioneer Air, Inc.  (PAR),  and
Pioneer Railroad Services, Inc. (PRS).

The Company operates in two business segments,  railroad operations and railroad
equipment   leasing.   Railroad   operations   are  provided  by  the  Company's
wholly-owned  short  line  railroad  subsidiaries  whose  rail  system  provides
shipping links for customers along its routes and  interchanges  with five major
railroads,  Burlington  Northern Santa Fe Railroad  (BNSF),  CSX  Transportation
(CSX), Canadian National Railway Company (CN), Norfolk Southern Railway (NS) and
Union Pacific Railroad (UP).  Additionally,  the Company's railroad subsidiaries
have interchanges with two smaller  railroads,  the Kansas City Southern Railway
(KCS) and the Arkansas & Missouri  Railroad (AM). PRC's rail system is primarily
devoted to carrying freight. The Company also seeks to encourage  development on
or near,  and  utilization  of, the real  estate  right of way of its  operating
railroads  by  potential  shippers  as a source of  additional  revenue and 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's  railroad
equipment leasing operation  provides  locomotives,  railcars and other railroad
related vehicles and equipment to the Company's operating railroad subsidiaries.
In addition,  the Company's railroad equipment leasing operation leases railcars
and locomotives to unaffiliated third parties.

Railroad Operations

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 traffic base
on the FSR is very  diversified  with both inbound and outbound  shipments.  The
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)  and  commenced
operations soon  thereafter.  The line runs from Flomaton to Corduroy,  Alabama,
and interchanges with CSX in Flomaton.  The railroad's principal commodities are
outbound lumber  products,  primarily  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
51 miles,  45.5 of which are located in Mississippi.  The railroad  interchanges
with  the NS at  Grand  Junction,  Tennessee  and  the  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 traffic base on the
MSCI is primarily outbound finished wood products and inbound products,  such as
resins,  chemicals and pulpwood,  for the  production of finished wood products.
Other products shipped on the MSCI include scrap steel, cottonseed,  fertilizer,
and plastics.

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Alabama & Florida Railway Co. Inc. - 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.
The line ran from  Georgiana  to Geneva,  Alabama,  a  distance  of 76 miles and
interchanged  with CSX at Georgiana.  On June 11, 2001, the Company's  Alabama &
Florida  Railway Co. (AF)  subsidiary  sold a 33 mile  segment of its track from
Georgiana, AL to Andalusia,  AL, to the Three Notch Railroad Co. (TNR), a wholly
owned subsidiary of Gulf & Ohio Railways. The AF operates the remaining 43 miles
of trackage. The AF's principal commodities are fertilizer and railcar storage.

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.  The Cisco  segment  runs from  Green's  Switch
(Decatur)  to Cisco,  Illinois,  approximately  thirteen  (13)  miles.  The CISI
segment runs from Elwin to  Assumption,  Illinois,  a distance of  approximately
seventeen (17) miles.  The two lines connect via trackage rights on the Canadian
National  Railway  Company  (CN)  through  Decatur,   Illinois,  a  distance  of
approximately  eight (8) miles.  Railroad  operations began on the Cisco segment
December  3, 1993,  and began on the CISI  segment  December  7, 1993.  The DT's
primary commodities are grain, fertilizer and plastics.

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 CSX and is  approximately  3.5 miles
long. The railroad's  principal  commodities  are steel pipe and plastic pellets
and fertilizer.

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,  in Van Buren  County,
Michigan.  The line  interchanges  with CSX.  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 an  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.

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. On December 19,
2001, the KJRY purchased 12.1 miles of track from LaHarpe to Lomax, Illinois and
was  assigned  trackage  rights from Lomax,  Illinois  to Ft  Madison,  Iowa,  a
distance  of  approximately  15.5  miles  over the  BNSF,  allowing  the KJRY to
interchange  traffic  with the UP. The KJRY also  interchanges  with the BNSF at
Keokuk,  Iowa and is in the process of trying to reestablish an interchange with
the Toledo,  Peoria & Western  Railway Company (TPW) at LaHarpe,  Illinois.  The
railroad's  principal  commodities are corn, corn germ, corn syrup, meal, gluten
feed, and railroad wheels.

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 Canadian National Railway
Company  (CN) and is  approximately  2.5 miles long.  The  railroad's  principal
commodities are glycol and railroad freight cars for cleaning.

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Michigan  Southern  Railroad  Company - On December 19, 1996,  Pioneer  Railcorp
through its wholly-owned  subsidiary Michigan Southern Railroad Company signed a
two year lease with the Michigan  Southern  Railroad Co. Inc.,  Morris  Leasing,
Inc., and Gordon D. Morris to operate certain railroad related assets. The lease
called for a fixed monthly payment for the equipment assets leased and a per car
charge for railroad usage.  The lease contained an exclusive  option to purchase
the stock of the  Michigan  Southern  Railroad  Company,  Inc.  and the railroad
assets of Morris  Leasing,  Inc.,  and this option was  exercised  on January 6,
1999, when the Company's  wholly-owned  subsidiary  Michigan  Southern  Railroad
Company (MSO) purchased all of the stock of the Michigan  Southern Railroad Co.,
Inc. (MSRR) from Gordon D. Morris.  The railroad is comprised of three separate,
non-contiguous  lines.  The  Michigan  Southern  Railroad  Company line (MSO) is
located in  southern  Michigan  and  currently  operates  15 miles of track.  On
February  1,  2001,  the  Company  separated  1.1  miles  of  track  located  in
Kendallville, Indiana from its Michigan Southern Railroad Company subsidiary and
operates  as a  wholly-owned  subsidiary  of  Pioneer  Railcorp  under  the name
Kendallville  Terminal Railway Co. (KTR). On May 1, 2001, the Company  separated
10 miles of track  located in the Indiana  counties  of Elkhart and St.  Joseph,
Indiana from its Michigan Southern Railroad Company subsidiary and operates as a
wholly-owned  subsidiary  of Pioneer  Railcorp  under the name Elkhart & Western
Railroad Co. (EWR).  These actions were taken to simplify  interchange  with the
Norfolk  Southern,  the  connecting  carrier to all lines.  The MSO's  principal
commodities are, scrap, scrap paper, pulpboard, lumber and soybean oils.

Pioneer  Industrial Railway Co. - On February 18, 1998, Pioneer Railcorp through
its  wholly-owned  subsidiary  Pioneer  Industrial  Railway Co., began operating
approximately 8.5 miles of railroad in Peoria County, Illinois when the Peoria &
Pekin Union  Railway Co. (PPU)  assigned  its lease with the owner,  the Peoria,
Peoria Heights & Western Railroad (PPHW) to Pioneer Railcorp.  The lease expires
in July 2004.  PPHW is owned by the City of Peoria,  Illinois and the village of
Peoria Heights,  Illinois. The railroad's principal commodities are steel, salt,
lumber and plastic pellets.

The Garden City Western Railway, Inc. - On April 29, 1999, the Company purchased
100% of the stock of The Garden City Western Railway,  Inc.(GCW) from the Garden
City  Coop,  Inc.  and  immediately  began  operations.  The GCW is  located  in
southwest Kansas and totals 40 miles of operating railroad and interchanges with
the BNSF. The primary commodities include grain, frozen beef,  fertilizer,  farm
implements, feed products and utility poles.

Indiana  Southwestern  Railway Co. - On April 1, 2000,  the Company  through its
wholly-owned  subsidiary Indiana Southwestern  Railway Co. (ISW) acquired,  in a
transaction  accounted for by the purchase method of accounting,  certain assets
including all of the rail facilities owned or leased by the Evansville  Terminal
Railway  Company (EVT).  The line is in  Evansville,  Indiana and is 23 miles in
length. The primary commodities are grain, plastics and rail equipment.

Kendallville  Terminal Railway Co. - On February 1, 2001, the Company  separated
1.1 miles of track located in Kendallville,  Indiana from its Michigan  Southern
Railroad  Company  (MSO)  subsidiary  and  began  operating  as  a  wholly-owned
subsidiary of Pioneer Railcorp under the name Kendallville  Terminal Railway Co.
(KTR). This action was taken to simplify  interchange with the Norfolk Southern,
the  connecting  carrier  to the  KTR,  MSO and  EWR.  The  railroads  principal
commodities are sugar and syrup.

Gettysburg & Northern  Railroad Co. - On February 20, 2001, the Company  through
its wholly-owned  subsidiary  Gettysburg & Northern Railroad Co. (GET), acquired
in a  transaction  accounted  for by the  purchase  method  of  accounting,  the
railroad assets of the former Gettysburg Railway, Inc. (GBRY) and the Gettysburg
Scenic Railway (GSRX),  from various corporate  entities owned by John H. Marino
of Manassas,  Virginia.  The line is 25 miles in length running from Gettysburg,
PA to Mount  Holly  Springs,  PA. The  primary  commodities  are  canned  goods,
pulpboard,  soda ash, grain,  and scrap paper. In addition,  the GET generates a
portion of its revenues from a scenic passenger operation.

Elkhart & Western Railroad Co. - On May 1, 2001, the Company  separated 10 miles
of track located in the Indiana counties of Elkhart and St. Joseph, Indiana from
its Michigan Southern Railroad Company (MSO) subsidiary and began operating as a
wholly-owned  subsidiary  of Pioneer  Railcorp  under the name Elkhart & Western
Railroad  Co.  (EWR).  This  action was taken to simplify  interchange  with the
Norfolk  Southern,  the  connecting  carrier to EWR, MSO and KTR. The  railroads
principal commodities are auto frames, cement and lumber.

Railroad Equipment Leasing

Pioneer  Railroad  Equipment Co., Ltd. (PREL),  formed on April 1, 1990,  leases
equipment to the Company's  subsidiary  railroads  and also leases  railcars and
locomotives  to  unaffiliated  third  parties.   PREL  also  earns  income  from
non-company  railroads  on its  fleet of  approximately  1,400  railcars  (as of
December 31, 2002) when they carry freight on non-company railroads.

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Corporate Support Operations

Pioneer Railroad Services, Inc.(PRS), Pioneer Resources,  Inc.(PRI), and Pioneer
Air,  Inc.  (PAR),  which are  wholly-owned  subsidiaries  of Pioneer  Railcorp,
provide  corporate  support  operations  which are  engaged  in by the  Company.
Pioneer Railroad Services, Inc. (PRS) which began operations on October 1, 1993,
provides accounting,  management,  marketing, operational and agency services to
the Company's subsidiary railroads.  Pioneer Resources, Inc. (PRI) was formed on
December  30,  1993 to manage real estate and  auxiliary  resources  for Company
subsidiaries. Pioneer Air, Inc. (PAR) 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.

Marketing

The Company's marketing department was established to foster continuing business
with existing  customers and to develop and attract new customers and additional
loadings on all PRC railroads.  The Company's  attention to marketing has earned
recognition  from  industry  publications,  Class I railroads,  and smaller rail
carriers.   The  Company's   marketing   department  along  with  the  Company's
operation's center have become important value-added services offered to present
and potential customers.

Distribution

Virtually all  interchange  traffic is with  unionized  Class I carriers,  and a
prolonged work stoppage on those  carriers would have a material  adverse impact
upon the Company,  however,  there has never been such a prolonged work stoppage
of the American railroad industry, and the Company considers the chances of such
an event to be remote.

Suppliers

The Company does not believe that the loss of any supplier would have a material
adverse effect on its business, as there are alternative suppliers available.

Competition

With respect to the industry in which PRC operates,  the Company, like any other
railroad company,  faces intense  competition from the trucking industry,  barge
lines and other  railroads  for the movement of  commodities.  The Company feels
(pricing and time sensitivity  constant) that it has a competitive advantage due
to its integrated  efforts in providing  value-added  rail services  through its
marketing department and operation's center, with continued emphasis on safe and
efficient train operations.

Competition  for  additional  railroads as they become  available on the market,
either as direct  "spin-offs"  from Class I Railroads  or through the  secondary
market, is intense. The Company believes that it has a competitive advantage for
the acquisition of future Class III Railroads due to the following factors:  (1)
the Company's acquisition and operation of multiple railroads, (2) the Company's
experienced  management team, (3) the Company's  proficiency with industry-trend
technologies  desired by Class I Railroads,  such as Electronic Data Interchange
(EDI), and (4) the quality of the Company's employees.

Regulations

The   Company's   subsidiaries   are  subject  to   regulation  by  the  Surface
Transportation Board (STB) of the U.S. Department of Transportation (USDOT), the
Federal   Railroad   Administration   (FRA),   and   certain   state  and  local
jurisdictions.  Such  regulation  affects  rates,  safety rules,  maintenance of
track, other facilities, and right of way, and may affect the Company's revenues
and  expenses.  To date  there  has been no  material  effect  on the  Company's
operations  because of regulatory  action,  nor does the Company expect any such
effect in the foreseeable future.

Employees

On December  31,  2002,  the Company had 114  employees  which  consisted  of 94
operating personnel, 17 support staff and 3 executive officers.

Environmental Matters

The  Company's  operations  are subject to various  regulations  relating to the
protection of the environment,  which have become increasingly stringent.  These
environmental  laws and  regulations,  which are implemented  principally in the
U.S.  by the  Environmental  Protection  Agency  ("EPA")  and  comparable  state
agencies govern the management of hazardous wastes,  the discharge of pollutants
into the air and surface and underground waters and the manufacture and disposal
of certain substances.

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There  are no  material  environmental  claims  pending  or,  to  the  Company's
knowledge at this time,  threatened  against the Company.  The Company  believes
that its operations are in material  compliance with current  environmental laws
and regulations. The Company estimates that any expenses incurred in maintaining
compliance  with the current  laws and  regulations  will not have any  material
effect on the Company's earnings or capital  expenditures.  However, the Company
can provide no  assurance  that the  current  regulatory  requirements  will not
change, that currently unforeseen environmental incidents will not occur or that
past  non-compliance  with the environmental  laws will not be discovered on the
Company's properties.

Liability Insurance

The  Company  could be liable  for  losses or claims  that may not be covered by
insurance.  The Company  maintains  insurance  that covers  claims  arising from
personal  injury  and  property  damage  in the  event of  derailments  or other
accidents or occurrences; however; losses or other claims may arise that may not
be  covered  under  insurance  policies  currently  carried by the  Company.  In
addition, under catastrophic  circumstances,  the potential liability that could
result in such a  circumstance  could  exceed  the  Company's  existing  insured
limits.  Insurance coverage is currently available from a very limited number of
insurers and could eventually  become  unavailable or only available under terms
or prices  that are  unacceptable  to the  Company.  Should  this  occur,  it is
possible the Company  would be adversely  effected as a result of a  significant
increase in insurance costs.

Fuel Costs

Fuel costs  constitute  a  significant  portion of our  railroad  transportation
expenses. Fuel prices and supplies are influenced significantly by international
political and economic  circumstances.  If a fuel supply  shortage were to arise
due to OPEC  production  curtailments,  a  disruption  of oil  imports  or other
factors,  higher fuel prices  could occur and any  significant  prolonged  price
increase could materially effect the Company's operating results.

General Economic Conditions

The Company's  operations  may be adversely  affected by changes in the economic
conditions of the  industries  and  geographic  regions that produce and consume
freight that we transport.  The Company's revenues may be affected by prevailing
economic  conditions and, if an economic  slowdown or recession were to occur in
key markets that the Company  serves,  the volume of rail  shipments the Company
carries is likely to be  reduced.  Significant  reductions  in the volume of the
Company's rail shipments  could have a material  adverse effect on the Company's
operating results.

Item 2.  Property

In October 1994, the Company  purchased a 16,000 square foot building located in
Peoria,  Illinois as a corporate  headquarters facility. In conjunction with the
purchase of its corporate office building,  the Company assumed a land lease for
the property on which the building is located.  This  twenty-five  year lease 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,
with appraisal value reviews every five years  following the  origination  date.
The Company is responsible for costs of maintenance, utilities, fire protection,
taxes and insurance. The building is pledged in a financing agreement.

A description  of the Company's  railroad  properties as of December 31, 2002 by
subsidiary follows:

A.)  Fort Smith Railroad Co. (FSR): The FSR leases 18 miles of railroad from the
     Union Pacific  Railroad  Company and began operations in July 1991 pursuant
     to a twenty year operating lease. The line runs from Fort Smith to Barling,
     Arkansas.  The lease agreement  contains  numerous  requirements  including
     maintaining existing traffic patterns,  repair and replacement of the right
     of way  to the  condition  in  which  it was  leased,  and  payment  of any
     applicable  real estate taxes.  The Company is entitled to a fixed rate per
     carload  switched  from the UP as well as ninety  percent of new leases and
     easements  and fifty  percent  of  existing  leases  and  easements  on the
     property.  As long as these  lease  requirements  are met,  the Company may
     continue to operate on the rail  facilities  without rent.  The Company has
     three twenty year renewal options. The FSR's track is in good condition.

B.)  Alabama  Railroad Co.  (ALAB):  The ALAB is 60 miles of operating  railroad
     running from Flomaton to Corduroy, Alabama. The Company considers the track
     to be in good condition.

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C.)  Mississippi  Central Railroad Co. (MSCI): The MSCI is 51 miles of operating
     railroad  running from Oxford,  Mississippi to Grand  Junction,  Tennessee.
     Approximately  45.5  miles of the track are  located  in  Mississippi.  The
     Company considers the track to be in good condition.

D.)  Alabama & Florida  Railway Co., Inc.  (AF): The AF is 43 miles of operating
     railroad  running  from  Andalusia to Geneva,  Alabama.  The Company has an
     option  from CSX  Transportation  to  negotiate  a  purchase  price for the
     underlying  real estate and  currently  leases the  property  for a monthly
     payment of $1,435. The Company has exclusive rights to the revenues derived
     from the land leases and easements. The Company considers the line to be in
     good condition.

E.)  Decatur  Junction  Railway Co.  (DT):  The DT leases from Cisco Co-op Grain
     Company  (CISCO) a segment of track,  approximately  thirteen (13) miles in
     length,  that  runs  from  Green's  Switch  (Decatur,  Illinois)  to Cisco,
     Illinois.  The DT also  leases a segment  of track  from  Central  Illinois
     Shippers,  Incorporated  (CISI),  approximately  seventeen  (17)  miles  in
     length,  that runs from Elwin to  Assumption,  Illinois.  The two lines are
     connected  via trackage  rights on the Canadian  National  Railway  Company
     (approximately eight miles) through Decatur,  Illinois.  Both leases expire
     in  December  2006  and  require  the  Company  to  perform   normal  track
     maintenance  and pay a nominal per car charge on traffic in excess of 1,000
     car loads per year. The DT's track is considered to be in good condition.

F.)  Vandalia  Railroad Company (VRRC):  The VRRC is approximately  3.5 miles of
     operating railroad located in Vandalia, Illinois. The VRRC has a lease with
     the City of Vandalia for the 3.5 miles of railway.  This lease is renewable
     for ten year periods  beginning in September  2003,  and the lease of $1 is
     prepaid through  September  2003.  After September 2003, the lease payments
     will be equal  to $10 per  loaded  rail car  handled  in  interchange.  The
     Company considers the track to be in good condition.

G.)  West Michigan  Railroad Co.  (WMI):  The WMI is  approximately  15 miles of
     operating railroad running from Hartford to Paw Paw, Michigan. The track is
     considered to be in good condition.

H.)  Keokuk  Junction  Railway Co.  (KJRY):  The KJRY operates a common  carrier
     railroad line within the City of Keokuk, Iowa,  approximately 38 miles from
     Keokuk to  LaHarpe,  Illinois,  a branch  line  from  Hamilton  to  Warsaw,
     Illinois, 12 miles of track from LaHarpe to Lomax Illinois and has trackage
     rights of 15.5 miles over the BNSF from Lomax, IL to Ft.  Madison,  IA. The
     assets and subsidiary  stock are pledged in various  financing  agreements.
     The track is considered to be in good condition.

I.)  Shawnee  Terminal  Railway  Company  (STR):  The STR  operates 2.5 miles of
     operating  railroad in Cairo,  Illinois.  The track is  considered to be in
     good condition.

J.)  Michigan Southern Railroad Company (MSO): The MSO is approximately 15 miles
     long  extending  from White  Pigeon to  Sturgis,  Michigan.  The assets and
     subsidiary stock are pledged in various financing agreements.  The track is
     considered to be in good condition.

K.)  Elkhart & Western  Railroad  Co.  (EWR):  The EWR is  located  in  Elkhart,
     Indiana and is approximately 10 miles in length. The track is considered to
     be in good condition.

L.)  Kendallville   Terminal   Railway  Co.   (KTR):   The  KTR  is  located  in
     Kendallville,  Indiana and is  approximately 1 mile in length.  The line is
     considered to be in good condition.

M.)  Pioneer  Industrial  Railway Co.  (PRY):  The PRY operates a railroad  line
     approximately  8.5  miles  long in Peoria  County,  Illinois.  PRY  assumed
     operations  from the Peoria & Pekin Union  Railway  Co.  (PPU) when the PPU
     assigned  its lease with the owner,  the Peoria,  Peoria  Heights & Western
     Railroad (PPHW),  effective February 18, 1998,  expiring July 2004. PPHW is
     owned by the City of Peoria,  Illinois  and the village of Peoria  Heights,
     Illinois.  PRY has improved the condition of the track  considerably  since
     assuming operation and, overall,  the track is now considered to be in good
     condition.

N.)  The Garden City Western  Railway Co.,  Inc.  (GCW):  The GCW is 40 miles of
     operating  railroad located in southwest Kansas originating in Garden City,
     Kansas  running  north 26 miles to Shallow  Water,  KS and east 14 miles to
     Wolf, KS. The assets and subsidiary stock are pledged in various  financing
     agreements. The Company considers the track to be in good condition.

                                       8
<PAGE>

O.)  Indiana  Southwestern  Railway Co. (ISW):  The ISW is 23 miles of operating
     railroad  located in Evansville,  Indiana.  The assets and subsidiary stock
     are pledged in various  financing  agreements.  The Company  considers  the
     track to be in good condition.

P.)  Gettysburg  & Northern  Railroad Co.  (GET):  The GET is 25 miles in length
     running  from  Gettysburg,  PA to Mount Holly  Springs,  PA. The assets and
     subsidiary stock are pledged in various financing  agreements.  The Company
     considers the track to be in good condition.

Company management believes that all of its properties and assets are adequately
covered by insurance.

Item 3.  Legal Proceedings

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.

The Company is presently involved in litigation surrounding trackage rights with
a Class I railroad regarding fees charged between March 1999 and May 2001 by the
Company  for the Class I  carrier's  access  to and  usage of a  segment  of the
Company's  tracks as a means of gaining access to certain  trackage owned by the
Class I railroad.  The Surface Transportation Board (STB), in a decision in June
2001,  ruled  that the  Class I  railroad  could  have  access  to and cross the
Company's  tracks  in  order to get to the  branch  line  owned  by the  Class I
railroad. The STB did not set compensation or other terms and conditions as part
of its decision and ordered the two parties to negotiate  terms and  conditions,
and ordered  that if no  agreement  could be reached,  that the STB would make a
ruling.  From March 1999  through  May 2001,  the  Company  charged  the Class I
railroad approximately $660,000 for access to the Company's track. From May 2001
through  December 31, 2001,  the Company did not charge the Class I railroad for
access to the segment of the  Company's  track in  question.  In June 2002,  the
Washington,  D.C.  Circuit Court of Appeals  vacated the June 2001 STB decision.
The Company and the Class I railroad began discussing resolution of the trackage
rights  dispute,  but no  agreement  could  be  reached.  The  Class I  railroad
commenced utilization of the segment of the Company's track on July 1, 2002. The
Class I  railroad  has  agreed  to pay  the  Company  $85  per  car for  traffic
commencing  July 1,  2002,  on the  segment  of the track in  question  with the
$145,690  charged by the Company  since July 1, 2002,  by  agreement  of the two
parties  being  accounted  for as deferred  revenue on the balance sheet pending
final  resolution  of the matter by the STB. The Company  intends to continue to
vigorously  defend  itself in this matter.  As of December  31, 2002,  it is not
possible to ascertain the ultimate  financial  impact, if any, upon the Company.
Management has made no provision for any estimated  losses  associated with this
matter.  In the  event  that the STB makes an  unfavorable  ruling  against  the
Company with respect to the $660,000 of fees charged from March 1999 through May
2001, it is possible,  however,  that the outcome could have a material  adverse
effect on the Company's financial position and results of operations.

As of the date of this Form  10-KSB,  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.

There were no  matters  submitted  to  security  holders  for vote in the fourth
quarter 2002.

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                                       9
<PAGE>

PART II

Item 5.  Market for Company's Common Equity and Related Stockholder Matters.

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 as reported on the Nasdaq for the periods  below are as
follows:

         01-1Q   01-2Q    01-3Q    01-4Q   02-1Q     02-2Q   02-3Q   02-4Q
--------------------------------------------------------------------------
High     $1.88   $1.56    $1.40    $1.39   $1.40     $1.97   $1.85   $1.61
Low      $1.06   $1.12    $1.05    $1.03   $1.15     $1.15   $1.39   $1.38

As of December 31, 2002,  the Company had 1,716 common  stockholders  of record,
including  brokers who hold stock for others. A cash dividend of $.03 per common
share  was paid to  stockholders  of  record  as of April  30,  2002.  The total
dividend was  $135,907 and was paid on August 20, 2002.  No dividend was paid in
2001.

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                                       10
<PAGE>

Item 6. 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 ON FORM 10-KSB.

Critical Accounting Policies

The discussion and analysis of our financial condition and results of operations
are based upon consolidated  financial  statements,  which have been prepared in
accordance with accounting principles generally accepted in the United States of
America.  The  preparation  of these  financial  statements  requires us to make
estimates and judgments that effect our reported assets,  liabilities,  revenues
and expenses,  and our related  disclosure of contingent assets and liabilities.
On an on-going basis, we evaluate our estimates,  including those related to bad
debts,  impairment of long-lived assets (including goodwill),  depreciable lives
for property and equipment,  self-insured  medical  benefits,  deferred revenue,
income  taxes and  contingencies  for legal  matters.  We base our  estimates on
historical  experience and on various other  assumptions that are believed to be
reasonable under the circumstances.  This forms the basis of judgments about the
carrying  values of assets and  liabilities  that are not readily  apparent from
other sources.  Actual results may differ from these  estimates  under different
assumptions  or  conditions.  Most  accounting  policies are not  considered  by
management to be critical accounting policies. We believe the following critical
accounting policies and the related judgments and estimates significantly affect
the  preparation  of our  consolidated  financial  statements:  We believe  that
revenue  recognition,  deferred revenue accounting,  accounting for property and
equipment and goodwill accounting are the Company's critical accounting policies
(see Note 1 in the Notes to  Consolidated  Financial  Statements  for additional
information).

Results of Operations

This management's  discussion and analysis of financial condition and results of
operations  references  the  Company's  two  operating  segments.  The Company's
railroad  operations  consist of wholly-owned  short line railroad  subsidiaries
that offer similar  services while the Company's  equipment  leasing  operations
leases  railcars,  locomotives,  and other railroad  equipment to affiliated and
unaffiliated  entities. All other operations are classified as corporate support
services for purpose of these  discussions.  All  information  provided for each
operating   segment  is  presented   after   elimination  of  all   intersegment
transactions, therefore reflecting its share of consolidated results.

The  Company's  railroad  operating  segment  had  revenue  earned  from a major
customer,  Roquette  America,  Inc.,  of  approximately  $2,851,000  in 2002 and
$2,829,000  in 2001.  A future loss of revenue from this  customer  could have a
materially  adverse effect on the Company's  results of operations and financial
condition.

Year Ended December 31, 2002 Compared to Year Ended December 31, 2001

The  Company's  net income in 2002  increased by $108,000 to  $1,246,000 up from
$1,138,000 in 2001. When comparing 2002 and 2001 net income,  it should be noted
that all 2002 net income is attributable to normal,  ongoing operations compared
to 2001 net income which included a pre-tax gain of  approximately of $1,738,000
attributable to the sale of 33 miles of Alabama & Florida Railway Co. track from
Georgiana, AL to Andalusia,  AL. Revenue increased in 2002 by $549,000 or 4%, to
$14,970,000 from  $14,421,000 in 2001.  Operating  expense  decreased in 2002 by
$953,000 or 7%, to  $12,133,000  from  $13,086,000  in 2001,  resulting from the
Company's  increased  efforts to eliminate and control costs.  Operating  income
increased in 2002 by $1,502,000 or 112%, to $2,837,000  from $1,335,000 in 2001.
The railroad operations increased operating income by approximately  $953,000 in
2002.  The increase in operating  income from the railroad  operations  resulted
from  increased  revenues of $668,000  and a decrease in  operating  expenses of
$285,000.  The  equipment  leasing  operations  decreased  operating  income  by
approximately  $14,000 in 2002,  resulting from  decreased  revenues of $104,000
offset by a  decrease  in  operating  expenses  of  $90,000.  Corporate  support
services increased operating income by approximately  $395,000 in 2002 primarily
related to a reduction in support staff and a decrease in health insurance costs
of approximately $120,000.

                                       11
<PAGE>

Revenue:

Revenue  increased in 2002 by $549,000 or 4% to $14,970,000  from $14,421,000 in
the  prior  year.  The  railroad  operations  increased  revenue   approximately
$668,000,  including the effects of $196,000 of decreased revenues  attributable
to the 2001 sale of the  Alabama & Florida  Railway  Co.  track.  The  remaining
operating railroads  generated increased revenue of $864,000 in 2002,  primarily
related to revenues  related to increased  freight rates and  increased  traffic
with higher per car revenue . The equipment  leasing  operations  had a $104,000
decrease in revenues in 2002 primarily from a $70,000  reduction in revenue from
its railcar fleet and a $34,000  decrease in revenue  generated  from  equipment
leases to unaffiliated  entities.  Corporate services decreased revenues $15,000
as a  result  of  the  Company  discontinuing  its  small  intermodal  logistics
activities.

Operating Expense:

Operating  expense  decreased  in 2002 by  $953,000 or 7%, to  $12,133,000  from
$13,086,000  in  2001.  The  railroad  operations  decreased  operating  expense
approximately  $285,000.  Included in this  decrease  is  $323,000 of  decreased
operating expense attributable to the 2001 sale of the Alabama & Florida Railway
Co. track.  In addition,  in 2001 the Company's  railroad  operations  wrote-off
approximately  $157,000 of  receivable  balances  due to  bankruptcy  filings by
customers. Excluding these write-offs, and the decrease related to the Alabama &
Florida track sale, the remaining  operating  railroads had decreased  operating
expense of $287,000 in 2002.  The  equipment  leasing  operations  had a $90,000
decrease  in  operating  expense in 2002  primarily  from  decreased  locomotive
maintenance  expenses.  Corporate support services  decreased  operating expense
approximately  $410,000,  primarily  related to a reduction in support staff and
related  support staff  expenses,  and a decrease in health  insurance  costs of
approximately $120,000 related to the Company's health plan.

Maintenance of Way and structure  expense (MOW) includes all expenses related to
track  maintenance;  including  payroll,  track materials,  signal  maintenance,
vegetation  control,  and bridge  maintenance.  MOW decreased $267,000 or 19% to
$1,129,000 from $1,396,000 in the prior year. The railroad operations  decreased
MOW by $211,000,  including a $111,000  decrease in MOW attributable to the 2001
sale of the Alabama & Florida  Railway Co.  track.  Corporate  support  services
decreased  MOW expense  approximately  $56,000  primarily  related to  decreased
payroll expenses from staff reductions.

Maintenance  of equipment  expense (MOE)  includes  expenses  related to railcar
repair expenses for both foreign and Company owned railcars;  including payroll,
car  repair  parts,  processing  fees  for  Company  owned  railcars,  and  also
maintenance  to  Company  owned  vehicles.  MOE  decreased  $258,000  or  15% to
$1,417,000 from $1,675,000 in the prior year. The railroad operations  decreased
MOE $134,000 as a result of decreased  payroll and material costs for repairs to
foreign  rail cars.  The  equipment  leasing  operations  increased  MOE expense
approximately $30,000 as a result of increased costs associated with maintaining
the Company's railcar fleet.  Corporate  support services  decreased MOE expense
approximately  $154,000  primarily  related to decreased  payroll  expenses from
staff reductions.

Transportation  expense  (TRAN)  includes  expenses  related  to train  movement
operations;  including  payroll,  locomotive fuel and supplies  expense,  repair
expenses to Company owned  locomotives,  car hire expense,  derailment  expense,
lading and damage  claims,  switching  services  purchased,  and joint  facility
expenses with other carriers.  TRAN decreased  $147,000 or 4% to $3,221,000 from
$3,368,000 in the prior year. The railroad operations  increased  transportation
expense  approximately  $6,000,   including  the  effect  of  $88,000  decreased
transportation  expense  attributabe  to the 2001 sale of the  Alabama & Florida
Railway Co. track.  The remaining  operating  railroads  increased  TRAN expense
$94,000  in 2002.  The  equipment  leasing  operations  decreased  TRAN  expense
approximately   $112,000  as  a  result  of  decreased  costs   associated  with
maintaining the Company's locomotive fleet. Corporate support services decreased
TRAN  expense  approximately  $41,000  primarily  related  related to  decreased
payroll expenses from staff reductions.

                                       12
<PAGE>

General &  administration  expense  (ADMIN)  includes  general  manager  payroll
expenses,  legal expenses,  bad debt expense  related to interline  settlements,
liability insurance,  utilities,  postage and freight,  real estate taxes, dues,
licenses and fees, vehicle insurance, freight to move company owned railcars and
locomotives,  health and dental insurance  expense,  audit fees,  printing,  and
corporate   headquarters  support  service  payroll  for  executive  management,
accounting,  operations, marketing, real estate, legal, and other support staff.
ADMIN decreased  $242,000 or 5% to $4,334,000 from $4,576,000 in the prior year.
The railroad operations decreased ADMIN expense approximately $81,000.  Included
in this decrease is $88,000 of decreased ADMIN expense  attributable to the 2001
sale of the  Alabama  & Florida  Railway  Co.  track.  The  remaining  operating
railroads  increased  ADMIN  expense  $7,000  in  2002.  The  equipment  leasing
operations  decreased  ADMIN  expense  approximately  $15,000  as  a  result  of
decreased  costs  associated  with  repositioning  the Company's  railcar fleet.
Corporate  support  services  decreased  ADMIN  expense  approximately  $146,000
primarily  related  to a decrease  in health  insurance  costs of  approximately
$120,000.

Depreciation and  amortization  expense  decreased  $39,000 or 2%, to $2,032,000
compared to $2,071,000 in the prior year. The majority of this decrease  relates
to  the  railroad  operations  decreased  amortization  expense  related  to the
adoption of SFAS 142  effective  January 1, 2002,  as further  discussed in this
report under the heading "Impact of New Accounting Pronouncements."

Other Income and Expense Income Statement Line Item Discussion:

Interest income decreased $23,000 to $7,000 from $30,000 in the prior year.

Interest expense decreased $267,000 in 2002 to $1,084,000 compared to $1,351,000
in 2001.  The  equipment  leasing  operations  had a decrease  of  approximately
$147,000 in interest  expense as a result of the the mid year 2001  repayment of
debt with proceeds from the Alabama & Florida  Railway Co. 2001 track sale and a
reduction in interest  expense related to mid-year 2001 and 2002  refinancing of
long-term debt at lower interest rates. In addition, the railroad operations had
decreased interest expense of $35,000, including a decrease of $44,000 resulting
from the sale of the Alabama & Florida Railway track. Corporate support services
reduced  interest  expense by $85,000  relating to the pay down of  principal on
outstanding financing agreements and reduced interest rates related to long-term
debt restructurings.

In 2002,  approximately  $305,000 of lease income was generated by the Company's
railroad  operations  from the granting of  easements  and leases for the use of
railroad  right of way  property,  compared to $268,000 of lease income in 2001.
The Company  continues to place a strong  emphasis on identifying and collecting
revenues from third parties occupying Company property.

Net gain on sale of property and equipment  was $17,000 in 2002.  The total gain
on sale of property and  equipment of $1,929,000 in 2001 included a pre-tax gain
of  $1,738,000  from the Alabama & Florida  Railway sale of a 33 mile segment of
its track from Georgiana,  AL to Andalusia,  AL, and a $183,000  pre-tax gain on
the sale of 3 small parcels of commercial  development land by the West Michigan
Railroad Co.

Other net  expense/income  increased  $46,000 in 2002 to $12,000 of income  from
$34,000 of expense in the prior year. Other income and expense includes revenues
generated from scrap sales, and other miscellaneous  non-operating  revenues and
expenses, primarily generated by the Company's railroad operations. In addition,
in 2001 the Company incurred  approximately $79,000 of expense as a guarantor on
an  outstanding  loan by the Minnesota  Central  Railroad Co., which the Company
sold in 1999.

Impact of New Accounting Pronouncements:

The Company performed the first of the required  impairment tests of goodwill as
of December 31, 2002,  and,  based on management  estimates of fair value of the
entity, there was no reduction in the carrying amount of the goodwill previously
recognized. The Company did not acquire any additional goodwill during 2002.

In July 2001, the FASB issued Statement of Financial Accounting Standards (SFAS)
No.  141,  "Business  Combinations"  (SFAS  No.  141).  SFAS No.  141  addresses
financial accounting and reporting for business  combinations,  and is effective
for all business  combinations  initiated after June 30, 2001. Effective January
1, 2002,  the Company  adopted  SFAS No. 141. The Company did not enter into any
business combinations after June 30, 2001, and, therefore,  the adoption of SFAS
No. 141 had no effect on the Company's financial statements.

                                       13
<PAGE>

In  October  2001,  the FASB  issued  Statement  No.  144,  "Accounting  for the
Impairment or Disposal of Long-Lived  Assets"  (FASB No. 144).  This  supersedes
FASB No.  121,  "Accounting  for the  Impairment  of  Long-Lived  Assets and for
Long-Lived  Assets and for Long-Lived Assets to be Disposed Of," and APB Opinion
No. 30, "Reporting the Results of Operations - Reporting the Effects of Disposal
of  a  Segment  of a  Business,  and  Extraordinary,  Unusual  and  Infrequently
Occurring Events and Transactions," for the disposal of a segment of a business.
FASB No. 144 also amends ARB No. 151,  "Consolidated  Financial Statements," and
was adopted effective January 1, 2002. The adoption of this accounting  standard
did  not  have  a  material  effect  on  the  Company's  consolidated  financial
statements.

In August  2001,  the FASB  issued  Statement  No.  143,  "Accounting  for Asset
Retirement  Obligations." FASB No. 143 amends FASB No. 19, "Financial Accounting
and  Reporting  by Oil and Gas  Producing  Companies."  It  addresses  financial
accounting  and  reporting for  obligations  associated  with the  retirement of
tangible,  long-lived  assets and the associated asset retirement  costs, and is
effective for financial  statements issued for fiscal years beginning after June
15, 2002.  The Company has not yet completed its full  assessment of the effects
of this new pronouncement on its financial  statements and so is uncertain as to
the impact.

In June  2002,  SFAS No.  146,  "Accounting  for Costs  Associated  with Exit or
Disposal  Activities," was issued.  SFAS No. 146 supersedes Emerging Issues Task
Force  ("EITF")  Issue No. 94-3,  "Liability  Recognition  for Certain  Employee
Termination  Benefits  and Other  Costs to Exit an Activity  (including  Certain
Costs Incurred in a Restructuring)."  SFAS No. 146 requires that a liability for
a cost  associated  with an exit or  disposal  activity be  recognized  when the
liability is incurred.  Under SFAS No. 146, an entity's commitment to a plan, by
itself,  does not create an obligation that meets the definition of a liability.
SFAS  No.  146  also  establishes  fair  value  as  the  objective  for  initial
measurement of the  liability.  The provisions of SFAS No. 146 are effective for
exit or disposal  activities that are initiated after December 31, 2002. As SFAS
No. 146 only applies to prospective  items, the Company believes the adoption of
SFAS No. 146 will not have a material impact on the Company's financial position
or results of operations.

In December 2002, the Financial  Accounting Standards Board issued SFAS No. 148,
"Accounting  for  Stock-Based  Compensation  - Transition  and  Disclosure,"  an
amendment of SFAS No. 123,  "Accounting for Stock-Based  Compensation." SFAS No.
148 provides  alternative  methods of transition  for a voluntary  change to the
fair value method of  accounting  for  stock-based  employee  compensation.  The
Company does not expect to adopt the fair value  method.  In addition,  SFAS No.
148  requires  the Company to  disclose  in both  annual and  interim  financial
statements the method of accounting for stock-based  compensation and the effect
of the method used on the Company's reported results.  SFAS No. 148 is effective
for annual and interim  periods  ending after December 15, 2002. The adoption of
SFAS No. 148 did not have a material  impact on the Company's 2002  consolidated
financial  statements  and is not  expected  to have a  material  impact  on the
Company's future consolidated financial statements.

In November  2002,  FASB  Interpretation  No. 45,  "Guarantor's  Accounting  and
Disclosure  Requirements  for  Guarantees,   Including  Indirect  Guarantees  of
Indebtedness of Others" (FASB Interpretation No. 45), was issued. The disclosure
requirements  are  effective  for  financial  statements  of interim  and annual
periods ending after December 15, 2002. The initial  measurement and recognition
provisions  are  required  to be applied on a  prospective  basis to  guarantees
issued or modified  after  December  31,  2002.  They  require  that a guarantor
recognize,  at the  inception of a guarantee,  a liability for the fair value of
the  obligation  undertaken  in issuing the  guarantee.  Under prior  accounting
principles,  a guarantee  would not have been  recognized as a liability until a
loss was probable and reasonably  estimable.  As FASB Interpretation No. 45 only
applies to prospective  transactions,  the Company believes that the adoption of
FASB  Interpretation  No. 45 will not have a  material  impact on the  Company's
financial position or results of operations.

In January 2003, FASB Interpretation No. 46, "Consolidation of Variable Interest
Entities" (FASB Interpretation No. 46), was issued. It clarifies the application
of Accounting Research Bulletin No. 51, "Consolidated  Financial Statements," to
certain  entities  in which  the  equity  investors  do not  have a  controlling
financial interest or do not have sufficient equity at risk. FASB Interpretation
No. 46 is effective on January 31, 2003, for entities  acquired after such date.
The effective  date for entities  acquired on or before January 31, 2003 is July
1, 2003.  The Company has not  completed  its full  assessment of the effects of
FASB Interpretation No. 46 on its financial statements and so it is uncertain as
to the impact.

                                       14
<PAGE>

Liquidity and Capital Resources:

The Company  primarily  uses cash  generated  from  operations  to fund  working
capital  needs and relies on long-term  financing  for the purchase of railcars,
new operating  subsidiaries,  and other significant  capital  expenditures.  The
Company has working capital  facilities  totaling  $1,100,000,  all of which was
available for use at the end of 2002.

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 had a credit agreement with National City Bank of  Michigan/Illinois
to  provide a $5  million  revolving  acquisition  line of credit  for  railroad
acquisitions  at a  variable  interest  rate of prime  plus 1%.  This  agreement
expired  in the third  quarter  2002 and was not  renewed  by the  Company.  The
primary reason the Company  decided not to renew the credit facility is that the
current  commercial  lending  environment  is requiring  loan covenants that are
stricter  than the Company is willing to agree to. The Company  still  considers
National  City Bank an important  source of  acquisition  financing,  and future
acquisition opportunities,  absent of this credit line, will require the bank to
review and approve the transaction prior to any funding  decisions.  Previously,
under the terms of the credit line,  the Company did not need bank  approval for
an acquisition  utilizing the credit line. The outstanding balance of $2,105,000
on the line was converted to a 5 year 5.75% fixed rate note on October 10, 2002.

Effective  October 10, 2002, the Company  negotiated  reduced  interest rates on
several  of its notes  outstanding  with  National  City  Bank.  The  ability to
renegotiate  interest rates was limited by the assessment of prepayment premiums
by  National  City  Bank in  accordance  with the terms of the  original  notes.
Therefore, it was not cost effective to renegotiate all notes, and the reduction
in interest rates on renegotiated notes was limited by the prepayment  premiums.
The  interest  rate on the  note  related  to the  acquisition  of the  Michigan
Southern  Railroad  Co. was  reduced  from 8.375% to 7.55% for 5 years on a note
balance of $1,897,000.  The interest rate on the note related to the acquisition
of the Keokuk Junction  Railway Co. was reduced from 8.375% to 7.15% for 5 years
on a note balance of $2,392,000.  The KJRY note includes  $500,000 of additional
principal that was  previously  funded by the  acquisition  line relating to the
December  19,  2001  purchase  of 12.1  miles of track  from  LaHarpe  to Lomax,
Illinois.  In addition,  the Company  converted  the variable  rate note payable
related to the acquisition of The Garden City Western  Railway,  Inc. to a fixed
rate of 5.7% for the next 5 years on a note balance of $1,216,000.

The following table summarizes the Company's future  commitments and contractual
obligations  related to its notes  payable,  long-term  debt and  noncancellable
operating leases as of December 31, 2002:


The following table summarizes the Company's future  commitments and contractual
obligations  (amount in thousands) related to its notes payable,  long-term debt
and noncancellable operating leases as of December 31, 2002:
<TABLE>

                                                  Years Ending December 31
  Commitments & Contractual     -----------------------------------------------------------------------
         Obligations             2003       2004       2005       2006       2007    Thereafter  Total
-------------------------------------------------------------------------------------------------------
<S>                             <C>       <C>         <C>        <C>        <C>        <C>      <C>
Notes payable .....             $    92   $    --     $   --     $   --     $   --     $    -   $    92
Long-term debt ....               2,717     2,874      2,760      1,681      4,164        432    14,628
Noncancellable
   operating leases                  31        31         31         31         31         71       226
</TABLE>

On June 11, 2001, the Company's  Alabama & Florida  Railway Co. (AF)  subsidiary
sold a 33 mile segment of its track from Georigiana, AL to Andalusia, AL, to the
Three  Notch  Railroad  Co.  (TNR),  a wholly  owned  subsidiary  of Gulf & Ohio
Railways  in  Knoxville,  TN.  The cash sale price was  $2,500,000  and the sale
generated a pre-tax gain of $1,738,000.

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  2,099,142 to  4,198,284.  At the same time  shareholders
became  entitled  to purchase  an  additional  4,198,284  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.  As of
December  31,  2002,  a total of  68,766  warrants  originally  issued  had been
exercised  to date,  and the Company  realized  $137,532 on the  issuance of the
warrants.

                                       15
<PAGE>

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 became fully vested and exercisable as of
July 1, 2001. The options are exercisable at prices ranging from $2.75 to $3.03,
based  upon the  trading  price on the  date of the  grant,  in whole or in part
within 10 years from the date of grant.  As of  December  31,  2002,  a total of
155,000 options are outstanding under this plan.

In 1999,  Pioneer  Railcorp's  Board of  Directors  authorized  and approved the
repurchase of up to one million  shares  (1,000,0000)  of the  Company's  common
stock. As of December 31, 2002, a total of 99,005 shares had been repurchased at
a cost of $141,728.  The Company plans to continue  buying back its common stock
but believes the  repurchase  will be on a more  limited  scope then  previously
anticipated due to capital  requirements and the trading volume of the Company's
stock.

The Company  generally  anticipates  that the outcomes  involving  current legal
proceedings  will not  materially  affect the Company's  consolidated  financial
position  or results  of  operation.  However,  with  respect  to the  Company's
trackage  rights  dispute  with a  Class I  railroad  discussed  in Item 3,  the
Company's  management has made no provision for any estimated losses  associated
with  respect to $660,000 of fees charged from March 1999 through May 2001 as it
is not possible to ascertain the outome of this matter. It is possible, however,
that  an  unfavorable  outcome  could  have a  material  adverse  effect  on the
Company's financial position and results of operations.

The Company  believes its cashflow from  operations  and its  available  working
capital  credit  lines,  will be more than  sufficient to meet  liquidity  needs
through at least December 31, 2003.

Balance Sheet and Cash Flow Items:

The Company  generated net cash from operating  activities of $4,371,000 in 2002
and  $3,651,000  in  2001.  Net  cash  from  operating  activities  for 2002 was
generated  from  $1,246,000  of  net  income,  $2,032,000  of  depreciation  and
amortization,  an increase in deferred  income taxes of $420,000,  a decrease in
accounts receivable of $265,000,  an increase in deferred revenue of $1,158,000,
and $238,000 net cash provided by changes in various other operating  assets and
liabilities  less a decrease  in  accounts  payable of  $568,000.  Net cash from
operating  activities  for 2001 was  generated  from  $1,138,000  of net income,
$2,072,000 of depreciation and amortization,  $440,000 of deferred income taxes,
a decrease  in income tax refund  claims of  $74,000,  an  increase  in accounts
payable of $607,000, a decrease in accounts receivable of $257,000,  an increase
in deferred  revenue of $870,000,  and $122,000 net cash  provided by changes in
various other operating  assets and liabilities  less a gain on sale of property
and equipment of $1,929,000.

In 2002, the Company purchased and capitalized approximately $2,740,000 of fixed
assets and capital  improvements which included the purchase of approximately 78
railcars at a cost of $320,000  and the purchase of 7  locomotives  at a cost of
$455,000.  The railcars and 5 of the 7 locomotive  purchases were financed using
the Company's working capital line of credit and refinanced with long-term fixed
rate financing. The other two locomotives with a combined value of $129,000 were
acquired in  exchange  of the  Company's  forgiveness  of certain  debt owed the
Company.  The Company  capitalized  approximately  $1,280,000 of track structure
additions and improvements including $1,036,000 for upgrades to the GET track to
handle heavy loads for a power plant.  The GET track  upgrades  were paid for by
the power plant and recorded as deferred revenue on the Company's balance sheet.
Current accounting principles dictate that this deferred revenue be amortized to
income at a rate equal to depreciation expense and therefore will have no effect
on net income in future  periods.  Other  capital  expenditures  in 2002 include
$375,000  capitalized  for  buildings  and  structures,  including  $145,000 for
construction  of a new engine house on the GCW,  replacing a building  which was
destroyed by a tornado in 2001,  and including  $182,000 for upgrades to several
railroad bridges.  Other capital expenditures include approximately $315,000 for
railcar and locomotive betterments and various equipment. Unless otherwise noted
above, capital expenditures were funded with working capital.

The  Company's  wholly-owned  subsidiary,   Mississippi  Central  Railroad  Co.,
exercised its conversion  rights on all of its  outstanding  shares of preferred
stock. The conversion rate was 110% of the par value of $1,000.  In October 2002
the Company  disbursed a total of  $365,200  to satisfy  the  complete  and full
conversion of all outstanding preferred shares to cash.

Item 7.  Financial Statements

             The remainder of this page is intentionally left blank

                                       16
<PAGE>

                          Independent Auditor's Report

To the Board of Directors
Pioneer Railcorp
Peoria, Illinois

We have audited the accompanying consolidated balance sheets of Pioneer Railcorp
and subsidiaries as of December 31, 2002 and 2001, and the related  consolidated
statements of income,  stockholders'  equity,  and cash flows for the years then
ended.  These  financial  statements  are the  responsibility  of the  Company's
management.  Our  responsibility  is to express  an  opinion on these  financial
statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the  United  States of  America.  Those  standards  require  that we plan and
perform the audit to obtain  reasonable  assurance  about  whether the financial
statements are free of material misstatement.  An audit includes examining, on a
test basis,  evidence  supporting  the amounts and  disclosures in the financial
statements.  An audit also includes assessing the accounting principles used and
significant  estimates  made by  management,  as well as evaluating  the overall
financial  statement  presentation.   We  believe  that  our  audits  provide  a
reasonable basis for our opinion.

In our opinion, the consolidated  financial statements referred to above present
fairly, in all material respects, the financial position of Pioneer Railcorp and
subsidiaries  as of  December  31,  2002  and  2001,  and the  results  of their
operations  and their cash flows for the years  then  ended in  conformity  with
accounting principles generally accepted in the United States of America.

As described in Note 17 to the financial  statements,  the Company  adopted FASB
Statement No. 142, "Goodwill and Other intangible  Assets," effective January 1,
2002.


/s/ McGladrey & Pullen, LLP
---------------------------

Peoria, Illinois
February 20, 2003

McGladrey & Pullen, LLP is an independent  member firm of RSM International,  an
affiliation of independent accounting and consulting firms.


                                       17
<PAGE>

PIONEER RAILCORP AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
December 31, 2002 and 2001

<TABLE>
ASSETS                                                             2002            2001
-------------------------------------------------------------------------------------------
<S>                                                            <C>             <C>
Current Assets
  Cash .....................................................   $  1,148,461    $    976,678
  Accounts receivable, less allowance for doubtful accounts
    2002 $27,481; 2001 $71,981 .............................      3,041,573       3,431,008
  Inventories ..............................................        287,763         222,257
  Prepaid expenses .........................................        214,606         202,787
  Income tax refund claims .................................        337,419         132,905
  Deferred income taxes ....................................         12,000          80,000
                                                               ----------------------------
        Total current assets ...............................      5,041,822       5,045,635

Investments, cash value of life insurance ..................        214,627         184,090

Property and Equipment, net ................................     27,793,573      27,128,209

Other Assets ...............................................        161,833          22,091

Goodwill ...................................................      1,017,430       1,017,430
                                                               ----------------------------

                                                               $ 34,229,285    $ 33,397,455
                                                               ============================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
  Current maturities of long-term debt .....................   $  2,716,801    $  4,828,203
  Notes payable ............................................         91,816          57,712
  Accounts payable .........................................      2,346,751       2,914,471
  Accrued expenses .........................................        950,968         775,031
                                                                ---------------------------
        Total current liabilities ..........................      6,106,336       8,575,417
                                                                ---------------------------

Long-Term Debt, net of current maturities ..................     11,911,244      10,820,867
                                                                ---------------------------

Deferred Revenue ...........................................      2,027,811         870,066
                                                                ---------------------------

Deferred Income Taxes ......................................      5,637,000       5,285,000
                                                                ---------------------------

Minority Interest in Subsidiaries ..........................        751,000       1,103,000
                                                                ---------------------------

Commitments and Contingencies (Note 11)

Stockholders' Equity
  Common stock, Class A (voting), par value $.001 per share,
    authorized 20,000,000 shares, issued 2002 and 2001
    4,612,517 shares .......................................          4,612           4,612
    In treasury 2002 99,005 shares; 2001 84,040 shares .....            (99)            (84)
                                                                 --------------------------
    Outstanding 2002 4,513,512; 2001 4,528,477 .............          4,513           4,528
  Common stock, Class B (nonvoting), no par value,
    authorized 20,000,000 shares ...........................             --              --
  Additional paid-in capital ...............................      2,009,441       2,044,041
  Retained earnings ........................................      5,781,940       4,694,536
                                                               ----------------------------
                                                                  7,795,894       6,743,105
                                                               ----------------------------

                                                               $ 34,229,285    $ 33,397,455
                                                               ============================
</TABLE>
See Notes to Consolidated Financial Statements

                                       18
<PAGE>

PIONEER RAILCORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 2002 and 2001
<TABLE>
                                                           2002            2001
-----------------------------------------------------------------------------------
<S>                                                    <C>             <C>
Railway operating revenue ..........................   $ 14,969,833    $ 14,420,945
                                                       ----------------------------

Operating expenses
  Maintenance of way and structures ................      1,129,442       1,396,451
  Maintenance of equipment .........................      1,416,737       1,674,703
  Transportation ...................................      3,220,839       3,368,143
  General and administrative .......................      4,334,140       4,576,346
  Depreciation .....................................      2,027,869       2,020,197
  Amortization .....................................          4,000          50,489
                                                        ---------------------------
                                                         12,133,027      13,086,329
                                                        ---------------------------

        Operating income ...........................      2,836,806       1,334,616
                                                        ---------------------------

Other income (expenses)
  Interest income ..................................          7,822          30,196
  Interest expense .................................     (1,084,133)     (1,350,985)
  Lease income .....................................        305,192         268,159
  Gain on sale of property and equipment ...........         17,190       1,929,107
  Other, net .......................................         12,245         (33,919)
                                                         --------------------------
                                                           (741,684)        842,558
                                                         --------------------------

        Income before provision for income taxes
        and minority interest in preferred stock
        dividends of consolidated subsidiaries .....      2,095,122       2,177,174

Provision for income taxes .........................        733,543         924,539
                                                         --------------------------

        Income before minority interest in preferred
        stock dividends of consolidated subsidiaries      1,361,579       1,252,635

Minority interest in preferred stock dividends of
  consolidated subsidiaries ........................        115,890         114,740
                                                       ----------------------------

        Net income .................................   $  1,245,689    $  1,137,895
                                                       ============================

Basic earnings per common share ....................   $       0.28    $       0.25
                                                       ============================
Diluted earnings per common share ..................   $       0.28    $       0.25
                                                       ============================
</TABLE>
See Notes to Consolidated Financial Statements.

                                       19
<PAGE>

PIONEER RAILCORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended December 31, 2002 and 2001
<TABLE>
                                                Common Stock
                                          ------------------------
                                              Class A (Voting)         Additional
                                          ------------------------      Paid-In      Retained
                                           Shares         Amount        Capital      Earnings
------------------------------------------------------------------------------------------------
<S>                                       <C>          <C>            <C>            <C>
Balance at December 31, 2000 ........     4,531,277    $     4,531    $ 2,044,041    $ 3,559,841

Shares acquired in treasury for
  retirement ........................        (2,800)            (3)            --         (3,200)

Net income ..........................            --             --             --      1,137,895
                                         -------------------------------------------------------

Balance at December 31, 2001 ........     4,528,477          4,528      2,044,041      4,694,536

Dividends on common stock,
  $.03 per share ....................            --             --             --       (135,907)

Redemption premium paid on repurchase
  of preferred stock (Note 10) ......            --             --        (34,600)            --

Shares acquired in treasury for
  retirement ........................       (14,965)           (15)            --        (22,378)

Net income ..........................            --             --             --      1,245,689
                                          ------------------------------------------------------

Balance at December 31, 2002 ........     4,513,512    $     4,513    $ 2,009,441    $ 5,781,940
                                          ======================================================
</TABLE>
See Notes to Consolidated Financial Statements.

                                       20
<PAGE>

PIONEER RAILCORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2002 and 2001
<TABLE>
                                                                 2002            2001
----------------------------------------------------------------------------------------
<S>                                                           <C>            <C>
Cash Flows From Operating Activities
  Net income ..............................................   $ 1,245,689    $ 1,137,895
  Adjustments to reconcile net income to net cash
    provided by operating activities:
    Minority interest in preferred stock dividends of
     consolidated subsidiaries ............................       115,890        114,740
    Depreciation ..........................................     2,027,869      2,020,197
    Amortization ..........................................         4,000         50,489
    (Increase) in cash value life insurance ...............       (30,537)       (27,388)
    (Gain) on sale of property and equipment ..............       (17,190)    (1,929,107)
    Deferred taxes ........................................       420,000        439,600
    Changes in assets and liabilities:
     (Increase) decrease in assets:
       Accounts receivable ................................       265,168        256,730
       Income tax refund claims ...........................      (204,514)        74,010
       Inventories ........................................       (65,506)        14,834
       Prepaid expenses ...................................       (11,819)      (106,430)
       Other assets .......................................      (143,742)         1,393
     Increase (decrease) in liabilities:
       Accounts payable ...................................      (567,720)       606,808
       Accrued expenses ...................................       175,937        131,288
       Income taxes payable ...............................          --           (4,099)
       Deferred revenue ...................................     1,157,745        870,066
                                                              --------------------------
        Net cash provided by operating activities .........     4,371,270      3,651,026
                                                              --------------------------
Cash Flows From Investing Activities
  Proceeds from sale of property and equipment ............        59,673      2,811,719
  Purchase of property and equipment ......................    (2,611,449)    (3,177,694)
  Insurance reimbursements for damaged property ...........            --        202,835
  Acquisition of subsidiaries, net of cash acquired
    and liabilities assumed ...............................            --     (1,600,000)
                                                              --------------------------
        Net cash (used in) investing activities ...........    (2,551,776)    (1,763,140)
                                                              --------------------------
Cash Flows From Financing Activities
  Proceeds from short-term borrowings .....................     1,339,637      1,874,450
  Proceeds from long-term borrowings ......................     1,219,769      7,678,351
  Principal payments on short-term borrowings .............    (1,305,533)    (1,816,738)
  Principal payments on long-term borrowings ..............    (2,240,794)    (9,090,818)
  Common stock dividend payments ..........................      (135,907)            --
  Preferred stock dividend payments to minority interest ..      (115,890)      (114,740)
  Purchase of common stock for the treasury ...............       (22,393)        (3,203)
  Repurchase of minority interest .........................      (352,000)        (3,000)
  Redemption premium on repurchase of preferred stock .....       (34,600)            --
                                                              --------------------------
        Net cash (used in) financing activities ...........    (1,647,711)    (1,475,698)
                                                              --------------------------

        Net increase in cash ..............................   $   171,783    $   412,188
Cash, beginning of year ...................................       976,678        564,490
                                                              --------------------------
Cash, end of year .........................................   $ 1,148,461    $   976,678
                                                              ==========================
Supplemental Disclosures of Cash Flow Information
  Cash payments for:
    Interest ..............................................   $ 1,073,983    $ 1,382,037
                                                              ==========================

    Income taxes ..........................................   $   518,057    $   415,028
                                                              ==========================
Supplemental Disclosures of Noncash Investing Information
  Accounts receivable applied to acquire equipment ........   $   124,267    $        --
                                                              ==========================

  Railroad acquisitions:
    Fair value of assets acquired, principally property and
      equipment ...........................................   $        --    $ 1,604,700
    Less liabilities assumed ..............................            --          4,700
                                                              --------------------------
        Net cash paid for stock acquisitions ..............   $        --    $ 1,600,000
                                                              ==========================
</TABLE>
See Notes to Consolidated Financial Statements.

                                       21
<PAGE>

PIONEER RAILCORP AND SUBSIDIARIES

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


Note 1.  Nature of Business and Significant Accounting Policies

Nature of business: Pioneer Railcorp is the parent company of sixteen 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,
Kansas,  Illinois,  Indiana,  Iowa,  Michigan,  Mississippi,  Pennsylvania,  and
Tennessee.

The Company's subsidiaries include the following:
<TABLE>
<S>                                                          <C>
  West Michigan Railroad Co.                                 Michigan Southern Railroad Company and its
  Vandalia Railroad Company                                     subsidiary, Michigan Southern Railroad
  Decatur Junction Railway Co.                                  Company, Inc.
  Alabama & Florida Railway Co., Inc.                        Kendalville Terminal Railway Co.
  Pioneer Industrial Railway Co.                             Elkhart & Western Railroad Co.
  Gettysburg & Northern Railroad Company                     The Garden City Western Railway, Inc.
  Mississippi Central Railroad Co.                           Indiana Southwestern Railway Co.
  Alabama Railroad Co.                                       Shawnee Terminal Railway Company
  Fort Smith Railroad Co.                                    Pioneer Resources, Inc.
  Pioneer Railroad Equipment Co., Ltd.                       Pioneer Railroad Services, Inc.
  Keokuk Junction Railway Co. and its subsidiary,            Pioneer Air, Inc.
    Keokuk Union Depot Company
</TABLE>

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 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 consolida-tion.

Cash and cash equivalents: 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, 2002 and 2001.  Periodically  throughout  the year, the Company has
amounts  on deposit  with  financial  institutions  that  exceed the  depository
insurance limits.  The Company has not experienced any loss as a result of those
deposits and does not expect any in the future.

Receivables  credit risk: The Company performs ongoing credit evaluations of its
customers and generally  does not require  collateral.  Provisions  are made for
estimated  uncollectible  trade accounts  receivable.  An account  receivable is
considered  to be  past  due  if  any  portion  of  the  receivable  balance  is
outstanding  for more than 90 days.  Management  determines  the  allowance  for
doubtful accounts by regularly  evaluating  individual customer  receivables and
considering  a  customer's  financial  condition,  credit  history,  and current
economic   conditions.   Accounts   receivables  are  written  off  when  deemed
uncollectible.  Recoveries  of  trade  receivables  previously  written  off are
recorded when received. To date, losses on accounts receivable have been minimal
in  relation  to  the  volume  of  sales  and  have  been  within   management's
expectations.

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.

                                       22
<PAGE>

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

                                                                           Years
                                                                           -----

Roadbed ....................................................                  20
Transportation equipment ...................................               10-15
Railcars ...................................................               10-25
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.

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.

Capital  projects  primarily  represent   transportation  equipment  or  roadbed
modification projects which have either been purchased and the Company is in the
process of modifying and upgrading prior to placing the assets into service,  or
roadbed modification projects which are not yet complete. As the assets have not
yet been placed into service, the Company does not depreciate these assets.

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, 2002 and 2001.

Goodwill:  Prior to January 1, 2002,  goodwill was amortized on a  straight-line
basis over periods ranging from 5-40 years.  Reference should be made to Note 17
regarding accounting changes with respect to goodwill effective January 1, 2002.
Effective January 1, 2002,  goodwill is subject to impairment tests performed at
least annually.

Deferred revenue: In 2002 and 2001, the Company incurred costs of $1,012,055 and
$870,066, respectively,  relating to an ongoing upgrade of the track and roadbed
of the Gettysburg & Northern Railroad Company.  The upgrade is required in order
to service a customer  that has agreed to  reimburse  the  Company for the costs
relating to the upgrade.  As of December 31, 2002,  the customer has  reimbursed
the Company  $1,882,121.  As the project is ongoing as of December 31, 2002, the
Company has recognized  deferred  revenue of $1,882,121 and capitalized the same
amount  for the  related  track and  roadbed  upgrade  in the  capital  projects
category of property and  equipment.  Commensurate  with the  completion  of the
upgrade in  January  2003,  the  capitalized  assets  will be  depreciated  on a
straight-line  basis over  their  estimated  useful  lives,  while the  deferred
revenue will be  amortized  to income over the same lives as the capital  assets
are  depreciated.  Additional  deferred  revenue  totaling  $145,690 is recorded
relating to a dispute with a Class 1 railroad.  Reference should be made to Note
11 regarding this matter.

Stock  options and  warrants:  The  Company's  accounting  for stock options and
warrants 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.
Alternatively,  SFAS 123 employs  fair value  based  measurement  and  generally
results in the recognition of compensation for all awards of stock to employees.
SFAS 123 does not  require an entity to adopt  those  provisions,  but,  rather,
permits  continued  application  of APB 25. While the Company has elected not to
adopt the fair value  recognition and measurement  provisions of SFAS 123, it is
required to make certain disclosures pursuant to SFAS 123.

                                       23
<PAGE>

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 pro forma amounts shown below.
<TABLE>
                                                                      2002           2001
                                                                -----------------------------
<S>                                                             <C>             <C>
Net income:
  As reported ...............................................   $   1,245,689   $   1,137,895
  Deduct: Stock based compensation expense determined under
    fair value based method for all awards, net of tax effect              --         (30,930)
                                                                -----------------------------
  Proforma ..................................................   $   1,245,689   $   1,106,965
                                                                =============================

Basic earnings per common share:
  As reported ...............................................   $        0.28   $        0.25
  Proforma ..................................................   $        0.28   $        0.24

Diluted earnings per common share:
  As reported ...............................................   $        0.28   $        0.25
  Proforma ..................................................   $        0.28   $        0.24
</TABLE>

Earnings  per common  share:  The  Company  follows the  guidance  of  Financial
Accounting Standards Board (FASB) Statement No. 128, "Earnings per Share," which
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.

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  grants:  From time to time,  the  Company,  through  its  subsidiary
railroads,  enters into agreements with state agencies in the form of federal or
state aid  projects or grant  agreements  which are  designed to aid the Company
with labor,  material, and other costs relating to the rehabilitation and repair
of track and bridge  structures  belonging  to the  Company.  As of December 31,
2002, all amounts  relative to these agreements have been received and satisfied
in full.

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
$25,000 of qualifying medical expenses per person on an annual basis, 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 $25,000 on an annual  basis and
total claims  exceeding  the  aggregate  excess,  subject to a maximum  lifetime
reimbursement of $2,000,000 per person.

Use of estimates in the preparation of financial statements:  The preparation of
financial statements in conformity with accounting principles generally accepted
in the United  States of  America  requires  management  to make  estimates  and
assumptions  that affect the amounts  reported in the financial  statements  and
accompanying  notes.  Actual results could differ from those estimates.  Note 2.
Property and Equipment

                                       24
<PAGE>

Property and equipment consist of the following:

                                                            December 31,
                                                   -----------------------------
                                                       2002              2001
                                                   -----------------------------
Land .......................................       $ 3,197,483       $ 3,197,483
Roadbed ....................................        10,348,541        10,281,530
Transportation equipment ...................         5,511,373         5,002,475
Railcars ...................................        13,666,990        13,378,214
Buildings ..................................         1,835,923         1,382,375
Machinery and equipment ....................         1,617,390         1,544,251
Office equipment ...........................           498,008           485,804
Leasehold improvements .....................           252,684           252,684
Capital projects ...........................         2,931,277         1,667,580
                                                   -----------------------------
                                                    39,859,669        37,192,396
Less accumulated depreciation ..............        12,066,096        10,064,187
                                                   -----------------------------
                                                   $27,793,573       $27,128,209
                                                   =============================

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

The Company has various  unsecured notes payable totaling $61,816 and $57,712 as
of December  31, 2002 and 2001,  respectively,  for the  financing  of insurance
premiums.  The $61,816  note,  as of December  31,  2002,  is payable in monthly
installments of $20,605, including interest at 6%, through March 2003.

The Company has a $30,000  non-interest-bearing  note payable as of December 31,
2002, with Delaware  Trans-portation  Equipment Co., L.L.C. This note payable is
payable  in  monthly  installments  of  $5,000,  final  payment  due June  2003,
collateralized by a locomotive.

The Company had a $600,000  and a $500,000  line of credit  with  National  City
Bank, Peoria, Illinois, at December 31, 2001, each bearing interest at prime, as
published  in The Wall  Street  Journal,  plus 1%,  collateralized  by  accounts
receivable and general  intangibles of certain  subsidiaries.  Effective October
10,  2002,  the $600,000 and $500,000  lines-of-credit  were  combined  into one
$1,100,000  line-of-credit  with National City Bank, Peoria,  Illinois,  bearing
interest  at  prime,  as  published  in  The  Wall  Street  Journal,  plus  .5%,
collateralized  by  inventory  and  accounts  receivable.  The  Company  had  no
outstanding  balance  under these  lines-of-credit  as of December  31, 2002 and
2001.

The Company had a $5 million  master  credit  facility  with National City Bank,
Peoria,  Illinois,  to provide a  revolving  acquisition  line of  credit.  This
facility expired in October 2002 and was  collateralized  by commercial  pledges
and  security  agreements  of  various  subsidiaries,   certain   transportation
equipment,  and other  tangible and  intangible  assets.  The interest  rate was
adjustable  at 1.0% over the bank's  prime rate  (5.75% at December  31,  2001).
Amounts  drawn on the master  line were  characterized  as  separate  notes that
generally  were to be  repaid  monthly  over  periods  of up to ten  years.  The
Company's  outstanding  borrowings  classified  as long-term  under this line of
credit totaled $2,709,343 as of December 31, 2001.

The credit  agreements with National City Bank contain various  restrictive loan
covenants,  including  among others,  minimum  tangible net worth,  debt service
coverage,   and  maximum  funded  debt  to  earnings  before  interest,   taxes,
depreciation, and amortization (EBITDA).

                                       25
<PAGE>

Long-term debt at December 31, 2002 and 2001, consists of the following:
<TABLE>
                                                                        2002         2001
                                                                     -----------------------
<S>                                                                  <C>          <C>
Note  payable,  National  City  Bank,  due in  monthly
  installments  of $33,012 including interest at 8.15%,
  final installment due July 2005, collateralized by
  locomotives ....................................................   $1,502,877   $1,765,273
Noninterest-bearing note payable, State of Mississippi,
  due in annual installments of $3,792, final installment
  due February 2009, collateralized by track structure ...........       26,546       30,338
Mortgage  payable,  National City Bank,  due in monthly
  installments  of $4,049 including  interest at 9.75%
  The interest rate is adjustable  every five years
  and is presently based on the Bank's base rate plus
  1.5% as of October 31, 1999.  Final installment due
  June 2008, collateralized by Pioneer Railcorp's corporate
  headquarters building ..........................................      346,516      360,105
Mortgage  payable,  National City Bank, due in monthly
  installments  of $26,057 including interest at 8.35%,
  final installment due July 2006, collateralized by railcars ....      963,576    1,184,756
Note payable,  Bank of America Leasing & Capital, due in monthly
  installments of $30,375 including interest at 5.9%, final
  installment  due December 2004, collateralized by locomotives ..      686,102    1,000,000
Note payable,  State of Iowa, due in annual  installments
  of $47,191  including interest at 3%, final installment
  due December 2011, collateralized by track material ............      402,551      145,891
Noninterest-bearing note payable, Main Street Inc., due in monthly
  installments of $100, final installment due January 2005,
  uncollateralized ...............................................        2,300        3,700
Notes payable, TCF Leasing Inc., due in monthly installments of
  $18,029 and $13,064 including interest at 7.4% and 6.7%,
  final installments due August 2006 and September 2006,
  collateralized by railcars .....................................    1,211,523    1,487,884
Notes payable, Center Capital Corporation, due in monthly install-
  ments of $47,008 including interest at 6.85%, final installments
  due January 2005, collateralized by 70 ton box cars ............    1,092,312    1,521,547
                                                                     -----------------------
Balance carried forward ..........................................   $6,234,303   $7,499,494
                                                                     -----------------------
</TABLE>

                                       26
<PAGE>

<TABLE>
                                                                             2002          2001
                                                                          -------------------------
<S>                                                                       <C>           <C>
Balance brought forward                                                   $ 6,234,303   $ 7,499,494
Note payable, National City Bank, due in monthly installments of
  $23,195 including interest at 5.75%, final payment due October
  2007, collateralized by Indiana Southwestern railway Co. and
  the Gettysburg & Northern Railroad Co. stock and assets ............      2,078,929            --
Note payable, National City Bank, due in monthly installments of
  $15,855 including interest at 5.70%, final payment due October
  2007, collateralized by Garden City & Western Railway, Inc. ........
  stock and assets ...................................................      1,196,091            --
Note payable, National City Bank, due in monthly installments of
  $36,365 including interest at 7.15%, final installment due
  November 2007, collateralized by Keokuk Junction Railway Co. .......
  stock and assets ...................................................      2,345,489            --
Note  payable,  National  City  Bank,  due in  monthly
  installments  of $30,731 including interest at 7.55%, final
  installment due October 2007,  collateralized by Michigan
  Southern Railway Company and Michigan Southern Railroad
  Company, Inc. stock and assets .....................................      1,865,398            --
Notes payable, Bank of America Leasing & Capital, due in
  monthly installments of $9,039 and $9,473 including
  interest at 6.39% and 5.16%, final installments due
  July 2007 and September 2007, collateralized by locomotives ........        907,835            --
Note payable under master line of credit  agreement with National
  City Bank, due in monthly  installments of $27,705  including
  interest at 1.0% over the bank's prime  rate (5.75%  at
  December 31,  2001), final 2002,ent due June 2002, collateralized
  by real estate, rail facilities,  and other
  assets of the Indiana Southwestern Railway Co. .....................
  and the Gettysburg & Northern Railroad Co. (refinanced in 2002) ....             --     2,709,343
Note payable,  National City Bank,  due in monthly  principal
  installments of $8,433 through July 2002, with annual increases
  thereafter,  plus interest at the bank's LIBOR rate plus 2.25%
  adjusted  monthly (4.18% at December 31, 2001), final installment
  due July 2005, collateralized by real estate, rail facilities,
  and other assets of Garden City & Western Railway, Inc. ............
  (refinanced in 2002) ...............................................             --     1,293,521
Note payable, National City Bank, due in monthly installments of
  $30,830 including interest at 8.375%, final installment due May
  2004, collateralized by the assets of the Michigan Southern Railroad
  Company and Michigan Southern Railroad Company, Inc. ...............
  (refinanced in 2002) ...............................................             --     2,047,793
Note  payable,  National  City  Bank,  due in  monthly  installments
  of $37,235 including  interest at 8.375%  through May 2004 when
  the rate will be  adjusted, final  installment due December 2008,
  collateralized by Keokuk Junction Railway Co. stock and assets
  (refinanced in 2002) ...............................................             --     2,098,919
                                                                          -------------------------
                                                                           14,628,045    15,649,070
Less current portion .................................................      2,716,801     4,828,203
                                                                          -------------------------
                                                                          $11,911,244   $10,820,867
                                                                          =========================
</TABLE>

Aggregate maturities required on long-term debt as of December 31, 2002, are due
in future years as follows:

Years ending December 31:                                               Amount
--------------------------------------------------------------------------------
2003                                                                 $ 2,716,801
2004                                                                   2,874,021
2005                                                                   2,760,229
2006                                                                   1,681,171
2007                                                                   4,163,615
Thereafter                                                               432,208
                                                                    ------------
                                                                    $ 14,628,045
                                                                    ============

                                       27
<PAGE>

Note 4.  Income Tax Matters

The  Company and all but one of its  subsidiaries  file a  consolidated  federal
income tax return.  This subsidiary  files separate federal and state income tax
returns.

The  provision  for income  taxes  charged  to  operations  for the years  ended
December 31, 2002 and 2001, was as follows:

                                                     2002                 2001
                                                   -----------------------------
Current:
  Federal ............................             $209,738             $374,805
  State ..............................              103,805              110,134
                                                   -----------------------------
                                                    313,543              484,939
                                                   -----------------------------
Deferred:
  Federal ............................              396,375              414,875
  State ..............................               23,625               24,725
                                                   -----------------------------
                                                    420,000              439,600
                                                   -----------------------------

                                                   $733,543             $924,539
                                                   =============================

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, 2002 and 2001, due to the following:
<TABLE>
                                                                                                2002        2001
                                                                                                -----------------
<S>                                                                                             <C>         <C>
Computed "expected" tax expense ...........................................................     34.0%       34.0%
Increase (decrease) in income taxes resulting from:
  State income taxes, net of federal tax benefit ..........................................      4.1         4.1
  Goodwill amortization ...................................................................       --          .7
  Reduction in state tax rate for changes in temporary differences ........................     (1.9)         --
  Other ...................................................................................     (1.2)        3.7
                                                                                                -----------------
                                                                                                35.0%       42.5%
                                                                                                =================]
</TABLE>

Deferred tax assets and  liabilities  consist of the following  components as of
December 31, 2002 and 2001:

                                                    2002                2001
                                                --------------------------------
Deferred tax assets:
  AMT credit carryforwards .............        $   614,000         $   772,000
  NOL carryforwards ....................               --                33,000
  Deferred compensation ................             50,000              49,000
  Other ................................             17,000              49,000
                                                --------------------------------
                                                    681,000             903,000
Deferred tax liabilities:
  Property and equipment ...............         (6,306,000)         (6,108,000)
                                                --------------------------------
                                                $(5,625,000)        $(5,205,000)
                                                ================================

                                       28
<PAGE>

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,
2002 and 2001, as follows:

                                                       2002             2001
                                                   -----------------------------

Current deferred tax assets ..................     $    12,000      $    80,000
Net noncurrent deferred tax liabilities ......      (5,637,000)      (5,285,000)
                                                   -----------------------------

Net deferred tax liability ...................     $(5,625,000)     $(5,205,000)
                                                   =============================

The Company  and its  subsidiaries  have  Alternative  Minimum Tax (AMT)  credit
carryforwards  of  approximately  $614,000 and $772,000 at December 31, 2002 and
2001,  respectively.  This excess of AMT over regular tax can be carried forward
indefinitely to reduce future federal income tax liabilities.

Note 5.  Retirement Plan

The Company has a defined  contribution  401(k) plan covering  substantially all
employees. Employees are eligible to participate in the plan upon employment and
may elect to  contribute,  on a tax deferred  basis,  the lesser of 15% of their
salary,  or  the  Internal  Revenue  Service  maximum  deferral  limit.  Company
contributions are  discretionary and there were no Company  contributions to the
plan in either 2002 or 2001.  Administrative  expenses paid by the Company under
the plan were $8,000 and $4,000 for the years ended  December 31, 2002 and 2001,
respectively.

Note 6.  Deferred Compensation Agreements

The Company has deferred compensation agreements with two former 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.  Since both former
employees  were fully eligible for benefits when they  terminated  employment in
1999, no  additional  compensation  benefits  will accrue.  The present value of
these  benefits was fully  accrued,  using a discount rate of 7%, by a charge to
compensation  expense as of December 31,  1999.  One  employee  began  receiving
benefits in 2001,  while the other employee is not scheduled to receive benefits
until 2008.  The accrual is increased  each year by charges to interest  expense
for the cost of deferring such benefit for the one employee who will not receive
benefits  until 2008.  The liability  recorded  under these  agreements  totaled
$133,000  and  $129,000 at December  31, 2002 and 2001,  respectively.  Interest
expense  under these  agreements  totaled  $9,200 and $8,600 for the years ended
December 31, 2002 and 2001, respectively.

Note 7.  Stock Options and Warrants

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  became
fully vested and exercisable as of July 1, 2001. Vested options may be exercised
in whole or in part within 10 years from the date of grant.  The exercise  price
for these  options  ranges from $2.75 to $3.03,  based upon the trading price on
the date of the grant.  As of  December  31,  2002,  155,000  options  are still
outstanding under the plan.

Other pertinent information related to the plans is as follows:

                                           2002                   2001
--------------------------------------------------------------------------------
                                               Weighted-              Weighted-
                                                Average                Average
                                               Exercise               Exercise
                                     Shares     Price      Shares       Price
--------------------------------------------------------------------------------

Outstanding at beginning of year    175,000    $   2.88    215,000    $   2.85
Forfeited ......................    (20,000)       2.75    (40,000)       2.75
Exercised ......................       --            --         --          --
                                    --------------------------------------------
Outstanding at end of year .....    155,000    $   2.89    175,000    $   2.88
                                    ============================================

Exercisable at end of year .....    155,000                175,000
                                    =======                =======

                                       29
<PAGE>

A further summary about stock options outstanding as of December 31, 2002, is as
follows:
<TABLE>
                                    Options Outstanding             Options Exercisable
                            -------------------------------------------------------------
                                          Weighted-
                                           Average     Weighted                  Weighted
                                          Remaining    Average                   Average
                               Number    Contractual   Exercise      Number      Exercise
Range of Exercise Prices    Outstanding     Life        Price     Exercisable     Price
-----------------------------------------------------------------------------------------
<S>                         <C>          <C>           <C>       <C>              <C>
$2.75 - $3.03                 155,000     3.4 years     $ 2.89      155,000       $ 2.89
                              =======                               =======
</TABLE>

On June 24, 1995,  the Company  issued  4,198,284  warrants to  stockholders  of
record as a dividend.  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 4,129,720 warrants outstanding as of
December 31, 2002 and 2001, respectively.

Note 8.  Lease Commitments and Total Rental Expense

The Company  has  entered  into five lease  agreements  covering  certain of its
railroad  properties.  For railroad 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 three railroad properties are based on
a per car basis,  $10 on all cars over 1,000 cars per year on each segment.  The
leases expire between July 2004 and September 2013 and three of these  railroads
have ten to twenty year renewal options.

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.

The total  approximate  minimum  rental  commitment  as of  December  31,  2002,
required under  noncancelable  leases, and excluding executory costs and per car
rentals, is due in future years as follows:

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

2003                                                                    $ 31,000
2004                                                                      31,000
2005                                                                      31,000
2006                                                                      31,000
2007                                                                      31,000
Thereafter                                                                71,000
                                                                        --------
                                                                        $226,000
                                                                        ========

The total rental expense under the leases was approximately  $38,000 and $49,000
for the years ended December 31, 2002 and 2001, respectively.

Note 9.  Major Customer

Revenue earned from a major railroad segment customer  amounted to approximately
$2,851,000  and  $2,829,000  during the years ended  December 31, 2002 and 2001,
respectively.  Accounts  receivable  as of December  31, 2002 and 2001,  include
approximately $443,000 and $340,000, respectively, from this customer.

Note 10. Minority Interest in Subsidiaries

Two of  the  Company's  subsidiaries  have  preferred  stock  outstanding  as of
December  31,  2002.  This  stock  is  accounted  for as  minority  interest  in
subsidiaries  and dividends on the stock are accounted for as a current expense.
The preferred stock of Mississippi  Central Railroad Company was callable at the
Company's option at 110% of fair value. The Company exercised this option during
2002 and  repurchased  all of the  outstanding  shares  of  Mississippi  Central
Railroad  Company  preferred  stock.  The $34,600  amount  representing  the 10%
premium paid on the redemption of the preferred stock is recorded as a charge to
additional paid-in capital.

                                       30
<PAGE>

Following is a summary of the minority  interest in  subsidiaries as of December
31, 2002 and 2001:
<TABLE>
                                                                2002         2001
                                                            ------------------------
<S>                                                         <C>           <C>
Preferred stock of Alabama Railroad Co. .................
  Par value - $1,000 per share
  Authorized - 700 shares
  Issued and outstanding - 392 and 405 shares
    (cumulative 12% dividend;  callable
    at Company's option at 150% of face value)
  at December 31, 2002 and 2001, respectively ...........   $  392,000    $  405,000
Preferred  stock of Alabama & Florida  Railway Co.,  Inc.
  Par value - $1,000 per share
  Authorized  - 500   shares
  Issued  and  outstanding  - 359 and 366 shares
    (cumulative  9% dividend;  callable at Company's
    option after June 22, 1995, at 150% of face value)
    at December 31, 2002 and 2001, respectively .........      359,000       366,000
Preferred stock of Mississippi Central Railroad Co. .....
  Par value - $1,000 per share
  Authorized -  1,000   shares
  Issued  and  outstanding  - none  and  332 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)
    at December 31, 2002 and 2001, respectively .........           --       332,000
                                                            ------------------------
                                                            $  751,000   $ 1,103,000
                                                            ========================
</TABLE>

Note 11. Commitments and Contingencies

Commitments: In December 2001, the Company entered into a five-year extension of
an existing  executive  employment  contract with the Company's  president.  The
five-year  extension  provides  for a  base  salary  with  an  annual  inflation
adjustment  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 accept a consulting position with
the Company  whereby he would be compensated the equivalent of one year's salary
for the  consulting  services  rendered,  or retire  outright with no retirement
benefits from the Company.

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.

                                       31
<PAGE>

The Company is presently involved in litigation surrounding trackage rights with
a Class I railroad regarding fees charged between March 1999 and May 2001 by the
Company  for the Class I  carrier's  access  to and  usage of a  segment  of the
Company's  tracks as a means of gaining access to certain  trackage owned by the
Class I railroad.  The Surface Transportation Board (STB), in a decision in June
2001,  ruled  that the  Class I  railroad  could  have  access  to and cross the
Company's  tracks  in  order to get to the  branch  line  owned  by the  Class I
railroad. The STB did not set compensation or other terms and conditions as part
of its decision and ordered the two parties to negotiate  terms and  conditions,
and ordered  that if no  agreement  could be reached,  that the STB would make a
ruling.  From March 1999  through  May 2001,  the  Company  charged  the Class I
railroad approximately $660,000 for access to the Company's track. From May 2001
through  December 31, 2001,  the Company did not charge the Class I railroad for
access to the segment of the  Company's  track in  question.  In June 2002,  the
Washington,  D.C.  Circuit Court of Appeals  vacated the June 2001 STB decision.
The Company and the Class I railroad began discussing resolution of the trackage
rights  dispute,  but no  agreement  could  be  reached.  The  Class I  railroad
commenced utilization of the segment of the Company's track on July 1, 2002. The
Class I  railroad  has  agreed  to pay  the  Company  $85  per  car for  traffic
commencing  July 1,  2002,  on the  segment  of the track in  question  with the
$145,690  charged by the  Company  since July 1, 2002,  being  accounted  for as
deferred  revenue on the  balance  sheet.  The  Company  intends to  continue to
vigorously  defend  itself in this matter.  As of December  31, 2002,  it is not
possible to ascertain the ultimate  financial  impact, if any, upon the Company.
Management has made no provision for any estimated  losses  associated with this
matter.  In the  event  that the STB makes an  unfavorable  ruling  against  the
Company with respect to the $660,000 of fees charged from March 1999 through May
2001, it is possible,  however,  that the outcome could have a material  adverse
effect on the Company' financial condition and results of operations.

The  Company  was awarded  grants  totaling  $722,097 in 1998 for the repair and
rehabilitation of certain railroad track and related structures the Company owns
in Alabama.  The Company's  obligations  under the grants  expire in 2004,  five
years after the  completion  of the repairs.  In the unlikely  event the Company
should  discontinue  using the  underlying  track prior to the expiration of the
aforementioned  commitment period,  the Company is contingently  liable to repay
the full value of awarded funds pursuant to the grants.

The  Company  was  contingently  liable as a guarantor  on an  outstanding  loan
payable to the U.S.  Small  Business  Administration.  The $79,000  loan was the
primary   responsibility  of  the  Minnesota  Central  Railroad  Co.  (Minnesota
Central),  which the Company sold in 1999;  however,  the Company had guaranteed
the debt prior to the sale of the Minnesota Central. The Company was required by
the U.S.  Small Business  Administration  to pay the $79,000 loan in 2001 as the
purchaser of Minnesota  Central Railroad Co. had defaulted on paying the $79,000
outstanding loan balance.

Note 12. Earnings Per Share

Following is information  about the  computation of the earnings per share (EPS)
data for the years ended  December 31, 2002 and 2001:
<TABLE>
                                                              For the Year Ended December 31, 2002
                                                             -------------------------------------
                                                               Income       Shares       Per Share
                                                             (Numerator) (Denominator)     Amount
                                                             -------------------------------------
<S>                                                          <C>         <C>             <C>
Basic EPS
Income available to common stockholders ..................   $1,245,689    4,527,523    $   0.28
                                                                                        ========
Effect of Dilutive Securities
Employee stock options ...................................           --           --
                                                             ------------------------
Diluted EPS
Income available to common stockholders
  plus assumed conversions ...............................   $1,245,689    4,527,523    $   0.28
                                                                                        =========

                                                              For the Year Ended December 31, 2001
                                                             -------------------------------------
Basic EPS
Income available to common stockholders ..................   $1,137,895    4,529,297    $   0.25
                                                                                        =========

Effect of Dilutive Securities
Employee stock options ...................................          --           --
                                                             -----------------------
Diluted EPS
Income available to common stockholders
  plus assumed conversions ...............................   $1,137,895    4,529,297    $   0.25
                                                                                        ========
</TABLE>

                                       32
<PAGE>

The Company has authorized the issuance of stock warrants and granted options to
employees  to  purchase  shares  of  common  stock  as  discussed  in Note 7. In
determining  the effect of  dilutive  securities,  certain  stock  warrants  and
options  were not  included in the  computation  of diluted  earnings  per share
because the exercise  price of those  warrants and options  exceeded the average
market price of the common shares during the applicable year.

Note 13. Common Stock Repurchase

In 1999, the Company's Board of Directors  approved a plan to begin repurchasing
shares of the Company's  common stock from  stockholders.  During 2002 and 2001,
the Company  repurchased  14,965 and 2,800  shares of common stock at an average
price of approximately  $1.50 and $1.14 per share,  respectively,  for a cost of
$22,393 in 2002 and $3,203 in 2001.

The common stock repurchased is accounted for as treasury stock in the Company's
2002 and 2001  consolidated  balance  sheets  and  statements  of  stockholders'
equity.  As such,  treasury  shares  held  reduce the number of shares of common
stock  outstanding  as of  December  31,  2002 and  2001,  and the  value of the
treasury stock reduces stockholders' equity. The excess of the purchase price of
the  treasury  stock over the par value of the stock of  $22,378  and $3,200 was
charged to retained earnings as of December 31, 2002 and 2001, respectively.

Note 14. Fair Value of Financial Instruments

The following  methods and  assumptions  were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate that
value:

Cash and cash equivalents:

The carrying amount approximates the fair value because of the short maturity of
those instruments.

Notes payable and long-term debt:

The fair value of the Company's  notes  payable and long-term  debt is estimated
based on the  quoted  market  prices  for the same or  similar  issues or on the
current rates offered to the Company for debt of the same  remaining  maturities
with similar collateral requirements.

The estimated fair values of the Company's financial  instruments as of December
31, 2002 and 2001, are as follows:
<TABLE>
                                               2002                       2001
                                   -----------------------------------------------------
                                     Carrying       Fair        Carrying        Fair
                                      Amount        Value        Amount         Value
                                   -----------------------------------------------------
<S>                                <C>           <C>           <C>           <C>
Cash and cash equivalents ......   $ 1,148,461   $ 1,148,461   $   976,678   $   976,678

Notes payable and long-term debt   $14,719,861   $14,295,707   $15,706,782   $15,461,138
</TABLE>

Although the fair value of the Company's  notes  payable and  long-term  debt is
less than its carrying amount at December 31, 2002 and 2001,  transaction costs,
including  prepayment  penalties,  have not been  considered in estimating  fair
values. Therefore, as a result of significant prepayment penalties, it would not
be prudent for the Company to settle the debt at a gain.

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  disclosures.  These include,  among other items,  the trained work force,
customer goodwill, and similar items.

Note 15. Segment Information

Description  of  products  and  services  from  reportable   segments:   Pioneer
Railcorp's two reportable  segments consist of railroad operations and equipment
leasing  operations.  All other  operations are classified as corporate  support
services for purposes of this disclosure.

Measurement  of  segment  profit  or loss and  segment  assets:  The  accounting
policies  of the  segments  are the same as those  described  in the  summary of
significant accounting policies. Pioneer Railcorp evaluates segment profit based
on operating income before  intersegment  revenues,  provision for income taxes,
items of other income and  expense,  and  minority  interest in preferred  stock
dividends of consolidated subsidiaries.

                                       33
<PAGE>

Intersegment transactions: Intersegment transactions are recorded at cost.

Factors management used to identify the reportable  segment:  Pioneer Railcorp's
reportable  segments  consist of wholly-owned  short line railroad  subsidiaries
that offer  similar  services and a railroad  equipment  subsidiary  that leases
railcars,   locomotives,   and  other  railroad   equipment  to  affiliated  and
unaffiliated  entities.  The corporate  operations  consist of support  services
provided to the operating segments.
<TABLE>
                                                                 For Year Ended December 31,
                                                                ----------------------------
                                                                    2002            2001
                                                                ----------------------------
<S>                                                             <C>             <C>
Segment Assets
  Railroad operations .......................................   $ 20,917,398    $ 19,813,484
  Equipment leasing operations ..............................     12,258,327      12,733,344
  Corporate support services ................................      1,053,560         850,627
                                                                ----------------------------
        Total consolidated segment assets ...................   $ 34,229,285    $ 33,397,455
                                                                ============================
Expenditures for additions to long-lived assets
  Railroad operations
    Purchases ...............................................   $  1,676,017    $  2,114,118
    Acquired through purchase of subsidiaries ...............           --         1,604,700
  Equipment leasing operations ..............................      1,056,625       1,051,826
  Corporate support services ................................          3,074          16,450
                                                                ----------------------------
        Total expenditures for additions to long-lived assets   $  2,735,716    $  4,787,094
                                                                ============================
Revenues
  Revenues from external customers
  Railroad operations .......................................   $ 11,978,261    $ 11,310,471
  Equipment leasing operations ..............................      2,976,332       3,080,117
  Corporate support services ................................         15,240          30,357
                                                                ----------------------------
        Total revenues from external customers ..............   $ 14,969,833    $ 14,420,945
                                                                ============================
Intersegment revenues
  Railroad operations .......................................   $         --    $         --
  Equipment leasing operations ..............................        398,400         398,400
  Corporate support services ................................      6,209,410       6,714,521
                                                                ----------------------------
        Total intersegment revenues .........................   $  6,607,810    $  7,112,921
                                                                ============================

        Total revenue .......................................   $ 21,577,643    $ 21,533,866
Reconciling items
  Intersegment revenues .....................................     (6,607,810)     (7,112,921)
                                                                ----------------------------
        Total consolidated revenues .........................   $ 14,969,833    $ 14,420,945
                                                                ============================
Expenses

Interest expense
  Railroad operations .......................................   $     18,210    $     53,037
  Equipment leasing operations ..............................        480,019         627,250
  Corporate support services ................................        585,904         670,698
                                                                ----------------------------
        Total consolidated interest expense .................   $  1,084,133    $  1,350,985
                                                                ============================
  Depreciation and amortization expense
  Railroad operations .......................................   $    719,426    $    751,832
  Equipment leasing operations ..............................      1,235,911       1,228,825
  Corporate support services ................................         76,532          90,029
                                                                ----------------------------
        Total consolidated depreciation and
        amortization expense ................................   $  2,031,869    $  2,070,686
                                                                ============================
Segment profit
 Railroad operations ........................................   $  5,004,626    $  3,809,823
 Equipment leasing operations ...............................      1,451,171       1,464,980
 Corporate support services .................................      2,988,819       3,172,734
                                                                ----------------------------
        Total segment profit ................................      9,444,616       8,447,537

Reconciling items
  Intersegment revenues .....................................     (6,607,810)     (7,112,921)
  Income taxes ..............................................       (733,543)       (924,539)
  Minority interest in preferred stock dividends
    of subsidiaries .........................................       (115,890)       (114,740)
  Other income (expense), net ...............................       (741,684)        842,558
                                                                ---------------------------
        Total consolidated net income .......................   $  1,245,689    $  1,137,895
                                                                ============================
</TABLE>

                                       34
<PAGE>

Note 16. Purchases of Railroad Facilities

On  February  20,  2001,  the  Company,   through  its  wholly-owned  subsidiary
Gettysburg & Northern  Railroad Co., acquired for $1,604,700 the railroad assets
of the former  Gettysburg  Railway,  Inc., and the Gettysburg Scenic Railway and
assumed  $4,700 of  liabilities  in a transaction  accounted for by the purchase
method of  accounting.  The fair value of the assets  acquired of $1,604,700 was
allocated to the track assets  acquired.  The operating  results of the acquired
company  have been  included in the  consolidated  statement of income since the
date of acquisition.  The Company  financed this  acquisition with $1,600,000 of
long-term borrowings.

Unaudited  pro  forma  consolidated  results  of  operation  for the year  ended
December 31, 2001, as though the  aforementioned  acquisition had occurred as of
January 1, 2001, follows:

                                                                         2001
                                                                     -----------

Railway operating revenue ..............................             $14,557,004
Net income .............................................               1,101,033
Earnings per common share ..............................                    0.24

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

Note 17. Accounting Change

In June 2001, the Financial  Accounting  Standards Board (FASB) issued Statement
No. 142,  "Goodwill and Other Intangible  Assets." Under FASB No. 142,  goodwill
and intangible assets that management  concludes has indefinite useful lives are
no longer amortized,  but will be subject to impairment tests performed at least
annually.  FASB No.  142 also  requires  that an  acquired  intangible  asset be
separately recognized if the benefit of the intangible asset is obtained through
contractual  or other legal rights,  or if the assets can be sold,  transferred,
licensed,  rented,  or exchanged,  regardless of the Company's  intent to do so.
Effective  January 1, 2002, the Company adopted FASB No. 142 and determined that
no transitional impairment loss was required at January 1, 2002.

The  Company  performed  the first of the annual  required  impairment  tests of
goodwill as of December 31, 2002,  and,  based on  management  estimates of fair
value of the  entity,  there  was no  reduction  in the  carrying  amount of the
goodwill  previously  recognized.  The Company  did not  acquire any  additional
goodwill during 2002.

In the  consolidated  balance  sheet as of December 31, 2002 and 2001,  goodwill
totaled $1,017,430.

The  following  table  presents  pro forma net  income and  earnings  per share,
exclusive of goodwill amortization expense:

                                                            December 31,
                                                  ------------------------------
                                                        2002              2001
                                                  ------------------------------

Reported net income ..........................    $   1,245,689    $   1,137,895
Add back goodwill amortization, net of tax ...               --           22,500
                                                  ------------------------------

Adjusted net income ..........................    $   1,245,689    $   1,160,395
                                                  ==============================

Basic earnings per share:
  Reported net income ........................    $        0.28    $        0.25
  Add back goodwill amortization .............               --             0.01
                                                  ------------------------------

Adjusted net income ..........................    $        0.28    $        0.26
                                                  ==============================

Fully diluted earnings per share:
  Reported net income ........................    $        0.28    $        0.25
  Add back goodwill amortization .............               --             0.01
                                                  ------------------------------

Adjusted net income ..........................    $        0.28    $        0.26
                                                  ==============================

                                       35
<PAGE>

Note 18. New Accounting Pronouncements

In July 2001, the FASB issued Statement of Financial Accounting Standards (SFAS)
No.  141,  "Business  Combinations"  (SFAS  No.  141).  SFAS No.  141  addresses
financial accounting and reporting for business  combinations,  and is effective
for all business  combinations  initiated after June 30, 2001. Effective January
1, 2002,  the Company  adopted  SFAS No. 141. The Company did not enter into any
business combinations after June 30, 2001, and, therefore,  the adoption of SFAS
No. 141 had no effect on the Company's financial statements.

In  October  2001,  the FASB  issued  Statement  No.  144,  "Accounting  for the
Impairment or Disposal of Long-Lived  Assets"  (FASB No. 144).  This  supersedes
FASB No.  121,  "Accounting  for the  Impairment  of  Long-Lived  Assets and for
Long-Lived  Assets and for Long-Lived Assets to be Disposed Of," and APB Opinion
No. 30, "Reporting the Results of Operations - Reporting the Effects of Disposal
of  a  Segment  of a  Business,  and  Extraordinary,  Unusual  and  Infrequently
Occurring Events and Transactions," for the disposal of a segment of a business.
FASB No. 144 also amends ARB No. 151,  "Consolidated  Financial Statements," and
was adopted effective January 1, 2002. The adoption of this accounting  standard
did  not  have  a  material  effect  on  the  Company's  consolidated  financial
state-ments.

In August  2001,  the FASB  issued  Statement  No.  143,  "Accounting  for Asset
Retirement  Obligations." FASB No. 143 amends FASB No. 19, "Financial Accounting
and  Reporting  by Oil and Gas  Producing  Companies."  It  addresses  financial
accounting  and  reporting for  obligations  associated  with the  retirement of
tangible,  long-lived  assets and the associated asset retirement  costs, and is
effective for financial  statements issued for fiscal years beginning after June
15, 2002.  The Company has not yet completed its full  assessment of the effects
of this new pronouncement on its financial  statements and so is uncertain as to
the impact.

In June  2002,  SFAS No.  146,  "Accounting  for Costs  Associated  with Exit or
Disposal  Activities," was issued.  SFAS No. 146 supersedes Emerging Issues Task
Force  ("EITF")  Issue No. 94-3,  "Liability  Recognition  for Certain  Employee
Termination  Benefits  and Other  Costs to Exit an Activity  (including  Certain
Costs Incurred in a Restructuring)."  SFAS No. 146 requires that a liability for
a cost  associated  with an exit or  disposal  activity be  recognized  when the
liability is incurred.  Under SFAS No. 146, an entity's commitment to a plan, by
itself,  does not create an obligation that meets the definition of a liability.
SFAS  No.  146  also  establishes  fair  value  as  the  objective  for  initial
measurement of the  liability.  The provisions of SFAS No. 146 are effective for
exit or disposal  activities that are initiated after December 31, 2002. As SFAS
No. 146 only applies to prospective  items, the Company believes the adoption of
SFAS No. 146 will not have a material impact on the Company's financial position
or results of operations.

In December 2002, the Financial  Accounting Standards Board issued SFAS No. 148,
"Accounting  for  Stock-Based  Compensation  - Transition  and  Disclosure,"  an
amendment of SFAS No. 123, "Accounting for Stock-Based  Compen-sation." SFAS No.
148 provides  alternative  methods of transition  for a voluntary  change to the
fair value method of  accounting  for  stock-based  employee  compensation.  The
Company does not expect to adopt the fair value  method.  In addition,  SFAS No.
148  requires  the Company to  disclose  in both  annual and  interim  financial
statements the method of accounting for stock-based  compensation and the effect
of the method used on the Company's reported results.  SFAS No. 148 is effective
for annual and interim  periods  ending after December 15, 2002. The adoption of
SFAS No. 148 did not have a material  impact on the Company's 2002  consolidated
financial  statements  and is not  expected  to have a  material  impact  on the
Company's future consolidated financial statements.

In November  2002,  FASB  Interpretation  No. 45,  "Guarantor's  Accounting  and
Disclosure  Requirements  for  Guarantees,   Including  Indirect  Guarantees  of
Indebtedness of Others" (FASB Interpretation No. 45), was issued. The disclosure
requirements  are  effective  for  financial  statements  of interim  and annual
periods ending after December 15, 2002. The initial  measurement and recognition
provisions  are  required  to be applied on a  prospective  basis to  guarantees
issued or modified  after  December  31,  2002.  They  require  that a guarantor
recognize,  at the  inception of a guarantee,  a liability for the fair value of
the  obligation  undertaken  in issuing the  guarantee.  Under prior  accounting
principles,  a guarantee  would not have been  recognized as a liability until a
loss was probable and reasonably  estimable.  As FASB Interpretation No. 45 only
applies to prospective  transactions,  the Company believes that the adoption of
FASB  Interpretation  No. 45 will not have a  material  impact on the  Company's
financial position or results of operations.

In January 2003, FASB Interpretation No. 46, "Consolidation of Variable Interest
Entities" (FASB Interpretation No. 46), was issued. It clarifies the application
of Accounting Research Bulletin No. 51, "Consolidated  Financial Statements," to
certain  entities  in which  the  equity  investors  do not  have a  controlling
financial interest or do not have sufficient equity at risk. FASB Interpretation
No. 46 is effective on January 31, 2003, for entities  acquired after such date.
The effective  date for entities  acquired on or before January 31, 2003 is July
1, 2003.  The Company has not  completed  its full  assessment of the effects of
FASB Interpretation No. 46 on its financial statements and so it is uncertain as
to the impact.


                                       36
<PAGE>

Item 8. Changes In and Disagreements With Accountants on Accounting Financial
        Disclosure

None.

PART III

Item 9.  Directors and Executive Officers of the Registrant

Set  forth  below  are the names  and ages of all the  directors  and  executive
officers of the Registrant and the positions and offices held by such persons as
of December 31, 2002.

Name (Age)                          Position

-------------------------------------------------------------------

Guy L. Brenkman (55)                Director (Chairman) & President
J. Michael Carr (38)                Director & Treasurer
Orvel L. Cox (60)                   Director
Clifton T. Lopez (57)               Director
John S. Fulton (70)                 Director
Scott Isonhart  (36)                Secretary

All of the above Directors and Officers, with the exception of Clifton T. Lopez,
were elected at the Annual  Meeting of the  Stockholders  (and the board meeting
which  followed)  on June 26, 2002 to serve until the 2003 annual  meeting.  Mr.
Lopez was  appointed  by the  Board to  complete  the term and fill the  vacancy
created by the resignation of William  Sharpe.  Mr. Sharpe resigned for personal
reasons and was not in conflict with the Board or Company  management.  There is
no family relationship between any officer or director.

Information about Directors and Executive Officers

Mr.  Brenkman,  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.

Mr.  Carr,  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.

Mr. Cox, Director,  also serves as same for each of the Company's  subsidiaries.
Mr. Cox has 43 years of active  railroading  experience  with 31 of those  years
working for Class I railroads.  Mr. Cox retired from employment with the Company
in 2002.  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. Mr. Cox is a member of the Audit Committee.

Clifton T. Lopez,  Director, was appointed to the board in August 2002. Mr Lopez
works as a consultant,  currently supporting the tax departments at Monsanto and
Pharmacia  Corp. in St. Louis,  MO. Mr. Lopez has over 30 years of experience in
accounting,  finance, and planning. Mr. Lopez has a BA-Accounting and Management
from Virginia  Commonwealth  University,  Richmond,  VA. In addition,  Mr. Lopez
served 5 years in the  military,  and  resigned  commission  as a Captain in the
Transportation Corp.,  associated with the transportation  business in the areas
of  trucking,  rail,  water  and  aircraft.  Mr.  Lopez is a member of the Audit
Committee  and  is  considered  the  Audit  Committee  financial  expert  of the
committee.

Mr. Fulton,  Director, was elected to the Board in 1993. Mr. Fulton has 19 years
experience  in the real estate  business  concentrating  in retail  sales,  real
estate  development and  appraising.  Mr. Fulton's  previous  positions  include
industrial  appraising (6 years) with Cole, Layer Trumble of Dayton, Ohio, and 5
years with  Pepsi-Cola.  Mr.  Fulton holds a BS degree in Public  Administration
from Bradley University in Peoria, Illinois. Mr. Fulton is a member of the Audit
Committee.

                                       37
<PAGE>

Mr.  Isonhart,  Assistant  Secretary,  also  serves  as same  for the  Company's
subsidiaries.  Mr.  Isonhart has been employed in the finance  department of the
Company  since  May 1993 and has a  BS-Accounting  from  Bradley  University  in
Peoria, Illinois.

Item 10.  Executive Compensation

Summary Compensation Table

                              Annual

                           Compensation   Long Term Compensation

                         ---------------  -----------------------
                                          Restricted

Name &                                      Stock                      Other
Position                 Year    Salary     Award    Options/SARs   Compensation
--------------------------------------------------------------------------------
Guy L. Brenkman, CEO     2002   $648,952     ----         ----           $ 0
                         2001   $654,267     ----         ----           $ 0
                         2000   $532,341     ----         ----           $ 0



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                                       38
<PAGE>

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           0/ 80,000                $0/$0
</TABLE>

In December  1993,  the Company  entered into a five-year  executive  employment
contract with the Company's president,  which was extended through December 2006
by the Board of Directors.  The agreement provides for a base salary with annual
inflation adjustments based upon the Consumer Price Index. The current agreement
provides for twelve weeks paid vacation each year. The president at his election
can be paid for any unused vacation during the year.  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, 2003, the president's base salary was $521,816.  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 accept a consulting  position with the Company whereby
he would be  compensated  the equivalent of one year's salary for the consulting
services rendered.

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.            11/13/96             01/01/98
Michigan Southern Railroad              12/19/96             01/01/97
Pioneer Industrial Railway Co.          02/18/98         No Raise Taken
The Garden City Western Railway Co.     04/29/99             05/01/99
Indiana Southwestern Railway Co.        04/01/00             01/01/01
Gettysburg & Northern Railroad CO.     02/20/01         No Raise Taken

                                       39
<PAGE>

Directors of the Registrant each were compensated $5,000 in 2002.

Item 11.  Security Ownership of Certain Beneficial Owners and Management

The following table sets forth information, as of March 25, 2003, 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 25,  2003  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)             3,483,503        39.94%
          Orvel L. Cox (3)                  183,869         2.11%
          John S. Fulton (4)                 26,400          .30%
          J. Michael Carr (5)                37,414          .43%
          Scott Isonhart (6)                  5,100          .06%
          Clifton T. Lopez                    1,000          .01%
                                          ---------------------------
          Directors and Executive

            Officers as a Group:          3,737,286         42.85%(1)

FOOTNOTES:

(1)  Based on 8,721,499 shares of common stock and equivalents outstanding as of
     March 25, 2003.

(2)  Of the total  number of shares  shown as owned by Mr.  Brenkman,  1,740,800
     shares represent the number of shares Mr. Brenkman has the right to acquire
     within 60 days through the exercise of warrants and 33,003  represents  the
     number of shares  Mr.  Brenkman  has the  right to  acquire  within 60 days
     through the  exercise of stock  options.  Mr.  Brenkman  owns all shares in
     joint  tenancy  with his wife.  In  addition,  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,  101,770  shares
     represent  the number of shares Mr. Cox has the right to acquire  within 60
     days through the exercise of warrants and 20,000  represents  the number of
     shares Mr. Cox has the right to acquire within 60 days through the exercise
     of stock  options.  Mr.  Cox's  shares are owned in joint  tenancy with his
     wife.

(4)  Of the total number of shares shown as owned by Mr.  Fulton,  10,200 shares
     represent the number of shares Mr.  Fulton has the right to acquire  within
     60 days upon the  exercise of warrants and 5,000  represents  the number of
     shares  Mr.  Fulton  has the right to acquire  within 60 days  through  the
     exercise of stock options.

(5)  Of the total  number of shares  shown as owned by Mr.  Carr,  1,000  shares
     represent the number of shares Mr. Carr has the right to acquire  within 60
     days through the exercise of warrants and 36,364  represents  the number of
     shares  Mr.  Carr has the  right to  acquire  within  60 days  through  the
     exercise of stock options.

(6)  Of the total  number of shares shown as owned by Mr.  Isonhart,  100 shares
     represent the number of shares Mr. Isonhart has the right to acquire within
     60 days through the exercise of warrants and 5,000 represents the number of
     shares Mr.  Isonhart  has the right to acquire  within 60 days  through the
     exercise of stock options.

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  representations  of its  directors  and  executive  officers,  the  Company
believes  that  during the years  ended  December  31, 2002 and 2001 all Section
16(a) filing requirements were satisfied.

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                                       40
<PAGE>

Item 13.  Exhibits and Reports on Form 8-K

Exhibit # 3(I) - Articles  of  Incorporation  of the  Company  (incorporated  by
reference to Exhibit 1 of the Company's registration statement of Form S-3 filed
July 7, 1995,  amended  August 30, 1995,  September  20, 1995 and  September 25,
1995).

Exhibit # 3(ii) - Bylaws of the Company (incorporated by reference to Exhibit #2
of the Company's registration statement on Form S-8 filed January 31, 1996).

Exhibit # 10.1 - 1994 Stock Option Plan for Pioneer  Railcorp  (incorporated  by
reference  to Exhibit #3 of the  Company's  registration  statement  on Form S-8
filed January 31, 1996).

Exhibit # 10.2 - Form of incentive stock option under the 1994 Stock Option Plan
for Pioneer  Railcorp  (incorporated by reference to Exhibit #4 of the Company's
registration statement on Form S-8 filed January 31, 1996).

Exhibit # 10.3 - Form of option agreement for  non-employee  Directors under the
1994 Stock  Option Plan for  Pioneer  Railcorp  (incorporated  by  reference  to
Exhibit #5 of the Company's registration statement on Form S-8 filed January 31,
1996).

Exhibit # 10.4 - Executive Contract  (incorporated by reference to the Company's
Form 10-KSB for the year ended December 31, 1994, filed March 31, 1995,  amended
August 31, 1995 and September 20, 1995).

Exhibit # 10.5 - 1996 Stock Option Plan for Pioneer  Railcorp  (incorporated  by
reference  to the  Company's  Form 10-KSB for the year ended  December 31, 1996,
filed March 31, 1997).

Exhibit # 10.6 - Form of incentive stock option under the 1996 Stock Option Plan
for Pioneer Railcorp (incorporated by reference to the Company's Form 10-KSB for
the year ended December 31, 1996, filed March 31, 1997).

Exhibit # 10.7 - Form of option agreement for  non-employee  Directors under the
1996 Stock Option Plan for Pioneer  Railcorp  (incorporated  by reference to the
Company's  Form 10-KSB for the year ended  December  31,  1996,  filed March 31,
1997).

Exhibit # 21 - Subsidiaries of the registrant.

No reports were filed on Form 8-K during the fourth quarter 2002.

Exhibit 99.1 - Certification pursuant to U.S.C. 18 section 1350.

Item 14. CONTROLS AND PROCEDURES

                                       41
<PAGE>

(a)  Evaluation  of  disclosure   controls  and   procedures:   Based  on  their
     evaluations  as of a date within 90 days of the filing date of this report,
     the  principal  executive  officer and principal  financial  officer of the
     Company  have  concluded  that  the  Company's   disclosure   controls  and
     procedures  (as  defined  in  Rules   13a-14(c)  and  15d-14(c)  under  the
     Securities Exchange Act) are effective to ensure that information  required
     to be disclosed by the Company in reports that the Company files or submits
     under the Securities  Exchange Act is recorded,  processed,  summarized and
     reported  within the time  periods  specified in the rules and forms of the
     SEC.

(b)  Changes in  internal  controls:  There were no  significant  changes in the
     Company's  internal  controls or in other factors that could  significantly
     affect these internal controls  subsequent to the date of their most recent
     evaluation,  including any  corrective  actions with regard to  significant
     deficiencies and material weaknesses.

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                                       42
<PAGE>

SIGNATURES

Pursuant to the requirements of Section 13 or 15 (d) of the Securities  Exchange
Act of 1934,  the  Registrant  has duly  caused  this report to be signed on its
behalf by the undersigned thereunto duly authorized.

PIONEER RAILCORP
(Registrant)


By: /s/ Guy L. Brenkman

    ----------------------------------------
    Guy L. Brenkman, President,
    Chief Executive Officer and Director

Dated: March 25, 2003

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following  persons on behalf of the  Registrant and
in the capacities and on the dates indicated.

By: /s/ J. Michael Carr

    --------------------------------------
    J. Michael Carr, Treasurer,
    Chief Financial Officer and Director

Dated: March 25, 2003

By: /s/ Orvel Cox

    --------------------------------------
    Orvel Cox, Director

Dated: March 25, 2003

By: /s/ John Fulton

    --------------------------------------
    John Fulton, Director

Dated: March 25, 2003


                                       43
<PAGE>

CERTIFICATIONS PURSUANT TO SECTION 302 OF THE SARBANES - OXKLEY ACT OF 2002

Certification by the Chief Executive Officer:

I, Guy L. Brenkman certify that:

1.   I have reviewed this annual report on Form 10-KSB of Pioneer Railcorp;

2.   Based on my  knowledge,  this annual report on Form 10-KSB does not contain
     any untrue  statement of a material  fact or omit to state a material  fact
     necessary to make the statements made, in light of the circumstances  under
     which such  statements were made, not misleading with respect to the period
     covered by this annual report;

3.   Based on my  knowledge,  the  financial  statements,  and  other  financial
     information  included in this annual report on Form 10-KSB,  fairly present
     in all material respects the financial condition, results of operations and
     cash flows of the registrant as of, and for, the periods  presented in this
     annual report;

4.   The  registrant's  other  certifying  officers  and I are  responsible  for
     establishing and maintaining disclosure controls and procedures (as defined
     in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

     a)   designed  such  disclosure  controls  and  procedures  to ensure  that
          material  information  relating  to  the  registrant,   including  its
          consolidated subsidiaries,  is made known to us by others within those
          entities,  particularly  during the period in which this annual report
          is being prepared;

     b)   evaluated the  effectiveness of the registrant's  disclosure  controls
          and procedures as of a date within 90 days prior to the filing date of
          this annual report (the "Evaluation Date"); and

     c)   presented   in  this   annual   report  our   conclusions   about  the
          effectiveness  of the disclosure  controls and procedures based on our
          evaluation as of the Evaluation Date;

5.   Theregistrant's  other certifying  officers and I have disclosed,  based on
     our most recent  evaluation,  to the  registrant's  auditors  and the audit
     committee of  registrant's  board of directors (or persons  performing  the
     equivalent function):

     a)   all  significant  deficiencies  in the design or operation of internal
          controls  which could  adversely  affect the  registrant's  ability to
          record,  process,   summarize  and  report  financial  data  and  have
          identified for the  registrant's  auditors any material  weaknesses in
          internal controls; and

     b)   any fraud, whether or not material,  that involves management or other
          employees who have a  significant  role in the  registrant's  internal
          controls; and

6.   Theregistrant's  other  certifying  officers  and I have  indicated in this
     annual report whether there were significant  changes in internal  controls
     or in other  factors  that could  significantly  affect  internal  controls
     subsequent  to the  date  of our  most  recent  evaluation,  including  any
     corrective  actions with regard to  significant  deficiencies  and material
     weaknesses.

Date: March 25, 2003

/s/ Guy L. Brenkman

-----------------------
Guy L. Brenkman
Chief Executive Officer


                                       44
<PAGE>

Certification by the Chief Financial Officer:

I, J. Michael Carr, certify that:

     1.   I have reviewed this annual report on Form 10-KSB of Pioneer Railcorp;


2.   Based on my  knowledge,  this annual report on Form 10-KSB does not contain
     any untrue  statement of a material  fact or omit to state a material  fact
     necessary to make the statements made, in light of the circumstances  under
     which such  statements were made, not misleading with respect to the period
     covered by this annual report;

3.   Based on my  knowledge,  the  financial  statements,  and  other  financial
     information  included in this annual report on Form 10-KSB,  fairly present
     in all material respects the financial condition, results of operations and
     cash flows of the registrant as of, and for, the periods  presented in this
     annual report;

4.   The  registrant's  other  certifying  officers  and I are  responsible  for
     establishing and maintaining disclosure controls and procedures (as defined
     in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

     a)   designed  such  disclosure  controls  and  procedures  to ensure  that
          material  information  relating  to  the  registrant,   including  its
          consolidated subsidiaries,  is made known to us by others within those
          entities,  particularly  during the period in which this annual report
          is being prepared;

     b)   evaluated the  effectiveness of the registrant's  disclosure  controls
          and procedures as of a date within 90 days prior to the filing date of
          this annual report (the "Evaluation Date"); and

     c)   presented   in  this   annual   report  our   conclusions   about  the
          effectiveness  of the disclosure  controls and procedures based on our
          evaluation as of the Evaluation Date;

5.   Theregistrant's  other certifying  officers and I have disclosed,  based on
     our most recent  evaluation,  to the  registrant's  auditors  and the audit
     committee of  registrant's  board of directors (or persons  performing  the
     equivalent function):

     a)   all  significant  deficiencies  in the design or operation of internal
          controls  which could  adversely  affect the  registrant's  ability to
          record,  process,   summarize  and  report  financial  data  and  have
          identified for the  registrant's  auditors any material  weaknesses in
          internal controls; and

     b)   any fraud, whether or not material,  that involves management or other
          employees who have a  significant  role in the  registrant's  internal
          controls; and

6.   The  registrant's  other  certifying  officers and I have indicated in this
     annual report whether there were significant  changes in internal  controls
     or in other  factors  that could  significantly  affect  internal  controls
     subsequent  to the  date  of our  most  recent  evaluation,  including  any
     corrective  actions with regard to  significant  deficiencies  and material
     weaknesses.

Date: March 25, 2003


/s/ J. Michael Carr

------------------------
J. Michael Carr
Chief Financial Officer


                                       45