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, 1998

                        Commission File Number 33-6658-C

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

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

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

Registrant's telephone number:     309-697-1400

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

Title of each Class Name of each  exchange  on which  registered  Common  Stock,
Class A Nasdaq 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, 1998 were $13,514,428

The  aggregate  market  value of  voting  stock  held by  non-affiliates  of the
Registrant on March 19, 1999 was $12,799,249

                                    4,610,597
             -------------------------------------------------------
             (Shares of Common Stock outstanding on March 19 , 1999)

<PAGE>



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.


             The remainder of this page is intentionally left blank

<PAGE>



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),  Wabash & Western  Railway  Co.  d/b/a  Michigan  Southern
Railroad  (MSO),  Fort Smith  Railroad Co. (FSR),  Alabama  Railroad Co. (ALAB),
Mississippi  Central  Railroad Co. (MSCI),  Alabama & Florida  Railway Co., Inc.
(AF),  Decatur  Junction  Railway Co. (DT),  Vandalia  Railroad  Company (VRRC),
Minnesota  Central  Railroad Co.  (MCTA),  Keokuk  Junction  Railway Co. (KJRY),
Rochelle  Railroad Co. (RRCO),  Shawnee Terminal Railway Company (STR),  Pioneer
Industrial Railway Co. (PRY),  Pioneer Resources,  Inc. (PRI),  Pioneer Railroad
Equipment  Co., Ltd.  (PREL),  Pioneer Air,  Inc.  (PAR),  and Pioneer  Railroad
Services, Inc. (PRS).

The Company operates in two business  activities - railroad  transportation  and
railroad equipment leasing. Railroad transportation is 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 six major
railroads, Burlington Northern Santa Fe Railroad (BNSF), Conrail, Inc. (CR), CSX
Transportation  (CSX),  Illinois Central Railroad (IC), Norfolk Southern Railway
(NS) and Union Pacific  Railroad  (UP).  Additionally,  the  Company's  railroad
subsidiaries  have  interchanges  with five smaller  railroads,  the Kansas City
Southern Railway (KCS), the Arkansas & Missouri Railroad (AM), the Twin Cities &
Western Railway (TCWR), the Toledo,  Peoria & Western Railway Corporation (TPW),
and Indiana Northeastern  Railroad Company (IN). PRC's rail system is devoted to
carrying  freight.  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 rail equipment to, and
repairs rail equipment owned by others.

Railroad Operations
-------------------

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.

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.

On April 1, 1992,  Pioneer  Railcorp  purchased  the common stock of the Natchez
Trace  Railroad  from  Kyle  Railways,  Inc.  The  railroad  runs  from  Oxford,
Mississippi to Grand Junction, Tennessee, a total of 56.5 miles, 51 of which are
located in Mississippi. The railroad interchanges with the 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 and cottonseed.
<PAGE>


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

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 Illinois  Central Railroad (IC) 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.

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

On December 12,  1994,  Pioneer  Railcorp's  wholly-owned  subsidiary  Minnesota
Central Railroad Co. acquired  certain assets of MNVA Railroad,  Inc. The assets
purchased included approximately 94 miles of operating railroad in south central
Minnesota.  The railroad  interchanges with the BNSF at Hanley Falls,  Minnesota
and the TCWR at Norwood,  Minnesota.  The railroad's  principal  commodities are
grain, clay, fertilizer, canned goods, dairy products, and particleboard.

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.  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.

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

On March 25, 1996, Pioneer Railcorp through its wholly-owned subsidiary Rochelle
Railroad Co. (RRCO) signed a one year lease with the city of Rochelle, Illinois,
to operate  approximately 2 miles of track serving the Rochelle Industrial Park.
The line interchanges with the BNSF and the UP. Train operations began April 15,
1996. The lease required RRCO to make monthly  payments to the city on a per car
basis and to maintain the trackage. The railroad's principal commodity is frozen
foods. The City of Rochelle,  Illinois,  terminated the Rochelle  Railroad Co.'s
lease  agreement  effective  January 19, 1998,  however,  Rochelle  Railroad Co.
continued to operate on the trackage until November 13, 1998 pending the outcome
of certain legal proceedings.

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


On December 19,  1996,  Pioneer  Railcorp  through its  wholly-owned  subsidiary
Wabash & Western Railway Co. signed a two year lease with the Michigan  Southern
Railroad Company, Inc., Morris Leasing, Inc., and Gordon D. Morris to operate 53
miles of track and certain railroad related assets.  The lease calls for a fixed
monthly  payment  for the  equipment  assets  leased  and a per car  charge  for
railroad usage.  The lease contains 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 1, 1999. The railroad is
comprised  of three  separate,  non-contiguous  lines,  one  located in southern
Michigan  and  two  located  in  northern  Indiana.   All  lines  have  separate
interchanges with Conrail.  The Michigan line also interchanges with the Indiana
Northeastern  Railroad Company. The railroad's  principal  commodities are scrap
paper, scrap iron, fertilizer, plastics, plywood, sugar and corn syrup.

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),  effective  February 18, 1998. The lease expires in July 2004.
PPHW is owned by the City of Peoria, Illinois and the village of Peoria Heights,
Illinois.  The Pioneer  Industrial Railway Co. has improved the condition of the
track since assuming  operation and overall the track is now considered to be in
good condition. The railroad's principal commodities are steel, salt, lumber and
plastic pellets.

Railroad Equipment Leasing
--------------------------

Pioneer Railroad Equipment Co., Ltd. (PREL),  which was formed on April 1, 1990,
leases equipment to the Company's subsidiary railroads and also purchases, sells
and leases equipment to and from unrelated parties.  PREL also earns income from
non-company railroads on its fleet of approximately 980 railcars (as of December
31, 1998) when they carry freight on non-company railroads.
PREL also engages in retail sales of promotional items.

Corporate Support Operations
----------------------------

Other corporate  support  operations  engaged in by the Company are performed by
its  wholly  owned  subsidiaries,   Pioneer  Railroad  Services,  Inc.,  Pioneer
Resources,  Inc., and Pioneer Air, Inc.  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.  was formed on December 30, 1993 to manage
real estate and auxiliary resources for Company subsidiaries.  Pioneer Air, Inc.
was formed on August 5, 1994 and currently  owns a Cessna 421B aircraft which is
used by Pioneer Railcorp subsidiaries exclusively for Company business travel.

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. At the end of 1998, the Company had two full-time
marketing employees. The Company's attention to marketing has earned recognition
in industry  publications,  Class I railroads,  and smaller rail  carriers.  The
Company's marketing  department along with the Company's  operations 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.
<PAGE>


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 operations 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), (4) the quality of the Company's  employees,  and (5) Pioneer  Railcorp's
$2.5 million acquisition line of credit.

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,  1998,  the Company had 108  employees  which  consisted  of 83
operating personnel, 20 support staff and 5 executive officers.

During  1994,  the  employees  of  the  FSR  voted  for  union   representation.
Negotiations with the American Train  Dispatchers  Department of the Brotherhood
of  Locomotive  Engineers  (BLE) reached an impasse and no contract was reached.
The BLE was  decertified  on March 4, 1998 by the National  Mediation  Board and
there is no union representation for the FSR employees.
<PAGE>



Item 2.  Property

In October 1994, the Company  purchased a 16,000 square foot building located in
Peoria,  Illinois as a permanent 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, 1998 by
subsidiary follows:

A.)  Fort Smith Railroad Co. (FSR): The FSR leases 18 miles of railroad from the
     Union  Pacific  Railroad  Company.  A twenty  year  lease  was  signed  and
     operations begun on July 7, 1991. 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 assets and subsidiary stock
     are pledged in various  financing  agreements.  The Company  considers  the
     track to be in good condition.

C.)  Mississippi  Central  Railroad  Co.  (MSCI):  The  MSCI  is 56.5  miles  of
     operating  railroad  running from Oxford,  Mississippi  to Grand  Junction,
     Tennessee.  Approximately 51 miles of the track are located in Mississippi.
     The  assets  and  subsidiary   stock  are  pledged  in  various   financing
     agreements. The Company considers the track to be in good condition.

D.)  Alabama & Florida  Railway Co., Inc.  (AF): The AF is 76 miles of operating
     railroad  running  from  Georgiana 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 $2,305. The Company has exclusive rights to the revenues derived
     from the land leases and  easements.  In  connection  with the operation of
     this line, the AF also leases from the Andalusia & Conecuh Railroad Company
     a two mile  segment  of track  connecting  to the AF's  line in  Andalusia,
     Alabama  for a  nominal  fee.  The  Company  also  absorbs  the cost of all
     maintenance of that facility.  The assets and subsidiary  stock are pledged
     in a  financing  agreement.  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  Illinois   Central   Railroad
     (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,
     as in recent years the owners of the line  received in excess of $1,000,000
     in rehabilitation grants from the Federal Railroad Administration (FRA).

F.)  Vandalia Railroad Company (VRRC):  The VRRC is approximately  3.45 miles of
     operating railroad located in Vandalia, Illinois. The VRRC has a lease with
     the City of Vandalia for the 3.45 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.
<PAGE>


G.)  Minnesota  Central Railroad Co. (MCTA):  The MCTA is approximately 94 miles
     of operating railroad running from Hanley Falls to Norwood,  Minnesota. The
     assets and subsidiary  stock are pledged in various  financing  agreements.
     Certain  sections of the line are in poor  condition and the Company made a
     significant  effort to improve  the line in 1995 and 1996,  and did in fact
     significantly  improve a continuous  20 mile section of the  railroad.  The
     remaining sections of line are in poor condition.  During 1997, the Company
     was   awarded  a  $396,000   grant  from  the   Minnesota   Department   of
     Transportation which is funded with federal disaster funds from the Federal
     Railroad   Administration   pursuant  to  the  Federal   Fiscal  Year  1997
     Supplemental  Appropriations Act. The grant was designed to aid the Company
     with the labor and material costs of rehabilitating and repairing track and
     bridge  structures  belonging to the Minnesota  Central  Railroad Co. which
     were damaged by severe weather  conditions during the 1996-1997 winter. The
     Company continues  negotiations  with the State of Minnesota  Department of
     Transportation  (MNDOT) for up to  approximately  $4.2  million of interest
     free  financing to  rehabilitate  the entire  line.  As of the date of this
     report,  the outcome of these  negotiations is uncertain and the Company is
     continuing to evaluate its options concerning the MCTA including  repairing
     a portion of the line using its own capital resources.

H.)  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.

I.)  Keokuk  Junction  Railway Co.  (KJRY):  The 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.  The assets and  subsidiary  stock are  pledged in
     various  financing  agreements.  The  track  is  considered  to be in  good
     condition.

J.)  Rochelle Railroad Co. (RRCO): The RRCO leased and operated  approximately 2
     miles of railroad serving the Rochelle  Industrial Park located in the City
     of Rochelle,  Illinois.  The track was considered to be in good  condition.
     The City of Rochelle,  Illinois,  terminated  the Rochelle  Railroad  Co.'s
     lease agreement effective January 19, 1998, however,  Rochelle Railroad Co.
     continued  to operate on the trackage  until  November 13, 1998 pending the
     outcome of certain legal proceedings.

K.)  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.

L.)  Wabash & Western  Railway Co. d/b/a/ Michigan  Southern  Railroad (MSO): On
     December 19, 1996,  Pioneer Railcorp,  through its wholly-owned  subsidiary
     Wabash & Western  Railway  Co.,  signed a two year lease with the  Michigan
     Southern Railroad Company, Inc. (MSRR), Morris Leasing Co., Ltd. and Gordon
     D. Morris to operate 53 miles of track and certain railroad related assets.
     The railroad is comprised of three separate,  non-contiguous lines totaling
     approximately  50 miles.  One line is 39 miles  long  extending  from White
     Pigeon to Coldwater,  Michigan,  of which  approximately  30 miles of track
     from  Sturgis to  Quincy,  Michigan  is owned by the Branch and St.  Joseph
     Counties Rail Users  Association  (RUA). The RUA leases that track to MSRR,
     which has contracted  with MSO to operate it. On January 7, 1999, MSRR gave
     notice to the RUA of the exercise of its option to purchase the segment. No
     closing  date has been set.  The two other  lines are  located in  northern
     Indiana: one at Elkhart, which is approximately 10 miles in length, and the
     other at Kendallville,  which is approximately 1 mile in length.  All lines
     are considered to be in good condition.  The lease required a fixed monthly
     payment for the equipment  assets and a per car charge for railroad  usage.
     Effective  January 1, 1999, MSO purchased all of the stock of the MSRR from
     Gordon D. Morris.

M.)  Pioneer   Industrial   Railway  Co.:  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  considerably  improved the condition of the track since
     assuming operation and, overall,  the track is now considered to be in good
     condition.

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


Item 3.  Legal Proceedings

During  1998,  the Rochelle  Railroad  Co.,  settled all of the actions  pending
between it and the City of Rochelle,  Illinois, and ceased operating the line in
November 1998. The settlement in itself did not have a material,  adverse effect
upon the  Company's  results of  operations,  but the  termination  of  railroad
operations will significantly decrease operating revenues and operating income.

In the course of business, the Company experiences crossing accidents,  employee
injuries,  delinquent and/or disputed accounts, and other incidents,  which give
rise to claims  that may result in  litigation.  Management  vigorously  pursues
settlement and release of such claims, but at any one time, some such incidents,
which could  result in lawsuits by and against the Company,  remain  unresolved.
Management believes it has valid claims for, or good defenses to, these actions.
Management considers such claims to be a routine part of the Company's business.

As of the date of this Form  10-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 1998.

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 for the periods below are as follows:

         97-1Q   97-2Q    97-3Q    97-4Q    98-1Q    98-2Q   98-3Q   98-4Q
         -----------------------------------------------------------------

High     $2.63   $2.13    $1.88    $1.88    $1.75    $2.25   $1.81   $1.75
Low      $1.75   $1.13    $1.38    $1.32    $1.25    $1.39   $1.19   $1.00

As of December 31, 1998,  the Company had 1,814 common  stockholders  of record,
including brokers who hold stock for others. No common stock cash dividends have
been declared or paid.

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.


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 and 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 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 of approximately $2,564,000 in 1998 and $1,760,000 in 1997.
<PAGE>


Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
---------------------------------------------------------------------

The Company's  net income in 1998  increased by 16% to $425,000 up from $366,000
in 1997.  Revenue increased by $735,000 or 6% to $13,514,000 from $12,779,000 in
1997. Operating expense increased in 1998 by $694,000 or 6%, to $11,504,000 from
$10,810,000 in the prior year. Operating income increased in 1998 by $41,000, or
2% to $2,010,000 from $1,969,000 in the prior year.

Operating income was increased in 1998 by both the Company's railroad operations
and equipment leasing operations.  The railroad  operations  increased operating
income by  approximately  $56,000 in 1998 and the equipment  leasing  operations
increased  operating  income  approximately  $300,000  in 1998,  primarily  from
increased  utilization of its railcar fleet by non-affiliated  railroads.  These
increases  in operating  income were offset by an increase in corporate  support
services operating expense of approximately $315,000.

Revenue:

Revenue increased in 1998 by $735,000, or 6%, to $13,514,000 from $12,779,000 in
the prior year.  The  railroad  operations  increased  revenue by  approximately
$214,000 in 1998.  Several  operating  railroad  subsidiaries  had  increases in
revenues  primarily  resulting  from  increased  loadings.   Some  of  the  more
significant  increases in revenues include $155,000 from the Pioneer  Industrial
Railway which began  operations in February of 1998,  $130,000 from the Michigan
Southern  Railroad,  $115,000  from the Keokuk  Junction,  and $163,000 from the
Alabama  Railroad.  However,  the Minnesota  Central  Railroad had a decrease in
revenues of approximately  $324,000 in 1998,  recording  revenues of $831,000 in
1998  compared to  $1,155,000  in the previous  year.  The decrease in Minnesota
Central  Railroad  revenue  resulted from  decreased  loadings of grain and clay
resulting from market  conditions  (grain) and track  conditions.  The equipment
leasing operations had a $510,000 increase in revenue in 1998 from the increased
utilization of its railcars by non-affiliated railroads.

Operating Expense:

Operating  expense  increased  in 1998 by  $694,000 or 6%, to  $11,504,000  from
$10,810,000  in the prior year.  The  railroad  operations  increased  operating
expense by approximately  $160,000 in 1998, of which  approximately  $141,000 is
attributable to the new operating  subsidiary,  Pioneer Industrial Railway.  The
equipment leasing operations increased operating expense approximately $210,000,
primarily  from  increased  maintenance  on  the  railcar  fleet  and  increased
depreciation  expense.  Corporate support services  increased  operating expense
approximately  $327,000,  primarily  related to  professional  services,  public
relations,  and  increased  payroll  expenses  related to hiring  and  retaining
support personnel.

Maintenance  of way and structures  expense (MOW)  increased  $10,000,  or 1% to
$1,351,000 from $1,341,000 in the prior year.  Several  railroad  operations had
modest  increases in MOW  resulting  from  increased  track  maintenance.  These
increases  were  offset by a decrease in MOW  expense by the  Minnesota  Central
Railroad of approximately  $125,000 resulting  primarily from the capitalization
of labor related to MCTA track rehabilitation expenditures in 1998.

Maintenance of equipment  expense (MOE) increased  $86,000,  or 6% to $1,621,000
from $1,535,000 in the prior year. The equipment  leasing  operations  increased
MOE expense  approximately  $117,000 as a result of increased  costs  associated
with  maintaining  the Company's  railcar fleet.  The railroad  operations had a
decrease in MOE expense of approximately $55,000.

Transportation  expense  (TRAN)  increased  $198,000,  or 6% to $3,353,000  from
$3,155,000 in the prior year.  Most of the increased  TRAN expense was generated
by the railroad operations,  primarily from the Pioneer Industrial Railway which
had $104,000 of transportation expense during 1998.

General  &  administration   expense  (ADMIN)  increased  $312,000  in  1998  to
$3,595,000 or 10% from  $3,283,000,  in the prior year. The railroad  operations
were  responsible  for  approximately  $81,000 of the increased ADMIN expense in
1998. Corporate expenses related to professional services, public relations, and
other corporate  support  expenditures  increased ADMIN expense by approximately
$206,000 in 1998.

Depreciation and amortization  expense increased  $86,000,  or 6%, to $1,583,000
compared to $1,497,000 in the prior year.  Approximately $71,000 of the increase
is related to the growth of the Company's railcar fleet.
<PAGE>


Other Income and Expense Income Statement Line Item Discussion:

Other income and expense decreased $32,000 to $1,042,000  compared to $1,074,000
in the prior year. In 1998, approximately $197,000 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 $225,000 of lease
income in 1997, a decrease  increase of $28,000.  The decrease relates primarily
to  additional  lease  income in 1997  generated  from new leases that  included
revenues  in 1997 for lease  income for the use of  railroad  property  prior to
entering  into the lease  agreement.  The  Company  continues  to place a strong
emphasis on  identifying  and collecting  revenues from third parties  occupying
Company property. In addition to lease income, other income and expense includes
revenues  generated  from scrap  sales,  and other  miscellaneous  non-operating
revenues and expenses, primarily generated by the company's railroad operations.

Interest expense decreased $86,000 in 1998 to $1,298,000  compared to $1,384,000
in 1997.  The  equipment  leasing  operations  had a decrease  of  approximately
$30,000 in interest expense as a result of 1998  refinancing  activities to take
advantage of the  favorable  1998 interest  rate  environment  and the remaining
decrease in interest  expense  relates to the refinancing of the Keokuk Junction
Railway debt in late 1997.

Net  gain on fixed  asset  dispositions  decreased  $28,000  in 1998 to  $77,000
compared to $105,000 in 1997. In 1998, approximately $108,000 of the net gain on
fixed asset dispositions was attributable to the railroad  equipment  operations
and the  disposition of railcars.  In addition,  the corporate  operations had a
loss of approximately $28,000 from the sale of its former corporate headquarters
in Chillicothe, Illinois.

Impact of New Accounting Pronouncements:

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

Year 2000 Compliance:

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

The Company has  initiated  a program to ensure that all  computer  applications
will be Year 2000 compliant on a timely basis. The program includes  engaging an
outside  consultant  to  review  all  of the  Company's  computer  hardware  and
software,  as well as to confirm  with  significant  outside  vendors that their
products are Year 2000 compliant.  Based on this review the Company believes its
internal systems are Year 2000 compliant.

The Company relies  primarily on one third party software company whose software
is critical to daily  operations.  The Company  believes this third party vendor
will be Year 2000 compliant in a timely manner. If the third party vendor is not
Year 2000 compliant in a timely manner, it will have a materially adverse affect
on the Company. To date the Company is not aware of any unaffiliated entity with
a Year 2000  issue  that  would  materially  impact  the  Company's  results  of
operations,  liquidity, or capital resources.  However, the Company has no means
of  ensuring  that  unaffiliated  entities  will be  Year  2000  compliant.  The
inability  of  unaffiliated  entities  to  complete  their Year 2000  resolution
process in a timely fashion could materially impact the Company.

The Company has expended  approximately $49,000 to date on its resolution of the
Year 2000 compliance issue and estimates that less than $10,000 will be expended
to complete Year 2000 compliance.

As noted,  the Company will be dependent on  successful  resolution of Year 2000
issues by unaffiliated  entities.  Failure by one or more of these  unaffiliated
entities  to  successfully  resolve  the Year  2000  issue  could  result in the
mishandling  of revenue loads and delayed  collection of revenues.  In addition,
disruptions in the economy  generally  resulting from the Year 2000 issues could
also materially  adversely affect the Company. The amount of lost revenue as the
results of these events cannot  reasonably be determined at this time, but could
be material in nature.

The  Company  currently  has no  contingency  plans in place to address  unknown
shortcomings  in its internal  systems or those of  unaffiliated  entities.  The
Company  plans to  continually  evaluate  its Year 2000  situation  periodically
throughout the year.
<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  railcars,  new operating
subsidiaries, and other significant capital expenditures.

The Company has working capital facilities totaling $1,200,000 of which $974,000
was available for use at the end of 1998. In addition,  the Company believes the
market  value of its railcar  fleet is  significantly  higher then the amount of
debt associated with the railcar fleet. Therefore, the Company believes it could
refinance  or sell part of its  railcar  fleet and  generate up to $1 million in
cash.

In March 1996, the Company negotiated a credit facility with its primary bank to
provide  a $2.5  million  annual  revolving  acquisition  line of  credit.  This
facility is  collateralized  by the common stock of the Alabama Railroad Co. and
the  Mississippi  Central  Railroad Co., as well as the Company's  investment in
stock of any  subsidiaries  acquired  under the line.  The interest rate for the
line is currently  11%. The interest rate is  adjustable  quarterly to 2.5% over
New York Prime,  limited to a one percent  annual  increase or decrease,  not to
exceed  13.5% or be reduced  below 10%.  Any  amounts  drawn on the line must be
repaid  monthly over a seven year period.  Subsequent to the year ended December
31, 1998, on January 1, 1999,  the Company  borrowed $2.4 million on the line in
connection  with its  exercise of it purchase  option on the  Michigan  Southern
Railroad.

Long-term  equipment  financing has historically  been readily  available to the
Company for its railcar  acquisition  program.  The Company  believes it will be
able to continue obtaining  long-term equipment financing should the need arise.
The Company's  plans for new debt in the  foreseeable  future is contingent upon
new railroad acquisitions and increased needs and/or opportunities for railcars.
The Company does not expect to make  significant  additions to its railcar fleet
in 1999.

In the second quarter 1998 the Company took advantage of the favorable  interest
rate  environment  and refinanced  approximately  $3.3 million of debt which had
interest  rates  averaging  10% and  replaced  it with debt  having  fixed  rate
interest  of  approximately  8.3%.  In  the  fourth  quarter  1998  the  company
refinanced  approximately  $2 million of debt which had interest rates averaging
10%  and  replaced  it  with  debt  having   average   fixed  rate  interest  of
approximately  7.4%.  The  Company is seeking to  refinance,  at more  favorable
interest  rates,  the debt of the  Alabama & Florida  Railway  Co.,  the  Keokuk
Junction  Railway Co., and the debt related to the  acquisition  of the Michigan
Southern Railroad.  The Company hopes to complete these refinancings  within the
first 4 months of 1999.

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. In 1998,
a total of 400 warrants were exercised and the Company realized $800 as a result
of  their  exercise.  As of  December  31,  1998,  a total  of  67,244  warrants
originally  issued had been exercised,  and the Company realized $134,488 on the
issuance of the warrants. The Company expects additional capital to be generated
by the  continued  exercise of warrants but is  uncertain as to the amount.  The
Company granted  836,000  options to certain  employees under its 1994 incentive
stock option  plan.  The options are  exercisable  at prices equal to the market
value of the  Company's  stock at the date of grant.  The exercise  price ranges
from $1.50 to $4.40 per share.  No options  were  exercised  in 1998.  Since the
plans inception a total of 69,700 options had been exercised and the Company has
realized $104,550 on the exercise of the options. On June 15, 1998, the Company,
acting  upon a  resolution  approved  by its Board of  Directors,  entered  into
agreements  with  employees to repurchase all of the  outstanding  stock options
with exercise prices equal to or less than $1.65. In exchange for forfeiting the
options,  employees received a one-time adjustment to their base salary equal to
$.15 per option share.  In total,  441,512 options were forfeited as a result of
these agreements.  A total of 20,000 options remain exercisable at $1.50 and are
held by an outside  director.  The  primary  reason this action was taken by the
Board  of  Directors  was  to  lessen  the  potential  dilution  to  all  common
shareholders from the exercise of the options based on the trading volume of the
Company  stock.  As of  December  31,  1998,  a total  of  194,759  options  are
outstanding under this plan.
<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  will be  fully  vested  and  will be
exercisable  as of July 1, 2001. The exercise date can be accelerated if Pioneer
Railcorp common shares reach a closing price of $7.25 per share, or higher,  for
any  consecutive  10-day  period,  as reported in the Wall Street  Journal.  The
options will be exercisable  at $2.75,  the market price of the common shares at
the date the options were granted,  in whole or in part within 10 years from the
date of  grant.  As of  December  31,  1998,  a total  of  242,000  options  are
outstanding under this plan.

The  Company is still  negotiating  with the State of  Minnesota  Department  of
Transportation  (MNDOT) for up to  approximately  $4.2 million of interest  free
financing to  rehabilitate  the entire line. As of the date of this report,  the
outcome of these  negotiations  is uncertain  and the Company is  continuing  to
evaluate its options  concerning the MCTA  including  repairing a portion of the
line using its own capital resources,  primarily  long-term debt. If the Company
undertakes  its own  rehabilitation  program,  it is  estimated  that the  total
capital requirement would be less than $2 million.

The City of Rochelle,  Illinois,  terminated  the Rochelle  Railroad Co.'s lease
agreement effective January 19, 1998,  however,  Rochelle Railroad Co. continued
to operate on the  trackage  until  November  13,  1998  pending  the outcome of
certain legal proceedings.  In 1998 the Rochelle Railroad Co. generated $440,000
in revenue and $216,000 of operating  income. In 1997, the Rochelle Railroad Co.
generated  $408,000 in revenue and  $250,000 of  operating  income.  The Company
believes  that a  majority  of the  lost  operating  income  resulting  form the
termination  of the  Rochelle  Railroad  will  be  recovered  through  increased
marketing efforts on the remaining operating railroads.

The Company  anticipates that the outcomes  involving  current legal proceedings
will not  materially  affect the Company's  consolidated  financial  position or
results of operation.

The Company  believes its cash flow from  operations  and its available  working
capital  credit  lines,  will be more than  sufficient to meet  liquidity  needs
through at least 1999.

Balance Sheet and Cash Flow Items:

The Company generated net cash from operating activities of $2.5 million in 1998
and $1.8  million  in 1997.  Net cash  from  operating  activities  for 1998 was
generated  from  $425,000  of  net  income,   $1,583,000  of  depreciation   and
amortization, $291,000 of deferred income taxes, an increase in accounts payable
of $266,000,  $211,000 net cash provided by changes in various  other  operating
assets and  liabilities,  reduced  by an  increase  in  accounts  receivable  of
$276,000.

In 1998, the Company  purchased  approximately  $1.5 million of fixed assets and
capital improvements which included the purchase of approximately 76 railcars at
a total cost of  $745,000.  The  Company  capitalized  approximately  $60,000 in
leasehold  improvements  relating to the Pioneer Industrial Railway trackage and
approximately  $30,000 of leasehold  improvements  on the Fort Smith Railroad in
connection with a reload center. Capital expenditures for track totaled $237,000
in 1998 of which $152,000 was for the Minnesota Central  Railroad.  In addition,
$132,000 of  transportation  equipment was  capitalized  in 1998 which  included
$85,000 of capital  expenditures  to rebuild  locomotives and $47,000 of capital
expenditures for the Company's corporate aircraft.  Several parcels of land were
purchased for $22,000.  Other capital  expenditures  in 1998 include $80,000 for
vehicles  and  equipment,  $90,000  of  bridge  repairs  and  $104,000  of other
miscellaneous capital expenditures.  The purchases of railcars for $745,000, was
financed with  long-term  fixed rate financing and $45,000 of bridge repairs was
financed with an interest free note from the State of Mississippi.
The  remaining  $710,000 of capital  expenditures  were funded  through  working
capital.
<PAGE>


During 1998,  the Company was awarded two grants from the Alabama  Department of
Transportation  which were funded with federal  disaster  funds from the Federal
Railroad  Administration  pursuant to the Federal Fiscal Year 1998  Supplemental
Appropriations  Act. A grant in the amount of  $657,757 to the Alabama & Florida
Railway and a grant of $64,340 to the Alabama  Railroad were designed to aid the
Company with labor and material costs of rehabilitating  and repairing track and
bridge structures which were damaged by severe weather conditions in March 1998.
As of December 31, 1998 the Company had expended  approximately $165,000 and had
recorded  receivables of $16,500 relative to the Alabama & Florida Railway grant
and had fully expended the $64,340 grant to the Alabama Railroad.

During  1997,  the  Company  was  awarded a $396,000  grant  from the  Minnesota
Department of  Transportation  which is funded with federal  disaster funds from
the Federal  Railroad  Administration  pursuant to the Federal  Fiscal Year 1997
Supplemental  Appropriations  Act. The grant is designed to aid the Company with
the labor and material costs of  rehabilitating  and repairing  track and bridge
structures  of the Minnesota  Central  Railroad Co. which were damaged by severe
weather  conditions  during the 1996-1997  winter.  As of December 31, 1998, the
Company had expended  approximately $357,000 and had receivables of $112,000 and
payables of $112,000 pursuant to the grant.

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

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

As previously mentioned herein this report Form 10-KSB filing, effective January
1, 1999,  MSO purchased all of the stock of the MSRR from Gordon D. Morris,  for
$2.4 million  funding the  transaction  with long-term  fixed rate debt obtained
from the Company's $2.5 million revolving acquisition line of credit.

Item 7.  Financial Statements


<PAGE>














                        Pioneer Railcorp and Subsidiaries


                          CONSOLIDATED Financial Report


                                December 31, 1998




<PAGE>





                                    Contents

----------------------------------------------------------------------------
INDEPENDENT AUDITOR'S REPORT                                            
----------------------------------------------------------------------------
FINANCIAL STATEMENTS
   Consolidated balance sheets                                            

   Consolidated statements of income                                    

   Consolidated statements of stockholders' equity   

   Consolidated statements of cash flows                           

   Notes to consolidated financial statements                        
----------------------------------------------------------------------------






<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, 1998 and 1997, 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  generally   accepted  auditing
standards.  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,  1998  and  1997,  and the  results  of their
operations  and their cash flows for the years  then  ended in  conformity  with
generally accepted accounting principles. 





                                             /s/ McGladrey & Pullen, LLP


Peoria, Illinois 
February 15, 1999
<PAGE>



Pioneer Railcorp and Subsidiaries

Consolidated Balance Sheets
December 31, 1998 and 1997
<TABLE>


ASSETS                                                                                       
                                                                                      1998         1997
----------------------------------------------------------------------------------------------------------
<S>                                                                               <C>          <C>  
Current Assets
   Cash ........................................................................  $   469,476  $   407,428
   Accounts receivable, less allowance for doubtful
      accounts 1998 $156,282; 1997 $82,375 .....................................    2,660,012    2,367,509
   Inventories .................................................................      331,841      351,331
   Prepaid expenses ............................................................      174,085      192,952
   Income tax refund claims ....................................................       56,933       74,602
   Deferred taxes ..............................................................       70,800       66,400
                                                                                  ------------------------
        Total current assets ...................................................    3,763,147    3,460,222

Investments, cash value of life insurance ......................................      112,348       95,547

Property and Equipment, net ....................................................   19,563,368   19,974,702

Intangible Assets, less accumulated amortization
   1998 $250,365; 1997 $197,724 ................................................    1,065,140    1,117,205
                                                                                  ------------------------
                                                                                  $24,504,003  $24,647,676
                                                                                  ========================

LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
   Notes payable ...............................................................  $   307,886  $   250,034
   Current maturities of long-term debt ........................................    1,988,041    1,836,132
   Accounts payable ............................................................    2,732,627    2,518,190
   Accrued expenses ............................................................      537,018      432,145
   Income taxes payable ........................................................       14,206       61,749
                                                                                  ------------------------
        Total current liabilities ..............................................    5,579,778    5,098,250
                                                                                  ------------------------

Long-Term Debt, net of current maturities ......................................   11,211,737   12,465,498
                                                                                  ------------------------

Deferred Taxes .................................................................    2,545,900    2,250,700
                                                                                  ------------------------

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

Commitments and Contingencies (Note 11)

Stockholders' Equity
   Common  stock,  Class A  (voting),  par  value  $.001 per  share,  authorized
      20,000,000 shares, issued and outstanding
      1998 4,610,597 shares; 1997 4,610,197 shares .............................        4,610        4,610
   Additional paid-in capital ..................................................    2,041,000    2,040,200
   Retained earnings ...........................................................    1,934,978    1,602,418
                                                                                  ------------------------
                                                                                    3,980,588    3,647,228
                                                                                  ------------------------

                                                                                  $24,504,003  $24,647,676
                                                                                  ========================
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>


Pioneer Railcorp and Subsidiaries

Consolidated Statements of Income
Years Ended December 31, 1998 and 1997




                                                              
                                                          1998          1997
--------------------------------------------------------------------------------

Railway operating revenue ..........................  $13,514,428   $12,779,249
                                                      -------------------------

Operating expenses
   Maintenance of way and structures ...............    1,351,140     1,340,940
   Maintenance of equipment ........................    1,621,232     1,534,999
   Transportation ..................................    3,353,439     3,155,099
   General and administrative ......................    3,595,460     3,282,602
   Depreciation ....................................    1,530,354     1,439,010
   Amortization ....................................       52,641        57,878
                                                      -------------------------
                                                       11,504,266    10,810,528
                                                      -------------------------

      Operating income .............................    2,010,162     1,968,721
                                                      -------------------------

Other income (expenses)
   Interest income .................................        7,536         5,522
   Interest expense ................................   (1,297,928)   (1,384,325)
   Lease income ....................................      197,087       224,569
   Gain on sale of property and equipment ..........       77,005       105,113
   Provision for unamortized interest discounts
      due to debt refinancing ......................          - -      (101,245)
   Other, net ......................................      (25,250)       76,297
                                                      -------------------------
                                                       (1,041,550)   (1,074,069)
                                                      -------------------------

      Income before provision for income taxes
        and minority interest in preferred stock
        dividends of consolidated subsidiaries .....      968,612       894,652

Provision for income taxes .........................      420,977       405,687
                                                      -------------------------

      Income before minority interest in preferred
        stock dividends of consolidated subsidiaries      547,635       488,965

Minority interest in preferred stock dividends of
   consolidated subsidiaries .......................      122,870       122,720
                                                      -------------------------

      Net income ...................................  $   424,765   $   366,245
                                                      =========================

Basic earnings per common share ....................  $       .09   $       .08
                                                      =========================

Diluted earnings per common share ..................  $       .09   $       .08
                                                      =========================

See Notes to Consolidated Financial Statements.
<PAGE>


Pioneer Railcorp and Subsidiaries

Consolidated Statements of STOCKHOLDERS' EQUITY
Years Ended December 31, 1998 and 1997


                                       Common Stock               
                                    ------------------- Additional
                                     Class A (voting)     Paid-In     Retained
                                     Shares     Amount    Capital     Earnings
--------------------------------------------------------------------------------

Balance at December 31, 1996 ...    4,574,027  $  4,574  $1,981,146  $1,236,173
   Common stock issued upon
      exercise of stock warrants
      and options ..............       36,170        36      59,054         - -
   Net income ..................          - -       - -         - -     366,245
                                    --------------------------------------------
Balance at December 31, 1997 ...    4,610,197     4,610   2,040,200   1,602,418
   Common stock issued upon
      exercise of stock warrants          400       - -         800         - -
   Dividends on common stock,
      $.02 per share ...........          - -       - -         - -     (92,205)
   Net income ..................          - -       - -         - -     424,765
                                    --------------------------------------------
Balance at December 31, 1998 ...    4,610,597  $  4,610  $2,041,000  $1,934,978
                                    ============================================

See Notes to Consolidated Financial Statements.


<PAGE>


Pioneer Railcorp and Subsidiaries

Consolidated Statements of Cash Flows
Years Ended December 31, 1998  a nd 1997
<TABLE>


                                                                      1998           1997
--------------------------------------------------------------------------------------------
<S>                                                                <C>           <C>   
Cash Flows From Operating Activities
   Net income .................................................    $  424,765    $   366,245
   Adjustments to reconcile net income to net cash provided
      by operating activities:
      Minority interest in preferred stock dividends of
        consolidated subsidiaries .............................       122,870        122,720
      Depreciation ............................................     1,530,354      1,439,010
      Amortization ............................................        52,641         57,878
      (Increase) in cash value life insurance .................       (16,801)       (20,585)
      (Gain) on sale of property and equipment ................       (71,318)      (105,113)
      Deferred taxes ..........................................       290,800        242,550
      Provision for unamortized interest discounts
        due to debt refinancing ...............................           - -        101,245
      Changes in assets and liabilities:
        (Increase) decrease in assets:
           Accounts receivable ................................      (275,638)      (296,220)
           Income tax refund claims ...........................        17,669        275,279
           Inventories ........................................        19,490         69,621
           Prepaid expenses ...................................        18,867         68,475
        Increase (decrease) in liabilities:
           Accounts payable ...................................       266,016       (455,068)
           Accrued expenses ...................................       131,146        (59,465)
           Income taxes payable ...............................       (47,543)        42,771
                                                                  --------------------------
           Net cash provided by operating activities ..........     2,463,318      1,849,343
                                                                  --------------------------

Cash Flows From Investing Activities
   Proceeds from sale of property and equipment ...............       340,303        194,959
   Purchase of property and equipment .........................    (1,482,722)    (1,371,992)
   Intangible assets ..........................................          (576)        (3,969)
                                                                  --------------------------
           Net cash (used in) investing activities ............    (1,142,995)    (1,181,002)
                                                                  --------------------------

Cash Flows From Financing Activities
   Proceeds from short-term borrowings ........................     3,272,648      3,915,971
   Proceeds from long-term borrowings .........................     5,898,636      4,608,427
   Principal payments on short-term borrowings ................    (3,214,796)    (4,435,472)
   Principal payments on long-term borrowings .................    (7,000,488)    (4,785,421)
   Proceeds from common stock issued upon exercise of
      stock warrants and options ..............................           800         59,090
   Common stock dividend payments .............................       (92,205)          --
   Preferred stock dividend payments to minority interest .....      (122,870)      (122,720)
   Repurchase of minority interest ............................          --           (2,000)
                                                                  --------------------------
           Net cash (used in) financing activities ............    (1,258,275)      (762,125)
                                                                  --------------------------

           Net increase (decrease) in cash ....................   $    62,048     $  (93,784)

Cash, beginning of year .......................................       407,428        501,212
                                                                  --------------------------
Cash, end of year .............................................   $   469,476    $   407,428
                                                                  ==========================

Supplemental Disclosures of Cash Flow Information
   Cash payments for:
      Interest ................................................   $ 1,346,232    $ 1,415,858
                                                                  ==========================

      Income taxes (net of refunds 1998 $21,783; 1997 $232,251)   $   160,051    $  (154,913)
                                                                  ==========================
</TABLE>
<PAGE>



Pioneer Railcorp and Subsidiaries

Consolidated Statements of Cash Flows
Years Ended December 31, 1998  a nd 1997
<TABLE>


                                                                      1998           1997
--------------------------------------------------------------------------------------------
<S>                                                                <C>           <C>   

Supplemental Disclosures of Noncash Inventory Information
   Loss on discontinuation of Rochelle Railroad Co. lease:
      Leasehold improvements disposed of, net .................   $   (74,132)   $       - -
      Liabilities forgiven ....................................        51,580            - -
      Proceeds to be received by Company ......................        16,865            - -
                                                                  --------------------------
        Loss on lease discontinuation .........................   $    (5,687)   $       - -
                                                                  ==========================

Cancellation of equipment purchase commitment:
   Equipment ..................................................   $   (25,000)   $       - -
   Accrued expenses ...........................................        25,000            - -
                                                                  --------------------------
                                                                  $       - -    $       - -
                                                                  ==========================
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>


PIONEER RAILCORP AND SUBSIDIARIES

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

Note 1.  Nature of Business and Significant Accounting Policies

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

The Company's subsidiaries include the following:

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

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

Significant accounting policies:

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

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, 1998 and 1997.  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.  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.

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
<PAGE>


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.

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, 1998 and 1997.

Intangible  assets:  Intangible assets consist  principally of goodwill which is
being  amortized  by the  straight-line  method over a  forty-year  period.  The
Company reviews intangible assets quarterly by subsidiary to determine potential
impairment  by  comparing  the  carrying  value  of  the  intangible   with  the
undiscounted anticipated future cash flows of the related property before income
taxes and management fees generated by Pioneer Railroad Services, Inc. If future
cash flows are less than the carrying value, the Company will determine the fair
market value of the property and adjust the carrying value of the intangibles if
the fair market  value is less than the  carrying  value.  The Company  does not
believe that impairment exists as of December 31, 1998 and 1997.

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  grant:  During  1998,  the  Company  was awarded two grants from the
Alabama  Department  of  Transportation  which are funded with federal  disaster
funds from the Federal  Railroad  Administration  pursuant to the Federal Fiscal
year 1998 Supplemental  Appropriations  Act. The $657,757 and $64,340 grants are
designed to aid the Company with the labor and material costs of  rehabilitating
and  repairing  track and bridge  structures  belonging to the Alabama & Florida
Railway  Company  and the Alabama  Railroad  Company,  respectively,  which were
damaged by severe weather conditions in March 1998. As of December 31, 1998, the
Company had expended  approximately  $165,000 and had  recorded  receivables  of
$16,500  relative  to the  $657,757  grant and had fully  expended  the  $64,340
pursuant to the other grant.

During  1997,  the  Company  was  awarded a $395,688  grant  from the  Minnesota
Department of  Transportation  which is funded with federal  disaster funds from
the Federal  Railroad  Administration  pursuant to the Federal  Fiscal Year 1997
Supplemental  Appropriations  Act. The grant is designed to aid the Company with
the labor and material costs of  rehabilitating  and repairing  track and bridge
structures belonging to the Minnesota Central Railroad Co. which were damaged by
severe weather  conditions in late 1996 and early 1997. As of December 31, 1998,
the Company had expended  approximately $357,000 and had recorded receivables of
approximately  $68,000 and accounts payable to vendors of approximately  $68,000
pursuant to this grant.

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


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

Use of estimates in the preparation of financial statements:  The preparation of
financial statements in conformity with generally accepted accounting principles
requires  management to make estimates and assumptions  that affect the reported
amounts  of assets and  liabilities  and  disclosure  of  contingent  assets and
liabilities at the date of the financial  statements and the reported amounts of
revenues and expenses during the reporting  period.  Actual results could differ
from those estimates.


Note 2.  Property and Equipment

Property and equipment consist of the following:

                                                            December 31,
                                                   -----------------------------
                                                       1998              1997
                                                   -----------------------------

Land .......................................       $ 1,433,888       $ 1,412,388
Roadbed ....................................         7,806,216         7,567,135
Transportation equipment ...................         2,428,275         2,202,965
Railcars ...................................        10,746,046         9,963,828
Buildings ..................................         1,058,052         1,090,207
Machinery and equipment ....................         1,005,897           933,034
Office equipment ...........................           429,805           395,122
Leasehold improvements .....................           204,886           211,371
Capital projects ...........................           447,463           800,667
                                                   -----------------------------
                                                    25,560,528        24,576,717
Less accumulated depreciation ..............         5,997,160         4,602,015
                                                   -----------------------------
                                                   $19,563,368       $19,974,702
                                                   =============================


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

The Company has a $2.5 million  credit  facility  with  Citizens  Bank and Trust
Company,  Chillicothe,  Missouri,  to provide a  revolving  acquisition  line of
credit.  This  facility  is  collateralized  by the common  stock of the Alabama
Railroad Co. and the Mississippi  Central Railroad Co., as well as the Company's
investment in stock of any  subsidiaries  acquired  under the line. The interest
rate is  adjustable  quarterly  to 2.5% over New York  Prime,  limited  to a one
percent  annual  increase or decrease,  not to exceed 13.5% or be reduced  below
10%.  Any amounts  drawn on the line must be repaid  monthly  over a  seven-year
period.  The Company has no outstanding  balance under this line of credit as of
December 31, 1998 and 1997.

The Company has a $100,000 line of credit with Citizens Bank and Trust  Company,
Chillicothe,  Missouri,  that expires July 1999,  bears interest at 9.5%, and is
collateralized  by  transportation  equipment.  The Company  had no  outstanding
balances under this line of credit as of December 31, 1998 and 1997.

The  Company  has a $500,000  line of credit with  National  City Bank,  Peoria,
Illinois,  that expires July 1999,  bears interest at prime, as published in The
Wall Street Journal,  plus 1%, and is collateralized by accounts  receivable and
general  intangibles  of certain  subsidiaries.  The Company had no  outstanding
balance under this line of credit as of December 31, 1998 and 1997.

The  Company  has a $600,000  line of credit with  National  City Bank,  Peoria,
Illinois,  that expires July 1999,  bears interest at prime, as published in The
Wall Street Journal,  plus 1%, and is collateralized by accounts  receivable and
general  intangibles  of  certain  subsidiaries.  The  Company  had  outstanding
balances  under this line of credit of $225,738  and $148,050 as of December 31,
1998 and 1997, respectively.
<PAGE>


The Company has various unsecured notes payable totaling $82,148 and $101,984 as
of December  31, 1998 and 1997,  respectively,  for the  financing  of insurance
premiums.  This  note  is due in  monthly  installments  of  $20,537,  including
interest at 7.95%, with final installment due May 1999.

Long-term debt at December 31, 1998 and 1997, consists of the following:
<TABLE>

                                                                                               1998           1997
                                                                                           -------------------------
<S>                                                                                        <C>           <C>   
Mortgage  payable,  National City Bank, due in monthly  installments  of $3,775,
   including  interest at 8.5%,  through October 1, 1999. At that date and every
   five years thereafter,  the interest rate may be adjusted based on the Bank's
   base  rate,  final  installment  due June 2008,  collateralized  by  Pioneer
   Railcorp's corporate headquarters building .........................................    $   395,606    $   406,299
Mortgage payable, National City Bank, due in monthly installments
   of $19,314, including interest at 9.25%, through December 2001. At that date,
   the interest rate adjusts to a U.S. Treasury index 5-year constant  maturity)
   plus 3.5%,  final  installment  due  December 2006,  collateralized  by real
   estate, rail facilities, and other assets of Alabama & Florida Railway Co., Inc. ...      1,293,713      1,398,669
Notes payable, Norwest Equipment Finance, Inc., due in monthly
   installments of $24,018, including interest at 7.26%, final install-
   ment due June 2004, collateralized by railcars .....................................      1,380,863      1,638,397
Note payable, Keycorp, due in monthly installments of $22,744,
   including interest at 8.86%, final installment due December 2003,
   collateralized by railcars .........................................................      1,098,977      1,266,399
Notes payable, Nations Bank, due in monthly installments from
   $8,524 to $23,305,  including  interest  ranging  from 8.75% to 9.35%,  final
   installments due from December 2002 to December
   2003, collateralized by railcars ...................................................        940,998      1,929,281
Notes payable, Concord Commercial Group, due in monthly
   installments of $2,239, including interest at 9%, final installment
   due March 1999, collateralized by railcars .........................................          6,599        108,950
Notes payable, Minnesota Valley Bank, due in monthly installments
   of $4,700, including interest at prime plus 2-2.75%, final
   installment due December 2001, collateralized by equipment
   acquired from MNVA Railroad, Inc. ..................................................        128,675        168,603
Note payable, U.S. Small Business Administration, due in monthly
   installments  of $7,577,  including  interest at 4%,  final  installment  due
   October 2000, collateralized by track acquired from MNVA
   Railroad, Inc. .....................................................................        152,235        235,197
Note payable, Rail Authority, interest only payments required through
   October 1998, then due in monthly installments of $3,975,  including interest
   at 7.5%, final installment due January 2011, collateralized
   by rail line acquired from MNVA Railroad, Inc. .....................................        375,845        380,000
Various notes payable, due in monthly installments from $404 to $573,
   including interest ranging from 6.75% to 10.25%,  final installments due from
   June 1999 to December 2001, collateralized by vehicles
   and railcars .......................................................................         62,468        109,591
Note payable, National City Bank, due in monthly installments of
   $39,041, including  interest at 9.5%,  through September 2002. At that date,
   the interest rate will be adjusted to 250 basis point over the weekly average
   yield on U.S.  Treasury  Securities,  final  installment  due December 2007,
   collateralized by Keokuk Junction Railway Co. stock and assets .....................      2,813,177      3,000,000
Notes payable, Center Capital Corporation, due in monthly
   installments from $1,402 to $5,202,  including  interest from 8.90% to 9.75%,
   final installments due from January 2002 to August 2005, collateralized by 70 
   ton box cars .......................................................................        641,325        188,732
Note payable, Pullman Bank & Trust Company, due in monthly
   installments of $4,933, including interest at 9.45%, final install-
   ment due December 2004, collateralized by covered hoppers ..........................        268,885        301,000
Note payable, GE Capital, due in monthly installments of $39,286,
   including interest at 8.2%, final installment due May 2003,
   collateralized by locomotives, boxcars, covered hoppers, and
   gondolas ...........................................................................      1,738,554           --
Note payable, Lyon Credit, due in monthly installments of $32,763,
   including interest at 8.38%, final installment due May 2002,
   collateralized by railcars .........................................................      1,856,393           --
Noninterest-bearing note payable, State of Mississippi, due in
   annual installments of $4,547, final installment due June 2008,
   collateralized by track structure ..................................................         45,465           --
Mortgage payable, Camden National Bank, due in monthly
   installments of $4,304, including interest at 12%, final installment due July
   2001, collateralized by Alabama Railroad Co. 
   real estate and rail facilities ....................................................           --          161,785
Note payable, FBS Leasing, due in monthly installments of $510,
   including interest of 8.37%, final installment due December 2001,
   collateralized by railcars .........................................................           --        1,087,819
Note payable, US Bancorp, due in monthly installments from
   $10,088, including interest of 9%, final installment due
   December 2002, collateralized by railcars ..........................................           --        1,023,926
Note payable, LDI Corporation, due in monthly installments of
   $16,731, including interest at 10.25%, final installment due
   December 2003, collateralized by locomotives .......................................           --          896,982
                                                                                           --------------------------
                                                                                            13,199,778     14,301,630
Less current portion ..................................................................      1,988,041      1,836,132
                                                                                           --------------------------
                                                                                           $11,211,737    $12,465,498
                                                                                           ==========================
</TABLE>
<PAGE>


Aggregate maturities required on long-term debt as of December 31, 1998, are due
in future years as follows:

Years ending December 31:          Amount
-------------------------------------------

  1999                          $ 1,988,041
  2000                            2,118,123
  2001                            2,187,834
  2002                            2,167,981
  2003                            1,524,092
  Thereafter                      3,213,707
                                -----------
                                $13,199,778
                                ===========


Note 4.  Income Tax Matters

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

The  provision  (credit) for income taxes  charged to  operations  for the years
ended December 31, 1998 and 1997, was as follows:

                                                   
                                                            1998        1997
                                                          --------------------
Current:
   Federal ......................................         $101,335    $115,432
   State ........................................           28,842      47,705

Deferred ........................................          290,800     242,550
                                                          --------------------
                                                          $420,977    $405,687
                                                          ====================

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, 1998 and 1997, due to the following:

                                                                 1998    1997
                                                                 -------------
Computed "expected" tax expense ...............................  35.0%   35.0%
Increase (decrease) in income taxes resulting from:
   State income taxes, net of federal tax benefit .............   6.0     6.0
   Other ......................................................   2.4     4.3
                                                                 -------------
                                                                 43.4%   45.3%
                                                                 =============

Deferred tax assets and  liabilities  consist of the following  components as of
December 31, 1998 and 1997:


                                                     1998              1997
                                                 ------------------------------
Deferred tax assets:
   AMT credit carryforwards ..............       $   463,400        $   434,500
   NOL carryforwards .....................         1,070,800          1,037,100
   Deferred compensation .................            35,200             29,800
   Other .................................            70,800             66,400
                                                 ------------------------------
                                                   1,640,200          1,567,800
Deferred tax liabilities:
   Property and equipment ................        (4,115,300)        (3,752,100)
                                                 ------------------------------
                                                 $(2,475,100)       $(2,184,300)
                                                 ==============================
<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,
1998 and 1997, as follows:

                                                       1998             1997
                                                   ----------------------------

Current deferred tax assets ..................     $    70,800      $    66,400
Net noncurrent deferred tax liabilities ......      (2,545,900)      (2,250,700)
                                                   ----------------------------

Net deferred tax liability ...................     $(2,475,100)     $(2,184,300)
                                                   ============================

The Company  and its  subsidiaries  have  Alternative  Minimum Tax (AMT)  credit
carryforwards  of  approximately  $463,000 and $435,000 at December 31, 1998 and
1997,  respectively.  This excess of AMT over regular tax can be carried forward
indefinitely   to  reduce  future  federal  income  tax   liabilities.   Certain
subsidiaries of the Company also have net operating loss carryforwards  totaling
approximately  $2,906,000  at  December  31,  1998,  which can be used to offset
future taxable income of those  subsidiaries.  Net operating loss  carryforwards
expire as follows:

Years ending December 31:                   Amount
----------------------------------------------------

    2008                                 $     9,000
    2009                                      16,000
    2010                                     352,000
    2011                                   1,641,000
    2012                                     632,000
    2013                                     256,000
                                         -----------
                                         $ 2,906,000
                                         ===========


Note 5.  Retirement Plan

The  Company  has  a  defined  contribution  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 $10,000. Company contributions are discretionary, and during 1998 and
1997,  the  Company  elected  to match  50% of the  first 8% of each  employee's
contributions.  Expenses  under the plan were  $43,153 and $43,769 for the years
ended December 31, 1998 and 1997, respectively.


Note 6.  Deferred Compensation Agreements

The  Company  has  deferred  compensation  agreements  with two Keokuk  Junction
Railway Co.  employees.  The agreements  provide  monthly  benefits for 15 years
beginning with the month immediately  following the employees' normal retirement
date, as defined in the agreements.  If an employee  terminates  employment with
the  Company  for any reason  other than death  prior to the  employees'  normal
retirement  date,  benefits  are  rendered on a pro rata basis.  The $91,566 and
$77,441  present  value of the  estimated  liability as of December 31, 1998 and
1997,  respectively,  under the  agreements  is being  accrued  ratably over the
remaining  years to the date when the employees are first  eligible for benefits
using a discount rate of 7%. Deferred  compensation  expense totaled $14,125 and
$12,638 for the years ended December 31, 1998 and 1997, respectively.
<PAGE>



Note 7.  Stock Options and Warrants

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

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

On June 1,  1998,  the Board of  Directors  approved  a plan for  repurchase  of
441,512 of the  outstanding  options  issued to Company  employees  on April 12,
1994.  Consequently,  only 20,000  options  held by an outside  director  remain
outstanding  pursuant to the April 12, 1994, stock plan. The employees were paid
$.15 for each  option  repurchased,  with the  repurchase  cost  payable  to the
employees  in  the  form  of  increased  compensation  over  a  one-year  period
commencing in June, 1998.

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

Other pertinent information related to the plans is as follows:

                                             1998                 1997
                                     --------------------- ---------------------
                                                 Weighted-             Weighted-
                                                  Average               Average
                                                 Exercise              Exercise
                                      Shares      Price      Shares     Price
                                     -------------------------------------------
Outstanding at beginning of year      973,271    $   2.36  1,099,800   $   2.35
Forfeited ......................      (95,000)       2.65   (100,029)      2.56
Repurchased ....................     (441,512)       1.54        - -        - -
Exercised ......................          - -         - -    (26,500)      1.50
                                     -------------------------------------------
Outstanding at end of year .....      436,759    $   3.13    973,271   $   2.36
                                     ===========================================

Exercisable at end of year .....      194,759                691,271
                                     ========              =========
<PAGE>


A further summary about stock options outstanding as of December 31, 1998, is as
follows:

                        Options Outstanding                Options Exercisable
                 ------------------------------------   ------------------------
                               Weighted-
                                Average      Weighted                 Weighted
    Range of                   Remaining     Average                  Average
    Exercise        Number    Contractual    Exercise     Number      Exercise
     Prices      Outstanding     Life        Price      Exercisable   Price
-------------------------------------------------------------------------------

$1.50                20,000     4 months    $    1.50      20,000     $  1.50
$2.75 - 3.56        352,000      5 years         3.07     110,000        3.56
$3.92 - 4.40         64,759    1.6 years         4.01      64,759        4.01
                 ----------                              --------
                    436,759                               194,759
                 ==========                              ========

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


                                                   1998         1997
                                                ----------------------
Net income:
   As reported ...........................      $ 424,765    $ 366,245
   Proforma ..............................      $ 344,765    $ 294,245

Basic earnings per common share:
   As reported ...........................      $     .09    $     .08
   Proforma ..............................      $     .08    $     .06

Diluted earnings per common share:
   As reported ...........................      $     .09    $     .08
   Proforma ..............................      $     .08    $     .06

On June 24, 1995, the stockholders  authorized the issuance of stock warrants as
a dividend to  stockholders  of record,  resulting  in the issuance of 4,198,284
warrants.  Each warrant  permits  stockholders a right to purchase an additional
share of stock at a  predetermined  price of $2 per  share.  Stock  acquired  by
exercise  of each  warrant  must be held for a one  year  period  of  time.  The
warrants  expire  July 1,  2015.  There are  4,131,040  and  4,131,440  warrants
outstanding as of December 31, 1998 and 1997, respectively.


Note 8.  Lease Commitments and Total Rental Expense

The  Company  has  entered  into six lease  agreements  covering  certain of its
railroad properties. For rail- road properties it leases, the Company ordinarily
assumes,   upon   the   commencement   date,   all   operating   and   financial
responsibilities,   including  maintenance,   payment  of  property  taxes,  and
regulatory compliance. Lease payments on five railroad properties are based on a
per car basis,  ranging from $10 to $25 on all cars over a range of 300 to 4,000
cars per year on each segment. The leases expire between September 2003 and July
2018 and two of these railroads have five to twenty year renewal options.

One railroad lease,  which expired on December 31, 1998,  contained an option to
purchase the stock and leased personal  property of the railroad upon expiration
of the lease. As disclosed in Note 15 to the financial  statements,  the Company
exercised its option to purchase this railroad subsequent to December 31, 1998.

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


The total  approximate  minimum  rental  commitment  as of  December  31,  1998,
required under  noncancelable  leases, and excluding executory costs and per car
rentals, is due in future years as follows:

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

       1999                          $  46,300
       2000                             46,300
       2001                             46,300
       2002                             46,300
       2003                             46,300
       Thereafter                      302,375
                                     ---------
                                     $ 533,875
                                     =========

The total  rental  expense  under the leases was  $347,281  and $440,986 for the
years ended December 31, 1998 and 1997, respectively.


Note 9.  Major Customer

Revenue earned from a major railroad segment customer  amounted to approximately
$2,567,000  and  $1,760,000  during the years ended  December 31, 1998 and 1997,
respectively.  Accounts  receivable  as of December  31, 1998 and 1997,  include
approximately $381,000 and $427,000, respectively, from this customer.


Note 10.  Minority Interest in Subsidiaries

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

Following is a summary of the minority  interest in  subsidiaries as of December
31, 1998 and 1997:

                                                                       Amounts
                                                                      ----------
Preferred stock of Alabama Railroad Co. 
   Par value - $1,000 per share
   Authorized - 700 shares
   Issued and outstanding - 424 (cumulative 12% dividend;
      callable at Company's option at 150% of face value) ......      $  424,000
Preferred stock of Alabama & Florida Railway Co., Inc. 
   Par value - $1,000 per share
   Authorized - 500 shares
   Issued and outstanding - 421  (cumulative 9% dividend;  
      callable at Company's option after June 22, 1995, at
      150% of  face  value) .....................................        421,000
Preferred stock of Mississippi Central Railroad Co. 
   Par value - $1,000 per share
   Authorized - 1,000 shares
   Issued and outstanding - 341 shares (cumulative 10% dividend;  
      convertible at a rate of $10 per common share, callable at
      Company's option after March 1, 1996, at 110% of face value)       341,000
                                                                      ----------
                                                                      $1,186,000
                                                                      ==========

Note 11.  Commitments and Contingencies

Commitments:  In December 1998, the Company entered into a one-year extension of
an existing  executive  employment  contract with the Company's  president.  The
one-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 a lump sum payment of one year's
salary.
<PAGE>


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

As discussed in Note 1, the Company was awarded  grants in 1998 and 1997 for the
repair  and  rehabilita-  tion of weather  damaged  railroad  track and  related
structures the Company owns in Alabama and Minnesota.  The Company's obligations
under the two  Alabama  grants  expire five years  after the  completion  of the
repairs,  while the Company's  obligation  under the Minnesota grant expires two
years after the completion of repairs.  In the unlikely event the Company should
discontinue   using  the  underlying  track  prior  to  the  expiration  of  the
aforementioned  commitment periods,  the Company is contingently liable to repay
to the Federal Railroad  Administration the full value of awarded funds pursuant
to the  Alabama  grants and the value of  materials  installed  pursuant  to the
Minnesota grant.  Management  estimates that materials installed pursuant to the
Minnesota grant approximate $123,000.


Note 12.  Earnings Per Share

Following is information  about the  computation of the earnings per share (EPS)
data for the years ended December 31, 1998 and 1997:
                                                        
                                               Income       Shares     Per-Share
                                             (Numerator) (Denominator)   Amount
                                             -----------------------------------
                                              For Year Ended December 31, 1998
                                             -----------------------------------
Basic EPS
Income available to common stockholders ....   $424,765    4,610,434    $   .09
                                                                        =======

Effect of Dilutive Securities
Employee stock options .....................         --        1,132
                                               ---------------------

Diluted EPS
Income available to common stockholders
   plus assumed conversions ................   $424,765    4,611,566    $   .09
                                               =================================

                                              For Year Ended December 31, 1997
                                             -----------------------------------


Basic EPS
Income available to common stockholders ....   $366,245    4,593,750    $   .08
                                                                        ========

Effect of Dilutive Securities
Employee stock options .....................         --       57,576
                                               ---------------------

Diluted EPS
Income available to common stockholders
   plus assumed conversions ................   $366,245    4,651,326    $   .08
                                               =================================

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.
<PAGE>


Note 13.  Fair Value of Financial Instruments

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

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

     The remaining  carrying  value of fixed rate  long-term  debt  collectively
     approximates  fair  value  based  upon the  similarity  of  interest  rates
     negotiated  on debt  instruments  in 1998 and 1997 as  compared to existing
     interest rates.

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


Note 14.  Segment Information

During 1998, the Company adopted Statement of Financial Accounting Standards No.
131,  "Disclosures  about  Segments of an Enterprise  and Related  Information,"
which supersedes  Statement of Financial Accounting Standards No. 14, "Financial
Reporting for Segments of a Business  Enterprise".  This  Statement,  applicable
only to public companies,  establishes standards for reporting information about
operating  segments  in annual  financial  statements  and  requires  that those
enterprises  report selected  information  about  operating  segments in interim
financial  reports issued to  stockholders.  It also  establishes  standards for
related  disclosures  about products and services,  geographic  areas, and major
customers.

Description of products and services from reportable segments:  Pioneer Railcorp
has two reportable  segments,  investing in operating  railroad  entities and an
investment in a railroad  equipment entity.  All other operations are classified
as corporate 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.

Intersegment transactions: Intersegment transactions are recorded at cost.
<PAGE>


Factors management used to identify the reportable  segment:  Pioneer Railcorp's
reportable  segments consists 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,
                                                                    --------------------------
                                                                        1998          1997
                                                                    --------------------------
<S>                                                                 <C>            <C>   
Segment Assets
   Railroads ....................................................   $13,626,948    $13,481,006
   Leasing company ..............................................    10,055,047     10,270,060
   Corporate ....................................................       822,008        895,610
                                                                    --------------------------
        Total consolidated segment assets .......................   $24,504,003    $24,647,676
                                                                    ==========================
Expenditures for additions to long-lived assets
   Railroads ....................................................   $   467,199    $   303,763
   Leasing company ..............................................       932,336        989,453
   Corporate ....................................................        83,187         78,776
                                                                    --------------------------
        Total expenditures for additions to long-lived assets ...   $ 1,482,722    $ 1,371,992
                                                                    ==========================
Revenues

Revenues from external customers
   Railroads ....................................................   $10,918,188    $10,703,799
   Leasing company ..............................................     2,585,072      2,075,450
   Corporate ....................................................        11,168            - -
                                                                    --------------------------
        Total revenues from external customers ..................    13,514,428     12,779,249
                                                                    --------------------------
Intersegment revenues
   Railroads ....................................................           - -            - -
   Leasing company ..............................................       427,100        352,500
   Corporate ....................................................     5,156,045      4,602,034
                                                                    --------------------------
        Total intersegment revenues .............................     5,583,145      4,954,534
                                                                    --------------------------

        Total revenue ...........................................   $19,097,573    $17,733,783
Reconciling items
   Intersegment revenues ........................................    (5,583,145)    (4,954,534)
                                                                    --------------------------
        Total consolidated revenues .............................   $13,514,428    $12,779,249
                                                                    ==========================
Expenses

Interest expense
   Railroads ....................................................   $   190,096    $   258,863
   Leasing company ..............................................       747,577        777,168
   Corporate ....................................................       360,255        348,294
                                                                    --------------------------
        Total consolidated interest expense .....................   $ 1,297,928    $ 1,384,325
                                                                    ==========================
Depreciation and amortization expense
   Railroads ....................................................   $   581,604    $   569,750
   Leasing company ..............................................       918,307        847,723
   Corporate ....................................................        83,084         79,415
                                                                    --------------------------
        Total consolidated depreciation and amortization expense    $ 1,582,995    $ 1,496,888
                                                                    ==========================
Segment profit
   Railroads ....................................................   $ 4,079,300    $ 4,022,039
   Leasing company ..............................................     1,362,173        987,652
   Corporate ....................................................     2,151,834      1,913,564
                                                                    --------------------------
        Total segment profit ....................................     7,593,307      6,923,255

Reconciling items
   Intersegment revenues ........................................    (5,583,145)    (4,954,534)
   Income taxes .................................................      (420,977)      (405,687)
   Minority interest in preferred stock dividends of subsidiaries      (122,870)      (122,720)
   Other income (expense), net ..................................    (1,041,550)    (1,074,069)
                                                                    --------------------------
        Total consolidated net income ...........................   $   424,765    $   366,245
                                                                    ==========================
</TABLE>
<PAGE>


Note 15.  Subsequent Event

On January 1, 1999,  the Company  exercised  its option to purchase the stock of
the Michigan  Southern  Railroad for cash of $2,400,000  in a transaction  to be
accounted  for using the purchase  method of  accounting.  The  acquisition  was
financed with $2,400,000  borrowings  against the Company's  acquisition line as
described in Note 3.  Management  has yet to determine  the fair market value of
the net assets acquired.

The excess,  if any, of the aggregate  purchase price over the fair market value
of the net assets  acquired will be amortized on a  straight-line  basis over 40
years in accordance with the Company's policy.
<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, 1998.

     Name (Age)                                Position
---------------------               -------------------------------

Guy L. Brenkman (51)                Director (Chairman) & President
Orvel L. Cox (56)                   Director
Timothy F. Shea (50)                Director
John S. Fulton (66)                 Director
J. Michael Carr (34)                Director & Treasurer
Daniel A. LaKemper (41)             Secretary
Kevin L. Williams (26)              Assistant Secretary

All of the above  Directors and Officers  were elected at the Annual  Meeting of
the  Stockholders  (and the board  meeting  which  followed) on June 16, 1998 to
serve until the next annual meeting. 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. Cox,  Director,  also serves as same for each of the Company's  subsidiaries
and  Superintendent of  Transportation  for same. Mr. Cox has 39 years of active
railroading experience with 31 of those years working for Class I railroads. Mr.
Cox has been a director and officer of Pioneer  Railcorp since its inception and
has been involved in all phases of the development and growth of the Company.

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


Mr. Fulton,  Director, was elected to the Board in 1993. Mr. Fulton has 17 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.  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.  LaKemper,  Secretary,  also  serves  as  same  for  each  of the  Company's
subsidiaries.  Mr. LaKemper is the Company's  General Counsel and serves as same
for each of the Company's  subsidiaries.  Mr.  LaKemper has been employed by the
Company since May 1992. Before joining the Company,  Mr. LaKemper  practiced law
since 1982 working in private  practice and, most recently,  as General  Counsel
for a manufacturing concern. Mr. LaKemper holds a Juris Doctorate from Creighton
University  School of Law in  Omaha,  Nebraska  and a  BS-History  from  Bradley
University in Peoria, Illinois.

Mr.  Williams,  Assistant  Secretary,  also  serves  as same  for the  Company's
subsidiaries.  In addition,  Mr. Williams serves as the Company's stock transfer
agent.  Mr.  Williams has been employed by the Company since June 1993 and has a
degree in paralegal services from Midstate College 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  1998   $486,494    - -         - -       $  5,000 (a)
                      1997   $419,695    - -         - -       $  4,750 (a)
                      1996   $350,098    - -      80,000       $  4,750 (a)

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


Option/SAR Grants in Last Fiscal Year
-------------------------------------

None

              Aggregated Option/SAR Exercises in Last Fiscal Year
                          and FY-End Option/SAR Values
              ---------------------------------------------------

                                                                    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
--------------------------------------------------------------------------------
Guy Brenkman-CEO          0         0          24,909/ 80,000          $0/$0

In December  1993,  the Company  entered into a five-year  executive  employment
contract with the Company's president,  which was extended one year by the Board
of  Directors  on  November  18,  1998 and will  expire in  December  1999.  The
agreement  provides for a base salary with annual  inflation  adjustments  based
upon the Consumer  Price Index.  Should the Company  acquire or form  additional
railroads,  the  base  salary  will  increase  $25,000  for the  acquisition  of
railroads of 125 miles or less,  and $50,000 for  railroads  over 125 miles.  At
January  1,  1999,  the  president's  base  salary  was  $428,203.   Should  the
president's  employment be terminated,  the contract requires a lump sum payment
equal to three years of his then current salary. Should the president retire, he
is entitled to a lump sum payment of one year's salary.

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

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

Directors of the Registrant each were compensated $2,000 in 1998.

Item 11.  Security Ownership of Certain Beneficial Owners and Management

The following table sets forth information, as of March 19, 1999, 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 19,  1999  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)             3,493,395         39.09%
          Orvel L. Cox (3)                  198,520          2.22%
          Daniel A. LaKemper (4)             97,798          1.09%
          John S. Fulton (5)                 42,200           .47%
          J. Michael Carr (6)                53,050           .59%
          Kevin Williams (7)                 11,100           .12%
          Tim Shea                            5,000           .06%
                                          ---------        -------
          Directors and Executive
            Officers as a Group:          3,901,063         43.65%(1)

FOOTNOTES:

(1)  Based on 8,936,396 shares of Common Stock and Equivalents outstanding as of
     March 19, 1999.

(2)  Of the total number of shares shown as owned by Mr. Brenkman, 24,909 shares
     represent the number of shares Mr. Brenkman has the right to acquire within
     60 days upon the exercise of options granted under the Company's 1994 Stock
     Option  Plan,  and  1,740,800  shares  represent  the  number of shares Mr.
     Brenkman  has the right to acquire  within 60 days  through the exercise of
     Warrants.  Mr.  Brenkman owns all shares in joint tenancy with his wife. In
     addition, 17,986 shares are held by Mr. Brenkman under the Pioneer Railcorp
     Retirement  Savings Plan and 2,340 shares are held by Mr.  Brenkman's wife,
     in which he disclaims beneficial ownership.

(3)  Of the total  number of shares  shown as owned by Mr.  Cox,  30,000  shares
     represent  the number of shares Mr. Cox has the right to acquire  within 60
     days upon the exercise of options  granted under the  Company's  1994 Stock
     Option Plan, and 101,770 shares  represent the number of shares Mr. Cox has
     the right to acquire  within 60 days through the  exercise of Warrants.  In
     addition,  1,880  shares  are held by Mr.  Cox under the  Pioneer  Railcorp
     Retirement  Savings Plan.  Mr. Cox's shares are owned in joint tenancy with
     his wife. Mr. Cox and his wife own one Preferred  Share in the  Mississippi
     Central Railroad Co.

(4)  Of the total number of shares shown as owned by Mr. LaKemper, 19,850 shares
     represent the number of shares Mr. LaKemper has the right to acquire within
     60 days upon the exercise of options granted under the Company's 1994 Stock
     Option Plan, and 40,000 shares  represent the number of shares Mr. LaKemper
     has the right to acquire  within 60 days  through the exercise of Warrants.
     In addition, 948 shares are held by Mr. LaKemper under the Pioneer Railcorp
     Retirement  Savings Plan. Mr.  LaKemper's shares are owned in joint tenancy
     with his wife.

(5)  Of the total number of shares shown as owned by Mr.  Fulton,  22,000 shares
     represent the number of shares Mr.  Fulton has the right to acquire  within
     60 days upon the exercise of options granted under the Company's 1994 Stock
     Option Plan,  and 10,200  shares  represent the number of shares Mr. Fulton
     has the right to acquire within 60 days upon the exercise of Warrants.

(6)  Of the total  number of shares shown as owned by Mr.  Carr,  53,050  shares
     represent the number of shares Mr. Carr has the right to acquire  within 60
     days upon the exercise of options  granted under the  Company's  1994 Stock
     Option Plan,  and 1,000 shares  represent the number of shares Mr. Carr has
     the right to acquire within 60 days through the exercise of Warrants.

(7)  Of the total number of shares shown as owned by Mr. Williams, 11,000 shares
     represent the number of shares Mr. Williams has the right to acquire within
     60 days upon the exercise of options granted under the Company's 1994 Stock
     Option Plan, and 100 shares represent the number of shares Mr. Williams has
     the right to acquire within 60 days through the exercise of Warrants.

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

Section  16(a) of the  Securities  Exchange Act of 1934  requires the  Company's
directors,  executive officers, and any persons holding more than ten percent of
the Company's  common stock to report their  initial  ownership of the Company's
common stock and any subsequent  changes in that ownership to the Securities and
Exchange Commission and to provide copies of such reports to the Company.  Based
upon the Company's  review of the copies of such reports received by the Company
and written representations of its directors and executive officers, the Company
believes that during the year ended  December 31, 1997, all Section 16(a) filing
requirements  were  satisfied  with  the  following  exceptions:  Timothy  Shea,
Director,  failed to file 1997 Form 5 by the deadline date. The Company believes
that  during  the year  ended  December  31,  1998,  all  Section  16(a)  filing
requirements were satisfied.

             The remainder of this page is intentionally left blank

<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 - Credit Agreement,  dated March 8, 1996, between the Company and
Citizens Bank and Trust Company, Chillicothe , Mo. (incorporated by reference to
Exhibit #10.1 of the Company's on Form 10-KSB filed March 27, 1996).

Exhibit # 10.2 - Exhibits to Credit Agreement,  dated March 8, 1996, between the
Company and Citizens Bank and Trust Company,  Chillicothe , Mo. (incorporated by
reference  to Exhibit  #10.2 of the  Company's  on Form  10-KSB  filed March 27,
1996.)

Exhibit # 10.3 - Purchase  agreement,  dated March 12, 1996  between the Company
and John Warfield,  regarding the Company's purchase of controlling  interest in
KNRECO,  Inc.,  d/b/a  Keokuk  Junction  Railway  (incorporated  by reference to
Exhibit #10.3 of the Company's on Form 10-KSB filed March 27, 1996).

Exhibit # 10.4 - 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 # 10.5 - 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 # 10.6 - 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 # 10.7 - 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 # 10.8 - 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 # 10.9 - 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 # 10.10 - 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.

Exhibit # 27 - Financial Data Schedule.

No reports were filed on Form 8-K during the fourth quarter 1998.
<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 19, 1999

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 19, 1999

By:  /s/ Orvel Cox
     ----------------------------------- 
     Orvel Cox, Director

Dated: March 19, 1999

By:  /s/ John Fulton
     -----------------------------------                 
     John Fulton, Director

Dated: March 19, 1999