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, 1995

                        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                 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, 1995 were $8,577,421.

The  aggregate  market  value of  voting  stock  held by  non-affiliates  of the
Registrant on March 25, 1996 was $9,680,930

                                    4,510,243
             ------------------------------------------------------
             (Shares of Common Stock outstanding on March 25, 1996)
<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. (WJ) (formerly West Jersey Railroad Co.),  Wabash & Western Railway
Co. (WGRY)  (formerly Wabash & Grand River Railway Co.), Fort Smith Railroad Co.
(FSR),  Alabama  Railroad Co. (ALAB),  Mississippi  Central Railroad Co. (MSCI),
Alabama & Florida Railway Co. (AF), Decatur Junction Railway Co. (DT),  Vandalia
Railroad Company (VRRC), Minnesota Central Railroad Co. (MCTA), Pioneer Railroad
Equipment  Co., Ltd.  (PREL),  Pioneer Air,  Inc.  (PAR),  and Pioneer  Railroad
Services, Inc. (PRS).

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

Railroad Operations

On October 1,  1988,  Pioneer  Railcorp  became  the  lessee and  operator  of a
railroad line in Salem and  Gloucester  counties,  New Jersey.  On July 1, 1990,
Pioneer  Railcorp  assigned  its lease to the West Jersey  Railroad  Co. (WJ), a
Class III common  carrier  freight  railroad and a  wholly-owned  subsidiary  of
Pioneer  Railcorp.  The lease ended April 30, 1995,  and the WJ's offer to renew
the lease was not accepted.

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 (MP) to operate 49 miles of
track from Fort Smith to Paris,  Arkansas. The FSR's primary interchange is with
the Union Pacific Railroad Company (UP), parent of the MP. 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. There are eleven other
products which are shipped on a periodic  basis.  In January of 1995 the FSR and
the MP jointly filed an abandonment  application  with the  Interstate  Commerce
Commission (ICC) to abandon  approximately 31 miles of leased railroad.  On July
6, 1995 the petition  was granted by the ICC  effective  August 19,  1995.  This
action reduced the miles of track leased and operated by the FSR to 18 miles.

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 purchase
was funded by issuing a mortgage  note  secured by the property for $300,000 and
issuing  $432,000 of preferred  stock.  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. (which formed the shortline railroad and
operated  it since  1982).  This  purchase  was  funded by cash,  a note to Kyle
Railways,  Inc. and by the  assumption  of debt.  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.  Both leases run through  December 31, 2006.  Pioneer
Railcorp  has a 10 year  renewal  option on the Cisco line.  They  require DT to
perform  normalized  maintenance on the line and for DT to compensate the owners
based upon the number of cars handled.  This compensation requires the DT to pay
$10.00 per car on all cars over 1,000 per year on each segment.

On October 7, 1994,  Pioneer Railcorp acquired all the outstanding  common stock
of the Vandalia  Railroad Company in exchange for $300,000 cash and the issuance
of 57,500 shares of Pioneer Railcorp Rule 144 restricted Class A common stock at
$4.87 per share.  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
purchase was consummated through the assumption of debt totaling $1,656,173. The
assets  purchased  included  approximately  94 miles of  operating  railroad  in
southwest  Minnesota,  7  locomotives,  33 railcars,  an engine house in Morton,
Minnesota,  several vehicles, pieces of maintenance equipment, and miscellaneous
parts, materials and supplies. The railroad interchanges with the BNSF at Hanley
Falls, MN and the TCW at Norwood, MN. The railroad's  principal  commodities are
grain, clay, fertilizer, canned goods, dairy products, and particle board.

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 for
$300,000  cash and  $200,000 of Pioneer  Railcorp  common  stock.  Those  assets
include  approximately  15 miles  of  track  and  right-of-way,  extending  from
Hartford to Paw Paw, in Van Buren County, Michigan, a depot building and parking
lot in Paw Paw and various  attendant  licenses  and rights  involving  the real
estate.  This agreement was approved by the United States  Bankruptcy  Court for
the Western  District  of  Michigan  in an order that  became  final on or about
September 21, 1995.  Pioneer Railcorp then assigned its right to purchase to the
West Jersey Railroad Co., a wholly owned  subsidiary of Pioneer,  which had been
operating the former KLSC tracks under a Interstate Commerce Commission Directed
Service Order since June 24, 1995. West Jersey Railroad Co. amended its articles
of  incorporation  to change its name to "West Michigan  Railroad Co." effective
October 2, 1995. The sale was approved by the Interstate  Commerce Commission by
order served October 18, 1995, and the West Michigan  Railroad Co. took title to
the property on October 24, 1995.

Other Operations

Other  operations  engaged in by the Company are  performed  by its wholly owned
subsidiaries,  Pioneer  Railroad  Equipment Co., Ltd. (PREL) which was formed on
April 1, 1990 and Pioneer Railroad  Services,  Inc. (PRS) which began operations
on October 1, 1993. PREL leases equipment to the Company's  subsidiary railroads
and also purchases,  sells and leases  equipment to and from unrelated  parties.
PREL also earns income from non-company  railroads on its fleet of approximately
750 railcars (as of December  31, 1995) when they carry  freight on  non-company
railroads.  PREL also engages in retail sales of promotional items. PRS provides
accounting,  management,  marketing,  operational  and  agency  services  to the
Company's  subsidiary  railroads and also sells computer  technical services and
equipment to unrelated  parties.  In addition,  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.
<PAGE>

Marketing

The Company's marketing department was established to foster continuing business
with existing  customers and to develop and attract new customers and additional
loadings on all PRC railroads.  The Company's  marketing  department is based in
Peoria, Illinois.

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 that
to be remote.

Suppliers

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

Competition

With respect to the industry in which PRC operates,  the Company, like any other
railroad company,  faces intense  competition from the trucking industry,  barge
lines and other railroads for moving commodities.

In regards to 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,  competition for these  acquisitions is intense.  The Company
believes that it has a competitive advantage for the acquisition of future Class
III  Railroads  due to  several  factors:  (1.) the  Company  has  acquired  and
currently operates multiple railroads, (2.) the Company's experienced management
team, (3.) the Company's proficiency with industry-trend technologies desired by
Class I Railroads,  such as  Electronic  Data  Interchange  (EDI),  and (4.) the
quality of the Company's employees.

Regulations

The   Company's   subsidiaries   are  subject  to   regulation  by  the  Surface
Transportation  Board of the U.S.  Department  of  Transportation,  the  Federal
Railroad  Administration (FRA), and certain state and local jurisdictions,  such
as state Departments of  Transportation,  in connection with some aspects of its
railroad operations. Such regulation affects rates, safety rules, maintenance of
track, other facilities, and right of way, and may effect 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, 1995,  the Company had 70  employees,  52 of whom are  operating
personnel, 14 support staff and 4 were executive officers.

During  1994  the   employees  of  the  FSR  voted  for  union   representation.
Negotiations are underway with the American Train Dispatchers Union which may or
may not result in a contract in the future.


Item 2.  Property

The Company  purchased in October 1994 a 16,000 square foot building  located in
Peoria,  Illinois as a permanent corporate  headquarters  facility.  The Company
moved its  corporate  office to these  facilities  in  November  1994.  With the
Company's business plan developing  rapidly,  the need for owned facilities with
ample room for  expansion  was  addressed  by this move.  The  Company's  former
headquarters in Chillicothe, Illinois is being offered for sale or lease.

A description of the Company's railroad  properties as of 12/31/95 by subsidiary
follows:

     a.) Fort Smith  Railroad  Co.  (FSR):  The FSR leases a line of railroad 18
         miles long from the Missouri  Pacific Railroad Company (a subsidiary of
         the Union Pacific Railroad Company). A twenty year lease was signed and
         operations  began on July 7,  1991.  The line runs  from Fort  Smith to
         Paris,  Arkansas.  The lease agreement  contains numerous  requirements
         including maintaining existing traffic patterns, repair and replacement
         of the right of way in the  condition  it was leased in and  payment of
         any  applicable  real estate taxes.  The Company is entitled to a fixed
         rate per carload  switched from the UP/MP 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.
<PAGE>

     b.) Alabama  Railroad Co.  (ALAB):  The ALAB is a line totaling 60 miles of
         operating railroad running from Flomaton to Corduroy, Alabama which was
         purchased by the Company from CSX  Transportation  (CSX) on October 25,
         1991.  The purchase  included both the track  materials and  underlying
         real  estate  and also  included  some rail  assets  associated  with a
         connecting CSX line  abandonment.  These rail assets which were part of
         the  transaction  included an  additional  1.5 miles of real estate and
         track  materials and an additional 3.5 miles of track  materials  only,
         which had to be removed  within twelve months of the  transaction.  The
         purchase was funded by issuing a mortgage note for $300,000 and issuing
         $432,000 of preferred stock.  The Company  considers the track to be in
         good condition.

     c.) Mississippi  Central  Railroad Co. (MSCI):  The MSCI,  formerly Natchez
         Trace  Railroad  (NTR),  is a line  totaling  56.5  miles of  operating
         railroad running from Oxford, Mississippi to Grand Junction, Tennessee.
         Approximately  51 of the total  miles are  located in  Mississippi.  On
         April 1, 1992,  100% of the common stock of this railroad was purchased
         by the  Company  from  Kyle  Railways,  Inc.,  which had  operated  the
         shortline  railroad  since 1982.  The  purchase  was funded by internal
         cash,  a note to Kyle  Railways,  Inc. and by  assumption  of the NTR's
         debt. The Mississippi  portion of the line was owned by the Layfayette,
         Marshall and Benton  Regional  Railroad  Authority  and operated by the
         MSCI under a  lease-purchase  arrangement.  On December 21, 1993,  MSCI
         concluded the purchase of the Mississippi  portion of the line from the
         Rail  Authority.  The  Company  considers  the  track  to  be  in  good
         condition, as several bridge and track rehabilitations have taken place
         during the railroad's existence.  On February 25, 1991, a large washout
         occurred  on the line a short  distance  from where the line enters the
         city of Oxford, Mississippi,  denying access to several MSCI customers.
         In late 1995 the MSCI repaired the washout and re-opened the line.  The
         Company is actively  pursuing new business on this segment of the line;
         however no  significant  revenues were generated in 1995 as a result of
         the washout repair.

     d.) Alabama & Florida  Railway Co. (AF): On November 23, 1992,  the Company
         purchased 76 miles of track facilities and railroad equipment from A&F,
         Inc., which had been doing business as Alabama & Florida Railroad. This
         railroad runs between Georgiana and Geneva,  Alabama.  The purchase was
         funded by issuing a mortgage note for $1,750,000 and by the proceeds of
         the issuance of $431,000 in preferred  stock. The Company has an option
         from  CSX   Transportation  to  negotiate  a  purchase  price  for  the
         underlying real estate and currently  leases the property for a monthly
         payment of $1,667.  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 $375 per month,  plus $15 per car over
         300 cars annually. The Company also absorbs the cost of all maintenance
         of  that  facility.  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.  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). The Company is required to
         perform normal track maintenance.

     f.) Vandalia Railroad Company (VRRC):  The VRRC is approximately 3.45 miles
         of operating railroad located in Vandalia,  Illinois.  The railroad was
         purchased  with $300,000 cash and the issuance of 57,500 shares of Rule
         144  restricted  common stock of the  Registrant.  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): On December 12, 1994 the Company
         purchased  approximately  94 miles of  operating  railroad and railroad
         equipment  from MNVA  Railroad,  Inc.  The  purchase  was funded by the
         assumption of debt totaling  $1,656,173.  Certain  sections of the line
         are in poor  condition  and the Company  made a  significant  effort to
         improve the line in 1995,  and plans to repeat  these  efforts in 1996.
         The Company decided against seeking rehabilitation grant funds from the
         Minnesota  Department of Transportation and believes it can improve the
         track with its own resources.

     h.) West  Michigan  Railroad Co. (WJ): 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 for $300,000
         cash and  $200,000  of Pioneer  Railcorp  common  stock.  Those  assets
         include  approximately  15 miles of track and  right-of-way,  extending
         from  Hartford  to Paw Paw,  in Van  Buren  County,  Michigan,  a depot
         building and parking lot in Paw Paw and various attendant  licenses and
         rights  involving the real estate.  This  agreement was approved by the
         United States  Bankruptcy Court for the Western District of Michigan in
         an order that became  final on or about  September  21,  1995.  Pioneer
         Railcorp  then  assigned  its  right to  purchase  to the  West  Jersey
         Railroad Co., a wholly owned subsidiary of Pioneer Railcorp,  which had
         been  operating  the former KLSC  tracks  under a  Interstate  Commerce
         Commission  Directed  Service  Order since June 24,  1995.  West Jersey
         Railroad Co. amended its articles of  incorporation  to change its name
         to "West Michigan Railroad Co." effective October 2, 1995. The sale was
         approved by the Interstate  Commerce Commission by order served October
         18, 1995, and the West Michigan Railroad Co. took title to the property
         on October 24, 1995.


Item 3.  Legal Proceedings

Several  lawsuits  were  pending  by and  against  Pioneer  Railcorp  and/or its
subsidiaries (collectively, the "Company") during 1995.

The Company (through its Decatur  Junction Railway Co.  subsidiary) was involved
in  litigation  in  both  state  and  federal  court  against   Indiana  Hi-Rail
Corporation  (the former  operator of DT's lines).  The cases  involved  alleged
breaches of contract by Indiana Hi-Rail Corporation ("IHRC"), and counter-claims
by IHRC against  Pioneer  Railcorp and DT. A settlement of all of thesecases was
reached with the Trustee of the IHRC's Bankruptcy Estate, and their dismissal is
pending.  The  settlement  did  not  have a  material  effect  on the  Company's
consolidated financial position or results of operations.

Two lawsuits  brought  against the Fort Smith Railroad Co. by a former  employee
went to trial  during the third  quarter of 1995.  That  trial  resulted  in the
dismissal  of one action and a jury verdict in favor of the Company in the other
action. Neither of those results was appealed.

The Fort Smith  Railroad was also involved as a Defendant in litigation  arising
out of an  accident  which  occurred  on or about  December  8,  1993 in which a
motorist was fatally  injured  when he collided  with an FSR train at a crossing
near Lavaca, Arkansas. That case was settled prior to trial. FSR was required to
pay its insurance  retention of $25,000,  which had already been reserved for in
1994.  The remainder of the  settlement  was paid by FSR's  liability  insurance
carrier.

There are a number of outstanding  issues between Minnesota Central Railroad Co.
("MCTA") and MNVA Railroad,  Inc. ("MNVA") and Dakota, Missouri Valley & Western
Railroad,  Inc.,  remaining from the asset sale from MNVA to MCTA last December.
Three cases,  involving  claims by and against MCTA and Pioneer,  are  currently
pending in Minnesota and Illinois. Management does not believe that any of these
cases will result in a material  adverse  effect on the  Company's  consolidated
financial position or results of operations.

A Federal Employer's  Liability Act ("FELA") lawsuit is also pending against the
Alabama & Florida  Railway Co. in  Alabama.  That action was brought by a former
employee of a track contractor (or its sub-contractor), and is being defended by
the contractor  pursuant to an indemnification  agreement.  The Company does not
believe it has any  liability in the matter,  and does not believe the case will
result in a material adverse effect on the Registrant's  consolidated  financial
position or results of operations.

The Company's  subsidiary  railroads have a number of claims against  delinquent
licensees,  customers and others, some of which are in litigation,  and other of
which are likely to result in litigation. None of the amounts involved, however,
would have a material impact on the Company's consolidated financial position or
results of operations if they proved to be uncollectible.
<PAGE>

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,
and as of the  date  of  this  Form  10-KSB,  management  believes  that no such
incident, which is not described herein, is likely to result in a liability that
would materially effect the Company's consolidated financial position or results
of operations.

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 1995.

PART II


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

 The  Company's  common stock  trades on 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 (adjusted to reflect a 2 for 1
stock split on 6/30/95):

         94-1Q    94-2Q    94-3Q   94-4Q   95-1Q    95-2Q    95-3Q    95-4Q
         -----    -----    -----   -----   -----    -----    -----    -----

High     $2.19    $2.07    $3.00   $3.07   $2.63    $4.50    $4.50    $3.38
Low      $1.50    $1.33    $1.50   $2.34   $2.00    $2.19    $2.63    $2.00

As of December 31, 1995,  the Company had 1,753 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

Results of Operations

Year Ended December 31, 1995 Compared to Year Ended December 31, 1994

The Company's  net income in 1995  increased by 18% to $462,000 up from $391,000
in 1994.  Operating revenues  increased by $2.2 million,  or 35% to $8.6 million
from $6.4 million in 1994. Operating expenses increased in 1995 by $1.9 million,
or 38%,  to $6.9  million  from $5 million in the prior year.  Operating  income
increased in 1995 by  $300,000,  or 24% to $1.7 million from $1.4 million in the
prior year.

Operating Revenues:

Operating  revenues  increased in 1995 by $2.2 million,  or 35%, to $8.6 million
from $6.4  million in the prior  year.  The  increase in  operating  revenues is
attributable  to the first  full year of  operations  of the  Minnesota  Central
Railroad Co. and the Vandalia  Railroad  Co., and the increase in revenues  from
the Company's  growing railcar fleet. The Minnesota  Central,  which the Company
began  operating  December 13, 1994,  generated  an  additional  $1.3 million in
revenues in 1995. The Vandalia  Railroad,  which was purchased  October 7, 1994,
added an  additional  $209,000 in revenues in 1995.  Carhire  revenues  from the
Company's  railcar  fleet  (approximately  750 cars at  12/31/95)  increased  by
$700,000,  or 59%,  to $1.8  million  from $1.1  million in the prior  year.  In
addition,  1995 was the first year in which the Company made significant efforts
to lease its railcars and excess  locomotives to non-affiliated  entities.  This
activity  generated  $125,000 in  revenues in 1995.  The loss of the West Jersey
Railroad  Co.  lease in April 1995 and it's  subsequent  operation of the former
KLSC railroad, had an immaterial affect on operating revenues in 1995.

Other factors affected the Company's 1995 operating revenues.  In early February
1995 the  Company's  Decatur  Junction  Railway Co.  began  performing  contract
switching  for the Illinois  Central  Railroad.  This contract was executed as a
direct result of labor disputes at certain Decatur, Illinois industries, and the
refusal of  Illinois  Central  train  crews to cross the  picket  lines at local
industries.  This  contract,  which  ceased  in early  January  1996,  generated
$139,000 of revenue in 1995.

The Mississippi Central Railroad had a decrease in revenues of $132,000,  or 13%
to $925,000 from $1,057,000 in the prior year. This decrease was a direct result
of a reduction in particle board shipments in 1995 compared to 1994. The Company
does not  anticipate a further  decrease in this  business  for the  foreseeable
future.

The  remaining  operating  subsidiaries  had constant  overall  revenues in 1995
compared to 1994.
<PAGE>

Operating Expenses (general):

Operating  expenses  increased in 1995 by $1.9 million,  or 38%, to $6.9 million
from $5 million  in the prior  year.  The  increase  in  operating  expenses  is
attributable  to the first  full year of  operations  of the  Minnesota  Central
Railroad Co. and the Vandalia Railroad Co.,  increases in equipment  maintenance
resulting  from  the  Company's   growing   railcar  fleet,   and  increases  in
administrative  expenses  resulting  from the current,  and  anticipated  future
growth of the Company. The Minnesota Central,  which the Company began operating
December  13,  1994,  added $1.1  million of  operating  expenses  in 1995.  The
Vandalia  Railroad,  which was  purchased  October  7,  1994,  added  $66,000 of
operating  expenses in 1995.  Operating  expenses relating to the maintenance of
the Company's railcar fleet increased $188,000, or 72% to $448,000 from $260,000
in the prior year.  Administration expense increased $515,000 to $2,240,000,  or
30% from  $1,725,000 in the prior year. The loss of the West Jersey Railroad Co.
lease in April 1995 and it's  subsequent  operation of the former KLSC railroad,
had an immaterial effect on operating expenses in 1995.

Operating Expense Income Statement Line Item Discussion:

Maintenance of ways expense increased $287,000, or 49% to $878,000 from $591,000
in the prior year. This increase was a direct result of the Minnesota  Central's
first full year incremental  expense of $226,000.  The Vandalia  Railroad had an
insignificant  amount of  maintenance of way expense since it only operates 3.45
miles of trackage.  Other operating subsidiaries had constant maintenance of way
expense in 1995 compared to 1994,  with some reduction in expense being realized
through the use of contract services.

Maintenance of equipment expense increased  $385,000,  or 60% to $1,031,000 from
$646,000 in the prior year.  This  increase was a direct result of the Minnesota
Central's first year incremental expense of $152,000.  The Vandalia Railroad had
an insignificant  amount of maintenance of equipment expense.  In addition,  the
Company  had an  increase  of  $188,000  in expense  as a result of its  growing
railcar  fleet.  Other  operating   subsidiaries  had  constant  maintenance  of
equipment expense in 1995 compared to 1994.

Transportation  expense increased $402,000, or 28% to $1,823,000 from $1,421,000
in the prior year. This increase was a direct result of the Minnesota  Central's
first full year incremental expense of $532,000.  The Vandalia Railroad added an
incremental expense of $10,000 as a result of its first full year of operations.
The  Fort  Smith   Railroad  had  a  decrease  in   transportation   expense  of
approximately  $60,000 or 20% of its 1994 transportation costs and the Alabama &
Florida  Railway  had a decrease  of  $85,000 or 27% of its 1994  transportation
costs . Both of these  reductions  resulted from more  efficient  train handling
operations.  Other operating subsidiaries had constant transportation expense in
1995 compared to 1994.

Administration expense increased $515,000 to $2,240,000,  or 30% from $1,725,000
in the prior year. The Minnesota  Central's first full year incremental  expense
was $106,000. The Vandalia Railroad added an incremental expense of $48,000 as a
result of its first full year of operations. Professional fees increased $60,000
in  1995  primarily  resulting  from  security  registrations  and  other  legal
services. Printing and postage expense increased $26,000 also as a direct result
of  security  registrations.  The  Company  completed  its  first  full  year of
occupation  in its new corporate  headquarters.  This  expanded  facility  added
approximately  $42,000 of overhead  compared to occupancy  expense in the former
office.  Expenses  relating to the hiring of several  support  personnel in 1995
increased administrative costs by approximately $200,000.

Depreciation and amortization  expense increased  $295,000,  or 48%, to $914,000
compared to $619,000 in the prior  year.  Approximately  33% of the  increase in
this expense is related to the Minnesota Central Railroad.  Approximately 55% of
this increase is related to the Company's  growing railcar fleet.  The remainder
is attributed to other miscellaneous capital additions.

Other Income and Expense Income Statement Line Item Discussion:

Other  income  and  expenses,  excluding  interest  expense  and gain on sale of
assets, increased $80,000 to $133,000 compared to $53,000 in the prior year. The
majority of this income is generated  from the granting of easements  and leases
to use railroad right of way property. Also included in this income are revenues
generated from scrap sales, and other  non-operating  revenues and expenses.  No
item included in this category is material when considered alone.

Equipment  interest expense increased  $195,000,  or 69% to $475,000 compared to
$280,000  in the prior  year.  All of this  increase  is a result  of  financing
activities  for the  Company's  railcar  acquisitions.  Other  interest  expense
increased  $83,000 or 37% to  $310,000  compared  to $227,000 in the prior year.
Most of the  increase is related to the debt  assumed in the  Minnesota  Central
asset purchase.
<PAGE>

Net  gain on fixed  asset  dispositions  increased  $40,000  in 1995 to  $43,000
compared to $3,000 in 1994.  Approximately  $25,000 of the gain was attributable
to the sale of 2.8 miles of Alabama  Railroad  track  materials.  This track was
removed from an area on the line that has been out of service for several years.
The disposition of 2 railcars  resulted in an $18,000 gain. The remainder of the
net  gain  resulted  from  the  disposition  of other  miscellaneous  pieces  of
equipment, none of which was disposed of at a significant gain or loss.

In November 1995, the Financial  Accounting  Standards Board issued Statement of
Financial  Accounting  Standard No. 123 (SFAS 123),  "Accounting for Stock Based
Compensation." SFAS 123 encourages,  but does not require,  accounting for stock
based compensation  awards on the basis of fair value at the date the awards are
granted.  The fair value of the award is included in expense on the statement of
income.  Companies  that do not adopt SFAS 123 will be required to disclose what
net income and  earnings  per share would have been,  had they adopted SFAS 123.
SFAS 123 is effective for fiscal years  beginning  after  December 15, 1996. The
Company does not intend to adopt SFAS 123.

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 $675,000 in unused working capital  facilities  available at the
end of 1995.  In addition,  the Company has seen the market value of its railcar
fleet increase significantly over the last several years. This increase in value
has resulted from the short supply of railcars  compared to the increased demand
for there use. The Company believes it could refinance part of its railcar fleet
with an asset based lender and generate up to $1 million in cash .

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  2,098,042 to  4,196,084.  At the same time  shareholders
became  entitled  to purchase  an  additional  4,196,084  shares  through  stock
warrants  issued by the  Company as  dividends.  One warrant was issued for each
share of common stock held after the split,  entitling  the holder to purchase 1
share of common  stock for $2.00 per share.  The shares  purchased  through  the
exercise of the warrants  must be held for 1 year from date of  purchase.  As of
December  31,  1995,  a total of 19,254  warrants  had been  exercised,  and the
Company  realized  $38,508 on the issuance of the warrants.  The Company expects
increased 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. The Company expects  increased  capital to
be  generated  by the  exercise of options in 1996,  but is  uncertain as to the
amount. No options have been exercised as of the date of this report.

Subsequent to its fiscal year end, 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,  however, 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.  As of the date of this
filing,  the line has been fully  drawn upon in  connection  with the  Company's
March 12, 1996  acquisition  of a controlling  interest of KNRECO, Inc. d/b/a
Keokuk Junction Railway,  common stock. The current monthly debt service
resulting from the $2.5 million borrowed is $43,000,  with monthly payments
 beginning on April 8, 1996.

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 are 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 1996. The Company is considering and analyzing the refinancing of some of its
present debt.
<PAGE>

The Company anticipates  favorable outcomes involving current legal proceedings.
The Company does not anticipate any material judgements against it or any of its
subsidiaries will arise out of the current proceedings.

The Company  believes its cash flow from  operations  and its available  working
capital  credit  lines,  will be more than  sufficient to meet  liquidity  needs
through at least 1996.

Balance Sheet and Cash Flow Items:

The Company generated net cash from operating activities of $1.4 million in 1995
and $1.8 million in 1994. Net cash from  operating  activities for 1995 resulted
from $462,000 of net income, $914,000 of depreciation and amortization, $334,000
of deferred income taxes,  partially offset by $319,000 net cash used by changes
in  operating  assets and  liabilities,  primarily  due to increases in accounts
receivable.  Accounts receivable increased  approximately  $240,000 in 1995 as a
result of increased revenues from the Company's growing railcar fleet .

In 1995 the  Company  purchased  approximately  $6 million  of fixed  assets and
capital  improvements.  The Company  purchased  approximately  300 railcars at a
total cost of $4.6  million,  bringing its railcar  fleet to  approximately  750
cars.  All of the railcars  purchased  were financed with  long-term  fixed rate
financing.  The Company also acquired 6 GP-8 locomotives through the issuance of
$270,000  of Rule 144  common  stock of the  Company.  The  Company  capitalized
$325,000 of track betterments in 1995,  $290,000 which was funded with operating
cash flows and  $35,000  funded by the  issuance  of Rule 144  Pioneer  Railcorp
common stock. The Company purchased $180,000 of machinery and equipment in 1995,
of which $120,000 was for the purchase of vehicles financed with long term debt.
The remaining  machinery and equipment was funded by operating cash. In 1994 the
Company  purchased 170 railcars at a cost of $1.4  million.  The majority of the
1994 railcar acquisitions were financed with long-term debt.

Of the $4.6  million of railcars  purchased  in 1995,  the Company  entered into
financing  agreements  for the  purchase of 150 covered  hoppers at a cost of $3
million in  December  of 1995.  This  transaction  resulted  in an  increase  of
approximately  $285,000 in the current  portion of long-term  debt.  The Company
believes the revenues  generated from the use of the railcars in 1996 and future
years will more than cover the cashflow requirements of the related debt.

The Company  purchased a Cessna 421 B aircraft  for $20,000 cash and $135,000 in
Company  common  stock.  The  aircraft is used  solely for  Company  business by
management and employees.

The  Company  purchased  through  bankruptcy  court the  tangible  assets of the
Southwestern  Michigan  Railroad  Company,  Inc., d/b/a  Kalamazoo,  Lakeshore &
Chicago Railroad.  The assets purchased totaled $500,000,  of which $300,000 was
generated through  short-term  borrowing and operating cash flow, and completely
refinanced  with  long-term  debt using  certain  railcars  as  collateral.  The
remaining $200,000 was financed by the issuance of common stock of the Company.

<PAGE>

Item 7.  Financial Statements


                          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, 1995 and 1994, 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,  1995  and  1994,  and the  results  of their
operations  and their cash flows for the years  then  ended in  conformity  with
generally accepted accounting  principles.  Peoria,  Illinois February 20, 1996,
except for Note 13 as to which the date is March 12, 1996

<PAGE>





PIONEER RAILCORP AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
December 31, 1995 and 1994
<TABLE>


ASSETS
                                                                                      1995         1994
----------------------------------------------------------------------------------------------------------
<S>                                                                              <C>          <C>

Current Assets
   Cash ........................................................................ $    276,230 $    179,415
   Accounts receivable, less allowance for doubtful
      accounts 1995 $15,958; 1994 $14,000 ......................................    1,283,124      934,574
   Income tax refund claims ....................................................       50,998         --
   Inventories .................................................................      287,772      211,887
   Prepaid expenses ............................................................      123,609      121,464
   Deferred taxes ..............................................................       35,000       16,850
                                                                                 ------------ ------------
        Total current assets ...................................................    2,056,733    1,464,190
                                                                                 ------------ ------------

Property and Equipment, less accumulated depreciation
   1995 $1,979,998; 1994 $1,225,487 ............................................   15,220,168   10,228,372
                                                                                 ------------ ------------

Intangible Assets, less accumulated amortization
   1995 $100,493; 1994 $57,945 .................................................      647,031      604,281
                                                                                 ------------ ------------

                                                                                 $ 17,923,932 $ 12,296,843
                                                                                 ============ ============

LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
   Notes payable ............................................................... $     80,333 $    154,160
   Current maturities of long-term debt ........................................    1,412,552      895,482
   Accounts payable ............................................................    1,115,241      925,380
   Accrued expenses ............................................................      354,834      261,891
   Income taxes payable ........................................................       17,367       83,129
                                                                                 ------------ ------------
        Total current liabilities ..............................................    2,980,327    2,320,042
                                                                                 ------------ ------------

Long-Term Debt, net of current maturities ......................................    9,934,737    6,470,710
                                                                                 ------------ ------------

Deferred Taxes .................................................................      843,000      490,850
                                                                                 ------------ ------------

Minority Interest in Subsidiaries ..............................................    1,195,000    1,209,000
                                                                                 ------------ ------------

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
      1995 4,487,881 shares; 1994 2,098,042 shares .............................        4,487        2,098
   Common stock, Class B (nonvoting), no par value;
      authorized 2,000,000 shares; issued none .................................            0            0
   Additional paid-in capital ..................................................    1,832,353    1,129,725
   Retained earnings ...........................................................    1,134,028      674,418
                                                                                 ------------ ------------
                                                                                    2,970,868    1,806,241
                                                                                 ------------ ------------

                                                                                 $ 17,923,932 $ 12,296,843
                                                                                 ============ ============

</TABLE>

See Notes to Consolidated Financial Statements.


<PAGE>


PIONEER RAILCORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 1995 and 1994
<TABLE>


                                                                              1995                1994
-----------------------------------------------------------------------------------------------------------
<S>                                                                   <C>                 <C>

Railway operating revenue                                             $       8,577,421   $      6,367,352
                                                                      -------------------------------------

Operating expenses
   Maintenance of way and structures                                            877,654            590,855
   Maintenance of equipment                                                   1,030,975            646,179
   Transportation                                                             1,822,982          1,420,709
   General and administrative                                                 2,240,581          1,725,068
   Depreciation                                                                 871,910            588,756
   Amortization                                                                  42,548             30,504
                                                                      -------------------------------------
                                                                              6,886,650          5,002,071
                                                                      -------------------------------------

      Operating income                                                        1,690,771          1,365,281
                                                                      -------------------------------------

Other income (expenses)
   Interest income                                                                3,005              2,317
   Interest expense                                                           (785,371)          (507,183)
   Lease income                                                                  74,551             65,232
   Gain on sale of assets                                                        43,862              2,820
   Other, net                                                                    54,738           (13,815)
                                                                      -------------------------------------
                                                                              (609,215)          (450,629)
                                                                      -------------------------------------
      Income before provision for income taxes
        and minority interest in preferred stock
        dividends of consolidated subsidiaries                                1,081,556            914,652

Provision for income taxes                                                      495,443            398,529
                                                                      -------------------------------------

      Income before minority interest in preferred
        stock dividends of consolidated subsidiaries                            586,113            516,123

Minority interest in preferred stock dividends of
   consolidated subsidiaries                                                    124,405            125,230
                                                                      -------------------------------------

      Net income                                                      $         461,708   $        390,893
                                                                      -------------------------------------

Earnings per common and common equivalent share:
   Primary                                                            $             .11   $            .08
                                                                      ====================================

   Fully diluted                                                      $             .10   $            .08
                                                                      ====================================

Weighted average number of common shares used in
   computing earnings per common and common
   equivalent share:
   Primary and fully diluted                                                  8,359,416          7,483,951
                                                                      ====================================

</TABLE>

See Notes to Consolidated Financial Statements.
<PAGE>



PIONEER RAILCORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended December 31, 1995 and 1994
<TABLE>

 
                                               Class A (voting)           Additional
                                            -------------------------       Paid-In        Retained
                                              Shares         Amount         Capital        Earnings
-----------------------------------------------------------------------------------------------------
<S>                                         <C>           <C>            <C>            <C>


Balance at December 31, 1993                 2,040,542    $     2,040    $    849,469   $     283,525
   Common stock issued                          57,500             58         280,256               0
   Net income                                        0              0               0         390,893
                                            ---------------------------------------------------------

Balance at December 31, 1994                 2,098,042    $     2,098    $  1,129,725   $     674,418
   Stock split July 1, 1995                  2,098,042          2,098               0         (2,098)
   Common stock issued to acquire
      property, equipment and
      inventory                                272,543            272         664,139               0
   Common stock issued upon
      exercise of stock warrants                19,254             19          38,489               0
   Net income                                        0              0               0         461,708
                                            ---------------------------------------------------------

Balance at December 31, 1995                 4,487,881    $     4,487    $  1,832,353   $   1,134,028
                                            =========================================================
</TABLE>

See Notes to Consolidated Financial Statements.


<PAGE>


PIONEER RAILCORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1995  AND 1994
<TABLE>


                                                                                   1995           1994
-----------------------------------------------------------------------------------------------------------
<S>                                                                          <C>            <C>

Cash Flows From Operating Activities
   Net income                                                                $      461,708 $       390,893
   Adjustments to reconcile net income to net cash provided
      by operating activities:
      Minority interest in preferred stock dividends of
        consolidated subsidiaries                                                   124,405         125,230
      Depreciation                                                                  871,910         588,756
      Amortization                                                                   42,548          30,504
      (Gain) on sale of property and equipment                                     (43,862)         (2,820)
      Deferred taxes                                                                334,000         193,000
      Changes in assets and  liabilities,  net of effects  from  
        acquisition  of subsidiaries:
        (Increase) decrease in accounts receivable                                (348,550)         106,503
        (Increase) in income tax refund claims                                     (50,998)               -
        (Increase) in inventories                                                  (58,635)        (45,175)
        (Increase) in prepaid expenses                                              (2,145)        (25,635)
        (Increase) in intangible assets                                            (85,298)           (136)
        Increase in accounts payable                                                189,861         224,859
        Increase in accrued expenses                                                 72,943         139,340
        Increase (decrease) in income taxes payable                                (65,762)          45,210
                                                                             -------------------------------
           Net cash provided by operating activities                              1,442,125       1,770,529
                                                                             -------------------------------

Cash Flows From Investing Activities
   Proceeds from sale of property and equipment                                     244,012          41,450
   Purchase of property and equipment, net of property and
      equipment from acquisition of subsidiaries                                (5,096,695)     (2,271,267)
   Acquisition of subsidiaries, net of cash acquired                              (300,000)       (237,200)
                                                                             -------------------------------
           Net cash (used in) investing activities                              (5,152,683)     (2,467,017)
                                                                             -------------------------------

Cash Flows From Financing Activities
   Proceeds from short-term borrowings, net of debt
      assumed in acquisition of subsidiaries                                      1,409,911         844,974
   Proceeds from long-term borrowings, net of debt assumed in
      acquisition of subsidiaries                                                 5,479,157       1,933,506
   Payments on short-term borrowings                                            (1,483,738)     (1,098,159)
   Payments on long-term borrowings                                             (1,498,060)       (724,706)
   Proceeds from common stock issued upon exercise of
      stock warrants                                                                 38,508               -
   Payments to minority interest                                                  (124,405)       (125,230)
   Repurchase of minority interest                                                 (14,000)               -
                                                                             -------------------------------
           Net cash provided by financing activities                              3,807,373         830,385
                                                                             -------------------------------

           Net increase in cash                                                      96,815         133,897

Cash, beginning of year                                                             179,415          45,518
                                                                             -------------------------------

Cash, end of year                                                            $      276,230 $       179,415
                                                                             ==============================
</TABLE>

                                (Continued)
<PAGE>



PIONEER RAILCORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED DECEMBER 31, 1995  AND 1994
<TABLE>


                                                                                1995             1994
-----------------------------------------------------------------------------------------------------------
<S>                                                                        <C>               <C> 
Supplemental Disclosures of Cash Flow Information
   Cash payments for:
      Interest                                                             $      489,986   $      425,091
                                                                           ===============================

      Income taxes, net                                                    $      278,203   $      159,978
                                                                           ===============================

Supplemental Schedule of Noncash Investing
   and Financing Activities
      Railroad acquisitions
        Fair value of assets acquired                                      $      500,000   $    2,458,610
        Cash paid for stock and assets                                          (300,000)        (300,000)
                                                                           -------------------------------
        Liabilities and debt assumed; and stock issued                     $      200,000   $    2,158,610
                                                                           ===============================

      Reconciliation:
        Liabilities assumed                                                $            -   $      222,123
        Debt assumed                                                                    -        1,656,173
        Issuance of common stock 1995 76,190 shares;
           1994 57,500 shares                                                     200,000          280,314
                                                                           -------------------------------
                                                                           $      200,000   $    2,158,610
                                                                           ===============================

      Additional property, equipment and inventory acquired
        upon issuance of common stock 1995 196,353 shares                  $      464,411   $            -
                                                                           ===============================

</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 (the  "Company") is the parent company of
eight active short-line common carrier railroad operations, an equipment leasing
company,  an aircraft  subsidiary,  and a service  company.  The Company and its
subsidiaries  operate in the  following  states:  Alabama,  Arkansas,  Illinois,
Michigan, Minnesota, Mississippi, and Tennessee.

The Company's active subsidiaries include the following:

   West Michigan Railroad Co.
   Minnesota Central Railroad Co.
   Vandalia Railroad Company
   Decatur Junction Railway Co.
   Alabama & Florida Railway Co.
   Mississippi Central Railroad Co.
   Alabama Railroad Co.
   Fort Smith Railroad Co.
   Pioneer Railroad Equipment Co. Ltd.
   Pioneer Air, Inc.
   Pioneer Railroad Services, Inc.

Pioneer Railroad  Equipment Co., Ltd. holds title to a majority of the Company's
operating  equipment,  and  Pioneer  Air,  Inc.  holds  title  to the  Company's
aircraft.  Pioneer Railroad Services,  Inc. provides management,  administrative
and  agency  services  to  the  Company's   subsidiary   railroads.   All  other
subsidiaries are active short-line common carrier railroad operations.

Significant accounting policies:

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

Presentation  of cash flows:  For the  purposes  of  reporting  cash flows,  the
Company considers all highly liquid debt instruments  purchased with maturity of
three months or less to be cash  equivalents.  There are no cash  equivalents at
December 31, 1995 and 1994.

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

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

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

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

                                                                         Years
                                                                      ----------

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

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

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

Long-lived assets: The Financial  Accounting Standards Board issued Statement of
Financial  Accounting  Standards  No.  121  (SFAS  121),   "Accounting  for  the
Impairment of Long-Lived  Assets and for  Long-Lived  Assets to be Disposed," in
March 1995,  and this  standard  was adopted by the Company  during 1995 with no
material  effect on the Company's  financial  position or results of operations.
SFAS 121  establishes  accounting  standards  for the  impairment  of long-lived
assets,  such as property and equipment,  certain  identifiable  intangibles and
goodwill related to those assets to be held and used, and for long-lived  assets
and certain  identifiable  intangibles  to be disposed  of. The Company  reviews
applicable assets on a quarterly basis to determine whether any circumstances or
events would indicate an impairment.

Earnings  per common and common  equivalent  share:  The earnings per common and
common equivalent share were computed by dividing the net income by the weighted
average  number  of  shares  of  common  stock  and  common  stock   equivalents
outstanding  during  the  year  for  primary  earnings  per  common  and  common
equivalent  share.  The number of common  shares was  increased by the number of
shares  issuable  under the stock  option plan and stock  warrants  described in
Notes 6 and 9, and this theoretical increase in the number of shares was reduced
by the number of shares which were assumed to have been  repurchased (20 percent
of the  outstanding  shares at the end of the year) using the proceeds  from the
exercise of the options and warrants. The repurchase price was assumed to be the
average  market price per share during the year for primary  earnings per common
and common  equivalent  share. The repurchase price was assumed to be the ending
market  price per share  for  fully  diluted  earnings  per  common  and  common
equivalent share. The remainder of the proceeds was assumed to have been used to
reduce debt with the net income adjusted for the interest expense reduction, net
of the related income tax effect.  Earnings per share  information  for 1994 has
been  retroactively  restated  to  reflect  the  effect of the  stock  split and
warrants.

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.

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.  The
insurance  contract  with Safeco Life  Insurance  Company  limits the  insurance
company's coverage to a $2,000,000 maximum lifetime reimbursement per person and
specifies  that  individual  claims in excess of $20,000 on an annual  basis and
total claims exceeding the aggregate excess will be fully covered by Safeco Life
Insurance Company, subject to the maximum lifetime reimbursement provision.


Note 2. Property and Equipment

Property and equipment consist of the following:

                                                             December 31,
                                                   -----------------------------
                                                      1995               1994
                                                   -----------       -----------

Land .......................................       $   280,606       $   183,100
Roadbed ....................................         4,840,367         4,175,010
Transportation equipment ...................         1,594,150         1,481,464
Railcars ...................................         8,328,207         3,905,575
Buildings ..................................           687,958           725,592
Machinery and equipment ....................           704,117           612,060
Office equipment ...........................           297,665           253,808
Capital projects ...........................           467,096           117,250
                                                   -----------       -----------
                                                    17,200,166        11,453,859
Less accumulated depreciation ..............         1,979,998         1,225,487
                                                   -----------       -----------
                                                   $15,220,168       $10,228,372
                                                   ===========       ===========
<PAGE>

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

The Company has a $75,000 line of credit with Citizens  Bank and Trust  Company,
Chillicothe,  Missouri.  The  line  of  credit  expires  February  1996  and  is
collateralized  by  transportation  equipment.  The Company  has no  outstanding
balance  under this line of credit as of December 31, 1995.  The balance owed as
of December 31, 1994, was $70,000. The line of credit bears interest at 10.5%.

The Company has a $600,000 line of credit with Merrill Lynch Business  Financial
Services, Inc., Chicago, Illinois. The line of credit expires August 1996 and is
collateralized by accounts receivable,  inventory and general  intangibles.  The
Company has no  outstanding  balance  under this line of credit at December  31,
1995 or 1994. The line bears interest at prime,  as published in The Wall Street
Journal, plus 1%.

The Company has a $11,682 and $35,962  unsecured note payable to MINNRAIL,  Inc.
as of December 31, 1995 and 1994, respectively. This note was assumed as part of
the asset  acquisition  from MNVA Railroad,  Inc. The note bears no interest and
requires quarterly payments on the basis of revenue carloads received or shipped
on the Minnesota  Central  Railroad Co., a Pioneer Railcorp  subsidiary,  at the
rate of $10 per car.

The Company has various  unsecured notes payable totaling $68,651 and $48,198 as
of December  31, 1995 and 1994,  respectively,  for the  financing  of insurance
premiums.  These  notes are due in monthly  installments  from $1,761 to $9,907,
including interest ranging from 7.75% to 11.1%, with final installments due from
April 1996 to August 1996.

Long-term debt at December 31, 1995 and 1994, consists of the following:
<TABLE>

                                                                                     1995         1994
                                                                                   ----------   ----------
<S>                                                                                <C>          <C>

Mortgage payable,  First of America 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 ..........................   $  425,021   $  433,297
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 ................................      218,850      242,662
Notes payable, Ford Motor Credit Company, due in monthly
   installments  from  $418 to $525,  including  interest  ranging  from 9.5% to
   10.25%, final installments due from July
   2000 to October 2000, collateralized by vehicles ............................       65,703            0
Notes payable, Commerce Bank, due in monthly installments
   from $593 to $646, including interest at 8.5%, final
   installments due January 1998, collateralized by automobiles ................       28,155            0
Notes payable, Norwest Equipment Finance, Inc.,  due in monthly
   installments of $2,184 to $8,009,  including  interest  ranging from 9.75% to
   10.75%, final installments due from May 2002
   to October 2002, collateralized by railcars .................................    1,059,044            0
Note payable, Keycorp, due in monthly installments of
   $22,744, including interest at 8.86%, final installment
   due December 2003, collateralized by railcars ...............................    1,560,000            0
Note payable, Nations Bank, due in monthly installments
   of $23,305, including interest at 8.75%, final installment
   due December 2002, collateralized by railcars ...............................    1,460,000            0
Notes payable, FBS Leasing, due in monthly installments
   from $510 to $12,998, including interest ranging from
   8.37% to 9.60%, final installments due from August
   2001 to March 2004, collateralized by railcars ..............................    1,337,721    1,447,028
                                                                                   ----------   ----------
Balance carried forward ........................................................   $6,154,494   $2,122,987
                                                                                   ==========   ==========
<PAGE>

                                                                                       1995          1994
                                                                                   -----------   -----------
<S>                                                                                <C>           <C>

Balance brought forward ........................................................   $ 6,154,494   $ 2,122,987
Note payable, A&F, Inc., due in monthly installments of
   $25,537, including interest at 10%, increasing to 12% during the term, final
   installment  due October 2001,  collateralized  by track  facilities  of the
   Alabama & lorida Railway Co. ................................................     1,285,600     1,446,954
Notes payable, US Bancorp, due in monthly installments
   from $637 to $11,995,  including  interest  ranging  from 9% to 10.9%,  final
   installments due from September 2001
   to December 2002, collateralized by railcars ................................     1,935,017       849,918
Notes payable, Concord Commercial Group, due in monthly
   installments from $1,105 to $4,684,  final installments due from June 1998 to
   March 1999, including interest at 9%,
   collateralized by railcars ..................................................       348,578       624,810
Notes payable, Minnesota Valley Bank, due in monthly
   installments of $10,697,  including interest at prime plus 2.00-2.75%,  final
   installment due December 2001, collateralized by equipment acquired from MNVA
   Railroad, Inc. ..............................................................       236,834       617,004
Note payable, Burling Bank, due in monthly installments
   of  $7,143, final installment due September 2000, plus
   interest at prime plus 2%, collateralized by locomotives ....................       407,143       492,857
Note payable, U.S. Small Business Administration, due in
   monthly installments of $7,577, including interest at 4%,
   final installment due September 2000, collateralized by
   track acquired from MNVA Railroad, Inc. .....................................       391,527       459,672
Note payable, Rail Authority, due in monthly installments
   of $3,975, including interest at 7.5%, final installment
   due January 2011, collateralized by rail line acquired
   from MNVA Railroad, Inc. ....................................................       380,000       380,000
Various notes payable, due in monthly installments from
   $332 to $1,559,  final  installments  due from April 1995 to September ......                       1996,
   including  interest ranging from 7.75% to 16.5%,  collateralized  by vehicles
   and maintenance
   equipment ...................................................................         4,927        44,452
Note payable, Citizens Bank and Trust Company, due in
   monthly installments of $4,410, including interest at 9.5%,
   final installment due June 1997, collateralized by locomotives ..............        77,480       120,717
Note payable, Kyle Railways, Inc., due in monthly
   installments of $2,630, including interest at 8%, final
   installment due April 1998, unsecured .......................................        66,972        92,073
Note payable, Citizens Bank and Trust Company, due in
   monthly installments of $1,683, including interest at 9%,
   final installment due May 1998, collateralized by railcars                           43,657        59,120
Notes payable, First of America Bank, due in monthly
   installments aggregating $1,206, including interest
   ranging from 6.5% to 6.75%, final installment due
   June 1999, collateralized by automobiles .................                           15,060        55,628
                                                                                  ------------    ----------
                                                                                    11,347,289     7,366,192
Less: Current portion .......................................                       (1,412,552)     (895,482)
                                                                                  ------------    ----------
                                                                                  $  9,934,737    $6,470,710
                                                                                  ============    ==========
</TABLE>
<PAGE>


Aggregate maturities required on long-term debt as of December 31, 1995, are due
in future years as follows:

Years ending December 31,
  1996                                  $ 1,412,552
  1997                                    1,520,645
  1998                                    1,550,576
  1999                                    1,580,925
  2000                                    1,673,039
  Thereafter                              3,609,552
                                        -----------
                                        $11,347,289
                                        ===========


Note 4. Income Tax Matters

The Company and eight of its subsidiaries file a consolidated federal income tax
return. Three of the subsidiaries file separate federal income tax returns.

The  provision  for income  taxes  charged  to  operations  for the years  ended
December 31, 1995 and 1994, was as follows:
                                                          1995           1994
                                                      -----------    -----------
Current:
  Federal                                             $   149,781    $   193,226
  State                                                    11,662         12,303
                                                          334,000        193,000
                                                      --------------------------
                                                      $   495,443    $   398,529
                                                      ==========================

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, 1995 and 1994, due to the following:

                                                         1995            1994
                                                       -------------------------

   Computed "expected" tax expense                       35.0%             35.0%
   Increase (decrease) in income taxes
      resulting from:
      State income taxes, net of federal tax benefit      4.6               4.5
      Other                                               6.2              (.8)
                                                      --------------------------
                                                         45.8%             38.7%
                                                      --------------------------

The Company  and its  subsidiaries  have  Alternative  Minimum Tax (AMT)  credit
carryforwards  of  approximately  $424,000 and $244,000 at December 31, 1995 and
1994,  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  $704,000 at December 31, 1995, which can be used to offset future
taxable income of those subsidiaries. Net operating loss carryforwards expire in
the years 2006 and 2007.

Deferred tax assets and  liabilities  consist of the following  components as of
December 31, 1995 and 1994:

                                                    1995                1994
                                                 -----------        -----------
Deferred tax assets:
   AMT credit carryforwards ..............       $   424,000        $   244,000
   NOL carryforwards .....................           278,000            177,000
   Restricted stock award ................                 0             79,000
   Other .................................            35,000              5,000
                                                 -----------        -----------
                                                     737,000            505,000
Deferred tax liabilities:
   Property and equipment ................        (1,545,000)          (979,000)
                                                 -----------        -----------
                                                 $  (808,000)       $  (474,000)
                                                 ===========        ===========
<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,
1995 and 1994, as follows:

                                                        1995             1994
                                                      ---------       ---------

Current deferred tax assets ....................      $  35,000       $  16,850
Net noncurrent deferred tax liabilities ........       (843,000)       (490,850)
                                                      ---------       ---------

Net deferred tax liability .....................      $(808,000)      $(474,000)
                                                      =========       =========

Note 5. Retirement Plan

The  Company  has  a  defined  contribution  plan  covering   substantially  all
employees,  except  employees  who are  members of a union  which has  bargained
separately  for  retirement  benefits.  To be eligible for the plan, an employee
must be 21 years of age and have  completed  one year of service.  Employees may
elect to  contribute,  on a tax deferred  basis,  up to 15% of their salary,  or
$9,240,  whichever  is least.  The  Company  matches 50% of the first 8% of each
employee's  contribution.  The Company's  expense under the plan was $21,413 and
$19,312 for the years ended December 31, 1995 and 1994, respectively.


Note 6. Stock Option Plan

On April 12,  1994,  the Board of  Directors  approved a stock option plan under
which the Company has granted  options to key  management,  other  employees and
outside  directors for the purchase of 760,000  shares of its common  stock,  as
adjusted  for the stock split  described in Note 9. 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.  None of the
outstanding  options have been  exercised  as of December 31, 1995.  The options
expire at various dates from April 12, 1999 to July 5, 2000.


Note 7. Lease Commitments and Total Rental Expense

On July 7, 1991, the Company,  through its wholly-owned  subsidiary,  Fort Smith
Railroad Co., entered into a twenty-year  lease, with three twenty-year  renewal
options,  with  the  Missouri  Pacific  Railroad  Company  for 49  miles of rail
facilities in Arkansas. The agreement contains numerous requirements,  including
maintaining  existing traffic  patterns,  repair and replacement of the right of
way in the  condition it was leased  (substantially  FRA Class I) and payment of
any  applicable  real estate taxes.  The Company is entitled to a fixed rate per
car load switched from the Missouri Pacific Railroad Company,  as well as 90% of
new  leases and  easements  and 50% 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 additional lease costs.

The Company, through its wholly-owned subsidiary, Alabama & Florida Railway Co.,
leases a 2 mile segment of track  connecting to the  subsidiary's  facilities in
Andalusia,  Alabama,  from the Andalusia & Concecuh Railroad  Company,  Inc. for
$375 per month, plus $15 per car on all cars over 300 per year. The Company also
bears the cost of all  maintenance on the track.  The subsidiary also leases the
real estate comprising the right of way from Georgiana to Genea,  Alabama,  from
CSX Transportation, Inc. for $1,667 per month.

During September 1993, the Company, through its wholly-owned subsidiary, Decatur
Junction  Railway Co.  (DT),  entered  into lease  agreements,  which  expire in
December 2006, with Cisco Co-Op Grain Company (CISCO) and with Central  Illinois
Shippers,  Inc. (CISI).  The Company has an option to renew the CISCO line lease
for a ten-year period.  The CISCO segment is  approximately 13 miles,  while the
CISI segment is approximately 17 miles in distance; both are located in Illinois
and connect via trackage rights on the Illinois  Central  Railroad.  Both leases
require DT to perform normalized  maintenance on the line and pay $10 per car on
all cars over 1,000 per year on each segment.

Vandalia Railroad Company has a lease with the City of Vandalia,  Illinois,  for
3.45 miles of railway. This lease is renewable for ten year periods beginning in
September  2003, and the annual lease of $1 is prepaid  through  September 2003.
Lease  payments will be equal to $10 per loaded  railcar  handled in interchange
beginning with the first renewal period in September 2003.
<PAGE>

In November  1994,  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, and 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 total  minimum  rental  commitment as of December 31, 1995, is due in future
years as follows:

   Years Ending December 31,
       1996                                                        $      38,604
       1997                                                               38,604
       1998                                                               38,604
       1999                                                               38,604
       2000                                                               38,604
       Thereafter                                                        333,819
                                                                   -------------
       Total minimum future payments                               $     526,839
                                                                   =============

The total rental  expense  incurred under the leases was $55,109 and $73,764 for
the years ended December 31, 1995 and 1994, respectively.


Note 8. Purchases of Railroad Facilities

In July 1995, the Company,  through its wholly-owned  subsidiary,  West Michigan
Railroad Co., 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.  This  acquisition was made by the
Company for $300,000 cash and the issuance of 76,190 shares of common stock,  at
$2 5/8 per share, for a total acquisition cost of $500,000.

In December 1994, the Company,  through its wholly-owned  subsidiary,  Minnesota
Central  Railroad  Co.,  acquired  certain  assets of MNVA  Railroad,  Inc.  The
purchase was consummated through the assumption of debt totaling $1,656,173.

In October 1994, the Company  acquired all the  outstanding  common stock of the
Vandalia  Railroad  Company in exchange for $300,000  cash,  the  assumption  of
liabilities  of $222,123,  and the issuance of 57,500  shares of $.001 par value
common stock, at $4 7/8 per share, for a total acquisition cost of $802,437. The
excess of the  acquisition  cost over the fair value of the net assets  acquired
was  allocated  to  goodwill  and  is  being  amortized  over  40  years  by the
straight-line method.

Operating results of these companies are included in the consolidated statements
of income from the date of acquisition.

Unaudited  pro forma  consolidated  results  of  operations  for the year  ended
December  31,  1994,  as though  Minnesota  Central  Railroad  Co. and  Vandalia
Railroad Company had been acquired as of January 1, 1994, follows:

Railway operating revenue ...............................             $7,919,905
Net income ..............................................                441,068
Earnings per common share ...............................                   0.09

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

To include the results of operations of West Michigan  Railroad Co. from January
1, 1994 to the date of acquisition,  would not have a significant  effect on the
consolidated  results of  operations  for the years ended  December 31, 1995 and
1994.


Note 9. Stock Split and Stock Warrants Issued as Dividends

On May 16, 1995, the Board of Directors authorized a 2 for 1 stock split payable
to shareholders  of record on June 30, 1995. In addition,  on June 24, 1995, the
shareholders ratified an amendment to the Articles of Incorporation  authorizing
the issuance of stock warrants as a dividend to shareholders  immediately  after
the stock split.  Each shareholder  received one warrant for each share of stock
owned.  Each warrant  permits  shareholders  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.
<PAGE>

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, 1995 and 1994:
<TABLE>

                                                                                       1995          1994
                                                                                ----------------------------
<S>                                                                             <C>              <C> 

Preferred stock of Alabama Railroad Co. .....................................
   Par value - $1,000 per share
   Authorized - 700 shares
   Issued and  outstanding  - 427 and 432 shares  (cumulative 12%   
     dividend; callable at Company's option at 150% of face value)
     at December 31, 1995 and 1994, respectively ............................   $     427,000   $    432,000
Preferred stock of Alabama & Florida Railway Co. ............................
   Par value - $1,000 per share
   Authorized - 500 shares
   Issued and  outstanding  - 423 and 431  shares  (cumulative 9% dividend;
     callable at Company's option after June 22, 1995, at 150% of face value)
     at December 31, 1995 and 1994, respectively ............................         423,000        431,000
                                                                                ----------------------------
Preferred stock of Mississippi Central Railroad Co.
   Par value - $1,000 per share
   Authorized - 1,000 shares
   Issued and  outstanding  - 345 and 346 shares  (cumulative  10%  dividend;
     convertible  at a rate of $10 per common  share,  callable at  Company's
     option after March 1, 1996, at 110%
     of face value) at December 31, 1995 and 1994, respectively .............         345,000        346,000
                                                                                 ---------------------------
                                                                                 $  1,195,000   $  1,209,000
                                                                                 ===========================

</TABLE>

Note 11. Commitments and Contingencies

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


In September 1995, the Company entered into an agreement to purchase 21 railcars
for $546,000. The Company has secured financing for this purchase through a loan
agreement with Norwest Equipment Finance,  Inc. These railcars were delivered to
the Company in February 1996.

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.
<PAGE>

Note 12. Fair Value of Financial Instruments

The  Financial   Accounting   Standards  Board  issued  Statement  of  Financial
Accounting  Standards  No.  107 (SFAS  107),  "Disclosures  About  Fair Value of
Financial  Instruments,"  in December  1991 and this standard was adopted by the
Company  during  1995 with no  effect on the  Company's  financial  position  or
results of operations.  SFAS 107 establishes  disclosure  standards for the fair
value of financial instruments.  The following disclosures of the estimated fair
value of financial  instruments are made in accordance with the  requirements of
SFAS 107. The estimated  fair value amounts have been  determined by the Company
using available market information and appropriate valuation methodologies.

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

    The carrying  value of cash,  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 1995 as compared  to existing  interest
    rates.


Note 13. Subsequent Events

On March 12,  1996,  the Company  acquired  126,380 of the  outstanding  189,430
shares of common stock of KNRECO,  Inc.,  d/b/a  Keokuk  Junction  Railway,  for
$16.50 per share, and has offered to purchase the remaining  outstanding  shares
at the same purchase price.

Additionally,  the Company has secured a $2,500,000 line of credit with Citizens
Bank and Trust Company of Chillicothe,  Missouri.  This credit facility was used
to finance the acquisition of the KNRECO, Inc. stock.  Borrowings under the line
of credit  are  collateralized  by the  common  stock of two  subsidiaries:  the
Alabama Railroad Co. and Mississippi Central Railroad Co.

The Company,  through its newly formed  subsidiary,  Columbia & Northern Railway
Co.,  also  entered  into a lease  agreement  with the  Marion  County  Railroad
Authority  for 28.78  miles of  railway.  This lease has an initial  term of ten
years and is renewable  for five  additional  ten year  periods,  with an annual
rental of $1.
<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, 1995.

    Name (Age)                               Position
-----------------------            -------------------------------
Guy L. Brenkman (48)               Director (Chairman) & President
Orvel L. Cox (53)                  Director
John P. Wolk (46)                  Director and Treasurer
John S. Fulton (62)                Director
J. Michael Carr (32)               Director and Assistant Treasurer
Daniel A. LaKemper (38)            Secretary

All of the above Directors and Officers were elected at the Tenth Annual Meeting
of the  Stockholders  (and the board meeting which followed) on June, 24 1995 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  Chief  Mechanical  officer  for  same.  Mr.  Cox  has 36  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 it's inception and
has been involved in all phases of the development and growth of the Company.

Mr. Wolk, Director and Treasurer for Pioneer Railcorp,  was elected to the Board
in 1991.  Mr. Wolk is Director of  Distribution  for Kimball  International  and
previously  spent  seventeen  years with Peabody Coal Company,  most recently as
Vice  President-Treasurer  & Controller.  Mr. Wolk holds an MBA-Finance from St.
Louis  University  and a  BS-Business  Administration  from  the  University  of
Missouri.

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,  Assistant  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  Registrant'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 solo  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.
<PAGE>

Item 10.  Executive Compensation

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

                            Annual
                         Compensation        Long Term Compensation
                       --------------- -------------------------------------
                                                    Options/      Other
  Name & Position      Year    Salary  Stock Award    SARs    Compensation
--------------------   ----   -------- -----------  --------  --------------
Guy L. Brenkman, CEO   1995   $310,546          0     37,000      $4,500 (a)
                       1994   $227,609          0    150,000      $4,500 (a)
                       1993   $206,925   $125,000

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


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

                                     % of Total
                                     Options Granted
                                     to Employees
                       Options       in the Fiscal    Exercise   Expiration
Name                   Granted       Year             Price          Date
---------              -------       -----------      ----------  -----------

Guy L. Brenkman - CEO   20,000            8%             $3.92      6/16/00
Guy L.B renkman - CEO   17,000            7%             $4.40       7/5/00


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/SAR  Options/SARs at FY-E    At FY-End
              Shares Acquired     Value         Exercisable/       Exercisable/
Name           On Exercise       Realized      Unexercisable       Unexercisble
----          ---------------  ----------- ---------------------- --------------

Guy Brenkman,
  CEO               0              0            167,000/ 0          $202,500/0

In December  1993,  the Company  entered into a five-year  executive  employment
contract with the Company's  president.  The five-year  agreement provides for a
base salary with annual  inflation  adjustments  based upon the  Consumer  Price
Index. Should the Company acquire or form additional railroads,  the base salary
will increase $25,000 for the acquisition of railroads of 125 miles or less, and
$50,000 for railroads over 125 miles. At December 31, 1995, the president's base
salary was  $271,625.  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.

Director's of the Registrant each were compensated $1,000 in 1995.

Item 11.  Security Ownership of Certain Beneficial Owners and Management

The following table sets forth information, as of March 26, 1996, 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 26,  1996  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.)             3,478,858         37.4%
          Orvel L. Cox (3.)                  234,806          2.5%
          Daniel A. LaKemper (4.)            144,054          1.6%
          John P. Wolk (5.)                  144,000          1.6%
          John S. Fulton (6)                  42,000           .5%
          J. Michael Carr (7)                 67,716           .7%
                                           ---------        ------
          Directors and Executive
            Officers as a Group:           4,111,434         44.3%(1)
<PAGE>

FOOTNOTES:

(1) Based on 9,303,657 shares of Common Stock and Equivalents  outstanding as of
March  25,  1996.  (2) Of the  total  number  of  shares  shown  as owned by Mr.
Brenkman,  60,606  shares  represent  the number of shares Mr.  Brenkman has the
right to acquire  within 60 days upon the exercise of options  granted under the
Company's 1994 Stock Option Plan, and 1,740,800  shares  represent the number of
shares Mr. Brenkman has the right to acquire within 60 days through the exercise
of Warrants.  Mr.  Brenkman  owns all shares in joint  tenancy with his wife. In
addition  7,052  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,  66,666  shares  represent the number of shares Mr. Cox has
the right to acquire  within 60 days upon the exercise of options  granted under
the Company's 1994 Stock Option Plan, and 101,770 shares represent the number of
shares Mr. Cox has the right to acquire  within 60 days  through the exercise of
Warrants.  In  addition  1,500  shares  are held by Mr.  Cox under  the  Pioneer
Railcorp  Retirement  Savings Plan.  Mr. Cox's shares are owned in joint tenancy
with his wife. Mr. Cox and his wife own one Preferred  Share in the  Mississippi
Central  Railroad  Co. (4) Of the total  number of shares  shown as owned by Mr.
LaKemper,  66,666  shares  represent  the number of shares Mr.  LaKemper has the
right to acquire  within 60 days upon the exercise of options  granted under the
Company's  1994 Stock Option Plan,  and 40,000  shares  represent  the number of
shares Mr. LaKemper has the right to acquire within 60 days through the exercise
of Warrants.  In addition 388 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.
Wolk,  22,000  shares  represent  the number of shares Mr. Wolk has the right to
acquire within 60 days upon the exercise of options  granted under the Company's
1994 Stock Option Plan,  and 61,000  shares  represent  the number of shares Mr.
Wolk has the right to acquire within 60 days upon the exercise of Warrants.  Mr.
Wolk has 60,000  shares held in joint  tenancy  with his wife.  Mr. Wolk and his
wife  jointly own ten  Preferred  Shares of the Alabama  Railroad Co. (6) 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
10,000 shares represent the number of shares Mr. Fulton has the right to acquire
within 60 days upon the exercise of Warrants.  (7) Of the total number of shares
shown as owned by Mr. Carr,  66,666  shares  represent  the number of shares Mr.
Carr has the  right to  acquire  within  60 days upon the  exercise  of  options
granted under the Company's 1994 Stock Option Plan,  and 1,000 shares  represent
the number of shares Mr.  Carr has the right to acquire  within 60 days  through
the exercise of Warrants.

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.

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.

Exhibit # 10.2 - Exhibits to Credit Agreement,  dated March 8, 1996, between the
Company and Citizens Bank and Trust Company, Chillicothe , Mo.

Exhibit # 10.3 - Purchase  agreement,  dated March  between the Company and John
Warfield,  regarding the Company's  purchase of controlling  interest in KNRECO,
Inc., d/b/a Keokuk Junction Railway

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).
<PAGE>

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 # 21 - Subsidiaries of the registrant.

Exhibit # 27 - Financial Data Schedule.

The following reports were filed on Form 8-K during the fourth quarter 1995:

(1) Form 8-K filed  November  21,  1995  regarding  the  purchase of 150 covered
hoppers from Norfolk and Western Railway Company.

<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, Director, President and
   Chief Executive Officer

Dated: March 27, 1996
       ------------------------------------

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, Assistant Treasurer,
   Chief Financial Officer and Director

Dated: March 27, 1996
       ------------------------------------


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

Dated: March 27, 1996
       ------------------------------------


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

Dated: March 27, 1996
       ------------------------------------