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, 2004

                        Commission File Number 33-6658-C

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

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

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

                   Registrant's telephone number: 309-697-1400

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

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

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

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

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

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

Issuer's revenues for the fiscal year ended December 31, 2004 were $16,775,390

The  aggregate  market  value of  voting  stock  held by  non-affiliates  of the
Registrant on March 21, 2005 was $8,414,742

                                    4,498,482
             -------------------------------------------------------
             (Shares of Common Stock outstanding on March 21 , 2005)
<PAGE>

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


             The remainder of this page is intentionally left blank

                                       1
<PAGE>

PART I

Item 1.  Business

General
-------

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

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

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

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

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

Mississippi  Central Railroad Co. - On April 1, 1992, Pioneer Railcorp purchased
the common stock of the Natchez  Trace  Railroad  from Kyle  Railways,  Inc. The
railroad runs from Oxford, Mississippi to Grand Junction,  Tennessee, a total of
51 miles,  45.5 of which are located in Mississippi.  The railroad  interchanges
with  the NS at  Grand  Junction,  Tennessee  and  the  BNSF at  Holly  Springs,
Mississippi.  The Company  changed the name of this wholly owned  subsidiary  to
Mississippi Central Railroad Co. (MSCI) in January 1993. The traffic base on the
MSCI is primarily outbound finished wood products and inbound products,  such as
resins,  chemicals and pulpwood,  for the  production of finished wood products.
Other products shipped on the MSCI include scrap steel, cottonseed,  fertilizer,
and plastics.

                                       2
<PAGE>

Alabama & Florida Railway Co. Inc. - On November 23, 1992, the Alabama & Florida
Railway Co. (AF), a wholly-owned  subsidiary of Pioneer Railcorp,  purchased the
tangible assets of the A&F Inc., d/b/a the Alabama & Florida  Railroad  Company.
The line ran from  Georgiana  to Geneva,  Alabama,  a  distance  of 76 miles and
interchanged  with CSX at Georgiana.  On June 11, 2001, the Company's  Alabama &
Florida  Railway Co. (AF)  subsidiary  sold a 33 mile  segment of its track from
Georgiana, AL to Andalusia,  AL, to the Three Notch Railroad Co. (TNR), a wholly
owned subsidiary of Gulf & Ohio Railways. The AF operates the remaining 43 miles
of trackage. The AF's principal commodities are fertilizer and railcar storage.

Decatur  Junction  Railway Co. - On  September  23, 1993,  the Decatur  Junction
Railway Co. (DT), a wholly-owned subsidiary of Pioneer Railcorp,  signed a lease
agreement with Cisco Co-op Grain Company  (Cisco) and on September 24, 1993 with
Central Illinois Shippers, Incorporated (CISI), for the lease of two segments of
track in east central  Illinois.  The Cisco  segment  runs from  Green's  Switch
(Decatur)  to Cisco,  Illinois,  approximately  thirteen  (13)  miles.  The CISI
segment runs from Elwin to  Assumption,  Illinois,  a distance of  approximately
seventeen (17) miles.  The two lines connect via trackage rights on the Canadian
National  Railway  Company  (CN)  through  Decatur,   Illinois,  a  distance  of
approximately  eight (8) miles.  Railroad  operations began on the Cisco segment
December  3, 1993,  and began on the CISI  segment  December  7, 1993.  The DT's
primary commodities are grain, fertilizer and plastics.

Vandalia  Railroad Company - On October 7, 1994,  Pioneer Railcorp  acquired all
the outstanding common stock of the Vandalia Railroad Company.  The line located
in Vandalia,  Illinois,  interchanges  with CSX and is  approximately  3.5 miles
long. The railroad's  principal  commodities  are steel pipe and plastic pellets
and fertilizer.

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

Keokuk Junction Railway Co. - On March 12, 1996,  Pioneer Railcorp purchased 93%
of the common stock of KNRECO,  Inc., an Iowa corporation  d/b/a Keokuk Junction
Railway  (hereinafter  "KJRY") from the  shareholders,  and purchased all of the
remaining common shares of KJRY in April of 1996. KJRY operates a common carrier
railroad line within the City of Keokuk, Iowa, from Keokuk to LaHarpe, Illinois,
and a branch line from Hamilton to Warsaw, Illinois, a total of approximately 38
miles.  In  addition,  KJRY owns all of the common  stock of Keokuk  Union Depot
Company,  an Iowa  corporation that owns the former Keokuk Union Depot building,
along with surrounding track and real estate. KNRECO, Inc. changed its corporate
name to Keokuk  Junction  Railway Co.  effective April 10, 1996. On December 19,
2001, the KJRY purchased 12.1 miles of track from LaHarpe to Lomax, Illinois and
was  assigned  trackage  rights from Lomax,  Illinois  to Ft  Madison,  Iowa,  a
distance  of  approximately  15.5  miles  over the  BNSF,  allowing  the KJRY to
interchange  traffic  with the UP. The KJRY also  interchanges  with the BNSF at
Keokuk.  The railroad's  principal  commodities are corn, corn germ, corn syrup,
meal, gluten feed, and railroad wheels. The Company's feeder line application on
file with the  Surface  Transportation  Board (STB) to acquire the assets of the
west end of the Toledo  Peoria and Western  Railway (TPW) was granted on October
28, 2004. The Company  completed the acquisition on February 11, 2005 at the STB
determined purchase price of $4,165,742 as is more fully described later in this
document.

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

                                       3
<PAGE>

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

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

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

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

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

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

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

Pioneer  Resources,  Inc.  (PRI) was formed on December 30, 1993 to manage real
estate and auxiliary resources for Company subsidiaries.  In addition, effective
January 1, 2004, it began performing  plant switching  activities at a limestone
mine in Oklahoma.

                                       4
<PAGE>

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

Pioneer  Railroad  Equipment Co., Ltd. (PREL),  formed on April 1, 1990,  leases
equipment to the Company's  subsidiary  railroads  and also leases  railcars and
locomotives  to  unaffiliated  third  parties.   PREL  also  earns  income  from
non-company  railroads on its fleet of 1,264  railcars (as of December 31, 2004)
when they carry freight on non-company railroads.


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

Pioneer Railroad Services, Inc.(PRS), Pioneer Resources, Inc.(PRI), and Pioneer
Air,  Inc.  (PAR),  which are wholly  owned  subsidiaries  of Pioneer  Railcorp,
provide  corporate  support  operations  which are  engaged  in by the  Company.
Pioneer Railroad Services, Inc. (PRS) which began operations on October 1, 1993,
provides accounting,  management,  marketing, operational and agency services to
the Company's subsidiary railroads. Pioneer Air, Inc. (PAR) was formed on August
5, 1994 and  currently  owns a Cessna 421B  aircraft,  which is, used by Pioneer
Railcorp subsidiaries exclusively for Company business travel.


Marketing
---------

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

Distribution
------------

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

Suppliers
---------

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

Competition
-----------

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

Regulations
-----------

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

Employees
---------

On December  31,  2004,  the Company had 119  employees,  which  consisted of 98
operating personnel, 18 support staff and 3 executive officers.

                                       5
<PAGE>

Environmental Matters
---------------------

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

Item 2.  Property

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

A description  of the Company's  railroad  properties as of December 31, 2004 by
subsidiary follows:

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

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

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

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

E.)  Decatur  Junction  Railway Co.  (DT):  The DT leases from Top Flight  Grain
     Co-Operative  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 (CIS) approximately seventeen (17) miles in length,
     which runs from Elwin to Assumption,  Illinois. The two lines are connected
     via trackage rights on the Canadian National Railway Company (approximately
     eight miles) through Decatur,  Illinois.  The Top Flight Grain Co-operative
     lease expires in December 2016 and the CIS lease expires in December  2006.
     Both leases require the Company to perform normal track maintenance and pay
     a nominal per car charge on traffic in excess of 1,000  carloads  per year.
     The DT's track is considered to be in good condition.

F.)  Vandalia  Railroad Company (VRRC):  The VRRC is approximately  3.5 miles of
     operating railroad located in Vandalia, Illinois. The VRRC has a lease with
     the City of Vandalia for the 3.5 miles of railway.  This lease is renewable
     for  ten-year  periods  beginning  in  September  2013 and the annual lease
     payments equal $10 per loaded rail car handled in interchange.  The Company
     considers the track to be in good condition.

                                       6
<PAGE>

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

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

     The   Company's   feeder  line   application   on  file  with  the  Surface
     Transportation  Board  (STB) to  acquire  the assets of the west end of the
     Toledo  Peoria and Western  Railway  (TPW) was granted on October 28, 2004.
     The Company  completed the  acquisition on February 11, 2005 which added 76
     miles from LaHarpe to Peoria, Illinois.

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

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

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

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

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

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

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

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

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

Item 3.  Legal Proceedings

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

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

Item 4. Submission of Matters to a Vote of Security Holders.

There were no  matters  submitted  to  security  holders  for vote in the fourth
quarter 2004.

                                       7
<PAGE>

PART II

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

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

       1 Qtr    2 Qtr    3 Qtr    4 Qtr    1 Qtr     2 Qtr    3 Qtr    4 Qtr
       2003     2003     2003     2003     2004      2004     2004     2004
       ---------------------------------------------------------------------

High   $1.50    $1.78    $2.54    $2.24    $3.06     $2.60    $2.65    $3.00
Low    $1.01    $1.30    $1.65    $1.84    $1.78     $2.20    $2.10    $2.62

As of December 31, 2004, the Company had approximately 1,680 common stockholders
of record,  including brokers who hold stock for others. A cash dividend of $.05
per common share was paid to  stockholders  of record as of April 30, 2004.  The
total dividend was $224,848 and was paid on August 23, 2004. A dividend $.05 per
common share totaling $224,534 was paid in 2003.

Item 6. Management's  Discussion and Analysis of Financial Condition and Results
        of Operations

THE  FOLLOWING  DISCUSSION  SHOULD  BE READ IN  CONNECTION  WITH  THE  COMPANY'S
CONSOLIDATED FINANCIAL STATEMENTS, RELATED NOTES AND OTHER FINANCIAL INFORMATION
INCLUDED ELSEWHERE IN THIS ANNUAL REPORT ON FORM 10-KSB.

Critical Accounting Policies

The preparation of financial statements in conformity with accounting principles
generally  accepted in the United States of America requires  management to make
estimates  and  assumptions  that  affect  the  reported  amounts  of assets and
liabilities and disclosure of contingent  assets and liabilities at the dates of
the financial statements and the reported amounts of revenue and expenses during
the reporting periods.  The financial statement  components or accounts that are
subject to  significant  estimation  are reserves for  litigation,  casualty and
environmental matters, accounts receivable,  deferred income taxes and property,
plant and equipment.


In accordance with Statement of Financial Accounting Standards,  or SFAS, No. 5,
"Accounting for  Contingencies," an accrual for a loss contingency  (litigation,
casualty and  environmental  matters) is established  if  information  available
prior to the issuance of the financial  statements indicates that it is probable
that a  liability  has been  incurred  or an  asset  has  been  impaired.  These
estimates have been developed in consultation  with outside counsel handling our
defense in these  matters and are based upon an analysis of  potential  results,
assuming a  combination  of litigation  and  settlement  strategies.  Subsequent
changes to those  estimates  are  reflected in our  statements  of income in the
period of the change.  Management  believes  that it has  adequate  insurance to
cover most of the likely loss  contingency  situations,  and most accruals for a
loss  contingency  would  be  no  more  than  the  Company's  maximum  insurance
self-retention  of $50,000 per  occurrence.  To date all losses on such  matters
have been within management's expectations.

Provisions are made for estimated uncollectible accounts receivable.  An account
receivable is considered to be past due if any portion of the receivable balance
is outstanding  for more than 90 days.  Management  determines the allowance for
doubtful accounts by regularly  evaluating  individual customer  receivables and
considering  a  customer's  financial  condition,  credit  history,  and current
economic   conditions.   Accounts   receivables  are  written  off  when  deemed
uncollectible.  Recoveries  of account  receivable  previously  written  off are
recorded when received. To date, losses on accounts receivable have been minimal
in  relation  to  the  volume  of  sales  and  have  been  within   management's
expectations.

                                       8
<PAGE>

Deferred  taxes  are  recognized  based on  differences  between  the  financial
statement  carrying  amounts  and the tax bases of assets  and  liabilities.  We
regularly review our deferred tax assets for recoverability. 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 based on projected  future taxable income,  a material change in
the  actual  effective  tax rates or time  period  within  which the  underlying
temporary  differences become taxable or deductible,  and the expected timing of
the reversals of existing  temporary  differences.  If we are unable to generate
sufficient  future  taxable income to utilize  deferred tax assets,  we would be
required to  establish a valuation  allowance  against a portion of our deferred
tax assets,  resulting  in an increase in our future  effective  tax rate with a
coinciding adverse impact on earnings. To date the Company has not had to record
a valuation  allowance  for deferred  tax assets  previously  recognized  on its
balance sheet,  nor does it expect to record such an allowance  through at least
December 31, 2005.

Net  property,  plant and  equipment  comprised  79% of our  total  assets as of
December  31,  2004.   These  assets  are  stated  at  cost,  less   accumulated
depreciation.  We use the  straight-line  method of depreciation  over estimated
lives generally applicable to the railroad industry.  Expenditures that increase
asset values or extend  useful  lives are  capitalized.  Repair and  maintenance
expenditures  are charged to operating  expense when the work is  performed.  We
periodically  review the carrying value of our long-lived assets for impairment.
This review is based upon our  projections of anticipated  future cash flows. If
the sum of the expected  future cash flows  (undiscounted  and without  interest
charges)  is less than the  carrying  amount of the  asset,  the  Company  would
recognize an impairment  loss measured by the amount by which the carrying value
of the asset  exceeds  the fair value of the asset.  The  estimate of fair value
shall be based on the best information available in the circumstances.  While we
believe  that our  estimates  of future  cash  flows are  reasonable,  different
assumptions  regarding such cash flows could materially  affect our evaluations.
No  impairment  has been  recorded on fixed assets  during the fiscal year ended
December 31, 2004.

For a complete description of our significant accounting policies, see Note 1 to
our Consolidated Financial Statements.

Results of Operations
---------------------

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

The  Company's  railroad  operating  segment  had  revenue  earned  from a major
customer,  Roquette  America,  Inc.,  of  approximately  $3,913,000  in 2004 and
$3,929,000  in 2003.  A future loss of revenue from this  customer  could have a
materially  adverse effect on the Company's  results of operations and financial
condition.


Year Ended December 31, 2004 Compared to Year Ended December 31, 2003
---------------------------------------------------------------------

Overview:

The Company operates in two business segments,  railroad operations and railroad
equipment  leasing.  Railroad  operations  are provided by the Company's  wholly
owned short line railroad  subsidiaries.  PRC's rail system is primarily devoted
to carrying  freight.  The railroad  subsidiaries  generate revenue from several
activities,  with the primary source referred to as switching revenue. Switching
revenue is the amount the Company receives for handling and delivering a load of
freight via railcar to and from its online  customers.  The railroad  operations
also generate revenue through repair of foreign  railcars  (railcars owned by an
unrelated entity) used to carry freight on the Company's railroads. The railroad
operations earn revenue from demurrage, a charge to online customers for holding
a foreign railcar for an excessive number of days. Generally, demurrage revenues
will be partially offset by carhire expense  (charges to the Company's  railroad
operations for using a foreign railcar). The Company also generates revenue from
the  storage  of private  railcars  (railcars  that are owned by a  non-railroad
company).  In addition,  the railroad  operations generate revenue by performing
contract services,  primarily track construction and maintenance,  for customers
and  governmental  agencies.  Finally,  the  Company,  through its wholly  owned
railroad subsidiary  Gettysburg & Northern Railroad Co. generates revenue from a
tourist passenger train in Gettysburg, PA.

                                       9
<PAGE>

The Company's revenue from its railroad  operations could be affected by several
events.  In most  instances,  several  railroads  take part in the  delivery  of
freight to and from the Company's customers.  Each railroad will set its revenue
requirement for handling the freight.  If the total revenue  requirement for all
railroads involved is not competitive with other  transportation  options, it is
likely the freight will not move by rail. The Company's  current  customers make
changes in the origin of their raw materials and  destination for their finished
products that could positively or negatively affect rail traffic.  A significant
portion of the Company's freight is carried in railcars supplied by the nation's
largest  railroads,  referred  to as Class 1  railroads.  The Class 1  railroads
ability to continue  to supply  railcars is an  important  factor in  generating
revenues.  The Company's equipment leasing operations own a large railcar fleet,
which helps to minimize adverse  consequences from a limited railcar supply. The
Company  continually  searches  for  railcars to purchase  that will provide its
customers with a reliable car supply.

The equipment leasing operations  generate revenue from carhire revenue (charges
non-affiliated  railroads  pay the Company for using its  railcars)  and revenue
from locomotive leases to unaffiliated  entities.  The Company's railcars have a
limited useful life,  generally 40 to 50 years from the year they were built. In
future  years,  as the  Company's  railcars  reach their useful life limit,  the
Company  will need to replace  the  railcars to  maintain  its  current  carhire
revenue levels. Any significant purchase of railcars will require long term debt
financing.  When the Company's  railcars reach the end of their useful life, the
Company  could still use some of the railcars on its own  railroads  for captive
grain loads or generate  income from the scrap value of the  railcars,  which is
currently about $4,500 per car.


Below is a chart illustrating the life expectancy of the Company's railcar fleet
as of December 31, 2004:

 Expiration Year   Box   Cov Hop   Gond   Flat   Hopper     Total    % of Fleet
 ------------------------------------------------------------------------------
     2005          14      57        3     38       1         113      8.94%
     2006          72     137        6                        215     17.01%
     2007           2      99                       2         103      8.15%
     2008          21       5        5              2          33      2.61%
     2009          38     154        5                        197     15.59%
     2010           9       6        4                         19      1.50%
     2011          88      50                       1         139     11.00%
     2012         162      17        4              2         185     14.63%
     2013          94      88       55     19       4         260     20.57%
                  ----------------------------------------------------------
                  500     613       82     57      12        1264    100.00%
                  ==========================================================

Nationally  there is a surplus  of  locomotives  for  lease and sale,  which has
caused a  decrease  in lease  rates and a  decrease  in  opportunities  to lease
locomotives as potential customers may choose to purchase locomotives in lieu of
leasing them. The Company's  lease renewals will be subject to market rates that
are currently  lower than the Company is earning.  Historically,  there has been
upturns  and  downturns  in the  locomotive  leasing  industry,  and the Company
believes it is well  positioned to take advantage of the next up turn due to the
size and quality of its locomotive fleet.

The Company seeks to encourage  development on or near, and  utilization of, the
real estate right of way of its operating  railroads by potential  shippers as a
source of additional  revenue and also generates  revenue by granting to various
entities,  such  as  utilities,   pipeline  and  communications   companies  and
non-industrial  tenants, the right to occupy its railroad right of way and other
real estate property.

The  Company's  primary  outflow  of cash  pertains  to  employee  wages,  track
materials, repair expenses to railcars and locomotives,  fuel, car hire expense,
liability insurance, health insurance, and debt repayments. The Company uses the
following categories to group expense in the financial statements:

Maintenance of Way and structure  expense (MOW) includes all expenses related to
track  maintenance;  including  payroll,  track materials,  signal  maintenance,
vegetation control, and bridge maintenance.

Maintenance  of equipment  expense (MOE)  includes  expenses  related to railcar
repair expenses for both foreign and Company owned railcars;  including payroll,
car  repair  parts,  processing  fees  for  Company  owned  railcars,  and  also
maintenance to Company owned vehicles.

                                       10
<PAGE>

Transportation  expense  (TRAN)  includes  expenses  related  to train  movement
operations;  including  payroll,  locomotive fuel and supplies  expense,  repair
expenses to Company owned locomotives,  car hire expense (the cost for utilizing
non-affiliated   railcars),   derailment  expense,  lading  and  damage  claims,
switching services purchased, and joint facility expenses with other carriers.


General &  administration  expense  (ADMIN)  includes  general  manager  payroll
expenses,  legal expenses,  bad debt expense  related to interline  settlements,
liability insurance,  utilities,  postage and freight,  real estate taxes, dues,
licenses and fees, vehicle insurance, freight to move company owned railcars and
locomotives,  health and dental insurance  expense,  audit fees,  printing,  and
corporate   headquarters  support  service  payroll  for  executive  management,
accounting, operations, marketing, real estate, legal, and other support staff.

Financial Results discussion:

The  Company's  net income in 2004 was  $1,440,000  an increase of $15,000 or 1%
compared to $1,425,000 net income in 2003. Revenue increased in 2004 by $780,000
or 5%, to $16,775,000 from $15,995,000 in 2003.  Operating  expense increased in
2004 by $712,000  or 5%, to  $13,727,000  from  $13,015,000  in 2003.  Operating
income increased in 2004 by $68,000 to $3,048,000 from $2,980,000 in 2003.

Revenue  increased in 2004 by $780,000 or 5% to $16,775,000  from $15,995,000 in
the prior year. The railroad  operations  generated total revenue of $14,042,000
in 2004, an increase of $1,113,000  (9%) compared to revenue of  $12,929,000  in
2003. The railroad operations increased revenue from increased switching revenue
of $770,000  primarily related to increased per car revenue,  and also increased
demurrage  revenue of $753,000,  primarily  from updating  rates and terms to be
more equitable to the Company's railroads.  As the economy continues to improve,
the Company's  railroad  operations have  experienced a decrease in revenue from
the storage of railcars  for  non-affiliated  companies as such  companies  find
utilization for their railcars in an improving economy. In 2004 revenue from car
storage  decreased  $204,000  to $380,000  compared  to  $584,000  in 2003.  The
railroad  operations also had a $286,000 decrease in contract service revenue as
a result of a decrease  in track  projects  on behalf of state  governments  and
customers.   The  equipment  leasing  operations   generated  total  revenue  of
$2,718,000 in 2004, a decrease of $327,000 (11%) compared to $3,045,000 in 2003.
In 2004 revenue from the equipment leasing  operations  included carhire revenue
of  $1,979,000,  a decrease  of  $408,000  (17%) from  $2,387,000  in 2003,  and
unaffiliated  lease  income of  $724,000,  an  increase  of  $92,000  (15%) from
$632,000 in 2003. The decrease in carhire  revenue in 2004 primarily  relates to
the  underutilization of the Company's covered hopper fleet. The Company entered
into 84 new covered  hopper  leases in the third quarter 2004 and 17 new covered
hopper leases in the fourth quarter 2004. The lease terms are expected to be for
two years at an average monthly rate of $320 per car. Corporate services did not
have significant revenues in either 2004 or 2003.


Operating  expenses  increased  in 2004 by $712,000 or 5%, to  $13,727,000  from
$13,015,000 in 2003.  The increase in operating  expenses was affected by a gain
on sale of property & equipment  of $387,000 in 2004  compared to a loss on sale
of  property &  equipment  of $74,000 in 2003.  Excluding  this gain and loss on
property  &  equipment,  operating  expenses  increased  $1,173,000  or 9%.  The
majority  of  this  increase  in  operating  expenses  resulted  from  increased
transportation  expenses of $651,000 and  increased  administrative  expenses of
$259,000 in 2004. The $651,000 of increased transportation expense was primarily
from the railroad operations,  which had a $458,000 increase resulting primarily
from an increase in payroll costs  attributable  to a higher number of operating
personnel in 2004 compared to 2003,  increased carhire and increased fuel costs.
The railroad  operations  also had an increase in  maintenance of way expense of
$110,000,  primarily  resulting from increased track  maintenance.  The railroad
operations generated total operating expenses of $8,383,000 in 2004, an $804,000
increase  (11%)  from  $7,579,000  in 2003.  The  equipment  leasing  operations
generated  operating  expenses of $1,565,000 in 2004, a $477,000  decrease (23%)
from  $2,042,000  in 2003.  The primary  decrease in  operating  expenses by the
equipment leasing  operations  relates to a gain on sale of property & equipment
of  $386,000   which   occurred  in  the  third  quarter  2004.   The  increased
administrative  expenses  of  $259,000  was  primarily  from  corporate  support
services  relating to the  Company's  actions to "go private" as detailed in the
Company's  Form 8-K and 8-K/A filed  September  21, 2004 and  September 23, 2004
respectively  as well as a  preliminary  proxy  statement  filed with the SEC on
November 9, 2004.  Corporate  support services  generated  operating  expense of
$3,779,000 in 2004 a $385,000 increase (11%) from $3,394,000 in 2003. The "going
private" transaction is more fully described later in this document.

                                       11
<PAGE>

Operating  income  increased  in 2004  by  $68,000  or 2%,  to  $3,048,000  from
$2,980,000  in 2003.  The  railroad  operations  generated  operating  income of
$5,659,000  in 2004,  a $309,000  increase  (6%) from  $5,350,000  in 2003.  The
equipment leasing operations generated operating income of $1,153,000 in 2004, a
$150,000  increase (15%) from  $1,003,000 in 2003.  Corporate  support  services
reduced  operating  income  $3,764,000  in 2004,  compared to reduced  operating
income in 2003 of  $3,373,000.  This  represents  a  $391,000  decrease  in 2004
operating income (12%) compared to 2003.


2004 Operations by Business Segment
-----------------------------------
<TABLE>
                                               Railroad          Equipment         Corporate
                                              Operations          Leasing          Services          Total
                                             ----------------------------------------------------------------
<S>                                          <C>                <C>               <C>             <C>
Revenue                                       $14,042,000       $ 2,718,000       $    15,000     $16,775,000

Expenses:
Mow                                             1,283,000                 0            62,000       1,345,000
Moe                                              $907,000           427,000           362,000       1,696,000
Tran                                            3,698,000           173,000           212,000       4,083,000
Admin                                           1,642,000            64,000         3,092,000       4,798,000
Dep/Amort                                        $853,000         1,287,000            52,000       2,192,000
(Gain)/Loss Sale of P&E                                 0          (386,000)           (1,000)       (387,000)
                                             ----------------------------------------------------------------
Operating Expense                             $ 8,383,000       $ 1,565,000       $ 3,779,000     $13,727,000

Operating Income                              $ 5,659,000       $ 1,153,000      ($ 3,764,000)    $ 3,048,000


2003 Operations by Business Segment
-----------------------------------


                                               Railroad          Equipment         Corporate
                                              Operations          Leasing          Services          Total
                                             ----------------------------------------------------------------
Revenue                                       $12,929,000       $ 3,045,000       $    21,000     $15,995,000

Expenses:
Mow                                             1,173,000                 0            78,000       1,251,000
Moe                                               761,000           486,000           273,000       1,520,000
Tran                                            3,240,000           141,000            51,000       3,432,000
Admin                                           1,552,000            61,000         2,926,000       4,539,000
Dep/Amort                                         842,000         1,292,000            65,000       2,199,000
(Gain)/Loss Sale of P&E                            11,000            62,000             1,000          74,000
                                            -----------------------------------------------------------------
Operating Expense                             $ 7,579,000       $ 2,042,000       $ 3,394,000     $13,015,000

Operating Income                              $ 5,350,000       $ 1,003,000      ($ 3,373,000)    $ 2,980,000

2004-2003 Variances by Business Segment
---------------------------------------
Increase (decrease)

                                               Railroad          Equipment          Corporate
                                              Operations          Leasing           Services         Total
                                            ------------------------------------------------------------------
Revenue                                       $ 1,113,000       $  (327,000)      $    (6,000)    $   780,000

Expenses:
Mow                                               110,000                 0          ( 16,000)          94,000
Moe                                               146,000           (59,000)           89,000          176,000
Tran                                              458,000            32,000           161,000          651,000
Admin                                              90,000             3,000           166,000          259,000
Dep/Amort                                          11,000            (5,000)          (13,000)          (7,000)
(Gain)/Loss Sale of P&E                          ( 11,000)         (448,000)           (2,000)        (461,000)
                                            ------------------------------------------------------------------
Operating Expense                             $   804,000       $  (477,000)      $   385,000     $    712,000

Operating Income                              $   309,000       $   150,000      ($   391,000)    $     68,000
</TABLE>


                                       12
<PAGE>

Other Income and Expense Income Statement Line Item Discussions:

Interest  expense  decreased  $179,000  (19%) in 2004 to  $750,000  compared  to
$929,000 in 2003.  This  decrease is the result of the Company  having paid down
long-term debt pursuant to scheduled repayment terms.

In 2004, $29,000 of non-operating expense was recorded by the Company, primarily
related to the write off a $51,000 account  receivable  recorded from a previous
railroad acquisition which has proven to be uncollectible.  In 2004, $334,000 of
lease income was earned by the Company, primarily from lease income generated by
the Company's railroad  operations from the granting of easements and leases for
the use of  railroad  right of way  property.  Lease  income  earned in 2003 was
$309,000.  No other  significant  items of non-operating  income or expense were
applicable to either 2004 or 2003.

Impact of New Accounting Pronouncements:

In  January  2003,  the FASB  issued  FASB  Interpretation  No.  46,  or FIN 46,
Consolidation  of  Variable  Interest  Entities,  and later in 2003  issued  its
amendment FIN 46R,  which  addresses  consolidation  by business  enterprises of
variable  interest  entities  ("VIE")  either:  (1) that do not have  sufficient
equity investment at risk to permit the entity to finance its activities without
additional  subordinated financial support, or (2) in which the equity investors
lack an essential  characteristic of a controlling financial interest. FIN 46 is
effective  immediately  for all VIEs created or acquired after January 31, 2003.
For VIEs created or acquired prior to February 1, 2003, the provisions of FIN 46
must be applied  effective in the annual  period  beginning  after  December 15,
2004. The Company does not anticipate the adoption of this  Interpretation  will
have a material  impact on its  financial  position  or  results of  operations.
However,  changes in the Company's business  relationships with various entities
could occur which may impact its financial  statements under the requirements of
FIN 46R.

In May 2003, FASB issued  Statement No. 150,  "Accounting for Certain  Financial
Instruments with Characteristics of both Liabilities and Equity".  Statement No.
150 requires  that certain  freestanding  financial  instruments  be reported as
liabilities in the balance sheet. Depending on the type of financial instrument,
it will be  accounted  for at either fair value or the  present  value of future
cash flows  determined  at each balance sheet date with the change in that value
reported  as  interest  expense  in  the  statement  of  income.  Prior  to  the
application of Statement No. 150,  either those financial  instruments  were not
required to be recognized, or if recognized,  were reported in the balance sheet
as equity with changes in the value of those instruments normally not recognized
in net income. The FASB has indefinitely delayed the effective date of statement
No.  150.  The  Company  believes  the  adoption of FASB No. 150 will not have a
material impact on the Company's financial position or results of operations.

FASB Statement No. 153, Exchange of Nonmonetary  Assets,  was issued in December
2004.  This  Statement  addresses the  measurement  of exchanges of  nonmonetary
assets and eliminates the exception from fair value  measurement for nonmonetary
exchanges of similar  productive  assets and  replaces it with an exception  for
exchanges  that do not have  commercial  substance.  A nonmonetary  exchange has
commercial  substance  if the future  cash flows of the entity are  expected  to
change  significantly  as a result of the exchange.  This Statement is effective
for periods  beginning  after June 15,  2005.  The  Company  does not expect the
application of Statement  No.153 to have a material  effect on the  accompanying
financial statements.

In December 2004, the Financial  Accounting  Standards Board ("FASB")  published
FASB Statement No. 123 (revised  2004),  "Share-Based  Payment" ("FAS 123(R)" or
the  "Statement").  FAS 123(R) requires that the  compensation  cost relating to
share-based payment transactions, including grants of employee stock options, be
recognized in financial statements. That cost will be measured based on the fair
value of the equity or liability  instruments  issued.  FAS 123(R) covers a wide
range  of  share-based   compensation   arrangements  including  stock  options,
restricted share plans, performance-based awards, share appreciation rights, and
employee share purchase plans. FAS 123(R) is a replacement of FASB Statement No.
123, Accounting for Stock-Based Compensation, and supersedes APB Opinion No. 25,
Accounting for Stock Issued to Employees,  and its related interpretive guidance
(APB 25).

The effect of the Statement  will be to require  entities to measure the cost of
employee services received in exchange for stock options based on the grant-date
fair value of the award,  and to recognize the cost over the period the employee
is required to provide  services for the award.  FAS 123(R) permits  entities to
use any  option-pricing  model  that  meets  the  fair  value  objective  in the
Statement.

                                       13
<PAGE>

The  Company  will be required  to apply FAS 123(R) as of the  beginning  of its
first interim period that begins after December 15, 2005, which will be the year
ending December 31, 2006.

FAS 123(R) allows two methods for determining the effects of the transition: the
modified prospective  transition method and the modified retrospective method of
transition.  Under the modified  prospective  transition method, an entity would
use the fair value based  accounting  method for all  employee  awards  granted,
modified,  or  settled  after the  effective  date.  As of the  effective  date,
compensation cost related to the nonvested  portion of awards  outstanding as of
that  date  would be based  on the  grant-date  fair  value of those  awards  as
calculated  under the  original  provisions  of Statement  No. 123;  that is, an
entity would not remeasure the  grant-date  fair value  estimate of the unvested
portion of awards  granted prior to the effective  date. An entity will have the
further  option to either apply the Statement to only the quarters in the period
of adoption and  subsequent  periods,  or apply the Statement to all quarters in
the  fiscal  year of  adoption.  Under  the  modified  retrospective  method  of
transition, an entity would revise its previously issued financial statements to
recognize  employee  compensation cost for prior periods presented in accordance
with the original provisions of Statement No. 123.


The Company has not yet  completed its study of the  transition  methods or made
any decisions  about how it will adopt FAS 123(R).  The impact of this Statement
on the Company in fiscal 2006 and beyond will depend upon various factors, among
them being our future compensation  strategy including whether or not additional
stock options will be awarded in the future.

Liquidity and Capital Resources:

The Company  primarily  uses cash  generated  from  operations  to fund  working
capital  needs and relies on long-term  financing  for the purchase of railcars,
new operating  subsidiaries,  and other  significant  capital  expenditures.  At
December 31, 2004 the Company had a working capital facility totaling $1,100,000
which was available for use at the end of 2004.

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 to obtain long-term  equipment financing should the need arise.
The Company's  plans for new debt in the  foreseeable  future is contingent upon
new railroad acquisitions,  increased needs and/or opportunities for railcar and
locomotive acquisitions, and other financing needs.

On October  28, 2004 the  Company's  feeder  line  application  on file with the
Surface  Transportation Board (STB) to acquire the assets of the west end of the
Toledo Peoria and Western Railway (TPW) was granted.  The Company  completed the
acquisition  on  February  11,  2005 at the STB  determined  purchase  price  of
$4,165,742.  This acquisition will be accounted for using the purchase method of
accounting.  This  acquisition  was financed  with proceeds from a National City
Bank  credit  facility  of up to $16  million.  National  City Bank  granted the
Company the $16 million  credit  facility on January 19,  2005,  the proceeds of
which will be utilized (1) to finance the aforementioned TPW acquisition, (2) to
refinance  approximately  $7 million of outstanding debt with National City Bank
and (3) to finance the Company's  proposed $5 million going private  transaction
expected to occur in 2005,  which is more fully described below. The $16 million
credit  facility  provides for interest at the LIBOR interest rate plus a spread
ranging from 200 basis points to 275 basis points  depending  upon the Company's
ratio of debt to earnings before interest,  taxes, depreciation and amortization
expense (EBITDA).  The debt is to be amortized over seven years with a five-year
balloon payment. The debt is collateralized by a security interest in all of the
assets of each of Pioneer Railcorp's  subsidiary railways, a pledge of the stock
of each such company, and a guaranty from each of the Company's subsidiaries. On
February 16, 2005, the Company entered into an interest rate swap agreement with
National City Bank in conjunction with the $16 million credit facility. The swap
agreement  exchanges the variable  LIBOR interest rate for a fixed interest rate
of 4.30%  until  maturity  of the note on May 1,  2010,  resulting  in a current
effective  interest  rate of  7.05%  (4.30%  fixed  rate  plus 275  basis  point
performance-based spread).


In addition to the $16 million credit facility, the Company secured a $2 million
line-of-credit  from  National  City Bank on January 19,  2005,  to replace it's
existing $1.1 million  line-of-credit.  The line-of-credit bears interest at the
Bank's prime rate with interest  payments due monthly  through January 2007. The
line-of-credit  matures  on January  19,  2007,  at which  time all  outstanding
borrowings would be due. The line-of-credit is collateralized in the same manner
as the $16 million credit facility.

                                       14
<PAGE>

On September 20, 2004, the Company's Board of Directors  unanimously  approved a
going  private  transaction  designed to  repurchase  outstanding  shares of the
Company's Class A common stock (common  stock).  This propsed  transaction  will
effectively  reduce  the  number  of  shareholders  to less  than  300,  thereby
terminating the need for continued  registration of the Company's stock with the
Securities and Exchange  Commission (SEC) and thus privatizing  ownership of the
Company.   Each   shareholder  of  less  than  2,000  shares  would  receive  an
independently  determined  fair  market  value  of  $2.85  per  share  for  each
outstanding  share of common  stock that the  Company  would  acquire  under the
proposed transaction.  It is expected the number of shareholders will be reduced
from  approximately  1,680  to  approximately  150 as a result  of the  proposed
transaction.  Furthermore,  all warrant  holders on the date of the  transaction
would receive $.85 per warrant,  said amount being  determined as the $2.85 fair
market value less the warrant exercise price of $2.00. Shareholders owning 2,000
or more shares will continue to own their shares.

The proposed  transaction  is subject to SEC and  shareholder  approval,  and if
completed,  would allow the Company to terminate the  registration of its common
stock  with the SEC and  would  result  in  discontinuation  of  trading  of the
Company's  common  stock on the NASDAQ  SmallCap  Market and the  Chicago  Stock
Exchange.  The Board of Directors  believes the costs of being a publicly traded
company are no longer justified by the benefits.

Costs associated with this proposed transaction are approximately $5 million and
would be funded with $5 million of proceeds  from the $16 million  National City
Bank credit facility.

The following table summarizes the Company's future  commitments and contractual
obligations  (amount in thousands) related to its notes payable,  long-term debt
and noncancellable operating leases as of December 31, 2004:
<TABLE>

Commitments & Contractual                   Years ending December 31
Obligations                      2005        2006   2007    2008    2009  Thereafter    Total
----------------------------     ------------------------------------------------------------
<S>                             <C>       <C>     <C>    <C>      <C>      <C>        <C>
Notes payable                    $  146    $   -   $   -  $   -    $    -   $   -      $  146
Long-term debt                    1,478     1,572  1,259   1,360    1,095    2,794      9,558
Noncancellable
operating leases                     31        31     31      28       17       26        164
</TABLE>


On July 1, 1995, the Company's  stock split and warrant  issuance became payable
to  shareholders.  The 2 for 1 stock split increased the number of shares issued
and  outstanding  from  2,099,142 to  4,198,284.  At the same time  shareholders
became  entitled  to purchase  an  additional  4,198,284  shares  through  stock
warrants  issued by the  Company as  dividends.  One warrant was issued for each
share of common stock held after the split,  entitling  the holder to purchase 1
share of common  stock for $2.00 per share.  The shares  purchased  through  the
exercise of the warrants  must be held for 1 year from date of  purchase.  As of
December  31,  2004,  a total of  90,964  warrants  originally  issued  had been
exercised  to date,  and the Company  realized  $181,928 on the  issuance of the
warrants. 4,107,320 warrants are outstanding as of December 31, 2004.

On June 26,  1996,  the  Company's  shareholders  approved a stock  option  plan
permitting the issuance of 407,000 shares of common stock. Options granted under
the plan are  incentive  based  except for the options  granted to the CEO whose
options are non-qualified. The options became fully vested and exercisable as of
July 1, 2001. The options are exercisable at $2.75, based upon the trading price
on the date of the grant,  in whole or in part  within 10 years from the date of
grant. As of December 31, 2004, a total of 150,000 options are outstanding under
this plan.

In 1999,  Pioneer  Railcorp's  Board of  Directors  authorized  and approved the
repurchase  of up to one million  shares  (1,000,000)  of the  Company's  common
stock.  As of December 31, 2004, a total of 137,665 shares had been  repurchased
at a cost of $208,585.

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

The Company believes its cash flow from operations and its available working
capital credit line will be more than sufficient to meet liquidity needs through
at least December 31, 2005.

                                       15
<PAGE>

Balance Sheet and Cash Flow Items:

The Company  generated net cash from operating  activities of $3,690,000 in 2004
compared to $3,364,000 net cash generated from operating activities in 2003. Net
cash from operating activities in 2004 was provided by $1,440,000 of net income,
$2,192,000 of  depreciation  and  amortization,  an increase in deferred  income
taxes of $317,000, a decrease in accounts receivable of $192,000, an increase in
accrued  liabilities  of $132,000,  and $80,000  from  changes in various  other
operating  assets and  liabilities.  Net cash was used in  operating  activities
during the year ended  December 31, 2004 from a decrease in accounts  payable of
$74,000,  an increase  in income tax refunds of $41,000,  a decrease in deferred
revenue of $86,000,  a gain on sale of property  and  equipment  of $387,000 and
$75,000 from changes in various other operating assets and liabilities.


The 2004 decrease in accounts receivable is primarily related to the collections
of increased revenue from railroad operations billed in the 4th quarter 2003 and
collected  subsequently  in 2004,  a  decrease  in accrued  accounts  receivable
related to car hire revenue from the Equipment leasing operations as a result of
a decrease in  utilization  of the  railcar  fleet in 2004,  and a $250,000  net
change in receivables collected for state funded crossing projects. In addition,
accounts  payable had  approximately  a $250,000  decrease  also relating to the
state funded crossing projects whereby cash was received from the state and paid
to a  contractor.  Excluding  the change in  accounts  payable  related to state
projects,  accounts payable increased  approximately  $176,000. This increase in
accounts payable, as well as the remaining change in accounts receivable relates
primarily to freight receivables. As previously discussed, several railroads are
usually involved in the process of delivering freight.  The Company collects the
total  revenue  for all  railroads  involved  in the  delivery  of  freight in a
majority  of its  shipments.  The  Company  records its share of the revenue and
records the amount due the other  railroads  as a current  payable.  The amounts
payable to other railroads are settled monthly.  Depending on the mix of freight
handled  by the  Company,  there  could be  significant  variances  in  accounts
receivable and accounts  payable in comparable  periods.  Under normal operating
conditions,  these  changes do not have a material  impact on  liquidity  or the
Company's  ability  to meet its  cash  requirements.  The  increase  in  accrued
liabilities  in 2004  primarily  resulted from  increased  unearned lease income
billed in 2004 when compared to 2003.

Cash  flow  used for  investing  activities  primarily  relates  to the  Company
purchasing and capitalizing approximately $1,462,000 of fixed assets and capital
improvements  in 2004 offset by  $848,000 of proceeds  from the sale of property
and equipment.  Included in the 2004 capital additions is the purchase of a used
locomotive   for  $31,000  and  $975,000  of  track   structure   additions  and
improvements.  In addition,  the Company capitalized $227,000 of leasehold track
improvements.  Other capital expenditures in 2004 include approximately $125,000
for railcar and locomotive betterments,  $33,000 for four vehicles,  $17,000 for
bridge  upgrades,  and $54,000 of various  equipment  items.  All of the capital
expenditures were funded with working capital.

Cash flow from  financing  activities  primarily  relates to the  borrowing  and
repayment  of debt and  certain  treasury  stock,  stock  warrant  and  dividend
transactions which are summarized on the statement of cash flows. New short-term
borrowings  of  $290,000  in  2004  relate  to the  financing  of the  Company's
liability  insurance  premium which has an outstanding  balance of approximately
$146,000 at December 31, 2004.

The Company anticipates  additional cash requirements  approximating $200,000 in
2005 as a result of the reversal of deferred taxes.


                                       16
<PAGE>

Item 7.  Financial Statements

McGladrey & Pullen
Certified Public Accountants


Report of Independent Registered Public Accounting Firm


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, 2004 and 2003, 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 the standards of the Public  Company
Accounting Oversight Board (United States). 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,  2004  and  2003,  and the  results  of their
operations  and their cash flows for the years  then  ended in  conformity  with
accounting principles generally accepted in the United States of America.



/s/McGladrey & Pullen, LLP



Peoria, Illinois
February 21, 2005





McGladrey & Pullen, LLP is a member firm of RSM International - an affiliation
of separate and independent legal entities.


                                       17
<PAGE>

Pioneer Railcorp and Subsidiaries

Consolidated Balance Sheets
December 31, 2004 and 2003
<TABLE>
                                                                   2004           2003
-------------------------------------------------------------------------------------------
<S>                                                            <C>             <C>
ASSETS
Current Assets
  Cash .....................................................   $    958,023    $  1,199,016
  Accounts receivable, less allowance for doubtful accounts
    2004 $109,367; 2003 $38,659 ............................      3,732,363       3,924,194
  Inventories ..............................................        369,551         352,708
  Prepaid expenses .........................................        298,539         274,458
  Income tax refund claims .................................        242,000         201,000
                                                               ----------------------------
        Total current assets ...............................      5,600,476       5,951,376

Investments, cash value of life insurance ..................        279,809         246,668

Property and equipment, net ................................     25,309,045      26,495,649

Other assets ...............................................          4,563          10,777

Goodwill ...................................................      1,017,430       1,017,430
                                                               ----------------------------
                                                               $ 32,211,323    $ 33,721,900
                                                               ============================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
  Current maturities of long-term debt .....................   $  1,478,198    $  2,954,637
  Notes payable ............................................        146,258         146,080
  Accounts payable .........................................      2,469,234       2,543,568
  Accrued expenses .........................................        968,139         836,332
  Deferred income taxes ....................................         46,000          62,000
                                                               ----------------------------
        Total current liabilities ..........................      5,107,829       6,542,617
                                                               ----------------------------

Long-term debt, net of current maturities ..................      8,080,054       9,638,122
                                                               ----------------------------

Deferred revenue ...........................................      1,701,755       1,788,017
                                                               ----------------------------

Deferred income taxes ......................................      6,396,000       6,063,000
                                                               ----------------------------

Minority interest in subsidiaries ..........................        736,000         737,000
                                                               ----------------------------

Commitments and Contingencies (Note 11)

Stockholders' Equity
  Common stock, Class A (voting), par value $.001 per share,
    authorized 20,000,000 shares, issued 2004 4,634,917;
    2003 4,615,717 shares ..................................          4,634           4,615
    In treasury 2004 137,665 shares; 2003 130,615 shares ...           (137)           (130)
                                                               ----------------------------
    Outstanding 2004 4,497,252; 2003 4,485,102 .............          4,497           4,485
  Common stock, Class B (nonvoting), no par value,
    authorized 20,000,000 shares ...........................             --              --
  Additional paid-in capital ...............................      2,054,219       2,015,838
  Retained earnings ........................................      8,130,969       6,932,821
                                                               ----------------------------
                                                                 10,189,685       8,953,144
                                                               ----------------------------

                                                               $ 32,211,323    $ 33,721,900
                                                               ============================
</TABLE>
See Notes to Consolidated Financial Statements.


                                       18
<PAGE>

Pioneer Railcorp and Subsidiaries

Consolidated Statements of Income
Years Ended December 31, 2004 and 2003
<TABLE>

                                                           2004            2003
-----------------------------------------------------------------------------------
<S>                                                    <C>             <C>
Railway operating revenue ..........................   $ 16,775,390    $ 15,994,621
                                                       ----------------------------

Operating expenses
  Maintenance of way and structures ................      1,344,865       1,251,112
  Maintenance of equipment .........................      1,695,778       1,519,396
  Transportation ...................................      4,083,258       3,431,951
  General and administrative .......................      4,798,034       4,539,075
  (Gain) loss on sale of property and equipment ....       (387,040)         74,285
  Depreciation .....................................      2,188,159       2,194,907
  Amortization .....................................          4,000           4,000
                                                       ----------------------------
                                                         13,727,054      13,014,726
                                                       ----------------------------

        Operating income ...........................      3,048,336       2,979,895
                                                       ----------------------------

Other income (expenses)
  Lease income .....................................        334,270         308,728
  Interest expense .................................       (750,011)       (929,451)
  Interest income ..................................          1,910           3,664
  Other, net .......................................        (29,316)         13,200
                                                       ----------------------------
                                                           (443,147)       (603,859)
                                                       ----------------------------

        Income before provision for income taxes
        and minority interest in preferred stock
        dividends of consolidated subsidiaries .....      2,605,189       2,376,036

Provision for income taxes .........................      1,087,347         872,063
                                                       ----------------------------

        Income before minority interest in preferred
        stock dividends of consolidated subsidiaries      1,517,842       1,503,973

Minority interest in preferred stock dividends of
  consolidated subsidiaries ........................         77,880          78,705
                                                       ----------------------------

        Net income .................................   $  1,439,962    $  1,425,268
                                                       ============================

Basic earnings per common share ....................   $       0.32    $       0.32
                                                       ============================
Diluted earnings per common share ..................   $       0.29    $       0.32
                                                       ============================
</TABLE>

See Notes to Consolidated Financial Statements.


                                       19
<PAGE>

Pioneer Railcorp and Subsidiaries

Consolidated Statements of Stockholders' Equity
Years Ended December 31, 2004 and 2003
<TABLE>
                                           Common Stock
                                      ------------------------
                                         Class A (Voting)         Additional
                                      ------------------------      Paid-In      Retained
                                        Shares         Amount       Capital      Earnings
-------------------------------------------------------------------------------------------
<S>                                   <C>          <C>            <C>           <C>
Balance at December 31, 2002 ....     4,513,512    $     4,513    $ 2,009,441   $ 5,781,940

  Warrants exercised ............         3,200              3          6,397            --

  Dividends on common stock,
    $.05 per share ..............            --             --             --      (224,534)

  Shares acquired in treasury for
    retirement ..................       (31,610)           (31)            --       (49,853)

  Net income ....................            --             --             --     1,425,268
                                      -----------------------------------------------------

Balance at December 31, 2003 ....     4,485,102          4,485      2,015,838     6,932,821
                                      -----------------------------------------------------

  Warrants exercised ............        19,200             19         38,381            --

  Dividends on common stock,
    $.05 per share ..............            --             --             --      (224,848)

  Shares acquired in treasury for
    retirement ..................        (7,050)            (7)            --       (16,966)

Net income ......................            --             --             --     1,439,962
                                      -----------------------------------------------------

Balance at December 31, 2004 ....     4,497,252    $     4,497    $ 2,054,219   $ 8,130,969
                                      =====================================================
</TABLE>

See Notes to Consolidated Financial Statements.


                                       20
<PAGE>

Pioneer Railcorp and Subsidiaries

Consolidated Statements of Cash Flows
Years Ended December 31, 2004 and 2003
<TABLE>
                                                                  2004           2003
-----------------------------------------------------------------------------------------
<S>                                                            <C>            <C>
Cash Flows from Operating Activities
  Net income ...............................................   $ 1,439,962    $ 1,425,268
  Adjustments to reconcile net income to net cash
    provided by operating activities:
    Minority interest in preferred stock dividends of
      consolidated subsidiaries ............................        77,880         78,705
    Depreciation ...........................................     2,188,159      2,194,907
    Amortization ...........................................         4,000          4,000
    (Increase) in cash value life insurance ................       (33,141)       (32,041)
    (Gain) loss on sale of property and equipment ..........      (387,040)        74,285
    Deferred taxes .........................................       317,000        500,000
    Changes in assets and liabilities:
      (Increase) decrease in assets:
      Accounts receivable ..................................       191,831       (882,621)
      Income tax refund claims .............................       (41,000)       136,419
      Inventories ..........................................       (16,843)       (64,945)
      Prepaid expenses .....................................       (24,081)       (59,852)
     Other assets ..........................................         2,214        147,056
   Increase (decrease) in liabilities:
     Accounts payable ......................................       (74,334)       196,817
     Accrued expenses ......................................       131,807       (114,636)
     Deferred revenue ......................................       (86,262)      (239,794)
                                                               --------------------------
        Net cash provided by operating activities ..........     3,690,152      3,363,568
                                                               --------------------------

Cash Flows from Investing Activities
  Proceeds from sale of property and equipment .............       847,629        109,302
  Purchase of property and equipment .......................    (1,462,144)    (1,080,570)
                                                               --------------------------
        Net cash (used in) investing activities ............      (614,515)      (971,268)
                                                               --------------------------

Cash Flows from Financing Activities
  Proceeds from short-term borrowings ......................       290,000        271,340
  Proceeds from long-term borrowings .......................            --      1,812,082
  Principal payments on short-term borrowings ..............      (289,822)      (217,076)
  Principal payments on long-term borrowings ...............    (3,034,507)    (3,847,368)
  Proceeds from common stock issued upon exercise
    of stock warrants and options ..........................        38,400          6,400
  Common stock dividend payments ...........................      (224,848)      (224,534)
  Preferred stock dividend payments to minority interest ...       (77,880)       (78,705)
  Purchase of common stock for the treasury ................       (16,973)       (49,884)
  Repurchase of minority interest ..........................        (1,000)       (14,000)
                                                               --------------------------
        Net cash (used in) financing activities ............    (3,316,630)    (2,341,745)
                                                               --------------------------

        Net (decrease) increase in cash ....................   $  (240,993)   $    50,555

Cash, beginning of year ....................................     1,199,016      1,148,461
                                                               --------------------------

Cash, end of year ..........................................   $   958,023    $ 1,199,016
                                                               =========================

Supplemental Disclosures of Cash Flow Information
  Cash payments for:
    Interest ...............................................   $   759,378    $   951,264
                                                               ==========================

    Income taxes (net of refunds 2004 $10,316; 2003 $13,709)   $   811,347    $   235,644
                                                               ==========================
</TABLE>
See Notes to Consolidated Financial Statements.


                                       21
<PAGE>

Pioneer Railcorp and Subsidiaries

Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------


Note 1.  Nature of Business and Significant Accounting Policies

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

The Company's subsidiaries include the following:
<TABLE>
<S>                                                    <C>

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

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

Significant accounting policies:

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

Cash and cash equivalents: For the purposes of reporting cash flows, the Company
considers all highly liquid debt  instruments  purchased  with maturity of three
months  or less to be cash  equivalents.  There  are no cash  equivalents  as of
December 31, 2004 and 2003.  Periodically  throughout  the year, the Company has
amounts  on deposit  with  financial  institutions  that  exceed the  depository
insurance limits.  The Company has not experienced any loss as a result of those
deposits and does not expect any in the future.

Accounts receivable:  Accounts receivable are carried at original invoice amount
less an estimate for  uncollectible  accounts  receivable.  The Company performs
ongoing  credit  evaluations  of its customers  and  generally  does not require
collateral. Provisions are made for estimated uncollectible accounts receivable.
Each  month,  management  determines  the  allowance  for  doubtful  accounts by
regularly   evaluating   individual  customer   receivables  and  considering  a
customer's financial condition, credit history, and current economic conditions.
Accounts  receivable  are written off when deemed  uncollectible.  Recoveries of
accounts receivable previously written off are recorded when received.

Accounts  receivable  are  considered  to be  past  due  if any  portion  of the
receivable  balance is outstanding for more than 90 days. The Company  generally
does not charge interest on past-due amounts.

Revenue  recognition:  Railroad  shipping  revenues are recognized  when inbound
shipments move onto the Company's  tracks,  or when outbound  shipments move off
the Company's tracks,  which due to the relatively short length of the hauls, is
not materially different from the recognition of revenues as shipments progress.
Industrial  switching and other service revenues are recognized as such services
are provided.


                                       22
<PAGE>
Inventories:   Inventories   consisting  of  various   mechanical  parts,  track
materials,  locomotive supplies, and diesel fuel are stated at the lower of cost
(determined  by the average  cost method) or market.  Inventories  are used on a
daily basis for normal operations and maintenance.

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

                                                                          Years
                                                                        --------

Roadbed ....................................................                 20
Transportation equipment ...................................              10-15
Railcars ...................................................              10-25
Buildings ..................................................              20-40
Machinery and equipment ....................................               5-10
Office equipment ...........................................               5-10

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

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

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

The  Company  reviews  applicable  assets  on a  quarterly  basis  to  determine
potential  impairment by comparing  carrying value of underlying assets with the
anticipated  future cash flows and does not believe that impairment exists as of
December 31, 2004 and 2003.

Goodwill:  Goodwill is no longer  amortized but is subject to  impairment  tests
performed at least  annually  (the Company  performs its  impairment  test as of
December 31 each year).

Deferred  revenue:  As of  December  31,  2002,  the Company  incurred  costs of
$1,882,121,  related  to an  ongoing  upgrade  of the track and  roadbed  of the
Gettysburg  & Northern  Railroad  Company.  The upgrade was required in order to
service a customer;  the customer reimbursed the Company for the $1,882,121 cost
of the  upgrade.  The Company  recognized  deferred  revenue of  $1,882,121  and
capitalized  the same  amount for the related  track and roadbed  upgrade in the
capital  projects  category of property  and  equipment.  Commensurate  with the
completion of the upgrade in January 2003,  the Company began  depreciating  the
capitalized  assets on a straight-line  basis over their estimated useful lives,
with  deferred  revenue  being  amortized  to income  over the same  lives.  The
unamortized  balance of deferred revenue related to these upgrades is $1,646,000
and $1,718,000 as of December 31, 2004 and 2003, respectively.

As of December 31, 2004 and 2003,  the Company had additional  deferred  revenue
totaling  approximately $56,000 and $70,000,  respectively,  related to advanced
payments  received  from Class I railroads  for  railroad  crossing  fees.  This
deferred revenue is being amortized over five years on a straight-line basis.

Stock  options and  warrants:  The  Company's  accounting  for stock options and
warrants is in  accordance  with APB Opinion No. 25 and related  interpretations
which  generally  requires  that the  amount of  compensation  cost that must be
recognized,  if any, is the quoted market price of the stock at the  measurement
date,  less the amount  the  grantee is  required  to pay to acquire  the stock.
Alternatively,  SFAS 123 employs  fair value  based  measurement  and  generally
results in the recognition of compensation for all awards of stock to employees.
SFAS 123 does not  require an entity to adopt  those  provisions,  but,  rather,
permits  continued  application  of APB 25. While the Company has elected not to
adopt the fair value  recognition and measurement  provisions of SFAS 123, it is
required to make certain disclosures pursuant to SFAS 123.

Had  compensation  cost for the stock-based  compensation  plans been determined
based on the grant date fair  values of awards  (the  method  described  in FASB
Statement No. 123) there would have been no effect on net income or earnings per
share for either the year ended December 31, 2004 or 2003.


                                       23
<PAGE>

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

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

Government  grants:  From time to time,  the  Company,  through  its  subsidiary
railroads,  enters into agreements with state agencies in the form of federal or
state aid  projects or grant  agreements  which are  designed to aid the Company
with labor,  material, and other costs relating to the rehabilitation and repair
of track and bridge structures belonging to the Company.

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

Self-insurance:  The Company self-insures a portion of the risks associated with
medical expenses incurred by its employees and their dependents. Under the terms
of the  self-insurance  agreement,  the  Company  is  responsible  for the first
$25,000 of qualifying medical expenses per person on an annual basis, limited to
an aggregate  excess amount  computed under the terms of the insurance  contract
using specified  participant  rates. An insurance contract with a life insurance
company  covers  individual  claims in excess of $25,000 on an annual  basis and
total claims  exceeding  the  aggregate  excess,  subject to a maximum  lifetime
reimbursement of $2,000,000 per person.

Reclassifications: Certain amounts in the accompanying financial statements for
2003 have been reclassified, with no effect on net income or stockholders'
equity, to be consistent with classifications adopted in 2004.

Use of estimates in the preparation of financial statements:  The preparation of
financial statements in conformity with accounting principles generally accepted
in the United  States of  America  requires  management  to make  estimates  and
assumptions  that  affect the  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.

The financial  statement  components or accounts that are subject to significant
estimation  are reserves for  litigation,  casualty and  environmental  matters,
accounts receivable, deferred income taxes and property, plant and equipment.

Note 2. Property and Equipment

Property and equipment consist of the following:
                                                           December 31,
                                                 -------------------------------
                                                     2004               2003
                                                 -------------------------------
Land ...................................         $ 3,179,483         $ 3,179,483
Roadbed ................................          14,089,923          13,101,000
Transportation equipment ...............           6,363,417           6,236,501
Railcars ...............................          12,465,315          13,450,948
Buildings ..............................           1,998,084           1,978,888
Machinery and equipment ................           1,742,625           1,669,879
Office equipment .......................             530,837             505,564
Leasehold improvements .................             489,378             261,444
Capital projects .......................             256,997             283,320
                                                 -------------------------------
                                                  41,116,059          40,667,027
Less accumulated depreciation ..........          15,807,014          14,171,378
                                                 -------------------------------
                                                 $25,309,045         $26,495,649
                                                 ===============================

                                       24
<PAGE>
Note 3. Line-of-Credit, Pledged Assets, Notes Payable, and Long-Term Debt

The Company has an unsecured note payable that totaled  $146,258 and $146,080 as
of December  31, 2004 and 2003,  respectively,  for the  financing  of insurance
premiums.  The note is payable in monthly installments of approximately $25,000,
including interest at 5.25%, through June 2005.

The Company has a $1,100,000  line-of-credit  with National  City Bank,  Peoria,
Illinois,  bearing  interest at prime,  as published in The Wall Street Journal,
plus .5%,  collateralized by inventory and accounts receivable.  The Company had
no  outstanding  balance under this  line-of-credit  as of December 31, 2004 and
2003. This  line-of-credit was renegotiated  subsequent to December 31, 2004, as
is more fully described in Note 17.

Long-term debt at December 31, 2004 and 2003, consists of the following:
<TABLE>
                                                                                2004         2003
                                                                            -------------------------
<S>                                                                         <C>           <C>
Note payable, National City Bank, due in monthly installments of
  $33,012 including interest at 8.15%, final installment due July
  2005, collateralized by locomotives (refinanced in 2005, see Note 17) .   $   910,311   $ 1,218,459
Mortgage payable, National City Bank, due in monthly installments
  of $26,057 including interest at 8.35%, final installment due
  July 2006, collateralized by railcars (refinanced in 2005, see Note 17)       461,793       723,077
Note payable, National City Bank, due in monthly installments of
  $23,195 including interest at 5.75%, final payment due October
  2007, collateralized by Indiana Southwestern Railway Co. and
  the Gettysburg & Northern Railroad Co. stock and assets
  (refinanced in 2005, see Note 17) .....................................     1,746,775     1,917,518
Note payable, National City Bank, due in monthly installments of
  $15,855 including interest at 5.70%, final payment due October
  2007, collateralized by Garden City & Western Railway, Inc.
  stock and assets (refinanced in 2005, see Note 17) ....................       940,110     1,071,699
Note payable, National City Bank, due in monthly installments of
  $36,365 including interest at 7.15%, final installment due
  November 2007, collateralized by Keokuk Junction Railway Co. ..........
  stock and assets (refinanced in 2005, see Note 17) ....................     1,774,924     2,070,138
Note payable, National City Bank, due in monthly installments of
  $30,731 including interest at 7.55%, final installment due October
  2007, collateralized by Michigan Southern Railway Company and
  Michigan Southern Railroad Company, Inc. assets (refinanced
  in 2005, see Note 17) .................................................     1,378,160     1,630,829
Mortgage payable, National City Bank, due in monthly installments
  of $3,584 including interest at 6.25%.  The interest rate is
  adjustable every five years and is presently based on the Bank's
  base rate plus 1.5% as of October 31, 2004.  Final installment
  due June 2008, collateralized by Pioneer Railcorp's corporate
  headquarters building .................................................       314,121       331,524
Note payable, Key Equipment Finance, due in monthly installments
  of $29,407 including interest at 4.81%, final installment due
  December 2006, collateralized by railcars .............................       644,885       958,515
Note payable, Bank of America Leasing & Capital, due in monthly
  installments of $10,894 including interest at 4.81%, final
  installment due September 2008, collateralized by locomotives .........       447,790       554,189
Notes payable, Bank of America Leasing & Capital, due in monthly
  installments of $9,039 and $9,473 including interest at 6.39% and
  5.16%, final installments due July 2007 and September 2007,
  collateralized by locomotives and railcars ............................       548,430       733,283
Note payable, State of Iowa, due in annual installments of $59,707
  including interest at 3%, final installment due December 2011,
  collateralized by track material ......................................       371,991       419,125
Noninterest-bearing note payable, State of Mississippi, due in
  annual installments of $3,792, final installment due February
  2009, collateralized by track structure ...............................        18,962        22,754
Note payable, Bank of America Leasing & Capital, due in monthly
  installments of $30,375 including interest at 5.9%, final installment
  due December 2004, collateralized by railcars .........................          --         353,175
Note payable, Center Capital Corporation, due in monthly install-
  ments of $47,008 including interest at 6.85%, final installment
  due January 2005, collateralized by railcars, repaid in 2004 ..........          --         587,374
Noninterest-bearing note payable, Main Street, Inc., due in monthly
  istallments of $100, final installment due December 2004,
  uncollateralized ......................................................          --           1,100
                                                                            -------------------------
                                                                              9,558,252    12,592,759
Less current portion ....................................................     1,478,198     2,954,637
                                                                            -------------------------
                                                                            $ 8,080,054   $ 9,638,122
                                                                            =========================
</TABLE>

                                       25
<PAGE>

Aggregate maturities required on long-term debt as of December 31, 2004, subject
to the  refinancing  of  certain  debt with  National  City Bank  subsequent  to
December  31,  2004,  as is more fully  described  in Note 17, are due in future
years as follows:

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

2005                                                                 $ 1,478,198
2006                                                                   1,571,655
2007                                                                   1,258,820
2008                                                                   1,360,667
2009                                                                   1,094,853
Thereafter                                                             2,794,059
                                                                      ----------
                                                                      $9,558,252
                                                                      ==========

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

Note 4.       Income Tax Matters

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

The  provision  for income  taxes  charged  to  operations  for the years  ended
December 31, 2004 and 2003, were as follows:

                                                  2004                    2003
                                               ---------------------------------
Current:
  Federal ........................             $  508,347             $  239,063
  State ..........................                262,000                133,000
                                               ---------------------------------
                                                  770,347                372,063
                                               ---------------------------------

Deferred:
  Federal ........................                288,000                475,000
  State ..........................                 29,000                 25,000
                                               ---------------------------------
                                                  317,000                500,000
                                               ---------------------------------
                                               $1,087,347             $  872,063
                                               =================================

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, 2004 and 2003, due to the following:

                                                           2004             2003
                                                          ----------------------

Computed "expected" tax expense ......................     35.0%           35.0%
Increase (decrease) in income taxes resulting from:
  State income taxes, net of federal tax benefit .....      6.3             3.9
  Other ..............................................      0.4            (2.2)
                                                          ----------------------
                                                           41.7%           36.7%
                                                          ======================

                                       26
<PAGE>

Deferred tax assets and  liabilities  consist of the following  components as of
December 31, 2004 and 2003:

                                                    2004                2003
                                                -------------------------------
Deferred tax assets:
  AMT credit carryforwards .............        $        --         $   192,000
  State NOL carryforwards ..............             28,000              35,000
  Deferred compensation ................             54,000              52,000
  Other ................................             87,000              65,000
                                                -------------------------------
                                                    169,000             344,000
                                                -------------------------------
Deferred tax liabilities:
  Property and equipment ...............         (6,504,000)         (6,372,000)
  Prepaid expenses .....................           (107,000)            (97,000)
                                                -------------------------------
                                                 (6,611,000)         (6,469,000)
                                                -------------------------------
                                                $(6,442,000)        $(6,125,000)
                                                ===============================


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,
2004 and 2003, as follows:

                                                       2004             2003
                                                   -----------------------------

Current deferred tax asset (liability) .......     $   (46,000)     $   (62,000)
Net noncurrent deferred tax liability ........      (6,396,000)      (6,063,000)
                                                   -----------------------------
Net deferred tax liability ...................     $(6,442,000)     $(6,125,000)
                                                   =============================

The Company  and its  subsidiaries  had  Alternative  Minimum  Tax (AMT)  credit
carryforwards  of  approximately  $192,000  at  December  31,  2003,  which were
utilized in the year ended  December 31, 2004. The full amount of the credit was
used in 2004.

Note 5. Retirement Plan

The Company has a defined  contribution  401(k) plan covering  substantially all
employees. Employees are eligible to participate in the plan upon employment and
may elect to  contribute,  on a tax deferred  basis,  the lesser of 15% of their
salary,  or  the  Internal  Revenue  Service  maximum  deferral  limit.  Company
contributions  are  discretionary  and  the  Company  contributed  approximately
$66,000  and  $53,000  for  the  years  ended   December   31,  2004  and  2003,
respectively.  Administrative  expenses  paid by the Company under the plan were
$990 and $485 for the years ended December 31, 2004 and 2003, respectively.

Note 6. Deferred Compensation Agreements

The Company has deferred compensation agreements with two former Keokuk Junction
Railway Co.  employees.  The agreements  provide  monthly  benefits for 15 years
beginning with the month immediately  following the employees' normal retirement
date,  as defined in the  agreements.  The present  value of these  benefits was
accrued, using a discount rate of 7%, by a charge to compensation expense in the
year ended  December 31, 1999. One employee  began  receiving  benefits in 2001,
while the other  employee is not scheduled to receive  benefits  until 2008. The
accrual is  increased  each year by charges to interest  expense for the cost of
deferring such benefit for the one employee who will not receive  benefits until
2008. The liability  recorded in accrued expenses on the Company's balance sheet
under these  agreements  totaled  $143,000 and $138,000 at December 31, 2004 and
2003,  respectively.  Interest expense under these agreements totaled $9,800 and
$9,500 for the years ended December 31, 2004 and 2003, respectively.

                                       27
<PAGE>

Note 7. Stock Options and Warrants

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

Other pertinent information related to the plans is as follows:
<TABLE>
                                           2004                       2003
                                    --------------------------------------------------
                                               Weighted-                   Weighted-
                                                Average                     Average
                                                Exercise                    Exercise
                                    Shares       Price         Shares         Price
                                    --------------------------------------------------
<S>                                 <C>       <C>              <C>        <C>
Outstanding at beginning of year    150,000   $      2.75      155,000    $       2.75
Forfeited ......................         --            --       (5,000)           2.75
                                    -------                    -------
Outstanding at end of year .....    150,000   $      2.75      150,000    $       2.75
                                    =======                    =======

Exercisable at end of year .....    150,000                    150,000
                                    =======                    =======
</TABLE>


A further summary about stock options outstanding as of December 31, 2004, is as
follows:
<TABLE>
                                                    Options Outstanding                    Options Exercisable
                                                -----------------------------------------------------------------
                                                                Weighted-
                                                                 Average     Weighted                   Weighted
                                                                Remaining     Average                   Average
                                                   Number      Contractual   Exercise      Number       Exercise
Exercise Price                                   Outstanding      Life         Price     Exercisable     Price
-----------------------------------------------------------------------------------------------------------------
<S>                                             <C>            <C>           <C>         <C>            <C>
$2.75                                              150,000      1.4 years     $ 2.75       150,000       $ 2.75
                                                ==============                          ============
</TABLE>

On July 1, 1995, the Company issued 4,198,284 warrants to stockholders of record
as a  dividend.  Each  warrant  permits  stockholders  a right  to  purchase  an
additional  share of  stock at a  predetermined  price  of $2 per  share.  Stock
acquired by exercise of each warrant must be held for a one-year period of time.
The warrants  expire July 1, 2015.  There are 4,107,320  and 4,126,520  warrants
outstanding as of December 31, 2004 and 2003, respectively.

Note 8. Lease Commitments and Total Rental Expense

The Company  has  entered  into five lease  agreements  covering  certain of its
railroad  properties.  For railroad properties it leases, the Company ordinarily
assumes,   upon   the   commencement   date,   all   operating   and   financial
responsibilities,   including  maintenance,   payment  of  property  taxes,  and
regulatory compliance.  Lease payments on three railroad properties are based on
a per car basis,  $10 on all cars over 1,000 cars per year on each segment.  The
leases  expire  between  December  2006 and  December  2016  and  three of these
railroads have ten to twenty year renewal options.

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

                                       28
<PAGE>

Note 8. Lease Commitments and Total Rental Expense (Continued)

The total  approximate  minimum  rental  commitment  as of  December  31,  2004,
required under  noncancelable  leases, and excluding executory costs and per car
rentals, is due in future years as follows:

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

2005                                                                    $ 31,000
2006                                                                      31,000
2007                                                                      31,000
2008                                                                      28,000
2009                                                                      17,000
Thereafter                                                                26,000
                                                                       ---------
                                                                       $ 164,000
                                                                       =========

The total rental expense under the leases was approximately  $43,000 and $38,000
for the years ended December 31, 2004 and 2003, respectively.

Note 9. Major Customer

Revenue earned from a major railroad segment customer  amounted to approximately
$3,913,000  and  $3,929,000  during the years ended  December 31, 2004 and 2003,
respectively.  Accounts  receivable  as of December  31, 2004 and 2003,  include
approximately $534,000 and $717,000, respectively, from this customer.

Note 10. Minority Interest in Subsidiaries

Two of  the  Company's  subsidiaries  have  preferred  stock  outstanding  as of
December 31, 2004 and 2003. 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, 2004 and 2003:
<TABLE>
                                                                      2004       2003
                                                                    -------------------
<S>                                                                 <C>        <C>
Preferred stock of Alabama Railroad Co. .........................
  Par value - $1,000 per share
  Authorized - 700 shares
  Issued and outstanding - 386 and 387 shares (cumulative 12%
    dividend; callable at Company's option at 150% of face value)
    at December 31, 2004 and 2003, respectively .................   $386,000   $387,000
Preferred stock of Alabama & Florida Railway Co., Inc. ..........
  Par value - $1,000 per share
  Authorized - 500 shares
  Issued and oustanding - 350 shares (cumulative 9%
    dividend; callable at Company's option after June 22, 1995,
    at 150% of face value) at December 31, 2004 and 2003 ........    350,000    350,000
                                                                    -------------------
                                                                    $736,000   $737,000
                                                                    ===================
</TABLE>

Note 11. Commitments and Contingencies

Commitments: In December 2001, the Company entered into a five-year extension of
an existing  executive  employment  contract with the Company's  chief executive
officer.  The  five-year  extension  provides  for a base  salary with an annual
inflation  adjustment  based upon the Consumer  Price Index.  Should the Company
acquire or form additional railroads,  the base salary will increase $25,000 for
the  acquisition  of railroads of 125 miles or less,  and $50,000 for  railroads
over 125 miles. Should the chief executive  officer's  employment be terminated,
the  contract  requires  a lump sum  payment  equal  to three  years of his then
current  salary.  Should  the  president  retire,  he is  entitled  to  accept a
consulting  position  with the  Company  whereby  he would  be  compensated  the
equivalent of one year's salary for the consulting services rendered,  or retire
outright with no retirement benefits from the Company.

                                       29
<PAGE>

Contingencies:  In  the  course  of its  business,  the  Company's  subsidiaries
experience  crossing  accidents,   employee  injuries,  delinquent  or  disputed
accounts  and other  incidents,  which  give rise to claims  that may  result in
litigation.  Management vigorously pursues settlement of such claims, but at any
one time, some such incidents, which could result in lawsuits by and against the
Company and its subsidiary railroads, remain unresolved.  Management believes it
has valid claims for, or good defenses to, these actions.

Management  considers such claims to be a routine part of the Company's business
and, as of the date of this statement,  management believes that no incident has
the  potential  to  result in a  liability  that  would  materially  effect  the
Company's consolidated financial position or results of operations.


Note 12.      Earnings Per Share

Following is information  about the  computation of the earnings per share (EPS)
data for the years ended December 31, 2004 and 2003:
<TABLE>
                                                         For the Year Ended December 31, 2004
                                                        --------------------------------------
                                                          Income        Shares       Per Share
                                                        (Numerator)  (Denominator)     Amount
                                                        --------------------------------------
<S>                                                     <C>          <C>             <C>
Basic EPS
Income available to common stockholders .............   $1,439,962     4,493,364      $   0.32
                                                                                      ========
Effect of dilutive securities
Warrants ............................................           --       457,565
                                                        ------------------------
Diluted EPS
Income available to common stockholders
  plus assumed conversions ..........................   $1,439,962     4,950,929      $   0.29
                                                        ======================================

                                                         For the Year Ended December 31, 2003
                                                        --------------------------------------

Basic EPS
Income available to common stockholders .............   $1,425,268     4,494,698      $   0.32
                                                                                      ========
Effect of dilutive securities
None ................................................           --            --
                                                        ------------------------
Diluted EPS
Income available to common stockholders
  plus assumed conversions ..........................   $1,425,268     4,494,698      $   0.32
                                                        ======================================
</TABLE>

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

Note 13. Common Stock Repurchase

In 1999, the Company's Board of Directors  approved a plan to begin repurchasing
up to 1,000,000 shares of the Company's common stock from  stockholders.  During
2004 and 2003, the Company  repurchased  7,050 and 31,610 shares of common stock
at an average price of  approximately  $2.41 and $1.58 per share,  respectively,
for a cost of $16,973 in 2004 and $49,884 in 2003.

The common stock repurchased is accounted for as treasury stock in the Company's
2004 and 2003  consolidated  balance  sheets  and  statements  of  stockholders'
equity.  As such,  treasury  shares  held  reduce the number of shares of common
stock  outstanding  as of  December  31,  2004 and  2003,  and the  value of the
treasury stock reduces stockholders' equity. The excess of the purchase price of
the  treasury  stock over the par value of the stock of $16,966  and $49,853 was
charged to retained earnings as of December 31, 2004 and 2003, respectively.

                                       30
<PAGE>

Note 14. Fair Value of Financial Instruments

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

Cash and cash equivalents:

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

Notes payable and long-term debt:

The fair value of the notes  payable and  long-term  debt is estimated  based on
interest  rates for the same or similar debt  offered to the Company  having the
same or similar remaining maturities and collateral requirements. The fair value
of notes payable and long-term debt  approximates the carrying value of the debt
as  of  December  31,  2004,  after  having  given  consideration  to  the  debt
refinancing which occurred  subsequent to year end as is more fully described in
Note 17. At December 31, 2003, the carrying value of the Company's notes payable
and long-term debt was $12,738,839,  while the present value was estimated to be
$12,293,518.


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

Note 15. Segment Information

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

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

                                       31
<PAGE>

Intersegment transactions: Intersegment transactions are recorded at cost.

Factors management used to identify the reportable  segment:  Pioneer Railcorp's
reportable  segments  consist of wholly-owned  short-line railroad  subsidiaries
that offer  similar  services and a railroad  equipment  subsidiary  that leases
railcars,   locomotives,   and  other  railroad   equipment  to  affiliated  and
unaffiliated  entities.  The corporate  operations  consist of support  services
provided to the operating segments.
<TABLE>
                                                                For Year Ended December 31,
                                                                ----------------------------
                                                                    2004            2003
                                                                ----------------------------
<S>                                                             <C>             <C>
Segment Assets
  Railroad operations .......................................   $ 21,330,736    $ 21,270,560
  Equiment leasing operations ...............................     10,208,540      11,559,448
  Corporate support services ................................        672,047         891,892
                                                                ----------------------------
        Total consolidated segment assets ...................   $ 32,211,323    $ 33,721,900
                                                                ============================
Expenditures for additions to long-lived assets
  Railroad operations .......................................   $  1,214,229    $    333,551
  Equipment leasing operations ..............................        235,513         732,492
  Corporate support services ................................         12,402          14,527
                                                                ----------------------------
        Total expenditures for additions to long-lived assets   $  1,462,144    $  1,080,570
                                                                ============================

Revenues

Revenues from external customers
  Railroad operations .......................................   $ 14,042,006    $ 12,928,600
  Equipment leasing operations ..............................      2,718,348       3,045,271
  Corporate support services ................................         15,036          20,750
                                                                ----------------------------
        Total revenues from external customers ..............   $ 16,775,390    $ 15,994,621
                                                                ============================
</TABLE>

                                       32
<PAGE>

<TABLE>
                                                               For Year Ended December 31,
                                                                ----------------------------
                                                                    2004            2003
                                                                ----------------------------
<S>                                                             <C>             <C>
Intersegment revenues
  Railroad operations .......................................   $       --      $       --
  Equipment leasing operations ..............................        396,000         397,710
  Corporate support services ................................      6,777,386       6,398,170
                                                                ----------------------------
        Total intersegment revenues .........................   $  7,173,386    $  6,795,880
                                                                ============================

        Total revenue .......................................   $ 23,948,776    $ 22,790,501

Reconciling items
  Intersegment revenues .....................................     (7,173,386)     (6,795,880)
                                                                ----------------------------
        Total consolidated revenues .........................   $ 16,775,390    $ 15,994,621
                                                                ============================

Expenses

Interest expense
  Railroad operations .......................................   $     22,369    $     23,432
  Equipment leasing operations ..............................        270,290         386,235
  Corporate support services ................................        457,352         519,784
                                                                ----------------------------
        Total consolidated interest expense .................   $    750,011    $    929,451
                                                                ============================

Depreciation and amortization expense
  Railroad operations .......................................   $    852,886    $    841,922
  Equipment leasing operations ..............................      1,287,404       1,291,799
  Corporate support services ................................         51,869          65,186
                                                                ----------------------------
        Total consolidated depreciation and
        amortization expense ................................   $  2,192,159    $  2,198,907
                                                                ============================

Segment profit
  Railroad operations ......................................    $  5,660,699    $  5,286,092
  Equipment leasing operations .............................       1,548,890       1,462,640
  Corporate support sevices ................................       3,012,133       3,027,043
                                                                ----------------------------
        Total segment profit ...............................      10,221,722       9,775,775

Reconciling items
  Intersegment revenues ....................................      (7,173,386)     (6,795,880)
  Income taxes .............................................      (1,087,347)       (872,063)
  Minority interest in preferred stock dividends
    of subsidiaries ........................................         (77,880)        (78,705)
  Other income (expense), net ..............................        (443,147)       (603,859)
                                                                ----------------------------
        Total consolidated net income ......................    $  1,439,962    $  1,425,268
                                                                ============================
</TABLE>

Note 16. Recently Issued Accounting Pronouncements

In  January  2003,  the FASB  issued  FASB  Interpretation  No.  46,  or FIN 46,
Consolidation  of  Variable  Interest  Entities,  and later in 2003  issued  its
amendment FIN 46R,  which  addresses  consolidation  by business  enterprises of
variable interest entities (VIE) either:  (1) that do not have sufficient equity
investment  at risk to permit  the  entity to  finance  its  activities  without
additional  subordinated financial support, or (2) in which the equity investors
lack an essential  characteristic of a controlling financial interest. FIN 46 is
effective  immediately  for all VIEs created or acquired after January 31, 2003.
For VIEs created or acquired prior to February 1, 2003, the provisions of FIN 46
must be applied  effective in the annual  period  beginning  after  December 15,
2004. The Company does not anticipate the adoption of this  Interpretation  will
have a material  impact on its  financial  position  or  results of  operations.
However,  changes in the Company's business  relationships with various entities
could occur which may impact its financial  statements under the requirements of
FIN 46R.


                                       33
<PAGE>

In May 2003,  FASB issued  Statement No. 150,  Accounting for Certain  Financial
Instruments with  Characteristics of both Liabilities and Equity.  Statement No.
150 requires  that certain  freestanding  financial  instruments  be reported as
liabilities in the balance sheet. Depending on the type of financial instrument,
it will be  accounted  for at either fair value or the  present  value of future
cash flows  determined  at each balance sheet date with the change in that value
reported  as  interest  expense  in  the  statement  of  income.  Prior  to  the
application of Statement No. 150,  either those financial  instruments  were not
required to be recognized, or if recognized,  were reported in the balance sheet
as equity with changes in the value of those instruments normally not recognized
in net income. The FASB has indefinitely delayed the effective date of Statement
No.  150.  The  Company  believes  the  adoption of FASB No. 150 will not have a
material impact on the Company's financial position or results of operations.

FASB Statement No. 153, Exchange of Nonmonetary  Assets,  was issued in December
2004.  This  statement  addresses the  measurement  of exchanges of  nonmonetary
assets and eliminates the exception from fair value  measurement for nonmonetary
exchanges of similar  productive  assets and  replaces it with an exception  for
exchanges  that do not have  commercial  substance.  A nonmonetary  exchange has
commercial  substance  if the future  cash flows of the entity are  expected  to
change  significantly  as a result of the exchange.  This Statement is effective
for periods  beginning  after June 15,  2005.  The  Company  does not expect the
application of Statement  No.153 to have a material  effect on the  accompanying
financial statements.

In December 2004, the Financial Accounting Standards Board (FASB) published FASB
Statement  No.  123  (revised  2004),  Share-Based  Payment  (FAS  123(R) or the
Statement).   FAS  123(R)  requires  that  the  compensation  cost  relating  to
share-based payment transactions, including grants of employee stock options, be
recognized in financial statements. That cost will be measured based on the fair
value of the equity or liability  instruments  issued.  FAS 123(R) covers a wide
range  of  share-based   compensation   arrangements  including  stock  options,
restricted share plans, performance-based awards, share appreciation rights, and
employee share purchase plans. FAS 123(R) is a replacement of FASB Statement No.
123, Accounting for Stock-Based Compensation, and supersedes APB Opinion No. 25,
Accounting for Stock Issued to Employees,  and its related interpretive guidance
(APB 25).

The effect of the Statement  will be to require  entities to measure the cost of
employee services received in exchange for stock options based on the grant-date
fair value of the award,  and to recognize the cost over the period the employee
is required to provide  services for the award.  FAS 123(R) permits  entities to
use any  option-pricing  model  that  meets  the  fair  value  objective  in the
Statement.

The  Company  will be required  to apply FAS 123(R) as of the  beginning  of its
first interim period that begins after December 15, 2005, which will be the year
ending December 31, 2006.

FAS 123(R) allows two methods for determining the effects of the transition: the
modified prospective  transition method and the modified retrospective method of
transition.  Under the modified  prospective  transition method, an entity would
use the fair value based  accounting  method for all  employee  awards  granted,
modified,  or  settled  after the  effective  date.  As of the  effective  date,
compensation cost related to the nonvested  portion of awards  outstanding as of
that  date  would be based  on the  grant-date  fair  value of those  awards  as
calculated  under the  original  provisions  of Statement  No. 123;  that is, an
entity would not remeasure the  grant-date  fair value  estimate of the unvested
portion of awards  granted prior to the effective  date. An entity will have the
further  option to either apply the Statement to only the quarters in the period
of adoption and  subsequent  periods,  or apply the Statement to all quarters in
the  fiscal  year  of  adoption  Under  the  modified  retrospective  method  of
transition, an entity would revise its previously issued financial statements to
recognize  employee  compensation cost for prior periods presented in accordance
with the original provisions of Statement No. 123.

The Company has not yet  completed its study of the  transition  methods or made
any decisions  about how it will adopt FAS 123(R).  The impact of this Statement
on the Company in fiscal 2006 and beyond will depend upon various factors, among
them being our future compensation  strategy including whether or not additional
stock options will be awarded in the future.


                                       34
<PAGE>

Note 17. Subsequent Events and Proposed Going Private Transaction

The Company's  feeder line  application on file with the Surface  Transportation
Board  (STB) to  acquire  the  assets of the west end of the  Toledo  Peoria and
Western Railway (TPW) was granted on October 28, 2004. The Company completed the
acquisition  on  February  11,  2005 at the STB  determined  purchase  price  of
$4,165,742.  This acquisition will be accounted for using the purchase method of
accounting.  This  acquisition  was financed  with proceeds from a National City
Bank  credit  facility  of up to $16  million.  National  City Bank  granted the
Company the $16 million  credit  facility on January 19,  2005,  the proceeds of
which will be utilized (1) to finance the aforementioned TPW acquisition, (2) to
refinance  approximately  $7 million of outstanding debt with National City Bank
and (3) to finance the Company's  proposed $5 million going private  transaction
expected to occur in 2005,  which is more fully described below. The $16 million
credit  facility  provides for interest at the LIBOR interest rate plus a spread
ranging from 200 basis points to 275 basis points  depending  upon the Company's
ratio of debt to earnings before interest,  taxes, depreciation and amortization
expense (EBITDA).  The debt is to be amortized over seven years with a five-year
balloon payment. The debt is collateralized by a security interest in all of the
assets of each of Pioneer Railcorp's  subsidiary railways, a pledge of the stock
of each such company, and a guaranty from each of the Company's subsidiaries. On
February 16, 2005, the Company entered into an interest rate swap agreement with
National City Bank in conjunction with the $16 million credit facility. The swap
agreement  exchanges the variable  LIBOR interest rate for a fixed interest rate
of 4.30%  until  maturity  of the note on May 1,  2010,  resulting  in a current
effective  interest  rate of  7.05%  (4.30%  fixed  rate  plus 275  basis  point
performance-based spread).

In addition to the $16 million credit facility, the Company secured a $2 million
line-of-credit  from  National  City Bank on January 19,  2005,  to replace it's
existing $1.1 million  line-of-credit.  The line-of-credit bears interest at the
Bank's prime rate with interest  payments due monthly  through January 2007. The
line-of-credit  matures  on January  19,  2007,  at which  time all  outstanding
borrowings would be due. The line-of-credit is collateralized in the same manner
as the $16 million credit facility.

On September 20, 2004, the Company's Board of Directors  unanimously  approved a
going  private  transaction  designed to  repurchase  outstanding  shares of the
Company's Class A common stock (common stock).  This proposed  transaction  will
effectively  reduce  the  number  of  shareholders  to less  than  300,  thereby
terminating the need for continued  registration of the Company's stock with the
Securities and Exchange  Commission (SEC) and thus privatizing  ownership of the
Company.   Each   shareholder  of  less  than  2,000  shares  would  receive  an
independently  determined  fair  market  value  of  $2.85  per  share  for  each
outstanding  share of common  stock that the  Company  would  acquire  under the
proposed transaction.  It is expected the number of shareholders will be reduced
from  approximately  1,680  to  approximately  150 as a result  of the  proposed
transaction.  Furthermore,  all warrant  holders on the date of the  transaction
would receive $.85 per warrant,  said amount being  determined as the $2.85 fair
market value less the warrant exercise price of $2.00. Shareholders owning 2,000
or more shares will continue to own their shares.

The proposed  transaction  is subject to SEC and  shareholder  approval,  and if
completed,  would allow the Company to terminate the  registration of its common
stock  with the SEC and  would  result  in  discontinuation  of  trading  of the
Company's  common  stock on the NASDAQ  SmallCap  Market and the  Chicago  Stock
Exchange.  The Board of Directors  believes the costs of being a publicly traded
company are no longer justified by the benefits.

Costs associated with this proposed transaction are approximately $5 million and
would be funded with $5 million of proceeds  from the $16 million  National City
Bank credit facility.


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

None.

                                       35
<PAGE>

Item 8A.  Controls and Procedures

As of the end of the period  covered by this  report,  the Company  conducted an
evaluation,  under the supervision and with the  participation  of the principal
executive officer and principal financial officer,  of the Company's  disclosure
controls and procedures (as defined in Rules  13a-15(e) and 15d-15(e)  under the
Securities Exchange Act of 1934 (the "Exchange Act")). Based on this evaluation,
the principal  executive officer and principal  financial officer concluded that
the Company's  disclosure  controls and  procedures are effective to ensure that
information  required to be disclosed by the Company in reports that it files or
submits under the Exchange Act is recorded,  processed,  summarized and reported
within the time periods  specified in Securities and Exchange  Commission  rules
and forms.  There was no change in the Company's internal control over financial
reporting  during the Company's most recently  completed fiscal quarter that has
materially affected, or is reasonably likely to materially affect, the Company's
internal control over financial reporting.


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, 2004.

Name (Age)                                  Position
------------------------------------------------------------------------
Guy L. Brenkman (57)                     Director and C.E.O
J. Michael Carr (40)                     Director, President & Treasurer
Orvel L. Cox (62)                        Director
Clifton T. Lopez (59)                    Director
John S. Fulton (72)                      Director
Scott Isonhart  (38)                     Secretary

All of the above  Directors and Officers  were elected at the Annual  Meeting of
the  Stockholders  (and the board  meeting  which  followed) on June 28, 2004 to
serve until the 2005 annual meeting. There is no family relationship between any
officer and director.

Information about Directors and Executive Officers
------------------------------------------------------------

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

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

Mr. Cox, Director,  also serves as same for each of the Company's  subsidiaries.
Mr. Cox has 43 years of active  railroading  experience  with 31 of those  years
working for Class I railroads.  Mr. Cox retired from employment with the Company
in 2002.  Mr. Cox has been a director and officer of Pioneer  Railcorp since its
inception and has been involved in all phases of the  development  and growth of
the Company. Mr. Cox is a member of the Audit Committee.

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

                                       36
<PAGE>

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

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



             The remainder of this page is intentionally left blank


Item 10.  Executive Compensation

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


                         Annual
                         Compensation      Long Term Compensation
                       ----------------   -----------------------

                                          Restricted
                                            Stock                      Other
Name & Position         Year    Salary      Award    Options/SARs   Compensation
--------------------------------------------------------------------------------

Guy L. Brenkman, CEO    2004   $700,617     ----         ----         $4,200(a)
                        2003   $664,051     ----         ----         $8,200(a)
                        2002   $648,952     ----         ----         $ 0


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


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

None

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

                                                                     Value of
                                                                   Unexercised
                                           Number of Securities    In-the-Money
                                         Underlying Unexercised    Options/SARs
                                         Options/SARs at FY-End      At FY-End
                Shares Acquired    Value       Exercisable/        Exercisable/
Name              On Exercise    Realized     Unexercisable       Unexercisable
--------------------------------------------------------------------------------

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

In December  1993,  the Company  entered into a five-year  executive  employment
contract with the Company's CEO, which was extended through December 2006 by the
Board of  Directors.  The  agreement  provides  for a base  salary  with  annual
inflation adjustments based upon the Consumer Price Index. The current agreement
provides for twelve weeks paid vacation  each year.  The CEO at his election can
be paid for any unused vacation  during the year.  Should the Company acquire or
form  additional  railroads,  the base  salary  will  increase  $25,000  for the
acquisition  of railroads of 125 miles or less,  and $50,000 for railroads  over
125 miles.  Should the CEO's employment be terminated,  the contract  requires a
lump sum payment  equal to three years of his then  current  salary.  Should the
president  retire,  he is  entitled  to accept a  consulting  position  with the
Company  whereby he would be compensated the equivalent of one year's salary for
the consulting services rendered.

                                       37
<PAGE>

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

                                            Date  Acquired     Date  Raise
     Subsidiary                               or formed         Effective
------------------------------------------------------------------------------

Vandalia Railroad Company                     10/07/94          10/07/94
Minnesota Central Railroad Co.                12/12/94          02/01/95
West Michigan Railroad Co.                    07/11/95          No Raise Taken
Columbia & Northern  Railway                  02/21/96          No Raise Taken
Keokuk Junction  Railway Co.                  03/12/96          04/16/96
Rochelle  Railroad Co                         03/25/96          04/16/96
Shawnee  Terminal  Railway Co.                11/13/96          01/01/98
Michigan  Southern Railroad                   12/19/96          01/01/97
Pioneer  Industrial  Railway Co.              02/18/98          No Raise Taken
The Garden City Western Railway Co.           04/29/99          05/01/99
Indiana Southwestern Railway Co.              04/01/00          01/01/01
Gettysburg  & Northern  Railroad  CO.         02/20/01          04/16/04
Pioneer Resources, Inc.                       12/30/93          05/01/04

Directors of the Registrant each were compensated $30,000 in 2004.


Item 11.  Security Ownership of Certain Beneficial Owners and Management

The following table sets forth information, as of March 21, 2005, 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 21,  2005  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)                 3,530,500           55.9%
Orvel L. Cox (3)                      183,869            4.0%
J. Michael Carr (4)                    37,414            0.8%
John S. Fulton (5)                     26,400            0.6%
Scott Isonhart (6)                      5,100            0.1%
Clifton T. Lopez                       1,000             0.0%
                              -------------------------------
Directors and Executive
Officers as a group:                3,784,283           58.2%  (1)
FOOTNOTES:

(1)  Based on 6,495,716 shares comprised of 4,498,482 common shares  outstanding
     for all shareholders,  146,364 options for beneficial owners, and 1,853,870
     warrants for beneficial owners outstanding as of March 21, 2005.

(2)  Of the total  number of shares  shown as owned by Mr.  Brenkman,  1,740,800
     shares represent the number of shares Mr. Brenkman has the right to acquire
     within 60 days through the exercise of warrants and 80,000  represents  the
     number of shares  Mr.  Brenkman  has the  right to  acquire  within 60 days
     through the  exercise of stock  options.  Mr.  Brenkman  owns all shares in
     joint  tenancy  with his wife.  In  addition,  2,340 shares are held by Mr.
     Brenkman's wife, in which he disclaims beneficial ownership.

(3)  Of the total  number of shares  shown as owned by Mr. Cox,  101,770  shares
     represent  the number of shares Mr. Cox has the right to acquire  within 60
     days through the exercise of warrants and 20,000  represents  the number of
     shares Mr. Cox has the right to acquire within 60 days through the exercise
     of stock  options.  Mr.  Cox's  shares are owned in joint  tenancy with his
     wife.

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

                                       38
<PAGE>


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

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

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



Section  16(a) of the  Securities  Exchange Act of 1934  requires the  Company's
directors,  executive officers, and any persons holding more than ten percent of
the Company's  common stock to report their  initial  ownership of the Company's
common stock and any subsequent  changes in that ownership to the Securities and
Exchange Commission and to provide copies of such reports to the Company.  Based
upon the Company's  review of the copies of such reports received by the Company
and  representations  of its  directors  and  executive  officers,  the  Company
believes  that  during the years  ended  December  31, 2004 and 2003 all Section
16(a) filing requirements were satisfied.

Item 13.  Exhibits and Reports on Form 8-K

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

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

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

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

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

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

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

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

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

Exhibit # 21.1 - Subsidiaries of the registrant.

Exhibit # 31.1 - Certification
by the Chief  Executive  Officer.

Exhibit # 31.2 -  Certification  by the Chief
Financial Officer.


Exhibit # 32.1 - Certification under 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.


Form 8-K filed December 23, 2004, regarding the Company's plans to not renew its
securities listing with Nasdaq and the Chicago Stock Exchange for 2005.

                                       39
<PAGE>

Item 14. Principal Accountant Fees and Services

Information  required  by  Item  14 of  this  form  and  the  audit  committee's
pre-approval  policies and procedures  regarding the engagement of the principal
accountant  are  incorporated  herein by  reference  from its  definitive  Proxy
Statement to be delivered to the  stockholders of the Company in connection with
the 2005 Annual Meeting of  Stockholders  to be held in the Summer of 2005 under
the caption "Audit Committee Report - Independent Auditor Fees"


                                       40
<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,
   Chief Executive Officer and Director

Dated: March 21, 2005

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, President, Treasurer,
   Chief Financial Officer and Director

Dated: March 21, 2005

By:  /s/ Clifton T. Lopez
   -----------------------------------------
    Clifton T. Lopez, Director

Dated: March 21, 2005

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

Dated: March 21, 2005