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, 1997

                        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.

Issuer's revenues for the fiscal year ended December 31, 1997 were $12,779,249

The  aggregate  market  value of  voting  stock  held by  non-affiliates  of the
Registrant on March 20, 1998 was $4,519,604

                                    4,609,513
             ------------------------------------------------------
             (Shares of Common Stock outstanding on March 20, 1998)

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


             The remainder of this page is intentionally left blank
<PAGE>



PART I

Item 1.  Business

General
-------

Pioneer Railcorp, an Iowa corporation, is a railroad holding company. As used in
this Form 10-KSB,  unless the context requires otherwise,  the term "Company" or
"PRC" refers to the parent, Pioneer Railcorp and its subsidiaries: West Michigan
Railroad  Co.  (WMI),  Wabash & Western  Railway  Co.  d/b/a  Michigan  Southern
Railroad  (MSO),  Fort Smith  Railroad Co. (FSR),  Alabama  Railroad Co. (ALAB),
Mississippi  Central  Railroad Co. (MSCI),  Alabama & Florida  Railway Co., Inc.
(AF),  Decatur  Junction  Railway Co. (DT),  Vandalia  Railroad  Company (VRRC),
Minnesota  Central  Railroad Co.  (MCTA),  Keokuk  Junction  Railway Co. (KJRY),
Rochelle  Railroad Co. (RRCO),  Shawnee Terminal Railway Company (STR),  Pioneer
Railroad Equipment Co., Ltd. (PREL), Pioneer Air, Inc. (PAR), Pioneer Resources,
Inc. (PRI), and Pioneer Railroad Services, Inc. (PRS).

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

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

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

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

On April 1, 1992,  Pioneer  Railcorp  purchased  the common stock of the Natchez
Trace  Railroad  from  Kyle  Railways,  Inc.  The  railroad  runs  from  Oxford,
Mississippi to Grand Junction, Tennessee, a total of 56.5 miles, 51 of which are
located in Mississippi. The railroad interchanges with the NS at Grand Junction,
Tennessee and the BNSF at Holly Springs,  Mississippi.  The Company  changed the
name of this wholly-owned  subsidiary to Mississippi Central Railroad Co. (MSCI)
in January  1993.  The traffic base on the MSCI is primarily  outbound  finished
wood products and inbound products, such as resins,  chemicals and pulpwood, for
the  production of finished wood products.  Other  products  shipped on the MSCI
include scrap steel and cottonseed.

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


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

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

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

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

On February 21,  1996,  Pioneer  Railcorp  through its  wholly-owned  subsidiary
Columbia & Northern  Railway Co.  (CNOW)  signed a lease with the Marion  County
(Mississippi) Railroad Authority ("Authority") to operate approximately 29 miles
of trackage between Columbia and Silver Creek, Mississippi.

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

On March 25, 1996, Pioneer Railcorp through its wholly-owned subsidiary Rochelle
Railroad Co. (RRCO) signed a one year lease with the city of Rochelle, Illinois,
to operate  approximately 2 miles of track serving the Rochelle Industrial Park.
The line interchanges with the BNSF and the UP. Train operations began April 15,
1996. The lease requires RRCO to make monthly  payments to the city on a per car
basis and to maintain the trackage. The railroad's principal commodity is frozen
foods. The City of Rochelle,  Illinois,  terminated the Rochelle  Railroad Co.'s
lease  agreement  effective  January 19, 1998,  however,  Rochelle  Railroad Co.
continues  to operate  on the  trackage  pending  the  outcome of certain  legal
proceedings. The City is seeking to replace the Rochelle Railroad as operator of
the line, with one of the on-line  customers.  The Rochelle  Railroad is seeking
damages,  seeking  relief from the  Surface  Transportation  Board,  and is also
seeking to condemn the property. The outcome of these actions is uncertain.

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


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

Other Operations
----------------

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

Marketing
---------

The Company's marketing department was established to foster continuing business
with existing  customers and to develop and attract new customers and additional
loadings  on all PRC  railroads.  At the end of  1997,  the  Company  had  three
full-time marketing  employees.  The Company's attention to marketing has earned
recognition in industry publications,  with Class I railroads,  and with smaller
rail  carriers.  The  Company's  marketing  department  along with the Company's
operations center have become important  value-added services offered to present
and potential customers.

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

Virtually all  interchange  traffic is with  unionized  Class I carriers,  and a
prolonged work stoppage on those  carriers would have a material  adverse impact
upon the Company;  however,  there has never been such a prolonged work stoppage
of the American railroad industry, and the Company considers the chances of such
an event to be remote.  The freight railroad industry as a whole has experienced
significant  problems  as a result of the Union  Pacific  and  Southern  Pacific
merger.  The Company estimates that almost 2,000 additional freight car loadings
could have been  generated in 1997 if not for poor transit times and  unreliable
service  caused by the merger.  However,  the Company  believes that in the long
term it will benefit from the merger and does not expect the short-term problems
to have a material impact on its operating results.

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 operations center, with continued emphasis on safe and
efficient train operations.

Competition  for  additional  railroads as they become  available on the market,
either as direct  "spin-offs"  from Class I Railroads  or through the  secondary
market, is intense. The Company believes that it has a competitive advantage for
the acquisition of future Class III Railroads due to the following factors: (1.)
the  Company's  acquisition  and  operation  of  multiple  railroads,  (2.)  the
Company's  experienced  management  team,  (3.) the Company's  proficiency  with
industry-trend  technologies  desired by Class I Railroads,  such as  Electronic
Data Interchange  (EDI), (4.) the quality of the Company's  employees,  and (5.)
Pioneer Railcorp's $2.5 million acquisition line of credit.
<PAGE>


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,  1997,  the Company had 103  employees  which  consisted  of 72
operating personnel, 27 support staff and 4 executive officers.

During  1994,  the  employees  of  the  FSR  voted  for  union   representation.
Negotiations with the American Train  Dispatchers  Department of the Brotherhood
of  Locomotive  Engineers  (BLE) reached an impasse and no contract was reached.
The BLE has  withdrawn as  representative  of the FSR employees and currently no
labor organization is representing the FSR employees.

Item 2.  Property

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

A description  of the Company's  railroad  properties as of December 31, 1997 by
subsidiary follows:

a.)     Fort Smith Railroad Co. (FSR):  The FSR leases 18 miles of railroad from
        the Union Pacific Railroad  Company.  A twenty year lease was signed and
        operations  begun on July 7,  1991.  The line runs  from  Fort  Smith to
        Barling,  Arkansas.  The lease agreement contains numerous  requirements
        including maintaining existing traffic patterns,  repair and replacement
        of the right of way to the condition in which it was leased, and payment
        of any applicable real estate taxes.  The Company is entitled to a fixed
        rate per carload  switched from the UP as well as ninety  percent of new
        leases and easements and fifty percent of existing  leases and easements
        on the  property.  As long as these  lease  requirements  are  met,  the
        Company may continue to operate on the rail facilities without rent. The
        Company has three  twenty year  renewal  options.  The FSR's track is in
        good condition.

b.)     Alabama Railroad Co. (ALAB):  The ALAB is 60 miles of operating railroad
        running from Flomaton to Corduroy,  Alabama.  The assets and  subsidiary
        stock are pledged in various financing agreements. The Company considers
        the track to be in good condition.

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

d.)     Alabama  &  Florida  Railway  Co.,  Inc.  (AF):  The AF is 76  miles  of
        operating  railroad  running  from  Georgiana  to Geneva,  Alabama.  The
        Company has an option from CSX  Transportation  to  negotiate a purchase
        price for the underlying  real estate and currently  leases the property
        for a monthly payment of $2,305. The Company has exclusive rights to the
        revenues derived from the land leases and easements.  In connection with
        the  operation  of this line,  the AF also leases  from the  Andalusia &
        Conecuh  Railroad  Company a two mile segment of track connecting to the
        AF's line in  Andalusia,  Alabama for a nominal  fee.  The Company  also
        absorbs the cost of all  maintenance  of that  facility.  The assets and
        subsidiary  stock are  pledged in a  financing  agreement.  The  Company
        considers the line to be in good condition.
<PAGE>


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

f.)     Vandalia Railroad Company (VRRC):  The VRRC is approximately  3.45 miles
        of  operating  railroad  located in Vandalia,  Illinois.  The VRRC has a
        lease  with the City of  Vandalia  for the 3.45 miles of  railway.  This
        lease is renewable for ten year periods beginning in September 2003, and
        the lease of $1 is prepaid through September 2003. After September 2003,
        the lease  payments  will be equal to $10 per loaded rail car handled in
        interchange. The Company considers the track to be in good condition.

g.)     Minnesota  Central  Railroad Co. (MCTA):  The MCTA is  approximately  94
        miles of  operating  railroad  running  from  Hanley  Falls to  Norwood,
        Minnesota.  The  assets  and  subsidiary  stock are  pledged  in various
        financing agreements. Certain sections of the line are in poor condition
        and the Company  made a  significant  effort to improve the line in 1995
        and 1996,  and did in fact  significantly  improve a continuous  20 mile
        section of the  railroad.  The  remaining  sections  of line are in poor
        condition.  During 1997,  the Company was awarded a $396,000  grant from
        the Minnesota  Department of Transportation which is funded with federal
        disaster funds from the Federal Railroad  Administration pursuant to the
        Federal Fiscal Year 1997 Supplemental  Appropriations  Act. The grant is
        designed  to aid the  Company  with  the  labor  and  material  costs of
        rehabilitating  and repairing track and bridge  structures  belonging to
        the Minnesota  Central Railroad Co. which were damaged by severe weather
        conditions  during the 1996-1997  winter.  The Company plans to continue
        efforts to rehabilitate  the line and is currently  negotiating with the
        State  of   Minnesota   Department   of   Transportation   (MNDOT)   for
        approximately $6 million of interest-free  financing to rehabilitate the
        entire line. The Company believes the outcome of these negotiations will
        be known by the end of the second quarter of 1998. The Company  believes
        that  there is  strong  support  for the  project  from  local  economic
        development agencies and a majority of the railroad's customers.

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

i.)     Keokuk Junction  Railway Co. (KJRY):  The KJRY operates a common carrier
        railroad line within the City of Keokuk,  Iowa,  from Keokuk to LaHarpe,
        Illinois,  and a branch line from Hamilton to Warsaw,  Illinois, a total
        of  approximately  38 miles. The assets and subsidiary stock are pledged
        in various financing  agreements.  The track is considered to be in good
        condition.

j.)     Rochelle Railroad Co. (RRCO): The RRCO leases and operates approximately
        2 miles of railroad serving the Rochelle  Industrial Park located in the
        City of  Rochelle,  Illinois.  The  track  is  considered  to be in good
        condition.  The City of  Rochelle,  Illinois,  terminated  the  Rochelle
        Railroad Co.'s lease agreement effective January 19, 1998 and is seeking
        to replace the Rochelle Railroad Co. as operator of the line with one of
        the on-line  customers.  Despite  the lease  termination,  the  Rochelle
        Railroad Co. continues to operate on the trackage pending the outcome of
        certain legal  proceedings.  The Rochelle  Railroad Co. is seeking legal
        damages,  seeking relief from the Surface  Transportation  Board, and is
        also seeking to condemn the  property.  The outcome of these  actions is
        uncertain.  If the Rochelle  Railroad ceases operating the railroad,  it
        would  have a  material  adverse  effect  on the  Company's  results  of
        operation.

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


l.)     Wabash & Western Railway Co. d/b/a/ Michigan Southern Railroad (MSO): On
        December 19, 1996, Pioneer Railcorp, through its wholly-owned subsidiary
        Wabash & Western  Railway Co., signed a two year lease with the Michigan
        Southern Railroad Company,  Inc., Morris Leasing Co., Ltd. and Gordon D.
        Morris to operate 53 miles of track and certain railroad related assets.
        The lease requires a fixed monthly payment for the equipment  assets and
        a per car charge for railroad usage.  The lease,  which expires December
        19,  1998,  contains an  exclusive  option to purchase  the stock of the
        Michigan  Southern  Railroad  Company,  Inc. and the railroad  assets of
        Morris Leasing Co., Ltd. and Gordon D. Morris. The railroad is comprised
        of three separate, non-contiguous lines totaling approximately 50 miles.
        One line is 39 miles  long  extending  from White  Pigeon to  Coldwater,
        Michigan.  Two lines are  located in northern  Indiana:  one at Elkhart,
        which  is   approximately   10  miles  in  length,   and  the  other  at
        Kendallville,  which is  approximately  1 mile in length.  All lines are
        considered to be in good condition.

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

Item 3.  Legal Proceedings

There are a number of legal actions  pending  between the Rochelle  Railroad Co.
("RRCO"), the City of Rochelle, Illinois, and other entities, arising out of the
City's  termination  of RRCO's lease  agreement.  The City is seeking to replace
RRCO as operator of the line, with one of the on-line customers. RRCO is seeking
damages,  seeking  relief from the  Surface  Transportation  Board,  and is also
seeking to condemn the property.  The outcome of these actions is uncertain.  If
RRCO were to cease  operating  the  railroad,  it would have a material  adverse
effect on the Company's results of operation.

The cases  involving MNVA Railroad,  Inc. and Dakota,  Missouri Valley & Western
Railroad,  Inc.,  concerning  the asset sale from MNVA to MCTA in December  1994
were settled early in 1997.  Also, the cases  involving  Ralston L. Taylor,  the
former General  Manager of Keokuk Junction  Railway were settled in 1997.  These
settlements  did  not  have a  material  effect  on the  Company's  consolidated
financial position or results of operation.

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

As of the date of this Form  10-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 1997.

PART II

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

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

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

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

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


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

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

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

Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
---------------------------------------------------------------------

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

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

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

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

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

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

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


Operating Expense:

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

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

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

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

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

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

Other Income and Expense Income Statement Line Item Discussion:

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

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

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


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

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

Year 2000 Compliance:

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

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

Liquidity and Capital Resources:

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

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

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

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

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


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

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

The  Company  granted  836,000  options  to  certain  employees  under  its 1994
incentive  stock option plan. The options are exercisable at prices equal to the
market value of the  Company's  stock at the date of grant.  The exercise  price
ranges from $1.50 to $4.40 per share.  In 1997,  a total of 26,500  options were
exercised under this plan and the Company  realized $39,750 from their exercise.
As of December 31, 1997, a total of 69,700  options had been  exercised  and the
Company has  realized  $104,550  on the  exercise  of the  options.  The Company
expects  additional  capital to be  generated by the exercise of options in 1997
but is uncertain  as to the amount.  As of December 31, 1997, a total of 691,271
options are outstanding under this plan.

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

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

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

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

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

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


Balance Sheet and Cash Flow Items:

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

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

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

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

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

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

Item 7.  Financial Statements Continued on Page 20.
<PAGE>












                        PIONEER RAILCORP AND SUBSIDIARIES


                          CONSOLIDATED FINANCIAL REPORT


                                DECEMBER 31, 1997




<PAGE>












                                    CONTENTS

----------------------------------------------------------------------------
INDEPENDENT AUDITOR'S REPORT                                             
----------------------------------------------------------------------------

FINANCIAL STATEMENTS
   Consolidated balance sheets  

   Consolidated statements of income  

   Consolidated statements of stockholders' equity      

   Consolidated statements of cash flows 

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






<PAGE>



                          INDEPENDENT AUDITOR'S REPORT



To the Board of Directors
Pioneer Railcorp
Peoria, Illinois


We have audited the accompanying consolidated balance sheets of Pioneer Railcorp
and subsidiaries as of December 31, 1997 and 1996, and the related  consolidated
statements of income,  stockholders'  equity,  and cash flows for the years then
ended.  These  financial  statements  are the  responsibility  of the  Company's
management.  Our  responsibility  is to express  an  opinion on these  financial
statements based on our audits.

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

In our opinion, the consolidated  financial statements referred to above present
fairly, in all material respects, the financial position of Pioneer Railcorp and
subsidiaries  as of  December  31,  1997  and  1996,  and the  results  of their
operations  and their cash flows for the years  then  ended in  conformity  with
generally accepted accounting principles.



/S/ McGLADREY & PULLEN, LLP


Peoria, Illinois
February 13, 1998

<PAGE>





PIONEER RAILCORP AND SUBSIDIARIES

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

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

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

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

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

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

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

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

Commitments and Contingencies (Note 12)

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


PIONEER RAILCORP AND SUBSIDIARIES

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




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

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

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

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

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

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

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

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

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

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

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

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

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

See Notes to Consolidated Financial Statements.
<PAGE>



PIONEER RAILCORP AND SUBSIDIARIES

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

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


PIONEER RAILCORP AND SUBSIDIARIES

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

           Net increase (decrease) in cash ...................................    $  (93,784)    $  224,982
Cash, beginning of year ......................................................       501,212        276,230
                                                                                  -------------------------
Cash, end of year ............................................................    $  407,428     $  501,212
                                                                                  =========================
</TABLE>
<PAGE>


PIONEER RAILCORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997  AND 1996
<TABLE>
                                                                                     1997           1996
-----------------------------------------------------------------------------------------------------------
<S>                                                                               <C>            <C>    
Supplemental Disclosures of Cash Flow Information
   Cash payments for:
      Interest ...............................................................    $1,415,858     $1,324,640
                                                                                  =========================

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

Supplemental Schedule of Noncash Investing and Financing Activities
   Railroad acquisitions:
      Fair value of assets acquired, net of cash of $338,714 .................    $       --     $5,686,890
      Cash paid for stock and assets .........................................            --     (2,795,644)
                                                                                  -------------------------
      Liabilities and debt assumed and stock issued ..........................    $       --      2,891,246
                                                                                  =========================

   Reconciliation:
      Liabilities assumed ....................................................    $       --     $2,444,442
      Debt assumed ...........................................................            --        445,564
      Issuance of 342 shares of common stock .................................            --          1,240
                                                                                  -------------------------
                                                                                  $       --     $2,891,246
                                                                                  =========================

   Additional property, equipment and inventory acquired
      upon issuance of 2,000 shares of common stock ..........................    $       --     $    7,000
                                                                                  =========================

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


PIONEER RAILCORP AND SUBSIDIARIES

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


Note 1.  Nature of Business and Significant Accounting Policies

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

The Company's subsidiaries include the following:

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

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

Significant accounting policies:

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

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

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

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

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

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

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

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

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.
<PAGE>


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

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

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

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

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

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

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

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


Note 2.  Property and Equipment

Property and equipment consist of the following:

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

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

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

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

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

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

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

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


                                                                                        1997        1996
                                                                                   ------------------------
<S>                                                                                <C>           <C>    
Mortgage payable, State of Illinois Department of Transportation,
   due in annual installments of $40,581, including interest at 2%,
   final installment due December 2004, collateralized by railroad
   and railroad ties (net of unamortized discount of $79,521) ...................         --        217,751
Note payable, Citizens Bank and Trust Company, due in monthly
   installments of $4,410, including interest at 9.5%, final install-
   ment due June 1997, collateralized by locomotives ............................         --         29,984
Note payable, U.S. Small Business Administration, due in monthly
   installments  of $3,062,  including  interest at 4%,  final  installment  due
   January 2004,  collateralized by second mortgage on all subsidiary-owned real
   estate and a personal  guarantee of the  subsidiary's  former president which
   the Company has indemnified (net of unamortized discount of $35,529) .........         --        187,655
Note payable, Citizens Bank and Trust Company, due in monthly
   installments of $42,483,  including interest adjustable quarterly to New York
   prime plus 2.5%, final  installment due March 2003,  collateralized by common
   stock in Alabama  Railroad  Co.,  Mississippi  Central  Railroad Co., and any
   property later acquired with these loan proceeds .............................         --      2,314,224
                                                                                   ------------------------
                                                                                    14,301,630   14,377,379
Less current portion ............................................................    1,836,132    1,813,246
                                                                                   ------------------------
                                                                                   $12,465,498  $12,564,133
                                                                                   ========================
</TABLE>
Aggregate maturities required on long-term debt as of December 31, 1997, are due
in future years as follows:

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


Note 4.  Income Tax Matters

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

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

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

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


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

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

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

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

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

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

                                                      1997              1996
                                                   ----------------------------
Current deferred tax assets ..................     $    66,400      $    25,901
Net noncurrent deferred tax liabilities ......      (2,250,700)      (1,967,651)
                                                   ----------------------------
Net deferred tax liability ...................     $(2,184,300)     $(1,941,750)
                                                   ============================
<PAGE>


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

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

    2008                                             $    8,000
    2009                                                 16,000
    2010                                                352,000
    2011                                              1,656,000
    2012                                                779,000
                                                     ----------
                                                     $2,811,000
                                                     ==========


Note 5.  Retirement Plan

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


Note 6.  Deferred Compensation Agreements

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


Note 7.  Stock Options and Warrants

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


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

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

Other pertinent information related to the plans is as follows:

                                              1997                 1996
                                       --------------------  -------------------
                                                  Weighted-            Weighted-
                                                   Average              Average
                                                  Exercise             Exercise
                                        Shares      Price     Shares     Price
                                      ------------------------------------------
Outstanding at beginning of year ..   1,099,800     $2.35    836,000    $2.15
Granted ...........................          --        --    407,000     2.75
Forfeited .........................    (100,029)     2.56   (100,000)    2.75
Exercised .........................     (26,500)     1.50    (43,200)    1.50
                                      ------------------------------------------
Outstanding at end of year ........     973,271     $2.36   1,099,800   $2.35
                                      ==========================================

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

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

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

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

$1.50 - $1.65      461,512     2.2 years   $  1.55      461,512     $   1.55

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

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


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

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

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

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

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

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

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


Note 8.  Lease Commitments and Total Rental Expense

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

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

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

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

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

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


Note 9.  Major Customer

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


Note 10.  Purchase of Railroad Facilities

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

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

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

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

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

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

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


Note 11.  Minority Interest in Subsidiaries

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

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

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

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


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

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

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


Note 13.  Earnings Per Share

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

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

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

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

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


Note 14.  Fair Value of Financial Instruments

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

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

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

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


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

None.

PART III

Item 9.  Directors and Executive Officers of the Registrant

Set  forth  below  are the names  and ages of all the  directors  and  executive
officers of the Registrant and the positions and offices held by such persons as
of December 31, 1997.

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

Guy L. Brenkman (52)                        Director (Chairman) & President
Orvel L. Cox (55)                           Director
Timothy F. Shea (48)                        Director
John S. Fulton (64)                         Director
J. Michael Carr (34)                        Director & Treasurer
Daniel A. LaKemper (40)                     Secretary
Kevin L. Williams (25)                      Assistant Secretary

All of the above  Directors and Officers  were elected at the Annual  Meeting of
the  Stockholders  (and the board  meeting  which  followed) on June 18, 1997 to
serve until the next annual meeting. There is no family relationship between any
officer or director.

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

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

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

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

Mr. Fulton,  Director, was elected to the Board in 1993. Mr. Fulton has 17 years
experience  in the real estate  business  concentrating  in retail  sales,  real
estate  development and  appraising.  Mr. Fulton's  previous  positions  include
Industrial  Appraising (6 years) with Cole, Layer Trumble of Dayton, Ohio, and 5
years with  Pepsi-Cola.  Mr.  Fulton holds a BS degree in Public  Administration
from Bradley University in Peoria, Illinois.

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

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

Mr.  Williams,  Assistant  Secretary,  also  serves  as same  for the  Company's
subsidiaries.  In addition,  Mr. Williams serves as the Company's stock transfer
agent.  Mr.  Williams has been employed by the Company since June 1993 and has a
degree in paralegal services from Midstate College in Peoria, Illinois.
<PAGE>


Item 10.  Executive Compensation

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

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

Guy L. Brenkman, CEO   1997   $419,695        ----          ----     $ 4,750 (a)
                       1996   $350,098        ----        80,000     $ 4,750 (a)
                       1995   $310,546        ----        37,000     $ 4,500 (a)

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

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

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

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

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

                                                              Date Raise
Subsidiary                               Date Acquired        Effective
                                         -------------     ----------------

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

Directors of the Registrant each were compensated $1,000 in 1997.
<PAGE>


Item 11.  Security Ownership of Certain Beneficial Owners and Management

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

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

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

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

FOOTNOTES:

(1)  Based on 9,714,024 shares of Common Stock and Equivalents outstanding as of
     March 20, 1998.

(2)  Of the total number of shares shown as owned by Mr. Brenkman, 60,606 shares
     represent the number of shares Mr. Brenkman has the right to acquire within
     60 days upon the exercise of options granted under the Company's 1994 Stock
     Option  Plan,  and  1,740,800  shares  represent  the  number of shares Mr.
     Brenkman  has the right to acquire  within 60 days  through the exercise of
     Warrants.  Mr.  Brenkman owns all shares in joint tenancy with his wife. In
     addition 13,233 shares are held by Mr. Brenkman under the Pioneer  Railcorp
     Retirement  Savings Plan and 2,340 shares are held by Mr.  Brenkman's wife,
     in which he disclaims beneficial ownership.

(3)  Of the total  number of shares  shown as owned by Mr.  Cox,  66,666  shares
     represent  the number of shares Mr. Cox has the right to acquire  within 60
     days upon the exercise of options  granted under the  Company's  1994 Stock
     Option Plan, and 101,770 shares  represent the number of shares Mr. Cox has
     the right to acquire  within 60 days through the  exercise of Warrants.  In
     addition  1,859  shares  are held by Mr.  Cox  under the  Pioneer  Railcorp
     Retirement  Savings Plan.  Mr. Cox's shares are owned in joint tenancy with
     his wife. Mr. Cox and his wife own one Preferred  Share in the  Mississippi
     Central Railroad Co.

(4)  Of the total number of shares shown as owned by Mr. LaKemper, 66,666 shares
     represent the number of shares Mr. LaKemper has the right to acquire within
     60 days upon the exercise of options granted under the Company's 1994 Stock
     Option Plan, and 40,000 shares  represent the number of shares Mr. LaKemper
     has the right to acquire  within 60 days  through the exercise of Warrants.
     In addition 938 shares are held by Mr. LaKemper under the Pioneer  Railcorp
     Retirement  Savings Plan. Mr.  LaKemper's shares are owned in joint tenancy
     with his wife.

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


(6)  Of the total  number of shares shown as owned by Mr.  Carr,  66,666  shares
     represent the number of shares Mr. Carr has the right to acquire  within 60
     days upon the exercise of options  granted under the  Company's  1994 Stock
     Option Plan,  and 1,000 shares  represent the number of shares Mr. Carr has
     the right to acquire within 60 days through the exercise of Warrants.

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

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


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

Item 13.  Exhibits and Reports on Form 8-K

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

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

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

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

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

Exhibit # 10.4 - 1994 Stock Option Plan for Pioneer  Railcorp  (incorporated  by
reference  to Exhibit #3 of the  Company's  registration  statement  on Form S-8
filed January 31, 1996).

Exhibit # 10.5 - Form of incentive stock option under the 1994 Stock Option Plan
for Pioneer  Railcorp  (incorporated by reference to Exhibit #4 of the Company's
registration statement on Form S-8 filed January 31, 1996).

Exhibit # 10.6 - Form of option agreement for  non-employee  Directors under the
1994 Stock  Option Plan for  Pioneer  Railcorp  (incorporated  by  reference  to
Exhibit #5 of the Company's registration statement on Form S-8 filed January 31,
1996).

Exhibit # 10.7 - Executive Contract  (incorporated by reference to the Company's
Form 10-KSB for the year ended December 31, 1994, filed March 31, 1995,  amended
August 31, 1995 and September 20, 1995).

Exhibit # 10.8 - 1996 Stock Option Plan for Pioneer  Railcorp  (incorporated  by
reference  to the  Company's  Form 10-KSB for the year ended  December 31, 1996,
filed March 31, 1997).

Exhibit # 10.9 - Form of incentive stock option under the 1996 Stock Option Plan
for Pioneer Railcorp (incorporated by reference to the Company's Form 10-KSB for
the year ended December 31, 1996, filed March 31, 1997).  Exhibit # 10.10 - Form
of option agreement for non-employee  Directors under the 1996 Stock Option Plan
for Pioneer Railcorp (incorporated by reference to the Company's Form 10-KSB for
the year ended December 31, 1996, filed March 31, 1997).

Exhibit # 21 - Subsidiaries of the registrant.

Exhibit # 27 - Financial Data Schedule.

No reports were filed on Form 8-K during the fourth quarter 1997.
<PAGE>



                                   SIGNATURES

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

PIONEER RAILCORP
(Registrant)


By: /s/ Guy L. Brenkman
    ------------------------------------
    Guy L. Brenkman, President,
    Chief Executive Officer and Director

Dated: March 20, 1998

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


By: /s/ J. Michael Carr
    --------------------------------------
    J. Michael Carr, Treasurer,
    Chief Financial Officer and Director

Dated: March 20, 1998

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

Dated: March 20, 1998

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

Dated: March 20, 1998