TO THE SHAREHOLDERS:

I am pleased to report that Pioneer  Railcorp  turned in another solid financial
performance  in the year ended 2000  reporting  strong  gains in both  operating
revenues  and  operating  income.  Operating  revenue  increases  resulted  from
increased  freight  revenues  by the  Company's  operating  railroads  and  also
increased revenues from the Company's equipment leasing operations.

Competition  for quality short line railroads  remains  fierce,  and on April 1,
2000,  the  Company  began  operating  its   wholly-owned   subsidiary   Indiana
Southwestern  Railway Co. (ISW).  The line is in  Evansville,  Indiana and is 23
miles in length. The primary commodities shipped by the ISW are grain,  plastics
and rail equipment.

Pioneer Railcorp  continues to evaluate  potential  railroad  acquisition as one
means of providing  additional growth for the Company and expects to selectively
make solid and safe financial investments in operating railroads in the future.

Pioneer  Railcorp  continues  to seek growth  internally  by working hard in our
marketing  efforts to secure  new  customers  while  working  to  increase  rail
transportation  services  with our  existing  customers.  In  addition,  we will
continue to seek to increase  revenues by offering  competitive  locomotive  and
railcar leasing products and services.  The Company  continues to place a strong
emphasis on collecting  auxiliary  revenues generated by right of way leases and
utility royalties.

I believe  Pioneer  Railcorp is well  positioned  to improve  profitability  and
shareholder  value in the future.  As it appears  that the country is entering a
time of economic  uncertainty,  the  management  team is working  diligently  to
control  costs and  eliminate  waste.  We will  continue to take a common  sense
approach in our daily operations to insure every dollar earned is used wisely.

As I have stated in the past,  I am thankful to our loyal  employees  for all of
their hard work and  efforts  put  forth.  They are the most  important  link in
providing  the quality  service to our customers  and  ultimately  the financial
benefits reaped by all of Pioneer Railcorp shareholders.

Sincerely,

/s/ Guy L. Brenkman


Guy L. Brenkman
Chief Executive Officer
<PAGE>


Company Background

Pioneer Railcorp, an Iowa corporation, is a railroad holding company. As used in
this annual report, unless the context requires otherwise, the term "Company" or
"PRC" refers to the parent, Pioneer Railcorp and its subsidiaries: West Michigan
Railroad  Co.  (WMI),  Michigan  Southern  Railroad  Company  (MSO),  Fort Smith
Railroad Co. (FSR),  Alabama Railroad Co. (ALAB),  Mississippi  Central Railroad
Co. (MSCI),  Alabama & Florida Railway Co., Inc. (AF),  Decatur Junction Railway
Co. (DT),  Vandalia  Railroad  Company (VRRC),  Minnesota  Central  Railroad Co.
(MCTA) (sold May 6, 1999), Keokuk Junction Railway Co. (KJRY),  Shawnee Terminal
Railway Company (STR),  Pioneer  Industrial  Railway Co. (PRY),  The Garden City
Western Railway,  Inc. (GCW),  Indiana  Southwestern  Railway Co. (ISW), Pioneer
Resources, Inc. (PRI), Pioneer Railroad Equipment Co., Ltd. (PREL), Pioneer Air,
Inc. (PAR), and Pioneer Railroad Services, Inc. (PRS) and an inactive subsidiary
Midwest Terminal Railway Company (formerly Rochelle Railroad Co.) (RRCO).

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

Pioneer Railcorp Subsidiaries

Fort Smith Railroad Co.

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

Alabama Railroad Co.

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

Mississippi Central Railroad Co.

On April 1, 1992,  Pioneer  Railcorp  purchased  the common stock of the Natchez
Trace  Railroad  from  Kyle  Railways,  Inc.  The  railroad  runs  from  Oxford,
Mississippi to Grand Junction, Tennessee, a total of 51 miles, 45.5 of which are
located in  Mississippi.  The railroad  interchanges  with the Norfolk  Southern
Railway (NS) at Grand Junction,  Tennessee and the Burlington  Northern Santa Fe
(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  railroad's  principal  commodities  include  outbound  finished wood
products as well as the resins,  chemicals  and pulpwood for  production  of the
finished wood products, scrap steel and cottonseed.

Alabama & Florida Railway Co.

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 railroad's principal commodities are resins, plastics, fertilizer,  peanuts,
and pulpwood.

Decatur Junction Railway Co.

On September 23, 1993,  the Decatur  Junction  Railway Co. (DT), a  wholly-owned
subsidiary of Pioneer Railcorp,  signed a lease agreement with Cisco Co-op Grain
Company  (Cisco) and on  September  24,  1993 with  Central  Illinois  Shippers,
Incorporated  (CISI),  for the lease of two  segments  of track in east  central
Illinois.  Approximately  38 miles of railroad is operated  including 8 miles of
trackage rights on the Illinois Central Railroad (IC) through Decatur, Illinois.
The leases run through December 31, 2006. The railroad's  principal  commodities
are primarily agriculture products.

Vandalia Railroad Company

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

West Michigan Railroad Co.

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

Keokuk Junction Railway Co.

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

Shawnee Terminal Railway Company

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

Michigan Southern Railroad

On December 19,  1996,  Pioneer  Railcorp  through its  wholly-owned  subsidiary
Michigan Southern  Railroad  Company,  signed a two year lease with the Michigan
Southern  Railroad Company,  Inc., Morris Leasing,  Inc. and Gordon D. Morris to
operate  53 miles of track  and  certain  railroad  related  assets.  The  lease
contained  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, and this option was exercised on January 6, 1999. The railroad
is comprised of three  separate  non-contiguous  lines,  one located in southern
Michigan  and  two  located  in  northern  Indiana.   All  lines  have  separate
interchanges  with Conrail (CR).  The Michigan line also  interchanges  with the
Indiana Northeastern Railroad Company (IN). The railroad's principal commodities
are scrap  paper,  scrap iron,  fertilizer,  plastics,  plywood,  sugar and corn
syrup.

Pioneer Industrial Railway Co.

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

The Garden City Western Railway, Inc.

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

Indiana Southwestern Railway Co.

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

Pioneer Railroad Equipment Co., Ltd.

Pioneer Railroad Equipment Co., Ltd. (PREL),  which was formed on April 1, 1990,
leases equipment to the Company's subsidiary railroads and also purchases, sells
and leases equipment to and from unrelated parties.  PREL also earns income from
non-company  railroads  on its  fleet of  approximately  1,100  railcars  (as of
December 31, 1999) when they carry freight on non-company  railroads.  PREL also
engages in retail sales of promotional items.

Corporate Support Operations

Other corporate  support  operations  engaged in by the Company are performed by
its  wholly  owned  subsidiaries,   Pioneer  Railroad  Services,  Inc.,  Pioneer
Resources,  Inc., and Pioneer Air, Inc.  Pioneer Railroad  Services,  Inc. (PRS)
which began  operations  on October 1, 1993,  provides  accounting,  management,
marketing,   operational  and  agency  services  to  the  Company's   subsidiary
railroads.  Pioneer  Resources,  Inc.  was formed on December 30, 1993 to manage
real estate and auxiliary resources for Company subsidiaries.  Pioneer Air, Inc.
was formed on August 5, 1994 and currently  owns a Cessna 421B aircraft which is
used by Pioneer Railcorp subsidiaries exclusively for Company business travel.

             The remainder of this page is intentionally left blank
<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, 2000 and 1999, 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,  2000  and  1999,  and the  results  of their
operations  and their cash flows for the years  then  ended in  conformity  with
generally accepted accounting principles.

/s/ McGladrey & Pullen, LLP

Peoria, Illinois

February 15, 2001, except for Note 17,
      as to which the date is February 20, 2001

<PAGE>

PIONEER RAILCORP AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
December 31, 2000 and 1999
<TABLE>

ASSETS                                                                                   2000            1999
-----------------------------------------------------------------------------------------------------------------
<S>                                                                                  <C>             <C>
Current Assets
  Cash ...........................................................................   $    564,490    $  2,356,844
  Accounts receivable, less allowance for doubtful
    accounts 2000 $120,099; 1999 $186,998 ........................................      3,687,738       3,940,029
  Inventories ....................................................................        237,091         272,278
  Prepaid expenses ...............................................................         96,357          91,377
  Income tax refund claims .......................................................        206,915          94,449
  Deferred taxes .................................................................         59,800          91,800
                                                                                     ----------------------------
        Total current assets .....................................................      4,852,391       6,846,777

Investments, cash value of life insurance ........................................        156,702         131,503

Property and Equipment, net ......................................................     25,451,459      24,159,995

Intangible Assets, less accumulated amortization
  2000 $288,984; 1999 $239,846 ...................................................      1,091,403       1,122,489
                                                                                     ----------------------------

                                                                                     $ 31,551,955    $ 32,260,764
                                                                                     ============================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
  Current maturities of long-term debt ...........................................   $  2,953,155    $  2,390,042
  Notes payable ..................................................................             --         810,000
  Accounts payable ...............................................................      2,307,663       3,983,617
  Accrued expenses ...............................................................        643,743         670,873
  Income taxes payable ...........................................................          4,099         561,697
                                                                                     ----------------------------
        Total current liabilities ................................................      5,908,660       8,416,229
                                                                                     ----------------------------

Long-Term Debt, net of current maturities ........................................     14,103,682      13,121,553
                                                                                     ----------------------------

Deferred Taxes ...................................................................      4,825,200       4,505,100
                                                                                     ----------------------------

Minority Interest in Subsidiaries ................................................      1,106,000       1,154,000
                                                                                     ----------------------------

Commitments and Contingencies (Note 11)

Stockholders' Equity
  Common stock, Class A (voting), par value $.001 per share, authorized 20,000,000
    shares, issued 2000 4,612,517 shares;
    1999 4,611,217 shares ........................................................          4,612           4,611
    In treasury 2000 81,240 shares; 1999 19,000 shares ...........................            (81)            (19)
                                                                                     ----------------------------
    Outstanding 2000 4,531,277; 1999 4,592,217 ...................................          4,531           4,592
  Common stock, Class B (nonvoting), no par value,
    authorized 20,000,000 shares .................................................             --              --
  Additional paid-in capital .....................................................      2,044,041       2,042,042
  Retained earnings ..............................................................      3,559,841       3,017,248
                                                                                     ----------------------------
                                                                                        5,608,413       5,063,882
                                                                                     ----------------------------

                                                                                     $ 31,551,955    $ 32,260,764
                                                                                     ============================
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>

PIONEER RAILCORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 2000 and 1999
<TABLE>
                                                           2000            1999
-----------------------------------------------------------------------------------
<S>                                                    <C>             <C>
Railway operating revenue ..........................   $ 14,771,656    $ 13,857,384
                                                       ----------------------------

Operating expenses
  Maintenance of way and structures ................      1,475,431       1,486,960
  Maintenance of equipment .........................      1,441,511       1,550,973
  Transportation ...................................      3,412,965       3,041,661
  General and administrative .......................      3,815,797       3,772,036
  Depreciation .....................................      1,884,571       1,699,593
  Amortization .....................................         49,138          63,531
                                                       ----------------------------
                                                         12,079,413      11,614,754
                                                       ----------------------------

        Operating income ...........................      2,692,243       2,242,630
                                                       ----------------------------

Other income (expenses)
  Interest income ..................................         43,685           9,652
  Interest expense .................................     (1,572,428)     (1,416,203)
  Lease income .....................................        266,776         251,278
  Gain on sale of property and equipment ...........         59,452       1,512,112
  Loss on sale of subsidiary .......................             --        (341,872)
  Other, net .......................................          9,100          34,524
                                                       ----------------------------
                                                         (1,193,415)         49,491
                                                       ----------------------------
        Income before provision for income taxes
        and minority interest in preferred stock
        dividends of consolidated subsidiaries .....      1,498,828       2,292,121

Provision for income taxes .........................        635,535         959,129
                                                        ---------------------------
        Income before minority interest in preferred
        stock dividends of consolidated subsidiaries        863,293       1,332,992

Minority interest in preferred stock dividends of
  consolidated subsidiaries ........................        117,710         120,515
                                                       ----------------------------

        Net income .................................   $    745,583    $  1,212,477
                                                       ============================

Basic earnings per common share ....................   $       0.16    $       0.26
                                                       ============================

Diluted earnings per common share ..................   $       0.16    $       0.26
                                                       ============================
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>

PIONEER RAILCORP AND SUBSIDIARIES


CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

Years Ended December 31, 2000 and 1999
<TABLE>
                                        Common Stock
                                    ------------------------
                                       Class A (Voting)         Additional
                                    ------------------------      Paid-In        Retained
                                     Shares        Amount         Capital        Earnings
                                    -------------------------------------------------------
<S>                                 <C>          <C>            <C>             <C>
Balance at December 31, 1998 ..     4,610,597    $     4,610    $ 2,041,000     $ 1,934,978
 Common stock issued upon
   exercise of stock warrants .           620              1          1,042              --
  Dividends on common stock,
   $.0225 per share ...........            --             --             --        (103,748)
  Shares acquired in treasury
    for retirement ............       (19,000)           (19)            --         (26,459)
  Net income ..................            --             --             --       1,212,477
                                    -------------------------------------------------------
Balance at December 31, 1999 ..     4,592,217          4,592      2,042,042       3,017,248
  Common stock issued upon
    exercise of stock warrants          1,300              1          1,999              --
  Dividends on common stock,
    $.025 per share ...........            --             --             --        (113,398)
  Shares acquired in treasury
    for retirement ............       (62,240)           (62)            --         (89,592)
  Net income ..................            --             --             --         745,583
                                    -------------------------------------------------------
Balance at December 31, 2000 ..     4,531,277    $     4,531    $ 2,044,041     $ 3,559,841
                                    =======================================================
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>

PIONEER RAILCORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2000 and 1999
<TABLE>
                                                                 2000           1999
----------------------------------------------------------------------------------------
<S>                                                           <C>            <C>
Cash Flows From Operating Activities
  Net income ..............................................   $   745,583    $ 1,212,477
  Adjustments to reconcile net income to net cash
    provided by operating activities:
    Minority interest in preferred stock dividends of
      consolidated subsidiaries ...........................       117,710        120,515
    Depreciation ..........................................     1,884,571      1,699,593
    Amortization ..........................................        49,138         63,531
    (Increase) in cash value life insurance ...............       (25,199)       (19,155)
    (Gain) on sale of property and equipment ..............       (59,452)    (1,512,112)
    Loss on sale of stock of subsidiary ...................            --        341,872
    Deferred taxes ........................................       352,100        325,360
    Changes in assets and liabilities:
      (Increase) decrease in assets:
        Accounts receivable ...............................       252,291     (1,474,931)
        Income tax refund claims ..........................      (112,466)       (37,516)
        Inventories .......................................        35,187         59,563
        Prepaid expenses ..................................        (4,980)        93,347
      Increase (decrease) in liabilities:
        Accounts payable ..................................    (1,675,954)     1,686,222
        Accrued expenses ..................................       (27,130)       350,698
        Income taxes payable ..............................      (557,598)       547,491
                                                              --------------------------
        Net cash provided by operating activities .........       973,801      3,456,955
                                                              --------------------------

Cash Flows From Investing Activities
  Proceeds from sale of property and equipment ............       606,332      1,584,473
  Purchase of property and equipment ......................    (3,100,151)    (2,337,041)
  Intangible assets .......................................       (18,052)       (18,818)
  Acquisition of subsidiaries, net of cash acquired .......      (619,000)    (3,893,896)
  Proceeds from sale of subsidiary, net of cash distributed            --        (43,773)
                                                              --------------------------
        Net cash (used in) investing activities ...........    (3,130,871)    (4,709,055)
                                                              --------------------------

Cash Flows From Financing Activities
  Proceeds from short-term borrowings .....................     4,201,719      3,463,323
  Proceeds from long-term borrowings ......................     5,504,773      5,021,590
  Principal payments on short-term borrowings .............    (5,011,719)    (2,961,209)
  Principal payments on long-term borrowings ..............    (3,959,531)    (2,102,538)
  Proceeds from common stock issued upon exercise
    of stock warrants and options .........................         2,000          1,043
  Common stock dividend payments ..........................      (113,398)      (103,748)
  Preferred stock dividend payments to minority interest ..      (117,710)      (120,515)
  Purchase of common stock for the treasury ...............       (89,654)       (26,478)
  Repurchase of minority interest .........................       (48,000)       (32,000)
                                                              --------------------------
        Net cash provided by financing activities .........       368,480      3,139,468
                                                              --------------------------
</TABLE>
                                  (Continued)
<PAGE>

PIONEER RAILCORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
Years Ended December 31, 2000 and 1999
<TABLE>
                                                                 2000            1999
                                                              --------------------------
<S>                                                           <C>            <C>
        Net increase (decrease) in cash ...................   $(1,792,354)   $ 1,887,368

Cash, beginning of year ...................................     2,356,844        469,476
                                                              --------------------------
Cash, end of year .........................................   $   564,490    $ 2,356,844
                                                              ==========================

Supplemental Disclosures of Cash Flow Information
  Cash payments for:
    Interest ..............................................   $ 1,563,463    $ 1,405,846
                                                              ==========================

  Income taxes (net of refunds 2000 $65,370; 1999 $3,403) .   $   953,499    $   123,794
                                                              ==========================

Supplemental Disclosures of Noncash Investing Information
  Railroad acquisitions:
    Fair value of assets acquired, principally property and
      equipment ...........................................   $   619,000    $ 5,745,331
    Less liabilities assumed, principally deferred income
      taxes ...............................................            --      1,845,331
                                                              --------------------------
    Cash paid .............................................       619,000      3,900,000
    Less cash acquired ....................................            --          6,104
                                                              --------------------------
        Net cash paid for stock acquisitions ..............   $   619,000    $ 3,893,896
                                                              ==========================

Sale of stock of railroad subsidiary:
  Assets disposed of including cash .......................   $        --    $ 1,877,449
  Less cash transferred to buyer ..........................            --         43,774
                                                              --------------------------
    Assets disposed of, net of cash .......................            --      1,833,675
  Less liabilities forgiven ...............................            --      1,491,802
                                                              --------------------------
    Loss before proceeds from sale of stock ...............            --        341,873
  Cash proceeds from sale of stock ........................            --              1
                                                              --------------------------
        Net loss on sale of stock of subsidiary ...........   $        --    $   341,872
                                                              ==========================
Increase in cash value of life insurance over
  premiums paid ...........................................   $    25,199    $    19,155
                                                              ==========================
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>

PIONEER RAILCORP AND SUBSIDIARIES

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


Note 1.  Nature of Business and Significant Accounting Policies

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

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

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

Significant accounting policies:

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

Cash and cash equivalents: For the purposes of reporting cash flows, the Company
considers all highly liquid debt  instruments  purchased  with maturity of three
months  or less to be cash  equivalents.  There  are no cash  equivalents  as of
December 31, 2000 and 1999.  Periodically  throughout  the year, the Company has
amounts  on deposit  with  financial  institutions  that  exceed the  depository
insurance limits.  The Company has not experienced any loss as a result of those
deposits and does not expect any in the future.

Receivables  credit risk: The Company performs ongoing credit evaluations of its
customers and generally  does not require  collateral.  Provisions  are made for
estimated  uncollectible trade accounts receivable.  To date, losses on accounts
receivable  have been  minimal in  relation to the volume of sales and have been
within management's expectations.

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

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

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

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

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

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

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

The  Company  reviews  applicable  assets  on a  quarterly  basis  to  determine
potential  impairment by comparing  carrying value of underlying assets with the
anticipated  future cash flows and does not believe that impairment exists as of
December 31, 2000 and 1999.

Intangible  assets:  Intangible assets consist  principally of goodwill which is
being  amortized by the  straight-line  method over periods ranging from five to
forty years.  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, 2000 and
1999.

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

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

Government  grants:  From time to time,  the  Company,  through  its  subsidiary
railroads,  enters into agree- ments with state  agencies in the form of federal
or state aid projects or grant  agreements which are designed to aid the Company
with labor,  material, and other costs relating to the rehabilitation and repair
of track and bridge  structures  belonging  to the  Company.  As of December 31,
2000, all amounts  relative to these agreements have been received and satisfied
in full.

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

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

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

Note 2.  Property and Equipment

Property and equipment consist of the following:

                                                            December 31,
                                                   -----------------------------
                                                      2000               1999
                                                   -----------------------------

Land .......................................       $ 2,979,438       $ 2,979,438
Roadbed ....................................         9,801,433         9,135,967
Transportation equipment ...................         4,766,477         2,815,931
Railcars ...................................        12,918,626        11,730,121
Buildings ..................................         1,449,526         1,397,636
Machinery and equipment ....................         1,412,644         1,420,363
Office equipment ...........................           477,987           441,110
Leasehold improvements .....................           252,684           210,247
Capital projects ...........................           301,987         1,271,914
                                                   -----------------------------
                                                    34,360,802        31,402,727
Less accumulated depreciation ..............         8,909,343         7,242,732
                                                   -----------------------------
                                                   $25,451,459       $24,159,995
                                                   =============================

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

The Company has a $5 million  master  credit  facility  with National City Bank,
Peoria,  Illinois,  to provide a  revolving  acquisition  line of  credit.  This
facility is  collateralized  by  commercial  pledges and security  agreements of
various subsidiaries,  certain transportation  equipment, and other tangible and
intangible assets. The interest rate is adjustable at 1.0% over the bank's prime
rate  (10.5%  at  December  31,  2000).  Amounts  drawn on the  master  line are
characterized  as separate  notes that must  generally  be repaid  monthly  over
periods of up to ten years. The Company's  outstanding  borrowings classified as
long-term  under  this line of credit  totaled  $600,011  and  $1,453,263  as of
December 31, 2000 and 1999,  respectively.  The  $1,453,263  note was refinanced
under a separate long-term note payable during fiscal 2000. The $600,011 note is
due June 2002. As of December 31, 1999, the Company also had a $810,000  current
note payable under the $5 million credit  facility which was refinanced  under a
separate long-term note payable during fiscal year 2000.

The Company had a $100,000 line of credit with Citizens Bank and Trust  Company,
Chillicothe,  Missouri,  that expired July 2000.  The Company had no outstanding
balance under this line of credit as of December 31, 1999.

The Company has a $600,000  and a $500,000  line of credit  with  National  City
Bank, Peoria, Illinois, each bearing interest at prime, as published in The Wall
Street  Journal,  plus .5%,  collateralized  by accounts  receivable and general
intangibles  of certain  subsidiaries.  The Company had no  outstanding  balance
under either of these lines of credit as of December 31, 2000 and 1999.
<PAGE>

Long-term debt at December 31, 2000 and 1999, consists of the following:
<TABLE>
                                                                       2000          1999
                                                                    -------------------------
<S>                                                                 <C>           <C>
Note payable under master line of credit agreement with
  National City Bank, due in monthly installments of $8,300
  including interest at 1.0% over the bank's prime rate
  (10.5% at December 31, 2000), final payment due June
  2002, collateralized by real estate, rail facilities, and other
  assets of Indiana Southwestern Railway Co. ....................   $   600,011   $        --
Note payable, National City Bank, due in monthly principle
  installments of $7,424 through July 2001, with annual
  increases therafter, plus interest at the bank's LIBOR
  rate plus 2.25% adjusted monthly (8.91% at December 31,
  2000), final installment due July 2005, collateralized by
  real estate, rail facilities, and other assets of Garden City
  & Western Railway, Inc. .......................................     1,387,654            --
Note payable, National City Bank, due in monthly principle
  installments of $18,226 through July 2001, with annual
  increases thereafter, plus interest at the bank's LIBOR
  rate plus 2.25% adjusted monthly (8.91% at December 31,
  2000), final installment due July 2005, collateralized by
  locomotives ...................................................     1,983,870            --
Note payable, Bank of America Leasing & Capital, due in
  monthly installments of $22,825, including intrest at 9.65%,
  final installment due June 2007, collateralized by railcars ...     1,318,697            --
Note payable, National City Bank, due in monthly install-
  ments of $30,830 including interest at 8.375%, final
  installment due May 2004, collateralized by the assets
  of the Michigan Southern Railroad Company and
  Michigan Southern Railroad Company, Inc. ......................     2,235,117     2,406,715
Mortgage payable, National City Bank, due in monthly
  installments of $4,049 including interest at 9.75%. The
  interest rate is adjustable every five years and is presently
  based on the Bank's base rate plus 1.5% as of October 31,
  1999. Final installment due June 2008, collateralized by
  Pioneer Railcorp's corporate headquarters building ............       372,410       383,958
Mortgage payable, National City Bank, due in monthly
  installments of $18,700, including interest at 8.375%
  through May 2004 when the rate will be adjusted, final
  installment due January 2007, collateralized by real estate
  rail facilities, and other assets of Alabama & Florida
  Railway Co., Inc. .............................................     1,041,422     1,170,613
Notes payable, Wells Fargo Equipment, due in monthly
  installments from $3,071 to $24,018 including interest
  ranging from 7.26% to 9.00%, final installments due
  June 2004 to May 2006, collateralized by railcars .............     1,811,385     2,146,401
                                                                    -------------------------
        Balance carried forward .................................   $10,750,566   $ 6,107,687
                                                                    -------------------------
</TABLE>
<PAGE>

Note 3.       Pledged Assets, Notes Payable, and Long-Term Debt (Continued)
<TABLE>
                                                                   2000          1999
                                                                -------------------------
<S>                                                             <C>           <C>
        Balance brought forward .............................   $10,750,566   $ 6,107,687
Note payable, Keycorp, due in monthly installments of
  $22,744, including interest at 8.86%, final installment
  due December 2003, collateralized by railcars .............       716,356       916,105
Note payable, Bank of America, due in monthly installments
  of $23,305, including interest at 8.75%, final
  installment due December 2002, collateralized by railcars .       511,708       736,060
Note payable, National City Bank, due in monthly
  installments of $37,235, including interest at 8.375%
  through May 2004 when the rate will be adjusted, final
  installment due December 2008, collateralized by Keokuk
  Junction Railway Co. stock and assets .....................     2,355,553     2,591,359
Notes payable, Center Capital Corporation, due in monthly
  installments from $1,402 to $5,202 including interest from
  8.90% to 9.75%, final installments due from January 2002
  to April 2005, collateralized by 70 ton box cars ..........       444,934       547,586
Note payable, Pullman Bank & Trust Company, due in
  monthly installments of $4,933, including interest at
  9.45%, final installment due December 2004, collateralized
  by covered hoppers ........................................       195,986       233,817
Note payable, Fifth Third Leasing, due in monthly
  installments of $39,286, including interest at 8.29%, final
  installment due May 2003, collateralized by locomotives,
  boxcars, covered hoppers, and gondolas ....................     1,029,426     1,398,524
Notes payable, United Capital, due in monthly installments
  of $32,763, and $12,028 including interest at 8.38% and
  7.63%, final installments due May 2002 and December
  2004, collateralized by railcars ..........................     1,018,178     1,454,383
Noninterest-bearing note payable, State of Mississippi,
  due in annual installments of $3,792, final installment
  due February 2009, collateralized by track structure ......        34,130        37,922
Various notes payable, due in monthly installments from
  $417 to $573, including interest ranging from 9.50% to
  10.25%, installments due through December 2000,
  collateralized by vehicles and railcars ...................            --        34,889
Note payable under master line of credit agreement with
  National City Bank, due in monthly installments of $18,900
  including interest at 9.5%, final payment due June 2001,
  collateralized by real estate, rail facilities, and other
  assets of Garden City & Western Railway , Inc. ............
  (refinanced in 2000) ......................................            --     1,453,263
                                                                -------------------------
                                                                 17,056,837    15,511,595
Less current portion ........................................     2,953,155     2,390,042
                                                                -------------------------
                                                                $14,103,682   $13,121,553
                                                                =========================
</TABLE>

Aggregate maturities required on long-term debt as of December 31, 2000, are due
in future years as follows:

Years ending December 31:                     Amount
------------------------------------------------------
  2001 ..............................      $ 2,953,155
  2002 ..............................        3,492,400
  2003 ..............................        2,469,054
  2004 ..............................        3,578,512
  2005 ..............................        2,862,642
  Thereafter ........................        1,701,074
                                           -----------
                                           $17,056,837
                                           ===========

Note 4.  Income Tax Matters

The  Company and all but two of its  subsidiaries  file a  consolidated  federal
income tax return.  Those two  subsidiaries  file  separate  federal  income tax
returns.
<PAGE>

The  provision  for income  taxes  charged  to  operations  for the years  ended
December 31, 2000 and 1999, was as follows:

                                                     2000                 1999
                                                   -----------------------------
Current:
  Federal ............................             $223,814             $549,067
  State ..............................               59,621               84,702
                                                   -----------------------------
                                                    283,435              633,769
                                                   -----------------------------
Deferred:
  Federal ............................              307,943              296,660
  State ..............................               44,157               28,700
                                                   -----------------------------
                                                    352,100              325,360
                                                   -----------------------------

                                                   $635,535             $959,129
                                                   =============================


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, 2000 and 1999, due to the following:

                                                             2000     1999
                                                             --------------

Computed "expected" tax expense .........................    35.0%    35.0%
Increase in income taxes resulting from:
  State income taxes, net of federal tax benefit ........     4.6      3.3
  Goodwill amortization .................................     1.1       .7
  Other .................................................     1.7      2.8
                                                             --------------
                                                             42.4%    41.8%
                                                             ==============


Deferred tax assets and  liabilities  consist of the following  components as of
December 31, 2000 and 1999:

                                                    2000                 1999
                                                -------------------------------
Deferred tax assets:
  AMT credit carryforwards .............        $   983,200         $   869,800
  NOL carryforwards ....................            180,000             391,100
  Deferred compensation ................             47,800              44,600
  Other ................................             59,800              91,800
                                                -------------------------------
                                                  1,270,800           1,397,300
Deferred tax liabilities:
  Property and equipment ...............         (6,036,200)         (5,810,600)
                                                -------------------------------
                                                $(4,765,400)        $(4,413,300)
                                                ===============================


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,
2000 and 1999, as follows:

                                                       2000             1999
                                                   ----------------------------

Current deferred tax assets ..................     $    59,800      $    91,800
Net noncurrent deferred tax liabilities ......      (4,825,200)      (4,505,100)
                                                   ----------------------------
Net deferred tax liability ...................     $(4,765,400)     $(4,413,300)
                                                   ============================
<PAGE>

The Company  and its  subsidiaries  have  Alternative  Minimum Tax (AMT)  credit
carryforwards  of  approximately  $983,000 and $870,000 at December 31, 2000 and
1999,  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  $326,000 at December 31, 2000, which can be used to offset future
taxable income of those subsidiaries. Net operating loss carryforwards expire as
follows:

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

2012 .............................................                     $ 141,000
2018 .............................................                       185,000
                                                                       ---------
                                                                       $ 326,000
                                                                       =========

Note 5.  Retirement Plan

The Company has a defined  contribution  401(k) plan covering  substantially all
employees. Employees are eligible to participate in the plan upon employment and
may elect to  contribute,  on a tax deferred  basis,  the lesser of 15% of their
salary,   or  $10,500.   Company   contributions  are   discretionary.   Company
contributions,  at  the  rate  of  50%  of  the  first  8%  of  each  employee's
contributions,  were made to the plan through  September 30, 1999, at which time
management elected to discontinue making future Company contributions.  Expenses
under the plan were $5,000 and $38,000 for the years ended December 31, 2000 and
1999, respectively.

Note 6.  Deferred Compensation Agreements

The Company has deferred compensation agreements with two former Keokuk Junction
Railway Co.  employees.  The agreements  provide  monthly  benefits for 15 years
beginning with the month immediately  following the employees' normal retirement
date, as defined in the agreements.  If an employee  terminates  employment with
the  Company  for any reason  other than death  prior to the  employees'  normal
retirement  date,  benefits  are  rendered on a pro rata basis.  The Company has
recorded  the $124,000 and $116,000  present  value of the  estimated  liability
under the  agreements  as of December 31, 2000 and 1999,  respectively,  using a
discount rate of 7%.  Deferred  compensation  expense totaled $8,000 and $24,000
for the years  ended  December  31, 2000 and 1999,  respectively.  Note 7. Stock
Options and Warrants

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

On April 12, 1994, the Board of Directors approved a stock option plan (the 1994
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  $3.56 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.  As of December 31, 2000,  all options
under the 1994 plan had expired.

On May 28, 1996,  the Board of Directors  approved a stock option plan (the 1996
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 ranges from $2.75 to $3.03,
based upon the trading price on the date of the grant.  As of December 31, 2000,
215,000 options are still outstanding under the 1996 plan.
<PAGE>

Note 7.       Stock Options and Warrants (Continued)

Other pertinent information related to the plans is as follows:

                                           2000                1999
                                   --------------------- ---------------------
                                               Weighted-             Weighted-
                                               Average               Average
                                               Exercise              Exercise
                                    Shares      Price     Shares      Price
                                   -------------------------------------------

Outstanding at beginning of year    366,759    $  3.22   436,759     $  3.13
Forfeited ......................   (151,759)      3.74   (70,000)       2.68
Exercised ......................         --         --        --          --
                                   -----------------------------------------
Outstanding at end of year .....    215,000    $  2.85   366,759     $  3.22
                                   =========================================

Exercisable at end of year .....         --              151,759
                                   ========              =======

A further summary about stock options outstanding as of December 31, 2000, is as
follows:
<TABLE>
                                    Options Outstanding           Options Exercisable
                            ----------------------------------   ---------------------
                                          Weighted-
                                           Average    Weighted                Weighted
                                          Remaining   Average                  Average
                              Number     Contractual  Exercise     Number     Exercise
Range of Exercise Prices    Outstanding      Life      Price     Exercisable    Price
--------------------------------------------------------------------------------------
<S>                         <C>          <C>          <C>        <C>          <C>
$2.75 - $3.03                 215,000     5.4 years    $ 2.85           -     $     --
</TABLE>

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:

                                                    2000        1999
                                                  ----------------------
Net income:
  As reported ..............................      $ 745,583   $1,212,477
  Proforma .................................      $ 683,723   $1,150,477

Basic earnings per common share:
  As reported ..............................      $    0.16   $     0.26
  Proforma .................................      $    0.15   $     0.25

Diluted earnings per common share:
  As reported ..............................      $    0.16   $     0.26
  Proforma .................................      $    0.15   $     0.25

On June 24, 1995,  the Company  issued  4,198,284  warrants to  stockholders  of
record as a dividend.  Each warrant permits  stockholders a right to purchase an
additional  share of  stock at a  predetermined  price  of $2 per  share.  Stock
acquired by exercise of each warrant must be held for a one year period of time.
The warrants  expire July 1, 2015.  There are 4,129,720  and 4,130,420  warrants
outstanding as of December 31, 2000 and 1999, respectively.

Note 8.  Lease Commitments and Total Rental Expense

The Company has entered  into seven  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, generally ranging from $10 to $15 on all cars over a range of 300
to 1,000 cars per year on each segment. The leases expire between September 2001
and July  2011 and three of these  railroads  have ten to  twenty  year  renewal
options.

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

The total  approximate  minimum  rental  commitment  as of  December  31,  2000,
required under  noncancelable  leases, and excluding executory costs and per car
rentals, is due in future years as follows:

Years Ending December 31:                                     Amount
---------------------------------------------------------------------
  2001  ...........................................          $ 45,000
  2002  ...........................................            42,000
  2003  ...........................................            42,000
  2004  ...........................................            42,000
  2005  ...........................................            42,000
  Thereafter ......................................           191,000
                                                             --------
                                                             $404,000
                                                             ========

The total  rental  expense  under the  leases  was  approximately  $144,000  and
$154,000 for the years ended December 31, 2000 and 1999, respectively.

Note 9.  Major Customer

Revenue earned from a major railroad segment customer  amounted to approximately
$2,762,000  and  $2,824,000  during the years ended  December 31, 2000 and 1999,
respectively.  Accounts  receivable  as of December  31, 2000 and 1999,  include
approximately $351,000 and $529,000, respectively, from this customer.

Note 10. Minority Interest in Subsidiaries

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

Following is a summary of the minority  interest in  subsidiaries as of December
31, 2000 and 1999:
<TABLE>
                                                                  2000        1999
                                                               -----------------------
<S>                                                            <C>           <C>
Preferred stock of Alabama Railroad Co. ....................
  Par value - $1,000 per share
  Authorized - 700 shares
  Issued and outstanding - 406 and 409 shares (cumulative
    12% dividend; callable at Company's option at 150% of
    face value) at December 31, 2000 and 1999, respectively    $  406,000   $  409,000
Preferred stock of Alabama & Florida Railway Co., Inc. .....
  Par value - $1,000 per share
  Authorized - 500 shares
  Issued and outstanding - 367 and 406 shares (cumulative
    9% dividend; callable at Company's option after
    June 22, 1995, at 150% of face value) at December 31,
    2000 and 1999, respectively ............................      367,000      406,000
Preferred stock of Mississippi Central Railroad Co. ........
  Par value - $1,000 per share
  Authorized - 1,000 shares
  Issued and outstanding - 333 and 339 shares (cumulative
    10% dividend; convertible at a rate of $10 per common
    share, callable at Company's option after March 1, 1996,
    at 110% of face value) at December 31, 2000 and 1999,
    respectively ...........................................      333,000      339,000
                                                               -----------------------
                                                               $1,106,000   $1,154,000
                                                               =======================
</TABLE>

Note 11. Commitments and Contingencies

Commitments:  In December 1999, the Company entered into a two-year extension of
an existing  executive  employment  contract with the Company's  president.  The
two-year  extension  provides  for  a  base  salary  with  an  annual  inflation
adjustment  based upon the Consumer Price Index.  Should the Company  acquire or
form  additional  railroads,  the base  salary  will  increase  $25,000  for the
acquisition  of railroads of 125 miles or less,  and $50,000 for railroads  over
125  miles.  Should the  president's  employment  be  terminated,  the  contract
requires a lump sum  payment  equal to three years of his then  current  salary.
Should the president retire, he is entitled to accept a consulting position with
the Company  whereby he would be compensated the equivalent of one year's salary
for the  consulting  services  rendered,  or retire  outright with no retirement
benefits from the Company.
<PAGE>

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

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

The  Company  was awarded  grants  totaling  $722,097 in 1998 for the repair and
rehabilitation of certain railroad track and related structures the Company owns
in Alabama.  The Company's  obligations under the grants expire five years after
the  completion  of the  repairs.  In the  unlikely  event  the  Company  should
discontinue   using  the  underlying  track  prior  to  the  expiration  of  the
aforementioned  commitment period,  the Company is contingently  liable to repay
the  full  value of  awarded  funds  pursuant  to the  grants.  The  repair  and
rehabilitation  of the track and related  structures was completed in the fiscal
year ended December 31, 1999.

The Company is contingently liable as a guarantor on an outstanding loan payable
to the U.S.  Small  Business  Administration.  The  $76,000  loan is the primary
responsibility of the Minnesota Central Railroad Co. (Minnesota Central),  which
the Company sold in 1999; however,  the Company had guaranteed the debt prior to
the sale of the Minnesota Central.

Note 12. Earnings Per Share

Following is information  about the  computation of the earnings per share (EPS)
data for the years ended December 31, 2000 and 1999:


                                              Income       Shares      Per Share
                                            (Numerator) (Denominator)    Amount
                                            ------------------------------------
                                            For the Year Ended December 31, 2000
Basic EPS

Income available to common stockholders .   $  745,583   $4,539,379     $   0.16
                                                                        ========
Effect of Dilutive Securities
Employee stock options ..................           --           --
                                            -----------------------
Diluted EPS
Income available to common stockholders
  plus assumed conversions ..............   $  745,583   $4,539,379     $   0.16
                                            ====================================

                                            For the Year Ended December 31, 1999
                                            ------------------------------------
Basic EPS
Income available to common stockholders .   $1,212,477   $4,610,439     $   0.26
                                                                        ========
Effect of Dilutive Securities
Employee stock options ..................           --           --
                                            -----------------------
Diluted EPS
Income available to common stockholders
  plus assumed conversions ..............   $1,212,477   $4,610,439     $   0.26
                                            ====================================

The Company has authorized the issuance of stock warrants and granted options to
employees  to  purchase  shares  of  common  stock  as  discussed  in Note 7. In
determining  the effect of  dilutive  securities,  certain  stock  warrants  and
options  were not  included in the  computation  of diluted  earnings  per share
because the exercise  price of those  warrants and options  exceeded the average
market price of the common shares during the  applicable  year.  Note 13. Common
Stock Repurchase

During the year ended  December  31,  1999,  the  Company's  Board of  Directors
approved a plan to begin repurchasing  shares of the Company's common stock from
stockholders.  During 2000 and 1999, the Company  repurchased  62,240 and 19,000
shares of common stock at an average price of approximately  $1.43 and $1.39 per
share, respectively, for a cost of $89,654 in 2000 and $26,478 in 1999.
<PAGE>

The common stock repurchased is accounted for as treasury stock in the Company's
2000 and 1999  consolidated  balance  sheets  and  statements  of  stockholders'
equity.  As such,  treasury  shares  held  reduce the number of shares of common
stock  outstanding  as of  December  31,  2000 and  1999,  and the  value of the
treasury stock reduces stockholders' equity. The excess of the purchase price of
the  treasury  stock over the par value of the stock of $89,592  and $26,459 was
charged to retained  earnings as of  December  31, 2000 and 1999,  respectively.
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 2000 and 1999 as  compared to existing
     interest rates.

In addition, other assets and liabilities of the Company that are not defined as
financial  instruments  are  not  included  in the  above  disclosures,  such as
property and equipment.  Also, nonfinancial instruments typically not recognized
in financial statements  nevertheless may have value but are not included in the
above  disclosures.  These include,  among other items,  the trained work force,
customer goodwill, and similar items. Note 15. Segment Information

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

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

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

Factors management used to identify the reportable  segment:  Pioneer Railcorp's
reportable  segments consists of wholly-owned  short line railroad  subsidiaries
that offer similar  services and a railroad  equip- ment  subsidiary that leases
railcars,   locomotives,   and  other  railroad   equipment  to  affiliated  and
unaffiliated  entities.  The corporate  operations  consist of support  services
provided to the operating segments.
<TABLE>
                                                                For Year Ended December 31,
                                                                ----------------------------
                                                                    2000            1999
                                                                ----------------------------
<S>                                                             <C>             <C>
Segment Assets
  Railroad operations .......................................   $ 17,612,933    $ 18,394,208
  Equipment leasing operations ..............................     13,031,695      11,558,068
  Corporate support services ................................        907,327       2,308,488
                                                                ----------------------------
        Total consolidated segment assets ...................   $ 31,551,955    $ 32,260,764
                                                                ============================

Expenditures for additions to long-lived assets
  Railroad operations
    Purchases ...............................................   $    215,744    $    128,005
    Acquired through purchase of subsidiaries ...............        619,000       5,614,510
  Equipment leasing operations ..............................      2,876,766       2,176,434
  Corporate support services ................................          7,641          32,602
                                                                ----------------------------
        Total expenditures for additions to long-lived assets   $  3,719,151    $  7,951,551
                                                                ============================

Revenues

Revenues from external customers
  Railroad operations .......................................   $ 11,634,662    $ 11,146,579
  Equipment leasing operations ..............................      3,120,139       2,678,305
  Corporate support services ................................         16,855          32,500
                                                                ----------------------------
        Total revenues from external customers ..............   $ 14,771,656    $ 13,857,384
                                                                ============================

Intersegment revenues
  Railroad operations .......................................   $       --      $       --
  Equipment leasing operations ..............................        393,900         392,700
  Corporate support services ................................      6,318,783       5,933,463
                                                                ----------------------------
        Total intersegment revenues .........................   $  6,712,683    $  6,326,163
                                                                ============================

Total revenue ...............................................   $ 21,484,339    $ 20,183,547

Reconciling items
  Intersegment revenues .....................................     (6,712,683)     (6,326,163)
                                                                ----------------------------
        Total consolidated revenues .........................   $ 14,771,656    $ 13,857,384
                                                                ============================
</TABLE>
<PAGE>

Note 15.      Segment Information (Continued)

                                                     For Year Ended December 31,
                                                     ---------------------------
                                                        2000            1999
                                                     ---------------------------
Expenses

Interest expense
  Railroad operations ............................   $    95,251    $   120,143
  Equipment leasing operations ...................       821,467        659,359
  Corporate support services .....................       655,710        636,701
                                                     --------------------------
        Total consolidated interest expense ......   $ 1,572,428    $ 1,416,203
                                                     ==========================

Depreciation and amortization expense
  Railroad operations ............................   $   712,857    $   701,634
  Equipment leasing operations ...................     1,129,992        972,868
  Corporate support services .....................        90,860         88,622
                                                     --------------------------
        Total consolidated depreciation and
        amortization expense .....................   $ 1,933,709    $ 1,763,124
                                                     ==========================

Segment profit
  Railroad operations ............................   $ 4,843,851    $ 4,559,919
  Equipment leasing operations ...................     1,686,778      1,271,247
  Corporate support services .....................     2,874,297      2,737,627
                                                     --------------------------
        Total segment profit .....................     9,404,926      8,568,793

Reconciling items
  Intersegment revenues ..........................    (6,712,683)    (6,326,163)
  Income taxes ...................................      (635,535)      (959,129)
  Minority interest in preferred stock dividends
    of subsidiaries ..............................      (117,710)      (120,515)
  Other income (expense), net ....................    (1,193,415)        49,491
                                                     --------------------------
        Total consolidated net income ............   $   745,583    $ 1,212,477
                                                     ==========================

Note 16. Purchases and Disposition of Railroad Facilities

On April 1, 2000,  the  Company,  through its  wholly-owned  subsidiary  Indiana
Southwestern Railway Co., acquired for $619,000 certain assets, including all of
the rail facilities owned or leased by the Evansville  Terminal Railway Company,
in a transaction  accounted for by the purchase  method of accounting.  The fair
value of the assets  acquired  of $619,000  was  allocated  to the track  assets
acquired.  The operating  results of the acquired  company have been included in
the consolidated statement of income since the date of acquisition.  The Company
financed this acquisition with $615,000 of long-term borrowings.

Effective  January 6, 1999, the Company,  through its  wholly-owned  subsidiary,
Michigan Southern Railroad Company,  exercised its option to purchase the common
stock  of  Michigan  Southern  Railroad  Co.,  Inc.  for  $2,400,000  cash  in a
transaction accounted for using the purchase method. Accordingly,  the operating
results of the acquired company have been included in the consolidated statement
of income since the date of acquisition.

The excess of the aggregate purchase price over the fair market value of the net
assets  acquired  of  $90,000  is  being  amortized  over  40  years  using  the
straight-line  method.  The Company financed this acquisition with $2,400,000 of
long-term borrowings.

On April 29,  1999,  the Company  acquired  the common  stock of the Garden City
Western Railway,  Inc. for $1,500,000 cash in a transaction  accounted for using
the purchase  method.  The operating  results of the acquired  company have been
included in the consolidated statement of income since the date of acquisition.

The excess of the aggregate purchase price over the fair market value of the net
assets  acquired  of  $24,077  is  being  amortized  over  40  years  using  the
straight-line  method.  The Company financed this acquisition with $1,500,000 of
long-term borrowings.
<PAGE>

Unaudited  pro forma  consolidated  results of  operations  for the years  ended
December  31,  2000 and 1999,  as though  the  aforementioned  acquisitions  had
occurred as of January 1, 1999, follows:

                                                    2000                 1999
                                                 -------------------------------

Railway operating revenue ..............         $14,806,081         $14,274,678
Net income .............................             713,715           1,106,209
Earnings per common share ..............                0.16                0.24

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

Effective May 6, 1999, the Company entered into an agreement whereby it sold the
common stock of the Minnesota  Central  Railroad Co. for $1. The  subsidiary had
historically generated net losses, thus manage- ment decided to dispose of it in
1999. The Company recognized a loss of $341,872 associated with this sale.

Note 17. Subsequent Event

On February 20, 2001, the Company through its wholly-owned subsidiary Gettysburg
&  Northern  Railroad  Co.  acquired  all of the  railroad  assets of the former
Gettysburg  Railway,  Inc.  and  the  Gettysburg  Scenic  Railway  for  cash  of
$1,600,000  in a transaction  to be accounted  for using the purchase  method of
accounting.  The acquisition was financed with $1,600,000 borrowings against the
Company's $5 million master credit facility.
<PAGE>


                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.

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

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

The  Company's  railroad  operating  segment  had  revenue  earned  from a major
customer,  Roquette  America,  Inc.,  of  approximately  $2,762,000  in 2000 and
$2,824,000 in 1999.

Year Ended December 31, 2000 Compared to Year Ended December 31, 1999
---------------------------------------------------------------------

The  Company's  net income in 2000  decreased by $466,000 to $746,000  down from
$1,212,000 in 2000.  Revenue  increased in 2000 by $915,000 or 7% to $14,772,000
from $13,857,000 in 1999. Operating expense increased in 2000 by $464,000 or 4%,
to $12,079,000 from  $11,615,000 in 1999.  Operating income increased in 2000 by
$449,000  or 20% to  $2,692,000  from  $2,243,000  in 1999.  In 1999 the Company
realized a pre-tax gain of approximately  $1,481,000 attributable to the sale of
5.5 miles of railroad  right-of-way and a loss of approximately  $342,000 on the
sale of the Minnesota Central Railroad Co.

Operating income was increased in 2000 by the Company's railroad  operations and
equipment leasing operations. The railroad operations increased operating income
by approximately  $284,000 in 2000. The equipment leasing  operations  increased
operating  income by  approximately  $414,000 in 2000,  primarily from increased
revenue generated from locomotive leasing.  Corporate support services decreased
operating  income by  approximately  $249,000 in 2000  primarily  resulting from
increased expenses associated with increased payroll .

Revenue:

Revenue  increased in 2000 by $915,000 or 7% to $14,772,000  from $13,857,000 in
the prior year. This increase  included an increase in revenues of approximately
$862,000  generated  by the  railroads  operated by the Company in the year 2000
less a decrease in revenue of approximately  $374,000 generated by the Minnesota
Central  Railroad  prior to is sale on May 6,  1999.  The  Garden  City  Western
Railway,  which the Company  began  operating on April 29, 1999,  had  increased
revenues of $215,000 in 2000.  In  addition,  the Company  began  operating  the
Indiana  Southwestern  Railway Co. on April 1, 2000 which generated  $285,000 of
revenue in 2000. The equipment  leasing  operations  had a $442,000  increase in
revenue in 2000  primarily  from increased  revenue  generated  from  locomotive
leasing.

Operating Expense:

Operating  expense  increased  in 2000 by  $464,000 or 4%, to  $12,079,000  from
$11,615,000 in 1999. This increase included an increase in operating expenses of
approximately $591,000 generated by the railroads operated by the Company in the
year 2000 less a decrease in operating  expenses of approximately  $387,000 as a
result of the sale of the Minnesota  Central Railroad on May 6, 1999. The Garden
City Western  Railway,  which the Company began operating on April 29, 1999, had
increased operating expense of $101,000 in 2000. In addition,  the Company began
operating the Indiana  Southwestern Railway Co. on April 1, 2000 which generated
$176,000  of  operating  expense  in  2000.  In  2000  the  railroad  operations
experienced   increased   transportation   expense  resulting  from  significant
increases in fuel costs. The equipment leasing  operations  increased  operating
expense of approximately $27,000,  primarily from decreased costs of $135,000 in
2000  associated  with  relocating  railcars  offset by  increased  depreciation
expense of $156,000 associated with additional  equipment  purchases.  Corporate
support services increased operating expense approximately  $233,000,  primarily
related to increased  payroll expenses  related to hiring and retaining  support
personnel.

Maintenance  of way and  structures  expense  (MOW)  decreased  $12,000 or 1% to
$1,475,000 from $1,487,000 in the prior year. This decrease included an increase
in MOW expense of approximately  $24,000 generated by the railroads  operated by
the  Company in the year 2000 less a decrease  in MOW  expense of  approximately
$51,000  as a result of the sale of the  Minnesota  Central  Railroad  on May 6,
1999.  The Garden City Western  Railway,  which the Company  began  operating on
April 29,  1999,  had  increased  MOW expense of $16,000 in 2000 and the Indiana
Southwestern Railway Co., which the Company began operating on April 1, 2000 had
$9,000 of MOW expense in 2000.  Corporate support services increased MOW expense
approximately $15,000 primarily related to increased payroll expenses related to
hiring and retaining support personnel.

Maintenance of equipment  expense (MOE)  decreased  $109,000 or 7% to $1,442,000
from  $1,551,000  in the prior year.  This  decrease  included a decrease in MOE
expense of  approximately  $111,000  generated by the railroads  operated by the
Company in the year 2000 less a decrease in MOE expense of approximately $27,000
as a result of the sale of the Minnesota  Central  Railroad on May 6, 1999.  The
Garden City  Western  Railway,  which the Company  began  operating on April 29,
1999, had decreased MOE expense of $29,000 in 2000 and the Indiana  Southwestern
Railway Co.,  which the Company began  operating on April 1, 2000 had $11,000 of
MOE expense in 2000.  Most of the decrease in MOE from the  railroad  operations
resulted from  decreased  payroll  expenses.  The equipment  leasing  operations
decreased  MOE  expense  approximately  $16,000 as a result of  decreased  costs
associated  with  maintaining  the Company's  railcar fleet.  Corporate  support
services  increased  MOE  expense  approximately  $45,000  primarily  related to
increased payroll expenses related to hiring and retaining support personnel.

Transportation  expense  (TRAN)  increased  $371,000 or 12% to  $3,413,000  from
$3,042,000 in the prior year. This increase included an increase in TRAN expense
of approximately  $592,000 generated by the railroads operated by the Company in
the year 2000 less a decrease  in TRAN  expense of  approximately  $244,000 as a
result of the sale of the Minnesota  Central Railroad on May 6, 1999. The Garden
City Western  Railway,  which the Company began operating on April 29, 1999, had
increased TRAN expense of $69,000 in 2000 and the Indiana  Southwestern  Railway
Co.,  which the  Company  began  operating  on April 1, 2000 had $85,000 of TRAN
expense  in  2000.  Approximately  $200,000  of the  increase  in  TRAN  expense
generated by the  railroads  operated by the Company in the year 2000 relates to
increased  fuel costs and $55,000  relates to  increased  carhire  expense.  The
equipment leasing operations increased TRAN expense  approximately  $38,000 as a
result of increased  costs  associated with  maintaining the Company's  expanded
locomotive   fleet.   Corporate   support   services   decreased   TRAN  expense
approximately $15,000 primarily related to decreased payroll expenses related to
hiring and retaining support personnel

General & administration  expense (ADMIN)  increased $44,000 or 1% to $3,816,000
from $3,772,000 in the prior year.  This increase  included an increase in ADMIN
expense of  approximately  $30,000  generated by the  railroads  operated by the
Company  in the year 2000 less a  decrease  in ADMIN  expense  of  approximately
$20,000  as a result of the sale of the  Minnesota  Central  Railroad  on May 6,
1999.  The Garden City Western  Railway,  which the Company  began  operating on
April 29, 1999,  had  increased  ADMIN expense of $6,000 in 2000 and the Indiana
Southwestern Railway Co., which the Company began operating on April 1, 2000 had
$48,000 of ADMIN expense in 2000.  The equipment  leasing  operations  decreased
ADMIN expense approximately  $150,000 primarily from decreased costs of $135,000
in  2000  associated  with  relocating  railcars.   Corporate  support  services
increased ADMIN expense  approximately  $184,000  primarily related to increased
payroll expenses related to hiring and retaining support personnel

Depreciation and amortization  expense increased  $171,000 or 10%, to $1,934,000
compared to $1,763,000 in the prior year. Approximately $156,000 of the increase
is related to the growth of the Company's  railcar and  locomotive  fleet.  This
increase  included an  increase  in  depreciation  and  amortization  expense of
approximately  $57,000 generated by the railroads operated by the Company in the
year  2000  less  a  decrease  in  depreciation  and  amortization   expense  of
approximately  $44,000 as a result of the sale of the Minnesota Central Railroad
on May 6,  1999.  The Garden  City  Western  Railway,  which the  Company  began
operating on April 29, 1999, had increased depreciation and amortization expense
of $38,000 in 2000 and the Indiana  Southwestern  Railway Co., which the Company
began  operating on April 1, 2000 had $23,000 of depreciation  and  amortization
expense  in  2000.   Corporate  support  services  increased   depreciation  and
amortization expense approximately $2,000.

Other Income and Expense Income Statement Line Item Discussion:

Interest income increased $34,000 to $44,000 from $10,000 in the prior year.

Interest expense increased $156,000 in 2000 to $1,572,000 compared to $1,416,000
in 1999. The sale of the Minnesota  Central stock resulted in a $15,000 decrease
in  interest  expense.  The  equipment  leasing  operations  had an  increase of
approximately  $162,000  in  interest  expense as a result of the  financing  of
locomotive purchases. Other changes in interest expense relates to the financing
activities for acquisitions  offset by decreased interest expense as a result of
the pay down of principal on other outstanding finance agreements.

In 2000,  approximately  $267,000 of lease income was generated by the Company's
railroad  operations  from the granting of  easements  and leases for the use of
railroad right of way property, compared to $251,000 of lease income in 1999, an
increase  of  $16,000.  The  Company  continues  to place a strong  emphasis  on
identifying  and  collecting  revenues  from  third  parties  occupying  Company
property.

Net gain on sale of  property  and  equipment  decreased  $1,453,000  in 2000 to
$59,000 compared to $1,512,000 in 1999. In 2000 most of the gain is attributable
to the sale of a locomotive and other  miscellaneous  equipment  items. In 1999,
$1,481,000  of income  was  attributable  to the sale of 5.5  miles of  railroad
right-of-way  and  approximately  $31,000  of  income  was  attributable  to the
railroad equipment operations.

On May 6, 1999,  Pioneer Railcorp sold all of the stock of the Minnesota Central
Railroad Co. to Southern Rail  Resources,  Inc., an Iowa  Corporation.  Southern
Rail Resources,  Inc. is not affiliated with Pioneer  Railcorp or any of Pioneer
Railcorp's  officers,  directors,  or employees.  The Company realized a loss of
$342,000  on the sale of the stock and the  write-off  of net assets  associated
with the Minnesota Central Railroad.

Other income decreased $26,000 in 2000 to $9,000 from $35,000 in the prior year.
Other income and expense includes revenues generated from scrap sales, and other
miscellaneous  non-operating  revenues and expenses,  primarily generated by the
Company's railroad operations.

Impact of New Accounting Pronouncements:

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

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  $1,100,000,  all of which was available for
use at the end of 2000.

On June 23, 2000, the Company entered into a credit agreement with National City
Bank of Michigan/Illinois to provide a $5 million revolving  acquisition line of
credit for railroad  acquisitions at a variable  interest rate of prime plus 1%,
renewable every 2 years.  Amounts drawn on the line are amortized over a 10 year
period.  This  credit  line is  secured  by all non real  estate  assets  of the
Mississippi  Central  Railroad  Co.,  the Alabama  Railroad Co. and all non real
estate assets of any company acquired using proceeds from the credit line.

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.

On July 1, 1995, the Company's  stock split and warrant  issuance became payable
to  shareholders.  The 2 for 1 stock split increased the number of shares issued
and  outstanding  from  2,099,142 to  4,198,284.  At the same time  shareholders
became  entitled  to purchase  an  additional  4,198,284  shares  through  stock
warrants  issued by the  Company as  dividends.  One warrant was issued for each
share of common stock held after the split,  entitling  the holder to purchase 1
share of common  stock for $2.00 per share.  The shares  purchased  through  the
exercise of the warrants  must be held for 1 year from date of  purchase.  As of
December  31,  2000,  a total of  68,766  warrants  originally  issued  had been
exercised  to date,  and the Company  realized  $137,532 on the  issuance of the
warrants.

The  Company  granted  836,000  options  to  certain  employees  under  its 1994
incentive  stock option plan.  As of December 31, 2000,  the  remaining  151,759
unexercised  options under this plan have expired and no further  options can be
exercised 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 prices  ranging from $2.75 to $3.03,  based upon
the trading price on the date of the grant,  in whole or in part within 10 years
from the date of grant.  As of December 31, 2000, a total of 215,000 options are
outstanding under this plan.

Pioneer Railcorp  guarantees certain long-term debt obligations of the Minnesota
Central  Railroad Co. in  connection  with debt  acquired as part of the initial
asset purchase by the Minnesota  Central Railroad Co. in 1994.  Pioneer Railcorp
remains as a guarantor on one note and could be required to repay the  principal
and accrued interest on the note if it is defaulted upon. The principal  balance
of the note as of December 31, 2000 was approximately $76,000.

In 1999,  Pioneer  Railcorp's  Board of  Directors  authorized  and approved the
repurchase of up to one million  shares  (1,000,0000)  of the  Company's  common
stock. As of December 31, 2000, a total of 81,240 shares had been repurchased at
a cost of $116,132.  The Company plans to continue  buying back its common stock
but believes the  repurchase  will be on a more  limited  scope then  previously
anticipated due to capital  requirements and the trading volume of the Company's
stock.

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

The Company  believes its cash flow from  operations  and its available  working
capital  credit  lines,  will be more than  sufficient to meet  liquidity  needs
through at least 2001.

Balance Sheet and Cash Flow Items:

The Company generated net cash from operating activities of $974,000 in 2000 and
$3.5 million in 1999. Net cash from operating  activities for 2000 was generated
from  $746,000 of net  income,  $1,934,000  of  depreciation  and  amortization,
$352,000  of  deferred  income  taxes,  a decrease  in income  taxes  payable of
$558,000,  a decrease in accounts  payable of $1,676,000,  and $176,000 net cash
provided by changes in various other operating assets and liabilities.  Net cash
from operating  activities for 1999 was generated from $1,212,000 of net income,
$1,763,000 of depreciation and amortization,  $325,000 of deferred income taxes,
an increase in income taxes payable of $547,000, an increase in accrued expenses
of $351,000,  a loss on sale of subsidiary stock of $342,000,  $429,000 net cash
provided by changes in various other operating assets and  liabilities,  reduced
by a gain on sale of property and equipment of $1,512,000.

In 2000,  excluding  assets recorded as a result of railroad  acquisitions,  the
Company  purchased  approximately  $3.1  million  of fixed  assets  and  capital
improvements  which  included  the purchase of  approximately  150 railcars at a
total  cost of  $1.1  million.  In  addition,  $1.6  million  of  transportation
equipment  was  capitalized  in 2000 for the  purchase  of 22  locomotives.  The
Company capitalized  approximately $45,000 of leasehold improvements on the Fort
Smith  Railroad  in  connection  with some  crossing  and signal  work.  Capital
expenditures for track totaled  $135,000 in 2000. Other capital  expenditures in
2000  include   $88,000  for  vehicles  and  equipment  and  $130,000  of  other
miscellaneous capital expenditures including railcar and locomotive betterments.
The railcars and locomotive  purchases  were financed with long-term  fixed rate
financing.  The  remaining  capital  expenditures  were funded  through  working
capital.

On April 29, 1999,  the Company  purchased  100% of the stock of The Garden City
Western Railway, Inc.(GCW) from the Garden City Coop, Inc. and immediately began
operations.  The GCW is  located  in  southwest  Kansas  and  totals 40 miles of
operating  railroad.  The  purchase  was  financed  with a 60 day  note  with an
interest rate of Prime plus 1% from National City Bank and was  refinanced  with
the National City Bank  revolving  acquisition  line of credit on June 18, 1999.
The Company recorded  $2,145,000 of fixed assets relating to the purchase of The
Garden City Western  Railway Inc.  stock,  of which  $1,280,000 was allocated to
track  structures,  $272,000  allocated  to land  and  right  of  way,  $253,000
allocated to buildings,  and the remaining  $340,000 allocated to transportation
equipment, vehicles, and railcars. In addition, as a result of the purchase, the
Company recorded  goodwill in the amount of $24,000 and a deferred tax liability
of $677,000.

On May 6, 1999,  Pioneer Railcorp sold all of the stock of the Minnesota Central
Railroad Co. to Southern Rail  Resources,  Inc., an Iowa  Corporation.  Southern
Rail Resources,  Inc. is not affiliated with Pioneer  Railcorp or any of Pioneer
Railcorp's  officers,  directors,  or  employees.  At the date of the sale,  the
Minnesota Central  accounted for  approximately  $1.8 million of assets and $1.3
million of  liabilities  reported on the  consolidated  balance sheet of Pioneer
Railcorp.

On April 1, 2000,  the  Company  through  its  wholly-owned  subsidiary  Indiana
Southwestern Railway Co. (ISW) acquired,  in a transaction  accounted for by the
purchase  method  of  accounting,  certain  assets  including  all of  the  rail
facilities owned or leased by the Evansville Terminal Railway Company (EVT). The
line  begins in  Evansville,  Indiana  and is 23 miles in  length.  The  primary
commodities are grain, plastics and rail equipment. The total purchase price was
$619,000 allocated to track assets. There was no goodwill recognized as a result
of this transaction

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<PAGE>

Market for Pioneer Railcorp Common Stock

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:

        00-1Q   00-2Q    00-3Q    00-4Q    99-1Q    99-2Q   99-3Q   99-4Q
        -----------------------------------------------------------------

High    $1.81   $1.56    $1.43    $1.31    $1.75    $1.56   $1.94   $1.88
Low     $1.25   $1.25    $1.25    $1.03    $1.25    $1.25   $1.25   $1.25

As of December 31, 2000,  the Company had 1,762 common  stockholders  of record,
including brokers who hold stock for others. A cash dividend of $.025 per common
share  was paid to  shareholders  of  record  as of April  30,  2000.  The total
dividend was $113,398 and was paid on May 24, 2000.

Board of Directors

Guy L. Brenkman, CEO and President, Pioneer Railcorp
J. Michael Carr, Chief Financial Officer, Pioneer Railcorp
Orvel L. Cox, Vice President, Pioneer Railroad Equipment Co., Ltd.
John S. Fulton, The Fayette Companies
Timothy F. Shea, President, Shea Property Management

Officers

Guy L. Brenkman, Chief Executive Officer and President
J. Michael Carr, Treasurer
Daniel A. LaKemper, Secretary
Scott Isonhart, Assistant Secretary

Corporate Information

The Corporate  offices of Pioneer  Railcorp and its  subsidiaries are located at
1318 S. Johanson Road, Peoria, Illinois, 61607; Telephone number 309-697-1400.

Reports and Publications

A copy of Pioneer  Railcorp's  2000 Form 10-KSB to the  Securities  and Exchange
Commission   (without   exhibits),   quarterly   financial   reports  and  other
publications  and news releases can be obtained  through the Investor  Relations
Department   or   accessed   through   the   Company's   web  page   located  at
www.Pioneer-Railcorp.com.