TO THE SHAREHOLDERS:

Despite  the  much-publicized  problems  associated  with the  Class I  railroad
mergers in 1999,  Pioneer Railcorp completed a very successful year. In 1999 the
Company  maintained  system-wide  revenue loadings in excess of 41,000 railcars,
paid its second  annual  cash  dividend  of 2 1/4 cents per share,  and  enjoyed
bottom line growth as increased revenues grew at a faster pace than expenses.

On April 29, 1999,  Pioneer  Railcorp  purchased the Garden City Western Railway
Company located in  southwestern  Kansas.  Unlike many railroads in Kansas,  the
GCW's traffic base is not dependent upon wheat for its survival. The majority of
the line's  traffic is inbound.  The outbound  commodities  handled are outbound
grain  (wheat & milo),  frozen meat and scrap  steel.  The  inbound  commodities
handled are inbound chemicals, farm equipment, feed ingredients, fertilizers and
utility poles. The GCW has a well-developed rail-to-truck transfer facility. The
Company  has  already  achieved  gains in  traffic  through  intense  marketing,
business  development,  placement of a car supply and increased service delivery
by adding crew starts and four locomotives.

In 1999 the  Company's  Pioneer  Railroad  Equipment  Co., LTD  subsidiary  made
several good railroad equipment acquisitions and began to increase the number of
lease  transactions  to  non-affiliated   short  line  railroad  and  industrial
customers.

Perhaps our most important  accomplishment in 1999 was the continued improvement
in our safety  record.  I personally  thank our employees for making  "safety" a
habit and encourage continued improvement for next year.

As I look  back on 1999,  I am very  proud of the  Pioneer  Railcorp  family  of
subsidiaries,  the management  team and employees that make it all come together
each  and  every  day  of the  year.  I am  also  thankful  to all of our  loyal
customers,  our  shareholders  and our  lending  partners  that place  trust and
confidence in Pioneer Railcorp each day.

As Pioneer Railcorp enters 2000, it does so well positioned,  well managed, well
equipped,  more confident,  financially  sound,  and a recognized  leader in the
short line railroad industry.

Sincerely,



/s/ Guy L. Brenkman
-----------------------
Guy L. Brenkman
Chairman, President and
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),  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  activities - railroad  transportation  and
railroad equipment leasing. Railroad transportation is provided by the Company's
wholly-owned  short  line  railroad  subsidiaries  whose  rail  system  provides
shipping links for customers along its routes and  interchanges  with five major
railroads,  Burlington  Northern Santa Fe Railroad  (BNSF),  CSX  Transportation
(CSX),  Illinois Central Railroad (IC),  Norfolk Southern Railway (NS) and Union
Pacific Railroad (UP).  Additionally,  the Company's railroad  subsidiaries have
interchanges  with 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.
<PAGE>


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.
<PAGE>


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.

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>




          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  $2,824,000  in 1999 and
$2,567,000 in 1998.

Year Ended December 31, 1999 Compared to Year Ended December 31, 1998
--------------------------------------------------------------------------------

The Company's net income in 1999  increased by $787,000 or 185% to $1,212,000 up
from $425,000 in 1998. Revenue increased by $343,000 or 2.5% to $13,857,000 from
$13,514,000 in 1998.  Operating  expense increased in 1999 by $111,000 or 1%, to
$11,615,000  from  $11,504,000 in 1998.  Operating  income  increased in 1999 by
$233,000  or 12% to  $2,243,000  from  $2,010,000  in 1998.  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 1999 by the Company's railroad operations. The
railroad  operations  increased  operating income by  approximately  $480,000 in
1999.  The  equipment   leasing   operations   decreased   operating  income  by
approximately  $56,000 in 1999,  primarily from increased costs  associated with
relocating  railcars with the intention of maximizing future  utilization of the
cars  and  also  increased   depreciation  expense  associated  with  additional
equipment  purchases.  Corporate support services decreased  operating income by
approximately  $191,000 in 1999  primarily  resulting  from  increased  expenses
associated with increased payroll .

Revenue:

Revenue  increased in 1999 by $343,000 or 2.5%, to $13,857,000  from $13,514,000
in the prior year. The railroad  operations  increased  revenue by approximately
$228,000 in 1999.  Several  operating  railroad  subsidiaries  had  increases in
revenues  primarily  resulting from increased  loadings,  and other rail-related
services.  Some of the more  significant  increases in revenues include $471,000
from the  Keokuk  Junction  Railway,  and  $248,000  from the  Alabama & Florida
Railway.  The Garden City Western Railway,  which the Company began operating on
April 29, 1999,  had revenues of $473,000 in 1999.  However,  as a result of the
sale of the stock of the Minnesota  Central Railroad on May 6, 1999, the Company
had a decrease in revenues of  $457,000  in 1999  compared to 1998.  Also,  as a
result of the  termination  of the  Rochelle  Railroad  Co.  lease in 1998,  the
Company had a decrease in  revenues  of $440,000 in 1999  compared to 1998.  The
equipment leasing  operations had a $93,000 increase in revenue in 1999 from the
increased  utilization  of its  railcars by  non-affiliated  railroads  and also
increased revenue from locomotive leases to non-affiliated third parties.
<PAGE>


Operating Expense:

Operating  expense  increased  in 1999 by  $111,000 or 1%, to  $11,615,000  from
$11,504,000  in the prior year.  The  railroad  operations  decreased  operating
expense by approximately  $253,000 in 1999. As a result of the sale of the stock
of the Minnesota  Central Railroad on May 6, 1999, the Company had a decrease in
operating expense of $637,000 in 1999 compared to 1998. Also, as a result of the
termination  of the  Rochelle  Railroad  Co.  lease in 1998,  the  Company had a
decrease in operating  expense of $226,000 in 1999 compared to 1998.  The Garden
City Western  Railway,  which the Company began operating on April 29, 1999, had
operating  expense of  $289,000  in 1999.  Several  other  operating  railroads,
including the KJRY, ALAB, and AF had increased  operating expense resulting from
increased  maintenance  of way expense and the FSR had increased  transportation
expenses primarily related to increased car hire expense.  The equipment leasing
operations increased operating expense  approximately  $150,000,  primarily from
increased  costs  associated  with  relocating  railcars  with the  intention of
maximizing  future  utilization  of the  cars and  also  increased  depreciation
expense  associated  with  additional  equipment  purchases.  Corporate  support
services increased operating expense approximately  $212,000,  primarily related
to increased payroll expenses related to hiring and retaining support personnel.

Maintenance of way and  structures  expense (MOW)  increased  $136,000 or 10% to
$1,487,000 from $1,351,000 in the prior year.  Several  railroad  operations had
modest  increases in MOW resulting from increased track  maintenance,  including
the KJRY,  ALAB and AF.  As a result  of the sale of the stock of the  Minnesota
Central  Railroad  on May 6, 1999,  the Company had a decrease in MOW expense of
$60,000 in 1999  compared to 1998.  The Garden City Western  Railway,  which the
Company began operating on April 29, 1999, had MOW expense of $70,000 in 1999.

Maintenance  of equipment  expense (MOE)  decreased  $70,000 or 4% to $1,551,000
from $1,621,000 in the prior year. The equipment  leasing  operations  decreased
MOE expense approximately $32,000 as a result of decreased costs associated with
maintaining the Company's railcar fleet. The railroad  operations had a decrease
in MOE expense of approximately $44,000. As a result of the sale of the stock of
the Minnesota Central Railroad on May 6, 1999, the Company had a decrease in MOE
expense of $61,000 in 1999  compared to 1998.  The Garden City Western  Railway,
which the Company began  operating on April 29, 1999, had MOE expense of $34,000
in 1999. The Michigan Southern Railroad had a decrease in MOE expense of $68,000
in 1999,  primarily  related to a reduction in equipment lease expense resulting
from the purchase of certain  leased  assets in  connection  with the January 6,
1999 stock purchase by the Company.

Transportation  expense  (TRAN)  decreased  $311,000  or 9% to  $3,042,000  from
$3,353,000 in the prior year.  Most of the decreased  TRAN expense was generated
by the  railroad  operations.  As a  result  of the  sale  of the  stock  of the
Minnesota  Central  Railroad on May 6, 1999,  the Company had a decrease in TRAN
expense  of  347,000  in  1999  compared  to  1998.  Also,  as a  result  of the
termination  of the  Rochelle  Railroad  Co.  lease in 1998,  the  Company had a
decrease in TRAN  expense of $96,000 in 1999  compared to 1998.  The Garden City
Western  Railway,  which the Company began operating on April 29, 1999, had TRAN
expense of $34,000 in 1999.  The Fort Smith  Railroad  had an  increase  in TRAN
expense of $102,000  in 1999  compared  to the prior year  primarily  related to
increased carhire expense.

General & administration  expense (ADMIN) increased $177,000 or 5% to $3,772,000
from $3,595,000, in the prior year. The railroad operations were responsible for
a $124,000  decrease  in ADMIN  expense in 1999.  As a result of the sale of the
stock of the  Minnesota  Central  Railroad  on May 6, 1999,  the  Company  had a
decrease in ADMIN expense of $87,000 in 1999 compared to 1998. Also, as a result
of the termination of the Rochelle Railroad Co. lease in 1998, the Company had a
decrease in ADMIN expense of $106,000 in 1999 compared to 1998.  The Garden City
Western Railway,  which the Company began operating on April 29, 1999, had ADMIN
expense of $74,000 in 1999.  Corporate support services  increased ADMIN expense
approximately $174,000,  primarily related to increased payroll expenses related
to hiring and retaining  support  personnel.  The equipment  leasing  operations
increased ADMIN expense approximately  $127,000,  primarily from increased costs
associated  with  relocating  railcars with the  intention of maximizing  future
utilization of the cars.

Depreciation and amortization  expense increased  $180,000 or 11%, to $1,763,000
compared to $1,583,000 in the prior year.  Approximately $55,000 of the increase
is related to the growth of the Company's  railcar and  locomotive  fleet.  As a
result  of the sale of the stock of the  Minnesota  Central  Railroad  on May 6,
1999, the Company had a decrease in  depreciation  and  amortization  expense of
$82,000 in 1999 compared to 1998.  Also, as a result of the  termination  of the
Rochelle  Railroad Co. lease in 1998, the Company had a decrease in depreciation
and  amortization  expense of $16,000 in 1999 compared to 1998.  The Garden City
Western  Railway,  which the Company  began  operating  on April 29,  1999,  had
depreciation  and  amortization  expense of $76,000 in 1999. The assets acquired
with the stock purchase of the Michigan  Southern Railroad Co., Inc., on January
6, 1999 increased depreciation and amortization expense $130,000 in 1999.
<PAGE>


Other Income and Expense Income Statement Line Item Discussion:

Interest income increased $2,100 to $9,600 from $7,500 in the prior year.

Interest expense increased $118,000 in 1999 to $1,416,000 compared to $1,298,000
in 1998.  Interest  expense was increased by $281,000 in 1999 as a result of the
financing for the MSO and GCW  acquisitions.  The sale of the Minnesota  Central
stock resulted in a $36,000 decrease in interest expense.  The equipment leasing
operations  had a decrease of  approximately  $88,000 in  interest  expense as a
result of 1998 refinancing  activities that took advantage of the favorable 1998
interest  rate  environment.  A majority of the  remaining  decrease in interest
expense relates to refinancing activities in 1999.

In 1999,  approximately  $251,000 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 $197,000 of lease income in 1998, an
increase  of  $54,000.  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  increased  $1,435,000  in 1999 to
$1,512,000  compared  to  $77,000  in 1998.  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.  In
1998,  approximately  $108,000 of the net gain on fixed asset  dispositions  was
attributable  to the  railroad  equipment  operations  and  the  disposition  of
railcars.  In addition,  the corporate  operations  had a loss of  approximately
$28,000  in  1998  from  the  sale  of  its  former  corporate  headquarters  in
Chillicothe, Illinois.

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  increased  $60,000 in 1999.  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.

Year 2000 Compliance:

The Year 2000  compliance  issue  existed  because  many  computer  systems  and
applications  were  utilizing  two-digit  fields  to  designate  a year.  It was
believed  as the century  date change  occurred,  date-sensitive  systems  would
either fail or not operate properly unless the underlying programs were modified
or replaced.

To date,  the Company  does not believe  that the Year 2000  Compliance  had any
effect on its operations or its ability to process  transactions.  Management is
unaware of any impact on financial or operational information processing that is
likely to occur in the future attributable to the Year 2000 Compliance issue.

The Company  believes all of its  significant  third party vendors are Year 2000
compliant  and to date the  Company is not aware of any  vendor or  unaffiliated
entity with a Year 2000 issue that would materially impact the Company's results
of operations, liquidity, or capital resources.

In  1998,  the  Company   initiated  a  program  to  ensure  that  all  computer
applications  would be Year  2000  compliant  on a  timely  basis.  The  program
included engaging an outside  consultant to review all of the Company's computer
hardware and software,  as well as to confirm with  significant  outside vendors
that their  products are Year 2000  compliant.  Based on this review the Company
believes  its internal  systems are Year 2000  compliant.  The Company  expended
approximately $60,000 on its resolution of the Year 2000 compliance issue.

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.
<PAGE>


The Company has working capital facilities totaling $1,200,000, all of which was
available  for use at the end of 1999.  In  addition,  the Company  believes the
market  value of its railcar  fleet is  significantly  higher then the amount of
debt associated with the railcar fleet. Therefore, the Company believes it could
refinance  or sell part of its  railcar  fleet and  generate up to $1 million in
cash.

In March 1996,  the Company  negotiated a credit  facility  with Citizens Bank &
Trust located in  Chillicothe,  MO., to provide a $2.5 million annual  revolving
acquisition line of credit. This facility was collateralized by the common stock
of the Alabama Railroad Co. and the Mississippi Central Railroad Co., as well as
the Company's  investment in stock of any subsidiaries  acquired under the line.
The interest rate was adjustable  quarterly to 2.5% over New York Prime, limited
to a one percent annual increase or decrease,  not to exceed 13.5% or be reduced
below 10%. Any amounts drawn on the line were to be repaid  monthly over a seven
year period.  On January 1, 1999, the Company  borrowed $2.4 million on the line
in connection with its purchase of the stock of the Michigan  Southern  Railroad
Co., Inc.

On May 21, 1999, the Company entered into a credit  agreement with National City
Bank  of   Michigan/Illinois  to  refinance  the  $2.4  million  debt  that  was
outstanding  on the Citizens Bank & Trust line related to the Michigan  Southern
Railroad Co., Inc. stock  purchase.  The National City Bank credit facility is a
fixed interest rate of 8.375% amortized over 10 years. The monthly principal and
interest payment on this note is $30,830.

On May 21, 1999, the Company  entered into interest  repricing  agreements  with
National City Bank that reduced the interest rate on the Keokuk Junction Railway
Co.  note from 9.5% to 8.375% and  reduced  the  interest  rate on the Alabama &
Florida Railway Co. note from 9.25% to 8.375%.  Both rates are fixed and will be
repriced  in five  years to the  bank's  cost of funds  plus  2.25%.  The  total
outstanding  principal  balance on the Keokuk Junction Railway and the Alabama &
Florida Railway notes is approximately $3.76 million.

On June 18, 1999, 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 any company
acquired using proceeds from the credit line. This credit facility  replaced the
Citizens Bank & Trust credit line.  The Company used $1.5 million of this credit
facility to finance the purchase of The Garden City Western Railway, Inc. common
stock.  The monthly  principal  and interest  payment  currently  required to be
repaid is $18,900.  As of December 31, 1999,  the  availability  of the line has
been further reduced by a separate  $810,000  financing  agreement with National
City Bank used to purchase 11  locomotives.  The note was due March 10, 2000 and
has been extended  pending  negotiations  to convert the note to long-term fixed
rate financing.

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,  1999,  a total of  67,766  warrants  originally  issued  had been
exercised, and the Company realized $135,532 on the issuance of the warrants.

The  Company  granted  836,000  options  to  certain  employees  under  its 1994
incentive  stock option plan. The options are exercisable at prices equal to the
market value of the  Company's  stock at the date of grant.  The exercise  price
ranges from $3.56 to $4.40 per share.  No options were exercised in 1999.  Since
the plans inception a total of 69,700 options had been exercised and the Company
has  realized  $104,550 on the exercise of the  options.  On June 15, 1998,  the
Company,  acting upon a resolution  approved by its Board of Directors,  entered
into  agreements  with  employees to  repurchase  all of the  outstanding  stock
options  with  exercise  prices  equal to or less than $1.65.  In  exchange  for
forfeiting the options,  employees received a one-time  adjustment to their base
salary equal to $.15 per option share. In total,  441,512 options were forfeited
as a result of these agreements. The primary reason this action was taken by the
Board  of  Directors  was  to  lessen  the  potential  dilution  to  all  common
shareholders from the exercise of the options based on the trading volume of the
Company  stock.  As of  December  31,  1999,  a total  of  151,759  options  are
outstanding under this plan.
<PAGE>


On June 26,  1996,  the  Company's  shareholders  approved a stock  option  plan
permitting the issuance of 407,000 shares of common stock. Options granted under
the plan are  incentive  based  except for the options  granted to the CEO whose
options  are  non-qualified.  The  options  will be  fully  vested  and  will be
exercisable  as of July 1, 2001. The exercise date can be accelerated if Pioneer
Railcorp common shares reach a closing price of $7.25 per share, or higher,  for
any  consecutive  10-day  period,  as reported in the Wall Street  Journal.  The
options will be exercisable  at 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, 1999, a total of 215,000 options are
outstanding under this plan.

The City of Rochelle,  Illinois,  terminated  the Rochelle  Railroad Co.'s lease
agreement effective January 19, 1998,  however,  Rochelle Railroad Co. continued
to operate on the  trackage  until  November  13,  1998  pending  the outcome of
certain legal proceedings.  In 1998 the Rochelle Railroad Co. generated $440,000
in revenue and $216,000 of operating income.

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, 1999 was approximately $80,000.

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.  In 1999,  19,000 shares were  repurchased at a cost of $26,478 and as of
March 21,  2000,  a total of 74,640  shares  had been  repurchased  at a cost of
$107,570.  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.

In January  2000,  the Company  purchased 22  locomotives  for  $1,585,000.  The
purchase of these locomotives was financed with short-term borrowing against the
Company's $5 million  acquisition  line of credit with National  City Bank.  The
Company  plans to  convert  this debt to  long-term  fixed rate  financing.  The
Company  plans  to   significantly   increase  its  leasing  of  locomotives  to
unaffiliated entities.

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 2000.

Balance Sheet and Cash Flow Items:

The Company generated net cash from operating activities of $3.5 million in 1999
and $2.5  million  in 1998.  Net cash  from  operating  activities  for 1999 was
generated  from  $1,212,000  of  net  income,  $1,700,000  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,  $492,000  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.  Net cash from  operating  activities for
1998 was generated from $425,000 of net income,  $1,583,000 of depreciation  and
amortization, $291,000 of deferred income taxes, an increase in accounts payable
of $266,000,  $211,000 net cash provided by changes in various  other  operating
assets and  liabilities,  reduced  by an  increase  in  accounts  receivable  of
$276,000.

On January 6, 1999,  the Company's  wholly-owned  subsidiary  Michigan  Southern
Railroad  Company  (MSO)  purchased  all of the stock of the  Michigan  Southern
Railroad Co., Inc. for $2.4 million.  The transaction was initially  funded with
long-term  fixed rate debt obtained from the  Company's  $2.5 million  revolving
acquisition  line of  credit  with  Citizens  Bank and  Trust  and  subsequently
refinanced  with a separate  note by  National  City Bank on May 21,  1999.  The
Company had been  operating the line under an operating  lease since December of
1996. The Company  recorded  $3,470,000 of fixed assets relating to the purchase
of the stock of the Michigan  Southern  Railroad Co., Inc., of which  $1,643,000
was  allocated to track  structures,  $1,301,000  allocated to land and right of
way, $175,000  allocated to buildings,  and the remaining  $351,000 allocated to
transportation  equipment,  vehicles,  and railcars. In addition, as a result of
the  purchase,  the  Company  recorded  goodwill  in the amount of $90,000 and a
deferred tax liability of $1,160,000.
<PAGE>


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.

In 1999,  excluding  assets recorded as a result of railroad  acquisitions,  the
Company  purchased  approximately  $2.3  million  of fixed  assets  and  capital
improvements  which  included  the purchase of  approximately  150 railcars at a
total  cost of  $848,000.  The  Company  capitalized  approximately  $17,000  of
leasehold  improvements  on the Fort  Smith  Railroad  in  connection  with some
crossing and signal work.  Capital  expenditures  for track totaled  $107,000 in
1999. In addition,  $1.1 million of transportation  equipment was capitalized in
1999 which included the purchase of 14 locomotives  for $967,000.  Other capital
expenditures in 1999 include $172,000 for vehicles and equipment and $104,000 of
other  miscellaneous  capital  expenditures  including  railcar  and  locomotive
betterments. The railcars purchased for $848,000 and 3 locomotives purchased for
$157,000 were financed with long-term fixed rate financing.  Eleven  locomotives
purchased for $810,000  were financed with a short-term  note with National City
Bank  and the  Company  plans to  convert  this  debt to  long-term  fixed  rate
financing.  The remaining  capital  expenditures of approximately  $485,000 were
funded through working capital.

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.

During 1998,  the Company was awarded two grants from the Alabama  Department of
Transportation  which were funded with federal  disaster  funds from the Federal
Railroad  Administration  pursuant to the Federal Fiscal Year 1998  Supplemental
Appropriations  Act. A grant in the amount of  $658,000 to the Alabama & Florida
Railway and a grant of $64,000 to the Alabama  Railroad were designed to aid the
Company with labor and material costs of rehabilitating  and repairing track and
bridge structures which were damaged by severe weather conditions in March 1998.
As of December 31, 1999 the Company had fully  expended  the $658,000  grant and
had recorded receivables of $159,000 and accounts payable to vendors of $130,000
relative  to the  Alabama & Florida  Railway  grant and had fully  expended  the
$64,000 grant to the Alabama Railroad.

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, 1999 and 1998, 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,  1999  and  1998,  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 11, 2000

<PAGE>



Pioneer Railcorp and Subsidiaries

Consolidated Balance Sheets
December 31, 1999 and 1998
<TABLE>

ASSETS
                                                                                      1999           1998
-------------------------------------------------------------------------------------------------------------
<S>                                                                                <C>            <C>
Current Assets
   Cash ........................................................................   $ 2,356,844    $   469,476
   Accounts receivable, less allowance for doubtful
      accounts 1999 $186,998; 1998 $156,282 ....................................     3,940,029      2,660,012
   Inventories .................................................................       272,278        331,841
   Prepaid expenses ............................................................        91,377        174,085
   Income tax refund claims ....................................................        94,449         56,933
   Deferred taxes ..............................................................        91,800         70,800
                                                                                   --------------------------
        Total current assets ...................................................     6,846,777      3,763,147

Investments, cash value of life insurance ......................................       131,503        112,348

Property and Equipment, net ....................................................    24,159,995     19,563,368

Intangible Assets, less accumulated amortization
   1999 $239,846; 1998 $250,365 ................................................     1,122,489      1,065,140
                                                                                   --------------------------

                                                                                   $32,260,764    $24,504,003
                                                                                   ==========================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
   Notes payable ...............................................................   $   810,000    $   307,886
   Current maturities of long-term debt ........................................     2,390,042      1,988,041
   Accounts payable ............................................................     3,983,617      2,732,627
   Accrued expenses ............................................................       670,873        537,018
   Income taxes payable ........................................................       561,697         14,206
                                                                                   --------------------------
        Total current liabilities ..............................................     8,416,229      5,579,778
                                                                                   --------------------------

Long-Term Debt, net of current maturities ......................................    13,121,553     11,211,737
                                                                                   --------------------------

Deferred Taxes .................................................................     4,505,100      2,545,900
                                                                                   --------------------------

Minority Interest in Subsidiaries ..............................................     1,154,000      1,186,000
                                                                                   --------------------------

Commitments and Contingencies (Note 11)

Stockholders' Equity
   Common  stock,  Class A  (voting),  par  value  $.001 per  share,  authorized
      20,000,000 shares, issued 1999 4,611,217 shares; 1998 4,610,597 shares ...         4,611          4,610
   In treasury 1999 19,000 shares; 1998 no shares ..............................           (19)          --
                                                                                   --------------------------
   Outstanding 1999 4,592,217; 1998 4,610,597 ..................................         4,592          4,610
   Additional paid-in capital ..................................................     2,042,042      2,041,000
   Retained earnings ...........................................................     3,017,248      1,934,978
                                                                                   --------------------------
                                                                                     5,063,882      3,980,588
                                                                                   --------------------------

                                                                                   $32,260,764    $24,504,003
                                                                                   ==========================
</TABLE>
See Notes to Consolidated Financial Statements.


<PAGE>


Pioneer Railcorp and Subsidiaries

Consolidated Statements of Income
Years Ended December 31, 1999 and 1998


                                                         1999           1998
--------------------------------------------------------------------------------

Railway operating revenue .......................... $13,857,384    $13,514,428
                                                     --------------------------

Operating expenses
   Maintenance of way and structures ...............   1,486,960      1,351,140
   Maintenance of equipment ........................   1,550,973      1,621,232
   Transportation ..................................   3,041,661      3,353,439
   General and administrative ......................   3,772,036      3,595,460
   Depreciation ....................................   1,699,593      1,530,354
   Amortization ....................................      63,531         52,641
                                                     --------------------------
                                                      11,614,754     11,504,266
                                                     --------------------------

      Operating income .............................   2,242,630      2,010,162
                                                     --------------------------

Other income (expenses)
   Interest income .................................       9,652          7,536
   Interest expense ................................  (1,416,203)    (1,297,928)
   Lease income ....................................     251,278        197,087
   Gain on sale of property and equipment ..........   1,512,112         77,005
   Loss on sale of subsidiary ......................    (341,872)          --
   Other, net ......................................      34,524        (25,250)
                                                     --------------------------
                                                          49,491     (1,041,550)
                                                     --------------------------
      Income before provision for income taxes
        and minority interest in preferred stock
        dividends of consolidated subsidiaries .....   2,292,121        968,612

Provision for income taxes .........................     959,129        420,977
                                                     --------------------------
      Income before minority interest in preferred
        stock dividends of consolidated subsidiaries   1,332,992        547,635

Minority interest in preferred stock dividends of
   consolidated subsidiaries .......................     120,515        122,870
                                                     --------------------------

      Net income ................................... $ 1,212,477    $   424,765
                                                     ==========================

Basic earnings per common share .................... $       .26    $       .09
                                                     ==========================

Diluted earnings per common share .................. $       .26    $       .09
                                                     ==========================

See Notes to Consolidated Financial Statements.

<PAGE>


Pioneer Railcorp and Subsidiaries

Consolidated Statements of Stockholders' Equity
Years Ended December 31, 1999 and 1998


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

Balance at December 31, 1997 .....   4,610,197   $4,610  $2,040,200  $1,602,418

   Common stock issued upon
      exercise of stock warrants .         400       --         800          --

   Dividends on common stock,
      $.0225 per share ...........          --       --          --     (92,205)

   Net income ....................          --       --          --     424,765
                                     ------------------------------------------

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
                                     ==========================================

See Notes to Consolidated Financial Statements.


<PAGE>


Pioneer Railcorp and Subsidiaries

Consolidated Statements of Cash Flows
Years Ended December 31, 1999  and 1998
<TABLE>


                                                                    1999          1998
-----------------------------------------------------------------------------------------
<S>                                                              <C>           <C>
Cash Flows From Operating Activities
   Net income ................................................   $1,212,477    $  424,765
   Adjustments to reconcile net income to net cash provided by
      operating activities:
      Minority interest in preferred stock dividends of
        consolidated subsidiaries ............................      120,515       122,870
      Depreciation ...........................................    1,699,593     1,530,354
      Amortization ...........................................       63,531        52,641
      (Increase) in cash value life insurance ................      (19,155)      (16,801)
      (Gain) on sale of property and equipment ...............   (1,512,112)      (71,318)
      Loss on sale of stock of subsidiary ....................      341,872          --
      Deferred taxes .........................................      325,360       290,800
      Changes in assets and liabilities:
        (Increase) decrease in assets:
           Accounts receivable ...............................   (1,474,931)     (275,638)
           Income tax refund claims ..........................      (37,516)       17,669
           Inventories .......................................       59,563        19,490
           Prepaid expenses ..................................       93,347        18,867
        Increase (decrease) in liabilities:
           Accounts payable ..................................    1,686,222       266,016
           Accrued expenses ..................................      350,698       131,146
           Income taxes payable ..............................      547,491       (47,543)
                                                                 ------------------------
           Net cash provided by operating activities .........    3,456,955     2,463,318
                                                                 ------------------------

Cash Flows From Investing Activities
   Proceeds from sale of property and equipment ..............    1,584,455       340,303
   Purchase of property and equipment ........................   (2,337,041)   (1,482,722)
   Intangible assets .........................................      (18,818)         (576)
   Acquisition of subsidiaries, net of cash acquired .........   (3,893,896)         --
   Proceeds from sale of subsidiary, net of cash distributed .      (43,773)         --
                                                                 ------------------------
           Net cash (used in) investing activities ...........   (4,709,073)   (1,142,995)
                                                                 ------------------------

Cash Flows From Financing Activities
   Proceeds from short-term borrowings .......................    3,463,323     3,272,648
   Proceeds from long-term borrowings ........................    5,021,590     5,898,636
   Principal payments on short-term borrowings ...............   (2,961,209)   (3,214,796)
   Principal payments on long-term borrowings ................   (2,102,538)   (7,000,488)
   Proceeds from common stock issued upon exercise of
      stock warrants and options .............................        1,042           800
   Common stock dividend payments ............................     (103,748)      (92,205)
   Preferred stock dividend payments to minority interest ....     (120,515)     (122,870)
   Purchase of common stock for the treasury .................      (26,459)         --
   Repurchase of minority interest ...........................      (32,000)         --
                                                                 ------------------------
           Net cash provided by (used in) financing activities    3,139,486    (1,258,275)
                                                                 ------------------------
</TABLE>
<PAGE>



Pioneer Railcorp and Subsidiaries

Consolidated  Statements  of Cash Flows (Continued)
Years Ended December 31, 1999 and 1998
<TABLE>



                                                                   1999         1998
---------------------------------------------------------------------------------------
<S>                                                             <C>          <C>
           Net increase in cash .............................   $1,887,368   $   62,048

Cash, beginning of year .....................................      469,476      407,428
                                                                -----------------------

Cash, end of year ...........................................   $2,356,844   $  469,476
                                                                =======================

Supplemental Disclosures of Cash Flow Information
   Cash payments for:
      Interest ..............................................   $1,405,846   $1,346,232
                                                                =======================

      Income taxes (net of refunds 1999 $3,403; 1998 $21,783)   $  123,794   $  160,051
                                                                =======================

Supplemental Disclosures of Noncash Investing Information
   Railroad acquisitions:
      Fair value of assets acquired, principally property and
        equipment ...........................................   $5,745,331   $       --
      Less liabilities assumed, principally deferred income
        taxes ...............................................    1,845,331           --
                                                                -----------------------
        Cash paid ...........................................    3,900,000           --
      Less cash acquired ....................................        6,104           --
                                                                -----------------------
           Net cash paid for stock acquisitions .............   $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 over premiums paid ................   $   19,155   $   16,801
                                                                =======================

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

   Cancellation of equipment purchase commitment:
      Equipment .............................................   $       --   $  (25,000)
      Accrued expenses ......................................           --       25,000
                                                                -----------------------
                                                                $       - -  $      - -
                                                                =======================
</TABLE>

See Notes to Consolidated Financial Statements.
<PAGE>


PIONEER RAILCORP AND SUBSIDIARIES

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

Note 1.  Nature of Business and Significant Accounting Policies

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

The Company's subsidiaries include the following:

  West Michigan Railroad Co.            Keokuk Junction Railway Co. and its
  Vandalia Railroad Company               subsidiary, Keokuk Union Depot Company
  Decatur Junction Railway Co.          Michigan Southern Railroad Company and
  Alabama & Florida Railway Co., Inc.     its subsidiary, Michigan Southern
  Mississippi Central Railroad Co.        Railroad Co., Inc.
  Alabama Railroad Co.                  The Garden City Western Railway, Inc.
  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)

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

Significant accounting policies:

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

Cash and cash equivalents: For the purposes of reporting cash flows, the Company
considers all highly liquid debt  instruments  purchased  with maturity of three
months  or less to be cash  equivalents.  There  are no cash  equivalents  as of
December 31, 1999 and 1998.  Periodically  throughout  the year, the Company has
amounts  on deposit  with  financial  institutions  that  exceed the  depository
insurance limits.  The Company has not experienced any loss as a result of those
deposits and does not expect any in the future.

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

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

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

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

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


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

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

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, 1999 and 1998.

Intangible  assets:  Intangible assets consist  principally of goodwill which is
being  amortized  by the  straight-line  method over a  forty-year  period.  The
Company reviews intangible assets quarterly by subsidiary to determine potential
impairment  by  comparing  the  carrying  value  of  the  intangible   with  the
undiscounted anticipated future cash flows of the related property before income
taxes and management fees generated by Pioneer Railroad Services, Inc. If future
cash flows are less than the carrying value, the Company will determine the fair
market value of the property and adjust the carrying value of the intangibles if
the fair market  value is less than the  carrying  value.  The Company  does not
believe that impairment exists as of December 31, 1999 and 1998.

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:  During  1998,  the  Company was awarded two grants from the
Alabama  Department  of  Transportation  which are funded with federal  disaster
funds from the Federal  Railroad  Administration  pursuant to the Federal Fiscal
year 1998 Supplemental  Appropriations  Act. The $657,757 and $64,340 grants are
designed to aid the Company with the labor and material costs of  rehabilitating
and  repairing  track and bridge  structures  belonging to the Alabama & Florida
Railway  Company  and the Alabama  Railroad  Company,  respectively,  which were
damaged by severe weather conditions in March 1998. As of December 31, 1999, the
Company had fully  expended the $657,757  grant and had recorded  receivables of
$159,000  and  accounts  payable to vendors of  $130,000.  The Company had fully
expended the $64,340 grant as of December 31, 1998.

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


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

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


Note 2.  Property and Equipment

Property and equipment consist of the following:

                                                            December 31,
                                                   -----------------------------
                                                       1999              1998
                                                   -----------------------------

Land .......................................       $ 2,979,438       $ 1,433,888
Roadbed ....................................         9,135,967         7,806,216
Transportation equipment ...................         2,815,931         2,428,275
Railcars ...................................        11,730,121        10,746,046
Buildings ..................................         1,397,636         1,058,052
Machinery and equipment ....................         1,420,363         1,005,897
Office equipment ...........................           441,110           429,805
Leasehold improvements .....................           210,247           204,886
Capital projects ...........................         1,271,914           447,463
                                                   -----------------------------
                                                    31,402,727        25,560,528
Less accumulated depreciation ..............         7,242,732         5,997,160
                                                   -----------------------------
                                                   $24,159,995       $19,563,368
                                                   =============================


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  (9.5%  at  December  31,  1999).  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 has two notes  outstanding  under this
line  of  credit  as  of  December  31,  1999,  of   $1,453,263   and  $810,000,
respectively.  The $1,453,263 note is classified as long-term and due June 2001,
while the $810,000  note payable  which is due March 10, 2000,  is classified as
current.

The Company has a $100,000 line of credit with Citizens Bank and Trust  Company,
Chillicothe,  Missouri,  that expires July 2000,  bears interest at 9.5%, and is
collateralized  by  transportation  equipment.  The Company  had no  outstanding
balances under this line of credit as of December 31, 1999 and 1998.

The  Company  had a $600,000  line of credit with  National  City Bank,  Peoria,
Illinois, that expired July 1999, bearing interest at prime, as published in The
Wall Street Journal,  plus 1%, and was collateralized by accounts receivable and
general  intangibles  of certain  subsidiaries.  The Company had no  outstanding
balances  under  this  line of  credit  as of  December  31,  1999 and  $225,738
outstanding as of December 31, 1998.

The Company had various  unsecured notes payable totaling $82,148 as of December
31, 1998, for the financing of insurance premiums.  This note was due in monthly
installments of $20,537, including interest at 7.95%, with final installment due
May 1999.
<PAGE>

Long-term debt at December 31, 1999 and 1998, consists of the following:
<TABLE>
                                                                                       1999         1998
                                                                                    -----------------------
<S>                                                                                 <C>          <C>
Note payable under master line of credit  agreement with National City Bank, due
   in monthly installments of $18,900 including interest at 1.0% over the bank's
   prime  rate  (9.5% at  December 31, 1999), final 2001, collateralized by real
   estate, rail facilities, and other assets of Garden City & Western Railway,
   Inc. .........................................................................  $ 1,453,263   $       --
Note payable, National City Bank, due in monthly installments 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. ................    2,406,715           --
Mortgage payable, National City Bank, due in monthly installments
   of $3,775 including interest at 8.5%. The interest rate is adjustable
   every five years and is presently based on the Bank's base rate as
   of October 31, 1999. Final installment due June 2008, collateralized
   by Pioneer Railcorp's corporate headquarters building ........................      383,958      395,606
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. .........................................................................    1,170,613    1,293,713
Notes payable, Wells Fargo Equipment, due in monthly installments
   from $3,070 to $24,018, including interest ranging from 7.26% to 9.00%, final
   installments due June 2004 to May 2006, collateralized
   by railcars ..................................................................    2,146,401    1,380,863
Note payable, Keycorp, due in monthly installments of $22,744,
   including interest at 8.86%, final installment due December 2004,
   collateralized by railcars ...................................................      916,105    1,098,977
Notes payable, Bank of America, due in monthly installments of
   $23,305, including interest at 8.75%, final installment due December
   2002,  collateralized by railcars ............................................      736,060      940,998
Various notes payable, due in monthly installments from $417 to $573,
   including interest ranging from 9.50% to 10.25%,  final installments due from
   July 2000 to December 2001, collateralized by vehicles
   and railcars .................................................................       34,889       62,468
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 ........................................    2,591,359    2,813,177
Notes payable, Center Capital Corporation, due in monthly
   installments from $1,402 to $5,202,  including  interest from 8.90% to 9.75%,
   final installments due from January 2002 to
   August 2005, collateralized by 70 ton box cars ...............................      547,586      641,325
Note payable, Pullman Bank & Trust Company, due in monthly
   installments of $4,933, including interest at 9.45%, final install-
   ment due December 2004, collateralized by covered hoppers ....................      233,817      268,885
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 .................................................................    1,398,524    1,738,554
Notes payable, United Capital, due in monthly installments of $32,763,
   and $12,028 including interest at 8.38% and 7.72%, final install-
   ments due May 2002 and May 2004, collateralized by railcars ..................    1,454,383    1,856,393
Noninterest-bearing note payable, State of Mississippi, due in
   annual installments of $3,792, final installment due February 2009,
   collateralized by track structure ............................................       37,922       45,465
Notes payable, Concord Commercial Group, due in monthly
   installments of $2,239, including interest at 9%, final installment
   due March 1999, collateralized by railcars ...................................         --          6,599
Notes payable, Minnesota Valley Bank, due in monthly installments
   of $4,700,  including  interest at prime plus 2-2.75%,  final installment due
   December 2001, collateralized by equipment, debt
   eliminated in 1999 as part of sale of subsidiary (see Note 16) ...............         --        128,675
Note payable, U.S. Small Business Administration, due in monthly
   installments of $7,577, including interest at 4%, final installment
   due October 2000, collateralized by track, debt eliminated in
   1999 as part of sale of subsidiary (see Note 16) .............................         --        152,235
Note payable, Rail Authority, interest only payments required through
   October 1998, then due in monthly installments of $3,975,  including interest
   at 7.5%,  final  installment due January 2011,  collateralized  by rail line,
   debt eliminated in 1999 as part of sale of subsidiary
   (see Note 16) ................................................................         --        375,845
                                                                                   ------------------------
                                                                                    15,511,595   13,199,778
Less current portion ............................................................    2,390,042    1,988,041
                                                                                   ------------------------
                                                                                   $13,121,553  $11,211,737
                                                                                   ========================
</TABLE>
<PAGE>


Aggregate maturities required on long-term debt as of December 31, 1999, are due
in future years as follows:

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

    2000                                                             $ 2,390,042
    2001                                                               3,798,117
    2002                                                               2,554,459
    2003                                                               1,904,016
    2004                                                               2,786,267
   Thereafter                                                          2,078,694
                                                                     -----------
                                                                     $15,511,595
                                                                     ===========


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.

The  provision  for income  taxes  charged  to  operations  for the years  ended
December 31, 1999 and 1998, was as follows:


                                             1999       1998
                                           -------------------
Current:
   Federal ..........................      $549,067   $101,335
   State ............................        84,702     28,842
                                           -------------------
                                            633,769    130,177
                                           -------------------
Deferred
   Federal ..........................       296,660    231,100
   State ............................        28,700     59,700
                                           -------------------
                                            325,360    290,800
                                           -------------------

                                           $959,129   $420,977
                                           ===================

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, 1999 and 1998, due to the following:

                                                                    1999   1998
                                                                    ------------

Computed "expected" tax expense ..................................  35.0%  35.0%
Increase (decrease) in income taxes resulting from:
   State income taxes, net of federal tax benefit ................   3.3    6.0
   Goodwill amortization .........................................    .7    1.9
   Other .........................................................   2.8     .5
                                                                    ------------
                                                                    41.8%  43.4%
                                                                    ============

Deferred tax assets and  liabilities  consist of the following  components as of
December 31, 1999 and 1998:


                                                           1999         1998
                                                      -------------------------
Deferred tax assets:
   AMT credit carryforwards ......................    $   869,800   $   463,400
   NOL carryforwards .............................        391,100     1,070,800
   Deferred compensation .........................         44,600        35,200
   Other .........................................         91,800        70,800
                                                      -------------------------
                                                        1,397,300     1,640,200
Deferred tax liabilities:
   Property and equipment ........................     (5,810,600)   (4,115,300)
                                                      -------------------------
                                                      $(4,413,300)  $(2,475,100)
                                                      =========================
<PAGE>


The components giving rise to the deferred tax assets and liabilities  described
above have been included in the  consolidated  balance sheets as of December 31,
1999 and 1998, as follows:


                                                      1999             1998
                                                   ----------------------------

Current deferred tax assets ..................     $    91,800      $    70,800
Net noncurrent deferred tax liabilities ......      (4,505,100)      (2,545,900)
                                                   ----------------------------

Net deferred tax liability ...................     $(4,413,300)     $(2,475,100)
                                                   ============================

The Company  and its  subsidiaries  have  Alternative  Minimum Tax (AMT)  credit
carryforwards  of  approximately  $870,000 and $463,000 at December 31, 1999 and
1998,  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  $922,000 at December 31, 1999, which can be used to offset future
taxable income of those subsidiaries. Net operating loss carryforwards expire as
follows:

   Years ending December 31:                                         Amount
-----------------------------------------------------------------------------
       2011                                                        $  215,000
       2012                                                           522,000
       2018                                                           185,000
                                                                   ----------
                                                                   $  922,000
                                                                   ==========


Note 5.  Retirement Plan

The  Company  has  a  defined  contribution  plan  covering   substantially  all
employees. Employees are eligible to participate in the plan upon employment and
may elect to  contribute,  on a tax deferred  basis,  the lesser of 15% of their
salary,   or  $10,000.   Company   contributions  are   discretionary.   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  $38,000 and $43,000 for the years ended  December  31, 1999
and 1998, 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 $116,000 and $92,000 present value of the estimated liability under
the agreements as of December 31, 1999 and 1998, respectively,  using a discount
rate of 7%.  Deferred  compensation  expense totaled $24,000 and $14,000 for the
years ended December 31, 1999 and 1998, 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.
<PAGE>


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,  1999,  151,759
options are outstanding and exercisable  under the 1994 plan. The options expire
July 5, 2000.

On June 1,  1998,  the Board of  Directors  approved  a plan for  repurchase  of
441,512 of the  outstanding  options  issued to Company  employees  on April 12,
1994.  The  employees  were  paid  $.15 for each  option  repurchased,  with the
repurchase  cost payable to the employees in the form of increased  compensation
over a one-year  period  commencing in June,  1998.  During 1999,  the remaining
20,000 options held by an outside director pursuant to the April 12, 1994, stock
plan were forfeited.

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, 1999,
215,000 options are still outstanding under the 1996 plan.

Other pertinent information related to the plans is as follows:

                                          1999                  1998
                                    -------------------   ------------------
                                              Weighted-            Weighted-
                                               Average              Average
                                              Exercise             Exercise
                                    Shares      Price     Shares     Price
                                    ----------------------------------------
Outstanding at beginning of year    436,759   $   3.13    973,271   $   2.36
Forfeited ......................    (70,000)      2.68    (95,000)      2.65
Repurchased ....................         --         --   (441,512)      1.54
Exercised ......................         --         --         --         --
                                    ----------------------------------------
Outstanding at end of year .....    366,759   $   3.22    436,759   $   3.13
                                    ========================================

Exercisable at end of year .....    151,759               194,759
                                    =======               =======

A further summary about stock options outstanding as of December 31, 1999, is as
follows:

                               Options                        Options
                             Outstanding                     Exercisable
                 -------------------------------------  ----------------------
                               Weighted-
                                Average       Weighted               Weighted
    Range of                   Remaining      Average                 Average
    Exercise        Number    Contractual     Exercise    Number     Exercise
     Prices      Outstanding     Life          Price    Exercisable    Price
------------------------------------------------------------------------------
$2.75 - 3.56       305,000        4.73         $3.06       90,000      $3.56
$3.92 - 4.40        61,759         .59          4.01       61,759       4.01
                   -------                                -------
                   366,759                                151,759
                   =======                                =======
<PAGE>


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:


                                                  1999          1998
                                                -----------------------
Net income:
   As reported ............................     $1,212,477   $  424,765
   Proforma ...............................     $1,150,477   $  344,765

Basic earnings per common share:
   As reported ............................     $      .26   $      .09
   Proforma ...............................     $      .25   $      .08

Diluted earnings per common share:
   As reported ............................     $      .26   $      .09
   Proforma ...............................     $      .25   $      .08

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 4,130,420  and 4,131,040  warrants
outstanding as of December 31, 1999 and 1998, respectively.


Note 8.  Lease Commitments and Total Rental Expense

The Company has entered  into seven  lease  agreements  covering  certain of its
railroad  properties.  For railroad properties it leases, the Company ordinarily
assumes,   upon   the   commencement   date,   all   operating   and   financial
responsibilities,   including  maintenance,   payment  of  property  taxes,  and
regulatory compliance. Lease payments on 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.

The total  approximate  minimum  rental  commitment  as of  December  31,  1999,
required under  noncancelable  leases, and excluding executory costs and per car
rentals, is due in future years as follows:

   Years Ending December 31:                                           Amount
------------------------------------------------------------------------------
       2000                                                           $ 46,000
       2001                                                             42,000
       2002                                                             42,000
       2003                                                             42,000
       2004                                                             42,000
       Thereafter                                                      233,000
                                                                      --------
                                                                      $447,000
                                                                      ========

The total  rental  expense  under the  leases  was  approximately  $154,000  and
$347,000 for the years ended December 31, 1999 and 1998, respectively.


Note 9.  Major Customer

Revenue earned from a major railroad segment customer  amounted to approximately
$2,824,000  and  $2,567,000  during the years ended  December 31, 1999 and 1998,
respectively.  Accounts  receivable  as of December  31, 1999 and 1998,  include
approximately $529,000 and $381,000, 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.
<PAGE>


Following is a summary of the minority  interest in  subsidiaries as of December
31, 1999 and 1998:
<TABLE>
                                                                                           1999         1998
                                                                                       -----------------------
<S>                                                                                    <C>          <C>
Preferred stock of Alabama Railroad Co. ............................................
   Par value - $1,000 per share
   Authorized - 700 shares
   Issued and outstanding - 409 and 424 shares (cumulative 12% dividend;
      callable at Company' option at 150% of face value) at December 31, 1999 and
      1998, respectively ...........................................................   $  409,000   $  424,000
Preferred stock of Alabama & Florida Railway Co., Inc.
   Par value - $1,000 per share
   Authorized - 500 shares
   Issued and outstanding - 406 and 421 shares (cumulative 9% dividend; callable
      at Company's option after June 22, 1995, at 150% of face value) at
      December 31, 1999 and 1998, respectively .....................................      406,000      421,000
Preferred stock of Mississippi Central Railroad Co.
   Par value - $1,000 per share
   Authorized - 1,000 shares
   Issued and  outstanding - 339 and 341 shares (cumulative 10% dividend;
      convertible  at a rate of $10 per  common  share,  callable  at  Company's
      option after March 1, 1996, at 110% of face value) at December 31, 1999
      and 1998, respectively .......................................................      339,000      341,000
                                                                                       -----------------------
                                                                                       $1,154,000   $1,186,000
                                                                                       =======================
</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 a lump sum payment of one year's
salary.

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

As  discussed  in Note 1, the Company was awarded  grants in 1998 for the repair
and  rehabilitation of weather damaged railroad track and related structures the
Company owns in Alabama. The Company's  obligations under the two Alabama 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 to the Federal  Railroad  Administration  the full value of awarded  funds
pursuant to the Alabama grants.

The Company is contingently liable as a guarantor on an outstanding loan payable
to the U.S.  Small  Business  Administration.  The  $75,000  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.
<PAGE>


Note 12.  Earnings Per Share

Following is information  about the  computation of the earnings per share (EPS)
data for the years ended December 31, 1999 and 1998:

<TABLE>

                                                For the Year Ended December 31, 1999
                                                -------------------------------------
                                                  Income        Shares      Per Share
                                                (Numerator)  (Denominator)    Amount
                                                -------------------------------------
<S>                                             <C>          <C>            <C>
Basic EPS
Income available to common stockholders ....    $1,212,477     4,610,439    $   .26
                                                                            =======
Effect of Dilutive Securities
Employee stock options .....................          --            --
                                                ------------------------
Diluted EPS
Income available to common stockholders
   plus assumed conversions ................    $1,212,477     4,610,439    $   .26
                                                ===================================



                                                For the Year Ended December 31, 1998
                                                ------------------------------------
                                                 Income        Shares      Per Share
                                                (Numerator)  (Denominator)    Amount
                                                ------------------------------------
Basic EPS
Income available to common stockholders ......   $ 424,765     4,610,434    $   .09
                                                                            =======

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

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

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


Note 13.  Common Stock Repurchase

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. As of December 31, 1999, the Company had repurchased 19,000 shares
of common  stock at an average  price of  approximately  $1.39 per share,  for a
total of $26,478.

The common stock repurchased is accounted for as treasury stock in the Company's
1999 consolidated balance sheet and statement of stockholders'  equity. As such,
treasury shares held reduce the number of shares of common stock  outstanding as
of December 31, 1999, and the value of the treasury stock reduces  stockholders'
equity.  The $26,459 excess of the purchase price of the treasury stock over the
par value of the stock was charged to retained earnings.
<PAGE>


Note 14.  Fair Value of Financial Instruments

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

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

     The remaining  carrying  value of fixed rate  long-term  debt  collectively
     approximates  fair  value  based  upon the  similarity  of  interest  rates
     negotiated  on debt  instruments  in 1999 and 1998 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

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

Description  of  products  and  services  from  reportable   segments:   Pioneer
Railcorp'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  equipment  subsidiary  that leases
railcars,   locomotives,   and  other  railroad   equipment  to  affiliated  and
unaffiliated  entities.  The corporate  operations  consist of support  services
provided to the operating segments.
<TABLE>
                                                               For Year Ended December 31,
                                                               ----------------------------
                                                                   1999            1998
                                                                --------------------------
<S>                                                             <C>            <C>
Segment Assets
   Railroad operations ......................................   $18,394,208    $13,626,948
   Equipment leasing operations .............................    11,558,068     10,055,047
   Corporate support services ...............................     2,308,488        822,008
                                                                --------------------------
        Total consolidated segment assets ...................   $32,260,764    $24,504,003
                                                                ==========================
Expenditures for additions to long-lived assets
   Railroad operations
      Purchases .............................................   $   128,005    $   467,199
      Acquired through purchase of subsidiaries .............     5,614,510             --
   Equipment leasing operations .............................     2,176,434        932,336
   Corporate support services ...............................        32,602         83,187
                                                                --------------------------
        Total expenditures for additions to long-lived assets   $ 7,951,551    $ 1,482,722
                                                                ==========================
Revenues

Revenues from external customers
   Railroad operations ......................................   $11,146,579    $10,918,188
   Equipment leasing operations .............................     2,678,305      2,585,072
   Corporate support services ...............................        32,500         11,168
                                                                --------------------------
        Total revenues from external customers ..............    13,857,384     13,514,428
                                                                --------------------------
Intersegment revenues
   Railroad operations ......................................   $        --    $        --
   Equipment leasing operations .............................       392,700        427,100
   Corporate support services ...............................     5,933,463      5,156,045
                                                                --------------------------
        Total intersegment revenues .........................     6,326,163      5,583,145
                                                                --------------------------

        Total revenue .......................................   $20,183,547    $19,097,573
Reconciling items
   Intersegment revenues ....................................    (6,326,163)    (5,583,145)
                                                                --------------------------
        Total consolidated revenues .........................   $13,857,384    $13,514,428
                                                                ==========================
</TABLE>
<PAGE>


<TABLE>
                                                                  For Year Ended December 31,
                                                                  ---------------------------
                                                                        1999        1998
                                                                    -----------------------
<S>                                                                 <C>        <C>

Expenses

Interest expense
   Railroad operations ..........................................   $  120,143   $  190,096
   Equipment leasing operations .................................      659,359      747,577
   Corporate support services ...................................      636,701      360,255
                                                                    -----------------------
        Total consolidated interest expense .....................   $1,416,203   $1,297,928
                                                                    =======================

Depreciation and amortization expense
   Railroad operations ..........................................   $  701,634   $  581,604
   Equipment leasing operations .................................      972,868      918,307
   Corporate support services ...................................       88,622       83,084
                                                                    -----------------------
        Total consolidated depreciation and amortization expense    $1,763,124   $1,582,995
                                                                    =======================

Segment profit
   Railroad operations ..........................................   $4,559,919   $4,079,300
   Equipment leasing operations .................................    1,271,247    1,362,173
   Corporate support services ...................................    2,737,627    2,151,834
                                                                    -----------------------
        Total segment profit ....................................    8,568,793    7,593,307

Reconciling items
   Intersegment revenues ........................................   (6,326,163)  (5,583,145)
   Income taxes .................................................     (959,129)    (420,977)
   Minority interest in preferred stock dividends of subsidiaries     (120,515)    (122,870)
   Other income (expense), net ..................................       49,491   (1,041,550)
                                                                    -----------------------

        Total consolidated net income ...........................   $1,212,477   $  424,765
                                                                    =======================
</TABLE>

Note 16.  Purchases and Disposition of Railroad Facilities

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., which it had previously  operated
pursuant to a lease,  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, 1999 and 1998, as though Michigan  Southern  Railroad Co., Inc. and
The Garden City Western  Railway,  Inc. had been acquired as of January 1, 1998,
follows:


                                                     1999                1998
                                                 -------------------------------

Railway operating revenue ..............         $14,042,350         $14,229,399
Net income .............................           1,191,351             513,577
Earnings per common share ..............                 .26                 .11

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 management decided to dispose of it in
1999. The Company recognized a loss of $341,872 associated with this sale.


Note 17.  Subsequent Event

In January 2000,  the Company  purchased 22 locomotives at a cost of $1,585,000.
The purchase of these  locomotives  was financed  with  borrowings of $1,585,000
against  the  $5,000,000  master  line of credit with  National  City Bank.  The
long-term borrowings are collateralized by the locomotives.

<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:

                99-1Q   99-2Q   99-3Q   99-4Q   98-1Q   98-2Q   98-3Q   98-4Q
                -------------------------------------------------------------

High ........   $1.75   $1.56   $1.94   $1.88   $1.75   $2.25   $1.81   $1.75
Low .........   $1.25   $1.25   $1.25   $1.25   $1.25   $1.39   $1.19   $1.00

As of December 31, 1999,  the Company had 1,811 common  stockholders  of record,
including  brokers  who hold stock for  others.  A cash  dividend  of $.0225 per
common share was paid to  shareholders of record as of April 30, 1999. The total
dividend was $103,748 and was paid on June 5, 1999.

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, RE/MAX 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  1999 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.