UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                   ----------

                                   FORM 10-QSB

(Mark One)

[X]      QUARTERLY REPORT UNDER SECTION 13 OR 15 (D) OF THE SECURITIES   
              EXCHANGE ACT OF 1934

         FOR THE QUARTERLY PERIOD ENDED  JUNE 30, 1998

[ ]      TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE  
              SECURITIES EXCHANGE ACT OF 1934

         FOR THE TRANSITION PERIOD FROM _______________  TO ________________

                        COMMISSION FILE NUMBER 0-26741

                          FIRST AMERICAN RAILWAYS, INC.
                          -----------------------------
        (EXACT NAME OF SMALL BUSINESS ISSUER AS SPECIFIED IN ITS CHARTER)

           NEVADA                                                87-0443800
-------------------------------                              -------------------
(STATE OR OTHER JURISDICTION OF                               (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION)                               IDENTIFICATION NO.)

           3700 NORTH 29TH AVENUE, SUITE 202, HOLLYWOOD, FLORIDA    33020
           --------------------------------------------------------------
                 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)         (ZIP CODE)

                    ISSUER'S TELEPHONE NUMBER (954) 920-0606
                    ----------------------------------------

                                      N/A
--------------------------------------------------------------------------------
              (FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR,
                         IF CHANGED SINCE LAST REPORT)

         Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such report(s), and (2)
has been subject to such filing requirements for the past 90 days. Yes  X  No
                                                                       ---   ---
                APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
                   PROCEEDINGS DURING THE PRECEDING FIVE YEARS

         Check whether the issuer filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by the court.  Yes      No      NOT APPLICABLE
                                                    ----    ----

                      APPLICABLE ONLY TO CORPORATE ISSUERS

         State the number of shares outstanding of each of the issuer's classes
of common equity as of the latest practicable date:

           AT AUGUST 18, 1998    25,524,020 SHARES OF COMMON STOCK, 
                                      PAR VALUE $.001 PER SHARE


       Transitional Small Business Disclosure Format (check one): Yes    No  X
                                                                     ---    --- 
<PAGE>

                          FIRST AMERICAN RAILWAYS, INC.

                                      INDEX
                        (SIX MONTHS ENDED JUNE 30, 1998)

                         
                                                                            PAGE
                                                                            ----
                         PART I - FINANCIAL INFORMATION

 Item 1.           Consolidated Financial Statements

                         Consolidated Balance Sheets                          3

                         Consolidated Statements of Operations                4

                         Consolidated Statements of Cash Flows                5

                         Notes to Consolidated Financial Statements           6

 Item 2.           Management's Discussion and Analysis                       9

                           PART II - OTHER INFORMATION

 Item 1.           Legal Proceedings                                         13

 Item 6.           Exhibits and Reports on Form 8-K                          14

                   Signatures                                                15


                                        2
<PAGE>

                          FIRST AMERICAN RAILWAYS, INC.

                           CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                                       JUNE 30,        DECEMBER 31,
                                                                                         1998              1997
                                                                                       --------        ------------
<S>                                                                             <C>                 <C>              
             ASSETS
CURRENT:
  Cash                                                                          $          96,386   $       1,711,927
  Restricted cash                                                                         100,000             100,000
                                                                                --------------------------------------
      Cash and cash items                                                                 196,386           1,811,927
  Inventories                                                                             180,413           1,017,557
  Prepaids and other                                                                      454,134           1,734,746
  Net assets held for sale                                                              4,359,439                   -
                                                                                --------------------------------------
      Total current assets                                                              5,190,372           4,564,230
                                                                                --------------------------------------
Fixed assets, net                                                                      12,911,995          41,668,275
Deferred loan costs, goodwill and other, net                                            2,283,947           4,316,953
                                                                                --------------------------------------

                                                                                $      20,386,314   $      50,549,458
                                                                                ======================================

             LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT:
  Accounts payable and accrued liabilities                                      $       4,085,589   $       4,812,626
  Unearned revenue                                                                        159,465             377,749
  Short term debt and current maturities of long-term debt                              2,420,589           1,896,000
  Reserve for loss on sale of net assets                                                1,841,000                   -
                                                                                --------------------------------------
      Total current liabilities                                                         8,506,643           7,086,375
                                                                                --------------------------------------
Long-term debt                                                                         16,968,680          33,573,157
Deferred income taxes and other long-term liabilities                                           -           8,258,788
                                                                                --------------------------------------
      Total liabilities                                                         $      25,475,323   $      48,918,320
                                                                                --------------------------------------

Commitments and contingencies                                                                  --                  --

Stockholders' equity
  Preferred stock ($.001 par value, 500,000 shares authorized)                                 --                  --
  Common stock ($.001 par value, 100,000,000 shares authorized),
     25,524,020 and 11,243,911 shares issued and outstanding                               25,524              11,244
  Additional Paid-in capital                                                           15,729,350          12,524,286
  Accumulated deficit                                                                 (20,843,883)        (10,904,392)
                                                                                --------------------------------------

      Total stockholders' equity                                                       (5,089,009)          1,631,138
                                                                                --------------------------------------

                                                                                $      20,386,314   $      50,549,458
                                                                                ======================================
</TABLE>

                    SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

                                        3
<PAGE>

                          FIRST AMERICAN RAILWAYS, INC.

                      CONSOLIDATED STATEMENTS OF OPERATIONS
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                           FOR THE THREE MONTHS                   FOR THE SIX MONTHS
                                                              ENDED JUNE 30,                         ENDED JUNE 30,
                                                         1998                1997               1998               1997
                                                         ----                ----               ----               ----

<S>                                               <C>                <C>               <C>                <C>             
Revenue                                           $        313,062   $     2,633,585   $        507,726   $      2,633,585
Cost of revenue                                          2,161,280         1,186,004          4,460,353          1,186,004
                                                  -------------------------------------------------------------------------

     Gross profit                                       (1,848,218)        1,447,581         (3,952,627)         1,447,581
                                                  -------------------------------------------------------------------------
Selling, general and administrative                        583,576           525,153          1,567,194            525,153
Development of Florida Fun-Train                                 -         1,149,491                  -          1,883,276
                                                  -------------------------------------------------------------------------
     Operating loss                                     (2,431,794)         (227,063)        (5,519,821)          (960,848)
                                                  -------------------------------------------------------------------------
Interest expense, net                                      633,324           553,418          1,257,734            593,019
Amortization of loan costs                                 128,253            92,428            256,507            142,090
Other Income                                                     -                 -                  -                  -
                                                  -------------------------------------------------------------------------
      Loss from continuing operations                   (3,193,371)         (872,909)        (7,034,062)        (1,695,957)
                                                  -------------------------------------------------------------------------

Discontinued operations:
    Loss from operations of
     Durango & Silverton NGRR                           (1,064,429)                -         (1,064,429)                 -

   Estimated loss on disposal of
     Durango & Silverton NGRR                           (1,841,000)                -         (1,841,000)                 -
                                                  -------------------------------------------------------------------------

     Loss from discontinued operations                  (2,905,429)                -         (2,905,429)                 -
                                                  -------------------------------------------------------------------------

Net income (loss)                                 $     (6,098,800)  $      (872,909)  $     (9,939,491)  $     (1,695,957)
                                                  =========================================================================


Weighted average number of
  common shares outstanding                             21,984,930         9,691,663         20,131,403          9,405,875

Net loss per common share
   Basic
     Loss from continuing operations                         (0.15)            (0.09)             (0.35)             (0.18)
     Income (loss) from discontinued operations              (0.05)                -              (0.05)                 -
     Estimated loss on disposal of D&SNG                     (0.08)                -              (0.09)                 -
                                                  -------------------------------------------------------------------------

                                                             (0.28)            (0.09)             (0.49)             (0.18)
                                                  -------------------------------------------------------------------------

   Diluted
     Loss from continuing operations                         (0.15)            (0.09)             (0.35)             (0.18)
     Income (loss) from discontinued operations              (0.05)                -              (0.05)                 -
     Estimated loss on disposal of D&SNG                     (0.08)                -              (0.09)                 -
                                                  -------------------------------------------------------------------------

                                                  $          (0.28)  $         (0.09)  $          (0.49)  $          (0.18)
                                                  -------------------------------------------------------------------------
</TABLE>

                    SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

                                        4

<PAGE>

                          FIRST AMERICAN RAILWAYS, INC.

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                                            FOR THE SIX MONTHS    FOR THE SIX MONTHS
                                                                               ENDED JUNE 30,       ENDED JUNE 30,
                                                                                   1998                    1997
                                                                                   ----                    ----
<S>                                                                          <C>                     <C>              
OPERATING ACTIVITIES:
  Net Loss                                                                   $       (9,939,491)     $     (1,695,957)
  Adjustments to reconcile net loss to net 
    cash used in operating activities:
       Depreciation                                                                     315,237                97,583
       Amortization                                                                     265,832               159,526
       Reserve for loss on sale assets                                                1,841,000                     -
       Assets held for sale                                                           1,147,451                     -
       Original issue discount                                                          324,600                     -
       Salaries and consulting fees paid in common stock                                406,060                44,014
       Interest payments paid in common stock                                           436,872                     -
       Decrease in restricted cash                                                            -               409,131
       Decrease in inventories                                                           19,404              (304,915)
       Decrease in prepaids and others                                                1,628,566              (429,407)
       Decrease in accounts payable and accrued liabilties                             (510,718)              185,249
       Increase in unearned revenue                                                      42,083             1,049,475
       Increase in other long-term liabilities                                                -                     -
                                                                           -------------------------------------------

Total adjustments                                                                     5,916,387             1,210,656
                                                                           -------------------------------------------

Net cash used in operating activities                                                (4,023,104)             (485,301)
                                                                           -------------------------------------------

Investing activities
  Capital expenditures                                                                  136,013            (5,365,785)
  Cash paid for acquisition                                                                   -            (3,481,582)
  Decrease in other assets                                                              120,846              (378,207)
                                                                           -------------------------------------------

Net cash provided by (used in) investing activities                                     256,859            (9,225,574)
                                                                           -------------------------------------------

Financing activities:
  Proceeds from issuance of notes payable and line of credit                          1,500,000            16,406,500
  Repayment of notes payable                                                            (19,235)           (4,567,342)
  Payment of loan costs                                                                 (50,000)           (1,629,125)
  Proceeds from issuance of common stock                                              2,607,790             3,736,710
  Payment of offering costs                                                            (389,067)             (504,570)
                                                                           -------------------------------------------

  Net cash provided by financing activities                                           3,649,488            13,442,173
                                                                           -------------------------------------------

  Net decrease in cash                                                                 (116,757)            3,731,298
  Cash at beginning of period                                                           313,143             7,174,020
                                                                           -------------------------------------------

  Cash at end of period                                                    $              196,386          10,905,318
                                                                           ===========================================

  Supplemental Disclosures:
       Cash paid for interest                                                             $ 410             $ 867,587
       Accrued fees and salaries paid in common stock                                         -               102,188
       Prepaids paid in common stock                                                          -                91,500
</TABLE>


                    SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

                                        5
<PAGE>

                                                   FIRST AMERICAN RAILWAYS, INC.
                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                                     (UNAUDITED)

1.       FINANCIAL                  The consolidated financial information  
         STATEMENTS                 included herein is unaudited. Certain   
                                    information and footnote disclosures    
                                    normally included in the consolidated   
                                    financial statements have been condensed or 
                                    omitted pursuant to the rules and           
                                    regulations of the Securities and Exchange  
                                    Commission, although the Company believes   
                                    that the disclosures made are adequate to   
                                    make the information presented not          
                                    misleading. These consolidated financial    
                                    statements should be read in conjunction    
                                    with the financial statements and related   
                                    notes contained in the Company's 1997 Annual
                                    Report on Form 10-KSB. Other than as        
                                    indicated herein, there have been no        
                                    significant changes from the financial data 
                                    published in said report. In the opinion of 
                                    Management, such unaudited information      
                                    reflects all adjustments, consisting only of
                                    normal recurring accruals, necessary for a  
                                    fair presentation of the unaudited          
                                    information shown.                          
                                    
                                    Results for the interim periods presented
                                    herein are not necessarily indicative of
                                    results expected for the full year.

2.       GOING CONCERN              The Company has incurred annual operating 
         CONSIDERATIONS             losses since its inception and at June 30,  
                                    1998, the Company had a working capital    
                                    deficiency of approximately $3,316,271. 
                                    Additionally, the Company will have to 
                                    obtain the necessary funds to either 
                                    complete the four railcars currently in 
                                    various stages of completion or obtain other
                                    railcars from a third party.

                                    From January through June 1998, the Company
                                    sold in private placements an aggregate of
                                    8,029,500 shares of common stock receiving
                                    net proceeds of approximately $2,218,723. An
                                    additional $500,000 was advanced as a
                                    short-term note by HEC Asset Management in
                                    partial funding of an investment option of
                                    up to $4,000,000. HEC elected not to invest
                                    additional funds. In addition, a $1,000,000
                                    equity investment made between March 30, and
                                    April 15, 1998 was converted to debt
                                    bringing the 1998 HEC investment to an
                                    aggregate of $1,500,000.

                                    The Company has implemented cost reduction
                                    programs including reducing corporate staff
                                    and reducing or eliminating contracted
                                    service agreements. Additionally, the
                                    Company has increased its marketing efforts
                                    to Florida residents and tourists visiting
                                    Florida to increase attendance on the
                                    Florida Fun-Train. This has resulted in a
                                    significant increase in ridership but is
                                    still far short of generating sufficient
                                    income.

                                        6
<PAGE>

3.       SALE OF A MAJOR            On July 2, 1998, the Company sold all of the
         SUBSIDIARY                 common stock of its subsidiary which 
                                    operates the Durango & Silverton Narrow 
                                    Gauge Railroad ("D&SNG") to a corporation
                                    controlled by the Company's former Chairman
                                    and Chief Executive Officer. The sales price
                                    was $2,500,000, which was paid in cash at
                                    closing. In connection with the sale, the
                                    parties also agreed that the Company would
                                    provide certain marketing, accounting and
                                    support services to the D&SNG for a period
                                    of five years at a total fee of $1,500,000
                                    payable in monthly installments of $25,000.
                                    In addition, the purchaser has granted the
                                    Company a five-year right of first refusal
                                    if the purchaser sells a controlling
                                    interest in the D&SNG during such period.
                                    Upon completion of the sale, Mr. Harper
                                    resigned as the Company's Chairman and CEO.

                                    An estimated loss on the disposal of the
                                    discontinued operation of $1,841,000
                                    represents the estimated loss on the
                                    disposal of the net assets of the D&SNG. Net
                                    operating results of the D&SNG for the six
                                    months ended June 30, 1998 are shown
                                    separately in the accompanying statements of
                                    operations. Revenues of the D&SNG for
                                    the first six months of 1998 were $1,780,867
                                    These amounts are not included in
                                    revenue in the accompanying statements of
                                    operations. The 1997 comparative financial
                                    statements did not present discontinued
                                    operations. This will be adjusted at a
                                    subsequent date.

  4.     ISSUANCE OF                For the period January 1, 1998
         EQUITY                     through June 30, 1998 the Company sold
         SECURITIES                 in private offerings approximately
                                    8,029,500 shares of its common stock for
                                    total consideration of $2,274,375. In
                                    addition, 750,000 shares and 17,155 warrants
                                    were issued to International Capital Growth
                                    Ltd., the Company's placement agent as
                                    partial compensation to the placement agent.
                                    The total placement agent's fees paid in
                                    connection with the sale of these shares
                                    were approximately $143,600 along with a
                                    non-accountable expense allowance of
                                    $31,200. Of these offerings, approximately
                                    5,447,640 shares were sold for cash to
                                    non-"US Persons" in an "offshore
                                    transaction" as defined in Regulation S.,
                                    with the balance of approximately 2,581,860
                                    shares being sold for cash to U.S.
                                    investors.

                                    In addition, 25,336 shares were issued under
                                    the Company's employee stock purchase plan 
                                    for total consideration of $7,970.

  5.     SHORT TERM DEBT            In March  1997, the Company entered into a 
                                    two year unsecured line of credit agreement
                                    with a bank. Under the agreement the Company
                                    was able to borrow up to $1,000,000 at an
                                    interest rate of prime plus 2% (10.5% June
                                    30, 1998). In December 1997, the line of
                                    credit agreement was amended (i) to allow no
                                    further borrowing than the outstanding
                                    balance under the line of credit
                                    (approximately 

                                        7
<PAGE>

                                    $881,000), (ii) to grant the bank a
                                    "blanket" second lien on all assets except
                                    those relating to the D&SNG, and (iii) to
                                    not renew the loan upon its maturity.
                                    Effectively, the approximately $881,000
                                    borrowed under the line of credit is due in
                                    October 1998. Additionally, the Company
                                    agreed to pay to the bank 10% of the gross
                                    proceeds of certain future financings.

                                    During the quarter ended June 30, 1998 the
                                    Company received $500,000 in new funds from
                                    HEC Asset Management, LLC ("HEC"), an
                                    affiliate of an existing investor, in
                                    partial funding of an investment option of
                                    up to $4,000,000. HEC elected not to invest
                                    additional funds under this option. In
                                    addition, a $1,000,000 equity investment
                                    made by HEC between March 30, and April 15,
                                    1998 was converted to debt bringing the 1998
                                    HEC investment to an aggregate of
                                    $1,500,000. In connection with this funding,
                                    HEC acquired an aggregate of $589,850 in
                                    convertible, secured promissory notes by
                                    assignment from original noteholders who
                                    will receive common stock from the Company
                                    in lieu of their notes and accrued interest.

6.       LONG-TERM DEBT             At June 30, 1998 the Company's long-term 
                                    debt consisted of the following:


<TABLE>
<S>                                                                                 <C>        
                                    8% convertible subordinated notes         
                                    due June 2002 less unamortized original 
                                    issue discount of $2,560,267                    $ 8,592,233

                                    10% convertible notes due in April and May
                                    2001 and secured by all non D&SNG assets of
                                    the Company (A)                                   8,235,682

                                    Capital lease with principal and 
                                    interest payable monthly through July 2002 
                                    secured by equipment                                180,765
                                                                                    -----------
                                                                                     17,008,680

                                        Less current maturities                         (40,000)
                                                                                    -----------
                                                                                    $16,968,680
                                                                                    ===========
</TABLE>

                           (A)      At August 18, 1998 the Company was in
                                    default of the April 30, 1998 interest
                                    payment of $382,291 due to the noteholders
                                    of the 10% secured convertible notes, as
                                    well as $223,050 due to the noteholders of
                                    the 8% unsecured convertible notes on June
                                    30, 1998. The Company is in the process of
                                    negotiating with these noteholders to accept
                                    these interest payments in additional shares
                                    of common stock. These same noteholders may
                                    be requested to convert their notes to
                                    equity in connection with the anticipated
                                    new funding.

                                        8
<PAGE>


ITEM 2.           MANAGEMENT'S DISCUSSION AND ANALYSIS

The Company's consolidated financial statements present its consolidated
operating results. This discussion supplements the detailed information
presented in the Consolidated Financial Statements and Notes thereto (which
should be read in conjunction with the financial statements and related notes
contained in the Company's 1997 Annual Report on Form 10-KSB) and is intended to
assist the reader in understanding the financial results and condition of the
Company.

The Company is currently pursuing its strategy of becoming the recognized leader
in providing innovative, quality entertainment-based passenger rail service
through the development of "Fun-Trains." The Company has developed its first
Fun-Train (the "Florida Fun-Train"), an entertainment-based rail service which
commenced operations on October 15, 1997 between South and Central Florida. The
Company will continue to pursue its strategy of acquiring and managing Scenic
Destination Railroads.

On July 2, 1998, the Company sold all of the common stock of its Durango and
Silverton subsidiary for $2,500,000 in cash proceeds. In connection with the
sale, the Company will provide certain marketing, accounting, and support
services to D&SNG for a period of five years at a total fee of $1,500,000
payable in monthly installments of $25,000. The Company has also been granted a
five-year right of first refusal if the purchaser sells a controlling interest
in the D&SNG during such period.

For purposes of a meaningful comparison, the revenue, cost of revenue, and
selling, general and administrative expenses for the three and six months ended
1998 have been analyzed for the current period only since in 1997 the Company
was a startup operation and had no revenues during the period.

RESULTS OF OPERATIONS

THREE MONTHS ENDED JUNE 30, 1998 COMPARED TO THREE MONTHS ENDED JUNE 30, 1997.

The Company generated revenues of approximately $313,062 for the three months
ended June 30, 1998. Revenues were significantly below expectations because 
ridership levels were below the projections for this start-up period.
Ridership was below expectations due to a delay in the delivery of the railcars
to the Company which precluded the Company from exhibiting and promoting the
train to various tour operators and travel agents. This delay also caused the
tour operators and travel agents to either withdraw their promotion of the
Florida Fun-Train or defer their promotional activities until late 1998.

Cost of revenue for the three months ended June 30, 1998 were approximately
$2,200,000, consisting primarily of the costs of the train operating agreement
with the National Passenger Railroad Corporation, the track rights fees with CSX
Transportation, Inc. and Florida Department of Transportation, liability and
other insurance, equipment leases, depreciation expense, train security and
salaries and benefits for on board personnel and operations management.

Selling, general and administrative expenses for the three months ended June 30,
1998 were approximately


                                        9
<PAGE>

$584,000, an increase of approximately $59,000 as compared to the same period in
1997 and results from the Company's commencement of operations. This amount also
represents a decrease of over $400,000 when compared to the three months ended
March 31, 1998. This decrease is reflective of the Company's cost cutting
measures for 1998 as well as its lack of capital to continue a comprehensive
marketing program.

The Company's net interest expense for the three months ended June 30, 1998 were
$633,324, an increase of approximately $80,000 when compared to the same period
in 1997, and primarily related to the issuance of additional debt securities.

Amortization of deferred loan costs increased by approximately $36,000 for the
three months ended June 30, 1998 as compared to the same period in 1997 due to
loan costs originating from the additional debt securities issued in June 1997.

The Company reported a net loss of approximately $6,100,000 or $.28 per share
for the three months ended June 30, 1998 as a result of the factors discussed
above.

SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX MONTHS ENDED JUNE 30, 1997

The Company generated revenues of approximately $507,726 for the six months
ended June 30, 1998. Revenues were significantly below expectations for this
period because ridership levels were below the projections for this start-up
period.

Cost of revenue for the six months ended June 30, 1998 was approximately
$4,400,000. Cost of revenues consist primarily of the costs of the train
operating agreement with the National Passenger Railroad Corporation, the track
rights fees with CSX Transportation, Inc. and Florida Department of
Transportation, liability and other insurance, equipment leases, depreciation
expense, train security and salaries and benefits for on-board personnel and
operations management.

Selling, general and administrative expenses were approximately $1,600,000 for
the six months ended June 30, 1998, a significant increase from approximately
$525,000 for the six months ended June 30, 1997. During the early months of
1998, the Company had begun its advertising and marketing campaign in an effort
to promote the train and increase its ridership. During the six months ended
June 30, 1998, the Company's financing was not completed and marketing expenses
were cut back significantly.

The Company's net interest expense were approximately $1,258,000 for the six
months ended June 30, 1998, an increase of approximately $707,000, which is
attributable to the issuance by the Company of additional debt securities in
June and December 1997.

Amortization of deferred loan costs was approximately $257,000 for the six
months ended June 30, 1998. This represents an increase of approximately
$115,000 due to the additional debt securities issued in June 1997.

The Company reported a net loss of approximately $9,900,000 or $.49 per share
for the six months ended June 30, 1998 as a result of the factors discussed
above.


                                       10
<PAGE>


LIQUIDITY AND CAPITAL RESOURCES

Overall, for the second quarter of 1998, available cash decreased by
approximately $1,615,000 primarily due to ongoing operating expenses and the
less than anticipated ridership on the Florida Fun-Train, as well as the
impending sale of the Company's major subsidiary.

More specifically, for the six months ended June 30, 1998, net cash used in
operating activities was approximately $4.0 million compared to approximately
$485,000 for the six months ended June 30, 1997. The increase was largely due to
the operation of the Florida Fun-Train despite its reduced (4 days per week)
schedule and ridership levels significantly below projections.

The Company's investing activities provided approximately $257,000 in the six
months ended June 30, 1998, compared to approximately $9.2 million used in the
six months ended June 30, 1997. The investing activity in 1997 was principally
due to capital expenditures for the construction of the railcars for the Florida
Fun-Train of approximately $1.6 million and the acquisition of D&SNG which
required approximately $3.5 million in cash

For the six months ended June 30, 1998, financing activities generated
approximately $3.6 million as compared to $13.4 million for the six months ended
June 30, 1997. Cash flows from financing activities were due to a private
placement of debt securities and related conversion of other debt to equity
completed in June 1998. At June 30, 1998 the Company had stockholders' equity of
approximately $5 million as compared to equity of approximately $1.6 million at
December 31, 1997.

During the quarter ended June 30, 1998 the Company received $500,000 in new
funds from HEC Asset Management, LLC ("HEC"), an affiliate of an existing
investor, in partial funding of an investment option of up to $4,000,000. HEC
elected not to invest the additional funds. In addition, a $1 million equity
investment made by HEC between March 30 and April 15, 1998, was converted to
debt bringing the 1998 HEC investment to an aggregate of $1.5 million. In
connection with this funding, HEC acquired an aggregate of $589,850 in
convertible, second promissory notes by assignment from original noteholders who
will receive an aggregate of 3,932,333 shares of common stock from the Company
in lieu of their notes and accrued interest.

The HEC representative elected, in connection with the financing to serve as the
sole director of Fun-Trains, Inc., the Company's wholly owned subsidiary that
operates the Florida Fun Train, has resigned and has been replaced by a
representative of the Company. In addition, the $50,000 invested by the
Company's investment advisor, in connection with the proposed investment by HEC
of up to $4 million, has been rescinded.

On April 1, 1998, the Nasdaq Stock Market, Inc. notified the Company that it no
longer met the minimum requirements for continued listing on the Nasdaq SmallCap
Market ("Nasdaq") as a result of the Company's net tangible assets being below
$2 million and the stock price being


                                       11
<PAGE>

below $1.00 per share. The Company had been notified that it would be delisted
and applied for a hearing. At a hearing on June 18, 1998, the Company presented
its plan to correct its deficiencies and its plan for continued listing on
Nasdaq. This plan would include converting a portion of its existing debt to
equity to meet the net tangible asset requirement and a reverse stock split of
the Company's common stock in order to address the bid price deficiency. The
Company was given an extension until August 3, 1998 to meet Nasdaq's
requirements and was unable to do so. On August 12, 1998 the Company was
delisted.

The Company's immediate cash requirements for the Florida Fun-Train are
significant. The Company's revenue and cash flow from the operations of the
Florida Fun-Train from October 15, 1997 to date have been materially below
expectations.

In July and August, the Florida Fun-Train's schedule was increased to 6 days per
week including 4 days between Ft. Lauderdale and Orlando. An aggressive
advertising and marketing campaign has resulted in a significant increase in
ridership but it is still far short of generating sufficient income to cover
current expenses. Continuation of the advertising and marketing program will
require substantial additional working capital, and there can be no assurance
that such funds will continue to be available. At June 30, 1998, the Company's
available cash balance was approximately $96,000. The Company believes that its
existing cash resources and financing commitments will not be sufficient to fund
the operations for the Florida Fun-Train beyond the end of August 1998. In order
for the Company to continue operations of the Florida Fun-Train it must
promptly: (i) significantly increase ridership on the Florida Fun-Train, and
(ii) arrange for additional sources of external financing. The Company is in
discussions with its investment advisors and potential investors concerning
additional financing as well as pursuing various marketing opportunities to
increase passenger ridership on the Florida Fun-Train. There is no assurance,
however, that the Company will obtain the additional financing or the necessary
ridership to sustain operations or its new marketing program in the near future.
Failure to obtain sufficient working capital could result in the immediate
suspension of Florida Fun-Train operations.

FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISK

This Form 10-QSB, specifically the Management's Discussion and Analysis,
contains "FORWARD-LOOKING STATEMENTS" within the meaning of the federal
securities laws. The Private Securities Litigation Reform Act of 1995 provides a
safe harbor for "FORWARD-LOOKING STATEMENTS." In order to comply with the terms
of the safe harbor, the Company notes that a variety of factors could cause the
Company's actual results and experience to differ materially from the
anticipated results or other expectations expressed in the Company's
"FORWARD-LOOKING STATEMENTS." Such factors include, among others, the following:
the ability of the Company to obtain from internal and external sources
sufficient additional working capital to fund its operations (particularly those
of the Florida Fun-Train) and continue as a going concern, the prompt
improvement in the Florida Fun-Train financial performance, specifically a
continuing and significant increase in ridership on the Florida Fun-Train,
reduction in the Company's outstanding indebtedness through the conversion of
existing convertible debt into equity, delivery of the remaining railcars to
complete the Florida Fun-Train, the successful marketing of the Company's rail
services in Florida and unscheduled repairs to the Company's 


                                       12
<PAGE>

railroad equipment. In addition, the Company's business prospects are generally
susceptible to national economic conditions, particularly those affecting the
Colorado and Florida tourism markets, as well as weather patterns. Actual
results could differ materially from the forward-looking statements as a result
of the foregoing factors.


                                       13
<PAGE>

                           PART II - OTHER INFORMATION

ITEM 1.       LEGAL PROCEEDINGS

              MITCHELL LAKES FIRE

              On July 3, 1997, the United States of America filed an action
              against D&SNG in the United States District for the District of
              Colorado. On October 22, 1997, D&SNG was served with an Amended
              Complaint. This civil action arises from a forest fire (the
              "Mitchell Lakes Fire") that occurred on July 5, 1994, along the
              Durango/Silverton train route, which was allegedly caused by the
              emission of burning particles from the exhaust of a D&SNG
              locomotive. The Amended Complaint alleges that 270 acres of forest
              in the San Juan National Forest were burned. The Amended Complaint
              alleges (i) various counts based on strict liability under
              Colorado law, under various federal rules and regulations
              regarding the use of federal rights-of-way, and under various
              alleged legal doctrines concerning the operation of "abnormally
              dangerous activities" and trains, (ii) a count based on breach of
              duty of care, and (iii) counts based on common law arising from
              the operation of an abnormally dangerous action and operation of a
              train and negligence, all arising from D&SNG's alleged actions in
              causing the Mitchell Lakes Fire. The United States seeks the cost
              of suppressing the fire (alleged to be $555,542) along with pre
              and post-judgement interest, administrative costs and penalties
              under federal statutes and regulations.

              The Company believes it has applicable insurance coverage, as well
              as a claim for indemnification from the Seller of D&SNG, which it
              believes will satisfy any financial responsibility it may have as
              a result of this action. The Company has filed a motion to dismiss
              this action and intends to vigorously defend the action.

              CARNIVAL

              As previously reported, on July 9, 1997, Carnival Corporation
              ("Carnival") commenced an action against the Company in the United
              States District Court for the Southern District of Florida
              alleging various trademark infringements related to the Company's
              use of the word "FUN". Carnival and the Company settled the
              lawsuit on August 14, 1998 pursuant to a consent agreement
              recognizing the right of the Company to operate under the mark
              "FUN Train" with the name "First American Railways" identified in
              conjunction with the use of the mark.

              DAKOTAH RESERVATIONS SERVICES

              On March 6, 1998, Dakotah Reservation Services, Inc. ("Dakotah"),
              filed an action against the Company in the United States District
              Court for the District of Colorado for breach of contract arising
              from an agreement for the provision of reservation services. The
              Company had previously terminated the reservation agreement with
              Dakotah (the "Agreement") pursuant to a letter dated December 30,
              1997, for non-performance by Dakotah of material provisions of
              such agreement. The Company 


                                       14
<PAGE>

              believes it has a basis on which to deny liability, and has filed
              a counterclaim against Dakotah for failure to perform under the
              Agreement.

              DAVID GILMARTIN

              On May 8, 1998, David Gilmartin filed an action in the Douglas
              County, Colorado District Court against the Company demanding
              unpaid wages and contract damages allegedly due pursuant to an
              agreement dated December 10, 1996, between Mr. Gilmartin and the
              Company. The Company terminated its agreement with Mr. Gilmartin
              for non-performance. The Company believes it has a basis to deny
              liability under the complaint and will file a response to the
              complaint in the near future.

              TRAIN ACCIDENT

              On August 1, 1998, the Florida Fun Train, which is owned and
              operated by the Company, was involved in a grade crossing accident
              with a truck. There were no injuries aboard the Fun Train;
              however, the driver of the truck was pronounced dead at the scene
              of the accident. To date, no litigation has been commenced against
              the Company. However, the Company recently received a notice, as
              required under Florida Statutes, from the attorney for the family
              of the driver requesting information regarding the Company's
              insurance. The Company does maintain liability insurance and has
              turned this matter over to its insurance carrier. The Company
              cannot determine at this time whether it has any liability with
              respect to this matter or whether the amounts which may be claimed
              will exceed the Company's policy limits. Therefore, management at
              this time is unable to determine whether this matter will have a
              material adverse effect on the Company, its business of financial
              condition.

ITEM 3.       DEFAULTS UPON SENIOR SECURITIES

              On April 30,1998, the Company failed to pay a semi-annual interest
              payment ($382,291 in the aggregate) which was due on the Company's
              10% Secured Convertible Notes. On June 30, 1998, the Company
              failed to pay a semi-annual interest payment of $223,050 in the
              aggregate which was due on the Company's 8% unsecured convertible
              notes.

ITEM 6.     EXHIBITS AND REPORTS ON FORM 8-K

              (a)  EXHIBITS

                   Exhibit 27 - Financial Data Schedule (EDGAR version only).

              (b)  REPORTS ON FORM 8-K:

                   On April 13, 1998, the Company filed a current report on
                   Form 8-K with respect to changes in its Board of Directors
                   and officers. Notification from the Nasdaq Stock Market
                   Inc., that the Company no longer met the requirements for
                   continued listing, and a sale of its equity securities in a
                   Private offering.


                                       15
<PAGE>




                                   SIGNATURES

         In accordance with the requirements of the Exchange Act, the Registrant
has caused this Form 10-QSB report to be signed on its behalf by the undersigned
hereunto duly authorized.

                                  FIRST AMERICAN RAILWAYS, INC.

                                  By: /s/ Alan L. Jacobs
                                     -------------------------------------------
                                  Alan L. Jacobs, Chairman of the
                                  Board of Directors and Chief Executive Officer

                                  By: /s/ Loretta A. Murphy
                                     -------------------------------------------
                                  Loretta A. Murphy, Vice President
                                  and Chief Financial Officer

DATED:  August 21, 1998


                                       16
<PAGE>


                                 EXHIBIT INDEX


EXHIBIT                              DESCRIPTION
-------                              -----------


  27                Financial Data Schedule