UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549

                                   ----------

                                   FORM 10-KSB

(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
     EXCHANGE ACT OF 1934 [FEE REQUIRED]

                   FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997

[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES              
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]

               FOR THE TRANSITION PERIOD FROM ________ TO ________

                        COMMISSION FILE NUMBER 333-43517

                          FIRST AMERICAN RAILWAYS, INC.
                 (NAME OF SMALL BUSINESS ISSUER 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

       SECURITIES REGISTERED UNDER SECTION 12(B) OF THE EXCHANGE ACT: NONE

         SECURITIES REGISTERED UNDER SECTION 12(G) OF THE EXCHANGE ACT:
                          COMMON STOCK, $.001 PAR VALUE

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

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

         The issuer's revenues for the year ended December 31, 1997, its most
recent fiscal year, were $9,895,867.

         The aggregate market value of the voting stock held by non-affiliates
computed using $0.3125 per share, the closing price of the Common Stock on March
20, 1998, was approximately $ 6,012,235.

         As of March 20, 1998, 21,314,648 shares of the issuer's common stock
were issued and outstanding.


<PAGE>




                                     PART I

                                     ITEM 1

                             DESCRIPTION OF BUSINESS

OVERVIEW

         First American Railways, Inc., a Nevada corporation (the "Company") was
organized in the State of Nevada in 1987.

         The Company provides innovative, quality entertainment passenger rail
service through the development of "Fun Trains" and the acquisition of "Scenic
Destination Railroads." The Company is currently operating its first Fun Train,
an entertainment-based train operating between two tourist destinations. This
train, the Florida Fun-Train, commenced operations October 15, 1997 and operates
between South and Central Florida. In March 1997 the Company acquired its first
"Scenic Destination Railroad," - the Durango & Silverton Narrow Gauge Railroad
(the "D&SNG").

         The Florida Fun-Train provides an enjoyable, high quality entertainment
alternative to other means of transportation between South and Central Florida.
The Company's goal is to maximize the entertainment value of the travel time
while providing a safe, efficient and reliable form of transportation at a
reasonable price.

         The Florida Fun-Train has been designed to provide passengers with an
exciting, unique, fun-filled overland leisure excursion. This is being
accomplished through the use of a variety of entertainment features, including
video games, as well as dining, dancing and lounge cars offering a variety of
live entertainment. Thus far the Florida Fun-Train's passengers have consisted
of members of the tourism and travel industries, tourists, and local residents.
The Company offers its service as an "extension" of the passenger's vacation.

         Over the last several years Florida has had an annual tourist base of
greater than 41 million tourists and in 1997 had approximately 46.9 million
visitors. Florida attracts tourists from across the world and was the top
tourist destination in the United States in 1995. South Florida, including the
Florida Keys, offers a number of well-known tourist destinations and a climate
that allows year-round outdoor activities, and is also a key entry point into
the state for cruise ships entering and leaving the Port of Miami and Port
Everglades (Fort Lauderdale), as well as tourists utilizing Miami International
and Hollywood-Fort Lauderdale Airports. Central Florida (Greater Orlando) plays
host to world renowned tourist destinations such as Universal Studios Florida,


                                       2
<PAGE>


Walt Disney World, Sea World, Kennedy Space Center and Port Canaveral. In 1994,
approximately 10 million people traveled between South and Central Florida. The
Florida Department of Transportation projects that by the year 2005, over 25
million people will travel that same corridor.

         On March 13, 1997, the Company purchased all of the capital stock of
The Durango & Silverton Narrow Gauge Railroad Company, a Colorado corporation
("D&SNG"), and a privately-held, scenic railroad, from Charles E. Bradshaw, Jr.

         D&SNG operates an antique, narrow gauge tourist railroad over a 45-mile
route between Durango and Silverton, Colorado along the Animas River. D&SNG
provides a scenic railroad excursion which is unique within the industry, and
has been operated principally as a tourist railroad since 1968. The railroad was
built between 1881 and 1882 by the Denver & Rio Grande Railway Company to
service the mining regions of the San Juan Mountains in southwestern Colorado.
The coal-fired, steam-driven locomotives were manufactured between 1923 and
1925, and the coaches, many of which are original, are of 1880s vintage. The
railroad is a registered National Historic Landmark and has exclusive rights for
passage through the San Juan National Forest. D&SNG's operations are seasonal
with peak months in June, July and August, and with up to four daily trains
except during the winter. The 90-mile round trip takes nine hours including a
two-hour layover in Silverton. From November through April, one train is
operated daily from Durango to Cascade Canyon (a 52-mile round trip of
approximately five hours). See "Plan of Operations."

         With the acquisition of the D&SNG, and the commencement of the Florida
Fun-Train, the Company entered into its full operational stage in 1997; and
consequently had material operations. Although the Company anticipates
replicating the Fun-Train concept in other markets in the future as well as
acquiring additional Scenic Railroads, its primary emphasis is on developing the
Florida Fun-Train into a viable operation and enhancing the operations of the
D&SNG. See "Business -- Florida Fun-Train."

         The Company maintains offices at 3700 North 29th Avenue, Hollywood,
Florida 33020. Its telephone number is (954) 920-0606.

STRATEGIC RESTRUCTURING AND OTHER STRATEGIES

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 because of
significantly reduced ridership from the projections for this start up period.
In addition, ridership was below expectations partially due to a delay of the
railcars to the Company which precluded the Company from exhibiting and
promoting the train to various tour operators and 


                                       3
<PAGE>

travel agents. Additionally, this delay caused many tour operators to cancel
substantially all of their commitments for passenger seats for the Fall of 1997
and Winter of 1998.

As part of the Company's efforts to reduce costs and enhance revenues, the
Company has implemented a number of different strategies to that effect. The
Florida Fun-Train schedule now consists of eight segments per week, down from
its initial operating schedule of sixteen segments per week. The Company has
begun an effort to market the Fun-Train to groups and companies for charter
service on the days that the train does not operate its regularly scheduled
service. In addition, the Company has terminated the employment of approximately
twenty (20) persons as part of this cost cutting effort (the employees were cut
from a broad cross-section of the company's staff, and included all
departments). The Company is considering other routes to accommodate other
facets of the Florida tourism market, such as excursion and dinner trains.

THE DURANGO & SILVERTON NARROW GAUGE RAILROAD COMPANY

         D&SNG operates a historic railroad (the "Railroad") which was built
between 1881-82 by the Denver & Rio Grande Railway Company, and is now owned by
D&SNG. The Railroad is a registered National Historic Landmark and has been
carrying passengers for more than 115 years. The Railroad operates between
Durango and Silverton, Colorado, a 90-mile round trip, which takes approximately
nine hours. The Railroad is located entirely within the State of Colorado, near
the "Four Corners" region of the United States (where the borders of Colorado,
Utah, New Mexico and Arizona come together).

         The steam-operated locomotives used to pull the trains are coal-fired.
These antique locomotives were manufactured between 1923 and 1925. In addition,
many of the coaches used by the Railroad are the original coaches dating back to
the 1880s.

         The Railroad has combined strict adherence to historical authenticity
and exacting standards of replication to provide a historically authentic
railroad service. Because of its historic authenticity, the Railroad has been
used as the location for the shooting of several films, including BUTCH CASSIDY
AND THE SUNDANCE KID.

         The Railroad operates as a tourist railroad, carrying tourists on an
unparalleled scenic and historic excursion along the Animas River and through
the San Juan National Forest. D&SNG's business is seasonal in nature with the
peak season being in the months of June, July and August when D&SNG operates
four trains daily. In 1995, D&SNG resumed year-round operations, offering one
train during the months of November through April (the "Winter Train"). 


                                       4
<PAGE>

The Winter Train consists of a 52-mile round trip to Cascade Canyon
(approximately halfway between Durango and Silverton).

         The operating rolling stock of D&SNG consists of six 1920s vintage
steam locomotives, 45 passenger coaches (enclosed, open gondola and parlor
cars), and one caboose. In addition to such rolling stock used in the passenger
consists, the D&SNG owns approximately 175 additional flat cars, box cars, side
dump and hopper cars, stock cars, cabooses, maintenance equipment, etc. for use
on the line for maintenance, storage or other purposes.

         The locomotives and cars are maintained at company-owned facilities
located in a state-of-the-art roundhouse and car shop. Both shops are capable of
totally rebuilding a locomotive or car. In 1989, the roundhouse was rebuilt
after a fire destroyed the building; it has 15 stalls, which can house all the
locomotives. Attached to the roundhouse is a fully equipped machine shop, which
can fabricate any locomotive part.

         PROPERTIES

         The real property used by D&SNG consists of approximately 975 acres and
includes two terminals. Of the total acreage, D&SNG uses approximately 735 acres
pursuant to easements and rights-of-way, and the remainder is held in fee simple
ownership. One terminal is in Durango (La Plata County), Colorado, and is
located on approximately 40 acres of D&SNG-owned land, along with other
improvements, including various buildings and a parking lot. The second terminal
is in Silverton (San Juan County), Colorado, where D&SNG owns approximately 50
acres of land including the depot. The D&SNG terminals are connected by an
approximate 45-mile railroad right-of-way, which ranges between 100 to 200 feet
in width, approximately 30 miles of which are located on public lands within the
San Juan National Forest. The right-of-way has railroad track and various other
improvements located thereon.

         The real estate improvements consist primarily of the following
buildings:

                                                      SQUARE
         DESCRIPTION                                 FOOTAGE
         -----------                                 -------

         Depot (Durango)                              4,952
         Roundhouse (Durango)                        39,089
         Car Shops (Durango)                          9,956
         Security Building (Durango)                    207
         Freight Depot (Durango)                      2,684
         Warehouse (Durango)                          2,232
         Garage (Rockwood)                            1,100
         Depot (Silverton)                            2,480


                                       5
<PAGE>

         In addition, the D&SNG owns other small buildings that are used for
miscellaneous storage. The condition of all of the buildings listed above would
be categorized as average to good. The administrative offices of D&SNG occupy
the second floor of the depot at Durango and are believed to be adequate for the
present operation of D&SNG.

         PRODUCTS AND SERVICES

         D&SNG offers a variety of train excursions to its customers with
different departure times. Covering a total of 90 miles, the round trip from
Durango to Silverton is by far the most popular expedition and takes
approximately nine hours to complete. During the peak season, D&SNG offers four
round-trip trains, with departure times ranging from 7:30 AM to 10:10 AM. During
the winter, D&SNG offers a five-hour excursion from Durango to Cascade Canyon
which is a 52-mile round-trip.

         D&SNG also offers one-way trips, with return from Silverton via motor
coach. Additionally, any round-trip (with the exception of the parlor car) can
consist of a layover in Silverton for up to 15 days. To accommodate hikers
desiring transportation, D&SNG offers trains that stop at several popular hiking
trails.

         Passengers may choose to ride in enclosed coaches, open gondola cars,
authentic parlor cars or the caboose with round-trip prices ranging from
approximately $21 to approximately $85. The excursion is available on a one way
basis with a return trip available via bus for the same price as a round trip
ticket.

         Refreshments and snacks are available on all trains with the parlor
cars offering a full bar.

         MARKETING

         D&SNG's principal source of ticket sales is the consumer-direct market,
which is served by its Durango-based reservation office. Approximately 86% of
D&SNG's passengers come from the direct "sales" to consumers, with the balance
handled through travel agents and group tours. The Company compensates travel
agents through the use of commissions. Historically, the operations of D&SNG
have been the subject of limited marketing efforts. The great majority of
D&SNG's passengers come from "word-of-mouth" as well as other "indirect" forms
of contact with the public, e.g., billboards and newsprint articles. According
to a 1994 passenger survey, commissioned by D&SNG, the five major states of
origin of D&SNG passengers were Colorado, Texas, California, Arizona and New
Mexico, which account for nearly 60% of D&SNG's passenger totals.


                                       6
<PAGE>

         D&SNG currently markets its services on a regional basis. Marketing
efforts consist principally of advertising in regional and local travel
publications, as well as the limited use of billboards, directories and
advertising on local radio programs. In addition, D&SNG is the subject of
repeated, unsolicited articles, which appear in local and national newspapers
and magazines. A promotional brochure describing D&SNG's program and services is
used to promote ridership. The brochure is distributed by a third- party service
to brochure "racks" located in hotels, restaurants, airports and other
tourist-related sites in selected cities that have been good "feeder markets"
for D&SNG ridership. In an attempt to broaden the passenger base in the future,
D&SNG intends to increase its marketing efforts on the broad-based,
travel-related industry.

         COMPETITION

         Two other popular railroads exist in Colorado: the Georgetown Loop and
the Cumbres & Toltec Railroad. Located approximately 40 miles west of Denver,
the Georgetown Loop is a seven-mile 70-minute excursion. The trains are pulled
mainly by steam locomotives with the remainder being pulled by diesel
locomotives. The Cumbres & Toltec, like D&SNG and the Georgetown Loop, is a
narrow gauge scenic railroad. Its trains are pulled mainly by steam locomotives,
with the remainder being pulled by diesel locomotives. The Cumbres & Toltec runs
from Chama, New Mexico to Antonito, Colorado, a distance of 64 miles. Its
closest boarding point to the D&SNG is located in Chama, approximately 100 miles
from Durango. Although the Cumbres & Toltec is scenic, it does not travel
through a national forest nor is it a registered National Historic Landmark.
Owned by the States of New Mexico and Colorado, the Cumbres & Toltec is
maintained primarily by volunteers. The termini of the Cumbres & Toltec are not
"tourist towns" and do not have the same atmosphere or appeal as those of the
D&SNG.

         Competition could come from others entering the industry but is
unlikely due to barriers to entry. There are few authentic steam locomotives in
existence today making it very difficult to enter into competition with D&SNG.
In addition, it would be nearly impossible for anyone to obtain right-of-way
through the San Juan National Forest.

         EMPLOYEES

         D&SNG employs approximately 65 people in the off-season
(November-April), and more than 200 people during the peak season (June-August).
Seasonal employees are added during the peak season primarily in the concession,
operations and reservation departments. The full-time staff is concentrated in
the administrative and maintenance departments where turnover is very low. The
D&SNG has no labor unions and management believes that the company's
relationship with its employees is satisfactory.


                                       7
<PAGE>



THE FLORIDA FUN-TRAIN

         The Company was organized in February 1994 by persons with experience
in the passenger rail and tourism industries in order to offer a unique
passenger train service in the Florida tourist market.

         Florida attracts tourists from across the world and was the top tourist
destination in the United States in 1995. Over the last several years Florida
has had an annual tourist base of approximately 40 million persons. South
Florida not only contains a number of well-known tourist destinations, but is
also a key entry point into the state for cruise ships entering and leaving the
Port of Miami and Port Everglades (Fort Lauderdale), as well as tourists
utilizing Miami International and Hollywood-Fort Lauderdale International
Airports. Central Florida (Greater Orlando) plays host to world renowned tourist
destinations such as Universal Studios Florida, Walt Disney World, Sea World,
Kennedy Space Center and Port Canaveral. In 1994, approximately 14 million
people traveled between South and Central Florida.

         The Fun-Train concept is to provide an enjoyable, high-quality
entertainment alternative to other means of transportation between South and
Central Florida. The Company's goal is to maximize the entertainment value of
the travel time while providing an efficient, safe and reliable form of
transportation at a reasonable price. The Florida Fun-Train was designed to
provide passengers with a unique overland leisure excursion through the use of
various entertainment features, including "virtual reality" and a variety of
"high-tech" video games, as well as dining, dancing and lounge cars offering a
variety of live entertainment. The exterior of the Florida Fun-Train was
designed to have the appearance of a colorful, ultra-modern train. The train's
colors are vibrant and contemporary unlike the typical passenger train in the
United States. The Company provides a high level of service ("customer care") in
order to accommodate its passengers; to facilitate this, the Company has hired a
group of employees who are specifically responsible with these duties.

         The Company expects that most of its passengers will be tourists, and
that the Company's service will be offered as an "extension" of the passenger's
vacation. As such, management of the Company believes it will be able to capture
both a portion of the tourist market intent on travelling between South and
Central Florida while also encouraging travel on the Florida Fun-Train by
tourists and residents who would not otherwise make the trip. Currently, travel
is made between South and Central Florida primarily by either automobile, bus or
airplane. The Company believes the Florida Fun-Train will generally offer price
advantages to travelling by airplane. Travelling by automobile, bus or airplane
does not offer the entertainment value provided on the Florida Fun-Train.


                                       8
<PAGE>

         During late 1996 and 1997, the Company completed significant steps to
launch its Florida Fun-Train service. In that regard, the Company has: entered
into an agreement with the National Railroad Passenger Corporation, "Amtrak" for
certain technical services including operating crew, train maintenance, as well
as, the leasing of three locomotives; developed its passenger boarding
facilities and ticket offices at its North Station (Poinciana) and South Station
(Hollywood); entered into an agreement with a third party to accommodate its
passengers with necessary transfers and shuttle service; entered into track
agreements with the Florida Department of Transportation ("FDOT") and CSX
Transportation, Inc.("CSXT"); built its commissary facility to handle the food
and beverage requirements of the Florida Fun-Train, which is located at its
headquarters in Hollywood, Florida; entered into wholesale, vendor agreements
with Walt Disney Attractions, Inc. and Universal Studios Florida which allow for
the marketing, selling and packaging of Orlando area Disney and other attraction
tickets in conjunction with the Florida Fun-Train (the tickets will also be
available on-board the Florida Fun-Train).

         FLORIDA FUN-TRAIN EQUIPMENT AND TRACK RIGHTS

         4 Operating Glass Domed                  Each car provides comfortable,
             Guest Cars                           spacious seating and meal 
                                                  service for approximately 75
                                                  guests.

         4 Glass Domed Guest                      These  cars, including  the  
             Cars in Various                      initial prototype car already 
             Stages of Completion                 owned by the Company, are in
                                                  various stages of completion
                                                  at Rader Railcar II, Inc.'s 
                                                  (RRI) manufacturing plant in
                                                  Colorado (see "Management's  
                                                  Discussion and Analysis").

         4 Operating Bilevel                      These cars consist of (i) one
             Entertainment Cars                   "tropical-themed Tiki Railbar
                                                  bar/lounge car" which sells
                                                  cocktails, beverages and 
                                                  appetizers and offers live 
                                                  entertainment including music 
                                                  for listening and/or dancing
                                                  (to be provided by musicians 
                                                  or a disc jockey), (ii) one 
                                                  "video game and kidzone car" 
                                                  which offers a variety of
                                                  high-tech video games and
                                                  virtual reality, as well as
                                                  a separate children's play
                                                  area (including a roving,
                                                  close-up magician and/or
                                                  clowns, etc.), (iii) one
                                                  "lounge car" which includes a


                                       9
<PAGE>

                                                50's Diner, a gift shop,
                                                Wine Bar and Pub and lounge
                                                area, (iv) one multi-media
                                                car which will include a
                                                custom designed, audio-visual
                                                presentation (the waiting area
                                                will have a concession area and
                                                video facilities). This
                                                presentation will be completed
                                                when the Company's cash flow
                                                improves.       

         1 Baggage Car                          This car provides storage space
                                                for the passengers' luggage, 
                                                food and beverage supplies and 
                                                work space for train management.

         Excluding the baggage car all of these railcars have been constructed
by RRI. Upon increased ridership on the Florida Fun-Train, the Company will seek
to have the remaining four railcars completed and/or lease railcars from
alternative sources.

         In addition, the Florida Fun-Train utilizes three leased diesel
locomotives, which have been repainted with the bright and colorful Florida
Fun-Train colors and graphics. One locomotive is positioned on each end of the
train, allowing the train to be operated in either direction without the need to
turn the train around. The third locomotive serves as a backup (spare).

         The Company operates the Florida Fun-Train between Hollywood and
Greater Orlando on currently existing FDOT and CSXT tracks.

         The tracks between Hollywood and West Palm Beach comprise part of the
route of the Florida Fun-Train and are controlled by FDOT. The Company entered
into an agreement dated January 6, 1997 (the "FDOT Agreement"), with FDOT to
obtain the use of this track. Pursuant to the FDOT Agreement, the Company has
access to and the use of that portion of the track between mile marker ("MM")
1034 located in Hialeah, Florida, and MM 965 located in West Palm Beach,
Florida. In addition, the parties have agreed to allow the Company the use of
the Hialeah railroad maintenance facility and the Sheridan Street Station in
Hollywood, Florida to be used as the southern terminal for the Florida
Fun-Train. The FDOT Agreement is for a five-year term, which began October 15,
1997. The Company is required to pay the FDOT $500 for each one-way trip over
the foregoing route which amount increases by $50 after each anniversary of the
FDOT Agreement.

         Pursuant to the FDOT Agreement, the Company has agreed to waive certain
future claims, if any, against FDOT for losses or costs arising out of the use
of FDOT's track, including those arising from the negligence or omissions of the
FDOT. Further, the Company has agreed to indemnify FDOT from third-party claims,
including but not limited to, personal injury claims, made against 


                                       10
<PAGE>

FDOT and arising from the Company's operations pursuant to the FDOT Agreement.
The Company has also agreed to maintain at least $125 million in comprehensive
general liability insurance with a $100,000 deductible (or self-insurance
amount).

         The FDOT Agreement may be terminated if (i) the Company's operations
are suspended for more than 90 days, (ii) there are more than ten independent
suspensions in such operations, (iii) there is a material violation in the
Company's obligations under the FDOT Agreement which is not cured upon 45 days'
written notice, and (iv) future high-speed rail operations are such that the
route cannot be shared (in the FDOT's sole opinion, but with three year's notice
to the Company).

         The CSXT Agreement dated October 31, 1996, provides for the use of
CSXT's tracks between West Palm Beach and Greater Orlando to be used for the
operation of the Florida Fun-Train. The CSXT provides, in part, that the Company
will initially pay CSXT the greater of $20 per train-mile, or 16% of the
Company's gross ticket revenue (less discounts) from the Florida Fun-Train
operations. The Company's payment requirements under the CSXT Agreement are as
follows: the per train-mile amount is subject to various increases for inflation
and other price adjustments including, (i) an annual increase, beginning January
1, 1999, in the per train-mile charge equal to the inflation index of the
Association of American Railroads, (ii) a $50,000 per month reduction for the
aggregate train-mile charge in 1997, 1998 and 1999, and (iii) a $2.20 increase
in the per train-mile charge along with a limit in certain circumstances on the
total annual compensation to CSXT beginning in the year 2000 and thereafter. In
addition, the Company is required to maintain at least $300 million in
comprehensive general liability insurance with a $100,000 deductible (or
self-insurance). In October 1997, the Company negotiated to pay track fees from
October 15, 1997 through March 31, 1998 with the Company's common stock. In
January 1998, the Company issued approximately 432,000 shares of its common
stock to CSXT for track fees between October 15, 1997 and December 31, 1997.

         Pursuant to the CSXT Agreement, CSXT has agreed not to grant similar
access rights to the subject rail corridor (between West Palm Beach and Greater
Orlando) to any other private rail passenger operator or contractor which would
provide comparable conventional rail passenger service for the cruise ship
market. The exclusivity provision specifically excepts the provision of access
to the subject CSXT route by Amtrak and the Tri-County Commuter Rail Authority,
as well as other publicly-funded authorities with statutory and/or contractual
rights with respect thereto. The exclusivity also does not apply to high-speed
rail activities. In addition, the exclusivity clause will be voidable at CSXT's
option if (i) after the first year of operation, the Company does not operate at
least 16 Florida Fun-Trains a week, or (ii) management of the Company changes
significantly. The term of the agreement 


                                       11
<PAGE>

will be five years. In addition to the foregoing, the Company has agreed to sell
up to 475,000 warrants to CSXT, exercisable at $4.50 per warrant with the
initial installment of 75,000 warrants being exercisable upon the commencement
of operations of the Florida Fun-Train and thereafter in four equal annual
installments of 100,000 warrants each commencing January 1, 1998. Pursuant to
the CSXT Agreement, in January 1997, the Company appointed a CSXT
representative, Albert B. Aftoora, to its Board of Directors, who resigned in
January 1998. CSXT has elected not to replace the Board membership at this time.

         The track rights agreements that the Company has with CSXT, requires
substantial amounts of general comprehensive liability insurance (up to $300
million in coverage) which the Company has obtained.

         MARKET

         The Florida Fun-Train's principal market is approximately 41 million
persons who visit Florida each year. The Company also relies on the more than
1.4 million residents of the Central Florida (principally the Greater Orlando
metropolitan area) and the more than 3.3 million residents of the South Florida
(Miami/Ft. Lauderdale) metropolitan area, as well as on the rest of the more
than 13.4 million residents of Florida. According to a recent study, Florida's
population and tourist base are expected to continue to grow significantly
during the next decade; however, the rates of growth have increased at a slower
rate. During the 1990's, the growth in portions of Florida's tourism industry
slowed, with some areas and attractions experiencing declines. According to the
same study, in 1994 approximately 14 million people traveled between Central and
South Florida. Of these trips, 55% were for tourism/recreation, 24% were for
family/personal reasons, and 21% were for business. SOURCE: "1994 Florida
Visitor Study," Florida Department of Commerce, Bureau of Economic Analysis,
Tallahassee, FL (1995).

         The Company's continued operations may be materially adversely affected
by declining growth or an absolute decline in the number of tourists visiting
Florida; however, the Company believes that, by offering a unique and safe
tourist attraction and service, it can attract the passenger base needed for
profitability, notwithstanding possible adverse trends in the growth of the
Florida tourist market as a whole.

         Given the status of both Central Florida and South Florida as major
tourist destinations, as well as the size of the underlying metropolitan areas,
the Company sees great potential in the market for transportation between the
two areas. As part of the Company's marketing effort, it has been targeting the
tourists and residents already traveling between the two destinations. As part
of that effort the Company is also attempting to stimulate travel between 


                                       12
<PAGE>

the areas serviced by the Florida Fun-Train by persons who otherwise would not
have made the trip. By providing a convenient, entertaining and reasonably
priced service between South Florida and Central Florida, the Company's
Fun-Train is marketed as an inducement to South Florida visitors and residents
to travel to Central Florida, and vice versa. Given the significant size of the
potential market, the Company believes that it needs to capture only a small
portion in order to be successful.

         Approximately 27 million passengers enplaned and deplaned at the
Orlando International Airport in 1997, up from approximately 25.6 million in
1996 and 22.5 million in 1995. Of these passengers, approximately 11% were
international visitors, primarily from Europe, Canada and, to a lesser extent,
Latin America.

         Central Florida is filled with a number of attractions including Walt
Disney World's Magic Kingdom, Epcot Center, Disney-MGM Studios, Universal
Studios Florida, Sea World of Florida, as well as Church Street Station, and
Splendid China.

         Walt Disney World (and its related attractions) is one of the dominant
components of the Central Florida economy; the relative influence of the Disney
attractions has lessened with the significant development of other major tourist
facilities. Walt Disney World's 1997 attendance was approximately 41.8 million,
which was an amount over four times that for Central Florida's next most popular
attraction (Universal Studios).

         One of the fastest growing components of the Central Florida economy is
the convention industry. Orlando is one of the largest convention markets (in
terms of number of delegates) in the United States. Reasons cited for the
increasing popularity of Orlando as a location for conventions and conferences
include the continuing development of area attractions, the addition of hotel
rooms, and the increased availability of transportation.

         The Miami/Fort Lauderdale metropolitan area contains approximately 3.3
million residents and is also a major tourist destination, with numerous
attractions, two major cruise ports, four major-league professional sports teams
and miles of beaches. The area attracts millions of domestic and international
visitors each year, who come for tourism, shopping, business and family visits.
Miami is the financial and trade capital of Latin America, and Miami Beach,
famous for its beaches and night life, is internationally known as a center for
the fashion, music and movie industries. Fort Lauderdale, Miami and Miami Beach
are also major convention destinations. Miami International Airport is the
primary travel connection linking the Americas, the Caribbean, Europe and
Africa. Served by approximately 140 airlines, more than any other airport in the
world, Miami International Airport logs approximately 1,500 daily departures and
arrivals. In 1996, over 33.5 million (14.9 million international) passengers
flew to or from Miami.


                                       13
<PAGE>

         South Florida has expanded from its traditional role as a wintertime
destination for North Americans to become a year-round destination for domestic
and international visitors. South Americans now comprise 35% of annual
international visitors, European visitors make up 27% of the annual total,
visitors from Central America and the Caribbean account for 23%, and North
Americans account for 15%.

         The Port of Miami is the home port to a world-leading fleet of 18
luxury cruise ships, including five of the world's largest passenger ships,
which are expressly outfitted for pleasure cruise vacations. In 1997, the Port
of Miami handled approximately 3.2 million passengers from its 12 passenger
terminals - more than any other cruise port in the world.

         Port Everglades, located approximately 30 miles north of Miami in Fort
Lauderdale, received approximately 2.5 million cruise passengers during 1997.
There are 32 cruise ships based at Port Everglades, with four cruise terminals
just a short walk from the Broward County Convention Center.

         The Fort Lauderdale/Hollywood International Airport is another major
transportation destination for tourists going to South Florida. In 1997, the
airport handled approximately 12.3 million domestic and international
passengers. There are approximately 41 major airlines serving the Fort
Lauderdale/Hollywood International Airport with approximately 450 daily arrivals
and departures. The airport is located just one and one-half miles from Port
Everglades and the Broward County Convention Center.

         MARKETING

         The one-way ticket price for the Florida Fun-Train is $69.95 for adults
and $49.95 for children, and the per-passenger en route revenue (for food,
beverages, entertainment and souvenirs) has been approximately $10.00 per
segment.

         Over the past 12 months the Company has continued to implement its
sales and marketing plan. The Company has hired five (5) employees who have been
marketing the Company to the travel and tour industries. Among other things
these employees market and sell tickets (passenger seats) through wholesale
travel and tour operators and retail travel agents. Wholesale tour operators
have historically represented a material source of business for the travel
industry in South and Central Florida, particularly in the cruise and lodging
businesses. However, the Company cannot anticipate what percentage of its future
business will be with wholesale tour operators.


                                       14
<PAGE>

         In addition, marketing efforts which feature the Company's services are
currently marketed through various channels such as trade shows and conferences,
as well as advertising in various tour industry publications and to the general
public. In March 1998, the Company brought its reservations in house after six
months of outsourcing this function. In addition, the Company is attempting to
market its services and sell tickets by means of joint arrangements with cruise
lines, airlines and hotels. The company has begun marketing short trip excursion
packages to groups and corporate sponsors on days the train does not make its
regularly scheduled trips, as well as through open-houses to the travel and
tourism industries and public relations special events. The Company has also
utilized general advertising on radio and television and in periodicals,
newspapers and other media all of which are an important component of the
Company's marketing program. The Company anticipates that national and
international marketing and sales efforts will enhance business, while the
implementation and execution of a yield management system and in house
reservations program will increase incremental revenues.

FUTURE ENTERTAINMENT TRAINS

         Part of the Company's overall strategy is to replicate the Fun-Train
concept in other viable markets. After the Florida Fun-Train, is running
efficiently, with revenue to support its ongoing operation, and assuming the
Company has sufficient capital available, it expects to provide "Fun-Train"
passenger service between South Florida and the Florida Space Coast (near the
Kennedy Space Center). The Space Coast Fun-Train is expected to provide daily
round-trip service at a fixed price which will include a full tour of the
Kennedy Space Center. The Kennedy Space Center is one of Florida's most popular
tourist attractions, receiving over 2.1 million visitors in 1994 and is
especially popular with international tourists. The Company expects to market
the Space Coast Fun-Train as a convenient and entertaining travel opportunity to
see the Kennedy Space Center. The Space Coast Fun-Train will operate over
existing tracks owned and operated by the Florida East Coast Railway Company
("FEC").

         On February 28, 1995, the Company entered into an agreement with FEC
for the use of certain track rights in the Miami-Fort Lauderdale-West Palm
Beach-Titusville corridor. The ten-year term of the FEC agreement starts when
the Space Coast Fun-Train is operational and the agreement provides for a
standard, per-car mileage charge of $1.20 per car-mile (which is equivalent to
$18 per train-mile based on the minimum FEC 15-car train requirement), payable
monthly, with a minimum guaranteed annual amount of $500,000 per route to be
paid by the Company to FEC. When the Space Coast Fun-Train is operable, the
minimum payment will be $500,000 per annum. The Company will operate the Space
Coast Fun-Train with locomotives it provides subject to dispatching (and related

                                       15
<PAGE>

controls) by FEC. The agreement provides for limited exclusivity to the Company
to operate "Fun-Train" type train services and/or services to cruise lines over
the prescribed route, with certain exceptions. Further, the Company is obliged
to indemnify FEC for claims under actions arising from the operation of the
Space Coast Fun-Train, and the Company is obliged to obtain a minimum of $200
million in comprehensive general liability insurance coverage in favor of FEC,
with a $100,000 deductible.

GENERAL

         COMPETITION

         Generally, the Company faces extensive competition for the spending of
leisure time and dollars from numerous attractions in the tourist entertainment
sector.

         Numerous companies, most of which are substantially larger than the
Company and have much greater financial and other resources, offer alternative
modes of transportation over the Florida Fun-Train route. In addition to the
extensive competition in the transportation sector, the Company faces extensive
competition for the spending of leisure time and dollars from numerous
attractions in the tourist entertainment sector. These alternative modes of
transportation offer transportation that is less expensive and/or faster than
the Company's rail service. Most of these competitors already enjoy an
established presence in the Florida transportation and tourism markets. The
Company is competing on the basis of its unique product, which provides a
combined package of transportation and entertainment.

         The Company believes that the principal transportation competition for
the Florida Fun-Train is from airlines, automobiles and inter-city buses. While
air travel is a faster means of transportation, it is generally more expensive
than the Company's fares; however, there are certain low-fare air carriers
operating in the South Florida/Orlando corridor. Further the Company believes
that airline travel does not provide significantly greater convenience within
the scope of the Florida Fun-Train's routes. Automobile travel is, on the other
hand, less expensive, but lacks the convenience and ease of transport provided
by the Florida Fun-Train. The Company is not aware of any other person or entity
currently planning to provide a service directly competitive with the Florida
Fun-Train; however, the Company is generally aware of the fact that Walt Disney
Company has indicated from time to time its interest in establishing a rail link
between its operations in greater Orlando and one or more cruise ports in
Florida. There can be no assurance that such a competitor will not appear. In
addition, Amtrak currently operates passenger train service between Miami/Fort
Lauderdale and Orlando, Florida with numerous stops in between. The cost of a
round-trip ticket on Amtrak between 


                                       16
<PAGE>

Miami/Fort Lauderdale and Orlando is currently $300 (first class service) and
$58 (coach service). Presently Amtrak service does not include the
"entertainment-type" service which the Company provides on the Florida
Fun-Train; however, there can be no assurance that Amtrak will not improve its
service and offer amenities similar to those offered by the Company. Amtrak
provides certain "technical services" for the Florida Fun-Train.

         GOVERNMENTAL REGULATION

         The Company's operations are subject to safety regulation by the
Federal Railroad Administration (which are administered in Florida by the
Department of Transportation), as well as environmental regulation by federal
and state agencies. The Company's operations are also required to maintain a
state liquor license and a Special Tax Stamp issued by the Federal Bureau of
Alcohol, Tobacco and Firearms, and it is subject to health and other regulations
promulgated by federal, state and local authorities. D&SNG's operations are
subject to rate, administrative and safety regulation by the Colorado Public
Utilities Commission, as well as environmental regulation by federal and state
agencies.

         The Company believes that the operations of the Florida Fun-Train as
well as the operations of D&SNG are in material compliance with all
environmental laws and regulations, and it estimates that such compliance will
not have any material adverse effect on its profitability or capital
expenditures.

         EMPLOYEES

         At March 20, 1998, the Company (excluding D&SNG) employed 60 persons,
six of whom are senior management and the remaining are full and part-time staff
members. The Company also relies on independent contractors and the outsourcing
of certain functions, e.g. marketing and rail operations. For a description of
D&SNG's employees, see "- The Durango & Silverton Narrow Gauge Railroad," above.

         Traditionally, railroad operating crews have been unionized, and with
respect to the Florida Fun-Train operations the Company may have no alternative
but to use a unionized crew. Further, while unionization among railroad
passenger service workers is less prevalent than among crew members, there can
be no assurance that the Company will not have to use unionized personnel in
passenger service positions as well. While the Company does not anticipate
material labor relations problems and believes that it can reach mutually
beneficial collective bargaining agreements with any unionized employees, there
can be no assurance that these problems will be avoided.


                                       17
<PAGE>




                                     ITEM 2

                             DESCRIPTION OF PROPERTY

         The Company leases approximately 14,800 square feet of space in a
facility located at 3700 North 29th Avenue, Suite 202, Hollywood, Florida 33020,
pursuant to a ten-year lease at a monthly rental rate of $7,625. For a
description of the properties of D&SNG see "Business -- The Durango & Silverton
Narrow Gauge Railroad Company."

                                     ITEM 3

                                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 statues 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.


                                       18
<PAGE>



CARNIVAL

         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. The Complaint alleges federal (Lanham Act) trademark
infringement, federal, state and common law trademark dilution, common law
unfair competition and false designation of origin, description and
representation of services under the Lanham Act, based on Carnival's alleged
ownership of a "family" of federal, state and common law service marks and
trademarks centered around the word "Fun" which relate to Carnival's business
activities including entertainment services (stage shows, nightclub shows,
contests, dances and parties), cruise ship services, cruise transportation
services, "on-line" services, on-board interactive television services and
various children's entertainment services. On July 22, 1997, Carnival filed a
Motion for Temporary Injunction seeking to enjoin the Company from (i) using the
Fun Train mark (and any related "Fun" marks), (ii) holding out the Company's
services or products as sponsored by or affiliated with Carnival, (iii)
committing acts of infringement or dilution of Carnival's marks, and (iv)
otherwise unfairly competing. On July 29, 1997, the federal court denied this
motion on the grounds that, among other things, Carnival has failed to establish
a substantial likelihood of success on the merits. Currently this action is in
discovery and this case is set for a pretrial conference on May 15, 1998. A
specific trial date has not been set.

         The Company has applied for the federal registration of "Fun-Train"
mark and is currently pursuing this application; however, Carnival has opposed
this application.

DAKOTAH RESERVATIONS SERVICES

         On December 31, 1997, Dakotah Reservation Services, Inc. ("Dakotah"),
sent a letter to the Company asserting a claim for breach of that certain
agreement (the "Reservation Agreement") between the Company and Dakotah dated
June 1, 1997. In March 1998 Dakotah filed an action against the Company in the
United States District Court for the District of Colorado for breach of an
agreement for the provision of reservation services. The Company had previously
terminated the Reservation Agreement with Dakotah pursuant to a letter dated
December 30, 1997, for non-performance by Dakotah of material provisions of the
Reservation Agreement. The Company believes it has a basis on which to deny
liability.


                                       19
<PAGE>



DAVID GILMARTIN

         On January 21, 1998, the Company received a letter from an attorney for
David Gilmartin 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. In the event litigation is commenced against the Company for
breach of the Agreement, the Company intends to deny liability.

JACK MOSS

         An action was filed in the 17th Judicial Circuit Court in and for
Broward County against the Company on February 19, 1998, by Jack Moss for unpaid
wages and expenses, and breach of the terms of his employment agreement with the
Company. The Company denies liability for breach of this agreement. The Company
is currently negotiating the settlement of this action.

                                     ITEM 4

               SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

         There were no matters submitted to a vote of security holders during
the fourth quarter of the fiscal year ended December 31, 1997.

                                     PART II

                                     ITEM 5

             MARKET FOR COMMON STOCK AND RELATED SHAREHOLDER MATTERS

         The Company's Common Stock is quoted on the Nasdaq SmallCap Market
under the symbol "FTRN"; however, there was no active trading market for the
Common Stock until the Second Quarter of 1996, to the best knowledge of the
company's management. The following table sets forth the high and low sale
prices of the Common Stock for the periods indicated in 1996, 1997 and 1998.

                                                   HIGH                LOW
                                                   ----                ---

1996:
              First Quarter                         -                  -
              Second Quarter                        6.375              3.00
              Third Quarter                         6.25               3.00
              Fourth Quarter                        4.75               2.00

1997:
              First Quarter                         2.75               1.75
              Second Quarter                        2.9375             2.375
              Third Quarter                         3.5625             2.50
              Fourth Quarter                        3.5625             0.25

1998:
              First Quarter (through
              March 20, 1998)                       0.5625             0.25


                                       20
<PAGE>

On March 20, 1998, the last reported sale price of the Common Stock was $0.3125
per share. As of March 25, 1998, there were 556 holders of record of the Common
Stock.

The Company has not paid any dividends on its Common Stock. The Company intends
to retain all earnings for use in its operations and to finance the development
and the expansion of its business, and does not anticipate paying any dividends
on the Common Stock in the foreseeable future. The payment of dividends is
within the discretion of the Company's Board of Directors. Any future decision
with respect to dividends will depend on future earnings, future capital needs
and the Company's operating and financial condition, among other factors.

See "Management's Discussion and Analysis."

                                     ITEM 6

                      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
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" and the acquisition of
"Scenic Destination Railroads." 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 is also pursuing its strategy of acquiring Scenic
Destination Railroads. On March 13, 1997, the Company purchased all of the
common stock of The Durango & Silverton Narrow Gauge Railroad Company ("D&SNG"),
which aggregated approximately $16.2 million and consisted of the following: (i)
two promissory notes aggregating $10.05 million which are subordinate to a
purchase money loan provided by a third-party lender in the amount of $8.5
million; (ii) 200,000 shares of the common stock of the Company; (iii) a
six-year warrant to purchase 1,610,000 shares of the Company at an exercise
price of $3.50 per share; and (iv) cash of approximately $5 million, including a
$2 million deposit which was paid in December 1996. The purchase resulted in an
allocation of approximately $1.5 million to goodwill, which is being amortized
over forty years.


                                       21
<PAGE>



         For financial statement purposes, the acquisition is assumed to have
occurred on March 31, 1997. The operations for the period from March 13, 1997 to
March 31, 1997 are not deemed to be material. Therefore, the operations of D&SNG
are included in the Company's Statements of Operations only since the date of
acquisition. However, for purposes of meaningful comparison, the revenue, cost
of revenue and selling, general and administrative expenses for the year ended
December 31, 1997 are compared to the prior year's comparable period (when D&SNG
was a stand alone entity) in Results of Operations below to provide better
insight into the results of D&SNG's operations despite the fact that the 1996
results of operations for D&SNG are not included in the Company's Statements of
Operations for 1996.

RESULTS OF OPERATIONS - YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED
DECEMBER 31, 1996.

         The Company generated revenues of approximately $9.9 million in 1997
consisting of approximately $9.7 million from D&SNG and approximately $200,000
from the Florida Fun-Train. D&SNG's revenues increased approximately $1.2
million from the same period in 1996 when D&SNG was a stand alone entity. The
increases in revenues are due primarily to a 15% increase in ticket prices and
selective price increases in train concessions implemented in 1997, partially
offset by a 3% decrease in passengers for the year ended December 31, 1997, from
the prior year's comparable period. The Company believes the decrease in
passengers was caused primarily by poor weather in April, May, and September and
a general decline in the Colorado tourism market. The Florida Fun-Train revenues
were significantly below expectations because of significantly reduced ridership
from the projections for this start up period. In addition, ridership was below
expectations partially 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 promotion until 1998.

         Cost of revenue in 1997 was approximately $4.0 million for D&SNG and
approximately $2.7 million for the Florida Fun-Train. D&SNG's cost of revenues,
which consist primarily of salaries and benefits for train operations, track
maintenance, railcar maintenance and concession personnel as well as product
costs for concessions, was consistent with costs in the comparable period in
1996. Cost of revenues for the Florida Fun-Train consist primarily of the costs
of the train operating agreement with the National Passenger Railroad
Corporation ("Amtrak"), the track rights fees with CSX Transportation, Inc.
("CSXT") and Florida Department of Transportation ("FDOT"), liability and other
insurance, equipment leases, depreciation expense, train security and salaries
and benefits for on board personnel and operations management.


                                       22
<PAGE>

         Selling, general and administrative expenses were approximately $2.0
million for D&SNG and approximately $1.6 million for the Florida Fun-Train and
the parent company. D&SNG's selling, general and administrative expenses
increased by approximately $200,000 as compared to the same period in 1996. The
increase is due to higher promotional, advertising and other marketing expenses
as well as increased expenditures for reservations, credit card fees and
salaries. These increased expenditures were partially offset by the elimination
or reduction of certain expenditures aggregating approximately $675,000 for the
year ended 1997. Eliminated expenses in 1997 include leasing of a corporate
airplane and an apartment and the allocation of management fees.

         Development expenses of the Florida Fun-Train increased by
approximately $1.6 million during 1997 as compared to the year ended December
31, 1996. The increase is related primarily to an addition of approximately 20
employees subsequent to December 31, 1996, and the significant increase in 1997
of general and administrative expenses, i.e. rent, insurance, promotional
travel, and advertising related to the commencement of operations for the
Florida Fun-Train. The major components of the development expenses in 1997 were
salary and payroll tax expenses and general and administrative expenses of
approximately $1.4 million and $1.9 million, respectively.

         The Company's net interest expense increased by approximately $2.2
million for 1997 as compared to 1996. The acquisition of D&SNG resulted in
additional net interest expense of approximately $1.3 million in 1997.
Additionally, the issuance by the Company of additional debt securities in June
1997 (see Note 10 of Notes to Consolidated Financial Statements) resulted in
additional interest expense of approximately $900,000 in 1997. These increases
were partially offset by an increase in capitalized interest of approximately
$300,000 in 1997.

         Amortization of deferred loan costs increased by approximately $245,000
in 1997 as compared to 1996 due to loan costs originating from the debt related
to the acquisition of D&SNG and the additional debt securities issued in June
1997.

         The Company reported a net loss of approximately $7.0 million or $.68
per share for 1997, as compared to a net loss of approximately $2.6 million or
$.34 per share, respectively, for 1996, as a result of the factors discussed
above.

LIQUIDITY AND CAPITAL RESOURCES

         Overall, in 1997, cash decreased by approximately $5.5 million
primarily due to capital expenditures for the Florida Fun-Train, the acquisition
of D&SNG and repayment of notes payable for D&SNG whose decrease was partially
offset by proceeds from subsequent borrowings and issuance of common stock.


                                       23
<PAGE>



         More specifically, in 1997, cash flow used in operating activities was
approximately $4.2 million compared to approximately $2.7 million for 1996. The
increase in use of funds was due primarily to the large cash requirements for
operations of the Florida Fun-Train since October 15, 1997 and the increased
level of developmental activities in preparation for the commencement of
operations. This increase was partially offset by D&SNG, which generated
positive operating cash flow of approximately $1.7 million in 1997.

         The Company's investing activities used approximately $15.2 million in
fiscal 1997, compared to approximately $4.1 million in the first nine months of
1996. The investing activity in 1997 was principally due to capital expenditures
of approximately $11.0 million (described below) and the acquisition of D&SNG
requiring approximately $3.5 million in cash. The capital expenditures are
primarily payments for the construction of the railcars and the two train
terminals for the Florida Fun-Train.

         In 1997 and 1996 financing activities generated approximately $13.9
million. Cash flows from financing activities for 1997 were principally due to a
private placement of debt and equity securities completed in June 1997 of
approximately $9.5 million (see Note 10 of Notes to Consolidated Financial
Statements), proceeds from a note payable used to primarily finance the
acquisition of D&SNG and repay existing notes payables (net increase of cash of
approximately $3.9 million), and proceeds from a line of credit. The Company's
percentage of total debt to total capital was 96.8% on December 31, 1997
compared to 65.9% on December 31, 1996.

         The Company's immediate cash requirements are significant and its
immediate sources of cash are limited. As a result, there is a question about
the Company's ablility to continue as a going concern. 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. Additionally, the Company lost in
excess of $5.5 million in the fourth quarter of 1997 and anticipates losing
approximately $5.0 million in the first quarter of 1998. At February 28, 1998,
the Company's cash balance was approximately $1.0 million of which approximately
$600,000 was subject to the restrictions in the loan covenant outlined in Note 6
of Notes to Consolidated Financial Statements. The Company believes that its
existing cash resources will not be sufficient to fund the operations for the
Florida Fun-Train beyond March 31, 1998. The Company requires an immediate cash
infusion of approximately $2.5 million to fund certain of its obligations
including, among other things, its operating agreement with Amtrak, the track
rights agreements with CSXT and FDOT, its insurance obligations and payroll
through May 31, 1998. On March 31, 1998 the Company received approximately
$500,000 of equity investment to partially fund this immediate cash need. 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 financing. The Company is in discussions with
its investment advisor and other third parties concerning alternative sources of
financing as well as pursuing various marketing opportunities to increase
passenger ridership on the Florida Fun-Train. There is no assurance that the
Company will obtain the additional financing or the necessary ridership to
sustain operations in the near future.
                                       24
<PAGE>

         Additionally, the Company has four railcars at various stages of
completion at Rader Railcar II ("RRI"). In accordance with a construction
agreement, approximately $681,000 will be paid to RRI after the delivery and
acceptance of all the railcars constructed by RRI. Once ridership on the Florida
Fun-Train increases, the Company will either negotiate with RRI to complete the
four railcars or obtain railcars from a third party. There can be no assurance
that funds for either option will be available on terms acceptable to the
Company or at all.

         In connection with the acquisition of D&SNG by the Company, D&SNG
borrowed, and the Company guaranteed, $8.5 million from a commercial lending
institution pursuant to a five-year term loan, portions of which were used to
pay a pre-existing lender to fund a portion of the cash required to close the
acquisition. The balance was used for working capital for D&SNG's operations
(approximately $1 million). This working capital and the funds generated from
D&SNG's operations are expected to be adequate to meet D&SNG's cash requirements
(including capital expenditures and debt service) for 1998. There are no
material short-term or long-term commitments for capital expenditures for D&SNG;
however, the Company anticipates expenditures of approximately $350,000 in 1998
for property and equipment, but has not yet finalized its plan in this regard.
Additionally, D&SNG is expected to incur in excess of $2 million of interest and
principal payments in 1998 resulting from the $8.5 million term loan and the
$10.05 million seller financing. D&SNG's business and cash flow are historically
seasonal in nature with the peak season being the months of June, July and
August; however, this factor is not expected to have a material adverse impact
on D&SNG's ability to meet cash requirements.

         Capital expenditures and debt service in 1998 and subsequent years are
expected to be funded from the working capital generated from D&SNG operations
and a $250,000 available line of credit. In the event that the sources are not
adequate to fund D&SNG cash requirements in 1998 and subsequent years, D&SNG
will be required to obtain additional third-party financing, e.g., unsecured
lines of credit, however, there can be no assurance that this or other sources
of funds will be available to D&SNG in the future.

FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISK

         This Form 10-KSB, 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 


                                       25
<PAGE>

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 an immediate 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 Colorado and unscheduled repairs to the
Company's 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
in Colorado and Florida. Actual results could differ materially from the
forward-looking statements as a result of the foregoing factors.

   
                                PART II - ITEM 7
    

                              FINANCIAL STATEMENTS

The financial statements are included herein beginning at page F-1.

                                     ITEM 8

                        CHANGES IN AND DISAGREEMENTS WITH
               ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES

         On January 26, 1998, the Registrant's Board of Directors voted to
engage Millward & Company to act as the Registrant's independent certified
public accountants, thereby dismissing and replacing BDO Seidman, LLP. The
former accountants' reports for the Registrant's last two fiscal years did not
contain any adverse opinion, or disclaimer of opinion, nor were any such reports
modified as to uncertainty, audit scope or accounting principles. There have
been no disagreements between the Registrant and the former accountants with
regard to any matters which would have caused such accountants to make reference
to the subject matter thereof with their report.

         On May 6, 1996, the Registrant's Board of Directors voted to engage BDO
Seidman, LLP to act as the Registrant's independent certified public
accountants, thereby dismissing and replacing Hansen, Barnett & Maxwell, P.C.
The former accountants' reports for the Registrant's last two fiscal years did
not contain any adverse opinion, or disclaimer of opinion, nor were any such
reports modified as to uncertainty, audit scope or accounting principles. There
have been no disagreements between the Registrant and the former accountants
with regard to any matters which would have caused such accountants to make
reference to the subject matter thereof with their report.


                                       26
<PAGE>

                                    PART III

                                     ITEM 9

          DIRECTORS, EXECUTIVE OFFICERS, PROMOTORS AND CONTROL PERSONS;
                COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT

         The information required by this item with respect to the executive
officers and directors of the Company is incorporated herein by reference to the
section entitled "Compensation of Directors and Executive Officers" and
"Election of Directors" in the Company's Proxy Statement for its 1998 Annual
Meeting of Shareholders (the "1998 Proxy Statement").

                                     ITEM 10

                             EXECUTIVE COMPENSATION

         The information required by this item with respect to the executive
compensation is incorporated herein by reference to the section entitled
"Compensation of Directors and Executive Officers" in the Company's 1998 Proxy
Statement.

                                     ITEM 11

                    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
                              OWNERS AND MANAGEMENT

         The information required by this item with respect to security
ownership is incorporated herein by reference to the section entitled "Voting
Securities and Principal Holders Thereof" in the Company's 1998 Proxy Statement.

                                     ITEM 12

                 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         The information required by this item with respect to security
ownership is incorporated herein by reference to the section entitled "Certain
Transactions" in the Company's 1998 Proxy Statement.


                                       27
<PAGE>

   
                               PART III - ITEM 13
    

                        EXHIBITS AND REPORTS ON FORM 8-K

         (a)      FINANCIAL STATEMENTS AND EXHIBITS

                  FINANCIAL STATEMENTS

                  The consolidated financial statements of the Company and its
subsidiaries filed as part of this Annual Report on Form 10-KSB are listed in
Item 7 of this Annual Report on Form 10-KSB, which listing is hereby
incorporated by reference.

                  EXHIBITS

   EXHIBIT NO.                              DESCRIPTION
   -----------                              -----------

         3.1      Articles of Incorporation, as amended, are hereby incorporated
                  by reference to Exhibit 3.1 of the Registrant's Registration
                  Statement on Form 8-A filed with the SEC on May 30, 1996.

         3.2      Plan and Articles of Merger are hereby incorporated by
                  reference to Exhibit 3.2 of the Registrant's Registration
                  Statement on Form 8-A filed with the SEC on May 30, 1996.

         3.3      Amended Bylaws are hereby incorporated by reference to Exhibit
                  3.3 to Form 10-KSB for the year ended December 31, 1997.

         4.1      Form of Common Stock Certificate is hereby incorporated by
                  reference to Exhibit 4.1 of the Registrant's Registration
                  Statement on Form 8-A filed with the SEC on May 30, 1996.

         4.2      Form of Series A Redeemable Warrant Agreement.*

         4.3      Series A Redeemable Warrant Agreement.*

         4.4      Form of Financial Advisory Warrant Certificate.*


                                       28
<PAGE>

         4.5      Financial Advisory Warrant Agreement.*

         4.6      Common Stock Purchase Warrant Certificate held by Charles E.
                  Bradshaw, Jr., dated March 13, 1997, is hereby incorporated by
                  reference to Exhibit 4.6 to Form 10-KSB for the year ended
                  December 31, 1997.

         10.1     Agreement effective as of June 28, 1994, between First
                  American-Florida and Rader Railcar, Inc., as amended.*

         10.2     Employment Agreement dated February 16, 1994, between First
                  American- Florida and Allen C. Harper.*

         10.3     Employment Agreement dated September 10, 1997, between the
                  Registrant and Ronald J. Hartman, is hereby incorporated by
                  reference to Exhibit 10.3 of the Registrant's Registration
                  Statement on Form S-3, filed December 30, 1997.

         10.4     Employment Agreement dated July 1, 1994, between First
                  American- Florida and Michael J. Acierno, as amended.*

         10.5     Settlement Agreement and General Release dated November 20,
                  1997, between the Registrant and Raymond Monteleone, is hereby
                  incorporated by reference to Exhibit 10.5 of the Registrant's
                  Registration Statement on Form S-3, filed December 30, 1997.

         10.6     Agreement dated February 28, 1995, between First
                  American-Florida and Florida East Coast Railway Company.*

         10.7     Form of Non-Competition Agreement between Thomas G. Rader and
                  First American-Florida.*


                                       29
<PAGE>




         10.8     Railcar Construction Agreement (without appendices) between
                  Rader Railcar II, Inc. and Fun Trains, Inc. dated October 23,
                  1996.*

         10.9     Financial Advisory and Consulting Agreement between the
                  Registrant and International Capital Growth, LLC, dated April
                  26, 1996*, as amended December 5, 1996, is hereby incorporated
                  by reference to Exhibit 10.9 to Form 10-KSB for the year ended
                  December 31, 1996.

         10.10    Note Escrow Agreement between the Registrant, Capital Growth
                  Interna-tional, LLC, and Sterling National Bank and Trust
                  Company of New York dated April 26, 1996.*

         10.11    Form of Convertible Secured Note.*

         10.12    Consulting Agreement between the Registrant and C. Dawson
                  Buck, dated June 24, 1997, is hereby incorporated by reference
                  to Exhibit 10.1 of the Registrant's Registration Statement on
                  Form S-8, filed July 14, 1997.

         10.13    Employment Agreement dated October 9, 1996, between the
                  Registrant and Donald P. Cumming.*

         10.14    Employment Agreement dated August 23, 1996, between the
                  Registrant and Thomas E. Blayney.*

         10.15    Employment Agreement dated September 30, 1996, between the
                  Registrant and Pamela S. Petcash.*

         10.16    Form of Confidentiality and Non-competition Agreement between
                  the Registrant's executive employees and the Registrant.*

         10.17    Consulting Agreement between Management Resource Group, Inc.
                  and the Registrant dated July 23, 1996.*


                                       30
<PAGE>

         10.18    Agreement between Universal Studios Florida and the
                  Registrant, dated October 30, 1996.*

         10.19    Agreement between CSX Transporta-tion, Inc. and the
                  Registrant, dated October 31, 1996.*

         10.20    Business Lease between Mandel Development, a Florida general
                  partnership, and the Registrant, dated January 15, 1997, is
                  hereby incorporated by reference to Exhibit 10.20 to Form
                  10-KSB for the year ended December 31, 1996.

         10.21    Operating Agreement between the Florida Department of
                  Transportation and the Registrant, dated January 6, 1997, is
                  hereby incorporated by reference to Exhibit 10.21 to Form
                  10-KSB for the year ended December 31, 1996.

         10.22    Form of the Registrant's 1996 Non-Qualified Stock Option Plan,
                  is hereby incorporated by reference to Exhibit 10.22 to Form
                  10-KSB for the year ended December 31, 1996.

         10.23    Loan Agreement (without exhibits) between NationsBank, N.A.
                  (South) and the Durango & Silverton Narrow Gauge Railroad
                  Company, dated March 13, 1997, is hereby incorporated by
                  reference to Exhibit 10.23 to Form 10-KSB for the year ended
                  December 31, 1996.

         10.24    Share Purchase Agreement between The Durango & Silverton
                  Narrow Gauge Railroad Company and the Registrant, dated
                  December 10, 1996, and Addendum to Share Purchase Agreement,
                  dated February 28, 1997, is hereby incorporated by reference
                  to Exhibit 10.24 to Form 10-KSB for the year ended December
                  31, 1996.


                                       31
<PAGE>



         10.25    Promissory Note in the amount of $4,200,000 from the
                  Registrant in favor of Charles E. Bradshaw, Jr., dated March
                  13, 1997, is hereby incorporated by reference to Exhibit 10.25
                  to Form 10-KSB for the year ended December 31, 1996.

         10.26    Promissory Note in the amount of $5,850,000 from the
                  Registrant in favor of Charles E. Bradshaw, Jr., dated March
                  13, 1997, is hereby incorporated by reference to Exhibit 10.26
                  to Form 10-KSB for the year ended December 31, 1996.

         10.27    Registration Rights and Price Guaranty Agreement between
                  Charles E. Bradshaw, Jr. and the Registrant, dated March 13,
                  1997, is hereby incorporated by reference to Exhibit 10.27 to
                  Form 10-KSB for the year ended December 31, 1996.

         10.28    Amendment No. 2 To Operating Agreement between the Florida
                  Department of Transportation and the Registrant, dated June 6,
                  1997, is hereby incorporated by reference to Exhibit 10.29 of
                  the Registrant's Post Effective Amendment No. 1 Registration
                  Statement on Form SB-2, filed June 25, 1997.

         10.29    Amendment No. 3 To Operating Agreement between the Florida
                  Department of Transportation and the Registrant, dated August
                  18, 1997, is hereby incorporated by reference to Exhibit 10.35
                  of the Registrant's Amendment No. 1 to the Registration
                  Statement on Form S-3/A, filed September 18, 1997.

         10.30    Amendment No. 3 To Railcar Construction Agreement between
                  Rader Railcar II, Inc. and Fun Trains, Inc., dated August 22,
                  1997, is hereby incorporated by reference to Exhibit 10.33 of
                  the Registrant's Amendment No. 1 to the Registration Statement
                  on Form S-3/A, filed September 18, 1997. 


                                       32
<PAGE>



         10.31    Limited Guaranty of Payment and Performance given by Thomas G.
                  Rader to Fun Trains, Inc., dated August 22, 1997, is hereby
                  incorporated by reference to Exhibit 10.34 of the Registrant's
                  Amendment No. 1 to the Registration Statement on Form S-3/A,
                  filed September 18, 1997.

         10.32    Amendment No. 4 to Railcar Construction Agreement between
                  Rader Railcar II, Inc., Fun Trains, Inc. and Thomas G. Rader,
                  dated November 12, 1997, is hereby incorporated by reference
                  to Exhibit 10.36 of the Registrant's Registration Statement on
                  Form S-3, filed December 30, 1997.

         10.33    Letter Agreement dated December 19, 1997, waiving default
                  under the Loan Agreement, dated March 10, 1997 between the
                  Registrant and Pointe Bank, is hereby incorporated by
                  reference to Exhibit 1 of the Registrant's Current Report on
                  Form 8-K, filed December 29, 1997.

         10.34    Letter Amendment to Agreement between CSX Transportation, Inc.
                  and the Registrant, dated November 24, 1997. **

         10.35    Placement Agent Agreement between International Capital
                  Growth, Ltd. and the Registrant, dated May 12, 1997. **

         10.36    Placement Agent Agreement between International Capital
                  Growth, Ltd. and the Registrant, dated December 16, 1997. **

         10.37    Consulting Agreement between the Registrant and Alan L.
                  Jacobs, dated March 18, 1998. **


                                       33
<PAGE>




         16.1     Letter dated January 29, 1998, from the Company's former
                  accountants, BDO Seidman, LLP, to the Registrant is hereby
                  incorporated by reference to Exhibit 16 to the Registrant's
                  Current Report on Form 8-K dated January 26, 1998.

         16.2     Letter dated May 10, 1996, from the Company's former
                  accountants, Hansen, Barnett & Maxwell, to the Registrant is
                  hereby incorporated by reference to Exhibit 16 to the
                  Registrant's Current Report on Form 8-K dated May 6, 1996.

         21       Subsidiaries of the Registrant.**

         23.1     Consent of BDO Seidman LLP ***

         27       Financial Data Schedule **



                                       34
<PAGE>


----------
*        Incorporated by reference to the comparable exhibit numbers as
         contained in the Registrant's Registration Statement on Form SB-2, as
         filed with the Securities and Exchange Commission on August 6, 1996.

   
**       Incorporated by reference to the comparable exhibit numbers as
         contained in the Registrant's Annual Report on Form 10-KSB, as filed
         with the Securities and Exchange Commission on March 31, 1998.

***      Filed herewith.
    

         (b)      REPORTS ON FORM 8-K FILED DURING THE THREE MONTHS ENDED
                  DECEMBER 31, 1997

                  On December 29, 1997, the Company filed a Current Report on
                  Form 8-K with respect to the significant cash shortage being
                  experienced by the Company (see Note 13 of Notes to
                  Consolidated Financial Statements).


                                       35
<PAGE>



                                   SIGNATURES

         In accordance with Section 13 or 15(d) of the Exchange Act, the
Registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.

   
DATED:  APRIL 14, 1998      FIRST AMERICAN RAILWAYS, INC.
    

                                 BY:    /S/ ALLEN C. HARPER
                                    --------------------------------------------
                                    ALLEN C. HARPER, CHAIRMAN OF THE
                                    BOARD  OF  DIRECTORS  AND  CHIEF
                                    EXECUTIVE OFFICER

         In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the Registrant and in the capacities and
on the dates indicated.

<TABLE>
<CAPTION>
SIGNATURES                                           TITLE                                  DATE
----------                                           -----                                  ----

<S>                                         <C>                                         <C> 
   
 /S/ ALLEN C. HARPER                        CHAIRMAN OF THE BOARD                       APRIL 14, 1998
-----------------------------               AND CHIEF EXECUTIVE                                                          
ALLEN C. HARPER                             OFFICER(PRINCIPAL)E
                                            EXECUTIVE OFFICER)

 /S/ LORETTA A. MURPHY                      VICE PRESIDENT, SECRETARY,                  APRIL 14, 1998
-----------------------------               TREASURER AND CHIEF              
LORETTA A. MURPHY                           FINANCIAL OFFICER (PRINCIPAL
                                            FINANCIAL OFFICER)

 /S/ THOMAS G. RADER                        DIRECTOR                                    APRIL 14, 1998
----------------------------                                                                          
THOMAS G. RADER

 /S/ DAVID RUSH                             DIRECTOR                                    APRIL 14, 1998
----------------------------
DAVID RUSH

 /S/ LUIGI SALVANESCHI                      DIRECTOR                                    APRIL 14, 1998
----------------------------                                                                          
LUIGI SALVANESCHI
    

</TABLE>


                                       36
<PAGE>


                                                   FIRST AMERICAN RAILWAYS, INC.

                                                                           Index

                                                                            PAGE
                                                                            ----

              REPORT OF INDEPENDENT AUDITORS                               F - 2

              REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS           F - 3

              CONSOLIDATED BALANCE SHEET                                   F - 4

              CONSOLIDATED STATEMENTS OF OPERATIONS                        F - 5

              CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)    F - 6

              CONSOLIDATED STATEMENTS OF CASH FLOWS                        F - 7

              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                   F - 8




                                      F-1
<PAGE>



REPORT OF INDEPENDENT AUDITORS

The Stockholders and Board of Directors
First American Railways, Inc.

We have audited the accompanying consolidated balance sheet of First American
Railways, Inc. as of December 31, 1997, and the related consolidated statements
of operations, stockholders' equity, and cash flows for the year 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 overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of First American
Railways, Inc. as of December 31, 1997, and the consolidated results of its
operations and its cash flows for the year then ended, in conformity with
generally accepted accounting principles.

The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 2 to the
consolidated financial statements, the Company has incurred annual operating
losses since its inception and in 1997 expended approximately $11,000,000 for
capital expenditures. At December 31, 1997, the Company had a working capital
deficiency of approximately $2,520,000. These matters raise substantial doubt
about its ability to continue as a going concern. Management's plans in regard
to these matters are also described in Note 2. The consolidated financial
statements do not include any adjustments to reflect the possible future effects
on the recoverability and classification of assets or the amounts and
classification of liabilities that might result from the outcome of the
foregoing uncertainties.

                                                          /S/ MILLWARD & COMPANY
                                                          ----------------------
                                                          Millward & Company

Fort Lauderdale, Florida
February 27, 1998


                                      F-2
<PAGE>



   
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS


To the Board of Directors and Stockholders of
First American Railways, Inc.


We have audited the accompanying statements of operations,  stockholders' equity
(deficit)  and cash flows of First  American  Railways,  Inc. for the year ended
December 31, 1996.  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 the opinion.

In our opinion,  the financial  statements  referred to above present fairly, in
all  material  respects,  the  results  of  operations  and cash  flows of First
American Railways,  Inc. for the year ended December 31, 1996 in conformity with
generally accepted auditing principles.


                                                          /S/ BDO SEIDMAN, LLP
                                                          ----------------------
                                                          BDO Seidman, LLP

Miami, Florida

January 14, 1997, except for Note 13,                                         
paragraph 1 as it relates to the terms of                                     
the acquisition of the Durango & Silverton                                    
Narrow Gauge Railroad Company, which is as                                    
of March 13, 1997.                                                            
    


                                      F-3
<PAGE>


                                                   FIRST AMERICAN RAILWAYS, INC.

                                                      CONSOLIDATED BALANCE SHEET

                                                                DECEMBER 31,1997
                                                                ----------------

ASSETS

CURRENT
   Cash                                                          $    1,711,927
   Restricted cash                                                      100,000
                                                                 --------------
      Cash and cash items                                             1,811,927
   Inventories                                                        1,017,557
   Prepaids and other                                                 1,734,746
                                                                 --------------
Total current assets                                                  4,564,230
Property and equipment, net                                          41,668,275
Deferred loan costs, goodwill and other, net                          4,316,953
                                                                 --------------
                                                                 $   50,549,458
                                                                 ==============

LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT
   Accounts payable and accrued liabilities                      $    4,812,626
   Unearned revenue                                                     377,749
   Short-term debt and current maturities of long-term debt           1,896,000
                                                                 --------------
Total current liabilities                                             7,086,375
Long-term debt                                                       33,573,157
Deferred income taxes and other long-term liabilities                 8,258,788
                                                                 --------------
                                                                     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
      11,243,911 shares issued and outstanding                           11,244
Additional paid-in capital                                           12,524,286
   Accumulated deficit                                              (10,904,392)
                                                                 --------------
TOTAL STOCKHOLDERS' EQUITY                                            1,631,138
                                                                 --------------
                                                                 $   50,549,458
                                                                 ==============

          SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.


                                      F-4
<PAGE>



<TABLE>
<CAPTION>
                          FIRST AMERICAN RAILWAYS, INC.

                      CONSOLIDATED STATEMENTS OF OPERATIONS

                                                                                     FOR THE YEAR
                                                                                 ENDED DECEMBER 31,
                                                                           1997                      1996
----------------------------------------------------------------------------------------------------------------

<S>                                                                  <C>                        <C>             
Revenue                                                              $     9,895,867            $              -
Cost of revenue                                                            6,750,036                           -
                                                                     ---------------            ----------------
Gross profit                                                               3,145,831

Selling, general and administrative                                        3,566,472                           -
Development of Florida Fun-Train                                           3,742,539                   2,150,300
                                                                     ---------------             ---------------
Operating loss                                                            (4,163,180)                 (2,150,300)
Interest expense, net of  $311,748 and $341,391
     of interest income                                                    2,340,188                     166,911
Amortization of loan costs                                                   465,853                     220,722
Expenses from offerings not completed                                              -                      57,829
                                                                     ---------------             ---------------
Net loss                                                             $    (6,969,221)            $    (2,595,762)
                                                                     ================            ================

Net loss per common share:
     Basic                                                           $         (0.68)            $         (0.34)
     Diluted                                                         $         (0.68)            $         (0.34)

   
Weighted average number of common shares
   used to compute net loss per common share
     Basic                                                                10,284,543                   7,550,043
     Diluted                                                              10,284,543                   7,550,043
</TABLE>
    



          SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.



                                      F-5
<PAGE>



                                                   FIRST AMERICAN RAILWAYS, INC.

                       CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------------


                                                                                              ADDITIONAL
                                                                   COMMON STOCK                 PAID-IN         ACCUMULATED
                                                              SHARES          AMOUNT            CAPITAL           DEFICIT
---------------------------------------------------------------------------------------------------------------------------
<S>                                                         <C>            <C>              <C>              <C>           
Balance at December 31, 1995                                 4,275,000   $     4,275      $    1,110,760    $   (1,339,409)
Issuance of common stock in connection

     with Stage I offering, net of

     offering costs of $11,692                                 375,004           375              42,933                 -
Issuance of common stock in connection
     with Stage II offering, net of offering

     costs of $1,247,967                                     4,050,274         4,050           6,998,666                 -
Merger with Asia-America Corporation                           350,000           350                (350)                -
Issuance of common stock to officer                             10,800            11              37,789                 -
Net loss                                                             -             -                    -       (2,595,762)
                                                           -----------    ----------      ---------------    --------------
Balance at December 31, 1996                                 9,061,078         9,061           8,189,798        (3,935,171)
Issuance of common stock, warrants and stock options

     in connection with payment of fees to third parties       351,180           351             636,472                 -
Issuance of common stock,
     net of offering costs of $409,268                       1,557,072         1,557           3,025,141                 -
Issuance of common stock and warrants
     in connection with acquisition of D&SNG                   200,000           200             544,700                 -
Issuance of common stock in connection
     with employee benefit plans                                70,284            70             113,143                 -
Issuance of common stock in

     connection with conversion of debt                          4,297             5              15,032                 -
Net loss                                                             -             -                   -        (6,969,221)
                                                           -----------    ----------      --------------     --------------
Balance at December 31, 1997                                11,243,911     $  11,244        $ 12,524,286     $ (10,904,392)
                                                           ===========    ==========      ==============     ==============
</TABLE>



          SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

                                      F-6
<PAGE>

                                                   FIRST AMERICAN RAILWAYS, INC.

                                                        STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                                              FOR THE YEAR
                                                                                          ENDED DECEMBER 31,
                                                                                  1997                           1996
--------------------------------------------------------------------------------------------------------------------------
<S>                                                                    <C>                                <C>              
OPERATING ACTIVITIES:
   Net loss                                                            $      (6,969,221)                 $     (2,595,762)
   Adjustments to reconcile net loss to
     net cash used in operating activities:
       Depreciation                                                              413,807                             6,172
       Amortization                                                              474,130                           220,722
       Amortization of original issue discount                                   361,133                                 -
       Salaries and consulting fees paid in common stock                         153,773                            37,800
       (Increase) Decrease in restricted cash                                    330,834                          (430,834)
       Increase in inventories                                                  (260,272)                                -
       Increase in prepaids and other                                         (1,399,030)                         (253,692)
       Increase in account payable and accrued liabilities                     2,896,927                           309,237
       Decrease in unearned revenue                                             (226,361)                                -
                                                                        ----------------                  ----------------
     Total adjustments                                                         2,744,941                          (110,595)
                                                                        ----------------                  ----------------
Net cash used in operating activities                                         (4,224,280)                       (2,706,357)
                                                                        ----------------                  ----------------
INVESTING ACTIVITIES:
   Capital expenditures                                                      (10,981,715)                       (2,063,500)
   Cash paid for acquisition                                                  (3,512,058)                       (2,000,000)
   Increase in other assets                                                     (665,324)                                -
                                                                        ----------------                  ----------------
   Net cash used in investing activities                                     (15,159,097)                       (4,063,500)
                                                                        ----------------                  ----------------

FINANCING ACTIVITIES:
   Proceeds from issuance of notes payable and line of credit                 17,287,500                         8,695,682
   Repayment of notes payable                                                 (5,138,374)                         (445,000)
   Payment of loan costs                                                      (1,311,110)                       (1,087,829)
   Proceeds from issuance of common stock                                      3,492,536                         7,300,761
   Payment of offering costs                                                    (409,268)                         (254,737)
   Borrowings from related parties                                                     -                            68,388
   Repayments of notes payable to related parties and others                           -                          (333,388)
                                                                        ----------------                  ----------------

  Net cash provided by financing activities                                   13,921,284                        13,943,877
                                                                        ----------------                  ----------------
  Net increase (decrease) in cash                                             (5,462,093)                        7,174,020
  Cash at beginning of period                                                  7,174,020                                 -
                                                                        ----------------                  ----------------
  Cash at end of period                                                 $      1,711,927                  $      7,174,020
                                                                        ================                  ================

SUPPLEMENTAL DISCLOSURES:
   Cash paid for interest                                               $      2,136,516                  $        542,731
                                                                        ================                  ================
</TABLE>



          SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

                                      F-7
<PAGE>


                                                   FIRST AMERICAN RAILWAYS, INC.

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1.  SUMMARY OF                   ORGANIZATION AND BUSINESS
    SIGNIFICANT
    ACCOUNTING                       First American  Railways,  Inc. and
    POLICIES                         subsidiaries ("the Company") is organized 
                                     for the  purpose  of  constructing,   
                                     acquiring  and  marketing  entertainment 
                                     based passenger trains. The Company 
                                     operates a "Fun-Train" between South and 
                                     Central Florida and a scenic destination 
                                     railroad in Southwestern Colorado.

                                 BASIS OF PRESENTATION

                                     Certain amounts in the prior years'
                                     financial statements have been reclassified
                                     to conform to the current year
                                     presentation. The Company was a development
                                     stage entity in 1996 for financial
                                     reporting purposes.

                                 CONSOLIDATION

                                     The  Consolidated  Financial  Statements  
                                     include the accounts of First  American
                                     Railways,  Inc. and all subsidiaries.  All 
                                     significant  intercompany balances and
                                     transaction have been eliminated.

                                 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.

                                 CASH EQUIVALENTS

                                     The Company considers all highly liquid
                                     investments with a maturity of three months
                                     or less when purchased to be cash
                                     equivalents. Cash equivalents are carried
                                     at cost, which approximates market value.

                                 RESTRICTED CASH

                                     Restricted cash consists of cash committed
                                     as collateral for credit card transactions.


                                      F-8
<PAGE>

                                                   FIRST AMERICAN RAILWAYS, INC.

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


                                 INVENTORIES

                                     Inventories are stated at the lower of cost
                                     or market. Cost is determined using the
                                     first-in, first-out method.

                                 INTANGIBLE ASSETS

                                     Trademarks, stated at cost are amortized
                                     using the straight-line method over ten
                                     (10) years. Goodwill is amortized using the
                                     straight-line method over forty (40) years.

                                 FIXED ASSETS AND DEPRECIATION

                                     Fixed assets are stated at cost and are
                                     depreciated by the straight-line method
                                     over the estimated useful lives of the
                                     assets. Construction in process will be
                                     depreciated beginning at the time those
                                     assets are placed into service.

                                 OFFERING COSTS

                                     Costs incurred in connection with the
                                     Company's efforts to obtain additional
                                     financing through a public offering or
                                     private placement of securities are
                                     deferred and offset against the proceeds or
                                     charged to operations if an offering or
                                     placement is unsuccessful.

                                 IMPAIRMENT

                                     On January 1, 1996, the Company adopted
                                     Statements of Financial Accounting
                                     Standards No. 121 "Accounting for the
                                     Impairment of Long-Lived Assets and for
                                     Long-Lived Assets to Be Disposed Of" ("SFAS
                                     No. 121"). SFAS No. 121 requires, among
                                     other things, impairment loss of assets to
                                     be held and gains or losses from assets
                                     that are expected to be disposed of be
                                     included as a component of income from
                                     continuing operations before taxes on
                                     income. During 1997 there have been no
                                     write-downs required in the accompanying
                                     financial statements.

                                 STOCK-BASED COMPENSATION

                                     Stock-based compensation is accounted for
                                     by using the intrinsic value based method
                                     in accordance with Accounting Principles
                                     Board Opinion 


                                      F-9
<PAGE>

                                                   FIRST AMERICAN RAILWAYS, INC.

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


                                     No 25, "Accounting for Stock Issued to
                                     Employees" ("APB 25"). The Company has
                                     adopted Statements of Financial Accounting
                                     Standards No. 123, "Accounting for
                                     Stock-Based Compensation," ("SFAS No. 123")
                                     which allows companies to either continue 
                                     to account for stock-based compensation for
                                     employees and directors using APB 25, or to
                                     adopt a fair value based method of
                                     accounting. The Company intends to continue
                                     with its current method of accounting in
                                     accordance with APB 25 for employees, but
                                     has made the required proforma disclosures
                                     in accordance with SFAS No. 123.

                                 FINANCIAL INSTRUMENTS

                                     The carrying value of financial
                                     instruments including accounts and notes
                                     payable approximate their fair value at
                                     December 31, 1997.

                                 ADVERTISING COSTS

                                     The Company expenses production costs of
                                     print and radio advertisements as of the
                                     first date the advertisement takes place.

                                 INTEREST

                                     Interest is capitalized to constructed
                                     assets during their construction period and
                                     is depreciated over their useful lives.

                                 INCOME TAXES

                                     The Company has no income since inception
                                     and accordingly has not provided for income
                                     taxes.

                                     Income taxes are accounted for under the
                                     asset and liability method of Statement of
                                     Financial Accounting Standards No. 109
                                     "Accounting for Income Taxes" ("SFAS No.
                                     109"). Deferred tax assets and liabilities
                                     are recognized for the future tax
                                     consequences attributable to differences
                                     between the financial statement carrying
                                     amounts of existing assets and liabilities
                                     and their respective tax bases and
                                     operating loss and tax credit
                                     carryforwards. Deferred tax assets and
                                     liabilities are measured using enacted tax
                                     rates expected to apply to taxable income
                                     in the years in which 


                                      F-10
<PAGE>

                                                   FIRST AMERICAN RAILWAYS, INC.

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                    those temporary differences are expected to
                                    be recovered or settled. Under SFAS No. 109,
                                    the effect on deferred tax assets and
                                    liabilities or a change in tax rate is
                                    recognized in income in the period that
                                    includes the enactment date. Deferred tax
                                    assets are reduced to estimated amounts to
                                    be realized by use of a valuation allowance.

                                 NET LOSS PER COMMON SHARE

                                    The Financial Standards Board ("FASB")
                                    issued SFAS No. 128, "Earnings Per Share".
                                    SFAS No. 128 supersedes Accounting
                                    Principles Board Opinion ("APB") No. 15,
                                    "Earnings Per Share" and various other
                                    authoritative pronouncements regarding
                                    earnings per share ("EPS"). SFAS No. 128
                                    became effective for periods ending after
                                    December 15, 1997. Accordingly, the Company
                                    adopted SFAS No. 128 effective December 31,
                                    1997.

                                    Under SFAS No. 128, primary earnings per
                                    share in accordance with APB No. 15 is
                                    replaced with a simpler calculation called
                                    basic earnings per share, which includes the
                                    dilutive effect of outstanding options,
                                    warrants and convertible securities. Diluted
                                    earnings per share under SFAS No. 128 has
                                    not changed significantly as compared to
                                    fully diluted earnings per share under APB
                                    No. 15, but has been renamed "diluted
                                    earnings per share".

                                    All loss per share amounts for all periods
                                    have been presented in accordance with the
                                    requirements of SFAS No. 128. As a result of
                                    the adoption of SFAS No. 128, there was no
                                    change to the Company's previously reported
                                    calculation of primary and fully diluted
                                    earnings per share under APB No. 15. Diluted
                                    losses per share are the same as basic loss
                                    per share for 1997 and 1996 as its results
                                    are anti-dilutive.


       

                                      F-11
<PAGE>

                                                   FIRST AMERICAN RAILWAYS, INC.

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

2.   GOING CONCERN                  The Company has incurred annual  operating 
     CONSIDERATIONS                 losses since its inception and in 1997
                                    expended  approximately  $11,000,000  for 
                                    capital  expenditures.  At December 31,
                                    1997, the Company had a working capital
                                    deficiency of approximately $2,520,000.
                                    Additionally, the Company will have to
                                    obtain the necessary funds to either
                                    complete the four railcars currently in
                                    various stages of completion (see Note
                                    9(a)) or obtain other railcars from a third
                                    party.

                                    From January through March 1998, the Company
                                    sold in private placements an aggregate of
                                    10,029,502 shares of common stock receiving
                                    net proceeds of approximately $2,507,000.

                                    The Company has implemented cost reduction
                                    programs including reduced 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.

                                    Despite these efforts, management believes
                                    that the Company requires additional funds
                                    through financing to ensure continued
                                    operations. There is no assurance that
                                    sufficient funds will be obtained or that
                                    the marketing efforts will be successful.
                                    The accompanying financial statements do not
                                    include any adjustments relating to the
                                    recoverability and classification of
                                    recorded assets, or the amounts and
                                    classification of liabilities that might be
                                    necessary in the event that the Company
                                    cannot continue in existence.


3.   INVENTORIES                    Inventories  consist of the following:
                                    --------------------------------------------
                                    Concession and souvenir items     $  473,978
                                    Parts                                543,579
                                    --------------------------------------------
                                                                     $ 1,017,557
                                    --------------------------------------------
                                    All inventory is pledged as collateral (see
                                    Notes 6 and 7).

                                      F-12
<PAGE>

                                                   FIRST AMERICAN RAILWAYS, INC.

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
4.   PROPERTY AND                    Property and equipment and the expected useful lives are as follows:
     EQUIPMENT                       ---------------------------------------------------------------------

<S>                                                                                        <C>            
                                     Land                                                  $    20,485,311
                                     Railcars                              25 years             11,845,264
                                     Building and improvements            15-30 years            3,742,607
                                     Machinery and equipment              3-15 years             2,899,402
                                     Construction in process (see Note 9(a))                     3,117,845
                                                                                           ---------------

                                                                                                42,090,429

                                     Less accumulated depreciation                                 422,154
                                                                                           ---------------
                                                                                             $  41,668,275
                                                                                           ===============
</TABLE>

                                    All property and equipment is pledged as
                                    collateral (See Notes 5 and 6)

                                    Interest of approximately $416,000 and
                                    $92,000 was capitalized as part of the
                                    construction of the railcars during 1997 and
                                    1996, respectively.

5.   INCOME TAXES                   At December 31, 1997, the Company had an
                                    accumulated net loss of approximately
                                    $11,000,000 for financial reporting
                                    purposes, which expire in the years 2009
                                    through 2012. In general, expenses incurred
                                    during the development stage have been
                                    capitalized for tax purposes as
                                    pre-operating expenses and are being
                                    amortized over a 60 month period commencing
                                    with the month in which active business
                                    began (April 1997).

                                    The use of the losses is limited to future
                                    taxable earnings of the Company. For
                                    financial reporting purposes, the deferred
                                    tax asset of approximately $4,125,000
                                    resulting from operating losses and the
                                    amortization and future amortization of
                                    capitalized pre-operating expenses has been
                                    entirely offset by a valuation allowance.

                                    As a result of the acquisition of the
                                    Durango and Silverton Narrow Gauge Railroad
                                    Company ("D&SNG") a deferred tax liability
                                    of approximately $8,167,000 was created
                                    primarily due to the difference in the
                                    carrying amount of property and equipment
                                    for financial statement and tax return
                                    purposes. This liability will be reduced
                                    only when the related property and equipment
                                    is disposed by the Company.

                                      F-13
<PAGE>

                                                   FIRST AMERICAN RAILWAYS, INC.

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

6.   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%
                                    December 31, 1997). 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 ($881,000), (ii) to grant to
                                    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 a future financing
                                    anticipated to be concluded in Spring 1998
                                    as repayment of the line of credit.

                                    In November 1997, the Company's D&SNG
                                    subsidiary entered into a one year unsecured
                                    line of credit agreement with a bank. Under
                                    the agreement D&SNG is able to borrow up to
                                    $250,000 at an interest rate of prime plus
                                    1%. The agreement contains covenants that
                                    require certain operating and equity
                                    criteria to be met as well as other
                                    requirements customary to loan facilities of
                                    this nature. The Company is Guarantor under
                                    the agreement. At December 31, 1997 there
                                    were no amounts outstanding under this line
                                    of credit.

<TABLE>
<S>                                                                                    <C>          
7.   LONG-TERM DEBT                 At December 31, 1997 the Company's long-term
                                    debt consisted of the following:

                                     8% convertible subordinated notes payable
                                     due June 2002 less unamortized original
                                     issue discount of $2,884,867                      $   8,267,633

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

                                     9.17% note payable to bank, principal and
                                     interest payable monthly through March 2002
                                     and secured by a first interest  in all
                                     D&SNG assets (A)                                      7,834,842

                                     Note payable to Charles E. Bradshaw, Jr.,
                                     interest ranging from $9.25% to 10%,
                                     due March 2002 and secured by a second
                                     interest in all D&SNG assets                          5,850,000
</TABLE>


                                      F-14
<PAGE>

                                                   FIRST AMERICAN RAILWAYS, INC.

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<S>                                 <C>                                              <C>        
                                    Note payable to Charles E. Bradshaw, Jr.,
                                    interest rate is 30-day commercial paper
                                    rate plus 650 basis points, due between
                                    September 1998 and March 2000 depending upon
                                    the occurrence of certain circumstances and
                                    secured by a second interest in all D&SNG 
                                    assets (B)                                         4,200,000

                                    Capital lease payable, principal and
                                    interest Payable monthly through July 2002
                                    secured by equipment                                 200,000
                                                                                     -----------
                                                                                      34,588,157

                                    Less current maturities                           (1,015,000)
                                                                                     -----------
                                                                                     $33,573,157
                                                                                     ===========
</TABLE>


                                (A) There is a restriction in the bank loan
                                    agreement, which limits the Company's
                                    ability to "upstream" the profits of D&SNG.
                                    This restriction requires compliance by
                                    D&SNG with covenants regarding the
                                    maintenance of equity plus subordinated debt
                                    and the ratio of senior debt to equity and
                                    subordinated debt, and that D&SNG certifies
                                    that there are no existing defaults by D&SNG
                                    under the bank loan agreement. D&SNG
                                    currently complies with all of these
                                    covenants. The term loan agreement also
                                    provides for notification and the provision
                                    to the lender of certain current financial
                                    statements regarding D&SNG before an
                                    "upstreaming" of profits. At December 31,
                                    1997, there was approximately $1,500,000 of
                                    cash subject to the notification required by
                                    such covenant.

                                (B) The maturity of the $4,200,000 note
                                    payable to Charles E. Bradshaw was extended
                                    in March 1998 by the Company from March 1998
                                    to September 1998 for a fee of $42,000. The
                                    note is payable in either common stock of
                                    the Company or cash upon election of Mr.
                                    Bradshaw. If Mr. Bradshaw elects to receive
                                    payment in common stock then the Company
                                    shall issue the number of shares of common
                                    stock equal to $4,200,000 divided by the
                                    closing sales price of the Company's common
                                    stock on the date of payment. If Mr.
                                    Bradshaw elects to receive cash payment then
                                    the Company may elect to extend the maturity
                                    of the note payable to March 2000.

                                    A summary of maturities by year of the above
                                    debt assuming the $4,200,000 note payable to
                                    Charles E. Bradshaw, Jr. is paid in cash in
                                    March 2000 as follows:


                                      F-15
<PAGE>

                                                   FIRST AMERICAN RAILWAYS, INC.

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<S>                                 <C>                                                <C>            
                                    1998                                               $     1,015,000
                                    1999                                                     1,098,000
                                    2000                                                     5,408,000
                                    2001                                                     9,578,000
                                    2002                                                     20,374,024
                                                                                       ----------------
                                                                                       $     37,473,024
                                    Less unamortized original issue discount                 (2,884,867)
                                                                                       ----------------
                                                                                       $     34,588,157
                                                                                       ================
</TABLE>

                                 a) DEFINED BENEFIT PENSION PLAN

8.   EMPLOYEE                       The Company has a noncontributory defined
     BENEFIT                        benefit pension plan (the "plan") covering
     PLANS                          substantially all D&SNG full-time employees.
                                    The plan provides pension benefits that are
                                    based on the employee's average annual
                                    compensation and their number of years of
                                    service. The Company's funding policy for
                                    the plan is to make at least the minimum
                                    annual contributions required by applicable
                                    regulations.

                                    A summary of the components of net periodic
                                    pension cost for the plan and the total
                                    contributions charged to pension expense for
                                    the plan from April 1, 1997 (effective date
                                    of the acquisition of D&SNG) through
                                    December 31, 1997 is as follows:

<TABLE>
                                 -------------------------------------------------------------------------------
<S>                                                                                          <C>        
                                   Defined benefit plan:
                                        Service cost                                         $     1,028
                                        Interest cost                                             17,242
                                        Actual return on plan assets                              (3,323)
                                        Net amortization and deferral                               (324)
                                 -------------------------------------------------------------------------------

                                   Total pension expense                                     $    14,623
                                 -------------------------------------------------------------------------------

                                    Assumptions used in the accounting for the
                                    plan in 1997 as of December 31 were:
                                 -------------------------------------------------------------------------------

                                   Weighted average discount rates                                   9.0%
                                   Rates of increase in compensation levels                          4.5%
                                   Expected long-term rate of return on assets                       9.0%
                                 -------------------------------------------------------------------------------
</TABLE>


                                      F-16
<PAGE>

                                                   FIRST AMERICAN RAILWAYS, INC.

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>

<S>                                                                                            <C>        
                                    The following table sets forth the funded
                                    status and amounts recognized in the balance
                                    sheet at December 31, 1997 for the plan:
                                 -----------------------------------------------------------------------------------

                                   Actual present value of benefit obligations:
                                   Vested benefit obligation                                   $ (234,945)
                                 -----------------------------------------------------------------------------------

                                   Accumulated benefit obligation                              $ (257,423)
                                 -----------------------------------------------------------------------------------

                                   Project benefit obligation                                  $ (386,223)
                                   Plan assets at fair value                                      181,919
                                 -----------------------------------------------------------------------------------

                                   Projected benefit obligation in

                                        Excess of plan assets                                    (204,304)

                                   Unrecognized net loss                                          114,587

                                 -----------------------------------------------------------------------------------

                                   Net pension liability recognized in the

                                        consolidated balance sheet                             $  (89,717)
                                 -----------------------------------------------------------------------------------
</TABLE>

                                    401(K) PROFIT SHARING PLAN

                                    The Company maintains a 401(k) profit
                                    sharing plan covering substantially all
                                    D&SNG employees meeting certain minimum age
                                    and service requirements. The Company's
                                    contributions to the plan are determined by
                                    the Board of Directors and are limited to a
                                    maximum of 50% of the employee's
                                    contribution and 6% of the employee's
                                    compensation. Contributions to the plan
                                    amounted to $28,325 for the nine months
                                    ended December 31, 1997.

9. COMMITMENTS                   a) In October 1996, the Company entered into
   AND                              an agreement with Rader Railcar II, Inc.
   CONTINGENCIES                    ("RRI"), a company owned by a director and
                                    shareholder, for design and production of
                                    eleven railcars. Through November 1997 the
                                    Company expended approximately $8.0 million
                                    to RRI (exclusive of approximately $850,000
                                    paid to an affiliate of RRI for the initial
                                    prototype car). Eight railcars were
                                    delivered to the Company for use in
                                    operations. In November 1997, RRI announced
                                    that it was temporarily suspending its
                                    operations due to a lack of sufficient


                                      F-17
<PAGE>

                                                   FIRST AMERICAN RAILWAYS, INC.

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                    working capital. Subject to the temporary
                                    suspension of operations of RRI, the
                                    remaining four railcars (including the
                                    initial prototype railcar) are under
                                    construction or refurbishment by RRI. In
                                    accordance with the construction agreement,
                                    approximately $681,000 will be paid to RRI
                                    after the delivery and acceptance of all of
                                    the railcars constructed by RRI. In addition
                                    to the necessity for the Company to raise
                                    additional funds (see Note 2) for the
                                    completion of this construction and
                                    refurbishment, the Company is relying on the
                                    ability of RRI, who has possession of the
                                    remaining four railcars, to complete the
                                    construction and refurbishment of these
                                    railcars. The failure of RRI to obtain
                                    additional resources could have a severe
                                    near term impact on the ability to complete
                                    the construction and refurbishment of the
                                    railcars.

                                  b)In October 1996, the Company signed an
                                    agreement with CSX Transportation, Inc.
                                    ("CSXT") for use of its tracks between West
                                    Palm Beach and Orlando to be used for the
                                    operation of the Florida Fun-Train. The
                                    agreement with CSXT provides, in part, that
                                    the Company will pay CSXT the greater of $20
                                    per train mile, or 16% of the Company's
                                    gross ticket revenue (less discounts) from
                                    the Florida Fun-Train operations. The
                                    per-train mile is subject to various
                                    increases for inflation and other price
                                    adjustments. In October 1997, the Company
                                    negotiated to pay track fees from October
                                    15, 1997 through March 31, 1998 with the
                                    Company's common stock. In January 1998, the
                                    Company issued approximately 432,000 shares
                                    of its common stock to CSXT for payment of a
                                    liability for track fees of approximately
                                    $396,000 incurred between October 15, 1997
                                    and December 31, 1997. In addition, the
                                    Company is required to maintain a minimum of
                                    $300 million in comprehensive general
                                    liability insurance. The Company is
                                    self-insured to the extent of a minimum
                                    deductible in such policies. The agreement
                                    also provides for a certain degree of
                                    exclusivity of the Company's proposed rail
                                    operations. Specifically, CSXT has agreed
                                    not to grant similar access rights to the
                                    subject rail corridor (between West Palm
                                    Beach and Orlando) to any other private rail
                                    passenger operator or contractor, which
                                    would provide comparable conventional rail
                                    passenger service (primarily servicing the
                                    cruise ship market). This exclusivity clause
                                    is voidable by CSXT upon the occurrence of
                                    certain conditions. The term of the
                                    agreement is five years. In addition, the
                                    Company has agreed to grant 475,000 warrants
                                    to CSXT, exercisable at $4.50 per warrant,
                                    with 75,000 warrants granted on October 15,
                                    1997 


                                      F-18
<PAGE>

                                                   FIRST AMERICAN RAILWAYS, INC.

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                    and thereafter in four equal annual
                                    installments of 100,000 warrants each
                                    commencing January 1, 1998. The Company
                                    appointed a CSXT representative to its Board
                                    of Directors who resigned in January 1998.
                                    CSXT has currently elected not to replace
                                    the Board membership.

                                 c) In January 1997, the Company entered into a
                                    five year agreement with Florida Department
                                    of Transportation ("FDOT") for the right to
                                    use the tracks between Ft. Lauderdale and
                                    West Palm Beach, which comprise part of the
                                    route of the Florida Fun-Train. The track
                                    usage fee is $500 per one way trip and will
                                    increase by $50 per one way trip annually.

                                 d) In February 1995, the Company entered
                                    into an agreement with the Florida East
                                    Coast Railway Company ("FEC") for the use of
                                    FEC track in connection with the Company's
                                    proposed rail operations. Under the
                                    agreement, the Company will pay a fee to the
                                    FEC upon commencement of operations of no
                                    less than either $500,000 per train, per
                                    year, or $18 per train mile (with a
                                    stipulated train size of 15 cars). Effective
                                    January 1 of the year in which the third
                                    anniversary of the commencement service
                                    occurs, and January 1 in every third year
                                    thereafter, the car mile rate and the
                                    minimum amount payable shall, upon the
                                    request of either party, be adjusted based
                                    on the "Consumer Price Index For Urban Wage
                                    Earners and Clerical Workers" unadjusted, as
                                    published by the Bureau of Labor Statistics,
                                    U.S. Department of Labor. The agreement will
                                    expire ten years from the date of
                                    commencement of service. At the conclusion
                                    of the initial ten year term, the company
                                    will have the right to extend the agreement
                                    for an additional ten year period upon
                                    twelve months advance notice to the FEC.

                                 e) In April 1997, the Company entered into
                                    an agreement with the National Passenger
                                    Railroad Corporation ("Amtrak") for certain
                                    technical services including operating and
                                    maintenance crew and supplies and the
                                    leasing of three diesel locomotives. The
                                    agreement with Amtrak expires on October 15,
                                    2012. The agreement states there will be
                                    monthly payments of approximately $340,000.
                                    However, due to the reduced operating
                                    schedule of the Florida Fun-Train and other
                                    factors, monthly payments for the three
                                    months ending December 31, 1997 averaged
                                    approximately $285,000. The agreement also
                                    included a $500,000 mobilization fee for
                                    conversion of facilities and hiring and
                                    training of operating and maintenance crew,
                                    which was paid in 1997. 


                                      F-19
<PAGE>

                                                   FIRST AMERICAN RAILWAYS, INC.

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                 f) The Company leases certain operating
                                    property and equipment under operating
                                    leases. The future lease commitments for
                                    property and equipment at December 31, 1997
                                    aggregated at $2,074,000 and are due as
                                    follows: 1998 - $474,000; 1999 - $407,000;
                                    2000 - $324,000; 2001 - $209,000; 2002 -
                                    $166,000 and $494,000 thereafter. Rent
                                    expense charged to operations was $361,000
                                    and $56,000 in 1997 and 1996, respectively.

                                 g) Litigation

                                   i)  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 statues
                                       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.


                                      F-20
<PAGE>

                                                   FIRST AMERICAN RAILWAYS, INC.

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                   ii) CARNIVAL

                                       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. The Complaint alleges federal
                                       (Lanham Act) trademark infringement,
                                       federal, state and common law trademark
                                       dilution, common law unfair competition
                                       and false designation of origin,
                                       description and representation of
                                       services under the Lanham Act, based on
                                       Carnival's alleged ownership of a
                                       "family" of federal, state and common law
                                       service marks and trademarks centered
                                       around the word "Fun" which relate to
                                       Carnival's business activities including
                                       entertainment services (stage shows,
                                       nightclub shows, contests, dances and
                                       parties), cruise ship services, cruise
                                       transportation services, "on-line"
                                       services, on-board interactive television
                                       services and various children's
                                       entertainment services. On July 22, 1997,
                                       Carnival filed a Motion for Temporary
                                       Injunction seeking to enjoin the Company
                                       from (i) using the Fun Train mark (and
                                       any related "Fun" marks), (ii) holding
                                       out the Company's services or products as
                                       sponsored by or affiliated with Carnival,
                                       (iii) committing acts of infringement or
                                       dilution of Carnival's marks, and (iv)
                                       otherwise unfairly competing. On July 29,
                                       1997, the federal court denied this
                                       motion on the grounds that, among other
                                       things, Carnival has failed to establish
                                       a substantial likelihood of success on
                                       the merits. Currently this action is in
                                       discovery and this case is set for a
                                       pretrial conference on May 15, 1998. A
                                       specific trial date has not been set.

                                       The Company has applied for the federal
                                       registration of "Fun-Train" mark and is
                                       currently pursuing this application;
                                       however, Carnival has opposed this
                                       application.

                                   iii)   DAKOTAH RESERVATIONS SERVICES

                                       On December 31, 1997, Dakotah Reservation
                                       Services, Inc. ("Dakotah"), sent a letter
                                       to the Company asserting a claim for
                                       breach of that certain agreement (the
                                       "Reservation Agreement") between the
                                       Company and Dakotah dated June 1, 1997.

                                       In March 1998 Dakotah filed an action
                                       against the Company in the United States
                                       District Court for the District of
                                       Colorado for breach of an agreement for
                                       the provision of reservation services.
                                       The Company had previously terminated the
                                       Reservation Agreement 


                                      F-21
<PAGE>

                                                   FIRST AMERICAN RAILWAYS, INC.

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                    with Dakotah pursuant to a letter dated
                                    December 30, 1997, for non-performance by
                                    Dakotah of material provisions of the
                                    Reservation Agreement. The Company believes
                                    it has a basis on which to deny liability.

                                   iv) DAVID GILMARTIN

                                    On January 21, 1998, the Company received a
                                    letter from an attorney for David Gilmartin
                                    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. In the event litigation is
                                    commenced against the Company for breach of
                                    the Agreement, the Company intends to deny
                                    liability.

                                   v)  JACK MOSS

                                    An action was filed in the 17th Judicial
                                    Circuit Court in and for Broward County
                                    against the Company on February 19, 1998, by
                                    Jack Moss for unpaid wages and expenses, and
                                    breach of the terms of his employment
                                    agreement with the Company. The Company
                                    denies liability for breach of this
                                    agreement. The Company is currently
                                    negotiating the settlement of this action.
                                    The Company intends to vigorously defend
                                    against the foregoing actions excluding Jack
                                    Moss. The ultimate outcome of these actions
                                    cannot presently be determined.

10. STOCKHOLDERS'                a) In May 1995, the Company executed a stock
    EQUITY                          split and exchanged the 1,996,400 then
                                    outstanding shares of its common stock for
                                    2,495,500 shares of common stock and changed
                                    the par value of its common stock from $.01 
                                    to no par. In February 1996, the Company
                                    executed a second stock split and exchanged
                                    the 2,495,500 shares of its common stock for
                                    4,275,000 shares of common stock with no
                                    par value, 10,000,000 shares authorized
                                    to be issued. On April 26, 1996, the
                                    Company merged into Asia-America
                                    Corporation, a public company, and
                                    accounted for the transaction as a
                                    reverse acquisition for financial
                                    statement purposes, and was recapitalized
                                    with 9,050,278 shares of $.001 par value
                                    stock, 100,000,000 shares 

                                      F-22
<PAGE>

                                                   FIRST AMERICAN RAILWAYS, INC.

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                    authorized to be issued. In connection with
                                    this transaction, there was no impact on the
                                    operating results of the Company and it
                                    resulted only in an adjustment to
                                    stockholders' equity. The components of
                                    stockholders' equity and all per share
                                    amounts in the accompanying financial
                                    statements have been adjusted retroactively
                                    to reflect the stock splits and changes in
                                    par value.

                                 b) In 1996, the Company granted two-year
                                    warrants to purchase 12,500 shares of common
                                    stock at $3.50 per share to a shareholder,
                                    in consideration for extending the repayment
                                    terms of a loan made to the Company.

                                 c) During 1996, the Company granted three
                                    year warrants to purchase 100,000 shares of
                                    common stock at $2.50 per share (the market
                                    value at the date of grant) pursuant to a
                                    consulting agreement.

                                 d) In May 1996, the Company entered into a
                                    two year agreement with an underwriter to
                                    provide financial advising and consulting
                                    services. The agreement was amended in
                                    January 1997 to extend the agreement an
                                    additional eighteen months to October 1999
                                    and to allow all fees through October 1999
                                    to be paid in full by the issuance of 52,500
                                    shares of common stock of the Company in
                                    January 1997. The agreement also provides
                                    for additional fees comprising of 3% to 5%
                                    of consideration paid for acquisitions or
                                    mergers with other companies, joint
                                    ventures, license and royalty agreements,
                                    etc., that the consultant arranges and 1.5%
                                    to 8% of the gross proceeds resulting from
                                    the sale of any securities issued by the
                                    Company.

11. DEBT AND EQUITY                 In March 1996, the Company completed its
    FINANCING                       Stage I financing. The company received
                                    gross proceeds from this private offering of
                                    $500,000 in exchange for $500,000 in notes
                                    payable bearing interest at 10% per annum,
                                    with a $55,000 original issue discount, and
                                    375,004 shares of common stock valued at
                                    $55,000. Costs associated with the offering
                                    were $106,291.

                                    In May 1996, the Company completed its Stage
                                    II financing. Total consideration of
                                    $16,501,365 from this private offering was
                                    received consisting of $16,085,000 in cash
                                    and the conversion of $412,500 in notes
                                    payable and $3,865 in accrued interest from
                                    Stage I financing.


                                      F-23
<PAGE>


                                                   FIRST AMERICAN RAILWAYS, INC.

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                    In connection with this transaction,
                                    $8,250,682 in five-year convertible notes
                                    bearing interest at 10% per annum were
                                    issued. Interest is payable semi-annually in
                                    April and October and the notes are
                                    convertible at $3.50 per share. In addition,
                                    3,950,271 redeemable common stock purchase
                                    warrants and 4,050,274 shares of common
                                    stock valued at $8,250,683 were issued.
                                    Costs associated with the offering were
                                    $1,986,460. The Company used $778,388 of the
                                    net proceed to paydown $333,388 in notes
                                    payable to related parties and others and
                                    $445,000 in notes payable from the Stage I
                                    financing. In connection with the retirement
                                    of the Stage I debt, $94,599 of deferred
                                    loan costs was charged to operations as
                                    amortization of deferred loan costs. In
                                    addition, $55,000 of original issue discount
                                    was charged to operations as interest
                                    expense.

                                    On June 30, 1997, the Company completed a
                                    private offering of 223.05 units of its
                                    securities at $50,000 per unit. Each unit
                                    consists of (i) an 8% convertible
                                    subordinated note in the principal amount of
                                    $50,000 and (ii) 5,000 shares of common
                                    stock of the Company. The subordinated notes
                                    may be converted at $3.50 per share, at the
                                    option of the holders thereof, at any time
                                    during the five-year term thereof. Investors
                                    who purchased at least 40 units ($2,000,000)
                                    received an additional 2,500 shares (for a
                                    total of 7,500 shares) for each unit
                                    purchased, however, the subordinated note(s)
                                    issued to these investors contain(s) a
                                    mandatory conversion feature which may be
                                    exercised by the Company in certain
                                    circumstances.

                                    The Company issued a total of $11,152,500
                                    (principal amount) in subordinated notes and
                                    1,465,250 shares of common stock which
                                    yielded gross proceeds and net proceeds of
                                    $11,152,500 and approximately $9,560,000,
                                    respectively. Additionally, the Company
                                    issued 223,050 shares of common stock as
                                    partial compensation to the placement agent
                                    and certain subplacement agents in the
                                    private offering. The transaction resulted
                                    in an original issue discount of
                                    approximately $3,450,000 which is being
                                    recorded as additional interest expense over
                                    the five-year term of the subordinated
                                    notes.

                                      F-24
<PAGE>

                                                   FIRST AMERICAN RAILWAYS, INC.

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

12.  STOCK BASED                    The Company has elected to follow Accounting
     COMPENSATION                   Principles Board Opinion No. 25 "Accounting 
                                    for Stock Issued to Employees" ("APB 25") in
                                    accounting for its employee stock options.  
                                    Under APB 25, because the exercise price of 
                                    the Company's employee stock options issued 
                                    equaled the market price of the underlying  
                                    stock or the close of grant, no compensation
                                    expense was recognized.                     
                                    

                                    Under the Company's 1996 Non-Qualified Stock
                                    Option Plan, the Company may grant options
                                    to its employees, directors and external
                                    consultants up to 717,500 shares of the
                                    Company's common stock. All options granted
                                    to employees have 10 year terms and become
                                    fully exercisable at the end of the second
                                    or third year. All options granted to
                                    directors and external consultants have ten
                                    year terms and vest immediately. Statement
                                    of Financial Accounting Standards No. 123
                                    "Accounting for Stock-Based Compensation,"
                                    ("SFAS No. 123") requires the Company to
                                    provide proforma information regarding net
                                    loss and loss per common share as if
                                    compensation cost for the Company's Stock
                                    Option plan had been determined in
                                    accordance with the fair value based method
                                    prescribed in SFAS No. 123. The Company
                                    estimates the fair value of each stock
                                    option on the date of grant by using the
                                    Black Scholes option-pricing model with the
                                    following weighted-average assumptions for
                                    1997 and 1996, respectively: risk-free
                                    interest rates of 6.1% and 6.5%; dividend
                                    yield of 0 for both years; volatility
                                    factors of the expected market price of the
                                    Company's common stock of .695 and .10; and
                                    weighted-average expected life of the option
                                    of 9 and 10 years.

                                    Under the accounting provisions of SFAS No.
                                    123, the Company's net loss and loss per
                                    common share for the years ended December
                                    31, 1997 and 1996 would have been $7,534,829
                                    and $.73 and $2,633,644 and $.35,
                                    respectively. A summary of the Company's
                                    stock option activity, and related
                                    information for the years ended December 31,
                                    1997 and 1996, is as follows:


                                      F-25
<PAGE>

                                                   FIRST AMERICAN RAILWAYS, INC.

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



<TABLE>
<CAPTION>
                                                                     WEIGHTED                      WEIGHTED
                                                                      AVERAGE                       AVERAGE     
                                                        OPTIONS    EXERCISE PRICE    OPTIONS    EXERCISE PRICE
                                                        -------    --------------    -------    --------------
<S>                                                     <C>            <C>           <C>              <C>     
                                    Outstanding
                                       January 1        138,700        $3.88               -              -
                                    Granted             487,000         2.41         138,700          $3.88    
                                    Exercised                 -            -               -              -
                                    Forfeited          (131,000)        2.53               -              -
                                                        -------        -----         -------          -----   
                                    Outstanding,
                                       December 31      494,700         2.79         138,700          $3.88   
                                                        -------        -----         -------          -----   

                                    Exercisable at      
                                       December 31      396,033         2.74          71,698          $3.77     
                                                        -------        -----         -------          -----   
</TABLE>

                                    The weighted-average fair value of options
                                    granted was $1.85 for each of the
                                    years ended December 31, 1997 and 1996.

                                    Exercise prices for options outstanding and
                                    exercisable as of December 31, 1997 ranged
                                    from $1.00 to $4.75. The weighted average
                                    remaining contractual life of these options
                                    is approximately 8.8 years.

13.  ACQUITISION                    On March 13, 1997, the Company purchased all
                                    of the common stock of The Durango &
                                    Silverton Narrow Gauge Railroad Company
                                    ("D&SNG"). The purchase price, which
                                    aggregated approximately $16.2 million
                                    consisted of the following: (i) two
                                    promissory notes aggregating $10.05 million
                                    which are subordinate to a purchase money
                                    loan provided by a third-party lender in the
                                    amount of $8.5 million; (ii) 200,000 shares
                                    of the common stock of the Company; (iii) a
                                    six-year warrant to purchase 1,610,000
                                    shares of the Company at an exercise price
                                    of $3.50 per share; and (iv) cash of
                                    approximately $5 million, including a $2
                                    million deposit which was paid in December
                                    1996. The purchase resulted in an allocation
                                    of approximately $1.5 million to goodwill,
                                    which is being amortized over forty years.


                                      F-26
<PAGE>

                                                   FIRST AMERICAN RAILWAYS, INC.

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                    For financial statement purposes, the
                                    acquisition is assumed to have occurred on
                                    March 31, 1997. The operations for the
                                    period from March 13, 1997 to March 31, 1997
                                    are not deemed to be material.

                                    In connection with the acquisition of D&SNG,
                                    the fair value of the assets acquired was as
                                    follows:

<TABLE>
<S>                                                                                <C>          
                                    Cash paid (net of cash acquired)               $   5,656,050
                                    Liabilities assumed and/or incurred               24,158,730
                                    Common stock and warrant issued                      544,900
                                    Fair value of assets acquired                  $  30,359,680
</TABLE>

                                    The acquisition was accounted for under the
                                    purchase method for accounting purposes and
                                    based upon a preliminary allocation of the
                                    purchase price resulted in the following
                                    significant assets acquired and liabilities
                                    assumed and/or incurred: 

<TABLE>
<S>                                                                 <C>         
                                    Fixed assets                    $ 28,487,047
                                    Inventories and other assets       1,872,633
                                    Deferred income tax liability      8,167,159
                                    Long-term debt                    17,650,000
                                    Other liabilities                  2,953,234
</TABLE>

                                    The Company's unaudited proforma
                                    consolidated statements of operations for
                                    the years ended December 31, 1997 and 1996,
                                    assuming the acquisition of D&SNG was
                                    effected at the beginning of each such
                                    period, are summarized as follows:

<TABLE>
<CAPTION>
                                                                            1997                     1996
                                                                            ----                     ----

<S>                                                                    <C>                     <C>          
                                       Total revenues                  $  10,187,607           $   8,946,462
                                       Net loss                        $  (8,100,775)          $  (1,196,049)
                                       Income loss per share           $       (0.78)          $       (0.15)
</TABLE>

                                    This proforma information does not purport
                                    to be indicative of the results which may
                                    have been obtained had the acquisition been
                                    consummated on the dates assumed.

                                    D&SNG's business is highly seasonal;
                                    historically, at least 60% of the total
                                    number of passengers who ride on D&SNG
                                    annually do so during the months of June,
                                    July and August.



                                      F-27
<PAGE>

                                 EXHIBIT INDEX

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

         23.1           Consent of BDO Seidman LLP.