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

FORM 10-Q

(Mark One)

|  |  |                                                                                         
|- |  | ----------------------------------------------------------------------------------------
|x |  | QUARTERLY REPORT PURSUANT TO SECTION 13 or 15 (d) OFTHE SECURITIES
EXCHANGE ACT OF 1934.
| 
|  |  | For the quarterly period ended March 31, 2002                                           
| 
|  |  | OR                                                                                      
| 
|o |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OFTHE SECURITIES
EXCHANGE ACT OF 1934.
| 
|  |  | For the transition period from  to                                                      

Commission file number 0-24639

RAILWORKS CORPORATION
(Exact name of registrant as specified in its governing instrument)

|                                                                                          |  |                                             
|----------------------------------------------------------------------------------------- |  | --------------------------------------------
|Delaware
(State of Organization)                                                          |  | 58-2382378
(IRS Employer
Identification No.)
|                                                                                         
|6225 Smith Avenue,
Suite 200,
Baltimore, Maryland
(Address of principal executive office) |  | 21209
(Zip Code)                            

(Registrants telephone number, including area code) (410) 580-6000

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes x
No o

14,383,551 shares of Common Stock were outstanding as of May 1, 2002.



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TABLE OF CONTENTS



|                                |                                                                                               |  |  |  |  |  |  | 
|------------------------------- | --------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I.  FINANCIAL INFORMATION
|                                | Item 1. Consolidated Financial Statements                                                    
|                                | Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
|                                | Item 3. Quantitative and Qualitative Disclosures About Market Risk                           
|PART II.    OTHER INFORMATION 
|                                | Item 1. Legal Proceedings                                                                    
|                                | Item 6. Exhibits and Reports on Form 8-K                                                     
|SIGNATURES                     



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##### Table of Contents



TABLE OF CONTENTS

|                                |                                                                                               |  |      |    | 
|------------------------------- | --------------------------------------------------------------------------------------------- |  | ---- | -- | 
|                                |                                                                                               |  | page
|                                |                                                                                               |  |     
|PART I.  FINANCIAL INFORMATION |                                                                                               |  | 2    |   
|                               
|                                | Item 1. Consolidated Financial Statements                                                     |  |      | 2  | 
|                               
|                                | Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations |  |      | 22 | 
|                               
|                                | Item 3. Quantitative and Qualitative Disclosures About Market Risk                            |  |      | 41 | 
|                               
|PART II.  OTHER INFORMATION    |                                                                                               |  | 42   |   
|                               
|                                | Item 1.
Legal Proceedings                                                                     |  |      | 43 | 
|                               
|                                | Item 6.
Exhibits and Reports on Form 8-K                                                      |  |      | 44 | 
|                               
|Signatures                      |                                                                                               |  | 45   |   



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##### Table of Contents






PART I.  FINANCIAL INFORMATION




Item 1. Consolidated Financial Statements

RAILWORKS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 2002 AND DECEMBER 31, 2001(in thousands, except share and per share data)

|                                       |                                                                                                                                                           |                                                              |                |                                             |         |             |         |          |         |        |         |  
|-------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------ | -------------- | ------------------------------------------- | ------- | ----------- | ------- | -------- | ------- | ------ | ------- | -
|                                       |                                                                                                                                                           |                                                              |                |                                             |         | (Unaudited)
|ASSETS                                 |                                                                                                                                                           | 2002                                                         |                | 2001                                       
|                                       |                                                                                                                                                           |                                                              |                |                                            
|CURRENT ASSETS:                        |                                                                                                                                                           |                                                              |                |                                             |         |             |         |         
|                                       | Cash and cash equivalents                                                                                                                                 |                                                              | $              | 2,105                                       |         |             | $       | 2,830    |        
|                                       | Accounts receivable, net of allowance for doubtful accounts of $14,240 and $14,170,
respectively                                                          |                                                              |                | 157,321                                     |         |             |         | 174,429  |        
|                                       | Costs and estimated earnings in excess of billings on uncompleted contracts                                                                               |                                                              |                | 38,902                                      |         |             |         | 40,693   |        
|                                       | Inventories:                                                                                                                                              |                                                              |                |                                             |         |             |         |          |        
|                                       |                                                                                                                                                           |                                                              | Raw materials  |                                             |         | 10,298      |         |          |         | 10,192 |        
|                                       |                                                                                                                                                           |                                                              | Finished goods |                                             |         | 15,091      |         |          |         | 12,578 |        
|                                       | Other current assets                                                                                                                                      |                                                              |                | 11,108                                      |         |             |         | 12,250   |        
|                                       |                                                                                                                                                           |                                                              |                |                                             |         |             |         |         
|                                       |                                                                                                                                                           |                                                              |                | Total current assets                        |         |             | 234,825 |          |         |        | 252,972 |  
|                                       |                                                                                                                                                           |                                                              |                |                                             |         |             |         |         
|PROPERTY, PLANT AND EQUIPMENT, NET     |                                                                                                                                                           |                                                              | 49,904         |                                             |         |             | 50,963  |         
|                                       |                                                                                                                                                           |                                                              |                |                                             |         |             |         |         
|OTHER ASSETS:                          |                                                                                                                                                           |                                                              |                |                                             |         |             |         |         
|                                       |                                                                                                                                                           | Excess of cost over net assets acquired, net of amortization |                |                                             | 204,721 |             |         |          | 204,812 |       
|                                       |                                                                                                                                                           | Other                                                        |                |                                             | 8,622   |             |         |          | 9,106   |       
|                                       |                                                                                                                                                           |                                                              |                |                                             |         |             |         |         
|                                       |                                                                                                                                                           |                                                              |                | Total other assets                          |         |             | 213,343 |          |         |        | 213,918 |  
|                                       |                                                                                                                                                           |                                                              |                |                                             |         |             |         |         
|                                       |                                                                                                                                                           |                                                              |                | TOTAL                                       |         | $           | 498,072 |          |         | $      | 517,853 |  
|                                       |                                                                                                                                                           |                                                              |                |                                             |         |             |         |         
|                                       |                                                                                                                                                           |                                                              |                | LIABILITIES AND STOCKHOLDERS DEFICIT       |         |             |         |          |         |        |         |  
|Liabilities Not Subject to Compromise: |                                                                                                                                                           |                                                              |                |                                             |         |             |         |         
|Current Liabilities:                   |                                                                                                                                                           |                                                              |                |                                             |         |             |         |         
|                                       | Cash overdraft                                                                                                                                            |                                                              | $              | 1,162                                       |         |             | $       | 2,995    |        
|                                       | Current maturities of long-term debt                                                                                                                      |                                                              |                | 50,169                                      |         |             |         | 41,523   |        
|                                       | Accounts payable                                                                                                                                          |                                                              |                | 35,281                                      |         |             |         | 30,341   |        
|                                       | Accrued payroll and related withholdings                                                                                                                  |                                                              |                | 7,064                                       |         |             |         | 6,650    |        
|                                       | Accrued interest payable                                                                                                                                  |                                                              |                | 1,070                                       |         |             |         | 477      |        
|                                       | Billings in excess of costs and estimated earnings on uncompleted contracts                                                                               |                                                              |                | 16,281                                      |         |             |         | 13,809   |        
|                                       | Other accrued liabilities                                                                                                                                 |                                                              |                | 16,324                                      |         |             |         | 15,865   |        
|                                       |                                                                                                                                                           |                                                              |                |                                             |         |             |         |         
|                                       |                                                                                                                                                           |                                                              |                | Total current liabilities                   |         |             | 127,351 |          |         |        | 111,660 |  
|                                       |                                                                                                                                                           |                                                              |                |                                             |         |             |         |         
|                                       | Long-term debt, net of current maturities                                                                                                                 |                                                              |                | 332                                         |         |             |         | 346      |        
|                                       | Deferred tax liability                                                                                                                                    |                                                              |                | 548                                         |         |             |         | 551      |        
|                                       | Excess of acquired net assets over cost, net of amortization                                                                                              |                                                              |                |                                            |         |             |         | 5,323    |        
|                                       | Other liabilities                                                                                                                                         |                                                              |                | 4,801                                       |         |             |         | 4,978    |        
|                                       |                                                                                                                                                           |                                                              |                |                                             |         |             |         |         
|                                       |                                                                                                                                                           |                                                              |                | Total long-term liabilities                 |         |             | 5,681   |          |         |        | 11,198  |  
|                                       |                                                                                                                                                           |                                                              |                |                                             |         |             |         |         
|                                       |                                                                                                                                                           |                                                              |                | Total liabilities not subject to compromise |         |             | 133,032 |          |         |        | 122,858 |  
|                                       | Liabilities subject to compromise                                                                                                                         |                                                              |                | 434,672                                     |         |             |         | 455,065  |        
|                                       |                                                                                                                                                           |                                                              |                |                                             |         |             |         |         
|                                       |                                                                                                                                                           |                                                              |                | Total liabilities                           |         |             | 567,704 |          |         |        | 577,923 |  
|                                       |                                                                                                                                                           |                                                              |                |                                             |         |             |         |         
|                                       | Minority interest                                                                                                                                         |                                                              |                | 1,784                                       |         |             |         | 1,749    |        
|Stockholders Deficit:                 |                                                                                                                                                           |                                                              |                |                                             |         |             |         |         
|                                       | Series A, convertible preferred stock, $1.00 par value, authorized
10,000,000 shares, 13,700 shares issued and outstanding                                |                                                              |                | 14                                          |         |             |         | 14       |        
|                                       | Common stock, $0.01 par value, authorized 100,000,000 shares, 15,512,585 shares issued and
14,383,551 outstanding at March 31, 2002 and December 31, 2001 |                                                              |                | 155                                         |         |             |         | 155      |        
|                                       | Treasury Stock                                                                                                                                            |                                                              |                | (2,667                                      | )       |             |         | (2,667   | )      
|                                       | Officer Loans, net                                                                                                                                        |                                                              |                | (1,876                                      | )       |             |         | (1,876   | )      
|                                       | Additional paid-in capital                                                                                                                                |                                                              |                | 136,572                                     |         |             |         | 136,572  |        
|                                       | Accumulated other comprehensive loss                                                                                                                      |                                                              |                | (2,157                                      | )       |             |         | (1,969   | )      
|                                       | Retained deficit                                                                                                                                          |                                                              |                | (201,457                                    | )       |             |         | (192,048 | )      
|                                       |                                                                                                                                                           |                                                              |                |                                             |         |             |         |         
|                                       |                                                                                                                                                           |                                                              |                | Total stockholders deficit                 |         |             | (71,416 | )        |         |        | (61,819 | )
|                                       |                                                                                                                                                           |                                                              |                |                                             |         |             |         |         
|                                       |                                                                                                                                                           |                                                              |                | TOTAL                                       |         | $           | 498,072 |          |         | $      | 517,853 |  
|                                       |                                                                                                                                                           |                                                              |                |                                             |         |             |         |         

See Notes to Consolidated Financial Statements.



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RAILWORKS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2002 AND 2001

(in thousands, except share and per share data)

|                                                                                                                        |                                          |   |             |        |      |   |            |         |  
|----------------------------------------------------------------------------------------------------------------------- | ---------------------------------------- | - | ----------- | ------ | ---- | - | ---------- | ------- | -
|                                                                                                                        |                                          |   | (Unaudited)
|                                                                                                                        |                                          |   | 2002        |        | 2001
|                                                                                                                        |                                          |   |             |        |     
|Revenue                                                                                                                 |                                          | $ | 111,278     |        |      | $ | 170,388    |        
|Costs of revenue                                                                                                        |                                          |   | 99,945      |        |      |   | 140,278    |        
|                                                                                                                        |                                          |   |             |        |      |   |            |        
|Gross profit                                                                                                            |                                          |   | 11,333      |        |      |   | 30,110     |        
|Selling, general and administrative expenses                                                                            |                                          |   | 17,762      |        |      |   | 18,754     |        
|Restructuring and other unusual charges                                                                                 |                                          |   |            |        |      |   | 232        |        
|                                                                                                                        |                                          |   |             |        |      |   |            |        
|Operating income (loss)                                                                                                 |                                          |   | (6,429      | )      |      |   | 11,124     |        
|                                                                                                                        |                                          |   |             |        |      |   |            |        
|                                                                                                                        | Interest expense                         |   |             | (2,450 | )    |   |            | (10,235 | )
|                                                                                                                        | Interest and other (expense) income, net |   |             | 170    |      |   |            | (237    | )
|                                                                                                                        |                                          |   |             |        |      |   |            |        
|Income (loss) before reorganization items, income taxes, minority interest
and effect of change in accounting principle |                                          |   | (8,709      | )      |      |   | 652        |        
|Reorganization items                                                                                                    |                                          |   | (6,110      | )      |      |   |           |        
|                                                                                                                        |                                          |   |             |        |      |   |            |        
|Income (loss) before income taxes, minority interest and effect of
change in accounting principle                       |                                          |   | (14,819     | )      |      |   | 652        |        
|Provision (benefit) for income taxes                                                                                    |                                          |   | (88         | )      |      |   | 500        |        
|                                                                                                                        |                                          |   |             |        |      |   |            |        
|Income (loss) before minority interest and effect of change in accounting principle                                     |                                          |   | (14,731     | )      |      |   | 152        |        
|Minority interest, net of tax                                                                                           |                                          |   | (1          | )      |      |   |           |        
|                                                                                                                        |                                          |   |             |        |      |   |            |        
|Net income (loss) before effect of change in accounting principle                                                       |                                          |   | (14,732     | )      |      |   | 152        |        
|Effect of change in accounting principle, net of tax                                                                    |                                          |   | 5,323       |        |      |   |           |        
|                                                                                                                        |                                          |   |             |        |      |   |            |        
|Net income (loss)                                                                                                       |                                          | $ | (9,409      | )      |      | $ | 152        |        
|                                                                                                                        |                                          |   |             |        |      |   |            |        
|Basic earnings (loss) per share before effect of change in accounting principle                                         |                                          | $ | (1.02       | )      |      | $ | 0.01       |        
|Basic earnings per share from effect of change in accounting principle                                                  |                                          |   | 0.37        |        |      |   |           |        
|                                                                                                                        |                                          |   |             |        |      |   |            |        
|Basic earnings (loss) per share                                                                                         |                                          | $ | (0.65       | )      |      | $ | 0.01       |        
|                                                                                                                        |                                          |   |             |        |      |   |            |        
|Diluted income (loss) per share before effect of change in accounting principle                                         |                                          | $ | (1.02       | )      |      | $ | 0.01       |        
|Diluted earnings per share from effect of change in accounting principle                                                |                                          |   | 0.37        |        |      |   |           |        
|                                                                                                                        |                                          |   |             |        |      |   |            |        
|Diluted earnings (loss) per share                                                                                       |                                          | $ | (0.65       | )      |      | $ | 0.01       |        
|                                                                                                                        |                                          |   |             |        |      |   |            |        
|Weighted average shares used in computing basic income (loss) per share                                                 |                                          |   | 14,383,551  |        |      |   | 15,369,759 |        
|                                                                                                                        |                                          |   |             |        |      |   |            |        
|Weighted average shares used in computing diluted income (loss) per share                                               |                                          |   | 14,383,551  |        |      |   | 16,781,976 |        
|                                                                                                                        |                                          |   |             |        |      |   |            |        

See Notes to Consolidated Financial Statements.



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RAILWORKS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2002 AND 2001

(in thousands)

|                                                                                          |                                                  |                                                                                                     |                                                                             |                                                     |        |             |        |        |        |        |         |  
|----------------------------------------------------------------------------------------- | ------------------------------------------------ | --------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------- | --------------------------------------------------- | ------ | ----------- | ------ | ------ | ------ | ------ | ------- | -
|                                                                                          |                                                  |                                                                                                     |                                                                             |                                                     |        | (Unaudited)
|                                                                                          |                                                  |                                                                                                     |                                                                             |                                                     |        | 2002        |        | 2001  
|                                                                                          |                                                  |                                                                                                     |                                                                             |                                                     |        |             |        |       
|CASH FLOWS FROM OPERATING ACTIVITIES:                                                     |                                                  |                                                                                                     |                                                                             |                                                     |        |             |        |       
|Net income (loss)                                                                         |                                                  |                                                                                                     | ($9,409                                                                     | )                                                   |        | $           | 152    |       
|Adjustments to reconcile net loss to net cash provided by (used in) operating activities: |                                                  |                                                                                                     |                                                                             |                                                     |        |             |        |       
|                                                                                          | Depreciation and amortization                    |                                                                                                     |                                                                             | 3,278                                               |        |             |        | 5,244  |       
|                                                                                          | Effect of change in accounting principle         |                                                                                                     |                                                                             | (5,323                                              | )      |             |        |       |       
|                                                                                          | Minority interest                                |                                                                                                     |                                                                             | 1                                                   |        |             |        |       |       
|                                                                                          | Bond discount amortization                       |                                                                                                     |                                                                             |                                                    |        |             |        | 18     |       
|                                                                                          | Loss (gain) on sale of equipment                 |                                                                                                     |                                                                             | 60                                                  |        |             |        | (114   | )     
|                                                                                          | Loss on sale of subsidiary                       |                                                                                                     |                                                                             |                                                    |        |             |        | 612    |       
|                                                                                          | Change in operating assets and liabilities:      |                                                                                                     |                                                                             |                                                     |        |             |        |        |       
|                                                                                          |                                                  | Accounts receivable and costs and estimated earnings in excess of billings on uncompleted contracts |                                                                             |                                                     | 18,898 |             |        |        | (6,963 | )     
|                                                                                          |                                                  |                                                                                                     | Inventories                                                                 |                                                     |        | (3,007      | )      |        |        | (1,509 | )      
|                                                                                          |                                                  |                                                                                                     | Other current assets                                                        |                                                     |        | 1,142       |        |        |        | (892   | )      
|                                                                                          |                                                  |                                                                                                     | Accounts payable                                                            |                                                     |        | (15,121     | )      |        |        | (1,163 | )      
|                                                                                          |                                                  |                                                                                                     | Accrued payroll and related withholdings                                    |                                                     |        | 414         |        |        |        | 4,453  |        
|                                                                                          |                                                  |                                                                                                     | Accrued interest payable                                                    |                                                     |        | 593         |        |        |        | 4,565  |        
|                                                                                          |                                                  |                                                                                                     | Billings in excess of costs and estimated earnings on uncompleted contracts |                                                     |        | 2,472       |        |        |        | (2,272 | )      
|                                                                                          |                                                  |                                                                                                     | Other accrued liabilities                                                   |                                                     |        | 1,292       |        |        |        | 1,440  |        
|                                                                                          |                                                  |                                                                                                     | Other assets                                                                |                                                     |        | 477         |        |        |        | 851    |        
|                                                                                          |                                                  |                                                                                                     | Other liabilities                                                           |                                                     |        | (182        | )      |        |        | (674   | )      
|                                                                                          |                                                  |                                                                                                     |                                                                             |                                                     |        |             |        |       
|                                                                                          |                                                  |                                                                                                     |                                                                             | Net cash provided by (used in) operating activities |        |             | (4,415 | )      |        |        | 3,748   |  
|                                                                                          |                                                  |                                                                                                     |                                                                             |                                                     |        |             |        |       
|CASH FLOWS FROM INVESTING ACTIVITIES:                                                     |                                                  |                                                                                                     |                                                                             |                                                     |        |             |        |       
|                                                                                          | Proceeds from sale of equipment                  |                                                                                                     |                                                                             | 292                                                 |        |             |        | 248    |       
|                                                                                          | Purchase of equipment and leasehold improvements |                                                                                                     |                                                                             | (2,215                                              | )      |             |        | (3,709 | )     
|                                                                                          | Proceeds from sale of subsidiary                 |                                                                                                     |                                                                             |                                                    |        |             |        | 9,140  |       
|                                                                                          | Distribution from minority interest              |                                                                                                     |                                                                             | 34                                                  |        |             |        |       |       
|                                                                                          | Contingent earn-out payments                     |                                                                                                     |                                                                             | (969                                                | )      |             |        | (545   | )     
|                                                                                          |                                                  |                                                                                                     |                                                                             |                                                     |        |             |        |       
|                                                                                          |                                                  |                                                                                                     |                                                                             | Net cash provided by (used in) investing activities |        |             | (2,858 | )      |        |        | 5,134   |  
|                                                                                          |                                                  |                                                                                                     |                                                                             |                                                     |        |             |        |       
|CASH FLOWS FROM FINANCING ACTIVITIES:                                                     |                                                  |                                                                                                     |                                                                             |                                                     |        |             |        |       
|                                                                                          | Net change in cash overdraft                     |                                                                                                     |                                                                             | (1,833                                              | )      |             |        | (7,403 | )     
|                                                                                          | Net activity on revolving line of credit         |                                                                                                     |                                                                             | (500                                                | )      |             |        | 2,571  |       
|                                                                                          | Payment of loan origination fees                 |                                                                                                     |                                                                             |                                                    |        |             |        | (46    | )     
|                                                                                          | Net change in debtor-in-possession funding       |                                                                                                     |                                                                             | 9,155                                               |        |             |        |       |       
|                                                                                          | Proceeds from fixed asset borrowings             |                                                                                                     |                                                                             |                                                    |        |             |        | 267    |       
|                                                                                          | Repayments of fixed asset borrowings             |                                                                                                     |                                                                             | (211                                                | )      |             |        | (2,308 | )     
|                                                                                          | Repayments of term loan                          |                                                                                                     |                                                                             |                                                    |        |             |        | (4,722 | )     
|                                                                                          | Repayments of sellers notes                      |                                                                                                     |                                                                             |                                                    |        |             |        | (2,825 | )     
|                                                                                          |                                                  |                                                                                                     |                                                                             |                                                     |        |             |        |       
|                                                                                          |                                                  |                                                                                                     |                                                                             | Net cash provided by (used in) financing activities |        |             | 6,611  |        |        |        | (14,466 | )
|                                                                                          |                                                  |                                                                                                     |                                                                             |                                                     |        |             |        |       
|EXCHANGE RATE EFFECT ON CASH AND CASH EQUIVALENTS                                         |                                                  |                                                                                                     | (63                                                                         | )                                                   |        |             | (502   | )     
|                                                                                          |                                                  |                                                                                                     |                                                                             |                                                     |        |             |        |       
|NET DECREASE IN CASH AND CASH EQUIVALENTS                                                 |                                                  |                                                                                                     | (725                                                                        | )                                                   |        |             | (6,086 | )     
|CASH AND CASH EQUIVALENTS, beginning of period                                            |                                                  |                                                                                                     | 2,830                                                                       |                                                     |        |             | 7,138  |       
|                                                                                          |                                                  |                                                                                                     |                                                                             |                                                     |        |             |        |       
|CASH AND CASH EQUIVALENTS, end of period                                                  |                                                  | $                                                                                                   | 2,105                                                                       |                                                     |        | $           | 1,052  |       
|                                                                                          |                                                  |                                                                                                     |                                                                             |                                                     |        |             |        |       

See Notes to Consolidated Financial Statements.



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##### Table of Contents



RAILWORKS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring adjustments) considered necessary
for a fair presentation have been included in the accompanying unaudited
consolidated financial statements. Operating results for the three months ended
March 31, 2002 are not necessarily indicative of the results that may be
expected for the year ending December 31, 2002.

On September 20, 2001, RailWorks Corporation and twenty-two of its
domestic subsidiaries filed voluntary petitions for relief under Chapter 11 of
the United States Bankruptcy Code in the United States Bankruptcy Court for the
District of Maryland (Baltimore Division) (See Note 2). The Companys ability
to continue as a going concern is contingent upon, among other things,
confirmation of a plan of reorganization, future profitable operations, the
ability to comply with the terms of its debtor-in-possession (DIP) financing
and the ability to generate sufficient cash flow from operations and financing
arrangements to fund ongoing operations. There can be no assurance that the
Company will be able to confirm a plan or comply with the terms of the DIP
Facility. As of May 1, 2002, the amount outstanding under the Companys
Transit Revolver (as defined below) totaled $45.0 million, the maximum amount
permitted under the facility, of which $30.0 million was outstanding borrowings
and $15.0 million was a letter of credit supporting the Companys commercial
insurance. At that date, the amount outstanding under the TP&S Revolver (as
defined below) was $26.6 million, consisting of $18.4 million of outstanding
borrowings and $8.2 million of letters of credit outstanding. We had $11.7
million of collateral outstanding under the Bonding Facility (as defined
below). No further borrowing capacity presently exists under the Transit
Revolver. The lack of additional availability under the Transit Revolver will
require that the transit services segment internally generate the cash
necessary to fund its operations and its share of the administrative costs of
reorganization, but there is no assurance that it will be able to do so.
Failure to do so coupled with a failure to obtain additional funding for the
transit services segment could result in the discontinuation of this business
segment. These financial statements do not include adjustments related to the
recoverability and classification of recorded asset amounts or the amounts and
classification of liabilities or any other adjustments that might result should
the Company be unable to continue as a going concern.

Nature of the Business

RailWorks Corporation (the Company) was formed to become a leading
nationwide provider of rail system services, including construction and
rehabilitation, repair and maintenance, and related products. The Company
provides contracting services and rail related products to a broad range of
customers including Class I railroads, transit authorities and



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commuter railroads, municipalities, industrial companies and commercial
enterprises. RailWorks operates principally in the United States and Canada.

In accordance with Statement of Financial Accounting Standards (SFAS)
No. 131, the Company has three reportable segments: (1) transit services, (2)
rail track services and (3) rail products and services. The transit services
segment provides transit construction and rehabilitation services, general
electrical contracting, contracting power generation facilities, as well as
installation of signaling, communications and electrical systems. The rail
track services segment provides design, engineering, construction,
rehabilitation and repair and maintenance of track systems. The rail products
and services segment provides a broad range of rail related products, including
treated wood ties. The Company evaluates performance based on profit or loss
from operations before income taxes, interest income and expense, and
non-recurring gains and losses.

Chapter 11 Bankruptcy

The consolidated financial statements of the Company have been presented
in accordance with the American Institute of Certified Public Accountants
Statement of Position 90-7: Financial Reporting by Entities in Reorganization
under the Bankruptcy Code (SOP 90-7) and have been prepared in accordance
with accounting principles generally accepted in the United States applicable
to a going concern. These principles, except as otherwise disclosed, assume
that assets will be realized and liabilities will be discharged in the normal
course of business. The uncertainty regarding the eventual outcome of the
reorganization cases, related problems with subcontractors and customers and
the effect of other unknown adverse factors could threaten the Companys
existence as a going concern.

SOP 90-7 states, among other things, that revenues, expenses, realized
gains and losses, and provisions from losses resulting from the reorganization
and the restructuring of the business should be reported separately as
reorganization items in the consolidated statement of operations. The
consolidated balance sheets at March 31, 2002 and December 31, 2001 distinguish
between prepetition liabilities that are subject to compromise and those that
are not such as fully secured liabilities that are not expected to be
compromised. If there is uncertainty about whether a secured claim is under
secured, or will be impaired under the reorganization plan, the entire amount
of the claim is included with liabilities subject to compromise. See Note 2
for more information on liabilities classified as subject to compromise and
amounts recorded as reorganization items.

Recently Issued Accounting Pronouncements

In June 2001, the Financial Accounting Standards Board (FASB) issued
SFAS No. 141, Business Combinations, which requires all business combinations
initiated after June 30, 2001 to be accounted for using the purchase method.
Implementation of this statement did not have an effect on the Companys
financial statements.

In June 2001, the Financial Accounting Standards Board approved Statement
of Financial Accounting Standard No. 142, Goodwill and Other Intangible
Assets (SFAS No. 142), which requires companies to cease amortizing
goodwill. SFAS No. 142 also establishes a new method of testing goodwill for
impairment on an annual basis or on an interim basis if an event occurs or
circumstances change that would reduce the fair value of a reporting unit below
its carrying value. The adoption of SFAS No. 142 resulted in the
discontinuation of amortization of goodwill commencing January 1, 2002, which
resulted in the Company not recording approximately $1.3



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million of amortization expense during the three months ended March 31,
2002. Had the Company adopted SFAS No. 142 effective January 1, 2001, the
Company would not have recorded approximately $1.4 million of amortization
expense during the three months ended March 31, 2001.

The Company is currently in the process of testing goodwill for impairment
under SFAS No. 142. The first step of the process, which must be completed by
June 30, 2002, requires the Company to determine whether the carrying value of
its reporting units exceeds the fair value of the goodwill related to those
reporting units. Upon completion of this step, the Company will be required to
determine the measurement of the impairment. The Company expects to complete
such impairment analysis by December 31, 2002. While the Company has not
determined that impairment at March 31, 2002, it believes that this statement
will require a material impairment charge on the Companys financial statements
upon final implementation. Further, upon emergence from Chapter 11 Bankruptcy
during 2002, the Company may be required to record an additional charge to
write off the goodwill to the extent that it exceeds excess reorganization
value of the Company upon emergence.

In addition, SFAS No. 142 states that beginning as of the earlier of
January 1, 2002 or the date SFAS No. 142 is applied in its entirety, any
unamortized excess of acquired net assets over cost (negative goodwill) shall
be written off and recognized as a change in accounting principle. As a
result, the company has written off and recognized as a change in accounting
principle approximately $5.3 million of negative goodwill during the three
months ended March 31, 2002.

The following table provides the comparable effects of adoption of SFAS
No. 142 for the three months ended March 31, 2002 and 2001 (in thousands,
except per share data).

|                                                                                  |  |             |         |      |  |   |       | 
|--------------------------------------------------------------------------------- |  | ----------- | ------- | ---- |  | - | ----- | 
|                                                                                  |  | (Unaudited)
|                                                                                  |  | 2002        |         | 2001
|                                                                                  |  |             |         |     
|Reported net income (loss), before change in accounting principle                 |  | $           | (14,732 | )    |  | $ | 152   | 
|Add back: goodwill amortization (net of tax)                                      |  |             |        |      |  |   | 1,363 | 
|                                                                                  |  |             |         |      |  |   |       | 
|Adjusted net income (loss)                                                        |  | $           | (14,732 | )    |  | $ | 1,515 | 
|                                                                                  |  |             |         |      |  |   |       | 
|Reported basic earnings (loss) per share, before change
in accounting principle   |  | $           | (1.02   | )    |  | $ | 0.01  | 
|Add back: goodwill amortization (net of tax)                                      |  |             |        |      |  |   | 0.09  | 
|                                                                                  |  |             |         |      |  |   |       | 
|Adjusted basic earnings (loss) per share                                          |  | $           | (1.02   | )    |  | $ | 0.10  | 
|                                                                                  |  |             |         |      |  |   |       | 
|Reported diluted earnings (loss) per share, before change
in accounting principle |  | $           | (1.02   | )    |  | $ | 0.01  | 
|Add back: goodwill amortization (net of tax)                                      |  |             |        |      |  |   | 0.08  | 
|                                                                                  |  |             |         |      |  |   |       | 
|Adjusted diluted earnings (loss) per share                                        |  | $           | (1.02   | )    |  | $ | 0.09  | 
|                                                                                  |  |             |         |      |  |   |       | 

In June 2001, the FASB issued SFAS No. 143 Accounting for Asset
Retirement Obligations. This statement addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. The statement is effective
for financial statements issued for fiscal years beginning after June 15, 2002.
The Company does not believe this statement will have a material impact on its
results of operations.



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##### Table of Contents



In August 2001, the FASB issued SFAS No. 144 Accounting for the
Impairment or Disposal of Long-Lived Assets. This statement addresses
financial accounting and reporting for the impairment or disposal of long-lived
assets. The provisions of this statement are effective for financial
statements issued for fiscal years beginning after December 15, 2001.
Implementation of this statement did not have a material impact on the
Companys financial statements.

Officers Loans

The Company has certain officer loans secured by common stock, which have
been classified as a contra equity account in the accompanying consolidated
balance sheets. During the third quarter of 2001, the Company forgave both the
principal and interest on certain of these loans, which were extended to former
officers, through foreclosure of the Companys stock, which was held as
collateral. This stock has been classified as treasury stock in the
accompanying consolidated balance sheets.

Use of Estimates

The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amount 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.

The recognition of revenues and costs in accordance with the American
Institute of Certified Public Accountants Statement of Position 81-1:
Accounting for Performance of Construction-Type and Certain Production Type
Contracts (SOP 81-1) involves considerable use of estimates and is
complicated by the need to evaluate continually the uncertainties inherent in
the performance of contracts and by the need to rely on estimates of revenues,
costs and the extent of progress toward completion of contracts. Operating in
Chapter 11 bankruptcy and problems with subcontractors and customers provides
even more risk and uncertainty in the estimates. Changes in these estimates
can cause significant volatility in the Companys financial results.

Revenue Recognition

The Company recognizes revenues from fixed-fee contracts using the
percentage-of-completion method in accordance with SOP 81-1, measured by the
percentage of cost incurred to date to managements estimate of total cost for
each contract. This method is used because management considers total cost to
be the best available measure of progress on the contracts. Revenues from
time-and-material contracts are recognized currently as the work is performed.

Contract revenue recognition inherently involves estimation. Examples of
estimates include the contemplated level of effort to accomplish the tasks
under contract, the costs of the effort, and an ongoing assessment of progress
toward completing the contract. The Company utilizes a number of management
processes to monitor contract performance and revenue estimates, including
monthly in-process reviews that cover, among other matters, outstanding action
items, progress against schedule, effort and staffing, quality, risks and other
issues, subcontractor management costs, and commitments. From time to time, as
part of the normal management processes, facts develop that require revisions
to estimated total costs or revenues expected. The cumulative effect of any
such revisions is recorded in the period in which the facts



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requiring revisions become known. The full amount of anticipated losses
on any type of contract are recognized in the period in which they become
known.

Disputes may arise in the normal course of the Companys business on
projects when the Company is contesting with customers for collection of funds
because of events such as delays, changes in contract specifications, and
questions of cost allowability or collectibility. Such disputes, whether
claims or unapproved change orders in the process of negotiation, are recorded
at the lesser of their estimated net realizable value or actual cost incurred,
and only when realization is probable and can be reliably estimated.

With regard to the rail products and services segment, the Company
recognizes revenue when products are delivered to customers pursuant to
shipping agreements. Cost of goods sold includes the raw materials cost, labor
and overhead costs of producing the product.

The asset, Costs and estimated earnings in excess of billings on
uncompleted contracts, represents revenues recognized in excess of amounts
billed. The liability, Billings in excess of costs and estimated earnings on
uncompleted contracts, represents billings in excess of revenues recognized.
In accordance with industry practice, the Company classifies as current all
assets and liabilities related to the performance of long-term contracts. The
contracting cycle for certain long-term contracts may extend beyond one year
and, accordingly, collection or payment of amounts related to these contracts
may extend beyond one year.

Inventories

Inventories are stated at the lower of cost or market. Cost is determined
by the first-in, first-out (FIFO) method. Inventory consists of stored
materials and parts to be used in long-term construction contracts and raw
materials and finished goods produced by the rail products and services
segment. The Company writes down its inventory for estimated obsolescence or
unmarketable inventory equal to the difference between the cost of inventory
and the estimated market value based upon assumptions about future demand and
market conditions. If actual future demand or market conditions are less
favorable than those projected by management, additional inventory write-downs
may be required.

2. PETITION FOR REORGANIZATION UNDER CHAPTER 11

On September 20, 2001 (the Filing Date), RailWorks Corporation and
twenty-two of its domestic subsidiaries (collectively, the Debtors) filed
voluntary petitions for relief under Chapter 11 of the Bankruptcy Code in the
United States Bankruptcy Court for the District of Maryland (Baltimore
Division) (the Bankruptcy Court). The filings have been consolidated for the
purpose of joint administration as case No. 01-6-4463, but the cases have not
been deemed consolidated for reorganization plan purposes by the Bankruptcy
Court. Our Canadian subsidiaries were not included in the filings and continue
to operate in the normal course of business outside of bankruptcy. The
consolidated financial statements of the Company have been presented in
accordance with SOP 90-7 and have been prepared in accordance with accounting
principles generally accepted in the United States applicable to a going
concern. These principles, except as otherwise disclosed, assume that assets
will be realized and liabilities will be discharged in the normal course of
business. The uncertainty regarding the eventual outcome of the reorganization
cases, related problems with subcontractors and customers and the effect of
other unknown adverse factors could threaten the Companys existence as a going
concern.



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##### Table of Contents



Under Chapter 11, except for certain statutory exceptions and for relief
that might otherwise be granted by the Bankruptcy Court, claims against the
Debtors in existence prior to the Filing Date (including claims secured by the
Debtors assets) are stayed while the Debtors continue business operations as
debtors-in-possession. Additional claims may arise subsequent to the Filing
Date resulting from rejection of executory contracts, including leases and
construction contracts, and from the determination by the Bankruptcy Court (or
agreed to by the parties in interest) of allowed claims for contingencies and
other disputed amounts.

Since the Filing Date, the Bankruptcy Court has approved, on a final
basis, the Debtors debtor-in-possession financing arrangements (collectively,
as amended, restated and/or replaced, the DIP Facility) with Bank of America,
N.A. (BOA), for itself and as agent for a syndicate of lenders, CSFB Global
Opportunities Advisers, LLC (CSFB), for itself and Stonehill Capital
Management, and Travelers Casualty & Surety Company of America (Travelers).
The DIP Facility includes an Amended and Restated DIP Transit Revolving Credit
Agreement (the Transit Revolver) for up to $30.0 million in borrowings and a
$15.0 million letter of credit in support of our company-wide liability and
casualty insurance in connection with the Debtors rail transit division; a DIP
Transit Bonding Facility (the Bonding Facility) for up to $100.0 million in
bonding commitment to support our project bonding requirements; a DIP Bond
Support Credit Agreement (the Bond Support Facility) with CSFB for up to
$40.0 million of collateral support for the transit services divisions project
surety bonds underwritten by Travelers; and a DIP Financing Agreement, as
replaced on March 5, 2002 (the TP&S Revolver) with certain lenders
represented by BOA as administrative agent for up to $35.0 million of financing
and letter of credit commitments to support the track services and products and
services divisions operating cash obligations and project bonding
requirements. The Debtors intend to utilize the DIP Facility and existing cash
flow to fund ongoing operations during the Chapter 11 proceedings. As of May
1, 2002 approximately $45.0 million was outstanding under the Transit Revolver,
consisting of $30.0 million of borrowings and a $15.0 million letter of credit;
$26.6 million was outstanding under the TP&S Revolver, consisting of $18.4
million in borrowings and $8.2 million of letters of credit outstanding; and we
had $11.7 million of collateral outstanding under the Bonding Facility. No
further borrowing capacity presently exists under the Transit Revolver. The
lack of additional availability under the Transit Revolver will require that
the transit services segment internally generate the cash necessary to fund its
operations and its share of the administrative costs of reorganization, but
there is no assurance that it will be able to do so.

Under the Transit
Revolver (as amended and restated), the Company is obligated to pay:
1) an up-front fee of 3.00% of the aggregate commitments;
2) an unused commitment fee of 0.50% per annum on the average
daily unused portion of the commitment; and 3) an additional fee
of $900,000 (together, with the Additional Fee for the TP&S Revolver
referred to below, the Additional Fees) if it does not
have a plan of reorganization acceptable to CSFB, BOA and Travelers
confirmed by the Bankruptcy Court by April 30, 2002 and/or
consummated by May 15, 2002. Borrowings under the Transit
Revolver bear interest at the prime rate plus 3.00%.

Under the Bond
Support Facility the Company is obligated to pay: 1) an up-front
fee of 3.00% of the aggregate commitments; 2) an unused
commitment fee of 0.50% per annum on the average daily unused portion
of the commitment; and 3) a letter of credit fee of 1.50%; and a
fronting and negotiation issuer fee of 0.125% per annum, both
calculated on the average daily maximum amount to be drawn under the
letters of credit from the date of issuance to the date of expiration.

Under the Bonding
Facility the Company is obligated to pay: 1) to Travelers all
premiums due for bonds issued within 60 days of issuance;
2) any broker's fees or commissions for all bond issuances; and
3) to Travelers a monthly management fee of $10,000. In
connection with the issuance of any bond under the Bonding Facility,
and as a necessary condition precedent thereto, the Company must
obtain collateral or letters of credit in an amount of 40% of the
penal sum of such bond as security for such bond.

Under the TP&S
Revolver, the Company is obligated to pay: 1) an up-front fee of
3.00% of the aggregated commitment amount; 2) an administrative
fee of $125,000; 3) a letter of credit fee of 1.50%; and a
fronting and negotiation issuer fee of 0.125% per annum, both
calculated on the average daily maximum amount to be drawn under the
letters of credit from the date of issuance to the date of
expiration; 4) a monthly adequate protection payment of $500,000;
and 5) an Additional Fee of $750,000 if we do not have a plan of
reorganization acceptable to CSFB, BOA and Travelers confirmed by the
Bankruptcy Court by April 30, 2002 and/or consummated by
May 15, 2002. Borrowings under the TP&S Revolver bear interest
at the prime rate plus 3.00%.

The Additional Fees
accrued on April 30, 2002 and became due on May 7, 2002. We
have reached an understanding with the lenders under the Transit
Revolver to extend the payment date for the Additional Fee under the
Transit Revolver and we are in the process of documenting such understanding.
In addition, we have reached an understanding with the lenders under the
TP&S Revolver to extend the payment date for the Additional Fee
under the TP&S Revolver to 9 a.m. Monday, May 20, 2002,
and we are currently in discussions concerning a further extension of
such payment date. There can be no assurance that the lenders under
the TP&S Revolver will agree to further extension.

Since the Filing Date, the Debtors also have received approval from the
Bankruptcy Court to pay or otherwise honor certain prepetition claims,
including employee wages and benefits, and unsecured claims resulting from
contract assumptions and critical vendor orders. The Debtors intend to remain
in possession of their assets and continue in the management and operation of
their businesses and properties, and to pay postpetition claims of their
various vendors and subcontractors in the ordinary course of business.

The Debtors have determined that there is insufficient collateral to cover
the interest portion of scheduled payments on their prepetition debt
obligations and therefore in accordance with SOP 90-7 have discontinued
accruing interest on these obligations. Contractual interest on these
obligations, which has not been accrued for, amounts to approximately $9.0
million for the three months ended March 31, 2002.

On March 15, 2002, the Debtors filed a plan of reorganization (the Plan)
in the U.S. Bankruptcy Court for the District of Maryland in Baltimore. The
Plan contemplates full repayment of debtor-in-possession or DIP claims,
satisfaction of secured claims held by certain of the Companys pre-petition
secured lenders through the issuance of a new secured note, and



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satisfaction of the balance of claims held by the Companys pre-petition
secured lenders through the conversion of such claims into substantially all of
the equity of the reorganized company. The Plan also provides that holders of
the Companys $173.1 million 11 1/2% senior subordinated notes due in 2009
and unsecured creditors that were not authorized by the Bankruptcy Court to be
paid as critical vendors will receive 3% of the stock of the reorganized
company and that the interests of the current equity holders of the Company
will be eliminated. The Company is continuing to negotiate certain terms and
conditions of the plan of reorganization with their prepetition secured lenders
and anticipates filing an amended plan of reorganization in the near term. It
is anticipated that the terms and conditions of the amended plan of
reorganization will differ from the terms and conditions of the plan of
reorganization described above. Confirmation of the Plan, which remains
subject to supplementation, modification and amendment, also remains subject to
Bankruptcy Court approval and certain other conditions.

Liabilities Subject to Compromise

The principal categories of claims reclassified in the consolidated
balance sheets and included in liabilities subject to compromise at March 31,
2002 and December 31, 2001 are identified below (in thousands). These amounts
may be subject to further adjustments depending on Bankruptcy Court actions,
further developments with respect to disputed claims, whether or not such
claims are secured, and the value of any security interests securing such
claims or other events.

|                                                    |  |                |         |                   |  |   |         | 
|--------------------------------------------------- |  | -------------- | ------- | ----------------- |  | - | ------- | 
|                                                    |  | (Unaudited)   
|                                                    |  | March 31, 2002 |         | December 31, 2001
|                                                    |  |                |         |                  
|Senior subordinated notes due 2009                  |  | $              | 173,073 |                   |  | $ | 173,073 | 
|Revolving credit agreement due 2004                 |  |                | 97,513  |                   |  |   | 97,513  | 
|Term note due through 2006                          |  |                | 94,278  |                   |  |   | 94,278  | 
|Accounts payable                                    |  |                | 38,187  |                   |  |   | 58,249  | 
|Accrued interest                                    |  |                | 12,400  |                   |  |   | 12,400  | 
|Deferred earnout obligations                        |  |                | 7,672   |                   |  |   | 7,672   | 
|Other accrued liabilities                           |  |                | 4,030   |                   |  |   | 4,166   | 
|Fixed asset and other notes payable                 |  |                | 2,192   |                   |  |   | 2,382   | 
|Other long-term liabilities                         |  |                | 2,144   |                   |  |   | 2,149   | 
|Promissory notes payable in 2002                    |  |                | 1,972   |                   |  |   | 1,972   | 
|Warrants payable                                    |  |                | 1,211   |                   |  |   | 1,211   | 
|                                                    |  |                |         |                   |  |   |         | 
|Total prepetition liabilities subject to compromise |  | $              | 434,672 |                   |  | $ | 455,065 | 
|                                                    |  |                |         |                   |  |   |         | 

Under the Bankruptcy Code, the Debtors may elect to assume or reject real
estate leases, employment contracts, personal property leases, service
contracts, construction contracts and other unexpired executory prepetition
contracts, subject to Bankruptcy Court approval. As of March 31, 2002 the
Debtors have rejected certain construction and executory contracts with
approval from the Bankruptcy Court. The Debtors cannot presently determine
with certainty the ultimate aggregate liability that will result from the
filing of claims relating to such contracts that have been rejected or may be
rejected in the future.

Reorganization Expenses

The Company has incurred reorganization related charges of approximately
$6.1 million for the three months ended March 31, 2002, which, in accordance
with SOP 90-7, have been reflected in the reorganization items line of the
consolidated statements of operations. These reorganization costs consist
primarily of professional and advisory fees incurred that are directly
associated with the reorganization proceedings under the Companys Chapter 11
filings net of interest income earned on accumulated cash resulting from the
Chapter 11 proceedings.



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##### Table of Contents



3. EARNINGS PER SHARE

The Company reports its earnings (loss) per share in basic and diluted
earnings per share. Basic earnings per share (EPS) is calculated using the
weighted average number of shares outstanding during the period. Diluted
earnings per share (Diluted EPS) includes the potentially dilutive effect of
contingently issuable shares and the dilutive effect, if any, which would occur
if outstanding options and warrants to purchase common stock were exercised.
Approximately 1.4 million of contingently issuable common shares were
outstanding during the three months ended March 31, 2002 and 2001 but were not
included in the computation of Diluted EPS as the effect would be
anti-dilutive. Certain options to purchase shares of common stock were
outstanding during both the three months ended March 31, 2002 and 2001 but were
not included in the computation of Diluted EPS because the options exercise
price was greater than the average market price of the common shares.

4. RESTRUCTURING AND OTHER UNUSUAL CHARGES

During the third and fourth quarters of 2000, the Companys management and
Board of Directors conducted and completed a strategic review of RailWorks
operations. The resulting restructuring plan (the 2000 Restructuring Plan)
contemplated systems integration, rationalization of real estate, equipment and
inventory and maximization of human resource productivity around three lines of
business. The Company reduced its headcount, consolidated certain facilities
and identified other synergies and cost reduction opportunities as a result of
the 2000 Restructuring Plan.

As of
December 31, 2001, approximately $0.6 million remained as accrued
restructuring costs for employee termination benefits under the 2000
Restructuring Plan. There has been no activity in this accrual during the
three months ended March 31, 2002.

For the three month period ended March 31, 2002, there were no
restructuring or other unusual charges related to the Companys 2000
Restructuring Plan. During the three month period ended March 31, 2001, the
Company incurred approximately $0.2 million in other unusual charges under the
Plan, primarily for outside consulting costs, employee and office relocation
costs and additional costs associated with the amendment of the Companys
credit agreement.

5. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

The following table presents supplemental cash flow information for the
three months ended March 31, 2002 and 2001, respectively (in thousands):

|                                                  |  |             |       |      |  |   |       | 
|------------------------------------------------- |  | ----------- | ----- | ---- |  | - | ----- | 
|                                                  |  | (Unaudited)
|                                                  |  | 2002        |       | 2001
|                                                  |  |             |       |     
|Cash paid during the period for interest          |  | $           | 267   |      |  | $ | 4,968 | 
|Cash paid during the period for income taxes      |  |             | 287   |      |  |   | 858   | 
|Reorganization items paid, net of interest earned |  |             | 3,694 |      |  |   |      | 

6. LONG-TERM DEBT

Due to the Companys failure to comply with certain financial covenants
and the commencement of the Chapter 11 cases, the Company is in default on
substantially all of its prepetition debt obligations except those held by the
Canadian subsidiaries. Except as otherwise may be determined by the Bankruptcy
Court, and subject to any statutory exceptions, the automatic stay afforded by
the Chapter 11 filings prevents any action from being taken with



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regard to any of the defaults under the Companys prepetition debt
obligations. These prepetition debt obligations related to the Company and its
domestic subsidiaries are classified as liabilities subject to compromise at
March 31, 2002 and December 31, 2001. See Note 2 for additional information on
these prepetition debt obligations.

Long-term debt consisted of the following at March 31, 2002 and December
31, 2001 (in thousands):

|                                    |  |             |        |      |  |   |        | 
|----------------------------------- |  | ----------- | ------ | ---- |  | - | ------ | 
|                                    |  | (Unaudited)
|                                    |  | 2002        |        | 2001
|                                    |  |             |        |     
|Debtor-in-possession financing      |  | $           | 45,555 |      |  | $ | 36,400 | 
|Canadian credit facility            |  |             | 4,500  |      |  |   | 5,000  | 
|Fixed asset and other notes payable |  |             | 446    |      |  |   | 469    | 
|                                    |  |             |        |      |  |   |        | 
|                                    |  |             | 50,501 |      |  |   | 41,869 | 
|Less current portion                |  |             | 50,169 |      |  |   | 41,523 | 
|                                    |  |             |        |      |  |   |        | 
|                                    |  | $           | 332    |      |  | $ | 346    | 
|                                    |  |             |        |      |  |   |        | 

7. CAPITAL STOCK AND STOCK INCENTIVE PLAN

The Stock Incentive Plan reserves for issuance 2,000,000 shares of common
stock of the Company. In general, the terms of the option awards (including
vesting schedules) will be established by the Compensation Committee of the
Companys Board of Directors. During the first quarter of 2002, there were no
options issued under the Stock Incentive Plan.

8. COMPREHENSIVE LOSS

The following table summarizes the components of comprehensive loss for
the three months ended March 31, 2002 and 2001 (in thousands):

|                                    |  |             |        |      |  |   |      |  
|----------------------------------- |  | ----------- | ------ | ---- |  | - | ---- | -
|                                    |  | (Unaudited)
|                                    |  | 2002        |        | 2001
|                                    |  |             |        |     
|TOTAL COMPREHENSIVE LOSS:           |  |             |        |      |  |   |      |  
|Net income (loss)                   |  | $           | (9,409 | )    |  | $ | 152  |  
|Foreign currency translation losses |  |             | (188   | )    |  |   | (921 | )
|                                    |  |             |        |      |  |   |      |  
|Total comprehensive loss            |  | $           | (9,597 | )    |  | $ | (769 | )
|                                    |  |             |        |      |  |   |      |  

9. SEGMENT REPORTING

The following table presents certain financial data as of and for the
three months ended March 31, 2002 by reportable segment (in thousands)
(Unaudited):

|                                                                            |  |   |          |  |               |   |          |   |           |   |         |   |  |   |         |   |  |   |         |   | 
|--------------------------------------------------------------------------- |  | - | -------- |  | ------------- | - | -------- | - | --------- | - | ------- | - |  | - | ------- | - |  | - | ------- | - | 
|                                                                            |  |   |          |  |               |   |          |   |           |   | RAIL    |   |  |   |         |   |  |   |        
|                                                                            |  |   | TRANSIT  |  | RAIL PRODUCTS |   | TRACK    |   | OTHER/    |   |         |   | 
|                                                                            |  |   | SERVICES |  | AND SERVICES  |   | SERVICES |   | CORPORATE |   | TOTAL  
|                                                                            |  |   |          |  |               |   |          |   |           |   |        
|Total revenues for reportable segments                                      |  | $ | 67,000   |  |               | $ | 18,031   |   |           | $ | 27,438  |   |  | $ |        |   |  | $ | 112,469 |  
|Inter-segmental revenue                                                     |  |   |         |  |               |   | 1,003    |   |           |   | 188     |   |  |   |        |   |  |   | 1,191   |  
|Depreciation/amortization                                                   |  |   | 516      |  |               |   | 999      |   |           |   | 1,548   |   |  |   | 215     |   |  |   | 3,278   |  
|Segment operating profit (loss)                                             |  |   | 645      |  |               |   | (566     | ) |           |   | (3,610  | ) |  |   | (2,898  | ) |  |   | (6,429  | )
|Costs and estimated earnings in
excess of billings on uncompleted contracts |  |   | 33,331   |  |               |   | 294      |   |           |   | 5,277   |   |  |   |        |   |  |   | 38,902  |  
|Segment assets                                                              |  |   | 221,642  |  |               |   | 132,186  |   |           |   | 164,636 |   |  |   | 223,266 |   |  |   | 741,730 |  



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##### Table of Contents



The Companys reconciliation of segment totals to enterprise values is as
follows (in thousands):

|          |                                            |  |   |          |  
|--------- | ------------------------------------------ |  | - | -------- | -
|REVENUES: |                                            |  |   |         
|          | Total revenues for reportable segments     |  | $ | 112,469  |  
|          | Elimination of inter-segment revenues      |  |   | (1,191   | )
|          |                                            |  |   |         
|          | Consolidated revenues                      |  | $ | 111,278  |  
|          |                                            |  |   |         
|ASSETS:   |                                            |  |   |         
|          | Total assets for reportable segments       |  | $ | 741,730  |  
|          | Elimination of inter-segment receivables   |  |   | (60,104  | )
|          | Elimination of investments in subsidiaries |  |   | (183,554 | )
|          |                                            |  |   |         
|          | Consolidated assets                        |  | $ | 498,072  |  
|          |                                            |  |   |         

The Companys Canadian operations produced revenues for the three month
period ended March 31, 2002 of approximately $5.2 million. The net book value
of long-lived assets relating to the Canadian operations amounted to
approximately $23.5 million as of March 31, 2002.

The following table presents certain financial data as of and for the
three months ended March 31, 2001 by reportable segment (in thousands)
(Unaudited):

|                                                                            |  |          |         |               |  |          |         |           |  |       |         |  |  |   |         |   |  |   |         | 
|--------------------------------------------------------------------------- |  | -------- | ------- | ------------- |  | -------- | ------- | --------- |  | ----- | ------- |  |  | - | ------- | - |  | - | ------- | 
|                                                                            |  |          |         |               |  |          |         |           |  | RAIL  |         |  |  |   |         |   |  |  
|                                                                            |  | TRANSIT  |         | RAIL PRODUCTS |  | TRACK    |         | OTHER/    |  |       |         | 
|                                                                            |  | SERVICES |         | AND SERVICES  |  | SERVICES |         | CORPORATE |  | TOTAL
|                                                                            |  |          |         |               |  |          |         |           |  |      
|Total revenues for reportable segments                                      |  | $        | 103,250 |               |  | $        | 25,726  |           |  | $     | 43,981  |  |  | $ |        |   |  | $ | 172,957 | 
|Inter-segmental revenue                                                     |  |          |        |               |  |          | 1,529   |           |  |       | 1,040   |  |  |   |        |   |  |   | 2,569   | 
|Depreciation/amortization                                                   |  |          | 825     |               |  |          | 1,290   |           |  |       | 2,782   |  |  |   | 347     |   |  |   | 5,244   | 
|Segment operating profit (loss)                                             |  |          | 11,275  |               |  |          | 1,872   |           |  |       | 883     |  |  |   | (2,906  | ) |  |   | 11,124  | 
|Costs and estimated earnings in
excess of
billings on uncompleted contracts |  |          | 28,168  |               |  |          |        |           |  |       | 6,401   |  |  |   |        |   |  |   | 34,569  | 
|Segment assets                                                              |  |          | 264,306 |               |  |          | 127,772 |           |  |       | 211,845 |  |  |   | 246,685 |   |  |   | 850,608 | 

The segment data presented above as of and for the three months ended
March 31, 2001 has been restated to reflect changes in the organization of the
Companys segment structure.

The Companys reconciliation of segment totals to enterprise values is as
follows (in thousands):

|          |                                            |  |   |          |  
|--------- | ------------------------------------------ |  | - | -------- | -
|REVENUES: |                                            |  |   |         
|          | Total revenues for reportable segments     |  | $ | 172,957  |  
|          | Elimination of inter-segment revenues      |  |   | (2,569   | )
|          |                                            |  |   |         
|          | Consolidated revenues                      |  | $ | 170,388  |  
|          |                                            |  |   |         
|ASSETS:   |                                            |  |   |         
|          | Total assets for reportable segments       |  | $ | 850,608  |  
|          | Elimination of inter-segment receivables   |  |   | (33,436  | )
|          | Elimination of investments in subsidiaries |  |   | (214,045 | )
|          |                                            |  |   |         
|          | Consolidated assets                        |  | $ | 603,127  |  
|          |                                            |  |   |         



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##### Table of Contents



The Companys Canadian operations produced revenues for the three month
period ended March 31, 2001 of $6.2 million. The net book value of long-lived
assets relating to the Canadian operations amounted to $26.8 million as of
March 31, 2001.

10. FINANCIAL INFORMATION FOR SUBSIDIARY GUARANTORS AND NON-GUARANTOR
SUBSIDIARIES

The Company conducts a significant portion of its business through its
subsidiaries. All of the Companys domestic subsidiaries (the Subsidiary
Guarantors) have fully and unconditionally guaranteed the Companys 11.5%
Senior Subordinated Notes (the Notes). The Companys non-U.S. subsidiaries
(the Non-Guarantor Subsidiaries) have not guaranteed the Notes. The Notes are
effectively subordinated in right of payment to all indebtedness and other
liabilities (including trade payables) of the Non-Guarantor Subsidiaries.

Set forth below are condensed consolidating financial statements for the
Company, the Subsidiary Guarantors and the Non-Guarantor Subsidiaries as of
March 31, 2002 and for the three-month period ended March 31, 2002 and 2001.
The equity method of accounting has been used by the Company to report its
investments in subsidiaries. Separate financial statements for the Subsidiary
Guarantors are not presented based on managements determination that they do
not provide additional information that is material to investors.



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##### Table of Contents



RAILWORKS CORPORATION
CONDENSED CONSOLIDATING BALANCE SHEET
March 31, 2002

(In Thousands) (Unaudited)

|                                                |                                                                             |                                              |                                                                             |                                               |       |                       |          |              |         |              |         |              |        |              |          |        |      |        |          |         |         |        |          |  
|----------------------------------------------- | --------------------------------------------------------------------------- | -------------------------------------------- | --------------------------------------------------------------------------- | --------------------------------------------- | ----- | --------------------- | -------- | ------------ | ------- | ------------ | ------- | ------------ | ------ | ------------ | -------- | ------ | ---- | ------ | -------- | ------- | ------- | ------ | -------- | -
|                                                |                                                                             |                                              |                                                                             |                                               |       | DEBTORS-IN-POSSESSION |          |              |         |              |         |              |        |              |          |        |      |       
|                                                |                                                                             |                                              |                                                                             |                                               |       |                       |          |              |         |              |         |              |        |              |          |        |      |       
|                                                |                                                                             |                                              |                                                                             |                                               |       | RAILWORKS             |          |              |         |              |         |              |        |              |          |        |      |        |          |         |         |       
|                                                |                                                                             |                                              |                                                                             |                                               |       | CORPORATION           |          |              |         |              |         | NON-         |        |              |          |        |      |        |          |        
|                                                |                                                                             |                                              |                                                                             |                                               |       | (PARENT CO.           |          | GUARANTOR    |         | GUARANTOR    |         |              |        |              |          |        |      |       
|                                                |                                                                             |                                              |                                                                             |                                               |       | ONLY)                 |          | SUBSIDIARIES |         | SUBSIDIARIES |         | ELIMINATIONS |        | CONSOLIDATED
|                                                |                                                                             |                                              |                                                                             |                                               |       |                       |          |              |         |              |         |              |        |             
|ASSETS:                                         |                                                                             |                                              |                                                                             |                                               |       |                       |          |              |         |              |         |              |        |              |          |        |      |        |          |        
|CURRENT ASSETS:                                 |                                                                             |                                              |                                                                             |                                               |       |                       |          |              |         |              |         |              |        |              |          |        |      |        |          |        
|                                                | Cash and cash equivalents                                                   |                                              | $                                                                           | 10,300                                        |       |                       | $        | (8,388       | )       |              | $       | 193          |        |              | $        |       |      |        | $        | 2,105   |        
|                                                | Accounts receivable, net                                                    |                                              |                                                                             |                                              |       |                       |          | 152,461      |         |              |         | 4,860        |        |              |          |       |      |        |          | 157,321 |        
|                                                | Costs and estimated earnings in excess of
billings on uncompleted contracts |                                              |                                                                             |                                              |       |                       |          | 38,801       |         |              |         | 101          |        |              |          |       |      |        |          | 38,902  |        
|                                                | Inventories:                                                                |                                              |                                                                             |                                               |       |                       |          |              |         |              |         |              |        |              |          |        |      |        |          |         |        
|                                                |                                                                             |                                              |                                                                             | Raw materials                                 |       |                       |         |              |         |              | 6,746   |              |        |              | 3,552    |        |      |        |         |         |         |        | 10,298   |  
|                                                |                                                                             |                                              |                                                                             | Finished goods                                |       |                       |         |              |         |              | 13,859  |              |        |              | 1,232    |        |      |        |         |         |         |        | 15,091   |  
|                                                | Due from affiliates                                                         |                                              |                                                                             |                                              |       |                       |          |             |         |              |         | 2,507        |        |              |          | (2,507 | )(a) |        |          |        |        
|                                                | Due from parent company                                                     |                                              |                                                                             | 9,864                                         |       |                       |          |             |         |              |         |              |        |              |          | (9,864 | )(a) |        |          |        |        
|                                                | Other current assets                                                        |                                              |                                                                             | 5,136                                         |       |                       |          | 3,836        |         |              |         | 2,136        |        |              |          |       |      |        |          | 11,108  |        
|                                                |                                                                             |                                              |                                                                             |                                               |       |                       |          |              |         |              |         |              |        |              |          |        |      |        |          |        
|                                                |                                                                             |                                              |                                                                             | Total current assets                          |       |                       | 25,300   |              |         |              | 207,315 |              |        |              | 14,581   |        |      |        | (12,371  | )       |         |        | 234,825  |  
|                                                |                                                                             |                                              |                                                                             |                                               |       |                       |          |              |         |              |         |              |        |              |          |        |      |        |          |        
|INVESTMENT IN SUBSIDIARIES                      |                                                                             |                                              | 347,943                                                                     |                                               |       |                       |         |              |         |              |        |              |        |              | (347,943 | )(b)   |      |        |         |        
|                                                |                                                                             |                                              |                                                                             |                                               |       |                       |          |              |         |              |         |              |        |              |          |        |      |        |          |        
|PROPERTY, PLANT AND EQUIPMENT, NET              |                                                                             |                                              | 1,207                                                                       |                                               |       |                       | 41,490   |              |         |              | 7,207   |              |        |              |         |        |      |        | 49,904   |        
|                                                |                                                                             |                                              |                                                                             |                                               |       |                       |          |              |         |              |         |              |        |              |          |        |      |        |          |        
|OTHER ASSETS:                                   |                                                                             |                                              |                                                                             |                                               |       |                       |          |              |         |              |         |              |        |              |          |        |      |        |          |        
|                                                |                                                                             | Excess of cost over acquired net assets, net |                                                                             |                                               |      |                       |          |              | 188,441 |              |         |              | 16,280 |              |          |        |     |        |          |         | 204,721 |       
|                                                |                                                                             | Other                                        |                                                                             |                                               | 8,348 |                       |          |              | 253     |              |         |              | 21     |              |          |        |     |        |          |         | 8,622   |       
|                                                |                                                                             |                                              |                                                                             |                                               |       |                       |          |              |         |              |         |              |        |              |          |        |      |        |          |        
|                                                |                                                                             |                                              |                                                                             | Total other assets                            |       |                       | 8,348    |              |         |              | 188,694 |              |        |              | 16,301   |        |      |        |         |         |         |        | 213,343  |  
|                                                |                                                                             |                                              |                                                                             |                                               |       |                       |          |              |         |              |         |              |        |              |          |        |      |        |          |        
|                                                |                                                                             |                                              |                                                                             | Total                                         |       | $                     | 382,798  |              |         | $            | 437,499 |              |        | $            | 38,089   |        |      | $      | (360,314 | )       |         | $      | 498,072  |  
|                                                |                                                                             |                                              |                                                                             |                                               |       |                       |          |              |         |              |         |              |        |              |          |        |      |        |          |        
|LIABILITIES AND STOCKHOLDERS (DEFICIT) EQUITY: |                                                                             |                                              |                                                                             |                                               |       |                       |          |              |         |              |         |              |        |              |          |        |      |        |          |        
|LIABILITIES NOT SUBJECT TO COMPROMISE:          |                                                                             |                                              |                                                                             |                                               |       |                       |          |              |         |              |         |              |        |              |          |        |      |        |          |        
|CURRENT LIABILITIES:                            |                                                                             |                                              |                                                                             |                                               |       |                       |          |              |         |              |         |              |        |              |          |        |      |        |          |        
|                                                |                                                                             |                                              | Cash overdraft                                                              |                                               | $     |                      |          |              | $       | 910          |         |              | $      | 252          |          |        | $    |       |          |         | $       | 1,162  |         
|                                                |                                                                             |                                              | Current maturities of long-term debt                                        |                                               |       | 45,555                |          |              |         | 61           |         |              |        | 4,553        |          |        |      |       |          |         |         | 50,169 |         
|                                                |                                                                             |                                              | Accounts payable                                                            |                                               |       | 233                   |          |              |         | 33,750       |         |              |        | 1,298        |          |        |      |       |          |         |         | 35,281 |         
|                                                |                                                                             |                                              | Accrued payroll and related withholdings                                    |                                               |       |                      |          |              |         | 6,668        |         |              |        | 396          |          |        |      |       |          |         |         | 7,064  |         
|                                                |                                                                             |                                              | Accrued interest payable                                                    |                                               |       | 1,035                 |          |              |         | 19           |         |              |        | 16           |          |        |      |       |          |         |         | 1,070  |         
|                                                |                                                                             |                                              | Billings in excess of costs and estimated
earnings on uncompleted contracts |                                               |       |                      |          |              |         | 14,953       |         |              |        | 1,328        |          |        |      |       |          |         |         | 16,281 |         
|                                                |                                                                             |                                              | Due to parent company                                                       |                                               |       |                      |          |              |         | 8,039        |         |              |        | 1,825        |          |        |      | (9,864 | )(a)     |         |         |       |         
|                                                |                                                                             |                                              | Due to affiliates                                                           |                                               |       |                      |          |              |         | 2,507        |         |              |        |             |          |        |      | (2,507 | )(a)     |         |         |       |         
|                                                |                                                                             |                                              | Other accrued liabilities                                                   |                                               |       | 9,615                 |          |              |         | 4,755        |         |              |        | 1,954        |          |        |      |       |          |         |         | 16,324 |         
|                                                |                                                                             |                                              |                                                                             |                                               |       |                       |          |              |         |              |         |              |        |              |          |        |      |        |          |        
|                                                |                                                                             |                                              |                                                                             | Total current liabilities                     |       |                       | 56,438   |              |         |              | 71,662  |              |        |              | 11,622   |        |      |        | (12,371  | )       |         |        | 127,351  |  
|                                                |                                                                             |                                              |                                                                             |                                               |       |                       |          |              |         |              |         |              |        |              |          |        |      |        |          |        
|LONG TERM DEBT, NET                             |                                                                             |                                              |                                                                            |                                               |       |                       |         |              |         |              | 332     |              |        |              |         |        |      |        | 332      |        
|DEFERRED TAX LIABILITY                          |                                                                             |                                              |                                                                            |                                               |       |                       |         |              |         |              | 548     |              |        |              |         |        |      |        | 548      |        
|OTHER LIABILITIES                               |                                                                             |                                              |                                                                            |                                               |       |                       | 4,777    |              |         |              | 24      |              |        |              |         |        |      |        | 4,801    |        
|                                                |                                                                             |                                              |                                                                             |                                               |       |                       |          |              |         |              |         |              |        |              |          |        |      |        |          |        
|                                                |                                                                             |                                              |                                                                             | Total long-term liabilities                   |       |                       |         |              |         |              | 4,777   |              |        |              | 904      |        |      |        |         |         |         |        | 5,681    |  
|                                                |                                                                             |                                              |                                                                             |                                               |       |                       |          |              |         |              |         |              |        |              |          |        |      |        |          |        
|                                                |                                                                             |                                              |                                                                             | Total liabilities not subject to compromise   |       |                       | 56,438   |              |         |              | 76,439  |              |        |              | 12,526   |        |      |        | (12,371  | )       |         |        | 133,032  |  
|                                                |                                                                             |                                              |                                                                             |                                               |       |                       |          |              |         |              |         |              |        |              |          |        |      |        |          |        
|LIABILITIES SUBJECT TO COMPROMISE               |                                                                             |                                              | 390,161                                                                     |                                               |       |                       | 44,511   |              |         |              |        |              |        |              |         |        |      |        | 434,672  |        
|                                                |                                                                             |                                              |                                                                             | Total liabilities                             |       |                       | 446,599  |              |         |              | 120,950 |              |        |              | 12,526   |        |      |        | (12,371  | )       |         |        | 567,704  |  
|MINORITY INTEREST                               |                                                                             |                                              |                                                                            |                                               |       |                       | 1,784    |              |         |              |        |              |        |              |         |        |      |        | 1,784    |        
|STOCKHOLDERS (DEFICIT) EQUITY:                 |                                                                             |                                              |                                                                             |                                               |       |                       |          |              |         |              |         |              |        |              |          |        |      |        |          |        
|                                                |                                                                             |                                              |                                                                             | Series A, convertible preferred stock         |       |                       | 14       |              |         |              |        |              |        |              |         |        |      |        |         |         |         |        | 14       |  
|                                                |                                                                             |                                              |                                                                             | Common stock                                  |       |                       | 125      |              |         |              | 2,816   |              |        |              | 378      |        |      |        | (3,164   | )(b)    |         |        | 155      |  
|                                                |                                                                             |                                              |                                                                             | Treasury stock                                |       |                       | (2,667   | )            |         |              |        |              |        |              |         |        |      |        |         |         |         |        | (2,667   | )
|                                                |                                                                             |                                              |                                                                             | Officer loans, net                            |       |                       | (1,876   | )            |         |              |        |              |        |              |         |        |      |        |         |         |         |        | (1,876   | )
|                                                |                                                                             |                                              |                                                                             | Additional paid-in capital                    |       |                       | 136,572  |              |         |              | 364,248 |              |        |              | 24,221   |        |      |        | (388,469 | )(b)    |         |        | 136,572  |  
|                                                |                                                                             |                                              |                                                                             | Accumulated other comprehensive income (loss) |       |                       |         |              |         |              |        |              |        |              | (2,157   | )      |      |        |         |         |         |        | (2,157   | )
|                                                |                                                                             |                                              |                                                                             | Retained earnings (deficit)                   |       |                       | (195,969 | )            |         |              | (52,299 | )            |        |              | 3,121    |        |      |        | 43,690   | (b)     |         |        | (201,457 | )
|                                                |                                                                             |                                              |                                                                             |                                               |       |                       |          |              |         |              |         |              |        |              |          |        |      |        |          |        
|                                                |                                                                             |                                              |                                                                             | Total stockholders (deficit) equity          |       |                       | (63,801  | )            |         |              | 314,765 |              |        |              | 25,563   |        |      |        | (347,943 | )       |         |        | (71,416  | )
|                                                |                                                                             |                                              |                                                                             |                                               |       |                       |          |              |         |              |         |              |        |              |          |        |      |        |          |        
|                                                |                                                                             |                                              |                                                                             | Total                                         |       | $                     | 382,798  |              |         | $            | 437,499 |              |        | $            | 38,089   |        |      | $      | (360,314 | )       |         | $      | 498,072  |  
|                                                |                                                                             |                                              |                                                                             |                                               |       |                       |          |              |         |              |         |              |        |              |          |        |      |        |          |        



---

|(a) |  | Elimination of inter-company receivables.  
|--- |  | -------------------------------------------
|(b) |  | Elimination of investments in subsidiaries.



---



##### Table of Contents



RAILWORKS CORPORATION
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2002

(In Thousands) (Unaudited)

|                                                                                                                        |  |                       |         |              |  |              |         |              |  |              |       |   |  |   |       |      |  |   |         |   |  |  |  | 
|----------------------------------------------------------------------------------------------------------------------- |  | --------------------- | ------- | ------------ |  | ------------ | ------- | ------------ |  | ------------ | ----- | - |  | - | ----- | ---- |  | - | ------- | - |  |  |  | 
|                                                                                                                        |  | DEBTORS-IN-POSSESSION |         |              |  |              |         |              |  |              |       |   |  |   |       |      |  |  
|                                                                                                                        |  |                       |         |              |  |              |         |              |  |              |       |   |  |   |       |      |  |  
|                                                                                                                        |  | RAILWORKS             |         |              |  |              |         | NON-         |  |              |       |   |  |   |       |      |  |   |         |  
|                                                                                                                        |  | CORPORATION           |         | GUARANTOR    |  | GUARANTOR    |         |              |  |              |       |   |  |   |       |      |  |  
|                                                                                                                        |  | (PARENT CO. ONLY)     |         | SUBSIDIARIES |  | SUBSIDIARIES |         | ELIMINATIONS |  | CONSOLIDATED |       |   |  |  
|                                                                                                                        |  |                       |         |              |  |              |         |              |  |              |       |   |  |  
|Revenue                                                                                                                 |  | $                     |        |              |  | $            | 106,905 |              |  | $            | 5,151 |   |  | $ | (778  | )(a) |  | $ | 111,278 |   |  |  |  | 
|Cost of revenue                                                                                                         |  |                       |        |              |  |              | 96,152  |              |  |              | 4,571 |   |  |   | (778  | )(a) |  |   | 99,945  |   |  |  |  | 
|                                                                                                                        |  |                       |         |              |  |              |         |              |  |              |       |   |  |   |       |      |  |   |         |   |  |  |  | 
|Gross profit                                                                                                            |  |                       |        |              |  |              | 10,753  |              |  |              | 580   |   |  |   |      |      |  |   | 11,333  |   |  |  |  | 
|Selling, general and administrative
expenses                                                                            |  |                       | 2,872   |              |  |              | 13,857  |              |  |              | 1,033 |   |  |   |      |      |  |   | 17,762  |   |  |  |  | 
|                                                                                                                        |  |                       |         |              |  |              |         |              |  |              |       |   |  |   |       |      |  |   |         |   |  |  |  | 
|Operating (loss) income                                                                                                 |  |                       | (2,872  | )            |  |              | (3,104  | )            |  |              | (453  | ) |  |   |      |      |  |   | (6,429  | ) |  |  |  | 
|Equity in earnings of subsidiaries                                                                                      |  |                       | (5,984  | )            |  |              |        |              |  |              |      |   |  |   | 5,984 | (b)  |  |   |        |   |  |  |  | 
|Interest expense                                                                                                        |  |                       | (2,339  | )            |  |              | (33     | )            |  |              | (78   | ) |  |   |      |      |  |   | (2,450  | ) |  |  |  | 
|Interest and other (expense) income                                                                                     |  |                       | (4      | )            |  |              | 113     |              |  |              | 61    |   |  |   |      |      |  |   | 170     |   |  |  |  | 
|                                                                                                                        |  |                       |         |              |  |              |         |              |  |              |       |   |  |   |       |      |  |   |         |   |  |  |  | 
|Income (loss) before reorganization items,
income taxes, minority interest and
effect
of change in accounting principle |  |                       | (11,199 | )            |  |              | (3,024  | )            |  |              | (470  | ) |  |   | 5,984 |      |  |   | (8,709  | ) |  |  |  | 
|Reorganization items                                                                                                    |  |                       | (6,110  | )            |  |              |        |              |  |              |      |   |  |   |      |      |  |   | (6,110  | ) |  |  |  | 
|                                                                                                                        |  |                       |         |              |  |              |         |              |  |              |       |   |  |   |       |      |  |   |         |   |  |  |  | 
|Income (loss) before income taxes,
minority
interest and effect of change in
accounting
principle                       |  |                       | (17,309 | )            |  |              | (3,024  | )            |  |              | (470  | ) |  |   | 5,984 |      |  |   | (14,819 | ) |  |  |  | 
|Provision (benefit) for income taxes                                                                                    |  |                       |        |              |  |              | 80      |              |  |              | (168  | ) |  |   |      |      |  |   | (88     | ) |  |  |  | 
|                                                                                                                        |  |                       |         |              |  |              |         |              |  |              |       |   |  |   |       |      |  |   |         |   |  |  |  | 
|Income (loss) before minority interest and
effect of change in accounting principle                                     |  |                       | (17,309 | )            |  |              | (3,104  | )            |  |              | (302  | ) |  |   | 5,984 |      |  |   | (14,731 | ) |  |  |  | 
|Minority interest in losses, net                                                                                        |  |                       |        |              |  |              | (1      | )            |  |              |      |   |  |   |      |      |  |   | (1      | )
|                                                                                                                        |  |                       |         |              |  |              |         |              |  |              |       |   |  |   |       |      |  |   |         |   |  |  |  | 
|Income (loss) before effect of change in
accounting principle                                                           |  |                       | (17,309 | )            |  |              | (3,105  | )            |  |              | (302  | ) |  |   | 5,984 |      |  |   | (14,732 | ) |  |  |  | 
|Effect of change in accounting principle,
net                                                                           |  |                       |        |              |  |              | 5,323   |              |  |              |      |   |  |   |      |      |  |   | 5,323   |   |  |  |  | 
|                                                                                                                        |  |                       |         |              |  |              |         |              |  |              |       |   |  |   |       |      |  |   |         |   |  |  |  | 
|Net income (loss)                                                                                                       |  | $                     | (17,309 | )            |  | $            | 2,218   |              |  | $            | (302  | ) |  | $ | 5,984 |      |  | $ | (9,409  | ) |  |  |  | 
|                                                                                                                        |  |                       |         |              |  |              |         |              |  |              |       |   |  |   |       |      |  |   |         |   |  |  |  | 



---

|(a) |  | Elimination of inter-company revenue.             
|--- |  | --------------------------------------------------
|(b) |  | Elimination of equity in earnings of subsidiaries.



---



##### Table of Contents



RAILWORKS CORPORATION
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2002

(In Thousands) (Unaudited)

|                                                                                                   |                                                                                                     |                                                     |                                                     |       |                       |        |              |         |              |        |              |      |              |     |        |       |   |   |        |         |        |        |  
|-------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------- | --------------------------------------------------- | --------------------------------------------------- | ----- | --------------------- | ------ | ------------ | ------- | ------------ | ------ | ------------ | ---- | ------------ | --- | ------ | ----- | - | - | ------ | ------- | ------ | ------ | -
|                                                                                                   |                                                                                                     |                                                     |                                                     |       | DEBTORS-IN-POSSESSION |        |              |         |              |        |              |      |              |     |        |       |  
|                                                                                                   |                                                                                                     |                                                     |                                                     |       |                       |        |              |         |              |        |              |      |              |     |        |       |  
|                                                                                                   |                                                                                                     |                                                     |                                                     |       | RAILWORKS             |        |              |         |              |        | NON-         |      |              |     |        |       |   |   |       
|                                                                                                   |                                                                                                     |                                                     |                                                     |       | CORPORATION           |        | GUARANTOR    |         | GUARANTOR    |        |              |      |              |     |        |       |  
|                                                                                                   |                                                                                                     |                                                     |                                                     |       | (PARENT CO. ONLY)     |        | SUBSIDIARIES |         | SUBSIDIARIES |        | ELIMINATIONS |      | CONSOLIDATED
|                                                                                                   |                                                                                                     |                                                     |                                                     |       |                       |        |              |         |              |        |              |      |             
|CASH FLOWS FROM OPERATING ACTIVITIES:                                                              |                                                                                                     |                                                     |                                                     |       |                       |        |              |         |              |        |              |      |              |     |        |       |   |   |        |        
|Net income (loss)                                                                                  |                                                                                                     | $                                                   | (17,309                                             | )     |                       | $      | 2,218        |         |              | $      | (302         | )    |              | $   | 5,984  | (a)   |   | $ | (9,409 | )      
|Adjustments to reconcile net income (loss) to net cash
provided (used in) by operating activities: |                                                                                                     |                                                     |                                                     |       |                       |        |              |         |              |        |              |      |              |     |        |       |   |   |        |        
|Depreciation and amortization                                                                      |                                                                                                     |                                                     | 215                                                 |       |                       |        | 2,640        |         |              |        | 423          |      |              |     |       |       |   |   | 3,278  |        
|Effect of change in accounting principle                                                           |                                                                                                     |                                                     |                                                    |       |                       |        | (5,323       | )       |              |        |             |      |              |     |       |       |   |   | (5,323 | )      
|Minority interest in losses                                                                        |                                                                                                     |                                                     |                                                     |       |                       |        | 1            |         |              |        |             |      |              |     |       |       |   |   | 1      |        
|Equity in earnings of subsidiaries                                                                 |                                                                                                     |                                                     | 5,984                                               |       |                       |        |              |         |              |        |             |      |              |     | (5,984 | ) (a) |   |   |       |        
|Loss (gain) on sale of equipment                                                                   |                                                                                                     |                                                     |                                                    |       |                       |        | 65           |         |              |        | (5           | )    |              |     |       |       |   |   | 60     |        
|Changes in operating assets and liabilities:                                                       |                                                                                                     |                                                     |                                                     |       |                       |        |              |         |              |        |              |      |              |     |        |       |   |   |        |        
|                                                                                                   | Accounts receivable and costs and estimated earnings in excess of billings on uncompleted contracts |                                                     |                                                     |      |                       |        |              | 18,182  |              |        |              | 716  |              |     |        |      |   |   |        | 18,898  |       
|                                                                                                   | Inventories                                                                                         |                                                     |                                                     |      |                       |        |              | (3,094  | )            |        |              | 87   |              |     |        |      |   |   |        | (3,007  | )     
|                                                                                                   | Other current assets                                                                                |                                                     |                                                     | 1,853 |                       |        |              | (424    | )            |        |              | (287 | )            |     |        |      |   |   |        | 1,142   |       
|                                                                                                   | Accounts payable                                                                                    |                                                     |                                                     | 107   |                       |        |              | (15,091 | )            |        |              | (137 | )            |     |        |      |   |   |        | (15,121 | )     
|                                                                                                   | Accrued payroll and related withholdings                                                            |                                                     |                                                     |      |                       |        |              | 402     |              |        |              | 12   |              |     |        |      |   |   |        | 414     |       
|                                                                                                   | Accrued interest payable                                                                            |                                                     |                                                     | 593   |                       |        |              | (1      | )            |        |              | 1    |              |     |        |      |   |   |        | 593     |       
|                                                                                                   | Billings in excess of costs and estimated
earnings on uncompleted contracts                         |                                                     |                                                     |      |                       |        |              | 2,298   |              |        |              | 174  |              |     |        |      |   |   |        | 2,472   |       
|                                                                                                   | Other accrued liabilities                                                                           |                                                     |                                                     | 2,404 |                       |        |              | (1,077  | )            |        |              | (35  | )            |     |        |      |   |   |        | 1,292   |       
|                                                                                                   | Other assets                                                                                        |                                                     |                                                     | 487   |                       |        |              | (14     | )            |        |              | 4    |              |     |        |      |   |   |        | 477     |       
|                                                                                                   | Other liabilities                                                                                   |                                                     |                                                     |      |                       |        |              | (182    | )            |        |              |     |              |     |        |      |   |   |        | (182    | )     
|                                                                                                   | Due
(to)/from affiliates                                                                            |                                                     |                                                     |      |                       |        |              | 480     |              |        |              | (480 | )            |     |        |      |   |   |        |        |       
|                                                                                                   | Due (to)/from parent company                                                                        |                                                     |                                                     | 3,513 |                       |        |              | (3,591  | )            |        |              | 78   |              |     |        |      |   |   |        |        |       
|                                                                                                   |                                                                                                     |                                                     |                                                     |       |                       |        |              |         |              |        |              |      |              |     |        |       |   |   |        |        
|                                                                                                   |                                                                                                     |                                                     | Net cash provided (used in) by operating activities |       |                       | (2,153 | )            |         |              | (2,511 | )            |      |              | 249 |        |       |   |  |        |         |        | (4,415 | )
|                                                                                                   |                                                                                                     |                                                     |                                                     |       |                       |        |              |         |              |        |              |      |              |     |        |       |   |   |        |        
|CASH FLOWS FROM INVESTING ACTIVITIES:                                                              |                                                                                                     |                                                     |                                                     |       |                       |        |              |         |              |        |              |      |              |     |        |       |   |   |        |        
|Proceeds from sale of equipment                                                                    |                                                                                                     |                                                     |                                                    |       |                       |        | 91           |         |              |        | 201          |      |              |     |       |       |   |   | 292    |        
|Purchase of equipment and leasehold improvements                                                   |                                                                                                     |                                                     | (12                                                 | )     |                       |        | (1,745       | )       |              |        | (458         | )    |              |     |       |       |   |   | (2,215 | )      
|Distribution from minority interest                                                                |                                                                                                     |                                                     |                                                    |       |                       |        | 34           |         |              |        |             |      |              |     |       |       |   |   | 34     |        
|Contingent earn-out payments                                                                       |                                                                                                     |                                                     |                                                    |       |                       |        |             |         |              |        | (969         | )    |              |     |       |       |   |   | (969   | )      
|                                                                                                   |                                                                                                     |                                                     |                                                     |       |                       |        |              |         |              |        |              |      |              |     |        |       |   |   |        |        
|                                                                                                   |                                                                                                     | Net cash provided by (used in) investing activities |                                                     |       | (12                   | )      |              |         | (1,620       | )      |              |      | (1,226       | )   |        |       |  |   |        |         | (2,858 | )     
|                                                                                                   |                                                                                                     |                                                     |                                                     |       |                       |        |              |         |              |        |              |      |              |     |        |       |   |   |        |        
|CASH FLOWS FROM FINANCING ACTIVITIES:                                                              |                                                                                                     |                                                     |                                                     |       |                       |        |              |         |              |        |              |      |              |     |        |       |   |   |        |        
|Net change in cash overdraft                                                                       |                                                                                                     |                                                     |                                                    |       |                       |        | (2,085       | )       |              |        | 252          |      |              |     |       |       |   |   | (1,833 | )      
|Net activity on revolving line of credit                                                           |                                                                                                     |                                                     |                                                    |       |                       |        |             |         |              |        | (500         | )    |              |     |       |       |   |   | (500   | )      
|Net change in debtor-in-possession funding                                                         |                                                                                                     |                                                     | 9,155                                               |       |                       |        |             |         |              |        |             |      |              |     |       |       |   |   | 9,155  |        
|Repayment of fixed asset borrowings                                                                |                                                                                                     |                                                     |                                                    |       |                       |        | (196         | )       |              |        | (15          | )    |              |     |       |       |   |   | (211   | )      
|                                                                                                   |                                                                                                     |                                                     |                                                     |       |                       |        |              |         |              |        |              |      |              |     |        |       |   |   |        |        
|                                                                                                   |                                                                                                     | Net cash provided by (used in) financing activities |                                                     |       | 9,155                 |        |              |         | (2,281       | )      |              |      | (263         | )   |        |       |  |   |        |         | 6,611  |       
|                                                                                                   |                                                                                                     |                                                     |                                                     |       |                       |        |              |         |              |        |              |      |              |     |        |       |   |   |        |        
|EXCHANGE RATE ON CASH                                                                              |                                                                                                     |                                                     |                                                    |       |                       |        |             |         |              |        | (63          | )    |              |     |       |       |   |   | (63    | )      
|                                                                                                   |                                                                                                     |                                                     |                                                     |       |                       |        |              |         |              |        |              |      |              |     |        |       |   |   |        |        
|NET (DECREASE) INCREASE IN CASH                                                                    |                                                                                                     |                                                     | 6,990                                               |       |                       |        | (6,412       | )       |              |        | (1,303       | )    |              |     |       |       |   |   | (725   | )      
|CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD                                                     |                                                                                                     |                                                     | 3,310                                               |       |                       |        | (1,976       | )       |              |        | 1,496        |      |              |     |       |       |   |   | 2,830  |        
|                                                                                                   |                                                                                                     |                                                     |                                                     |       |                       |        |              |         |              |        |              |      |              |     |        |       |   |   |        |        
|CASH AND CASH EQUIVALENTS,
END OF PERIOD                                                           |                                                                                                     | $                                                   | 10,300                                              |       |                       | $      | (8,388       | )       |              | $      | 193          |      |              | $   |       |       |   | $ | 2,105  |        
|                                                                                                   |                                                                                                     |                                                     |                                                     |       |                       |        |              |         |              |        |              |      |              |     |        |       |   |   |        |        



---

|(a) |  | Elimination of equity in earnings of subsidiaries.
|--- |  | --------------------------------------------------



---



##### Table of Contents



RAILWORKS CORPORATION
CONDENSED CONSOLIDATING BALANCE SHEET
DECEMBER 31, 2001

(In Thousands) (Unaudited)

|                                                |                                                                             |                                              |                                                                             |                                               |       |                       |          |              |         |              |         |              |        |              |          |         |       |         |          |         |         |        |          |   |  |  |  | 
|----------------------------------------------- | --------------------------------------------------------------------------- | -------------------------------------------- | --------------------------------------------------------------------------- | --------------------------------------------- | ----- | --------------------- | -------- | ------------ | ------- | ------------ | ------- | ------------ | ------ | ------------ | -------- | ------- | ----- | ------- | -------- | ------- | ------- | ------ | -------- | - |  |  |  | 
|                                                |                                                                             |                                              |                                                                             |                                               |       | DEBTORS-IN-POSSESSION |          |              |         |              |         |              |        |              |          |         |       |         |          |         |         |       
|                                                |                                                                             |                                              |                                                                             |                                               |       |                       |          |              |         |              |         |              |        |              |          |         |       |         |          |         |         |       
|                                                |                                                                             |                                              |                                                                             |                                               |       | RAILWORKS             |          |              |         |              |         |              |        |              |          |         |       |         |          |         |         |        |          |   |  | 
|                                                |                                                                             |                                              |                                                                             |                                               |       | CORPORATION           |          |              |         |              |         | NON-         |        |              |          |         |       |         |          |         |         |        |          |  
|                                                |                                                                             |                                              |                                                                             |                                               |       | (PARENT CO.           |          | GUARANTOR    |         | GUARANTOR    |         |              |        |              |          |         |       |         |          |         |         |       
|                                                |                                                                             |                                              |                                                                             |                                               |       | ONLY)                 |          | SUBSIDIARIES |         | SUBSIDIARIES |         | ELIMINATIONS |        | CONSOLIDATED |          |         |       |        
|                                                |                                                                             |                                              |                                                                             |                                               |       |                       |          |              |         |              |         |              |        |              |          |         |       |        
|ASSETS:                                         |                                                                             |                                              |                                                                             |                                               |       |                       |          |              |         |              |         |              |        |              |          |         |       |         |          |         |         |        |          |  
|CURRENT ASSETS:                                 |                                                                             |                                              |                                                                             |                                               |       |                       |          |              |         |              |         |              |        |              |          |         |       |         |          |         |         |        |          |  
|                                                | Cash and cash equivalents                                                   |                                              | $                                                                           | 3,310                                         |       |                       | $        | (1,976       | )       |              | $       | 1,496        |        |              | $        |        |       |         | $        | 2,830   |         |        |          |   | 
|                                                | Accounts receivable, net                                                    |                                              |                                                                             |                                              |       |                       |          | 169,208      |         |              |         | 5,221        |        |              |          |        |       |         |          | 174,429 |         |        |          |   | 
|                                                | Costs and estimated earnings in excess of
billings on uncompleted contracts |                                              |                                                                             |                                              |       |                       |          | 40,237       |         |              |         | 456          |        |              |          |        |       |         |          | 40,693  |         |        |          |   | 
|                                                | Inventories:                                                                |                                              |                                                                             |                                               |       |                       |          |              |         |              |         |              |        |              |          |         |       |         |          |         |         |        |          |   | 
|                                                |                                                                             |                                              |                                                                             | Raw materials                                 |       |                       |         |              |         |              | 6,191   |              |        |              | 4,001    |         |       |         |         |         |         |        | 10,192   |   |  |  |  | 
|                                                |                                                                             |                                              |                                                                             | Finished goods                                |       |                       |         |              |         |              | 11,708  |              |        |              | 870      |         |       |         |         |         |         |        | 12,578   |   |  |  |  | 
|                                                | Due from affiliates                                                         |                                              |                                                                             |                                              |       |                       |          |             |         |              |         | 2,027        |        |              |          | (2,027  | ) (a) |         |          |        |         |        |          |   | 
|                                                | Due from parent company                                                     |                                              |                                                                             | 13,377                                        |       |                       |          |             |         |              |         |             |        |              |          | (13,377 | ) (a) |         |          |        |         |        |          |   | 
|                                                | Other current assets                                                        |                                              |                                                                             | 6,989                                         |       |                       |          | 3,412        |         |              |         | 1,849        |        |              |          |        |       |         |          | 12,250  |         |        |          |   | 
|                                                |                                                                             |                                              |                                                                             |                                               |       |                       |          |              |         |              |         |              |        |              |          |         |       |         |          |         |         |        |          |  
|                                                |                                                                             |                                              |                                                                             | Total current assets                          |       |                       | 23,676   |              |         |              | 228,780 |              |        |              | 15,920   |         |       |         | (15,404  | )       |         |        | 252,972  |   |  |  |  | 
|                                                |                                                                             |                                              |                                                                             |                                               |       |                       |          |              |         |              |         |              |        |              |          |         |       |         |          |         |         |        |          |  
|INVESTMENT IN SUBSIDIARIES                      |                                                                             |                                              | 353,926                                                                     |                                               |       |                       |         |              |         |              |        |              |        |              | (353,926 | ) (b)   |       |         |         |         |         |        |          |  
|                                                |                                                                             |                                              |                                                                             |                                               |       |                       |          |              |         |              |         |              |        |              |          |         |       |         |          |         |         |        |          |  
|PROPERTY, PLANT AND EQUIPMENT, NET              |                                                                             |                                              | 1,410                                                                       |                                               |       |                       | 42,146   |              |         |              | 7,407   |              |        |              |         |         |       |         | 50,963   |         |         |        |          |  
|                                                |                                                                             |                                              |                                                                             |                                               |       |                       |          |              |         |              |         |              |        |              |          |         |       |         |          |         |         |        |          |  
|OTHER ASSETS:                                   |                                                                             |                                              |                                                                             |                                               |       |                       |          |              |         |              |         |              |        |              |          |         |       |         |          |         |         |        |          |  
|                                                |                                                                             | Excess of cost over acquired net assets, net |                                                                             |                                               |      |                       |          |              | 188,440 |              |         |              | 16,372 |              |          |         |      |         |          |         | 204,812 |        |          |   |  | 
|                                                |                                                                             | Other                                        |                                                                             |                                               | 8,835 |                       |          |              | 246     |              |         |              | 25     |              |          |         |      |         |          |         | 9,106   |        |          |   |  | 
|                                                |                                                                             |                                              |                                                                             |                                               |       |                       |          |              |         |              |         |              |        |              |          |         |       |         |          |         |         |        |          |  
|                                                |                                                                             |                                              |                                                                             | Total other assets                            |       |                       | 8,835    |              |         |              | 188,686 |              |        |              | 16,397   |         |       |         |         |         |         |        | 213,918  |   |  |  |  | 
|                                                |                                                                             |                                              |                                                                             |                                               |       |                       |          |              |         |              |         |              |        |              |          |         |       |         |          |         |         |        |          |  
|                                                |                                                                             |                                              |                                                                             | Total                                         |       | $                     | 387,847  |              |         | $            | 459,612 |              |        | $            | 39,724   |         |       | $       | (369,330 | )       |         | $      | 517,853  |   |  |  |  | 
|                                                |                                                                             |                                              |                                                                             |                                               |       |                       |          |              |         |              |         |              |        |              |          |         |       |         |          |         |         |        |          |  
|LIABILITIES AND STOCKHOLDERS (DEFICIT) EQUITY: |                                                                             |                                              |                                                                             |                                               |       |                       |          |              |         |              |         |              |        |              |          |         |       |         |          |         |         |        |          |  
|LIABILITIES NOT SUBJECT TO COMPROMISE:          |                                                                             |                                              |                                                                             |                                               |       |                       |          |              |         |              |         |              |        |              |          |         |       |         |          |         |         |        |          |  
|CURRENT LIABILITIES:                            |                                                                             |                                              |                                                                             |                                               |       |                       |          |              |         |              |         |              |        |              |          |         |       |         |          |         |         |        |          |  
|                                                |                                                                             |                                              | Cash overdraft                                                              |                                               | $     |                      |          |              | $       | 2,995        |         |              | $      |             |          |         | $     |        |          |         | $       | 2,995  |          |   |  |  | 
|                                                |                                                                             |                                              | Current maturities of long-term debt                                        |                                               |       | 36,400                |          |              |         | 66           |         |              |        | 5,057        |          |         |       |        |          |         |         | 41,523 |          |   |  |  | 
|                                                |                                                                             |                                              | Accounts payable                                                            |                                               |       | 126                   |          |              |         | 28,780       |         |              |        | 1,435        |          |         |       |        |          |         |         | 30,341 |          |   |  |  | 
|                                                |                                                                             |                                              | Accrued payroll and related withholdings                                    |                                               |       |                      |          |              |         | 6,266        |         |              |        | 384          |          |         |       |        |          |         |         | 6,650  |         
|                                                |                                                                             |                                              | Accrued interest payable                                                    |                                               |       | 442                   |          |              |         | 20           |         |              |        | 15           |          |         |       |        |          |         |         | 477    |          |   |  |  | 
|                                                |                                                                             |                                              | Billings in excess of costs and estimated
earnings on uncompleted contracts |                                               |       |                      |          |              |         | 12,655       |         |              |        | 1,154        |          |         |       |        |          |         |         | 13,809 |          |   |  |  | 
|                                                |                                                                             |                                              | Due to parent company                                                       |                                               |       |                      |          |              |         | 11,630       |         |              |        | 1,747        |          |         |       | (13,377 | ) (a)    |         |         |       |          |   |  |  | 
|                                                |                                                                             |                                              | Due to affiliates                                                           |                                               |       |                      |          |              |         | 2,027        |         |              |        |             |          |         |       | (2,027  | ) (a)    |         |         |       |          |   |  |  | 
|                                                |                                                                             |                                              | Other accrued liabilities                                                   |                                               |       | 7,210                 |          |              |         | 5,695        |         |              |        | 2,960        |          |         |       |        |          |         |         | 15,865 |          |   |  |  | 
|                                                |                                                                             |                                              |                                                                             |                                               |       |                       |          |              |         |              |         |              |        |              |          |         |       |         |          |         |         |        |          |  
|                                                |                                                                             |                                              |                                                                             | Total current liabilities                     |       |                       | 44,178   |              |         |              | 70,134  |              |        |              | 12,752   |         |       |         | (15,404  | )       |         |        | 111,660  |   |  |  |  | 
|                                                |                                                                             |                                              |                                                                             |                                               |       |                       |          |              |         |              |         |              |        |              |          |         |       |         |          |         |         |        |          |  
|LONG TERM DEBT, NET                             |                                                                             |                                              |                                                                            |                                               |       |                       |         |              |         |              | 346     |              |        |              |         |         |       |         | 346      |         |         |        |          |  
|DEFERRED TAX LIABILITY                          |                                                                             |                                              |                                                                            |                                               |       |                       |         |              |         |              | 551     |              |        |              |         |         |       |         | 551      |         |         |        |          |  
|EXCESS OF ACQUIRED NET ASSETS OVER
COST, NET    |                                                                             |                                              |                                                                            |                                               |       |                       | 5,323    |              |         |              |        |              |        |              |         |         |       |         | 5,323    |         |         |        |          |  
|OTHER LIABILITIES                               |                                                                             |                                              |                                                                            |                                               |       |                       | 4,954    |              |         |              | 24      |              |        |              |         |         |       |         | 4,978    |         |         |        |          |  
|                                                |                                                                             |                                              |                                                                             |                                               |       |                       |          |              |         |              |         |              |        |              |          |         |       |         |          |         |         |        |          |  
|                                                |                                                                             |                                              |                                                                             | Total long-term liabilities                   |       |                       |         |              |         |              | 10,277  |              |        |              | 921      |         |       |         |         |         |         |        | 11,198   |   |  |  |  | 
|                                                |                                                                             |                                              |                                                                             |                                               |       |                       |          |              |         |              |         |              |        |              |          |         |       |         |          |         |         |        |          |  
|                                                |                                                                             |                                              |                                                                             | Total liabilities not subject to compromise   |       |                       | 44,178   |              |         |              | 80,411  |              |        |              | 13,673   |         |       |         | (15,404  | )       |         |        | 122,858  |   |  |  |  | 
|                                                |                                                                             |                                              |                                                                             |                                               |       |                       |          |              |         |              |         |              |        |              |          |         |       |         |          |         |         |        |          |  
|LIABILITIES SUBJECT TO COMPROMISE               |                                                                             |                                              | 390,161                                                                     |                                               |       |                       | 64,904   |              |         |              |        |              |        |              |          |         |       |         | 455,065  |         |         |        |          |  
|                                                |                                                                             |                                              |                                                                             | Total liabilities                             |       |                       | 434,339  |              |         |              | 145,315 |              |        |              | 13,673   |         |       |         | (15,404  | )       |         |        | 577,923  |   |  |  |  | 
|MINORITY INTEREST                               |                                                                             |                                              |                                                                            |                                               |       |                       | 1,749    |              |         |              |        |              |        |              |          |         |       |         | 1,749    |         |         |        |          |  
|STOCKHOLDERS (DEFICIT) EQUITY:                 |                                                                             |                                              |                                                                             |                                               |       |                       |          |              |         |              |         |              |        |              |          |         |       |         |          |         |         |        |          |  
|                                                |                                                                             |                                              |                                                                             | Series A, convertible preferred stock         |       |                       | 14       |              |         |              |        |              |        |              |         |         |       |         |         |         |         |        | 14       |   |  |  |  | 
|                                                |                                                                             |                                              |                                                                             | Common stock                                  |       |                       | 125      |              |         |              | 2,816   |              |        |              | 378      |         |       |         | (3,164   | ) (b)   |         |        | 155      |   |  |  |  | 
|                                                |                                                                             |                                              |                                                                             | Treasury stock                                |       |                       | (2,667   | )            |         |              |        |              |        |              |         |         |       |         |         |         |         |        | (2,667   | ) |  |  |  | 
|                                                |                                                                             |                                              |                                                                             | Officer loans, net                            |       |                       | (1,876   | )            |         |              |        |              |        |              |         |         |       |         |         |         |         |        | (1,876   | ) |  |  |  | 
|                                                |                                                                             |                                              |                                                                             | Additional paid-in capital                    |       |                       | 136,572  |              |         |              | 364,248 |              |        |              | 24,221   |         |       |         | (388,469 | ) (b)   |         |        | 136,572  |   |  |  |  | 
|                                                |                                                                             |                                              |                                                                             | Accumulated other comprehensive income (loss) |       |                       |         |              |         |              |        |              |        |              | (1,969   | )       |       |         |         |         |         |        | (1,969   | ) |  |  |  | 
|                                                |                                                                             |                                              |                                                                             | Retained earnings (deficit)                   |       |                       | (178,660 | )            |         |              | (54,516 | )            |        |              | 3,421    |         |       |         | 37,707   | (b)     |         |        | (192,048 | ) |  |  |  | 
|                                                |                                                                             |                                              |                                                                             |                                               |       |                       |          |              |         |              |         |              |        |              |          |         |       |         |          |         |         |        |          |  
|                                                |                                                                             |                                              |                                                                             | Total stockholders (deficit) equity          |       |                       | (46,492  | )            |         |              | 312,548 |              |        |              | 26,051   |         |       |         | (353,926 | )       |         |        | (61,819  | ) |  |  |  | 
|                                                |                                                                             |                                              |                                                                             |                                               |       |                       |          |              |         |              |         |              |        |              |          |         |       |         |          |         |         |        |          |  
|                                                |                                                                             |                                              |                                                                             | Total                                         |       | $                     | 387,847  |              |         | $            | 459,612 |              |        | $            | 39,724   |         |       | $       | (369,330 | )       |         | $      | 517,853  |   |  |  |  | 
|                                                |                                                                             |                                              |                                                                             |                                               |       |                       |          |              |         |              |         |              |        |              |          |         |       |         |          |         |         |        |          |  



---

|(a) |  | Elimination of inter-company receivables.  
|--- |  | -------------------------------------------
|(b) |  | Elimination of investments in subsidiaries.



---



##### Table of Contents



RAILWORKS CORPORATION
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2001

(In Thousands) (Unaudited)

|                                             |  |                   |        |              |  |              |         |              |  |              |       |   |  |   |        |      |  |   |         |  
|-------------------------------------------- |  | ----------------- | ------ | ------------ |  | ------------ | ------- | ------------ |  | ------------ | ----- | - |  | - | ------ | ---- |  | - | ------- | -
|                                             |  | RAILWORKS         |        |              |  |              |         | NON-         |  |              |       |   |  |   |        |     
|                                             |  | CORPORATION       |        | GUARANTOR    |  | GUARANTOR    |         |              |  |              |       |   |  |  
|                                             |  | (PARENT CO. ONLY) |        | SUBSIDIARIES |  | SUBSIDIARIES |         | ELIMINATIONS |  | CONSOLIDATED
|                                             |  |                   |        |              |  |              |         |              |  |             
|Revenue                                      |  | $                 |       |              |  | $            | 164,940 |              |  | $            | 6,177 |   |  | $ | (729   | )(a) |  | $ | 170,388 |  
|Cost of revenue                              |  |                   |       |              |  |              | 135,973 |              |  |              | 5,034 |   |  |   | (729   | )(a) |  |   | 140,278 |  
|                                             |  |                   |        |              |  |              |         |              |  |              |       |   |  |   |        |      |  |   |         |  
|Gross profit                                 |  |                   |       |              |  |              | 28,967  |              |  |              | 1,143 |   |  |   |       |      |  |   | 30,110  |  
|Selling, general and administrative expenses |  |                   | 2,645  |              |  |              | 14,729  |              |  |              | 1,380 |   |  |   |       |      |  |   | 18,754  |  
|Restructuring and other unusual charges      |  |                   | 232    |              |  |              |        |              |  |              |      |   |  |   |       |      |  |   | 232     |  
|                                             |  |                   |        |              |  |              |         |              |  |              |       |   |  |   |        |      |  |   |         |  
|Operating income                             |  |                   | (2,877 | )            |  |              | 14,238  |              |  |              | (237  | ) |  |   |       |      |  |   | 11,124  |  
|Equity in earnings of subsidiaries           |  |                   | 7,335  |              |  |              |        |              |  |              |      |   |  |   | (7,335 | )(b) |  |   |        |  
|Interest expense                             |  |                   | (9,842 | )            |  |              | (254    | )            |  |              | (139  | ) |  |   |       |      |  |   | (10,235 | )
|Other (expense) income                       |  |                   | (620   | )            |  |              | 293     |              |  |              | 90    |   |  |   |       |      |  |   | (237    | )
|                                             |  |                   |        |              |  |              |         |              |  |              |       |   |  |   |        |      |  |   |         |  
|Income (loss) before income taxes            |  |                   | (6,004 | )            |  |              | 14,277  |              |  |              | (286  | ) |  |   | (7,335 | )    |  |   | 652     |  
|Provision (benefit) for income taxes         |  |                   |       |              |  |              | 587     |              |  |              | (87   | ) |  |   |       |      |  |   | 500     |  
|                                             |  |                   |        |              |  |              |         |              |  |              |       |   |  |   |        |      |  |   |         |  
|Net income (loss)                            |  | $                 | (6,004 | )            |  | $            | 13,690  |              |  | $            | (199  | ) |  | $ | (7,335 | )    |  | $ | 152     |  
|                                             |  |                   |        |              |  |              |         |              |  |              |       |   |  |   |        |      |  |   |         |  



---

|(a) |  | Elimination of inter-company revenue.             
|--- |  | --------------------------------------------------
|(b) |  | Elimination of equity in earnings of subsidiaries.



---



##### Table of Contents



RAILWORKS CORPORATION
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2001

(In Thousands) (Unaudited)

|                                                                                            |                                                                                                     |                                                     |        |             |        |              |        |              |        |              |        |              |       |   |        |      |   |   |        |        |         |  
|------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------- | --------------------------------------------------- | ------ | ----------- | ------ | ------------ | ------ | ------------ | ------ | ------------ | ------ | ------------ | ----- | - | ------ | ---- | - | - | ------ | ------ | ------- | -
|                                                                                            |                                                                                                     |                                                     |        | RAILWORKS   |        |              |        |              |        |              |        |              |       |   |        |      |   |   |        |       
|                                                                                            |                                                                                                     |                                                     |        | CORPORATION |        |              |        |              |        | NON-         |        |              |       |   |        |      |   |  
|                                                                                            |                                                                                                     |                                                     |        | (PARENT CO. |        | GUARANTOR    |        | GUARANTOR    |        |              |        |              |       |   |        |     
|                                                                                            |                                                                                                     |                                                     |        | ONLY)       |        | SUBSIDIARIES |        | SUBSIDIARIES |        | ELIMINATIONS |        | CONSOLIDATED
|                                                                                            |                                                                                                     |                                                     |        |             |        |              |        |              |        |              |        |             
|CASH FLOWS FROM OPERATING ACTIVITIES:                                                       |                                                                                                     |                                                     |        |             |        |              |        |              |        |              |        |              |       |   |        |      |   |   |        |       
|Net Income                                                                                  |                                                                                                     | $                                                   | (6,004 | )           |        | $            | 13,690 |              |        | $            | (199   | )            |       | $ | (7,335 | )(a) |   | $ | 152    |       
|Adjustments to reconcile net income to net cash
(used in) provided by operating activities: |                                                                                                     |                                                     |        |             |        |              |        |              |        |              |        |              |       |   |        |      |   |   |        |       
|Depreciation and amortization                                                               |                                                                                                     |                                                     | 335    |             |        |              | 4,308  |              |        |              | 601    |              |       |   |       |      |   |   | 5,244  |       
|Bond discount amortization                                                                  |                                                                                                     |                                                     | 18     |             |        |              |       |              |        |              |       |              |       |   |       |      |   |   | 18     |       
|Equity in earnings of subsidiaries                                                          |                                                                                                     |                                                     | (7,335 | )           |        |              |       |              |        |              |       |              |       |   | 7,335  | (a)  |   |   |       |       
|Gain on sale of equipment                                                                   |                                                                                                     |                                                     |       |             |        |              | (55    | )            |        |              | (59    | )            |       |   |       |      |   |   | (114   | )     
|Loss on sale of subsidiary                                                                  |                                                                                                     |                                                     | 612    |             |        |              |       |              |        |              |       |              |       |   |       |      |   |   | 612    |       
|Changes in operating assets and liabilities:                                                |                                                                                                     |                                                     |        |             |        |              |        |              |        |              |        |              |       |   |        |      |   |   |        |       
|                                                                                            | Accounts receivable and costs and estimated earnings
In excess of billings on uncompleted contracts |                                                     |        | (29         | )      |              |        | (9,172       | )      |              |        | 2,238        |       |   |        |     |   |   |        | (6,963 | )      
|                                                                                            | Inventory                                                                                           |                                                     |        |            |        |              |        | (1,682       | )      |              |        | 173          |       |   |        |     |   |   |        | (1,509 | )      
|                                                                                            | Other current assets                                                                                |                                                     |        | 116         |        |              |        | (1,039       | )      |              |        | 31           |       |   |        |     |   |   |        | (892   | )      
|                                                                                            | Accounts payable and accrued liabilities                                                            |                                                     |        | 109         |        |              |        | (653         | )      |              |        | (619         | )     |   |        |     |   |   |        | (1,163 | )      
|                                                                                            | Accrued payroll and related withholdings                                                            |                                                     |        |            |        |              |        | 4,369        |        |              |        | 84           |       |   |        |     |   |   |        | 4,453  |        
|                                                                                            | Accrued interest payable                                                                            |                                                     |        | 4,530       |        |              |        | 1            |        |              |        | 34           |       |   |        |     |   |   |        | 4,565  |        
|                                                                                            | Billings in excess of costs and estimated
Earnings on uncompleted contracts                         |                                                     |        |            |        |              |        | (2,312       | )      |              |        | 40           |       |   |        |     |   |   |        | (2,272 | )      
|                                                                                            | Other current liabilities                                                                           |                                                     |        | 1,077       |        |              |        | 506          |        |              |        | (143         | )     |   |        |     |   |   |        | 1,440  |        
|                                                                                            | Other assets                                                                                        |                                                     |        | 148         |        |              |        | 691          |        |              |        | 12           |       |   |        |     |   |   |        | 851    |        
|                                                                                            | Other liabilities                                                                                   |                                                     |        | (26         | )      |              |        | (549         | )      |              |        | (99          | )     |   |        |     |   |   |        | (674   | )      
|                                                                                            | Due (to)/from affiliates                                                                            |                                                     |        |            |        |              |        | (685         | )      |              |        | 685          |       |   |        |     |   |   |        |       |        
|                                                                                            | Due (to)/from parent company                                                                        |                                                     |        | 734         |        |              |        | 463          |        |              |        | (1,197       | )     |   |        |     |   |   |        |       |        
|                                                                                            |                                                                                                     |                                                     |        |             |        |              |        |              |        |              |        |              |       |   |        |      |   |   |        |       
|                                                                                            |                                                                                                     | Net cash (used in) provided by operating
Activities |        |             | (5,715 | )            |        |              | 7,881  |              |        |              | 1,582 |   |        |      |  |   |        |        | 3,748   |  
|                                                                                            |                                                                                                     |                                                     |        |             |        |              |        |              |        |              |        |              |       |   |        |      |   |   |        |       
|CASH FLOWS FROM INVESTING ACTIVITIES:                                                       |                                                                                                     |                                                     |        |             |        |              |        |              |        |              |        |              |       |   |        |      |   |   |        |       
|Proceeds from sale of equipment                                                             |                                                                                                     |                                                     |       |             |        |              | 133    |              |        |              | 115    |              |       |   |       |      |   |   | 248    |       
|Purchase of equipment and leasehold improvements                                            |                                                                                                     |                                                     | (100   | )           |        |              | (3,220 | )            |        |              | (389   | )            |       |   |       |      |   |   | (3,709 | )     
|Proceeds from sale of subsidiary                                                            |                                                                                                     |                                                     | 9,402  |             |        |              | (262   | )            |        |              |       |              |       |   |       |      |   |   | 9,140  |       
|Contingent earn-out payments                                                                |                                                                                                     |                                                     | (545   | )           |        |              |       |              |        |              |       |              |       |   |       |      |   |   | (545   | )     
|                                                                                            |                                                                                                     |                                                     |        |             |        |              |        |              |        |              |        |              |       |   |        |      |   |   |        |       
|                                                                                            |                                                                                                     | Net cash provided by (used in) investing activities |        |             | 8,757  |              |        |              | (3,349 | )            |        |              | (274  | ) |        |      |  |   |        |        | 5,134   |  
|                                                                                            |                                                                                                     |                                                     |        |             |        |              |        |              |        |              |        |              |       |   |        |      |   |   |        |       
|CASH FLOWS FROM FINANCING ACTIVITIES:                                                       |                                                                                                     |                                                     |        |             |        |              |        |              |        |              |        |              |       |   |        |      |   |   |        |       
|Net change in bank overdraft                                                                |                                                                                                     |                                                     | (488   | )           |        |              | (7,001 | )            |        |              | 86     |              |       |   |       |      |   |   | (7,403 | )     
|Net activity on revolving line of credit                                                    |                                                                                                     |                                                     | 3,571  |             |        |              |       |              |        |              | (1,000 | )            |       |   |       |      |   |   | 2,571  |       
|Payment of loan origination fees                                                            |                                                                                                     |                                                     | (46    | )           |        |              |       |              |        |              |       |              |       |   |       |      |   |   | (46    | )     
|Proceeds from long-term borrowing                                                           |                                                                                                     |                                                     |       |             |        |              | 221    |              |        |              | 46     |              |       |   |       |      |   |   | 267    |       
|Repayment of long-term borrowing                                                            |                                                                                                     |                                                     |       |             |        |              | (2,268 | )            |        |              | (40    | )            |       |   |       |      |   |   | (2,308 | )     
|Repayment of term loan                                                                      |                                                                                                     |                                                     | (4,722 | )           |        |              |       |              |        |              |       |              |       |   |       |      |   |   | (4,722 | )     
|Repayment of seller notes                                                                   |                                                                                                     |                                                     | (2,825 | )           |        |              |       |              |        |              |       |              |       |   |       |      |   |   | (2,825 | )     
|                                                                                            |                                                                                                     |                                                     |        |             |        |              |        |              |        |              |        |              |       |   |        |      |   |   |        |       
|                                                                                            |                                                                                                     | Net cash used in
Financing activities               |        |             | (4,510 | )            |        |              | (9,048 | )            |        |              | (908  | ) |        |      |  |   |        |        | (14,466 | )
|                                                                                            |                                                                                                     |                                                     |        |             |        |              |        |              |        |              |        |              |       |   |        |      |   |   |        |       
|NET (DECREASE)
INCREASE IN CASH                                                             |                                                                                                     |                                                     | (1,468 | )           |        |              | (4,516 | )            |        |              | 400    |              |       |   |       |      |   |   | (5,584 | )     
|EXCHANGE RATE EFFECT ON CASH                                                                |                                                                                                     |                                                     |       |             |        |              | (11    | )            |        |              | (491   | )            |       |   |       |      |   |   | (502   | )     
|CASH AND CASH EQUIVALENTS, BEGINNING
OF PERIOD                                              |                                                                                                     |                                                     | 1,532  |             |        |              | 5,420  |              |        |              | 186    |              |       |   |       |      |   |   | 7,138  |       
|                                                                                            |                                                                                                     |                                                     |        |             |        |              |        |              |        |              |        |              |       |   |        |      |   |   |        |       
|CASH AND CASH EQUIVALENTS, END OF PERIOD                                                    |                                                                                                     | $                                                   | 64     |             |        | $            | 893    |              |        | $            | 95     |              |       | $ |       |      |   | $ | 1,052  |       
|                                                                                            |                                                                                                     |                                                     |        |             |        |              |        |              |        |              |        |              |       |   |        |      |   |   |        |       



---

|(a) |  | Elimination of equity in earnings of subsidiaries.
|--- |  | --------------------------------------------------



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##### Table of Contents






Item 2.   Managements Discussion and Analysis of Financial Condition and
Results of Operations

General

We were formed in March 1998 to become a leading nationwide provider of
rail system services, including construction and rehabilitation, repair and
maintenance, and related products. We primarily perform services pursuant to
contracts for the completion of specific projects, some of which take up to
five years to complete. On most projects, we contract directly with rail system
operators, while on other projects we act as a subcontractor.

In August 1998, we acquired, in separate concurrent transactions, fourteen
companies (the Founding Companies) engaged principally in the rail system
services and products business and we consummated our initial public offering
(IPO) of Common Stock. In November 1998, we acquired two
companies; in 1999, we acquired fourteen companies or groups of
companies; and in 2000, we acquired five
companies or groups of companies. Except for
the acquisition of Comstock Holdings, Inc. (Comstock), a Founding Company,
all of our acquisitions have been accounted for as purchases in accordance with
APB No. 16. Comstock has been identified as the accounting acquirer for
accounting and financial statement purposes consistent with Staff Accounting
Bulletin No. 97 of the SEC because its owners received the largest portion,
34.6% of the shares of Common Stock issued to the owners of the Founding
Companies at the time of their acquisition.

Our consolidated balance sheet as of March 31, 2002 includes all companies
that were owned as of March 31, 2002. Our consolidated statement of operations
and statement of cash flows for the three months ended March 31, 2002 includes
the results of operations and cash flows of all companies owned as of December
31, 2001. There were no acquisitions or dispositions during the three months
ended March 31, 2002. Our consolidated balance sheet as of December 31, 2001
includes all companies that were owned as of December 31, 2001. During the
first quarter of 2001, we sold our subsidiary FCM Rail, Ltd. Our statement of
operations and statement of cash flows for the three months ended March 31,
2001 include the results of operations and cash flows of all companies owned as
of March 31, 2001 and the results of operations and cash flows of FCM Rail, Ltd
through the date of disposition. There were no acquisitions during the three
months ended March 31, 2001.

On September 20, 2001 (the Filing Date), RailWorks Corporation and
twenty-two of its domestic subsidiaries (collectively, the Debtors) filed
voluntary petitions for relief under Chapter 11 of the Bankruptcy Code in the
United States Bankruptcy Court for the District of Maryland (Baltimore
Division). The filings have been consolidated for the purpose of joint
administration as case No. 01-6-4463, but the cases have not been deemed
consolidated for Plan purposes by the Bankruptcy Court. Our Canadian
subsidiaries were not included in the filings and continue to operate in the
normal course of business outside of bankruptcy. Under Chapter 11, except for
certain statutory exceptions and for relief that might otherwise be granted by
the Bankruptcy Court, claims against the Debtors in existence prior to the
Filing Date (including claims secured by the Debtors assets) are stayed while
the Debtors continue business operations as debtors-in-possession. Additional
claims may arise subsequent to the Filing Date resulting from rejection of
executory contracts, including leases and construction contracts, and from the
determination by the Bankruptcy Court (or agreed to by the parties in interest)
of allowed claims for contingencies and other disputed amounts.





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Our ability to continue as a going concern is contingent upon, among other
things, confirmation of a plan of reorganization, future profitable operations,
the ability to comply with the terms of the DIP facility and the ability to
generate sufficient cash flow from operations and financing arrangements to
fund ongoing operations. There can be no assurance that we will be able to
confirm a plan or comply with the terms of the DIP Facility or the credit
facilities under the proposed Plan. As of May 1, 2002, the amount outstanding
under the Companys Transit Revolver totaled $45.0 million, the maximum amount
permitted under the facility, of which $30.0 million was outstanding borrowings
and $15.0 million was a letter of credit supporting the Companys commercial
insurance. At that date, the amount outstanding under the TP&S Revolver was
$26.6 million, consisting of $18.4 million of outstanding borrowings and $8.2
million of letters of credit outstanding. We had $11.7 million of collateral
outstanding under the Bonding Facility. No further borrowing capacity
presently exists under the Transit Revolver. The lack of additional
availability under the Transit Revolver will require that the transit services
segment internally generate the cash necessary to fund its operations and its
share of the administrative costs of reorganization, but there is no assurance
that it will be able to do so. Failure to do so coupled with a failure to
obtain additional funding for the transit services segment could result in the
discontinuation of this business segment.

Since the Filing Date, the Bankruptcy Court has approved, on a final
basis, the Debtors debtor-in-possession financing arrangements (collectively,
as amended, restated and/or replaced, the DIP Facility) with Bank of America,
N.A. (BOA), for itself and as agent for a syndicate of lenders, CSFB Global
Opportunities Advisers, LLC (CSFB), for itself and Stonehill Capital
Management, and Travelers Casualty & Surety Company of America (Travelers).
The DIP Facility includes an Amended and Restated DIP Transit Revolving Credit
Agreement (the Transit Revolver) for up to $30.0 million in borrowings and a
$15.0 million letter of credit in support of our company wide liability and
casualty insurance in connection with the Debtors rail transit division; a DIP
Transit Bonding Facility (the Bonding Facility) for up to $100.0 million in
bonding commitment to support our project bonding requirements; a DIP Bond
Support Credit Agreement (the Bond Support Facility) with CSFB for up to
$40.0 million of collateral support for the transit services divisions project
surety bonds underwritten by Travelers; and a DIP Financing Agreement, as
replaced on March 5, 2002 (the TP&S Revolver) with certain lenders
represented by BOA as administrative agent for up to $35.0 million of financing
and letter of credit commitments to support the track services and products and
services divisions operating cash obligations and project bonding
requirements. The Debtors intend to utilize the DIP Facility and existing cash
flow to fund ongoing operations during the Chapter 11 proceedings. As of May
1, 2002 approximately $45.0 million was outstanding under the Transit Revolver,
consisting of $30.0 million of borrowings and a $15.0 million letter of credit;
$26.6 million was outstanding under the TP&S Revolver, consisting of $18.4
million in borrowings and $8.2 million of letters of credit outstanding; and we
had $11.7 million of collateral outstanding under the Bonding Facility.

On March 15, 2002, the Debtors filed a plan of reorganization in the U.S.
Bankruptcy Court for the District of Maryland in Baltimore. The Plan
contemplates full repayment of debtor-in-possession or DIP claims, satisfaction
of secured claims held by certain of the Companys pre-petition secured lenders
through the issuance of a new secured note, and satisfaction of the balance of
claims held by the Companys pre-petition secured lenders through the
conversion of such claims into substantially all of the equity of the
reorganized company. The Plan also provides that holders of the Companys
$173.1 million 11 1/2% senior subordinated notes due in 2009 and unsecured
creditors that were not authorized by the Bankruptcy Court to be paid as
critical vendors will receive 3% of the stock of the reorganized company and
that the interests of the current equity holders of the Company will be
eliminated. The Company is continuing to negotiate certain terms and
conditions of the plan of reorganization with their prepetition secured





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##### Table of Contents



lenders and anticipates filing an amended plan of reorganization in the
near term. It is anticipated that the terms and conditions of the amended plan
of reorganization will differ from the terms and conditions of the plan of
reorganization described above. Confirmation of the Plan, which remains
subject to supplementation, modification and amendment, also remains subject to
Bankruptcy Court approval and certain other conditions.

Critical Accounting Policies

Managements Discussion and Analysis of Financial Condition and Results of
Operations discusses RailWorks consolidated financial statements and results
of operations by segment, which have been prepared in accordance with
accounting principles generally accepted in the United States. The preparation
of financial statements in conformity with accounting principles generally
accepted in the United States requires management to make estimates and
assumptions that affect the reported amount 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. On an ongoing basis, management evaluates its estimates and
assumptions, including those related to contract revenue, anticipated contract
costs, bad debts, inventories, intangible assets, income taxes, retirement
benefits, and contingencies and litigation. Management bases its estimates and
assumptions on historical experience and on various other factors that are
believed to be reasonable under the circumstances, the results of which form
the basis for making assumptions about the carrying values of assets and
liabilities and the reported amounts of revenues and expenses that are not
readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.

Revenue Recognition

The recognition of revenues and costs in accordance with the American
Institute of Certified Public Accountants Statement of Position 81-1:
Accounting for Performance of Construction-Type and Certain Production Type
Contracts (SOP 81-1) involves considerable use of estimates and is
complicated by the need to evaluate continually the uncertainties inherent in
the performance of contracts and by the need to rely on estimates of revenues,
costs and the extent of progress toward completion of contracts. Operating in
Chapter 11 bankruptcy and certain related problems with subcontractors and
customers provides even more risk and uncertainty in the estimates. Changes in
these estimates can cause significant volatility in the Companys financial
results.

We recognize revenue from fixed price contracts using the
percentage-of-completion method in accordance with SOP 81-1, measured by the
percentage of costs incurred to date to managements estimate of total cost for
each contract. This method is used because management considers total cost to
be the best available measure of progress on the contracts. Revenue from
time-and-material contracts is recognized currently as the work is performed.

Contract revenue recognition inherently involves estimation. Examples of
estimates include the contemplated level of effort to accomplish the tasks
under contract, the costs of the effort, and an ongoing assessment of progress
toward completing the contract. We utilize a number of management processes to
monitor contract performance and revenue estimates, including monthly
in-process reviews that cover, among other matters, outstanding action items,
progress against schedule, effort and staffing, quality, risks and other
issues, subcontractor management, costs, and commitments. From time to time,
as part of the normal management processes, facts develop that require
revisions to estimated total costs or revenues expected. The cumulative effect
of any such revisions is recorded in the period in which the facts requiring
revisions become known. The full amount of anticipated losses on any type
of contract are recognized in the period in which they become known.





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Disputes may arise in the normal course of our business on projects when
we are contesting with customers for collection of funds because of events such
as delays, changes in contract specifications, and questions of cost
allowability or collectibility. Such disputes, whether claims or unapproved
change orders in the process of negotiation, are recorded at the lesser of
their estimated net realizable value or actual cost incurred, and only when
realization is probable and can be reliably estimated.

With regard to the rail products and services segment, we recognize
revenue when products are delivered to customers pursuant to shipping
agreements. Cost of goods sold includes the raw materials cost, labor and
overhead costs of producing the product.

In accordance with industry practice, the Company classifies as current
all assets and liabilities related to the performance of long-term contracts.
The contracting cycle for certain long-term contracts may extend beyond one
year and, accordingly, collection or payment of amounts related to these
contracts may extend beyond one year.

Inventories

Inventories are stated at the lower of cost or market. Cost is determined
by the first-in, first-out (FIFO) method. Inventory consists of stored
materials and parts to be used in long-term construction contracts and raw
materials and finished goods produced by the rail products and services
segment. RailWorks writes down its inventory for estimated obsolescence or
unmarketable inventory equal to the difference between the cost of inventory
and the estimated market value based upon assumptions about future demand and
market conditions. If actual future demand or market conditions are less
favorable than those projected by management, additional inventory write-downs
may be required.

Chapter 11 Bankruptcy

The consolidated financial statements of the Company have been presented
in accordance with the American Institute of Certified Public Accountants
Statement of Position 90-7: Financial Reporting by Entities in Reorganization
under the Bankruptcy Code (SOP 90-7) and have been prepared in accordance
with accounting principles generally accepted in the United States applicable
to a going concern. These principles, except as otherwise disclosed, assume
that assets will be realized and liabilities will be discharged in the normal
course of business. The uncertainty regarding the eventual outcome of the
reorganization cases, the liquidity constraints at the transit services
segment, the financial feasibility of the Plan, related problems with
subcontractors and customers and the effect of other unknown adverse factors
could threaten the Companys existence as a going concern.

SOP 90-7 states, among other things, that revenues, expenses, realized
gains and losses, and provisions from losses resulting from the reorganization
and the restructuring of the business should be reported separately as
reorganization items in the statement of operations. The balance sheet should
distinguish between prepetition liabilities that are subject to compromise and
those that are not such as fully secured liabilities that are not expected to
be compromised. If there is uncertainty about whether a secured claim is
undersecured, or will be impaired under the reorganization plan, the entire
amount of the claim should be included with liabilities subject to
compromise. See Note 2 to the consolidated financial statements for more
information on liabilities classified as subject to compromise and amounts
recorded as reorganization items.





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##### Table of Contents



Pursuant to SOP 90-7, approval of the Plan by the Bankruptcy Court may
entail adoption by the Debtors of fresh-start accounting. Under fresh-start
accounting, the Debtors must allocate their reorganization value to their
assets in accordance with the rules for purchase accounting set forth in
Accounting Principles Board Opinion No. 16, Business Combinations (APB No.
16). Any excess of reorganization value that cannot be allocated to specific
tangible or identified intangible assets must be reported as the intangible
asset reorganization value in excess of amounts allocable to identifiable
assets. All liabilities existing at the Plan confirmation date, other than
deferred taxes, are required to be stated at present values of amounts to be
paid. The Company is currently assessing this matter and has not yet
determined the effect that the adoption of fresh-start accounting might have on
the financial statements.

Impact of Recently Issued Accounting Pronouncements

In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS
No. 141, Business Combinations, which requires all business combinations
initiated after June 30, 2001 to be accounted for using the purchase method.
Implementation of this statement did not have a material effect on our financial
statements.

In June 2001, the Financial Accounting Standards Board approved Statement
of Financial Accounting Standard No. 142, Goodwill and Other Intangible
Assets (SFAS No. 142), which requires companies to cease amortizing
goodwill. SFAS No. 142 also establishes a new method of testing goodwill for
impairment on an annual basis or on an interim basis if an event occurs or
circumstances change that would reduce the fair value of a reporting unit below
its carrying value. The adoption of SFAS No. 142 resulted in the
discontinuation of amortization of goodwill commencing January 1, 2002, which
resulted in the Company not recording approximately $1.3 million of
amortization expense during the three months ended March 31, 2002. Had the
Company adopted SFAS No. 142 effective January 1, 2001, the Company would not
have recorded approximately $1.4 million of amortization expense during the
three months ended March 31, 2001.

The Company is currently in the process of testing goodwill for impairment
under SFAS No. 142. The first step of the process, which must be completed by
June 30, 2002, requires the Company to determine whether the carrying value of
its reporting units exceeds the fair value of the goodwill related to those
reporting units. Upon completion of this step, the Company will be required to
determine the measurement of the impairment. The Company expects to complete
such impairment analysis by December 31, 2002. While the Company has not
determined that impairment at March 31, 2002, it believes that this statement
will require a material impairment charge on the Companys financial statements
upon final implementation. Further, upon emergence from Chapter 11 Bankruptcy
during 2002, the Company may be required to record an additional charge to
write off the goodwill to the extent that it exceeds excess reorganization
value of the Company upon emergence.

In addition, SFAS No. 142 states that beginning as of the earlier of
January 1, 2002 or the date SFAS No. 142 is applied in its entirety, any
unamortized excess of acquired net assets over cost (negative goodwill) shall
be written off and recognized as a change in accounting principle. As a
result, the company has written off and recognized as a change in accounting
principle approximately $5.3 million of negative goodwill during the three
months ended March 31, 2002.





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##### Table of Contents



The following table provides the comparable effects of adoption of SFAS
No. 142 for the three months ended March 31, 2002 and 2001 (in thousands,
except per share data).

|                                                                                  |  |      |         |      |  |   |       | 
|--------------------------------------------------------------------------------- |  | ---- | ------- | ---- |  | - | ----- | 
|                                                                                  |  | 2002 |         | 2001
|                                                                                  |  |      |         |     
|Reported net income (loss), before change in accounting principle                 |  | $    | (14,732 | )    |  | $ | 152   | 
|Add back: goodwill amortization (net of tax)                                      |  |      |        |      |  |   | 1,363 | 
|                                                                                  |  |      |         |      |  |   |       | 
|Adjusted net income (loss)                                                        |  | $    | (14,732 | )    |  | $ | 1,515 | 
|                                                                                  |  |      |         |      |  |   |       | 
|Reported basic earnings (loss) per share, before change
in accounting principle   |  | $    | (1.02   | )    |  | $ | 0.01  | 
|Add back: goodwill amortization (net of tax)                                      |  |      |        |      |  |   | 0.09  | 
|                                                                                  |  |      |         |      |  |   |       | 
|Adjusted basic earnings (loss) per share                                          |  | $    | (1.02   | )    |  | $ | 0.10  | 
|                                                                                  |  |      |         |      |  |   |       | 
|Reported diluted earnings (loss) per share, before change
in accounting principle |  | $    | (1.02   | )    |  | $ | 0.01  | 
|Add back: goodwill amortization (net of tax)                                      |  |      |        |      |  |   | 0.08  | 
|                                                                                  |  |      |         |      |  |   |       | 
|Adjusted diluted earnings (loss) per share                                        |  | $    | (1.02   | )    |  | $ | 0.09  | 
|                                                                                  |  |      |         |      |  |   |       | 

In June 2001, the FASB issued SFAS No. 143 Accounting for Asset
Retirement Obligations. This statement addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. The statement is effective
for financial statements issued for fiscal years beginning after June 15, 2002.
We believe that the impact of this statement will not have a material effect
on our financial statements.

In June 2001, the FASB issued SFAS No. 144 Accounting for the Impairment
for Disposal of Long-Lived Assets. This statement addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
The provisions of this statement are effective for financial statements issued
for fiscal years beginning after December 15, 2001. Implementation of this
statement did not have a material effect on our financial statements.

Results of Operations

Three Months Ended March 31, 2002 Compared to the Three Months Ended March
31, 2001.

Revenue.Revenue decreased $59.1 million, or 34.7%, from $170.4 million
for the three months ended March 31, 2001 to $111.3 million for the three
months ended March 31, 2002. A portion of the decrease in revenue for the three
months ended March 31, 2002 was attributable to our decision to lessen our
transit services segments exposure to the power and industrial and commercial
sectors as well as a lack of new projects in that segment. Revenue also
decreased in our rail track services group due to the sale of the civil and
maintenance divisions of RailWorks W.T. Byler during 2001 and in the rail
products and services group due to the sale of FCM Rail, Ltd. during 2001.
Additional decreases resulted from the winding down of a project in our rail
products and services group as well as liquidity constraints and other effects
of operating in bankruptcy during 2002.

Transit services
revenue decreased $36.2 million, or 35.1%, from $103.2
million for the three months ended March 31, 2001 to $67.0 million for the
three months ended March 31, 2002. The majority of this decrease in revenue
for the three months ended March 31, 2002 is a result of our decision to lessen
our exposure to the power and industrial and commercial sectors. In
addition, in our core transit business we lack sufficient revenues from
new projects to offset revenues of those completed since the first quarter of
2001.





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##### Table of Contents



Rail track services
revenue decreased $15.7 million, or 36.5%, from $43.0
million for the three months ended March 31, 2001 to $27.3 million for the
three months ended March 31, 2002. This decrease is primarily the result of the
inclusion of a full quarter of revenue in 2001 from the civil and maintenance
divisions of RailWorks W.T. Byler, which were sold during the second quarter of
2001.

Rail products and services revenue decreased $7.2 million, or 29.8%, from
$24.2 million for the three months ended March 31, 2001 to $17.0 million for
the three months ended March 31, 2002. This decrease in revenue for the three
months ended March 31, 2002 is primarily a result of the winding down of our
railroad construction contract in Panama. The remaining decrease is the result
of the inclusion of revenue from FCM Rail, Ltd for a portion of the three
months ended March 31, 2001 prior to its sale, as well as liquidity constraints
and the adverse effects of the bankruptcy on the divisions ability to secure
raw materials. These decreases were partially offset by revenue from new
contracts in our rail services group for the three months ended March 31, 2002.

Gross Profit.Gross profit decreased $18.8 million, or 62.5%, from $30.1
million for the three months ended March 31, 2001 to $11.3 million for the
three months ended March 31, 2002. A portion of the decrease in gross profit
for the three months ended March 31, 2002 is directly related to the shortfall
in revenue earned during the period as well as the sales of FCM Rail, Ltd and
the civil and maintenance divisions of RailWorks W.T. Byler during 2001.
Additionally, increased estimates of costs to complete resulting from liquidity
constraints and other operational factors caused a deterioration of gross
profit margins. As a result, the gross profit percentage decreased from 17.7%
for the three months ended March 31, 2001 to 10.2% for the three months ended
March 31, 2002.

Transit services
gross profit decreased $10.6 million or 58.6% from $18.1
million for the three months ended March 31, 2001 to $7.5 million for the three
months ended March 31, 2002. A portion of this decrease is directly
attributable to the decrease in revenue discussed above. In addition,
approximately $1.7 million of the decrease in gross profit is
attributable to a change in management's estimate of cost to complete
on one project in our commercial sector. The remaining
decrease is a result of the application of percentage of completion accounting
to managements lowered profit estimates made during the course of 2001 of
ongoing projects. As a result of the foregoing, the gross profit percentage
decreased from 17.5% for the three months ended March 31, 2001
to 11.2% for the
three months ended March 31, 2002.

Rail track services
gross profit decreased $4.9 million, or 77.8%, from
$6.3 million for the three months ended March 31, 2001 to
$1.4 million for the
three months ended March 31, 2002. The decrease in gross profit for the rail
track services segment for the three months ended March 31, 2002 is primarily
due to the sale of the civil and maintenance divisions of RailWorks W.T. Byler
in the second quarter of 2001. The remainder of this decrease is attributable
to managements estimates of greater cost to complete on several projects due
to the complications of operating in bankruptcy. These factors caused gross
profit percentage to decline from 14.7% for the three months ended March 31,
2001 to 5.1% for the three months ended March 31, 2002.

Rail products and services gross profit decreased $3.3 million, or 57.9%,
from $5.7 million for the three months ended March 31, 2001 to $2.4 million for
the three months ended March 31, 2002. This decrease in gross profit for the
three months ended March 31, 2002 is primarily a result of the winding down of
our railroad construction contract in Panama. A portion of the decrease is
also due to the inclusion of FCM Rail, Ltd for a portion of the three months
ended March 31, 2001 prior to its sale. The remaining decrease was caused
by liquidity constraints and other effects of operating in bankruptcy. As a
result of the foregoing, the gross profit percentage decreased from 23.6% for
the three months ended March 31, 2001 to 14.1% for the three months ended March
31, 2002.





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##### Table of Contents



Selling, General and Administrative Expenses.Selling, general and
administrative expenses decreased $1.0 million or 5.3%, from $18.8 million for
the three months ended March 31, 2001 to $17.8 million for the three months
ended March 31, 2002. The decrease in selling, general and administrative
expenses for the three months ended March 31, 2002 was due primarily to the
cessation of amortization of goodwill in 2002 in accordance with SFAS No. 142,
partially offset by increased insurance costs in 2002. As a percentage of
revenue, selling, general and administrative expenses increased from 11.0% for
the three months ended March 31, 2001 to 16.0% for the three months ended March
31, 2002. This increase was primarily the result of the decrease in revenue
discussed above.

Transit services selling, general and administrative expenses increased
$0.1 million or 1.5%, from $6.8 million for the three months ended March 31,
2001 to $6.9 million for the three months ended March 31, 2002. The increase in
selling, general and administrative expenses for the three months ended March
31, 2002 was due primarily to increased insurance costs in 2002 offset by the
cessation of amortization of goodwill in 2002. As a percentage of segment
revenue, selling, general and administrative expenses increased from 6.6% for
the three months ended March 31, 2001 to 10.3% for the three months ended March
31, 2002. This percentage increase was primarily the result the decrease in
revenue discussed above.

Rail track services selling, general and administrative expenses decreased
$0.3 million, or 5.6%, from $5.4 million for the three months ended March 31,
2001 to $5.1 million for the three months ended March 31, 2002. The decrease in
selling, general and administrative expenses for the three months ended March
31, 2002 was due primarily to the cessation of amortization of goodwill in 2002
partially offset by increased insurance costs in 2002. As a percentage of
segment revenue, selling, general and administrative expenses increased from
12.6% for the three months ended March 31, 2001 to 18.7% for the three months
ended March 31, 2001. This percentage increase was primarily the result the
decrease in revenue discussed above.

Rail products and services selling, general and administrative expenses
decreased $1.1 million, or 27.5%, from $4.0 million for the three months ended
March 31, 2001 to $2.9 million for the three months ended March 31, 2002. The
decrease in selling, general and administrative expenses for the three months
ended March 31, 2002 was due partially to the cessation of amortizing goodwill
in 2002 in addition to savings from the development of a centralized hub for
our rail services division. As a percentage of segment revenue, selling,
general and administrative expenses increased from 16.5% for the three months
ended March 31, 2001 to 17.0% for the three months ended March 31, 2002. This
percentage increase was primarily the result the decrease in revenue discussed
above.

Corporate selling, general and administrative expenses increased $0.3
million, or 11.5%, from $2.6 million for the three months ended March 31, 2001
to $2.9 million for the three months ended March 31, 2002. The increase in
selling, general and administrative expenses for the three months ended March
31, 2002 was due primarily to increased insurance costs and increased
professional fees in 2002. As a percentage of total revenue, selling, general
and administrative expenses increased from 1.5% for the three months ended
March 31, 2001 to 2.6% for the three months ended March 31, 2002. The
percentage increase was primarily due to the decrease in revenue discussed
above.





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##### Table of Contents



Operating Income.Operating income decreased $17.5 million, from $11.1
million for the three months ended March 31, 2001 to a loss of
$6.4 million for
the three months ended March 31, 2002. This decrease is primarily a result of
the items mentioned above.

Interest Expense.Interest expense decreased $7.7 million, or 75.5%, from
$10.2 million for the three months ended March 31, 2001 to $2.5 million for the
three months ended March 31, 2002. The decrease in interest expense for the
three months ended March 31, 2002 was due primarily to the Company not accruing
approximately $9.0 million of interest expense during the three months ended
March 31, 2002 related to prepetition debt in accordance with SOP 90-7. This
decrease is partially offset by the addition of interest expense in 2002
related to the DIP Facility.

Reorganization Items.Reorganization items of approximately $6.1 million
for the three months ended March 31, 2002 consist primarily of professional and
advisory fees incurred that are directly associated with the reorganization
proceedings under the Companys Chapter 11 filings, net of interest income
earned on accumulated cash resulting from the Chapter 11 proceedings.

Taxes.The Company has recorded an income tax benefit of approximately
$0.1 million for the three months ended March 31, 2002. This benefit, which was
recorded by our Canadian subsidiaries is partially offset by a provision
recorded for domestic state taxes.

Net Income.Net income decreased $9.6 million, from $0.2 million for the
three months ended March 31, 2001 to a net loss of $9.4 million for the three
months ended March 31, 2002. This decrease is a result of the items mentioned
above offset by the cumulative effect of a change in accounting principle for
the write off of negative goodwill of approximately $5.3 million.

Fluctuations in Quarterly Operating Results

We experience quarterly variations in revenue, operating income (including
operating losses), net income (including net losses) and cash flows (including
operating cash flow deficits) as a result of various factors, including
seasonality, projects commenced and completed during a quarter, the number of
business days in a quarter and the size and scope of projects. A variation in
the number of projects, progress on projects or the timing of the initiation or
completion of projects can cause periods in which certain operating resources
are not generating revenue and can cause significant variations in operating
results between reporting periods. Negative fluctuations have been and may be
particularly pronounced, and net losses have been and may be incurred, in the
first and fourth calendar quarters, generally due to adverse weather
conditions. We expect to continue to experience such quarterly fluctuations in
operating results, including possible net losses.

Liquidity and Capital Resources

Working Capital.At March 31, 2002, we had $2.1 million in cash and cash
equivalents offset by a cash overdraft of $1.2 million resulting in a net cash
position of $0.9 million compared to $2.8 million in cash and cash equivalents
offset by a cash overdraft of $3.0 million resulting in a negative net cash
position of $0.2 million as of December 31, 2001. Net cash used in operating
activities for the three months ended March 31, 2002 was approximately $4.4
million. Net cash used in investing activities for the three months ended March
31, 2002 was approximately $2.9 million, which consisted primarily of cash
payments for capital expenditures and earnout obligations. Net cash provided by
financing activities for the three months ended March 31, 2002
was approximately $6.6 million, which included borrowings of approximately
$9.2 million offset by debt and cash overdraft repayments of approximately $2.6
million.





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We had working
capital of $107.5 million as of March 31, 2002, which does
not include liabilities subject to compromise of approximately $434.7 million
which otherwise would be recorded as current. These liabilities represent
claims in existence prior to the Filing Date, which are generally stayed while
the Debtors continue business operations as debtors-in-possession under Chapter
11 of the Bankruptcy Code. Including such liabilities subject to compromise as
current liabilities, our working capital deficit as of March 31, 2002 would be
$327.2 million. Our working capital as of December 31, 2001 was $141.3 million
excluding liabilities subject to compromise of approximately $455.1 million.
Including such liabilities subject to compromise as current liabilities, our
working capital deficit as of December 31, 2001 would be $313.8 million.

The Debtors have determined that insufficient collateral exists to cover
the interest portion of scheduled payments on their prepetition debt
obligations, including the obligations under the Credit Agreement and the
senior subordinated notes, and therefore have discontinued accruing interest on
these obligations. Contractual interest on these obligations, which has not
been accrued, amounts to approximately $9.0 million for the three months ended
March 31, 2002. Capital expenditures were $2.2 million and $3.7 million for
the three months ended March 31, 2002 and 2001, respectively. Historically,
capital expenditures have been, and future expenditures are anticipated to be,
primarily to support expansion of our operations, including our management
information systems. Our capital expenditures over the next several years, as a
percentage of revenues, are expected to decrease compared to those of the past
two fiscal years.

In connection with certain acquisitions, we have agreed to pay additional
consideration based on operating results of the acquired entity. The payment of
any such contingent consideration could result in an increase in the purchase
prices of such acquisitions and, as a result, additional goodwill. Additional
consideration payable as of March 31, 2002 related to 2000 and 2001 operating
performance amounted to approximately $9.0 million. As a result of the Chapter
11 filings, all additional consideration payable related to our domestic
subsidiaries has been classified as liabilities subject to compromise.

Indebtedness. As of March 31, 2002, we had a total of $419.5 million of
indebtedness outstanding, which includes approximately $191.8 million
outstanding under our Amended and Restated Credit Agreement (the Credit
Agreement), $173.1 million of 11 1/2% Senior Subordinated Notes (the
Notes), $45.6 million under the DIP Facility, $4.5 million under our Canadian
credit agreement and $4.5 million of fixed asset and other notes payable.

Of the $191.8 million of borrowings outstanding under the Credit
Agreement, $94.3 million was borrowed under a term loan payable through 2006
and $97.5 million was borrowed under the revolving credit commitment. In
connection with the Credit Agreement, the Company granted to BOA a security
interest in essentially all of the assets, including receivables, of the
Company.

As a result of the Chapter 11 filings, approximately $369.0 million of our
total debt outstanding has been classified as liabilities subject to
compromise. This includes the $191.8 million of borrowings under the Credit
Agreement and $173.1 million of Senior Subordinated Notes outstanding. It does
not include the debt of our Canadian subsidiaries or the DIP Facility which was
obtained after the Filing Date. In addition, we have not made interest
payments on our obligations under the Credit Agreement since July of 2001 and
did not make our semi-annual interest payment due October 15, 2001 under the
Notes. As a result, approximately $12.4 million
of prepetition accrued interest related to the Credit Agreement and the
Notes has been included in liabilities subject to compromise. We have not
accrued any interest on our prepetition debt obligations since the Filing Date.





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In October 2001, we entered into the DIP Facility that was subsequently
amended and partially replaced in March 2002, which includes: 1) the Transit
Revolver with CSFB for up to $30 million (subsequently increased to $45
million, as discussed below) of financing supporting the transit services
divisions operations; 2) the Bond Support Facility with CSFB for up to $40
million of collateral supporting the transit services divisions project surety
bonds underwritten by Travelers; 3) the Bonding Facility with Travelers for up
to $100 million of surety bond commitment supporting the Debtors project
bonding requirements; and 4) the TP&S Revolver with certain lenders represented
by BOA as administrative agent for up to $35 million of financing and letter of
credit commitments supporting the track services and products & services
divisions operating cash obligations and project bonding requirements. The
DIP Facility matures on September 30, 2002.

Under the Transit Revolver (as amended and restated), we are obligated to
pay: 1) an up-front fee of 3.00% of the aggregate commitments; 2) an unused
commitment fee of 0.50% per annum on the average daily unused portion of the
commitment; and 3) an additional fee of $900,000 (together, with the Additional
Fee for the TP&S Revolver referred to below, the Additional Fees) if we do
not have a plan of reorganization acceptable to CSFB, BOA and Travelers
confirmed by the Bankruptcy Court by April 30, 2002 and/or consummated by May
15, 2002. Borrowings under the Transit Revolver bear interest at the prime
rate plus 3.00%.

Under the Bond Support Facility we are obligated to pay: 1) an up-front
fee of 3.00% of the aggregate commitments; 2) an unused commitment fee of 0.50%
per annum on the average daily unused portion of the commitment; and 3) a
letter of credit fee of 1.50%; and a fronting and negotiation issuer fee of
0.125% per annum, both calculated on the average daily maximum amount to be
drawn under the letters of credit from the date of issuance to the date of
expiration.

Under the Bonding Facility we are obligated to pay: 1) to Travelers all
premiums due for bonds issued within 60 days of issuance; 2) any brokers fees
or commissions for all bond issuances; and 3) to Travelers a monthly management
fee of $10,000. In connection with the issuance of any bond under the Bonding
Facility, and as a necessary condition precedent thereto, we must obtain
collateral or letters of credit in an amount of 40% of the penal sum of such
bond as security for such bond.

Under the TP&S Revolver, we are obligated to pay: 1) an up-front fee of
3.00% of the aggregated commitment amount; 2) an administrative fee of
$125,000; 3) a letter of credit fee of 1.50%; and a fronting and negotiation
issuer fee of 0.125% per annum, both calculated on the average daily maximum
amount to be drawn under the letters of credit from the date of issuance to the
date of expiration; 4) a monthly adequate protection payment of $500,000; and
5) an Additional Fee of $750,000 if we do not have a plan of reorganization
acceptable to CSFB, BOA and Travelers confirmed by the
Bankruptcy Court by April 30, 2002 and/or consummated by May 15, 2002.
Borrowings under the TP&S Revolver bear interest at the prime rate plus 3.00%.





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On February 1, 2002, the Bankruptcy Court authorized the amendment and
restatement of the Transit Revolver to, among other things, provide for an
increase in the amount of the commitment thereunder from $30 million to $45
million, of which $15 million represents a letter of credit to secure certain
of the Companys insurance obligations. In connection with the amendment, the
Company is obligated to pay a letter of credit issuance fee equal to $225,000,
payable in four equal quarterly installments beginning on March 31, 2002. On
March 5, 2002, the Bankruptcy Court authorized the Debtors to replace the TP&S
Revolver with a substantially identical revolving facility. In connection with
the replacement of the TP&S Revolver, the lenders under both the Transit
Revolver and the TP&S Revolver agreed to extend the triggering deadlines for
the payment of the Additional Fees referred to above to the dates indicated
above. The Additional Fees accrued on April 30, 2002 and became due on May 7,
2002. We have reached an understanding with the lenders under the Transit
Revolver to extend the payment date for the Additional Fee under the
Transit Revolver and we are in the process of documenting such
understanding. In addition, we have reached an understanding with the
lenders under the TP&S Revolver to extend the payment date for the
Additional Fee under the TP&S Revolver to 9 a.m. Monday,
May 20, 2002, and we are currently in discussions concerning a
further extension of such payment date. There can be no assurance
that the lenders under the TP&S Revolver will agree to a further
extension. As of May 1, 2002, approximately $45.0 million was outstanding
under the Transit Revolver, consisting of $30.0 million of borrowings and a
$15.0 million letter of credit; $26.6 million was outstanding under the TP&S
Revolver, consisting of $18.4 million of borrowings and $8.2 million of letters
of credit; and we had approximately $11.7 million of collateral outstanding
under the Bonding Facility.

Our obligations under the DIP Facility are jointly and severally
guaranteed by each of the other Debtors. Generally, pursuant to the DIP
Facility agreements, we have granted to the DIP Facility lenders first priority
liens and security interests (subject to valid, perfected, enforceable and
non-avoidable liens existing as of the Filing Date and other carve-outs and
exceptions as fully described in the DIP Facility and the Bankruptcy Court
orders related thereto) in all of the Debtors property. The DIP Facility
agreements limit, among other things, our ability to incur additional
indebtedness or obligations, to permit additional liens, to make additional
acquisitions, to sell or dispose of assets, to create or incur liens on assets,
and to merge or consolidate with any other entity. The DIP Facility also
limits our ability to file certain Material Pleadings in our Chapter 11 case,
unless we first obtain the consent of BOA, CSFB and Travelers. Pleadings
requiring the consent of BOA, CSFB and Travelers include, among others, a plan
of reorganization and disclosure statement, material asset sale motions, and an
employee retention plan motion. The DIP Facility contains customary
representations, warranties and covenants, including certain financial
covenants and DIP Facility usage covenants. The breach of any such provisions,
to the extent not cured or waived within applicable grace or cure periods,
could result in our inability to obtain further advances under the DIP Facility
and the potential exercise of remedies by the lenders under the DIP Facility,
which could materially impair our ability to reorganize under Chapter 11 and
could force us into a liquidation. In a liquidation, holders of our public and
unsecured debt and holders of our equity would likely receive no value for
their respective interests. There can be no assurance that the funding
provided by the DIP Facilities will be sufficient to satisfy our working
capital needs or that we will be able to secure additional financing if needed.
We are currently in compliance with the covenants under the DIP Facility.





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##### Table of Contents



Contractual Obligations and Commitments.The following table presents
projected payments and expirations under our contractual obligations and
commercial commitments as of March 31, 2002 (in thousands):

|                                   |                              |                         |         |                                          |  |                  |         |           |  |           |        |               |  |   |       |  |  |   |     |  |  | 
|---------------------------------- | ---------------------------- | ----------------------- | ------- | ---------------------------------------- |  | ---------------- | ------- | --------- |  | --------- | ------ | ------------- |  | - | ----- |  |  | - | --- |  |  | 
|                                   |                              |                         |         | Payments Due and/or Expiration By Period
|                                   |                              |                         |         |                                         
|                                   |                              |                         |         | Total                                    |  | Less than 1 year |         | 1-3 years |  | 4-5 years |        | After 5 years
|                                   |                              |                         |         |                                          |  |                  |         |           |  |           |        |              
|                                   |                              | Contractual Obligations |         |                                          |  |                  |         |           |  |           |        |               |  |   |       |  |  |   |     |  |  | 
|Long-term debt (a)                 |                              | $                       | 269,323 |                                          |  | $                | 269,323 |           |  | $         |       |               |  | $ |      |  |  | $ |    | 
|Capital lease obligations (b)      |                              |                         | 2,638   |                                          |  |                  | 2,306   |           |  |           | 332    |               |  |   |      |  |  |   |    | 
|Operating leases (c)               |                              |                         | 42,177  |                                          |  |                  | 28,033  |           |  |           | 12,076 |               |  |   | 1,302 |  |  |   | 766 | 
|                                   |                              |                         |         |                                          |  |                  |         |           |  |           |        |               |  |   |       |  |  |   |     | 
|Total contractual cash obligations |                              | $                       | 314,138 |                                          |  | $                | 299,662 |           |  | $         | 12,408 |               |  | $ | 1,302 |  |  | $ | 766 | 
|                                   |                              |                         |         |                                          |  |                  |         |           |  |           |        |               |  |   |       |  |  |   |     | 
|                                   | Other Commercial Commitments |                         |         |                                          |  |                  |         |           |  |           |        |               |  |   |       |  |  |   |     |  | 
|Lines of Credit (d)                |                              | $                       | 147,568 |                                          |  | $                | 147,568 |           |  | $         |       |               |  | $ |      |  |  | $ |    | 
|Letters of Credit (e)              |                              |                         | 19,925  |                                          |  |                  | 3,882   |           |  |           | 15,843 |               |  |   | 200   |  |  |   |    | 
|                                   |                              |                         |         |                                          |  |                  |         |           |  |           |        |               |  |   |       |  |  |   |     | 
|Total commercial commitments       |                              | $                       | 167,493 |                                          |  | $                | 151,450 |           |  | $         | 15,843 |               |  | $ | 200   |  |  | $ |    | 
|                                   |                              |                         |         |                                          |  |                  |         |           |  |           |        |               |  |   |       |  |  |   |     | 



|(a) |  | Long term debt includes approximately $173.1 million of Notes due in
2009, $94.3 million under the term loan portion of the Credit Agreement
payable through 2006 and $2.0 million of seller notes due through 2002
related to the purchase of one of our subsidiaries. As a result of the
bankruptcy, these obligations have been classified as liabilities subject
to compromise in the consolidated balance sheet as of March 31, 2002 and
have been included as due in less than one year for purposes of this
schedule.                                                        
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(b) |  | As a result of the bankruptcy, all of our capital lease obligations, with
the exception of the capital lease obligations of our non-debtor Canadian
subsidiaries, have been classified as liabilities subject to compromise in
the consolidated balance sheet as of March 31, 2002 and have been included
as due in less than one year for purposes of this schedule.                                                                                                                                                                                                               
|   
|(c) |  | We lease various office buildings, machinery, equipment and vehicles
under operating leases expiring at various dates. Most of the real
property leases have escalation clauses related to increases in real
property taxes.                                                                                                                                                                                                                                                                                                                                                        
|   
|(d) |  | Lines of credit include $97.5 million under the revolving credit portion
of the Credit Agreement due in 2004, $45.6 million under the DIP Facility
due in 2002 and $4.5 million under our Canadian credit facility which is
payable on demand with no set final maturity. As a result of the
bankruptcy, the amount due under the revolving credit portion of the
Credit Agreement has been classified as a liability subject to compromise
in the consolidated balance sheet as of March 31, 2002 and has been
included as due in less than one year for purposes of this schedule.
|   
|(e) |  | As of March 31, 2002, we had letters of credit and other collateral
outstanding of approximately approximately $19.9 million under the DIP
Facility.                                                                                                                                                                                                                                                                                                                                                                                                                                





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Certain of our subsidiaries lease their operating facilities from former
Founding Company owners who remained employees or directors of the Company. We
believe the rents to be the fair market rental value of the property.

Certain executives of RailWorks have entered into employment agreements
with the Company. In general, the employment agreements provide that, in the
event of a termination of employment without cause, such employee will be
entitled to receive from us an amount in cash equal to the employees then
current annual base salary for the remainder of the term.

The Companys operations are subject to extensive federal, state and local
regulations under environmental laws and regulations concerning, among other
things, emissions to the air, discharges to waters and the generation,
handling, storage, transportation, treatment and disposal of waste, hazardous
substances, underground and aboveground storage tanks and soil and groundwater
contamination. We are also subject to certain federal, state and local
environmental laws and regulations relating to the use of creosote. Creosote is
used in certain of our manufacturing processes to treat wood railroad ties so
that they can withstand exposure to outside elements. Creosote, a coal tar
treated derivative, has been recognized by the environmental regulating
agencies as a hazardous material. We believe that we are in compliance with all
of the various regulations applicable to our business and we have not been
notified of any violations by regulatory agencies.

Inflation

We do not believe that inflation has had a material effect on our results
of operations in recent years. However, there can be no assurance that our
business will not be affected by inflation in the future.

Risk Factors

This quarterly report may contain forward-looking statements within the
meaning of the Securities Act of 1933 and the Securities Exchange Act of 1934.
You can find discussions containing forward-looking statements in the section
of this report entitled Managements Discussion and Analysis of Financial
Condition and Results of Operations as well as in other sections. We use the
words believes, anticipates, expects, estimates, plans, intends and
similar expressions so as to identify forward-looking statements. All
forward-looking statements involve substantial risks and uncertainties. There
may be events in the future that we are not accurately able to predict, or over
which we have no control.

Forward-looking statements include, without limitation, our expectations
and estimates as to development of our services and products and expansion of
our customer base, future financial performance, including growth in revenues
and earnings and the effect on new acquisitions on our financial position and
results of operations, cash flows from operations, acquisitions, capital
expenditures, the availability of funds from credit facilities and the sale of
securities. Consequently, you should regard forward-looking statements only as
our current plans, estimates and beliefs. We do not promise to notify you if we
learn that our assumptions or projections are wrong for any reason. Additional
information concerning the risk and uncertainties listed above, and other
factors that you may wish to consider, are contained in our filings with the
Securities and Exchange Commission. Copies of these filings are available from
us free of charge.





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Some factors that may cause actual results to differ from projected
results are:

Under the Plan of Reorganization, Holders of Common Stock Will Receive No
Value and Holders of the Publicly-Traded Debt Will Receive Minimal Value.You
are likely to lose all or part of your investment in the Companys Common Stock
or debt. The Bankruptcy Code requires that all debts be paid in full before
stockholders can receive any recovery in our restructuring. We cannot assure
you that our restructuring will ultimately result in any value for our
stockholders. In the event of our liquidation, we believe that our equity
would have no value. Furthermore, we cannot predict the value of any recovery
to the holders of our debt. The holders of our unsecured debt will likely
receive substantially less than the holders of our secured debt. All of our
assets and the assets of all of our subsidiaries are pledged to secure our debt
obligations under various secured debt facilities. Under applicable law,
collateral for secured claims must be used first to satisfy secured claims.
Our Plan which we filed with the Bankruptcy Court on March 15, 2002, provides
that the holders of our public and other unsecured debt will receive 3% of the
stock of the reorganized company and that the holders of equity will be
eliminated entirely. The Company is continuing to negotiate certain terms and
conditions of the plan of reorganization with their prepetition secured lenders
and anticipates filing an amended plan of reorganization in the near term. It
is anticipated that the terms and conditions of the amended plan of
reorganization will differ from the terms and conditions of the plan of
reorganization described above. Confirmation of the Plan, which remains
subject to supplementation, modification and amendment, also remains subject to
Bankruptcy Court approval and certain other conditions.

Bankruptcy Cases. Our commencement of Chapter 11 cases in the Bankruptcy
Court, and other factors such as our recurring losses, raise substantial doubt
as to our ability to continue as a going-concern. The financial statements
contained herein have been prepared assuming that we will continue as a
going-concern with the realization of assets and the settlement of liabilities
and commitments in the normal course of business. However, as a result of the
bankruptcy cases and circumstances relating to this event, including our
leveraged financial structure and losses from operations, such realization of
assets and liquidation of liabilities and the ability to complete our contracts
and process them in an efficient manner is subject to significant uncertainty.
In addition, our relationships with our customers and suppliers may suffer as a
result of our bankruptcy. While in Chapter 11, we may sell or otherwise
dispose of assets (subject to provisions of the DIP Facility and Bankruptcy
Court approval), and liquidate or settle liabilities and claims, for amounts
other than those reflected in the financial statements. Further, a plan of
reorganization could materially change the amounts reported in the financial
statements. Additionally, deadlines have been established for the assertion of
pre-Filing Date claims against the Company (commonly referred to as bar dates),
including contingent, unliquidated or disputed claims, which claims could
result in an increase in liabilities subject to compromise as reported in the
financial statements. Our ability to continue as a going-concern is contingent
upon, among other things, confirmation of a plan of reorganization, future
profitable operations, the ability to comply with the terms of the DIP Facility
and the ability to generate sufficient cash flow from operations and financing
arrangements to meet ongoing obligations. There can be no assurance that we
will be able to confirm a plan or comply with the terms of the DIP Facility.
On March 15, as discussed previously, the Company filed a plan of
reorganization in the U.S. Bankruptcy Court for the District of Maryland in
Baltimore for itself and twenty-two of its domestic debtor subsidiaries. The
Plan is subject to confirmation and Bankruptcy Court approval and requires the
Debtors to have sufficient funds on hand on the effective date to comply with
claim treatments as proposed in the Plan. There can be no assurance that the
Company will in fact have such sufficient funds or that the Bankruptcy Court
will approve the Plan. The Company is continuing to negotiate certain terms
and conditions of the plan of reorganization with their prepetition secured
lenders and anticipates filing an amended plan of reorganization in the near
term. It is anticipated that the terms and conditions of the amended plan of
reorganization will differ from the terms and conditions of the plan of
reorganization described above.





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##### Table of Contents



Potential Breach of DIP Financing. The DIP Facility imposes on us
operating and financial restrictions. These restrictions significantly limit or
prohibit, among other things, our ability to incur additional indebtedness or
create liens on our assets, pay dividends, sell assets, engage in mergers or
acquisitions, or make investments. The DIP Facility also imposes certain
financial covenants as well as reporting requirements and other non-financial
covenants. Absent a waiver, failure to comply with any of these restrictions
or covenants could result in a default under the DIP Facility. Following a
default, the lenders under the DIP Facility may be able to accelerate the
indebtedness and exercise certain remedies without further Bankruptcy Court
approval. There can be no assurance that the funding provided by the DIP
Facility will be sufficient to satisfy our working capital needs or that we
will be able to secure additional financing if needed. We may not have the
funds to repay the DIP Facility debt upon acceleration, which would
significantly impede our ability to remain in Chapter 11 and could force us
into a liquidation. In a liquidation, holders of our public and other
unsecured debt and holders of our equity would likely receive no value for
their respective interests.

Our Access to Capital Markets and Timely Financial Reporting May be
Impaired if We Need to Engage a New Independent Public Accounting Firm.On
March 14, 2002, RailWorks independent public accountant, Arthur Andersen, was
indicted on federal obstruction of justice charges arising from the
governments investigation of Enron. Arthur Andersen has indicated that it
intends to contest vigorously the indictment. The SEC has said that it will
continue accepting financial statements audited by Arthur Andersen, and interim
financial statements reviewed by it, so long as Arthur Andersen is able to make
certain representations to its clients. RailWorks access to the capital
markets and its ability to make timely SEC filings could be impaired if the SEC
ceases accepting financial statements audited by Arthur Andersen, if Arthur
Andersen becomes unable to make the required representations to RailWorks or if
for any other reason Arthur Andersen is unable to perform required
audit-related services for RailWorks. In such case, RailWorks would promptly
seek to engage a new independent public accounting firm or take such other
actions as may be necessary to enable RailWorks to maintain access to the
capital markets and to file timely its financial reports. Any such transition
between accounting firms could cause us to incur substantial unforeseen costs,
could delay our access to capital markets and could impair our ability to make
timely SEC filings.

Posting of Bonds. Our transit services group derives a substantial portion
of its revenue from contracts entered into through a competitive bid process.
Many projects that are competitively bid require us to post a bond to provide
the customer with insurance in the event we are unable to complete the project.
Prior to the Filing Date, Travelers furnished almost all of the bonding for
such projects. In May 2001, Travelers indicated that, if it were to continue
furnishing payment and performance bonds in support of our projects, it would
be necessary for Travelers and our lenders to enter into an Inter-creditor
Agreement by August 1, 2001. No inter-creditor agreement was reached prior to
the Filing Date. Under the DIP Facility, Travelers has agreed to provide up to
$100 million in postpetition payment and performance bonds in support of the
Companys projects. The Companys ability to continue to secure new business
will be significantly and adversely affected absent continued bonding from
Travelers or another source because a large percentage of our business
(particularly in the Transit Systems Group) is dependent upon the ability to
furnish such bonds to owners and general contractors.

Illiquidity of Common Stock. A liquid public market for our Common Stock
does not exist, which may make it difficult for you to sell our Common Stock.
Our Common Stock is traded on the NASD OTC Bulletin Board Market. There may be
very limited demand for our Common Stock.





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##### Table of Contents



Substantial Leverage.We have a substantial amount of debt outstanding
(most of which is subject to compromise), which could adversely affect our
financial health. Our substantial amount of debt could have important
consequences for you. For example, it could:



| |  |  | limit our ability to obtain additional financing, if
we need it, for working capital, capital expenditures,
acquisitions, debt service requirements or other purposes;                                  
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | increase our vulnerability to adverse economic and
industry conditions;                                                                                                                                 
|
| |  |  | require us to dedicate a substantial portion of our
cash flow from operations to payments on our debt, thereby
reducing funds available for operations, future business
opportunities or other purposes;
|
| |  |  | limit our flexibility in planning for, or reacting
to, changes in our business and the industry in which we
compete; and                                                                                
|
| |  |  | place us at a competitive disadvantage compared to
our competitors that have less debt.                                                                                                                 

Losses.With the exception of the year ended December 31, 1999, we have
reported net losses since our inception in August 1998. Even if the
reorganized company achieves its projected results, we expect to have net
losses until December 31, 2002.

Lack of Combined Operating History.Our company was founded in March 1998
but conducted no operations and generated no revenue until we completed the
initial public offering, or IPO, of our common stock in August 1998. We
acquired 14 groups of companies concurrently with the completion of our IPO and
have acquired an additional 21 operating companies, or groups of companies,
since the IPO through December 31, 2001. The integration of our operating
companies, while allowing them to retain decentralized operations and
management, is important to our operating and growth strategies and the
achievement of efficiencies in our combined operations. We may not be able to
integrate the operations or the necessary systems and procedures, including
accounting and financial reporting systems and project management systems, to
effectively manage the combined enterprise. Certain members of our management
group have only recently joined our company and there can be no assurance that
the management group will be able to implement our operating strategies. We
cannot assure you that we will be able to establish, maintain or increase the
profitability of the operating companies. Our financial statements include
results of operations for certain operating companies when they were not under
common control or management. As a result, our financial statements may not be
indicative of our future results of operations. Any failure by our management
group to implement our strategies, integrate the operating companies without
substantial costs, delays or other operational or financial difficulties,
dispose of non-strategic subsidiaries or effectively oversee the combined
entity could have a material adverse effect on our business, financial
condition and results of operations.

Internal Growth.Our ability to grow will be affected by various factors,
including demand for rail system services and products, our success in bidding
on new projects, the success of our cross-selling efforts and our ability to
develop a national accounts program. Our growth may also depend on increased
outsourcing by rail system operators. Many of these factors are beyond our
control. Our strategies may not be successful or we may be unable to generate
cash flow adequate for combined operations and to support internal growth. The
senior managers of the operating companies retain responsibility for day-to-day
operations. If proper business
controls are not implemented and maintained, this decentralized operating
strategy could result in inconsistent operating and financial practices of the
operating companies, which could have a material adverse effect on our
business, financial condition and results of operations.





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Dependence on Certain Customers.We derived approximately 37.8% of our
revenue for the year ended December 31, 2001 from our top ten customers.
Approximately 17.9% of our 2001 revenue was derived from projects undertaken
for the New York City Transit Authority, which we refer to as NYCTA. These
projects were undertaken under a number of separate contracts. If the NYCTA
were to significantly reduce the amount of business that it does with us or
determine not to do business with us in the future, it would have a material
adverse effect on our business, financial condition and results of operations.
In addition, we rely on timely and regular payments from our customers on
ordinary course business terms. The failure of our top ten customers to pay on
ordinary course business terms may have a material adverse effect on our
business, financial condition and results of operations.

Competition.The rail system services and products industry is highly
competitive. Numerous companies provide services to transit authorities,
construct and repair rail systems or sell related products or supplies, and
some of these companies operate in more than one of these lines of business.
Some of our competitors have greater resources than we have, may also provide a
broad range of services and products, and may have sufficient bonding capacity
and other resources to undertake large projects. Any inability to compete
successfully against our existing and future competitors would have a material
adverse effect on our business, financial condition and results of operations.
Certain of our operating companies also provide electrical contracting services
to non-rail industrial and commercial customers. While we believe that we
currently compete effectively in the non-rail electrical contracting business,
this industry is highly competitive and is served by small, owner-operated
private companies, public companies and several large regional companies.
Additionally, we could face competition in the future from other competitors
entering our markets. The effect of us operating in Chapter 11 could also put
us at a significant competitive disadvantage.

Public Sector Contracts and Funding.The rail system services and products
business involves contracts that are supported by funding from federal, state
and local governmental agencies, as well as contracts with such agencies, which
we refer to as public sector contracts. Public sector contracts are subject to
detailed regulatory requirements and public policies, as well as funding
priorities. These contracts may be conditioned upon the continuing availability
of public funds; the availability of public funds depends upon lengthy and
complex budgetary procedures. These contracts may also be subject to
significant pricing constraints. Moreover, public sector contracts may
generally be terminated for reasons beyond the control of the contractor,
including when such termination is in the best interests of the governmental
agency. We cannot assure you that these factors or others unique to public
sector contracts will not have a material adverse effect on our business,
financial condition and results of operations.

Fixed Price Contracts.Fixed price contracts are typically awarded in the
rail system services industry pursuant to a competitive bidding process. In
compiling our bid on a particular project, we must estimate the time it will
take to complete the project, along with the projects labor and supply costs.
These costs may be affected by a variety of factors, some of which may be
beyond our control. If we cannot accurately predict the costs of fixed price
contracts, certain projects could have lower margins than anticipated or we
could suffer losses on the projects. From time to time we may incur
unanticipated additional contract costs for which we seek recovery from
customers. Recovery of such amounts involves various uncertainties and may
require extended periods of negotiation, litigation or other costs. As a result
of these uncertainties,
amounts ultimately realized from these contracts may not be known for a
significant period following completion of a contract, and lower contract
margins or losses may result. Lower margins and losses could have a material
adverse effect on our business, financial condition and results of operations.





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Reliance on Subcontractors and Suppliers.When we perform a contract for
transit signaling and communication systems, it may be as a subcontractor to
the company that designs the systems and manufactures or purchases the
necessary equipment. In other instances, we act as the prime contractor and
subcontract the design of the signal or communication system and necessary
equipment. When we are a prime contractor for such projects, we generally
require subcontractors to post performance bonds. We may not require a
subcontractor to post a performance bond in situations where (1) the
subcontractor has strong experience with a specific type of project and
demonstrates financial stability and (2) the customer does not require bonds
from us as prime contractor. We sometimes depend upon the subcontractor to
perform design and other services and provide equipment. For certain projects
only a limited number of companies can perform the subcontract if the initial
subcontractor defaults. As a result, we depend upon our subcontractors to
perform under the subcontracts. Further, the major components of signaling and
communication systems for transit authorities are manufactured to
specifications and require long lead times for production. If a subcontractor
or supplier defaults, or if a supplier refuses or cannot do business with us,
it could have a material adverse effect on our business, financial condition
and results of operations. While we have obtained authority from the Bankruptcy
Court to pay prepetition claims of certain vendors and subcontractors, we have
not yet paid a significant portion of such claims. The failure or inability to
make these payments likely will have a material adverse effect on the business
and our relationships with subcontractors and suppliers.

Unionized Workforce.As of December 31, 2001, approximately 29.0% of our
employees were covered under collective bargaining agreements. Approximately
11.0% of our employees were covered under our largest collectively bargaining
agreement. We cannot assure you that future work stoppages will not affect us.
In addition, labor agreements are generally negotiated on an industry-wide
basis and the terms and conditions of future labor agreements could be beyond
our control. We may be subject to terms and conditions in future labor
agreements that could have a material adverse effect on our business, financial
condition and results of operations.

Environmental and Other Government Regulation.Our operations are subject
to extensive federal, state and local regulation under environmental laws and
regulations. Among other things, these laws and regulations cover emissions to
the air, discharges to waters and the generation, handling, storage,
transportation, treatment and disposal of waste, underground and aboveground
storage tanks and remediation of soil and groundwater contamination.
Environmental liability can extend to previously owned or operated properties,
leased properties and properties owned by third parties, as well as to
properties currently owned and used by us. Environmental liabilities may also
arise from claims asserted by adjacent landowners or other third parties in
toxic tort litigation. We could incur significant ongoing costs associated with
environmental regulatory compliance. Further, we sometimes use hazardous
materials in connection with our operations. Although we believe that we
materially comply with all of the various environmental regulations applicable
to our business, we cannot assure you that requirements will not change in the
future or that we will not incur significant costs to comply with such
requirements.

In addition to safety, health and other regulations of general
applicability, our operations may be significantly affected by regulations of
the Surface Transportation Board, the Federal Railroad Administration, the
Occupational Safety and Health Administration, state departments
of transportation and other state and local regulatory agencies. Changes
in regulation of the rail and transit industries through legislative,
administrative, judicial or other action could have a material adverse effect
on our business, financial condition and results of operations.





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Dependence on Key Personnel.Our success depends to a significant extent
upon the efforts and abilities of certain key senior managers at Company
headquarters and at various of the Companys operations. While we have entered
into employment agreements with certain of these senior managers, we cannot be
sure that such individuals will remain with us throughout the terms of their
agreements, or thereafter. The loss of the services of one or more of these key
employees before we are able to attract and retain qualified replacement
personnel could have a material adverse effect on our business, financial
condition and results of operations..




Item 3.    Quantitative and Qualitative Disclosures About Market Risk

We are subject to market risk associated principally with changes in
interest rates. Interest rate exposure has been principally limited to the
$237.3 million of long-term debt under our revolving credit facility, term loan
agreement and DIP Facility outstanding at March 31, 2002. All of that debt is
priced at interest rates that float with the market. A 50 basis point movement
in the interest rate on our floating rate debt could result in an approximately
$1.2 million annualized increase or decrease in interest expense and cash
flows. We will from time to time enter into interest rate swaps on our debt,
when we believe there is a clear financial advantage for doing so. We do not
use derivative financial or commodity instruments for trading purposes and the
use of such instruments is subject to strict approval levels by senior
officers. Typically, the use of such derivative instruments is limited to
interest rate swaps on our outstanding long-term debt. Our exposure related to
such derivative instruments is, in the aggregate, not material to our financial
position, results of operations and cash flows. There were no swap agreements
in effect as of March 31, 2002.





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PART II.    OTHER INFORMATION




Item 1.              Legal Proceedings

On September 20, 2001, the Company and 22 of its U.S. subsidiaries filed
voluntary petitions for relief under Chapter 11 of the Bankruptcy Code in the
United States Bankruptcy Court for the District of Maryland (Baltimore
Division). The Company is currently operating as a debtor-in-possession under
the supervision of the Bankruptcy Court. The following are the material
developments which have occurred since January 1, 2002:



| |  |  | On March 5, 2002 the Bankruptcy Court authorized the
Company to replace the TP&S Revolver with a substantially
identical revolving facility. In connection with the
replacement of the TP&S Revolver, the lenders under both the
Transit Revolver and the TP&S Revolver agreed to extend the
triggering deadlines for the payment of an Additional Fee in the
amount of $900,000 for the Transit Revolver and $750,000 for the
TP&S Revolver if the Company did not have a plan of
reorganization acceptable to CSFB, BOA and Travelers confirmed
by the Bankruptcy Court by April 30, 2002 and/or consummated by
May 15, 2002. The Additional Fee accrued on April 30, 2002 and
became due on May 7, 2002. The Company has reached an
understanding with the lenders under the Transit Revolver to extend
the payment date for the Additional Fee under the Transit Revolver and
the parties are in the process of documenting such understanding. In
addition, the Company has reached an understanding with the lenders
under the TP&S Revolver to extend the payment date for the
Additional Fee under the TP&S Revolver to 9 a.m. Monday, May 20,
2002, and the parties are currently in discussions concerning a
further extension of such payment date. There can be no assurance
that the lenders under the TP&S Revolver will agree to a further
extension.                                                                                                          
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | On March 15, 2002, the Company filed a plan of
reorganization with the Bankruptcy Court. The Plan contemplates
full repayment of debtor-in-possession or DIP claims,
satisfaction of secured claims held by certain of the Companys
pre-petition secured lenders through the issuance of a new
secured note, and satisfaction of the balance of claims held by
the Companys pre-petition secured lenders through the
conversion of such claims into substantially all of the equity
of the reorganized company. The Plan also provides that holders
of the Companys $173.1 million 11 1/2% senior subordinated
notes due in 2009 and unsecured creditors that were not
authorized by the Bankruptcy Court to be paid as critical
vendors will receive 3% of the stock of the reorganized company
and that the interests of the current equity holders of the
Company will be eliminated. The Company is continuing to
negotiate certain terms and conditions of the plan of
reorganization with their prepetition secured lenders and
anticipates filing an amended plan of reorganization in the near
term. It is anticipated that the terms and conditions of the
amended plan of reorganization will differ from the terms and
conditions of the plan of reorganization described above.
Confirmation of the Plan, which remains subject to
supplementation, modification and amendment, also remains
subject to Bankruptcy Court approval and certain other
conditions.
|
| |  |  | On April 2, 2002, the Company filed its disclosure
statement which provides a summary of the Plan, as well as other
information relevant to the Debtors businesses and
reorganization cases. The Company intends to file an amended
disclosure statement concurrently with its amended plan of
reorganization.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               





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Item 6.              Exhibits and Reports on Form 8-K

(b)  Reports on Form 8-K:

A current Report on Form 8-K, which included and reported Other events
under Item 5, was filed on January 22, 2002 and announced the resignation of
Edward M. Cumberledge as a Vice President and the Chief Financial Officer of
the Company and the election of Eric Schless as the acting Chief Financial
Officer of the Company

A current Report on Form 8-K, which included and reported Other events
under Item 5, was filed on March 26, 2002 and announced the Companys filing of
a Plan of Reorganization in the United States Bankruptcy Court for the District
of Maryland (Baltimore Division) for itself and twenty-two of its domestic
debtor subsidiaries.





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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.

|                       |  |                               
|---------------------- |  | ------------------------------
|Date:    
May 15, 2002 |  |                               
|                       |  |                               
|                       |  |                               
|                       |  | RAILWORKS CORPORATION         
|                       |  |                               
|                       |  | /s/ Eric H. Schless           
|                       |  |                               
|                       |  | Eric H. Schless               
|                       |  | acting Chief Financial Officer