<PAGE>   1


                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) OF THE
                  SECURITIES EXCHANGE ACT OF 1934.

                  For the quarterly period ended June 30, 2001

                                       OR

      [ ]         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                  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 charter)

                    Delaware                                   58-2382378
             (State of Organization)                (IRS Employer Identification
                                                                 No.)

6225 Smith Avenue, Suite 200, Baltimore, Maryland                 21209
     (Address of principal executive office)                   (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 [ ]

15,212,585 shares of Common Stock were outstanding as of July 23, 2001.




<PAGE>   2


                              RailWorks Corporation

                                    CONTENTS

<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION                                              Page
<S>                                                                         <C>

  Item 1 - Consolidated Financial Statements:
     Consolidated Balance Sheets as of June 30, 2001
           (unaudited) and December 31, 2000                                    3
     Consolidated Statements of Operations for the three months ended
           June 30, 2001 (unaudited) and 2000 (unaudited)                       4
     Consolidated Statements of Operations for the six months ended
           June 30, 2001 (unaudited) and 2000 (unaudited)                       5
     Consolidated Statements of Cash Flows for the six months ended
           June 30, 2001 (unaudited) and 2000 (unaudited)                       6
     Notes to Consolidated Financial Statements (unaudited)                  7-23

  Item 2 - Management's Discussion and Analysis of Financial                24-36
           Condition and Results of Operations

  Item 3 - Quantitative and Qualitative Disclosures About Market Risk          36



PART II - OTHER INFORMATION

  Items 1 through 6                                                         36-38
  Signatures                                                                   39


EXHIBIT INDEX                                                                  40
</TABLE>


                                       2
<PAGE>   3


RAILWORKS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2001 AND DECEMBER 31, 2000
(in thousands, except share and per share data)



<TABLE>
<CAPTION>
                                                                                    (Unaudited)
                                 ASSETS                                              June 30,         December 31,
                                                                                        2001              2000
                                                                                    -----------       ------------
<S>                                                                                 <C>               <C>
CURRENT ASSETS:
  Cash and cash equivalents                                                          $   1,561         $   7,138
  Accounts receivable, net of allowance for doubtful accounts of
    $12,770 and $1,581, respectively                                                   180,335           192,840
  Costs and estimated earnings in excess of billings on uncompleted contracts           55,095            31,638
  Inventories:
    Raw materials                                                                       15,171            21,207
    Finished goods                                                                      15,440            10,091
  Deferred tax asset                                                                        --             5,436
  Other current assets                                                                   7,429            10,336
                                                                                     ---------         ---------
      Total current assets                                                             275,031           278,686
                                                                                     ---------         ---------

PROPERTY, PLANT AND EQUIPMENT, NET                                                      53,908            83,075
                                                                                     ---------         ---------
OTHER ASSETS:
    Excess of cost over net assets acquired, net of amortization                       230,166           242,678
    Other                                                                               10,553            10,824
                                                                                     ---------         ---------
      Total other assets                                                               240,719           253,502
                                                                                     ---------         ---------

          TOTAL                                                                      $ 569,658         $ 615,263
                                                                                     =========         =========

                         LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
  Cash overdraft                                                                     $   7,754         $  16,766
  Current portion of long-term debt                                                    368,055            22,733
  Accounts payable                                                                      85,073            67,160
  Accrued payroll and related withholdings                                               7,710             5,103
  Accrued interest payable                                                               5,339             5,940
  Billings in excess of costs and estimated earnings on uncompleted contracts           13,634            21,680
  Other accrued liabilities                                                             24,471            19,324
                                                                                     ---------         ---------
      Total current liabilities                                                        512,036           158,706
                                                                                     ---------         ---------

LONG-TERM DEBT, NET OF CURRENT PORTION                                                      --           358,166
DEFERRED TAX LIABILITY                                                                     900             3,526
EXCESS OF NET ASSETS ACQUIRED OVER COST, NET OF AMORTIZATION                             5,399             5,475
OTHER LIABILITIES                                                                        4,954             7,968
                                                                                     ---------         ---------
      Total long-term liabilities                                                       11,253           375,135
                                                                                     ---------         ---------
        Total liabilities                                                              523,289           533,841
                                                                                     ---------         ---------

WARRANTS PAYABLE                                                                         1,211                --
MINORITY INTEREST                                                                        2,226                --

STOCKHOLDERS' EQUITY:
  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 issued and 15,212,585 outstanding at June 30, 2001 and
   15,369,761 shares issued and outstanding at December 31, 2000
                                                                                           155               153
  Treasury stock                                                                          (960)               --
  Officer loans, net                                                                    (3,583)           (3,583)
  Additional paid-in capital                                                           136,572           136,136
  Accumulated other comprehensive (loss) income                                           (547)               50
  Retained deficit                                                                     (88,719)          (51,348)
                                                                                     ---------         ---------
      Total stockholders' equity                                                        42,932            81,422
                                                                                     ---------         ---------
          TOTAL                                                                      $ 569,658         $ 615,263
                                                                                     =========         =========
</TABLE>

                 See Notes to Consolidated Financial Statements.


                                       3
<PAGE>   4



RAILWORKS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30, 2001 AND 2000
(In thousands, except share and per share data)

<TABLE>
<CAPTION>
                                                                               (Unaudited)
                                                                        2001                 2000
                                                                   ------------         ------------
<S>                                                                <C>                  <C>
Revenue                                                            $    198,280         $    154,664
Cost of revenue                                                         191,113              120,773
                                                                   ------------         ------------

Gross profit                                                              7,167               33,891
Selling, general and administrative expenses                             17,324               17,006
Restructuring and other unusual charges                                     650                   --
                                                                   ------------         ------------

Operating (loss) income                                                 (10,807)              16,885
                                                                   ------------         ------------

Other expense:
  Interest expense                                                      (10,258)              (8,430)
  Interest and other income                                                 153                1,058
  Loss on sale of subsidiary                                            (13,964)                  --
                                                                   ------------         ------------

     Other expense, net                                                 (24,069)              (7,372)
                                                                   ------------         ------------

(Loss) income before income taxes, minority interest
   and extraordinary item                                               (34,876)               9,513
Provision for income taxes                                                3,244                4,091
                                                                   ------------         ------------

(Loss) income before minority interest and
   extraordinary item                                                   (38,120)               5,422
Minority interest in losses                                                  60                   --
                                                                   ------------         ------------

(Loss) income before extraordinary item                                 (38,060)               5,422
Extraordinary gain on extinguishment of debt, net of tax                    537                   --
                                                                   ------------         ------------

Net (loss) income                                                  $    (37,523)        $      5,422
                                                                   ============         ============

Basic (loss) earnings per share before extraordinary item          $      (2.48)        $        .38
Basic earnings per share from extinguishment of debt                        .04                   --
                                                                   ------------         ------------
Basic (loss) earnings per share                                    $      (2.44)        $        .38
                                                                   ============         ============

Diluted (loss) earnings per share before extraordinary item        $      (2.48)        $        .35
Diluted earnings per share from extinguishment of debt                      .04                   --
                                                                   ------------         ------------
Diluted (loss) earnings per share                                  $      (2.44)        $        .35
                                                                   ============         ============

Weighted average shares used in computing
   basic earnings per share                                          15,354,450           14,366,234
                                                                   ============         ============

Weighted average shares used in computing
   diluted earnings per share                                        15,354,450           15,739,153
                                                                   ============         ============
</TABLE>

                 See Notes to Consolidated Financial Statements.


                                       4
<PAGE>   5



RAILWORKS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2001 AND 2000
(In thousands, except share and per share data)

<TABLE>
<CAPTION>
                                                                             (Unaudited)
                                                                       2001                 2000
                                                                   ------------         ------------
<S>                                                                <C>                  <C>
Revenue                                                            $    368,668         $    280,028
Cost of revenue                                                         331,391              222,109
                                                                   ------------         ------------

Gross profit                                                             37,277               57,919
Selling, general and administrative expenses                             36,078               29,310
Restructuring and other unusual charges                                     881                   --
                                                                   ------------         ------------

Operating income                                                            318               28,609
                                                                   ------------         ------------

Other expense:
  Interest expense                                                      (20,493)             (16,391)
  Interest and other income                                                 527                1,522
  Loss on sale of subsidiaries                                          (14,576)                  --
                                                                   ------------         ------------

     Other expense, net                                                 (34,542)             (14,869)
                                                                   ------------         ------------

(Loss) income before income taxes, minority interest
   and extraordinary item                                               (34,224)              13,740
Provision for income taxes                                                3,744                5,993
                                                                   ------------         ------------

(Loss) income before minority interest and
   extraordinary item                                                   (37,968)               7,747
Minority interest in losses                                                  60                   --
                                                                   ------------         ------------

(Loss) income before extraordinary item                                 (37,908)               7,747
Extraordinary gain on extinguishment of debt, net of tax                    537                   --
                                                                   ------------         ------------

Net (loss) income                                                  $    (37,371)        $      7,747
                                                                   ============         ============

Basic (loss) earnings per share before extraordinary item          $      (2.47)        $        .54
Basic earnings per share from extinguishment of debt                        .04                   --
                                                                   ------------         ------------
Basic (loss) earnings per share                                    $      (2.43)        $        .54
                                                                   ============         ============

Diluted (loss) earnings per share before extraordinary item        $      (2.47)        $        .50
Diluted earnings per share from extinguishment of debt                      .04                   --
                                                                   ------------         ------------
Diluted (loss) earnings per share                                  $      (2.43)        $        .50
                                                                   ============         ============

Weighted average shares used in computing basic
   Earnings per share                                                15,362,063           14,359,567
                                                                   ============         ============

Weighted average shares used in computing
   diluted earnings per share                                        15,362,063           15,734,808
                                                                   ============         ============
</TABLE>

                 See Notes to Consolidated Financial Statements.


                                       5
<PAGE>   6




RAILWORKS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2001 AND 2000
(in thousands)

<TABLE>
<CAPTION>
                                                                                                    (Unaudited)
                                                                                               2001              2000
                                                                                             --------         ---------
<S>                                                                                          <C>              <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income                                                                            $(37,371)        $   7,747
Adjustments to reconcile net (loss) income to net cash used in
      operating activities:
    Depreciation and amortization                                                              10,523            10,468
    Deferred tax valuation allowance                                                            2,964                --
    Non-cash gain on extinguishment of bonds                                                     (537)               --
    Non-cash restructuring and other special charges                                             (630)               --
    Provision for accounts receivable, claims, loss contracts and costs and estimated
        earnings in excess of billings on uncompleted contracts                                21,115                --
    Bond discount amortization                                                                     36                33
    Gain on sale of equipment                                                                    (128)             (280)
    Loss on sale of subsidiaries                                                               14,576                --
    Change in operating assets and liabilities:
       Accounts receivable and costs and estimated earnings in excess of billings
        on uncompleted contracts                                                              (49,208)          (25,282)
       Inventories                                                                                872            (1,374)
       Other current assets                                                                    (1,000)           (5,313)
       Accounts payable and accrued liabilities                                                29,337            (2,814)
       Accrued payroll and related withholdings                                                 3,624              (169)
       Accrued interest payable                                                                  (601)              332
       Billings in excess of costs and estimated earnings on  uncompleted contracts            (5,672)           (1,640)
       Other current liabilities                                                                2,680               (60)
       Other assets                                                                               827               114
       Other liabilities                                                                       (1,198)          (10,032)
                                                                                             --------         ---------
                 Net cash used in operating activities                                         (9,791)          (28,270)
                                                                                             --------         ---------

CASH FLOWS FROM INVESTING ACTIVITIES:
    Proceeds from sale of equipment                                                               351             8,590
    Purchase of equipment and leasehold improvements                                           (6,378)          (15,353)
    Proceeds from sale of subsidiary                                                           23,126                --
    Acquisitions of subsidiaries, net of cash acquired                                            (48)          (18,613)
    Contingent earn-out payments                                                               (3,239)          (17,372)
                                                                                             --------         ---------
                 Net cash provided by (used in) investing activities                           13,812           (42,748)
                                                                                             --------         ---------

CASH FLOWS FROM FINANCING ACTIVITIES:
    Net change in bank overdraft                                                               (7,717)               --
    Net activity on revolving line of credit                                                   10,635             9,826
    Debt issuance costs                                                                            --              (236)
    Payment of loan origination fees                                                             (171)           (2,606)
    Proceeds from fixed asset borrowings                                                          284             8,994
    Proceeds from term loan borrowing                                                              --           100,000
    Repayments of fixed asset borrowings                                                       (3,877)          (11,710)
    Repayments of term loan                                                                    (4,972)          (29,925)
    Repayments of seller notes                                                                 (3,457)           (6,550)
    Proceeds from exercise of stock options                                                         4                --
                                                                                             --------         ---------
                Net cash (used in) provided by financing activities                            (9,271)           67,793
                                                                                             --------         ---------

EXCHANGE RATE EFFECT ON CASH AND CASH EQUIVALENTS                                                (327)               90
                                                                                             --------         ---------
NET DECREASE IN CASH AND CASH EQUIVALENTS                                                      (5,577)           (3,135)
CASH AND CASH EQUIVALENTS, beginning of period                                                  7,138             4,617
                                                                                             --------         ---------

CASH AND CASH EQUIVALENTS, end of period                                                     $  1,561         $   1,482
                                                                                             ========         =========

SUPPLEMENTARY DISCLOSURES OF CASH FLOW INFORMATION:
    Cash paid during the period for interest                                                 $ 20,118         $  12,970
                                                                                             ========         =========
    Cash paid during the period for income taxes                                             $    916         $   4,319
                                                                                             ========         =========
</TABLE>


                 See Notes to Consolidated Financial Statements.


                                       6
<PAGE>   7



                              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 accounting principles generally accepted in the
United States 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 accounting principles generally
accepted in the United States 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 six months ended June 30, 2001 are not necessarily indicative of the results
that may be expected for the year ending December 31, 2001.

NATURE OF THE BUSINESS

         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 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, 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.

         As described in Note 4 below, effective June 18, 2001, the Company
entered into an amendment (the "Third Amendment") to its Amended and Restated
Credit Agreement (the "Credit Agreement") pursuant to which the Company's
available revolving credit commitment was increased to $111,000,000 through
September 30, 2001. Upon the expiration of the Third Amendment (as defined),
the available revolving credit commitment will be reduced to a level that will
not allow the Company to fund its current operations. Further, as described in
Note 4, the Company is currently in default under certain covenants under the
Third Agreement and the Credit Agreement and unless the Company is able to
obtain a further amendment to the Credit Agreement, it is likely that the
Company will be in default under certain additional covenants under the Credit
Agreement. Any acceleration of the borrowings under the Credit Agreement would
cause a default under the indenture governing the Company's Senior Subordinated
Notes (the "Notes"). In addition, without an amendment to the Credit Agreement
that will increase the availability under the revolving credit commitment (as
discussed below), the Company does not believe that it will be able to make its
scheduled interest payment of approximately $10 million on the Notes due on
October 15, 2001. These defaults could give the lenders under the Credit
Agreement (the "Lenders") and holders of the Notes the right to accelerate the
maturity of all principal and interest amounts under the Company's debt
agreements (see Note 4).

         The Company is seeking a further amendment to its Credit Agreement
that would contain covenants that are more favorable to the Company and an
increased revolving credit commitment. Unless the Company is able to reach such
an agreement with its Lenders and the Lenders waive the current defaults, it is
likely that the Company will be prevented from using additional borrowings
under the Credit Agreement, would not be able to fund continuing operations and
would not have the cash available to repay the outstanding borrowings, if
accelerated, on a timely basis, if at all. Due to its current limited access to
capital, the Company has recently been unable to fund all of its accounts
payable within the prescribed time periods. Further, the Company's ability to
obtain bonding on its contracts may be significantly impacted as described in
Note 9 below which could result in an inability to secure new business. If
these events were to occur, it would have a material adverse effect on the
Company's operations and financial condition and its ability to continue as a
going-concern.

                                       7
<PAGE>   8

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. The
Company believes that the impact of this statement will not have an effect on
the Company's financial statements.

         In June 2001, the FASB issued SFAS No. 142 "Goodwill and Other
Intangible Assets," which states that goodwill is no longer subject to
amortization over its estimated useful life. Rather, goodwill will be subject to
at least an annual assessment for impairment by applying a fair value based
test, with any adjustments thereto resulting in a separate charge to earnings in
the period in which the impairment took place. It also requires that an acquired
intangible asset should be separately recognized if the benefit of the
intangible asset is obtained through contractual or other legal rights, or if
the intangible asset can be sold, transferred, licensed, rented or exchanged,
regardless of the acquirer's intent to do so. This standard becomes effective on
January 1, 2002 for goodwill and intangible assets existing as of June 30, 2001
and immediately for goodwill and intangible assets acquired after June 30, 2001.
The Company is assessing these matters and has not yet determined the extent to
which this statement will impact the Company's financial statements.

OFFICER LOANS

         The Company has certain officer loans secured by common stock which
have been classified as a contra equity account, net of applicable reserves.

ACCOUNTS RECEIVABLE

         Included in accounts receivable on the accompanying consolidated
balance sheets are approximately $13.1 million and approximately $5.9 million of
contractually billable receivables as of June 30, 2001 and December 31, 2000,
respectively, which are billed shortly after the balance sheet date.

INCOME TAXES

         Due to the uncertainty as to the realizability of the Company's
deferred tax assets, an additional valuation allowance of approximately $3.0
million was recorded in the current tax provision to reduce the Company's
deferred tax assets.

USE OF ESTIMATES

         The preparation of consolidated 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.

RECLASSIFICATIONS

         Certain reclassifications have been made to the prior periods'
financial statements to conform to the current period presentation.


                                       8
<PAGE>   9


2.       EARNINGS PER SHARE

         In accordance with SFAS No. 128, the Company reports its (loss)
earnings per share (EPS) in basic and diluted earnings per share. Basic EPS
includes no dilution and is computed by dividing income available to common
stockholders by the weighted-average number of common shares outstanding for the
period. Diluted EPS reflects the potential dilution if certain securities are
converted and also includes certain shares that are contingently issuable.


         The following is the computation of earnings per share for the three
months ended June 30, 2001 and 2000 (in thousands, except per share data):



<TABLE>
<CAPTION>
                                                       2001              2000
                                                    ----------         -------
<S>                                                 <C>                <C>
(Loss) income before extraordinary item             $  (38,060)        $ 5,422
Extraordinary gain on extinguishment of debt               537              --
                                                    ----------         -------
Net (loss) income                                   $  (37,523)        $ 5,422
                                                    ==========         =======

Shares used for determining basic EPS                   15,354          14,366

Dilutive effect of:
   Stock options                                             *               3
   Warrants outstanding                                      *              --
   Convertible preferred shares                              *           1,370
                                                    ----------         -------

Shares used for determining diluted EPS                 15,354          15,739
                                                    ==========         =======

Basic EPS before extraordinary item                 $    (2.48)        $   .38
Basis EPS from extraordinary gain                          .04              --
                                                    ----------         -------
Basic EPS                                           $    (2.44)        $   .38
                                                    ==========         =======

Diluted EPS before extraordinary item               $    (2.48)        $   .35
Diluted EPS from extraordinary gain                        .04              --
                                                    ----------         -------
Diluted EPS                                         $    (2.44)        $   .35
                                                    ==========         =======
</TABLE>


   * Due to the net loss recognized in 2001, outstanding stock options, warrants
   and convertible preferred shares would be anti-dilutive and therefore were
   excluded.

    The following is the computation of earnings per share for the six months
ended June 30, 2001 and 2000 (in thousands, except per share data):

<TABLE>
<CAPTION>
                                                       2001              2000
                                                    ----------         -------
<S>                                                 <C>                <C>
(Loss) income before extraordinary item             $  (37,908)        $ 7,747
Extraordinary gain on extinguishment of debt               537              --
                                                    ----------         -------
Net (loss) income                                   $  (37,371)        $ 7,747
                                                    ==========         =======

Shares used for determining basic EPS                   15,362          14,360

Dilutive effect of:
   Stock options                                             *               5
   Warrants outstanding                                      *              --
   Convertible preferred shares                              *           1,370
                                                    ----------         -------

Shares used for determining diluted EPS                 15,362          15,735
                                                    ==========         =======

Basic EPS before extraordinary item                 $    (2.47)        $   .54
Basis EPS from extraordinary gain                          .04              --
                                                    ----------         -------
Basic EPS                                           $    (2.43)        $   .54
                                                    ==========         =======

Diluted EPS before extraordinary item               $    (2.47)        $   .50
Diluted EPS from extraordinary gain                        .04              --
                                                    ----------         -------
Diluted EPS                                         $    (2.43)        $   .50
                                                    ==========         =======
</TABLE>

   * Due to the net loss recognized in 2001, outstanding stock options, warrants
   and convertible preferred shares would be anti-dilutive and therefore were
   excluded.


                                       9
<PAGE>   10



3.       RESTRUCTURING AND OTHER UNUSUAL CHARGES

         During the year ended December 31, 2000, the Company's management and
Board of Directors conducted and completed a strategic review of RailWorks'
operations. The resulting restructuring plan (the "Plan") involved systems
integration, rationalization of real estate, equipment and inventory and
maximization of human resource productivity around three lines of business. The
Plan resulted in reduction of the Company's headcount, consolidation of certain
facilities and identification of other synergies and cost reduction
opportunities available to the Company.

RESTRUCTURING CHARGES

         Restructuring costs include costs directly related to the Company's
Plan. The Emerging Issues Task Force Issue No. 94-3 "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit" ("EITF 94-3")
provides specific requirements as to the appropriate recognition of costs
associated with employee termination benefits and other exit costs. Employee
termination costs are recognized when benefit arrangements are communicated to
affected employees in sufficient detail to enable the employees to determine the
amount of benefits to be received on termination. Other exit costs that do not
benefit future activities are recognized at the date of commitment to the Plan.
These costs must be either incremental to the Plan or represent amounts under
contractual obligations which existed prior to the commitment date and have no
future economic benefit or result in a penalty to cancel the obligation. Other
costs directly related to the Plan, which are not eligible for recognition at
the commitment date, such as relocation and other integration costs, are
expensed as incurred.

         During the year ended December 31, 2000, the Company recorded
liabilities of approximately $2.2 million related to employee termination
benefits for those employees who had been identified and notified in accordance
with EITF 94-3 and approximately $.7 million for non-cancelable lease costs in
excess of the expected sublease income. During the second quarter of 2001, the
Company reduced its liability by approximately $(0.9) million based upon
determination of the actual liability amount. The Company may record additional
adjustments to these liabilities during future periods depending on its ability
to sublease closed offices and upon determination of the final amount of the
Company's severance obligations.

         The following table provides a rollforward of liabilities for
termination benefits and non-cancelable lease costs resulting from the Plan in
accordance with EITF 94-3 (in thousands):



<TABLE>
<CAPTION>
           Type of Cost                December 31,                                                   June 30,
           ------------                  2000          Charges         Payments      Adjustments        2001
                                       -----------     -------         --------      -----------      --------
  <S>                                  <C>             <C>             <C>           <C>              <C>
  Employee termination benefits          $1,534          $  --           $(498)          $(549)          $487
  Facility closing costs                    631             --            (164)           (315)           152
                                         ------          -----           -----           -----           ----

                                         $2,165          $  --           $(662)          $(864)          $639
                                         ======          =====           =====           =====           ====
</TABLE>


OTHER UNUSUAL CHARGES

         The Plan also resulted in additional integration costs that were
expensed as incurred in accordance with EITF 94-3. During the quarter and six
months ended June 30, 2001, the Company incurred approximately $1.6 million and
$1.8 million, respectively, of other unusual charges, primarily for outside
consulting costs, employee and office relocation costs related to the Plan and
additional costs associated with the amendment of the Company's credit
agreement.


                                       10
<PAGE>   11



4.       LONG-TERM DEBT

Long-term debt consisted of the following at June 30, 2001 and December 31, 2000
(in thousands):


<TABLE>
<CAPTION>
                                                           2001        2000
                                                        ---------   ---------
              <S>                                       <C>         <C>
              Revolving credit agreement due 2004       $  89,085   $  77,000

              Term note due through 2006                   94,528      99,500

              Senior subordinated notes due 2009          173,056     174,020

              Seller promissory notes payable through       2,127       7,160
              2002

              Canadian credit facility                      5,151       6,600

              Fixed asset notes                             4,108      16,619
                                                        ---------   ---------

                                                          368,055     380,899

              Less current portion                        368,055      22,733
                                                        ---------   ---------

                                                        $      --   $ 358,166
                                                        =========   =========
</TABLE>


         As of June 30, 2001, the Company had a total of $368.1 million of debt
outstanding, which includes approximately $183.6 million under the Amended and
Restated Credit Agreement (the "Credit Agreement") and approximately $173.1 in
11.5% Senior Subordinated Notes due 2009 (the "Notes") outstanding. As a result
of the Company's current and anticipated noncompliance with certain covenants
under the Credit Agreement and its anticipated default under the indenture
governing the Notes discussed below, the Company has classified all of its debt
as current.

         Of the $183.6 million of borrowings outstanding under the Credit
Agreement, $94.5 million was a term loan payable through 2006 and $89.1 million
was borrowed under the revolving credit commitment. The loans under the Credit
Agreement bore interest at a weighted average rate of 8.83% per annum at such
date. In connection with the Credit Agreement, the Company granted the Lenders
a security interest in essentially all of the assets, including receivables, of
the Company. As of June 30, 2001, the Company had aggregate borrowing
availability of approximately $7.9 million under the revolving credit
commitment after giving effect to the June 18, 2001 amendment to the Credit
Agreement discussed below; however, as a result of the defaults under the
Credit Agreement discussed below, the Company may be unable to effect any
additional borrowings under the revolving credit commitment. Due to the limited
availability remaining under the revolving credit commitment during the second
quarter even after the increase discussed in the next paragraph, the Company
entered into discussions with the Lenders to increase the maximum availability
under the revolving credit commitment in order to fund working capital,
contingent purchase price obligations and other cash requirements.

         Effective June 18, 2001, the Company entered into an amendment to the
Credit Agreement (the "Third Amendment") pursuant to which the available
revolving credit commitment was increased to $111,000,000 through September 30,
2001. In connection with the Third Amendment, the Company agreed to pay an
amendment fee of a quarter of a percent (0.25%) of the commitments and to issue
to the Lenders warrants to purchase the Company's common stock in an amount
equal to approximately two percent (2.0%) of the fully diluted and outstanding
equity of the Company as of June 18, 2001 (or 379,359 shares) at an exercise
price of $0.01 per share. Under the Third Amendment, all amounts outstanding
under the Credit Agreement bear interest at a per annum rate one-half percent
(0.5%) higher than previously applicable, or 4.0% above prime rate for the term
loan and 3.0% above prime rate for the revolving credit commitment. The Company
is not allowed to enter into any LIBOR contracts during the term of the Third
Amendment, which expires on September 30, 2001, and must continue to have prime
rate-based borrowings during such term. In the Third Amendment, the Lenders
waived the Company's noncompliance with certain financial covenants for the
period ended June 30, 2001, but the Company was required to achieve a minimum
earnings before interest, taxes, depreciation and amortization (EBITDA) of $15.0
million for the quarter ending June 30, 2001. The Company failed to achieve the
minimum EBITDA for the quarter ending June 30, 2001. In addition, as of August
7, 2001, the Company had exceeded the permitted borrowing base over advance
under the Credit Agreement by $778,900. After recalculation of the borrowing
base to reflect adjustments made for the period ended June 30, 2001, the
Company has exceeded the permitted borrowing base over advance by approximately
$12.5 million.

As a result of the foregoing, on August 7, 2001, the Company sought a waiver
from the Lenders for its noncompliance with the EBITDA covenant under the Third
Amendment, its exceeding the permitted borrowing base aver advance under the
Credit Agreement and its noncompliance with certain other covenants under the
Third Amendment. The Company's noncompliance with certain of these covenants
under the Third Amendment and the Credit Agreement could provide the Lenders
with the right to accelerate payment of all amounts owed by the Company under
the Credit Agreement and to prohibit the Company from effecting any further
borrowings under the revolving credit commitment. On August 13, 2001, the
Lenders notified the Company that they had decline to provide the waivers
sought and accordingly the Company's debt under the Credit Agreement has
been classified as current.

                                       11
<PAGE>   12

         Upon the expiration of the Third Amendment on October 1, 2001, the
available revolving credit commitment under the Credit Agreement will be reduced
to the lesser of (i) $96,057,690 or (ii) the amount to which the available
revolving committed amount is reduced by mandatory reductions in accordance with
the Credit Agreement and the waiver of the Company's noncompliance with the
financial covenants discussed above will terminate. Unless the Company is able
to obtain a further amendment to the Credit Agreement on or before September 30,
2001, it will be required to repay any borrowings under the revolving credit
commitment which exceed the reduced committed amount. In addition, without a
further amendment, it is unlikely that the Company will be in compliance with
the financial covenants under the Credit Agreement as of September 30, 2001.
The Company's failure to repay such excess borrowings and its noncompliance
with such financial covenants will constitute additional defaults under the
Credit Agreement.

         If the Company is not able to obtain a further amendment to the Credit
Agreement which increases the level of the revolving credit commitment and
waives current defaults under the Third Amendment and the Credit Agreement, it
is likely that the Company will be prevented from using additional borrowings
under the Credit Agreement to fund current operations. In addition, the Lenders
could accelerate payment of amounts owed under the Credit Agreement. Without
additional borrowings under the Credit Agreement it is likely that the Company
would not be able to fund its continuing operations or make its scheduled
interest payment on the Notes. If the Company is not able to pay the amounts due
under the Credit Agreement, such nonpayment would constitute a default under the
indenture governing the Notes and payment of the principal amount of the Notes
and all accrued and unpaid interest thereon may be accelerated. Accordingly, the
Notes have been classified as current as of June 30, 2001. If this were to
occur, the Company would not have the cash available to repay the outstanding
borrowings under the Credit Agreement and the Notes and it is unlikely that the
Company would be able to obtain debt or equity financing to repay such
borrowings on a timely basis, if at all.

         Due to the Company's current limited access to capital, it has recently
been unable to fund all of its accounts payable within prescribed time periods.
In order for the Company to meet its working capital needs subsequent to
September 30, 2001, and to meet its obligation to make the $10.0 million
interest payment on the Notes that is due on October 15, 2001, the Company will
require increased borrowing capacity under the Credit Agreement, other
additional debt or equity financing, additional asset sales or a combination
thereof. The Company intends to engage in further discussions with the Lenders
and potential investors and to explore additional asset sales in order to
address all of the above-described needs. There can be no assurance that the
Company will be successful in obtaining such increased borrowing capacity or
such additional funding and if the Company is unable to do so within the time
period required, it is likely that it will be unable to meet working capital and
cash requirements, including interest payments payable on the Notes. If this
were to occur, it would have a material adverse effect on the Company's
operations and financial condition.

         On June 18, 2001, the Company exchanged 140,326 shares of its $0.01 par
value common stock for $1,000,000 of its Notes outstanding. In connection with
this transaction, the Company has recorded an extraordinary gain on the
extinguishment of debt of approximately $537,000.


5.       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 second quarter of 2001, options covering an aggregate of
30,000 shares of common stock were issued under the Plan. Various key management
employees and directors were issued options for shares of common stock with an
exercise price equal to the price of the common stock on the dates of each of
the respective grants. In all cases, the options expire ten years after the date
of grant.

         In connection with the Third Amendment, the Company was required to
issue to the Lenders warrants to purchase 379,359 shares of the Company's common
stock at $0.01 per share. These warrants have customary anti-dilution protection
for stock splits, dividends and distributions. The warrants become exercisable
in four equal monthly increments beginning on September 30, 2001 and ending
December 31, 2001, and the warrants expire on July 31, 2011. The Company agreed
to deliver registered shares with respect to the common stock issuable upon
exercise of the warrants. The Company has calculated the fair market value of
these warrants to be approximately $1.2 million using the Black-Scholes pricing
model and has recorded this amount as warrants payable in the


                                       12
<PAGE>   13

accompanying consolidated balance sheet as of June 30, 2001. As the Company has
committed to settle the warrants in registered shares of the Company's stock,
the warrants have been classified outside of equity in accordance with EITF
00-19, "Accounting for Derivative Financial Instruments Indexed to, and
Potentially Settled in, a Company's Own Stock."


6.       SEGMENT REPORTING

         The following table presents certain financial data as of and for the
three months ended June 30, 2001 by reportable segment (in thousands):



<TABLE>
<CAPTION>
                                                       TRANSIT      RAIL PRODUCTS    RAIL        OTHER/
                                                      SERVICES       AND SERVICES    TRACK      CORPORATE      TOTAL
                                                     ----------     -------------   --------    ---------    ---------
   <S>                                               <C>            <C>             <C>         <C>          <C>
   Total revenues for reportable segments            $ 110,507        $ 33,874      $ 55,956     $     --    $ 200,337
   Inter-segmental revenue                                  --           1,622           435           --        2,057
   Depreciation/amortization                               302             990         1,902        2,085        5,279
   Segment operating (loss) profit                     (14,101)          2,387         4,882       (3,975)     (10,807)
   Costs and estimated earnings in excess of
        billings on uncompleted contracts               44,894           1,803         8,398           --       55,095
   Segment assets                                      194,265          83,918        80,832      452,028      811,043
</TABLE>

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

<TABLE>
               <S>                                             <C>
               REVENUES:
                 Total revenues for reportable segments        $  200,337
                 Elimination of inter-segment revenues             (2,057)
                                                               ----------
                 Consolidated revenues                         $  198,280
                                                               ==========

               ASSETS:
                 Total assets for reportable segments          $  811,043
                 Elimination of inter-segment receivables         (45,046)
                 Elimination of investments in subsidiaries      (196,339)
                                                               ----------
                 Consolidated assets                           $  569,658
                                                               ==========
</TABLE>

         The Company's Canadian operations produced revenues for the three month
period ended June 30, 2001 of approximately $10.1 million. The net book value of
long-lived assets relating to the Canadian operations amounted to approximately
$26.9 million as of June 30, 2001.


         The following table presents certain financial data as of and for the
three months ended June 30, 2000 by reportable segment (in thousands):



<TABLE>
<CAPTION>
                                                      TRANSIT      RAIL PRODUCTS     RAIL        OTHER/
                                                     SERVICES       AND SUPPLIES     TRACK      CORPORATE      TOTAL
                                                     --------      -------------    --------    ---------    ---------
    <S>                                              <C>           <C>              <C>         <C>         <C>
    Total revenues for reportable segments           $ 74,169         $ 32,921      $ 52,702     $     --    $ 159,792
    Inter-segmental revenue                             2,253            1,164         1,711           --        5,128
    Depreciation/amortization                             239            1,741         1,748        1,897        5,625
    Segment operating profit (loss)                     8,662            3,942         6,235       (1,954)      16,885
    Costs and estimated earnings in excess of
       billings on uncompleted contracts               63,383            3,448         8,760           --       75,591
    Segment assets                                    148,283           70,270        88,892      510,959      818,404
</TABLE>


                                       13
<PAGE>   14



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

<TABLE>
         <S>                                                        <C>
         REVENUES:
           Total revenues for reportable segments                   $ 159,792
           Elimination of inter-segment revenues                       (5,128)
                                                                    ---------
         Consolidated revenues                                      $ 154,664
                                                                    =========

         ASSETS:
           Total assets for reportable segments                     $ 818,404
           Elimination of inter-segment receivables/payables           (4,375)
           Elimination of investments in subsidiaries                (165,500)
                                                                    ---------
         Consolidated assets                                        $ 648,529
                                                                    =========
</TABLE>

         The Company's Canadian operations had revenues for the three month
period ended June 30, 2000 of $11.9 million. The net book value of long-lived
assets relating to the Canadian operations amounted to $8.9 million as of June
30, 2000.

         The following table presents certain financial data as of and for the
six months ended June 30, 2001 by reportable segment (in thousands):



<TABLE>
<CAPTION>
                                                     TRANSIT      RAIL PRODUCTS     RAIL         OTHER/
                                                    SERVICES       AND SERVICES    TRACK        CORPORATE         TOTAL
                                                   ----------     -------------   -------       ----------       --------
   <S>                                             <C>            <C>             <C>           <C>              <C>
   Total revenues for reportable segments          $ 211,732        $61,626       $99,936       $      --        $373,294
   Inter-segmental revenue                                --          3,151         1,475              --           4,626
   Depreciation/amortization                             573          2,202         3,953           3,795          10,523
   Segment operating profit (loss)                    (2,301)         4,367         6,496          (8,244)            318
   Costs and estimated earnings in excess of
        billings on uncompleted contracts             44,894          1,803         8,398              --          55,095
   Segment assets                                    194,265         83,918        80,832         452,028         811,043
</TABLE>


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

<TABLE>
         <S>                                                <C>
         REVENUES:
           Total revenues for reportable segments           $ 373,294
           Elimination of inter-segment revenues               (4,626)
                                                            ---------
           Consolidated revenues                            $ 368,668
                                                            =========

         ASSETS:
           Total assets for reportable segments             $ 811,043
           Elimination of inter-segment receivables           (45,046)
           Elimination of investments in subsidiaries        (196,339)
                                                            ---------
           Consolidated assets                              $ 569,658
                                                            =========
</TABLE>

         The Company's Canadian operations produced revenues for the six month
period ended June 30, 2001 of approximately $16.3 million. The net book value of
long-lived assets relating to the Canadian operations amounted to approximately
$26.9 million as of June 30, 2001.

         The following table presents certain financial data as of and for the
six months ended June 30, 2000 by reportable segment (in thousands):


<TABLE>
<CAPTION>
                                                    TRANSIT     RAIL PRODUCTS     RAIL          OTHER/
                                                    SERVICES     AND SUPPLIES     TRACK        CORPORATE         TOTAL
                                                    --------    -------------    -------       ---------        --------
    <S>                                             <C>         <C>              <C>           <C>              <C>
    Total revenues for reportable segments          $137,941       $60,961       $91,551       $      --        $290,453
    Inter-segmental revenue                            5,685         2,201         2,539              --          10,425
    Depreciation/amortization                            421         3,234         3,512           3,301          10,468
    Segment operating profit (loss)                   13,781         8,022         9,626          (2,820)         28,609
    Costs and estimated earnings in excess of
       billings on uncompleted contracts              63,383         3,448         8,760              --          75,591
    Segment assets                                   148,283        70,270        88,892         510,959         818,404
</TABLE>


                                       14
<PAGE>   15

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

<TABLE>
         <S>                                                       <C>
         REVENUES:
           Total revenues for reportable segments                  $ 290,453
           Elimination of inter-segment revenues                     (10,425)
                                                                   ---------
         Consolidated revenues                                     $ 280,028
                                                                   =========

         OPERATING PROFIT OR LOSS:
           Total profit or loss for reportable segments            $  28,609
                                                                   =========

         ASSETS:
           Total assets for reportable segments                    $ 818,404
           Elimination of inter-company receivables/payables          (4,375)

           Elimination of investments in subsidiaries               (165,500)
                                                                   ---------
         Consolidated assets                                       $ 648,529
                                                                   =========
</TABLE>

         The Company's Canadian operations had revenues for the six-month period
ended June 30, 2000 of $17.2 million. The net book value of long-lived assets
relating to the Canadian operations amounted to $8.9 million as of June 30,
2000.


7.       SALE OF DIVISION

         On June 20, 2001, the Company entered into an agreement to sell all of
the assets and liabilities of the civil and maintenance divisions of its
subsidiary Railworks W.T. Byler, L.P for approximately $20.5 million in cash and
other consideration. The Company has recorded a loss related to this sale of
approximately $14.0 million which included the write-off of goodwill of
approximately $15.2 million. As part of the consideration for this sale, the
Company received 300,000 shares of its issued and outstanding common stock,
which has been classified as treasury stock in the accompanying consolidated
balance sheet as of June 30, 2001.


8.       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 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 June
30, 2001 and for the three and six-month periods ended June 30, 2001 and 2000.
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.


                                       15
<PAGE>   16



                              RAILWORKS CORPORATION
                      CONDENSED CONSOLIDATING BALANCE SHEET
                                  JUNE 30, 2001
                           (In Thousands) (Unaudited)


<TABLE>
<CAPTION>
                                                RAILWORKS
                                               CORPORATION                          NON-
                                                  (PARENT         GUARANTOR      GUARANTOR
                                               COMPANY ONLY)    SUBSIDIARIES    SUBSIDIARIES       ELIMINATIONS        CONSOLIDATED
                                               -------------    ------------    ------------      --------------       ------------
<S>                                            <C>              <C>             <C>               <C>                  <C>
                 ASSETS:
CURRENT ASSETS:
  Cash                                           $    950         $    539         $    72         $      --             $  1,561
  Accounts receivable, net                             --          174,797           5,538                --              180,335
  Costs and estimated earnings in excess
    of billings on uncompleted contracts               --           54,595             500                --               55,095
  Inventories:
      Raw materials                                    --           10,955           4,216                --               15,171
      Finished goods                                   --           14,525             915                --               15,440
  Deferred tax asset                                   --               --              --                --                   --
  Due from parent company/subsidiaries             36,839           27,003           4,143           (67,985)(a)               --
  Due from affiliates                                  --               57           1,310            (1,367)(a)               --
  Other current assets                                153            5,400           1,876                --                7,429
                                                 --------         --------         -------         ---------             --------
      Total current assets                         37,942          287,871          18,570           (69,352)             275,031
                                                 --------         --------         -------         ---------             --------


INVESTMENT IN SUBSIDIARIES                        366,474               --              --          (366,474)(b)               --
                                                 --------         --------         -------         ---------             --------

PROPERTY, PLANT AND
 EQUIPMENT, NET                                     1,487           44,079           8,342                --               53,908
                                                 --------         --------         -------         ---------             --------

OTHER ASSETS:
  Excess of cost over net assets
    acquired, net of amortization                      --          211,637          18,529                --              230,166
  Other                                             9,544              877             132                --               10,553
                                                 --------         --------         -------         ---------             --------
      Total other assets                            9,544          212,514          18,661                --              240,719
                                                 --------         --------         -------         ---------             --------
          TOTAL                                  $415,447         $544,464         $45,573         $(435,826)            $569,658
                                                 ========         ========         =======         =========             ========
</TABLE>

(a)      Elimination of intercompany receivables.
(b)      Elimination of investments in subsidiaries.


                                       16
<PAGE>   17


                              RAILWORKS CORPORATION
                      CONDENSED CONSOLIDATING BALANCE SHEET
                                  JUNE 30, 2001
                           (In Thousands) (Unaudited)


<TABLE>
<CAPTION>
                                                  RAILWORKS
                                                 CORPORATION                        NON-
                                                   (PARENT        GUARANTOR      GUARANTOR
                                                COMPANY ONLY)   SUBSIDIARIES    SUBSIDIARIES    ELIMINATIONS       CONSOLIDATED
                                                -------------   ------------    ------------    ------------       ------------
<S>                                             <C>             <C>             <C>             <C>                <C>
LIABILITIES AND STOCKHOLDERS' EQUITY:
CURRENT LIABILITIES:
  Cash overdraft                                  $      --        $  7,314       $    440        $      --           $   7,754
  Current maturities of long-term debt              358,796           3,648          5,611               --             368,055
  Accounts payable                                    3,366          79,706          2,001               --              85,073
  Accrued payroll and related withholdings               11           7,035            664               --               7,710

  Accrued interest payable                            5,303               1             35               --               5,339
  Billings in excess of costs and estimated
      earnings on uncompleted contracts                  --          13,492            142               --              13,634
  Due to parent company                              31,145          32,227          4,613          (67,985)(a)              --
  Due to affiliates                                      --           1,304             63           (1,367)(a)              --
  Other accrued liabilities                           9,670          14,215            586               --              24,471
                                                  ---------        --------       --------        ---------           ---------
    Total current liabilities                       408,291         158,942         14,155          (69,352)            512,036
                                                  ---------        --------       --------        ---------           ---------

LONG TERM DEBT                                           --              --             --               --                  --
DEFERRED TAX LIABILITIES                                 --              --            900               --                 900
EXCESS OF NET ASSETS ACQUIRED OVER
  COST, NET OF AMORTIZATION                              --           5,399             --               --               5,399
OTHER LIABILITIES                                        --           4,954             --               --               4,954
                                                  ---------        --------       --------        ---------           ---------
    Total long-term liabilities                          --          10,353            900               --              11,253
                                                  ---------        --------       --------        ---------           ---------

        Total liabilities                           408,291         169,295         15,055          (69,352)            523,289
                                                  ---------        --------       --------        ---------           ---------

WARRANTS PAYABLE                                      1,211              --             --               --               1,211
MINORITY INTEREST                                        --           2,226             --               --               2,226

STOCKHOLDERS' EQUITY:
  Series A, convertible preferred stock                  14              --             --               --                  14
  Common stock                                          125           3,430            378           (3,778)(b)             155
  Treasury stock                                       (960)             --             --               --                (960)
  Officer loans, net                                 (3,583)             --             --               --              (3,583)
  Additional paid-in capital                        136,572         299,739         25,989         (325,728)(b)         136,572
  Intercompany funding                                   --          51,545            (80)         (51,465)(b)              --
  Accumulated other comprehensive income                 --              11           (558)              --                (547)
  Retained earnings (deficit)                      (126,223)         18,218          4,789           14,497(b)          (88,719)
                                                  ---------        --------       --------        ---------           ---------
    Total stockholders' equity                        5,945         372,943         30,518         (366,474)             42,932
                                                  ---------        --------       --------        ---------           ---------

        TOTAL                                     $ 415,447        $544,464       $ 45,573        $(435,826)          $ 569,658
                                                  =========        ========       ========        =========           =========
</TABLE>


(a)      Elimination of intercompany payables.
(b)      Elimination of investments in subsidiaries.


                                       17
<PAGE>   18




                              RAILWORKS CORPORATION
                 CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
                    FOR THE THREE MONTHS ENDED JUNE 30, 2001
                           (In Thousands) (Unaudited)


<TABLE>
<CAPTION>
                                                  RAILWORKS
                                                 CORPORATION                         NON-
                                                 (PARENT CO.       GUARANTOR      GUARANTOR
                                                    ONLY)        SUBSIDIARIES    SUBSIDIARIES     ELIMINATIONS      CONSOLIDATED
                                                 -----------     ------------    ------------     -------------     ------------
<S>                                              <C>             <C>             <C>              <C>               <C>
Revenue                                            $     --        $ 189,255        $ 10,090        $ (1,065)(a)       $ 198,280
Cost of revenue                                          --          184,521           7,657          (1,065)(a)         191,113
                                                   --------        ---------        --------        --------           ---------

Gross profit                                             --            4,734           2,433              --               7,167
Selling, general and administrative expenses          3,515           12,816             993              --              17,324
Restructuring and other unusual charges               1,514             (864)             --              --                 650
                                                   --------        ---------        --------        --------           ---------

Operating income (loss)                              (5,029)          (7,218)          1,440              --             (10,807)

Equity in loss of subsidiaries                      (29,958)              --              --          29,958(b)               --
Interest expense                                    (10,030)            (135)            (93)             --             (10,258)
Other (expense) income                                    1              162             (10)             --                 153
Loss on sale of subsidiary                            1,247          (15,211)             --              --             (13,964)
                                                   --------        ---------        --------        --------           ---------

Income (loss) before income taxes, minority         (43,769)         (22,402)          1,337          29,958             (34,876)
   interest and extraordinary item
Provision for income taxes                               --            2,726             518              --               3,244
                                                   --------        ---------        --------        --------           ---------
Income (loss) before minority interest and          (43,769)         (25,128)            819          29,958             (38,120)
   extraordinary item
Minority interest in losses                              --               60              --              --                  60
                                                   --------        ---------        --------        --------           ---------
Income (loss) before extraordinary item             (43,769)         (25,068)            819          29,958             (38,060)
Extraordinary gain on extinguishment of debt            537               --              --              --                 537
                                                   --------        ---------        --------        --------           ---------

Net income (loss)                                  $(43,232)       $ (25,068)       $    819        $ 29,958           $ (37,523)
                                                   ========        =========        ========        ========           =========
</TABLE>

(a) Elimination of intercompany revenue.
(b) Elimination of equity in earnings of subsidiaries.


                                       18
<PAGE>   19



                              RAILWORKS CORPORATION
                 CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
                     FOR THE SIX MONTHS ENDED JUNE 30, 2001
                           (In Thousands) (Unaudited)


<TABLE>
<CAPTION>
                                                   RAILWORKS
                                                  CORPORATION                         NON-
                                                  (PARENT CO.       GUARANTOR      GUARANTOR
                                                     ONLY)        SUBSIDIARIES    SUBSIDIARIES     ELIMINATIONS      CONSOLIDATED
                                                  -----------     ------------    ------------    --------------     ------------
<S>                                               <C>             <C>             <C>             <C>                <C>
Revenue                                            $     --        $ 354,195        $ 16,267        $ (1,794)(a)       $ 368,668
Cost of revenue                                          --          320,494          12,691          (1,794)(a)         331,391
                                                   --------        ---------        --------        --------           ---------

Gross profit                                             --           33,701           3,576              --              37,277
Selling, general and administrative expenses          6,160           27,545           2,373              --              36,078
Restructuring and other unusual charges               1,745             (864)             --              --                 881
                                                   --------        ---------        --------        --------           ---------

Operating (loss) income                              (7,905)           7,020           1,203              --                 318

Equity in loss of subsidiaries                      (22,623)              --              --          22,623(b)               --
Interest expense                                    (19,872)            (389)           (232)             --             (20,493)
Other (expense) income                                   (8)             455              80              --                 527
Loss on sale of subsidiary                              635          (15,211)             --              --             (14,576)
                                                   --------        ---------        --------        --------           ---------

Income (loss) before income taxes, minority         (49,773)          (8,125)          1,051          22,623             (34,224)
   interest and extraordinary item
Provision for income taxes                               --            3,313             431              --               3,744
                                                   --------        ---------        --------        --------           ---------
Income (loss) before minority interest and          (49,773)         (11,438)            620          22,623             (37,968)
   extraordinary item
Minority interest in losses                              --               60              --              --                  60
                                                   --------        ---------        --------        --------           ---------
Income (loss) before extraordinary item             (49,773)         (11,378)            620          22,623             (37,908)
Extraordinary gain on extinguishment of debt            537               --              --              --                 537
                                                   --------        ---------        --------        --------           ---------

Net income (loss)                                  $(49,236)       $ (11,378)       $    620        $ 22,623           $ (37,371)
                                                   ========        =========        ========        ========           =========
</TABLE>

(a) Elimination of intercompany revenue.
(b) Elimination of equity in earnings of subsidiaries.


                                       19
<PAGE>   20

                              RAILWORKS CORPORATION
                 CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
                     FOR THE SIX MONTHS ENDED JUNE 30, 2001
                           (In Thousands) (Unaudited)

<TABLE>
<CAPTION>
                                                               RAILWORKS
                                                              CORPORATION                     NON-
                                                              (PARENT CO.    GUARANTOR     GUARANTOR
                                                                 ONLY)      SUBSIDIARIES  SUBSIDIARIES   ELIMINATIONS CONSOLIDATED
                                                              -----------   ------------  ------------   ------------ ------------

<S>                                                           <C>           <C>           <C>            <C>          <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income                                               $(49,236)     $(11,378)     $    620      $ 22,623(a)   $(37,371)
Adjustments to reconcile net (loss) income to net cash
    (used in) provided by operating activities:
 Depreciation and amortization                                       687         8,605         1,231            --        10,523
 Deferred tax valuation allowance                                     --         2,964            --                       2,964
 Non-cash gain on extinguishment of bonds                           (537)           --            --                        (537)
 Non-cash restructuring and other special charges                    234          (864)           --                        (630)
 Provision for accounts receivable, claims, loss contracts
    and costs and estimated earnings in excess of billings            --        21,115            --                      21,115
 Bond discount amortization                                           36            --            --            --            36
 Equity in earnings of subsidiaries                               22,623            --            --       (22,623)(a)        --
 Gain on sale of equipment                                            --           (55)          (73)           --          (128)
 Loss on sale of subsidiary                                         (635)       15,211            --            --        14,576
 Changes in operating assets and liabilities:
  Accounts receivable and costs and estimated earnings
   In excess of billings on uncompleted contracts                     --       (48,956)         (252)           --       (49,208)
  Inventories                                                         --           320           552            --           872
  Other current assets                                                 7        (1,445)          438            --        (1,000)
  Accounts payable and accrued liabilities                         1,259        27,946           132            --        29,337
  Accrued payroll and related withholdings                            11         3,385           228            --         3,624
  Accrued interest payable                                          (637)            1            35            --          (601)
  Billings in excess of costs and estimated
    earnings on uncompleted contracts                                 --        (5,510)         (162)           --        (5,672)
  Other current liabilities                                        2,277           521          (118)           --         2,680
  Other assets                                                       283           526            18            --           827
  Other liabilities                                                  (68)       (1,031)          (99)           --        (1,198)
  Due (to/from affiliates                                             --          (237)          237            --            --
  Due (to)/from parent company                                       998          (232)         (766)           --            --
                                                                --------      --------      --------      --------      --------
    Net cash (used in) provided by operating activities          (22,698)       10,886         2,021            --        (9,791)
                                                                --------      --------      --------      --------      --------

CASH FLOWS FROM INVESTING ACTIVITIES:
 Proceeds from sale of equipment                                      --           177           174            --           351
 Purchase of equipment and leasehold improvements                   (358)       (5,081)         (939)           --        (6,378)
 Proceeds from sale of subsidiary                                 23,388          (262)           --            --        23,126
 Acquisitions of subsidiaries, net of cash acquired                   --           (48)           --            --           (48)
 Contingent earn-out payments                                     (3,239)           --            --            --        (3,239)
                                                                --------      --------      --------      --------      --------
    Net cash provided by (used in) investing activities           19,791        (5,214)         (765)           --        13,812
                                                                --------      --------      --------      --------      --------

CASH FLOWS FROM FINANCING ACTIVITIES:
 Net change in bank overdraft                                     (1,164)       (6,993)          440            --        (7,717)
 Net activity on revolving line of credit                         12,085            --        (1,450)           --        10,635
 Payment of loan origination fees                                   (171)           --            --            --          (171)
 Proceeds from fixed asset borrowings                                 --           238            46            --           284
 Repayments of fixed asset borrowings                                 --        (3,816)          (61)           --        (3,877)
 Repayments of term loan                                          (4,972)           --            --            --        (4,972)
 Repayments of seller notes                                       (3,457)           --            --                      (3,457)
 Proceeds from exercise of stock options                               4            --            --            --             4
                                                                --------      --------      --------      --------      --------
    Net cash used in financing activities                          2,325       (10,571)       (1,025)           --        (9,271)
                                                                --------      --------      --------      --------      --------

EXCHANGE RATE EFFECT ON CASH                                          --            18          (345)                       (327)
                                                                --------      --------      --------      --------      --------
NET (DECREASE) INCREASE IN CASH                                     (582)       (4,881)         (114)           --        (5,577)
CASH AND CASH EQUIVALENTS, beginning of period                     1,532         5,420           186            --         7,138
                                                                --------      --------      --------      --------      --------
CASH AND CASH EQUIVALENTS, end of period                        $    950      $    539      $     72      $     --      $  1,561
                                                                ========      ========      ========      ========      ========
</TABLE>

(a)      Elimination of equity in earnings of subsidiaries.


                                       20
<PAGE>   21

                              RAILWORKS CORPORATION
                 CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
                    FOR THE THREE MONTHS ENDED JUNE 30, 2000
                           (In Thousands) (Unaudited)

<TABLE>
<CAPTION>
                                                 RAILWORKS
                                                 CORPORATION                      NON-
                                                 (PARENT CO.    GUARANTOR       GUARANTOR
                                                   ONLY)       SUBSIDIARIES   SUBSIDIARIES    ELIMINATIONS CONSOLIDATED
                                                 -----------   ------------   ------------    ------------ ------------

         <S>                                     <C>           <C>            <C>             <C>          <C>
         Revenue                                  $     --      $  147,847      $ 11,944      $ (5,127)(a)  $  154,664
         Cost of revenue                                --         117,253         8,647        (5,127)(a)     120,773
                                                  --------      ----------      --------      --------      ----------

         Gross profit                                   --          30,594         3,297            --          33,891
         Selling, general and administrative         1,954          13,881         1,171            --          17,006
                                                  --------      ----------      --------      --------      ----------
         expenses

         Operating income                           (1,954)         16,713         2,126            --          16,885

         Equity in earnings of subsidiaries         12,070              --            --       (12,070)(b)          --
         Interest expense                           (7,866)           (469)          (95)           --          (8,430)
         Interest and other income                      --           1,075           (17)           --           1,058
                                                  --------      ----------      --------      --------      ----------

         Income before income taxes                  2,250          17,319         2,014       (12,070)          9,513
         Provision for income taxes                     --           3,187           904            --           4,091
                                                  --------      ----------      --------      --------      ----------

         Net income                               $  2,250      $   14,132      $  1,110      $(12,070)     $    5,422
                                                  ========      ==========      ========      ========      ==========
</TABLE>

(a)      Elimination of intercompany revenue.

(b)      Elimination of equity in earnings in subsidiaries.


                                       21
<PAGE>   22

                              RAILWORKS CORPORATION
                 CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
                     FOR THE SIX MONTHS ENDED JUNE 30, 2000
                           (In Thousands) (Unaudited)

<TABLE>
<CAPTION>
                                                 RAILWORKS
                                                CORPORATION                      NON-
                                                (PARENT CO.     GUARANTOR      GUARANTOR
                                                   ONLY)       SUBSIDIARIES   SUBSIDIARIES    ELIMINATIONS CONSOLIDATED
                                                -----------    ------------   ------------    ------------ ------------

         <S>                                    <C>            <C>            <C>             <C>          <C>
         Revenue                                  $     --      $  274,035      $ 16,418      $(10,425)(a)  $  280,028
         Cost of revenue                                --         220,395        12,139       (10,425)(a)     222,109
                                                  --------      ----------      --------      --------      ----------

         Gross profit                                   --          53,640         4,279            --          57,919
         Selling, general and administrative         2,820          24,336         2,154            --          29,310
                                                  --------      ----------      --------      --------      ----------
         expense

         Operating income                           (2,820)         29,304         2,125            --          28,609

         Equity in earnings of subsidiaries         20,504              --            --       (20,504)(b)          --
         Interest expense                          (15,168)         (1,074)         (149)           --         (16,391)
         Interest and other income                       2           1,474            46            --           1,522
                                                  --------      ----------      --------      --------      ----------

         Income before income taxes                  2,518          29,704         2,022       (20,504)         13,740
         Provision for income taxes                     --           4,979         1,014            --           5,993
                                                  --------      ----------      --------      --------      ----------

         Net income                               $  2,518      $   24,725      $  1,008      $(20,504)     $    7,747
                                                  ========      ==========      ========      ========      ==========
</TABLE>

(a)      Elimination of intercompany revenue.

(b)      Elimination of equity in earnings in subsidiaries.


                                       22
<PAGE>   23

                              RAILWORKS CORPORATION
                 CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
                     FOR THE SIX MONTHS ENDED JUNE 30, 2000
                           (In Thousands) (Unaudited)

<TABLE>
<CAPTION>
                                                         RAILWORKS
                                                        CORPORATION                        NON-
                                                        (PARENT CO.      GUARANTOR      GUARANTOR
                                                           ONLY)        SUBSIDIARIES   SUBSIDIARIES    ELIMINATIONS CONSOLIDATED
                                                        -----------     ------------   ------------    ------------ ------------

<S>                                                     <C>             <C>            <C>             <C>          <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income                                               $    2,518      $   24,725      $  1,008      $(20,504)(a)  $    7,747
Adjustments to reconcile net income to net cash
    (used in) provided by operating activities:
 Depreciation and amortization                                  273           9,290           905            --          10,468
 Bond discount amortization                                      33              --            --            --              33
 Equity in earnings of subsidiaries                         (20,504)             --            --        20,504(a)           --
 (Gain) loss on sale of equipment                                --            (310)           30            --            (280)
 Changes in operating assets and liabilities:
  Accounts receivable and costs and
    estimated earnings in excess of billings
    on uncompleted contracts                                    205         (24,045)       (1,442)           --         (25,282)
  Inventories                                                    --          (1,502)          128            --          (1,374)
  Other current assets                                       (5,001)            228          (540)           --          (5,313)
  Accounts payable and accrued liabilities                      368          (3,936)          754            --          (2,814)
  Accrued interest payable                                      339             (19)           12            --             332
  Accrued payroll and related withholdings                      (33)           (555)          419            --            (169)
  Billings in excess of costs and estimated
    earnings on uncompleted contracts                            --          (1,220)         (420)           --          (1,640)
  Other current liabilities                                   1,177          (2,086)          849            --             (60)
  Other assets                                                  398            (223)          (61)           --             114
  Other liabilities                                            (447)         (9,431)         (154)           --         (10,032)
  Due (to)/from parent company                              (10,201)         14,885        (4,684)           --              --
                                                         ----------      ----------      --------      --------      ----------
    Net cash (used in) provided by operating
     activities                                             (30,875)          5,801        (3,196)           --         (28,270)
                                                         ----------      ----------      --------      --------      ----------

CASH FLOWS FROM INVESTING ACTIVITIES:
 Proceeds from sale of equipment                                 --           8,477           113            --           8,590
 Purchase of equipment and leasehold improvements              (713)        (12,869)       (1,771)           --         (15,353)
 Acquisitions of subsidiaries, net of cash acquired         (18,658)             45            --            --         (18,613)
 Additional purchase consideration and contingent
     earn-out payments                                      (17,372)             --            --            --         (17,372)
                                                         ----------      ----------      --------      --------      ----------
    Net cash used in investing activities                   (36,743)         (4,347)       (1,658)           --         (42,748)
                                                         ----------      ----------      --------      --------      ----------

CASH FLOWS FROM FINANCING ACTIVITIES:
 Net activity on revolving line of credit                     9,826              --            --            --           9,826
 Proceeds from fixed asset borrowings                       100,000         (94,009)        3,003            --           8,994
 Direct financing costs paid                                   (236)             --            --            --            (236)
 Payment of loan origination fees                            (2,606)             --            --            --          (2,606)
 Proceeds from term loan borrowings                              --         100,000            --            --         100,000
 Repayments of term loan                                    (29,925)             --            --            --         (29,925)
 Repayments of seller notes                                  (6,550)             --            --            --          (6,550)
 Repayments of fixed asset borrowings                           (75)        (10,589)       (1,046)           --         (11,710)
                                                         ----------      ----------      --------      --------      ----------
    Net cash provided by (used in)
          financing activities                               70,434          (4,598)        1,957            --          67,793
                                                         ----------      ----------      --------      --------      ----------
NET (DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS                                                   2,816          (3,144)       (2,897)           --          (3,225)
EXCHANGE RATE EFFECT ON CASH AND CASH EQUIVALENTS                --              --            90            --              90
CASH AND CASH EQUIVALENTS, beginning of year                    (13)          1,188         3,442            --           4,617
                                                         ----------      ----------      --------      --------      ----------

CASH AND CASH EQUIVALENTS, end of year                   $    2,803      $   (1,956)     $    635      $     --      $    1,482
                                                         ==========      ==========      ========      ========      ==========
</TABLE>

(a)      Elimination of equity in earnings of subsidiary.


                                       23
<PAGE>   24

9.       SUBSEQUENT EVENT

         As of June 30, 2001, Travelers Casualty and Surety Company of America
("Travelers") was the primary source for payment, performance and other bonding
for the Company's bonded projects. In May 2001, Travelers indicated that, if it
were to continue furnishing payment and performance bonds in support of the
Company's projects, it would be necessary for Travelers and the Lenders to enter
into an Inter-creditor Agreement by August 1, 2001. Since August 1, 2001, the
Company has not approached Travelers to furnish any bonds. The Inter-creditor
agreement would define the security interests of the parties in and to the
assets of the Company and the circumstances under which the parties may exercise
such rights. Although negotiations have been ongoing since mid-July 2001, as of
the date hereof, Travelers and the Lenders have not reached agreement. If
Travelers and the Lenders fail to reach agreement, Travelers may cease
furnishing such bonds on behalf of the Company. In such case, the Company's
ability to secure new business will be significantly and adversely affected
because a large percentage of the Company's business (particularly in the
transit services segment) is dependent upon the ability to furnish such bonds to
owners and general contractors.

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
(the "1998 Acquired Companies"); in 1999, we acquired fourteen companies or
groups of companies (the "1999 Acquired Companies"); and in 2000, we acquired
five companies or groups of companies (the "2000 Acquired 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.

         As described in "Liquidity and Capital Resources" below, effective June
18, 2001, the Company entered into an amendment (the "Third Amendment) to its
Amended and Restated Credit Agreement (the "Credit Agreement") pursuant to which
the Company's available revolving credit commitment was increased to
$111,000,000 through September 30, 2001. Upon the expiration of the Third
Amendment, the available revolving credit commitment will be reduced to a level
that will not allow the Company to fund its current operations. Further, as
described in "Liquidity and Capital Resources", the Company is currently in
default under certain covenants under the Third Amendment and the Credit
Agreement and unless the Company is able to obtain a further amendment to the
Credit Agreement, it is likely that the Company will be in default under certain
additional covenants under the Credit Agreement. Any acceleration of the
borrowings under the Credit Agreement would cause a default under the indenture
governing the Company's Senior Subordinated Notes (the "Notes"). In addition,
without an amendment to the Credit Agreement that will increase the availability
under the revolving credit commitment (as discussed below), the Company does not
believe that it will be able to make its scheduled interest payment of
$10,000,000 on the Notes due on October 15, 2001. These defaults could give the
lenders under the Credit Agreement (the "Lender") and holders of the Notes the
right to accelerate the maturity of all principal and interest amounts under the
Company's debt agreements.

         The Company is seeking a further amendment to its Credit Agreement,
that would contain covenants that are more favorable to the Company and an
increased revolving credit commitment. Unless the Company is able to reach such
an agreement with its Lenders and the Lender waive the current defaults, it is
likely that the Company will be prevented from using additional borrowings
under the Credit Agreement, would not be able to fund continuing operations and
would not have the cash available to repay the outstanding borrowings, if
accelerated, on a timely basis, if at all. Due to its current limited access to
capital, the Company has recently been unable to fund all of its accounts
payable within the prescribed time periods. Further, the Company's ability to
obtain bonding on its contracts may be significantly impacted as described
"Liquidity and Capital Resources-Bonding" which could result in an inability to
secure new business. If these events were to occur, it would have a material
adverse effect on the Company's operations and financial condition and its
ability to continue as a going-concern.


                                       24
<PAGE>   25

         During 2001, we sold FCM Rail, Ltd. and certain assets and liabilities
associated with the civil and maintenance divisions of Railworks W.T. Byler L.P.
(the "2001 Dispositions"). Our consolidated balance sheet as of June 30, 2001
includes all companies that were owned as of June 30, 2001. Our statement of
operations and statement of cash flows for the three and six months ended June
30, 2001 includes the results of operations and cash flows of all companies
owned as of June 30, 2001 and the 2001 Dispositions through their respective
dates of disposal. There were no acquisitions during the six months ended June
30, 2001. Our consolidated balance sheet as of December 31, 2000 includes all
companies that were owned as of December 31, 2000. Our statement of operations
and statement of cash flows for the three and six months ended June 30, 2000
includes the results of operations and cash flows of all companies owned as of
December 31, 1999 and the results of operations and cash flows of the applicable
2000 Acquired Companies from each of their respective dates of acquisition
during the period.

RESULTS OF OPERATIONS

Three Months Ended June 30, 2001 Compared to the Three Months Ended June 30,
2000.

Revenue. Revenue increased $43.6 million, or 28.2%, from $154.7 million for the
three months ended June 30, 2000 to $198.3 million for the three months ended
June 30, 2001. The increase in revenue for the three months ended June 30, 2001
was due primarily to increased revenue in the transit services segment and the
western and southwest divisions of the track services segment as well as the
addition of revenue from the 2000 Acquired Companies. These increases were
offset by decreased revenue from several of our subsidiaries in the rail
products and services segment as well as the 2001 Dispositions.

         Transit services revenue increased $38.6 million, or 53.7%, from $71.9
million for the three months ended June 30, 2000 to $110.5 million for the three
months ended June 30, 2001. Approximately $7.6 million of the increase arises
from two commercial contracts; $12.3 million arises from four power and
industrial contracts; $14.3 million arises from two New York transit contracts;
and $2.2 million arises from one national transit contract. The remaining
increase is a result of an overall increase in revenue across the entire transit
services segment.

         Rail products and services revenue increased $0.5 million, or 1.6%,
from $31.8 million for the three months ended June 30, 2000 to $32.3 million for
the three months ended June 30, 2001. The increase in revenue for the three
months ended June 30, 2001 was the result of additional revenues from the
acquisition of the railroad tie related business of The Western Tar Products
Corporation and Hovey Industries, Ltd during the second quarter of 2000. This
increase was partly offset by the sale of FCM Rail, Ltd. in the first quarter of
2001, as well as additional decreases in revenue across the entire rail products
and services segment.

         Rail track services revenue increased $4.5 million, or 8.8%, from $51.0
million for the three months ended June 30, 2000 to $55.5 million for the three
months ended June 30, 2001. Approximately $1.7 million of this increase is
related to one project in the western region. The remainder of the increase is
the result of an increase in revenue in our southwest division, which is
partially offset by the sale of the civil and maintenance divisions of Railworks
W.T. Byler L.P. during June of 2001.

Gross Profit. Gross profit decreased $26.7 million, or 78.8%, from $33.9 million
for the three months ended June 30, 2000 to $7.2 million for the three months
ended June 30, 2001. Approximately $21.1 million of the decrease in gross profit
for the three months ended June 30, 2001 resulted from required provisions for
accounts receivable as well as contract claims and other contract exposures in
the transit services segment as discussed below. The remaining decrease is
attributable to the 2001 Dispositions as well as an overall decrease in gross
profit across the entire rail products and services segment. The gross profit
percentage decreased from 21.9% for the three months ended June 30, 2000 to 3.6%
for the three months ended June 30, 2001. This decrease was due primarily to the
establishment of the aforementioned $21.1 million of reserves as well as a
general slowing of the Class I Railroad market and overall competitive pressures
upon the rail products and services segment and the rail track services segment.


                                       25
<PAGE>   26

         Transit services gross profit decreased $20.6 million or 152.6%, from
$13.5 million for the three months ended June 30, 2000 to a loss of $7.1 million
for the three months ended June 30, 2001. Approximately $21.1 million of the
decrease in gross profit for the three months ended June 30, 2001 resulted from
required provisions for accounts receivable as well as contract claims and other
contract exposures on several power and industrial projects and one commercial
project. These provisions are a result of management's estimate of the
recoverability of the recognized accounts receivable and costs and estimated
earnings in excess of billings on uncompleted contracts under revised settlement
scenarios on those contract exposures given the current financial situation of
the Company. This decrease is partly offset by an increase in gross profit as a
result of the increased revenue in the commercial, power and industrial, New
York transit and national transit divisions of the transit services segment. The
gross profit percentage decreased from 18.8% for the three months ended June 30,
2000 to a negative 6.4% for the three months ended June 30, 2001. This
percentage decrease was due primarily to the required provisions discussed
above.

         Rail products and services gross profit decreased $3.0 million, or
34.9%, from $8.6 million for the three months ended June 30, 2000 to $5.6
million for the three months ended June 30, 2001. The decrease in gross profit
for the three months ended June 30, 2001 was partly due to the sale of FCM Rail,
Ltd. as well as an overall decrease in gross profit in the entire rail products
and services segment. The gross profit percentage decreased from 27.0% for the
three months ended June 30, 2000 to 17.3% for the three months ended June 30,
2001. The decrease in gross profit and gross profit percentage for the rail
products and services segment was the result of the general slowing of the Class
I Railroad market and the overall increase in competitive pressures that such a
slowdown creates.

         Rail track services gross profit decreased $2.0 million, or 18.7%, from
$10.7 million for the three months ended June 30, 2000 to $8.7 million for the
three months ended June 30, 2001. The gross profit percentage decreased from
21.0% for the three months ended June 30, 2000 to 15.7% for the three months
ended June 30, 2001. The decrease in gross profit and gross profit percentage
for the rail track services segment was due to an overall increase in
competitive pressures resulting from a general slowing of the Class I Railroad
market, as well as adverse weather conditions during the first month of the
second quarter.

Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $0.3 million, or 1.8%, from $17.0 million for
the three months ended June 30, 2000 to $17.3 million for the three months ended
June 30, 2001. The increase in selling, general and administrative expenses for
the three months ended June 30, 2001 was due primarily to the additional
selling, general and administrative expenses of the 2000 Acquired Companies as
well as additional costs incurred in developing centralized hubs in the rail
products and services and the rail track services segments as well as increased
selling, general and administrative expenses associated with the growth of the
transit services segment. As a percentage of revenue, selling, general and
administrative expenses decreased from 11.0% for the three months ended June 30,
2000 to 8.7% for the three months ended June 30, 2001. This percentage decrease
was primarily the result of leveraging our relatively fixed overhead over a
larger revenue base in 2001.

         Transit services selling, general and administrative expenses increased
$2.1 million, or 42.9%, from $4.9 million for the three months ended June 30,
2000 to $7.0 million for the three months ended June 30, 2001. The increase in
selling, general and administrative expenses for the three months ended June 30,
2001 was due primarily to the overall growth of the transit services segment. As
a percentage of segment revenue, selling, general and administrative expenses
decreased from 6.8% for the three months ended June 30, 2000 to 6.3% for the
three months ended June 30, 2001. This percentage decrease was primarily the
result of leveraging our relatively fixed overhead over a larger revenue base in
2001.

         Rail products and services selling, general and administrative expenses
decreased $1.3 million, or 30.2%, from $4.3 million for the three months ended
June 30, 2000 to $3.0 million for the three months ended June 30, 2001. The
decrease in selling, general and administrative expenses for the three months
ended June 30, 2001 was due primarily to the sale of FCM Rail, Ltd. during the
first quarter of 2001 partially offset by additional selling, general and
administrative expenses from the two rail products and services companies
acquired during the second quarter of 2000. As a percentage of segment revenue,
selling, general and administrative expenses decreased from 13.5% for the three
months ended June 30, 2000 to 9.3% for the three months ended June 30, 2001.
This percentage decrease was primarily the result of the exclusion of the higher
selling, general and administrative cost structure of FCM Rail, Ltd. in 2001.


                                       26
<PAGE>   27

         Rail track services selling, general and administrative expenses
decreased $0.1 million, or 2.4%, from $4.2 million for the three months ended
June 30, 2000 to $4.1 million for the three months ended June 30, 2001. The
decrease in selling, general and administrative expenses for the three months
ended June 30, 2001 was due primarily to the sale of the civil and maintenance
divisions of Railworks W.T. Byler L.P. in June, 2001 offset by higher selling,
general and administrative expenses in the southwest division associated with
increased revenues in that division. As a percentage of segment revenue,
selling, general and administrative expenses decreased from 8.2% for the three
months ended June 30, 2000 to 7.4% for the three months ended June 30, 2001.
This percentage decrease was primarily the result of the establishment of a
centralized hub for the entire rail track services segment.

         Corporate selling, general and administrative expenses increased $0.4
million, or 11.1%, from $3.6 million for the three months ended June 30, 2000 to
$3.2 million for the three months ended June 30, 2001. The decrease in selling,
general and administrative expenses for the three months ended June 30, 2001 was
due primarily to favorable lease settlements during the quarter partially offset
by an increased level of overhead to administer the larger operations in 2001.
As a percentage of total revenue, corporate selling, general and administrative
expenses decreased from 2.3% for the three months ended June 30, 2000 to 1.6%
for the three months ended June 30, 2001. This percentage decrease was the
result of the items discussed above as well as leveraging our relatively fixed
overhead over a larger revenue base in 2001.

Operating (Loss) Income. Operating income decreased $27.7 million, or $163.9%,
from $16.9 million for the three months ended June 30, 2000 to a loss of $10.8
million for the three months ended June 30, 2001. This decrease was mostly a
result of the items mentioned above as well as additional restructuring and
other unusual charges of approximately $0.7 million related to the Company's
recovery plan.

Interest Expense. Interest expense increased $1.9 million, or 22.6%, from $8.4
million for the three months ended June 30, 2000 to $10.3 million for the three
months ended June 30, 2001. The increase in interest expense for the three
months ended June 30, 2001 was due primarily to the increase in average total
debt outstanding of $339.5 million for the three months ended June 30, 2000 at
an effective interest rate of 10.7% to $367.6 million for the three months ended
June 30, 2001 at an effective interest rate of 8.96%.

Taxes. The Company has recorded an income tax provision of $3.2 million for the
three months ended June 30, 2001. This provision reflects revised estimates of
state and foreign income taxes payable by the Company after consideration of the
losses incurred in the second quarter of 2001 as a result of the sale of certain
assets of our Railworks W.T. Byler LP subsidiary and the establishment of
additional reserves in the transit services segment. In addition, due to
uncertainty as to the realizability of the Company's deferred tax asset, an
additional valuation allowance of approximately $3.0 million against the
Company's deferred tax assets was recorded in the current provision.

Net Income. Net income decreased $42.9 million, from $5.4 million for the three
months ended June 30, 2000 to a net loss of $37.5 million for the three months
ended June 30, 2001 primarily as a result of the items mentioned above including
the loss of approximately $14.0 million from the sale of our subsidiary
Railworks W.T. Byler LP and approximately $21.1 million for required provisions
in the transit services segment. Net income also includes an extraordinary gain
from the extinguishment of bonds of approximately $0.5 million.

Six Months Ended June 30, 2001 Compared to the Six Months Ended June 30, 2000.

Revenue. Revenue increased $88.7 million, or 31.7%, from $280.0 million for the
six months ended June 30, 2000 to $368.7 million for the six months ended June
30, 2001. The increase in revenue for the six months ended June 30, 2001 was due
primarily to increased revenue in the transit services segment and the western
and southwest divisions of the track services segment as well as the addition of
revenue from the 2000 Acquired Companies. These increases were offset by
decreased revenue from several of our subsidiaries in the rail products and
services segment as well as the 2001 Dispositions.

         Transit services revenue increased $79.5 million, or 60.1%, from $132.2
million for the six months ended June 30, 2000 to $211.7 million for the six
months ended June 30, 2001. Approximately $10.4 million of the increase in
revenue for the six months ended June 30, 2001 was due to the addition of
revenue from the acquisition of HSQ Technology Corporation and Breaking
Technologies, Inc. In addition, approximately $13.2 million of the increase


                                       27
<PAGE>   28

arises from two commercial contracts; $25.4 million arises from four power and
industrial contracts; $21.3 million arises from two New York transit contracts;
and $4.6 million arises from one national transit contract. The remaining
increase is a result of an overall increase in revenue across the entire transit
services segment.

         Rail products and services revenue decreased $0.3 million, or 0.5%,
from $58.8 million for the six months ended June 30, 2000 to $58.5 million for
the six months ended June 30, 2001. This decrease in revenue for the six months
ended June 30, 2001 was the result of a decrease in revenue related to three of
our rail products and services subsidiaries and the sale of FCM Rail, Ltd.
during February 2001. These decreases were partially offset by the addition of
approximately $8.2 million of revenue from the acquisition of the railroad tie
related business of The Western Tar Products Corporation and Hovey Industries,
Ltd.

         Rail track services revenue increased $9.5 million, or 10.7%, from
$89.0 million for the six months ended June 30, 2000 to $98.5 million for the
six months ended June 30, 2001. This increase is attributable to one project in
the western division as well as an increase in revenue in our southwest division
offset by the sale of the civil and maintenance divisions of Railworks W.T Byler
L.P.

Gross Profit. Gross profit decreased $20.6 million, or 35.6%, from $57.9 million
for the six months ended June 30, 2000 to $37.3 million for the six months ended
June 30, 2001. Approximately $21.1 million of the decrease in gross profit for
the six months ended June 30, 2001 resulted from required provisions for
accounts receivable as well as contract claims and other contract exposures in
the transit services segment as discussed below. Gross profit also decreased in
the rail products and services segment and the rail track services segment.
These decreases were partly offset by additional gross profit from the 2000
Acquired Companies as well as additional gross profit realized on increased
revenues in the transit services segment. The gross profit percentage decreased
from 20.7% for the six months ended June 30, 2000 to 10.1% for the six months
ended June 30, 2001. This decrease was due primarily to the establishment of the
additional reserves mentioned above as well as the general slowing of the Class
I Railroad market and overall competitive pressures upon the rail products and
services segment and the rail track services segment.

         Transit services gross profit decreased $12.1 million, or 52.6%, from
$23.0 million for the six months ended June 30, 2000 to $10.9 million for the
six months ended June 30, 2001. This decrease resulted from required provisions
of approximately $21.1 million for accounts receivable as well as contract
claims and other contract exposures on several power and industrial projects and
one commercial project. These provisions are a result of management's estimate
of the recoverability of the recognized accounts receivable and costs and
estimated earnings in excess of billings on contracts under revised settlement
scenarios on these contract exposures given the current financial situation of
the Company. This decrease is partially offset by the addition of $1.8 million
of gross profit from the two transit services companies acquired during 2000 as
well as additional gross profit realized on increased revenues in the
commercial, power and industrial, New York transit and national transit
divisions of the transit services segment. The gross profit percentage decreased
from 17.4% for the six months ended June 30, 2000 to 5.1% for the six months
ended June 30, 2001. This percentage decrease was due primarily to the required
provisions mentioned above.

         Rail products and services gross profit decreased $3.6 million, or
24.0%, from $15.0 million for the six months ended June 30, 2000 to $11.4
million for the six months ended June 30, 2001. The decrease in gross profit for
the six months ended June 30, 2001 was due to the sale of FCM Rail, Ltd. as well
as an overall decrease in gross profit in the entire rail products and services
segment offset by the addition of gross profit from the two rail products and
services companies acquired during 2000. The gross profit percentage decreased
from 25.5% for the six months ended June 30, 2000 to 19.5% for the six months
ended June 30, 2001. The decrease in gross profit and gross profit percentage
for the rail products and services segment was the result of the general slowing
of the Class I Railroad market and the overall increase in competitive pressures
that such a slowdown creates.

         Rail track services gross profit decreased $3.8 million, or 20.2%, from
$18.8 million for the six months ended June 30, 2000 to $15.0 million for the
six months ended June 30, 2001. The gross profit percentage decreased from 21.1%
for the six months ended June 30, 2000 to 15.2% for the six months ended June
30, 2001. The decrease in gross profit and gross profit percentage for the rail
track services segment was due to an overall increase in


                                       28
<PAGE>   29

competitive pressures resulting from a general slowing of the Class I Railroad
market, as well as adverse weather conditions during April 2001.

Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $6.8 million, or 23.2%, from $29.3 million for
the six months ended June 30, 2000 to $36.1 million for the six months ended
June 30, 2001. The increase in selling, general and administrative expenses for
the six months ended June 30, 2001 was due primarily to additional selling,
general and administrative expenses of the 2000 Acquired Companies as well as
additional costs incurred in developing centralized hubs in the rail products
and services and the rail track services segments and increased selling, general
and administrative expenses associated with the growth of the transit services
segment. As a percentage of revenue, selling, general and administrative
expenses decreased from 10.5% for the six months ended June 30, 2000 to 9.8% for
the six months ended June 30, 2001. This percentage decrease was primarily the
result of leveraging our relatively fixed overhead over a larger revenue base
during 2001.

         Transit services selling, general and administrative expenses increased
$4.3 million, or 48.3%, from $8.9 million for the six months ended June 30, 2000
to $13.2 million for the six months ended June 30, 2001. The increase in
selling, general and administrative expenses for the six months ended June 30,
2001 was due primarily to the addition of approximately $2.6 million of selling,
general and administrative expenses from the two transit services companies
acquired during 2000. The remaining increase is a result of the overall growth
of the segment. As a percentage of segment revenue, selling, general and
administrative expenses decreased from 6.7% for the six months ended June 30,
2000 to 6.2% for the six months ended June 30, 2001. This percentage decrease
was primarily the result of leveraging our relatively fixed overhead over a
larger revenue base during 2001.

         Rail products and services selling, general and administrative expenses
increased $0.6 million, or 9.5%, from $6.3 million for the six months ended June
30, 2000 to $6.9 million for the six months ended June 30, 2001. The increase in
selling, general and administrative expenses for the six months ended June 30,
2001 was due primarily to the addition of selling, general and administrative
expenses from the two rail products and services companies acquired during 2000.
As a percentage of segment revenue, selling, general and administrative expenses
increased from 10.7% for the six months ended June 30, 2000 to 11.8% for the six
months ended June 30, 2001. This percentage increase was the result of
additional costs incurred to establish a centralized hub for the rail products
and services segment as well as the addition of the higher selling, general and
administrative cost structures of the two rail products and services companies
acquired during 2000.

         Rail track services selling, general and administrative expenses
increased $0.8 million, or 10.0%, from $8.0 million for the six months ended
June 30, 2000 to $8.8 million for the six months ended June 30, 2001. The
increase in selling, general and administrative expenses for the six months
ended June 30, 2001 was due primarily to the development of a centralized hub
for the rail track services segment and additional costs incurred to integrate
the operations of the segment. As a percentage of segment revenue, selling,
general and administrative expenses decreased from 9.0% for the six months ended
June 30, 2000 to 8.9% for the six months ended June 30, 2001. This percentage
decrease was primarily the result of additional costs incurred to establish a
centralized hub for the rail track services segment as well as the relatively
unchanged level of revenues in the segment.

         Corporate selling, general and administrative expenses increased $1.1
million, or 18.0%, from $6.1 million for the six months ended June 30, 2000 to
$7.2 million for the six months ended June 30, 2001. The increase in selling,
general and administrative expenses for the six months ended June 30, 2001 was
due primarily to the increased level of overhead to administer the larger
operations in 2001. As a percentage of total revenue, selling, general and
administrative expenses decreased from 2.2% for the six months ended June 30,
2000 to 2.0% for the six months ended June 30, 2001. This decrease was primarily
the result of leveraging our relatively fixed overhead over a larger revenue
base during 2001.

Operating (Loss) Income. Operating income decreased $28.3 million, or 99.0%,
from $28.6 million for the six months ended June 30, 2000 to $0.3 million for
the six months ended June 30, 2001. This decrease was mostly a result of the
items mentioned above as well as additional restructuring and other unusual
charges of approximately $0.9 million related to the Company's recovery plan.

Interest Expense. Interest expense increased $4.1 million, or 25.0%, from $16.4
million for the six months ended June 30, 2000 to $20.5 million for the six
months ended June 30, 2001. The increase in interest expense for the six


                                       29
<PAGE>   30

months ended June 30, 2001 was due primarily to the increase in average total
debt outstanding of $331.2 million for the six months ended June 30, 2000 at an
effective interest rate of 10.1% to $374.5 million for the six months ended June
30, 2001 at an effective interest rate of 9.14%. General interest rates have
risen during this period, which adversely affects our variable rate debt.

Taxes. The Company has recorded an income tax provision of $3.7 million for the
six months ended June 30, 2001. This provision reflects revised estimates of
state and foreign income taxes payable by the Company after consideration of the
losses incurred in the second quarter as a result of the sale of certain assets
of out Railworks W.T. Byler L.P. subsidiary and the establishment of additional
reserves in the transit services segment. In addition, due to uncertainty as to
the realizability of the Company's deferred tax asset, an additional valuation
allowance of approximately $3.0 million against the Company's deferred tax asset
was recorded in the current provision.

Net Income. Net income decreased $45.1 million, from $7.7 million for the six
months ended June 30, 2000 to a net loss of $37.4 million for the six months
ended June 30, 2001, primarily as a result of the items mentioned above,
including losses of approximately $14.6 million related to the 2001 Dispositions
and $21.1 million for required provisions in the transit services segment. Net
income also includes an extraordinary gain from the extinguishment of bonds of
approximately $0.5 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 June 30, 2001, we had $1.6 million in cash and cash
equivalents offset by a cash overdraft of $7.8 million resulting in a negative
cash position of $6.2 million compared to $7.1 million in cash and cash
equivalents offset by a cash overdraft of $16.8 million resulting in a negative
cash position of $9.7 million as of December 31, 2000. Net cash used in
operating activities for the six months ended June 30, 2001 was approximately
$9.8 million. Net cash provided by investing activities for the six months ended
June 30, 2001 was approximately $13.8 million, which consisted primarily of cash
proceeds from the sale of a subsidiary and a division offset by cash payments
for capital expenditures and earnout obligations. Net cash used in financing
activities for the six months ended June 30, 2001 was approximately $9.3
million, which included borrowings of approximately $10.9 million offset by debt
repayments and reduction of cash overdraft of approximately $20.2 million.

         We had a working capital deficit of $237.0 million as of June 30, 2001,
primarily as the result of the reclassification of $356.5 million in long-term
debt to short term debt as discussed below. Excluding such reclassification our
working capital as of June 30, 2001 was $119.5 million. Our working capital as
of December 31, 2000 was $120.0 million.

         Capital expenditures were $6.4 million and $15.4 million for the six
months ended June 30, 2001 and 2000, 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. The ability to continue any capital expenditure programs is subject to
our ability to obtain vendor financing or other sources of capital.

         Subject to our ability to obtain required financing, we anticipate
total capital expenditures of approximately $ 2.5 to $3.0 million for equipment
and leasehold improvements for the remainder of 2001. This investment relates to
the anticipated facility consolidations of the


                                       30
<PAGE>   31

operating companies, the continued installation and expansion of a comprehensive
financial reporting computer system and the purchase or lease of supplemental
machinery and equipment needed to meet operational demands.

         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 recorded as goodwill as of June 30, 2001 relating to
2000 operating performance amounted to approximately $13.6 million as adjusted
based on finalized earn-out calculations. Such amounts are to be paid throughout
2001. Through June 30, 2001, we paid approximately $3.0 million of such
additional consideration and $4.6 million was forgiven as partial consideration
in the sale of the civil and maintenance divisions of Railworks W.T. Byler L.P.
leaving the balance of $6.0 million of such consideration to be paid during the
remainder of 2001. Our ability to make such payments is dependent upon the
successful renegotiation of our financing arrangements as discussed below.

Indebtedness. As of June 30, 2001, we had a total of $368.1 million of
indebtedness outstanding, which includes approximately $183.6 million
outstanding under our Credit Agreement and $173.1 million in Notes outstanding.
As a result of our current and anticipated noncompliance with certain covenants
under the Credit Agreement and our current and anticipated default under certain
covenants under the indenture governing the Notes discussed below we have
reclassified all of our outstanding indebtedness as short debt. Excluding such
reclassification, $356.5 million of our indebtedness as of June 30, 2001 would
be long term debt.

         Of the $183.6 million of borrowings outstanding under the Credit
Agreement, $94.5 million was a term loan payable through 2006 and $89.1 million
was borrowed under the revolving credit commitment. The loans under the Credit
Agreement bore interest at a weighted average rate of 8.83% per annum at such
date. In connection with the Credit Agreement, the Company granted the Lenders
a security interest in essentially all of the assets, including receivables, of
the Company. As of June 30, 2001, the Company had aggregate borrowing
availability of approximately $7.9 million under the revolving credit
commitment after giving effect to the June 18, 2001 amendment to the Credit
Agreement discussed below; however, as a result of the defaults under the
Credit Agreement discussed below, the Company may be unable to effect any
additional borrowings under the revolving credit commitment. Due to the limited
availability remaining under the revolving credit commitment during the second
quarter even after the increase discussed in the next paragraph, the Company
entered into discussions with the Lenders to increase the maximum availability
under the revolving credit commitment in order to fund working capital,
contingent purchase price obligations and other cash requirements.

         Effective June 18, 2001, we entered into an amendment to the Credit
Agreement (the "Third Amendment") pursuant to which the available revolving
credit commitment was increased to $111,000,000 through September 30, 2001. In
connection with the Third Amendment, we agreed to pay an amendment fee of a
quarter of a percent (0.25%) of the commitments and to issue to the Lenders
warrants to purchase our common stock in an amount equal to two percent (2.0%)
of our fully diluted and outstanding equity as of June 18, 2001 (or 379,359
shares) at an exercise price of $0.01 per share. The warrants will have
customary anti-dilution protection for stock splits, dividends and
distributions. The warrants will become exercisable in four equal monthly
increments beginning on September 30, 2001 and ending on December 31, 2001, and
will expire on July 18, 2011. We agreed to certain demand and piggyback
registration rights with respect to the common stock issuable upon exercise of
the warrants.

         Under the Third Amendment, all amounts outstanding under the Credit
Agreement will bear interest at a per annum rate one-half percent (0.5%) higher
than previously applicable, or 4.0% above the prime rate for the term loan and
3.0% above the prime rate on the revolving credit commitment. We are not allowed
to enter into any LIBOR contracts during the term of the Third Amendment period,
which expires on September 30, 2001, and must continue to have prime rate-based
borrowings during such term. In the Third Amendment the Lenders waived our
noncompliance with certain of the financial covenants in the Credit Agreement
for the period ended June 30, 2001. Pursuant to the Third Amendment we were
required to achieve a minimum earnings before interest, taxes, depreciation and
amortization (EBITDA) of $15,000,000 for the quarter ended June 30, 2001. We
failed to achieve such minimum EBITDA for the quarter ended June 30, 2001. In
addition, as of August 7, 2001, we had exceeded the permitted borrowing base
over advance under the Credit Agreement by $778,900. After recalculation of the
borrowing base to reflect adjustments made for the period ended June 30, 2001,
the Company has exceeded the permitted borrowing base over advance by
approximately $12.5 million.

         As a result of the foregoing, on August 7, 2001, we sought a waiver
from our Lenders for our noncompliance with the EBITDA covenant under the Third
Amendment, our exceeding the permitted borrowing base over advance under the
Credit Agreement and our noncompliance with certain other covenants in the
Third Amendment. Our noncompliance with certain of these covenants under the
Third Amendment and the Credit Agreement could provide the Lenders with the
right to accelerate payment of all amounts owed by us under the Credit
Agreement and to prohibit us from effecting any further borrowings under the
revolving credit commitment. On August 13, 2001, the Lenders notified us that
they had declined to provide the waivers sought.

         Upon the expiration of the Third Amendment, on October 1, 2001, the
available revolving credit commitment under the Credit Agreement will be reduced
to the lesser of (i) $96,057,690 or (ii) the amount to which the available


                                       31
<PAGE>   32

revolving committed amount is reduced by mandatory reductions in accordance with
the Credit Agreement and the waiver of our noncompliance with the financial
covenants under the Credit Agreement discussed above will terminate. Unless we
are able to agree to a further amendment to the Credit Agreement with our
Lenders on or before September 30, 2001 we will be required to repay any
borrowings under the revolving credit commitment which exceed the reduced
committed amount. In addition, without such a further amendment to the Credit
Agreement it is unlikely we will be in compliance with the financial covenants
under the Credit Agreement. Our failure to repay such excess borrowings and our
noncompliance with such financial covenants will constitute additional defaults
under the Credit Agreement.

         If we are not able to obtain a further amendment of the Credit
Agreement which increases the level of the revolving credit commitment and
waives current defaults under the Credit Agreement and the Third Amendment, it
is likely we will be prevented from using additional borrowings under our Credit
Agreement to fund our current operations. If we are unable pay the amounts due
under the Credit Agreement or make the interest payment due on the Notes, either
of such nonpayments would constitute a default under the indenture governing the
Notes and payment of the principal amount of the Notes and all accrued and
unpaid interest thereon may be accelerated. If this were to occur, we would not
have the cash available to repay the outstanding borrowings under the Credit
Agreement and the Notes and it is unlikely that we would be able to obtain debt
or equity financing to repay such borrowings on a timely basis, if at all.

         Due to our current limited access to capital, we have recently been
unable to fund all of our accounts payable within prescribed time periods. To
meet our working capital and cash needs subsequent to September 30, 2001, and to
meet our obligation to make the $10.0 million interest payment on our 11.5%
Senior Subordinated Notes that is due on October 15, 2001, we will require
increased borrowing capacity under our Credit Agreement, other additional debt
or equity financing, additional asset sales or a combination thereof. We intend
to engage in further discussions with the Lenders and potential investors and to
explore additional asset sales in order to address all of the above-described
needs. We cannot assure you that we will be successful in obtaining such
increased borrowing capacity or such additional funding. If we are unable to do
so within the time period required, it is likely we will be unable to meet our
working capital and cash requirements, including interest payments payable on
our debt. If this were to occur, it would have a material adverse effect on our
operations and financial condition.

Bonding. As of June 30, 2001, Travelers Casualty and Surety Company of America
("Travelers") was the primary source for payment, performance and other bonding
for the Company's bonded 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 Lenders to enter into an
Inter-creditor Agreement by August 1, 2001. Since August 1, 2001, we have not
approached Travelers to furnish any bonds. The Inter-creditor agreement would
define the security interests of the parties in and to our assets and the
circumstances under which the parties would be entitled to exercise their
respective rights under such security interests. Although negotiations have been
ongoing since mid-July, 2001, as of the date hereof, Travelers and the Lenders
have not reached agreement. If Travelers and the Lenders fail to reach
agreement, then Travelers may cease furnishing such bonds on our behalf. In such
case, our ability to secure new business will be significantly and adversely
affected 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.

Credit Rating. On August 16, 2001, Standard & Poor's ("S&P") lowered its rating
on us and placed the ratings on "CreditWatch" with negative implications. In
taking such action, S&P cited our need to secure additional financing, our
October 15th interest payment due on the Notes and our recent announcement of a
net loss for the quarter ended June 30, 2001. S&P also expressed concern
regarding our ability to obtain an additional amendment or waiver from the
Lenders due to our June 26, 2001 announcement that we would further miss
earnings expectations for the last two quarters of 2001 and the frequency that
we have gone to the Lenders for amendments and waivers.

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


                                       32
<PAGE>   33

revenues and earnings and the effect of 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.

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

Need for Additional Capital. We will need additional capital to fund our future
operations and comply with the terms of and repay existing indebtedness.
However, as a result of the defaults under the Credit Agreement discussed
above, we may be unable to effect any additional borrowings under the revolving
credit commitment. Due to our current limited access to capital, we have
recently been unable to fund all of our accounts payable within the prescribed
time periods. On October 1, 2001, the available revolving credit commitment
will be reduced to the lesser of (i) $96,057,690 or (ii) the amount to which
the available revolving committed amount is reduced by mandatory reductions in
accordance with the Credit Agreement. To meet our working capital needs
subsequent to September 30, 2001, and to meet our obligation to make the $10.0
million interest payment on our 11.5% Senior Subordinated Notes that is due on
October 15, 2001, we will require increased borrowing capacity under our Credit
Agreement, other additional debt or equity financing, additional asset sales or
a combination thereof. We cannot assure you that we will be successful in
obtaining such increased borrowing capacity or such additional funding.

         If we are not able to increase our borrowing capacity or obtain
additional financing, we may not be able to fund our continuing operations. We
may also be unable to repay interest and principal on our outstanding
indebtedness as it comes due or comply with the financial covenants of our
indebtedness agreements or instruments. Any of these results may cause our
creditors to accelerate our indebtedness to them.

         Our debt instruments and credit agreement restrict our ability to
obtain additional debt or obtain financing. Moreover, even if we are able to
secure the consent of the holders of those securities and the Lenders to
additional financing, we cannot assure you that we will be able to obtain the
additional financing necessary to satisfy our operating and other cash
requirements.

Breaches of Covenants. Our Credit Agreement and the indenture governing our
outstanding notes impose 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. Our Credit
Agreement also imposes certain financial covenants. Failure to comply with any
of these restrictions could result in a default under the applicable instrument
and thereby cause defaults on other financings. Following a default, the lender
may be able to accelerate the indebtedness. We may not have the funds to repay
the debt upon acceleration, which could cause us or our creditors to file a
petition for bankruptcy. In addition, the terms of any additional debt or equity
financing that we may incur could restrict our operational flexibility and
thereby adversely affect our business, results of operations and financial
condition.

         We anticipated that we would not be in compliance with the financial
covenants under our Credit Agreement for the period ending June 30, 2001. The
Lenders waived these breaches. In connection with this waiver and certain
amendments to the financial covenants, we agreed to have a minimum EBITDA of
$15.0 million for the quarter ending June 30, 2001. Due to certain charges
recorded for the second quarter of 2001, we failed to achieve the minimum
EBITDA for the quarter ending June 30, 2001. In addition, as of August 7, 2001,
we had exceeded the permitted borrowing base over advance under the Credit
Agreement by $778,900. After recalculation of the borrowing base to reflect
adjustments made for the period ended June 30, 2001, the Company has exceeded
the permitted borrowing base over advance by approximately $12.5 million. As a
result of the foregoing, on August 7, 2001, we sought a waiver from our
Lenders for our noncompliance with the EBITDA covenant under the Third
Amendment, our exceeding the permitted borrowing base over advance under the
Credit Agreement and our noncompliance with certain other covenants in the
Third Amendment. Our noncompliance with certain of these covenants under the
Third Amendment and the Credit Agreement could provide the Lenders with the
right to accelerate payment of all amounts owed by us under the Credit
Agreement and to prohibit us from effecting any further borrowings under the
revolving credit commitment. On August 13, 2001, the Lenders notified us that
they had declined to provide the waivers sought. If we are not able to obtain
this waiver our Lenders could prevent us from using additional borrowings under
our Credit Agreement to fund our current operations and could accelerate
payment of amounts we owe under our Credit Agreement. If we are unable to pay
amounts due under the Credit Agreement, payment of the principal amount of the
Notes and all interest thereon may be accelerated. We would not have the cash
available to repay the outstanding borrowings under the Credit Agreement and
the principal and interest on the Notes and it is unlikely that we would be
able to obtain debt or equity financing to repay such borrowings on a timely
basis, if at all.


                                       33
<PAGE>   34

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 compete the project.
Travelers Casualty and Surety Company of America, has 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 the Lenders to enter into an
Inter-creditor Agreement by August 1, 2001. Since August 1, 2001, we have not
approached Travelers to furnish bonds. The Inter-creditor agreement would
define the security interests of the parties in and to our assets and the
circumstances under which the parties would be entitled to exercise their
respective rights under such security interests. Although negotiations have
been ongoing since mid-July, 2001, as of August 14, 2001, Travelers and the
Lenders have not reached agreement. If Travelers and the Lenders fail to reach
agreement, then Travelers may cease furnishing such bonds on our behalf. In
such case, our ability to secure new business will be significantly and
adversely affected 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.

Substantial Leverage. We have a substantial amount of debt outstanding, 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.

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 June 30, 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 manage effectively 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.

Dependence on Certain Customers. We derived approximately 37.4% of our revenue
for the year ended December 31, 2000 from our top ten customers. Approximately
17.1% of our 2000 revenue was derived from projects


                                       34
<PAGE>   35

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.

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 services, 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.

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 involve 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.

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 purchase 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. In addition, we
have recently experienced a delay in jobs because we have not been able to pay
subcontractors as promptly as in the past. 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.


                                       35
<PAGE>   36

Unionized Workforce. Approximately 50% of our employees are covered under
collective bargaining agreements. 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.

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 operation.

Item 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are subject to market risk associated principally with changes in interest
rates. As of June 30, 2001, interest rate exposure has been principally limited
to the $183.6 million of long-term debt outstanding at June 30, 2001 under our
credit facilities. All of that debt bears interest at rates that fluctuate with
the market. A 50 basis point movement in the interest rate on our floating rate
debt would have resulted in an approximately $918,000 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 June 30, 2001.

PART II: OTHER INFORMATION

Item 1.  Legal Proceedings

         The previously reported action by Steven G. Hutchinson, Douglas W.
Hutchinson and C. C. Hutchinson, which was commenced on January 3, 2001, against
Neosho Incorporated, a subsidiary of the Company, and the Company, in the
District Court of Shawnee County, Kansas, has been settled on terms favorable to
the Company.

Item 2.  Changes in Securities and Use of Proceeds


                                       36
<PAGE>   37

         (i)      Changes in Securities

                  None.

         (ii)     Use of Proceeds

                  None.

         (iii)    Recent Sales of Unregistered Securities

                  (1)      On June 18, 2001, we issued 140,326 shares of
                           unregistered Common Stock of the Company to HBV
                           Rediscovered Opportunities Fund L. P. ("HBV") in
                           exchange for the Company's 11.5% Senior Subordinated
                           Notes in the amount of $1 million held by HBV. The
                           stock was issued in reliance on an exemption from
                           registration under Section 3(a)(9) of the Securities
                           Act of 1933.

                  (2)      On July 31, 2001, we issued warrants to purchase
                           379,359 shares of Common Stock of the Company to Bank
                           of America, N. A., as Administrative Agent under our
                           Credit Agreement, for the benefit of the Lenders;
                           said warrants are exercisable on September 30, 2001
                           and ending on December 31, 2001, and said warrants
                           expire on July 31, 2011. The warrants were issued in
                           reliance on an exemption from registration under
                           Section 4(2) of the Securities Act of 1933.

Item 3.           Default Upon Senior Securities

         Pursuant to the Third Amendment we were required to achieve a minimum
earnings before interest, taxes, depreciation and amortization (EBITDA) of
$15,000,000 for the quarter ended June 30, 2001. We failed to achieve such
minimum EBITDA for the quarter ended June 30, 2001. In addition, as of August 7,
2001, we had exceeded the permitted borrowing base over advance under the Credit
Agreement by $778,900. After recalculation of the borrowing base to reflect
adjustments made for the period ended June 30, 2001, the Company has exceeded
the permitted borrowing base over advance by approximately $12.5 million.

         As a result of the foregoing, on August 7, 2001, we sought a waiver
from our Lenders for our noncompliance with the EBITDA covenant under the Third
Amendment, our exceeding the permitted borrowing base over advance under the
Credit Agreement and our noncompliance with certain other covenants in the Third
Amendment. Our noncompliance with certain of these covenants under the Third
Amendment and the Credit Agreement could provide the Lenders with the right to
accelerate payment of all amounts owed by us under the Credit Agreement and to
prohibit us from effecting any further borrowings under the revolving credit
commitment. On August 13, 2001, the Lenders notified us that they had declined
to provide the waivers sought.

Item 4.           Submission of Matters to a Vote of Security Holders

         On May 4, 2001 the Company held its annual meeting of stockholders and
three proposals were considered. All such proposals were approved by the
stockholders.

The first proposal was to approve amendments to the Company's Certificate of
Incorporation to effect a reverse stock split of the Company's issued and
outstanding Common Stock. The following is the vote on this proposal:

<TABLE>
<CAPTION>
   For:             Against:            Abstained
---------           ---------           ---------
<S>                 <C>                 <C>
9,699,474           1,589,301            153,039
</TABLE>

The reverse split authorized by the stockholders was never effected and the
board's authority to effect such reverse split pursuant to the stockholders'
resolution has expired.

The second proposal was to elect three directors. The following is a separate
tabulation with respect to the vote for each nominee:

<TABLE>
         <S>               <C>                   <C>
         Scott D. Brace:   For: 10,719,906       Withhold: 721,908

         John G. Larkin:   For: 10,719,906       Withhold: 721,908

         R. C. Matney:     For: 10,719,906       Withhold: 721,908
</TABLE>

         Messrs. Michael R. Azarela, Ronald W. Drucker, John Kennedy and Donald
P. Traviss, whose terms have not expired, continued as directors.

         The third proposal was to approve and ratify the Board of Directors'
appointment of Arthur Andersen LLP as the Company's independent accountants for
the 2001 fiscal year. The following is a breakdown of the vote on such matter:

<TABLE>
<CAPTION>
         For                     Against                Abstained
         ---                     -------                ---------
         <S>                     <C>                    <C>
         10,901,337              322,915                217,562
</TABLE>


                                       37
<PAGE>   38

Item 5.           Other Information

                  John G. Larkin, Chairman, and Michael R. Azarela, Chief
                  Operating Officer, resigned their positions as officers and
                  directors of the Company, effective August 19, 2001.

Item 6.           Exhibits and Reports on Form 8-K

                  a)        Exhibit List:

<TABLE>
                                 <S>       <C> <C>
                                 4.5       --  Common Stock Purchase Warrant, issued July 31,
                                               2001, to Bank of America, N. A., Certificate 1
                                               of 4.
                                 10.52     --  Asset Purchase Agreement between W. T. Byler
                                               Co., LP, RailWorks W. T. Byler, LP, RailWorks
                                               Corporation, William Troy Byler and William
                                               Troy Byler, Jr., dated June 20, 2001.
</TABLE>

                  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
                           June 22, 2001.


                                       38
<PAGE>   39

                                   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.

                                             RailWorks Corporation

                                             /s/ Edward M. Cumberledge
                                             -----------------------------------
                                             By: Edward M. Cumberledge
                                                   Vice President and
                                                   Chief Financial Officer

Date: August 20, 2001


                                       39
<PAGE>   40

                                  EXHIBIT INDEX


<TABLE>
<CAPTION>
NUMBER                                   EXHIBIT                                   PAGE NUMBER
------                                   -------                                   -----------
<S>         <C>                                                                    <C>
4.5         Common Stock Purchase Warrant, issued July 31, 2001, to Bank of
            America, N. A., Certificate 1 of 4.

10.52       Asset Purchase Agreement between W. T. Byler Co., LP, RailWorks
            W. T. Byler, LP, RailWorks Corporation, William Troy Byler and
            William Troy Byler, Jr., dated June 20, 2001.
</TABLE>


                                       40