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                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                             ---------------------
                                   FORM 10-K
 
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<C>                    <S>
(MARK ONE)
         [X]           ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
                       THE SECURITIES EXCHANGE ACT OF 1934
                       FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
                                                OR
        [  ]           TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
                       THE SECURITIES EXCHANGE ACT OF 1934
                       FOR THE TRANSITION PERIOD FROM --------------- TO
                       ---------------
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                        COMMISSION FILE NUMBER: 0-24639
 
                             RAILWORKS CORPORATION
             (Exact name of registrant as specified in its charter)
 
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<S>                                <C>
            DELAWARE                   58-2382378
  (State or other jurisdiction      (I.R.S. Employer
of incorporation or organization)  Identification No.)
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                             1104 KENILWORTH DRIVE
                                   SUITE 301
                           BALTIMORE, MARYLAND 21204
                    (Address of Principal Executive Offices)
 
      Registrant's telephone number, including area code:  (410) 512-0500
 
           Securities registered pursuant to Section 12(b)of the Act:
 
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                                                           NAME OF EACH EXCHANGE
             TITLE OF EACH CLASS                            ON WHICH REGISTERED
             -------------------                           ---------------------
<S>                                            <C>
         Common Stock, par value $.01                     The Nasdaq Stock Market
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       Securities registered pursuant to Section 12(g) of the Act:  None
 
     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 [ ]
 
     Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.  [X]
 
     The aggregate market value of the voting and nonvoting common equity held
by non-affiliates of the Registrant (assuming for these purposes, but without
conceding, that all executive officers and directors are "affiliates" of the
Registrant) as of March 1, 1999 (based on the closing sale price of the
Registrant's Common Stock, par value $.01, as reported on The Nasdaq Stock
Market on such date) was $106,460,325 and there were 13,796,038 shares of Common
Stock outstanding.
 
                      DOCUMENTS INCORPORATED BY REFERENCE
 
     Portions of the Registrant's Proxy Statement for the Annual Meeting of
Stockholders to be held on May 27, 1999 are herein incorporated by reference in
Part III.
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                               TABLE OF CONTENTS
 
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                                   PART I
Item 1.    Business....................................................    1
Item 2.    Properties..................................................   14
Item 3.    Legal Proceedings...........................................   14
Item 4.    Submission of Matters to a Vote of Security Holders.........   14
Item X.    Executive Officers of the Registrant........................   14
 
                                   PART II
Item 5.    Market for Registrant's Common Equity and Related
             Stockholder Matters.......................................   16
Item 6.    Selected Financial Data.....................................   17
Item 7.    Management's Discussion and Analysis of Financial Condition
             and Results of Operations.................................   18
Item 7A.   Quantitative and Qualitative Disclosures About Market
             Risk......................................................   28
Item 8.    Financial Statements and Supplementary Data.................   28
Item 9.    Changes in and Disagreements with Accountants on Accounting
             and Financial Disclosure..................................   28
 
                                  PART III
Item 10.   Directors and Executive Officers of the Registrant..........   29
Item 11.   Executive Compensation......................................   29
Item 12.   Security Ownership of Certain Beneficial Owners and
             Management................................................   29
Item 13.   Certain Relationships and Related Transactions..............   29
 
                                   PART IV
Item 14.   Exhibits, Financial Statement Schedules, and Reports on Form
             8-K.......................................................   30
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                                     PART I
 
ITEM 1.  BUSINESS
 
OVERVIEW
 
     RailWorks Corporation ("RailWorks" or the "Company"), a Delaware
corporation organized in 1998, is a leading provider of integrated rail system
services and products to a diverse base of customers throughout the United
States. Management believes RailWorks is positioned to grow significantly due to
its ability to comprehensively design, supply, construct and maintain rail
systems. The Company's strategy is based on providing a full range of
rail-related services and products on a "turnkey" basis throughout North America
and offering rail system solutions under the "RailWorks" brand. RailWorks
provides track construction, rehabilitation, repair, maintenance and operations;
rail electrification and installation of communication and signaling systems;
and related products and supplies. The Company provides these services to a wide
variety of customers, including Class I and shortline railroads, publicly funded
transit authorities and commercial and industrial companies. RailWorks also
provides non-rail products and services such as electrical contracting, bridge
and highway support structures and related concrete products.
 
INDUSTRY OVERVIEW
 
     The rail passenger and freight industries have undergone significant
changes in recent years. Changes in the industry have affected Class I
railroads, shortline and regional railroads, passenger railroads and transit
systems. In addition, industrial and other commercial companies that own and
maintain their own rail systems have become more focused on transportation
logistics and achieving cost efficiencies. These changes have resulted in an
ongoing reconfiguration of the country's rail infrastructure, significant new
construction projects and emerging demand for outsourced construction,
rehabilitation, repair and maintenance services.
 
     Total Expenditures.  Based on information published by the American
Association of Railroads (the "AAR") and the American Public Transit Association
("APTA"), management estimates that expenditures by rail system operators for
domestic new construction, rehabilitation, repair and maintenance were
approximately $16 billion in 1998. Management estimates that the breakdown of
expenditures was as follows:
                            (EXPENDITURES PIE CHART)
 
     The Company also believes that expenditures for these services outside the
United States have increased significantly in recent years as a result of
infrastructure construction and modernization programs, as well as privatization
of large rail systems. In many instances, foreign governments and companies have
sought the expertise of designers, engineers and construction managers in the
United States.
 
                                        1
<PAGE>   4
 
     Class I Railroads.  According to the AAR, Class I track usage (defined as
tons shipped per track mile) has increased significantly from 4.7 million in
1988 to 7.8 million in 1997, representing a 5.9% compound annual growth rate. As
a result of industry consolidation, there are only eight Class I railroads (as
defined by the Surface Transportation Board ("STB")) operating in the United
States today, compared to 27 in 1980. These railroads are Burlington Northern
Sante Fe Railway, CSX Transportation, Kansas City Southern Lines, Norfolk
Southern Railway Company, Union Pacific Railroad, Canadian National, Canadian
Pacific and Consolidated Rail Corporation. According to the AAR, these railroads
accounted for 71% of the rail mileage operated in the United States and 91% of
railroad revenue in 1997. In recent years, the Class I railroads have sought to
rationalize their systems, for example by "double-tracking" certain high traffic
main lines and abandoning portions of their systems that generate lower volumes
of traffic. Mergers of Class I systems have also created significant
construction projects as the systems are reconfigured and integrated.
Historically, the major railroads have been vertical organizations that sought
to perform their own construction and maintenance by utilizing specialized
workforces and equipment for these functions. Management believes that as Class
I railroads seek to continue to improve their cost structures, they will
increasingly continue to outsource certain construction and maintenance
functions to independent contractors.
 
     Shortline and Regional Railroads.  In recent years, the number and coverage
of shortline and regional railroads (i.e., those railroads which are not Class I
railroads) have increased significantly. The Staggers Rail Act of 1980 provided
for partial deregulation of the railroad industry and created mechanisms by
which larger railroads could more easily dispose of portions of rail line. Since
that time, the larger railroad systems in the United States have streamlined
their operations by disposing of portions of their systems that generate lower
volumes of traffic and other companies have acquired portfolios of shortline
railroads. According to the AAR, there are approximately 550 shortline and
regional railroads, which in the aggregate generated approximately 9% of all
railroad revenue in 1997. The percentage of total track miles operated by
shortline and regional railroads in the United States increased to 29% in 1997
from approximately 17% in 1986. Shortline and regional railroads spend a
relatively large portion of their capital and operating budgets on maintenance
of their track assets, because these assets are often in poor condition when
they are acquired. These railroads typically utilize independent contractors for
their maintenance and construction programs, because they do not have systems
large enough to support the purchases of equipment and development of workforces
that would be required for these functions.
 
     Passenger Rail Transit Services.  The growth of major metropolitan areas
and the aging of existing rail systems have resulted in significant developments
in passenger rail transit services. Heavy rail, commuter rail (service between
metropolitan and suburban areas) and light rail (typically, short trains
operating on rights-of-way that are not separated from other traffic) have
emerged as attractive alternatives to bus or automobile transit and older
commuter rail systems have been rehabilitated and extended to handle increased
ridership. Many older urban systems (such as the New York City subway system)
are undergoing significant rehabilitation and/or modernization, while major
heavy rail systems built in the 1970s (such as the systems in San Francisco and
Atlanta) are being extended and upgraded. Additionally, there have been several
recent initiatives to develop high-speed rail transit networks between major
urban areas (for example, in Florida and the Northeast corridor). According to
APTA, there are now 18 commuter rail agencies in 14 urban areas, 14 heavy rail
agencies in 11 urban areas and 23 light rail agencies nationwide. According to
APTA, commuter and light rail ridership has increased 30% and 99%, respectively,
from 1985 to 1997. Since 1979, approximately 16 cities have constructed new
light rail-based transit systems and other cities have either extended or
refurbished their existing systems, with ridership increasing by approximately
150% over the period from 1978 through 1996. In June 1998, the President signed
the Transportation Equity Act for the 21st Century ("TEA 21"), which is expected
to provide $42 billion of funds for transit projects through 2003. See
"Government Regulation -- TEA 21." This represents more than a 50% increase of
funding from the previous six-year period. According to APTA, in 1997, 53.7% of
transit spending was derived from federal funding with the balance derived from
state and local sources. Accordingly, opportunities to provide rail-related
signaling, communication, electrical and track system construction,
rehabilitation, repair and maintenance services for transit systems have
increased and are expected to continue to increase significantly.
 
                                        2
<PAGE>   5
 
     Industrial Companies.  Companies install trackwork in their plants to
transport raw materials, equipment and finished goods. This trackwork consists
of connector lines that provide access to Class I or shortline railroads and
railyards to coordinate the shipment and delivery of cargo to and from their
plants. Companies are responsible for maintaining their own track and typically
construct and reconfigure trackage as part of plant construction and expansion.
Companies seek to optimize their track infrastructure in order to (1) reduce the
risk of accidents that can cause delays, property damage, and environmental
spills, (2) gain access to competing railroads to drive down costs and (3)
reduce transportation costs by minimizing the switching of railcars which is
time consuming and expensive. Such companies generally do not have the internal
resources to perform these services and typically use independent contractors to
design, construct and maintain these rail lines.
 
COMPANY HISTORY
 
     RailWorks was formed in March 1998 to become a leading nationwide provider
of rail system services, including construction and rehabilitation, repair and
maintenance, and related products. The Company currently has 20 operating
companies that have been in the rail systems business for an average of 29
years. The Company has acquired the operating companies through the following
transactions:
 
     - In August 1998, RailWorks acquired in separate concurrent transactions 14
       groups of companies engaged principally in the rail system services and
       products business and RailWorks consummated its initial public offering
       (the "IPO"). These groups of companies are referred to as the "Founding
       Companies."
     - In November 1998, RailWorks acquired two companies. These companies are
       referred to as the "1998 Acquired Companies."
     - In the first quarter of 1999, RailWorks acquired four companies. These
       companies are referred to as the "1999 Acquired Companies." The 1998
       Acquired Companies and the 1999 Acquired Companies are together referred
       to as the "Acquired Companies." The Acquired Companies had combined
       fiscal 1998 revenue of $83.1 million.
 
COMPETITIVE STRENGTHS
 
     Breadth of Services and Products.  Management believes that the Company
offers a broader range of services and products than most industry participants.
The Company believes that larger rail system operators are seeking to establish
relationships with contractors that specialize in rail system services and
products and that can provide efficient, integrated solutions over the entire
life cycle of their assets. The Company further believes that rail system
operators and industrial companies are increasingly seeking to enter into
arrangements with a smaller number of companies that can provide integrated
services on a national or regional basis, in order to ensure centralized
management of their rail assets, adherence to uniform quality standards and more
cost-effective procurement practices. The Company is able to cross-sell its
services and products as it combines the strengths of the operating companies to
provide its customers with integrated rail system solutions. For example, the
Company combines its design and engineering services with track construction to
offer a turnkey approach to track construction projects. The Company's ability
to bundle services, including construction, rehabilitation and maintenance,
under a single contract has allowed it to compete more effectively against
companies that provide a more limited range of services.
 
     Expansive Geographic Coverage.  The Company's 37 operating facilities
provide it with expansive geographic coverage that enables it to reach customers
throughout North America. These multiple facilities enable the Company to
undertake projects in a more cost effective manner than would be possible
without local facilities. RailWorks is able to perform projects at multiple
locations for its national account customers, enabling them to use a single
company for rail system projects throughout the United States and Canada. The
Company also can allocate equipment and technical specialists throughout the
United States and Canada to maximize asset utilization, satisfy regional demand
and complete projects in remote locations. Management believes its broad
geographic presence allows it to reduce the impact of local and regional
economic cycles, as well as weather-related or seasonal variations in its
business.
 
                                        3
<PAGE>   6
 
     Significant Market Presence.  In an industry that has traditionally been
comprised of regional competitors, management believes that the Company's size
gives it a competitive advantage. The Company's substantial contract bonding
capacity allows it to bid on additional projects and more substantial projects
that may not be available to smaller companies. This has allowed the Company to
significantly increase its project backlog since August 1998. In addition, the
Company's size provides significant economies of scale in terms of materials
purchasing, capital expenditures and administrative costs.
 
     Diverse Sources of Revenue.  The Company derives a significant portion of
its revenue from public transit authorities whose funding is appropriated from
federal, state and local sources and is less sensitive to economic cycles. In
addition, a portion of the Company's work is related to government-mandated
safety standards and, therefore, cannot be postponed. The Company sells its
services through a large number of individual contracts. No contract accounted
for more than 5.2% of the Company's pro forma revenue for the year ended
December 31, 1998. More than half of the Company's contracts have a duration in
excess of one year, providing the Company with a significant source of future
revenue. The Company has strong relationships with a wide variety of customers,
including:
 
     Class I railroads which have utilized RailWorks for repair and maintenance,
construction or engineering and supply:
 
     - CSX Transportation
 
     - Union Pacific Railroad
 
     - Burlington Northern Santa Fe Railway
 
     - Canadian National Railway
 
     Shortline and regional railroads, which have contracted with RailWorks for
track construction and maintenance work or product supply:
 
     - Alaska Railroad Corp.
 
     - Louisville & Indiana Railroad
 
     - Indiana Southern Railroad Company
 
     - Indiana & Ohio Rail Systems
 
     Publicly funded transit authorities, which have contracted with RailWorks
for electrical installations, signaling, communications and station projects:
 
     - New York City Transit Authority
 
     - New York Department of Transportation
 
     - Los Angeles Metropolitan Transit Authority
 
     - Connecticut Department of Transportation Rail Division
 
     Commercial and industrial companies, which have contracted with RailWorks
for track construction and maintenance and non-rail electrical contracting work:
 
     - United States Steel
 
     - Bethlehem Steel
 
     - Morse Diesel
 
     - Babcock & Wilcox
 
     Experienced Management.  The Company's senior operating managers have an
average of 26 years of experience in the rail services and products industry,
and many of them are or have previously served as leaders of industry trade
groups. The Company uses a corporate management structure that allows these
senior managers to focus on marketing and growing their operations instead of
administrative responsibilities.
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<PAGE>   7
 
Management has created a culture of cooperation and teamwork among the operating
companies that emphasizes dissemination of best practices among the Company's
regional and local management teams. For example, management believes that the
Company can successfully implement best practices in the areas of 24-hour
emergency rerailment services, annual maintenance contracts and efficient
inventory management. As of February 28, 1999, the Company's directors and
executive officers and senior managers of the operating companies beneficially
owned an aggregate of 36.9% of the Company's outstanding common stock.
 
STRATEGY
 
     Key elements of the Company's strategy include the following:
 
     Capitalize on Scale and Geographic Coverage.  By combining the operations
of the Founding Companies and the Acquired Companies, the Company has achieved
greater size and scope than regional and local contractors. The Company believes
that it will be able to achieve continued internal growth by building its
national accounts program to serve rail customers with multiple sites and by
enhancing its sales and marketing programs. Management expects to leverage the
Company's geographic network and greater bonding capacity to increase its
business. The Company currently has very limited international operations but
over time it may increase its activity in international markets, where
privatizations of railroads and large transit projects are creating increased
demand for sophisticated design and construction management services. The
Company also shares equipment and labor while managing multiple worksites. The
Company believes that this process of sharing resources and its comprehensive
bidding capabilities enable it to compete more effectively.
 
     Utilize Cross-Selling.  The Founding Companies and the Acquired Companies
have provided RailWorks with a broad range of rail-related services and
products. The Company intends to leverage its existing customer base to
"cross-sell" these services and products. For example, we will seek to provide
additional track construction and maintenance services to Class I railroads who
are already significant buyers of our track supplies. We also intend to continue
to emphasize the marketing of rail maintenance programs which provide recurring
revenue and strengthen customer relationships. The Company has been successful
in leveraging its maintenance relationships to obtain new rail system
installation projects. In addition, by placing a stronger emphasis on our design
and engineering services we expect to gain access to more track construction
opportunities.
 
     Expand Through Acquisitions.  Management believes the Company is
well-positioned to capitalize on the consolidation of the rail system services
and products industry on a regional and nationwide basis. The Company has
created an efficient operating platform that management expects will facilitate
the integration of future acquisitions. The Company's acquisition program
includes expanding geographic coverage throughout North America, broadening the
Company's lines of services and products, and adding density and operating
leverage within the Company's current markets. Management believes that the
experience and industry reputations of the senior managers of the operating
companies and senior corporate management of the Company provide it with a
competitive advantage in identifying, completing and integrating acquisitions.
Since the Company completed its IPO in August 1998, it has acquired six
companies with aggregate revenue of $83.1 million for fiscal 1998. The Company
currently has letters of intent to acquire four companies. The Company expects
to execute definitive purchase agreements, which will have customary closing
conditions (including completion of due diligence), in the second quarter of
1999. However, there can be no assurance that the Company will acquire any or
all of these companies. The Company's acquisition strategy includes the
following elements:
 
     - Enter New Geographic Markets.  Management intends to expand into
       geographic markets the Company does not currently serve by acquiring
       well-established contractors and related supply companies that are
       leaders in their regional or local markets. In addition, after an initial
       emphasis on acquisitions within the United States and Canada, management
       may pursue international acquisition opportunities.
 
     - Enter Complementary Services and Product Markets.  Management intends to
       continue acquiring companies offering complementary services and products
       to those currently offered by the operating companies. Specifically,
       management believes that there will continue to be attractive acquisition
                                        5
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opportunities with respect to design and engineering firms, designers and
manufacturers of signaling and communication systems and suppliers of electrical
equipment, rail, switches and panels, and concrete and steel ties.
 
     - Expand Within Existing Geographic Markets.  Management plans to acquire
       additional companies in many of the regions in which the Company
       currently operates in order to expand the volume and scope of the
       Company's operations in a particular market. Management will continue to
       pursue acquisitions of smaller companies to increase utilization of the
       Company's existing fixed assets and equipment or to gain access to new
       customers. Management believes these types of acquisitions will improve
       operating efficiencies and more effectively use the Company's capital
       resources without a proportionate increase in administrative costs.
 
     Reduce Operating Costs.  Key areas in which management has achieved and
expects to continue to achieve cost savings include (1) purchasing of equipment
and supplies, (2) insurance expenses and (3) financing costs. The Company also
has established an operating platform to achieve optimal utilization of
equipment, inventory and the Company's workforce. The Company expects to
continue to reduce administrative expenses through the integration of certain
accounting, financing, human resources and other functions.
 
SERVICES AND PRODUCTS
 
     The Company operates in three business lines: (1) transit services; (2)
rail construction services; and (3) rail products and supplies. The following
chart sets forth the percentage of 1998 pro forma revenue that was represented
by each business line.
LOGO
 
     Transit Services
 
     The Company's transit services business includes all products and services
that it provides to rail-based public transit agencies and authorities in
various metropolitan markets. The Company typically contracts with these
agencies to install (1) electric train traction power systems (by means of third
rail or overhead catenary wiring), (2) train control signal systems, (3) train,
station and command station communications systems, (4) general electrical
installations for lighting and other applications and (5) tunnel and station
track. The Company can perform major new projects that involve track
installation including excavation, grading, paving and drainage improvements as
well as minor rehabilitation projects. Projects for new public transit lines
generally include the installation of all of these systems, giving the Company a
competitive advantage.
 
     In addition, the Company leverages its knowledge of transit systems to
efficiently provide mechanical services, including installations of heating and
air conditioning systems, ventilating and pump rooms, fan chambers, elevators
and escalators. The Company has experience with rubber tired vehicular people
mover systems, installing concrete guided trackway, power guide beam, central
guidance rail, walkway and handrails.
 
                                        6
<PAGE>   9
 
     The duration and size of the Company's transit contracts vary greatly
depending on the scope of the project. Large scale transit projects have had a
term of up to four years and have a total contract size of up to $100 million.
The Company has performed installations for most of the country's transit
authorities, including those in Atlanta, Boston, Chicago, Los Angeles, New York,
Philadelphia, Portland, San Diego, San Francisco, St. Louis and Washington, D.C.
The Company generally performs its services as either a prime contractor
directly to the transit agencies or as a subcontractor to large civil
engineering contractors or equipment manufacturers. Contracts with transit
authorities are competitively bid and awarded on a fixed price basis generally
to the lowest bidder. As a result, the Company focuses its business to (1)
provide accurate bid estimating to both win contracts and ensure a profit and
(2) monitor construction costs to ensure that projects are completed on time and
within budget. The Company's bidding process is highly involved and draws on the
expertise of many individuals within the Company. The Company carefully
considers a variety of factors, including material prices, local labor rates and
practices, its knowledge of the work site and contracting practices of the
transit authorities. The Company has a rigorous project review process that
continually monitors the incurred labor and material costs against an initial
plan to avoid overruns. The Company believes that these methods provide it with
a competitive advantage.
 
     As an outgrowth of its transit-related business, the Company also performs
commercial real estate electrical installations (primarily in the New York City
metropolitan area) and industrial electrical installations (throughout the
United States). The Company contracts for these projects on an opportunistic
basis, that is, when it has resources available and can realize attractive
returns. The Company does not intend to grow its non-rail-related businesses
beyond its current scope.
 
     Rail Construction Services
 
     The Company's rail construction services business consists of providing
rail design, construction and maintenance services to Class I and shortline
railroads and industrial companies with on-site rail infrastructure. Rail design
is a highly specialized discipline and there are a limited number of companies
that can provide these services. The Company utilizes its rail design
capabilities to facilitate access to rail construction projects. By having the
ability to provide integrated design-build services, the Company has been
successful in increasing its project flow. The Company's rail construction
efforts primarily involve the construction of main line segments, passing
sidings, rail yards, connector segments between railroads and industrial sites,
turnouts and track and road intersections. With respect to track maintenance,
the Company enters into multi-year contracts with several customers to provide
ongoing maintenance of on-site rail infrastructure. Maintenance contracts allow
the Company to obtain recurring revenues and gain access to additional new
construction projects from the same customer. Additional rail contracting
services also include the removal of tracks which are no longer in use.
 
     Rail construction and maintenance are highly complex processes that usually
involve numerous separate parties that design, supply and construct the
different elements of the track. Following the design stage, construction
entails (1) site preparation and grading, (2) the laying of ballast (gravel) to
provide a solid track fixation medium, (3) the positioning of cross ties, (4)
securing rail with high precision using metal plates, spikes and clamps, (5)
installing complex track crossings and turnouts and (6) installing other track
related systems such as signal, communications and automatic train control and
safety devices. Management believes that the Company's ability to bundle these
services on a turnkey basis provides it with a significant competitive
advantage.
 
     The Company provides its rail services on a nationwide basis. Since it is
generally not economical to work on contracts outside of a 300 mile radius of an
operating facility, this broad footprint facilitates servicing customers with
multiple sites across regions. Most of the Company's competitors in this market
are regionally focused. Management believes the Company has a competitive
advantage due to its ability to direct equipment and labor resources to regions
with higher demand due to economic or seasonal fluctuations. The Company also
maintains track and track material inventory at each location. By coordinating
information across its network the Company is able to maximize inventory
utilization and improve supply for projects in different regions.
 
                                        7
<PAGE>   10
 
     Rail Products and Supplies
 
     The Company manufactures wooden and concrete products and rail fastening
systems out of four facilities. The Company's wooden products include cross ties
and switch and bridge timbers. The Company's wood treating operations consist of
pressure-treating pre-cut beams of hardwood to provide weather-proofing. These
treated cross ties are used for securing rail for tracks or assembled to
construct bridge support structures. Concrete products consist primarily of
pre-cast structural components for bridges and other support structures. The
Company's concrete operations consist of pouring mixed concrete into large molds
to create specialized structural support components. The Company also designs
and manufactures rail fastening systems which are primarily used in overhead and
portal crane rail applications.
 
     The Company's rail construction operations source rail and other track
materials (primarily metal components such as plates and spikes) from (1) the
reclamation of existing track that is no longer in use, (2) track materials
brokers and (3) manufacturers. The Company sells its rail products and supplies
directly to contractors (including its own subsidiaries) and to Class I and
shortline railroads that perform their own track construction and maintenance.
Some of the Company's products are used in non-rail applications such as highway
construction and decorative landscaping.
 
     The Company's product capabilities provide it with an advantage in
supplying its track construction and maintenance operations. This is
particularly important in the context of wooden cross ties as the market has
experienced shortages in the past. There are a limited number of cross tie
manufacturing facilities in North America due to stringent regulations. The
Company enhances its competitive advantage by having uninterrupted access to
cross ties and other track products. The Company has also developed strong
customer relationships through products sales, particularly with Class I and
shortline railroads. Additionally, the Company leases track construction and
maintenance equipment. By offering operating leases for such equipment, the
Company has formed additional industry relationships, created an additional
revenue source and established an avenue to fully utilize the operating life of
its equipment. As part of its growth strategy, the Company intends to leverage
these relationships to cross-sell other services, particularly design and
engineering as well as track construction and maintenance.
 
ACQUISITION PROGRAM
 
     Management believes the combination of management's acquisition expertise
and the highly fragmented nature of the rail services and products industry
provides the Company with significant acquisition opportunities. RailWorks
identifies acquisition candidates by leveraging the relationships of its
experienced operational managers and utilizing its dedicated acquisitions team.
The Company focuses on acquiring companies that have a strategic fit, provide
RailWorks with cost synergies, complement its geographic presence, and
demonstrate a willingness to learn and share best practices through open
communications. After an initial screening, management evaluates each
acquisition candidate through its due diligence process, which includes detailed
financial and operational reviews. During the due diligence process, the Company
often identifies a number of areas in which it expects to realize efficiencies
during the integration process. The Company offers acquisition candidates
several benefits, including:
 
     - expertise to expand in specialized markets;
     - enhanced productivity through the reduction of administrative burdens;
     - national name recognition;
     - increased bonding capacity;
     - access to public capital markets; and
     - the opportunity for a continued role in management.
 
Other key elements of the Company's acquisition program include:
 
     Retain and Provide Incentives to Existing Management.  The Company seeks
acquisitions of successful companies whose senior managers will remain as
employees of the Company and continue to operate their respective businesses on
a local level. The Company motivates these managers and aligns their interests
with those of the Company through (1) employment agreements, (2) shares of
common stock as a portion of the
 
                                        8
<PAGE>   11
 
acquisition consideration and (3) a structured earnout program which is tied to
the acquired entity meeting specific earnings targets.
 
     Leverage Industry Reputation and Contacts.  The Company utilizes existing
industry relationships established by the operating companies and Company
management to develop a broad base of potential acquisitions. The Company
intends to remain actively involved in industry organizations on local and
national levels, working with independent companies to support issues of
interest to the Company.
 
     Acquisition Consideration.  In the course of implementing its acquisition
strategy, the Company has typically used cash and performance-based earnouts as
consideration for the acquired businesses. In the future, the Company expects to
use a combination of cash, common stock, promissory notes and performance-based
earnouts as consideration for acquired businesses.
 
     Since completion of the IPO, RailWorks has acquired the following
companies:
 
<TABLE>
<CAPTION>
 ACQUISITION               NAME OF               FISCAL 1998
    DATE               ACQUIRED COMPANY            REVENUE       HEADQUARTERS           BUSINESS LINE
-------------   ------------------------------  -------------   ---------------  ---------------------------
                                                (in millions)
<S>             <C>                             <C>             <C>              <C>
November 1998   Armcore Railroad Contractors,
                Inc...........................      $ 3.8       Frankfort, IN    Rail construction services
November 1998   Sheldon Electric Co., Inc.....        1.4(1)    Long Island      Transit services
                                                                City, NY
January 1999    Gantrex Group.................       13.8       Ajax, Ontario,   Rail products and supplies
                                                                Canada
January 1999    Mid West Railroad Construction
                and Maintenance Corporation of
                Wyoming.......................       13.2       Salt Lake City,  Rail construction services
                                                                UT
January 1999    FCM Rail, Ltd. ...............        4.9       Grand Blanc, MI  Rail products and supplies
March 1999      F&V Metro Contracting Corp.
                and Affiliates ...............       46.0       Farmingdale, NY  Transit services
</TABLE>
 
---------------
 
(1) Railworks acquired certain assets and ongoing contracts of Sheldon Electric
    Co., Inc. Therefore, only revenue since the date of acquisition ($1.4
    million since November 4, 1998) has been included above.
 
SOURCES OF SUPPLY
 
     The Company purchases new rail from a limited number of suppliers. New rail
is generally installed only on main lines, where the track may carry high
volumes of heavy traffic at high speeds. Over time, rail is removed, inspected
and, if in the appropriate condition, refurbished for sale as "relay" rail.
Relay rail is typically installed on secondary (non-main line) tracks, as well
as yard or branch tracks. Total rail life before scrapping may be as long as 60
years. The Company also purchases a large volume of relay rail that is
refurbished by third parties and resold.
 
     Similarly, the Company regularly purchases entire sections of track that
are removed and subsequently disassembled at the Company's facilities. The
Company inspects the various track components -- rail, ties, and
accessories -- and items are placed into its inventory (either in their "as
removed" condition or after being refurbished by third parties) or sold for
scrap. Additionally, in connection with certain repair and rehabilitation
projects, the Company acquires trackwork that is removed. Management believes
the Company's network of contractors enables the Company to acquire
previously-used track on comparatively advantageous terms.
 
     For installing electrical signaling and communication systems for transit
authorities, the Company purchases equipment from a limited number of suppliers.
 
     Certain of the Company's operating companies process creosote-treated
wooden ties. Their operations include the purchase of raw lumber, trimming the
lumber to specified sizes, pressurized impregnation of the
 
                                        9
<PAGE>   12
 
lumber with creosote preservative and finishing of the ties (which would include
the pre-drilling of spike holes and the attachment of plates, as specified by
the customer). The service life of pressure treated ties has been extended to a
range of 25 to 40 years.
 
     Management believes the Company is able to purchase materials in sufficient
quantities to permit it to realize purchasing economies and discounts from its
suppliers. Historically, the cost of the lumber used to produce wooden ties,
steel used to produce rail and copper used to produce electrical wiring has
fluctuated significantly due to market and industry conditions. Increasing
demand for these raw materials may result in cost increases. There can be no
assurance that the Company will be able to recoup any such increases by
increasing the prices of its products. Further, a reduction in supply of lumber,
steel or copper due to increased demand or other factors could have an adverse
effect on the Company's business, financial condition and results of operations.
 
SALES AND MARKETING
 
     The Company maintains a targeted national sales program to further develop
the business of each of the operating companies. The focus of this initiative is
on the Class I railroads and other large industrial companies with facilities in
multiple areas. Prior to their acquisition by the Company, the individual
operating companies had been unable to serve such customers on a comprehensive,
nationwide basis. In addition, the Company's ability to offer electrical
installation services together with rail construction, rehabilitation, repair
and maintenance services and related products provides the Company with
opportunities to cross-sell its services to large industrial companies.
Management believes that the Company has an advantage over its competitors since
it can offer consistent, high-quality service and products throughout the United
States. The Company's expansive geographic coverage enables customers to use its
services and products in multiple locations rather than dealing with numerous
regional or local companies.
 
     The Company has achieved significant synergies in its marketing programs.
Management also believes that the Company has developed and will continue to
refine cross-selling programs under which:
 
          (1) the Company's design and engineering groups provide timely leads
     to its construction, product supply and electrical installation companies,
 
          (2) the Company's electrical signaling and communications companies,
     which have previously utilized third parties for track engineering and
     construction, utilize other operating companies for these projects, and
 
          (3) the Company's track construction companies contract with other
     operating companies for signaling, communication and electrical
     installation services.
 
     Similarly, the Company's product supply companies have, over the years,
developed long-term relationships with the Class I railroads and large
industrial companies, and management believes that these relationships provide
an attractive basis for marketing the Company's construction and maintenance
services.
 
BIDDING AND CONTRACTS
 
     A majority of the Company's pro forma revenue for the year ended December
31, 1998 was derived from contracts entered into through a competitive bidding
process. Public agencies, including the New York City Transit Authority
("NYCTA"), that solicit bids are generally required to accept the lowest cost
proposal. In some cases, the party that submitted the low bid must first pass a
technical qualification before being awarded a project. Following the acceptance
of a bid, the Company typically enters into a contract with the customer. The
Company's track construction and repair projects generally do not involve
long-term contracts.
 
     Many projects that are competitively bid require the company that is
awarded the project to post a bond, which varies according to the size of the
project. Each company has a bonding limit, which is based on the company's
working capital and work in progress. The bond provides the customer with
insurance in the event that the company is unable to complete the project.
Accordingly, the ability of each of the operating companies to bid on larger
projects had, prior to their acquisition by the Company, been limited by their
 
                                       10
<PAGE>   13
 
ability to obtain the required bonding. The size of the Company, as compared to
the size of the individual operating companies, facilitated increases in the
bonding limits for each operating company thereby better positioning them to bid
on and undertake significantly larger construction and maintenance projects.
Management believes that the increased bonding capacity permits the Company to
bid on and undertake more projects than could smaller companies.
 
CUSTOMERS
 
     The following table lists the Company's top four customers in each category
on a pro forma basis giving effect to the acquisitions of the Founding Companies
and the Acquired Companies as if they had occurred on January 1, 1998:
 
<TABLE>
<CAPTION>
             CLASS I RAILROADS                           SHORTLINE AND REGIONAL RAILROADS
--------------------------------------------       --------------------------------------------
<S>                                                <C>
CSX Transportation                                 Alaska Railroad Corporation
Union Pacific Railroad                             Louisville & Indiana Railroad
Burlington Northern Santa Fe                       Indiana Southern Railroad Company
Canadian National Railway                          Indiana & Ohio Rail Systems
</TABLE>
 
<TABLE>
<CAPTION>
          TRANSIT AUTHORITIES AND                            INDUSTRIAL COMPANIES AND
             COMMUTER RAILROADS                               COMMERCIAL ENTERPRISES
--------------------------------------------       --------------------------------------------
<S>                                                <C>
NYCTA (New York)                                   United States Steel
NYDOT (New York)                                   Bethlehem Steel
LAMTA (Los Angeles)                                Morse Diesel
CDOT Rail Division (Connecticut)                   Babcock & Wilcox
</TABLE>
 
     The Company derived approximately 43.7% of its pro forma revenue for the
year ended December 31, 1998 from its top ten customers. Approximately 21.1% of
the Company's 1998 pro forma revenue was derived from projects undertaken for
the 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 competitive, and projects
are often awarded through competitive bidding. The Company competes with other
rail system construction, rehabilitation and maintenance companies, electrical
contractors and suppliers of products. Certain competitors have significantly
greater resources than the Company, may provide a broad range of services and
products and may have sufficient bonding capacity to undertake large projects.
The Company competes on the basis of its breadth of services and products,
ability to take on large projects and nationwide presence. Any inability of the
Company to compete successfully against existing and future competitors would
have a material adverse effect on the Company's business, results of operations
and financial condition. Moreover, the Company may depend in part upon
opportunities for consolidation in the rail system services and products
industry in order to execute effectively its acquisition and vertical
integration strategy. If the Company's customers do not receive the Company's
vertical integration strategy favorably, such customers have numerous
alternative sources of services and supply.
 
                                       11
<PAGE>   14
 
RISK MANAGEMENT AND SAFETY
 
     Because the Company's business is labor intensive, workers' compensation is
a significant operating expense for the Company. The Company could be exposed to
liability for the acts or negligence of its employees who cause personal injury
or damage while on assignment, as well as claims of misuse of customer
proprietary information or theft of client property. The Company has adopted
policies and procedures intended to reduce its exposure to these risks.
 
     The Company maintains insurance against these risks with policy limits it
considers sufficient and consistent with industry standards. The Company has
retained a risk management professional who is responsible for claims management
and the establishment of appropriate reserves for the deductible portion of
claims. The Company holds regular meetings with the presidents of the operating
companies at which safety issues are discussed. The Company also conducts
routine safety inspections of local work sites.
 
EQUIPMENT
 
     The Company owns and maintains specialized equipment used in rail
construction, rehabilitation, repair and maintenance. This equipment may be
moved between job sites and, consequently, the Company is seeking to increase
the sharing of equipment between the operating companies where it is appropriate
and cost effective. For example, during the winter months, the operating
companies located in the Northern United States could relocate their equipment
to the operating companies located in the South. Each of the operating companies
generally performs its own equipment maintenance. The Company intends to manage
its equipment through its equipment leasing subsidiary, which will maintain a
comprehensive database that tracks the use of all of the Company's equipment.
 
GOVERNMENT REGULATION
 
     Overview.  In addition to the environmental, safety and other regulations
generally applicable to all businesses, the Company's business is impacted by
regulations that are administered by the STB, the successor to the Interstate
Commerce Commission ("ICC"), and the FRA and by regulatory agencies in the
various states in which the Company and its customers do business. Since 1980,
there has been a significant relaxation in regulations governing the sale,
leasing or other transfer of railroad properties, and this change has favorably
affected the operations of many of the Company's customers. Various interests in
the United States have sought and continue to seek reimposition of government
controls on the railroad industry in areas deregulated in whole or in part since
1980, including stricter rate regulation and more onerous labor protection
conditions for rail line transfers.
 
     Railroad Regulations.  The ICC Termination Act, which was enacted on
December 29, 1995, eliminated the ICC as an independent agency and created the
STB, a new agency within the Department of Transportation which began
functioning on January 1, 1996. The ICC Termination Act changed the procedure
and timing for federal approval of rail projects, including abandonments, line
sales, mergers, rates and tariffs, simplifying and streamlining the abandonment
process. The FRA regulates railroad safety and equipment standards, including
track maintenance and train speed standards, special procedures for handling
hazardous shipments, locomotive and railcar inspection and repair requirements,
operating practices and crew qualifications. The Roadway Worker Protection
Rules, which were promulgated by the FRA, apply to rail contractors and
establish certain safety criteria that must be complied with on rail projects.
 
     TEA 21.  On June 9, 1998, the President signed TEA 21, the six-year surface
transportation program that represents a significant development in the federal
transit program. TEA 21, the largest infrastructure funding bill in U.S.
history, authorizes funding for transit in the amount of $42 billion through
2003. TEA 21 authorizes over 50 percent more than the 1991 Intermodal Surface
Transportation Efficiency Act, whose funding has expired.
 
     State Regulatory Agencies.  State regulatory agencies no longer have
authority to engage in economic regulation of railroads that are part of the
intrastate network. State and local governments generally retain
 
                                       12
<PAGE>   15
 
jurisdiction over local rail safety matters, such as the installation of grade
crossings and grade crossing warnings devices.
 
ENVIRONMENTAL MATTERS
 
     The Company's operations and properties are subject to environmental laws
and regulations relating to pollution and protection of the environment and
public and employee health and safety. The principal environmental regulatory
requirements applicable to the Company's operations relate to the use of
creosote to treat lumber, and the generation, storage, transportation, treatment
and disposal of solid and hazardous wastes. The Company believes that its
operations have all required environmental permits and currently are in
compliance, in all material respects, with applicable regulatory requirements.
 
     The Company has had environmental assessments performed for recent
acquisitions. Based on these reports and available information, the Company is
not aware of any significant environmental exposures or claims against it.
However, the historical and current uses of the Company's facilities may have
resulted in spills or releases of various hazardous materials, which now, or in
the future, could require remediation. The Company also may be subject to
requirements related to remediation of hazardous materials that have been
released into the environment at properties that it owns or operates, or owned
or operated in the past or at properties to which it sends, or may have sent,
hazardous materials for treatment or disposal. Such remediation requirements
generally are imposed without regard to fault, and liability for any required
environmental remediation can be substantial.
 
EMPLOYEES
 
     As of December 31, 1998, the Company employed approximately 2,000
employees. The Company believes that its relations with its employees are good.
 
     Approximately 66.9% of the Company's employees are members of certain labor
unions and are employed pursuant to collective bargaining agreements. Certain of
the operating companies are parties to collective bargaining agreements with the
International Brotherhood of Electrical Workers, Laborers' International Union
of North America, the International Union of Operating Engineers, United
Brotherhood of Carpenters and Joiners of America and the United Brotherhood of
Teamsters. Certain of the Company's customers only hire unionized labor. The
Company's largest collective bargaining agreement, covering 1,054 employees,
expires in June 2001. Except for a one-week work stoppage in Connecticut by the
United Brotherhood of Teamsters in June 1994, the Company has not experienced
any work stoppages in the past five years.
 
INFORMATION TECHNOLOGY SYSTEMS
 
     The Company is in the process of implementing integrated information
technology systems that will be utilized by each of the operating companies.
These information technology systems will be used for a variety of purposes,
including monitoring inventory levels, tracking the progress of construction
projects and integrating the Company's financial, general ledger, payables and
receivables functions. In addition, the Company will network its corporate
offices to the offices of its operating companies and will have e-mail
capability at all offices. The Company expects that the required systems will be
purchased and installed in 1999 and that its expenditures for these systems will
not be material to the Company. All of the new systems will be Year 2000
compatible. Until these new systems are fully operational, each of the operating
companies will continue using the information systems that are currently being
used.
 
                                       13
<PAGE>   16
 
ITEM 2.  PROPERTIES
 
     The Company's corporate offices are in approximately 3,000 square feet of
leased space in a suburb of Baltimore, Maryland. In addition to its corporate
offices, the Company leases 27 facilities and owns 10 facilities. these
facilities consist of local offices, storage yards, distribution facilities,
warehouses and wood processing plants.
 
ITEM 3.  LEGAL PROCEEDINGS
 
     Not applicable.
 
ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
     Not applicable.
 
ITEM X.  EXECUTIVE OFFICERS OF THE REGISTRANT
 
     The following table sets forth certain information regarding the Company's
executive officers:
 
<TABLE>
<CAPTION>
NAME:                                        AGE                    POSITION
-----                                        ---                    --------
<S>                                          <C>   <C>
John G. Larkin.............................  43    Chairman of the Board, Chief Executive
                                                   Officer and Director
Michael R. Azarela.........................  40    Executive Vice President, Chief Financial
                                                   Officer and Director
John Kennedy...............................  60    Vice President, Chief Operating
                                                   Officer -- Track Contractors and Director
Peter Alan Pasch...........................  48    Vice President, Chief Operating Officer --
                                                   Transit Operations and Director
Robert D. Wolff............................  56    Vice President, Chief Operating Officer --
                                                   Western Track Construction & Maintenance
</TABLE>
 
     John G. Larkin has been the Chairman of the Board and Chief Executive
Officer and a director of RailWorks since its inception in March 1998. For the
past 21 years, Mr. Larkin has worked in the transportation industry. From
December 1994 to February 1998, Mr. Larkin was a managing director of BT Alex.
Brown Incorporated, where he focused on the transportation industry. Prior
thereto, he served in various capacities at BT Alex. Brown Incorporated since
1987, including as an equity research analyst, focused exclusively on the
transportation industry. From 1986 to 1987, Mr. Larkin was Assistant Vice
President of CSX Transportation, Inc., where he was responsible for strategic
planning and analysis. From 1985 to 1986, Mr. Larkin was Director of Strategic
Planning of Seaboard System Railroad, Inc. From January 1979 through July of
1982, Mr. Larkin served as an engineering project coordinator for Day &
Zimmermann, Inc., an engineering and construction management firm. During this
period, Mr. Larkin was focused exclusively on railroad and rail transit design
and valuation projects. Mr. Larkin has a Master of Business Administration from
Harvard University and a Master of Science in Civil Engineering from the
University of Texas.
 
     Michael R. Azarela has served as the Executive Vice President, Chief
Financial Officer and a director of RailWorks since May 1998. Mr. Azarela was
Chief Executive Officer of L.K. Comstock from February 1998 to August 1998 and
Senior Vice President and Chief Financial Officer of CGI and Spie from May 1994
to February 1998, Chairman of the Board of Comstock Holdings, Inc. since
November 1996 and Vice President and Treasurer of L.K. Comstock from September
1992 to April 1994 and in various other positions at Comstock since June 1983.
Mr. Azarela is a certified public accountant and has a Master of Business
Administration from Iona College.
 
     John Kennedy has served as Vice President and a director of RailWorks since
its inception in March 1998, and Chief Operating Officer -- Track Contractors
since January 1999. From March 1998 to January 1999, he was Chief Operating
Officer of RailWorks. Mr. Kennedy has served as President of Kennedy
 
                                       14
<PAGE>   17
 
Railroad, a Founding Company, from June 1965 to February 1998, as President of
Railcorp, Inc. from April 1986 to February 1998 and as Principal of
Alpha-Keystone from January 1996 to February 1998. From 1980 to 1988, Mr.
Kennedy served as an Elected Member of the Pennsylvania House of
Representatives.
 
     Peter Alan Pasch has served as a director of RailWorks since the IPO and as
Vice President and Chief Operating Officer -- Transit Operations since January
1999. From August 1998 to January 1999, Mr. Pasch served as Chief Executive
Officer of Comstock and from April 1997 to August 1998 he served as President
and Chief Operating Officer of Comstock. From October 1995 to April 1997, Mr.
Pasch served as Executive Vice President of Comstock in charge of operations
outside the New York Metropolitan area. Mr. Pasch served as Executive Vice
President of Comstock from October 1987 to September 1995. Mr. Pasch joined
Comstock in 1973 after receiving his Master of Engineering Degrees from
Rensselaer Polytechnic Institute. Mr. Pasch is a Registered Professional
Engineer in 45 states, a Master Electrician in 18 states and is a member of the
International Brotherhood of Electrical Workers.
 
     Robert D. Wolff has served as Vice President, Chief Operating
Officer -- Western Track Construction and Maintenance of RailWorks since January
1999. From 1977 to January 1999, Mr. Wolff was the Chief Executive Officer of
Mid West Railroad Construction & Maintenance Corp. Mr. Wolff is a past President
of the National Railroad Construction and Maintenance Association, Inc.
 
     Each of the above executive officers was elected by the Board of Directors
to hold office until the next annual election of officers and until his
successor is elected and qualified or until his earlier resignation or removal.
 
                                       15
<PAGE>   18
 
                                    PART II
 
ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
 
     RailWorks Corporation's Common Stock began trading on July 30, 1998 in the
Nasdaq National Market under the symbol "RWKS." The following table details the
high and low bid information for the Common Stock as reported by the Nasdaq
National Market for the periods indicated:
 
<TABLE>
<CAPTION>
                                                               HIGH     LOW
                                                              ------   -----
<S>                                                           <C>      <C>
  Third Quarter 1998 (from July 30, 1998)...................  $12.00   $5.69
  Fourth Quarter 1998.......................................    9.50    4.56
</TABLE>
 
     On March 23, 1999, (1) the last sale price of the Common Stock as reported
by the Nasdaq National Market was $11.50 per share and (2) there were 124
holders of record of the Common Stock.
 
     The Company has never paid any cash dividends on its Common Stock, and the
Board of Directors currently intends to retain all earnings for use in the
Company's business for the foreseeable future. Any future payment of dividends
will depend upon the Company's results of operations, financial condition, cash
requirements, restrictions contained in credit and other agreements and other
factors deemed relevant by the Board of Directors.
 
Recent Sales of Unregistered Securities
 
     On October 14, 1998 the Company issued 13,700 unregistered shares of its
non-voting Series A Convertible Preferred Stock to BT Alex. Brown Incorporated
in exchange for 1,370,000 shares of its Common Stock pursuant to the exemption
from registration under Section 4(2) of the Securities Act of 1933.
 
     In 1998, the Company issued options to certain employees and non-employee
directors under its stock option plan to purchase an aggregate of 30,000 shares
of Common Stock at exercise prices equal to the fair market value of the Common
Stock on the date of grant. Such options were issued in reliance on the
exemption contained in Rule 701 under the Securities Act of 1933.
 
     In 1998, the Company granted an aggregate of 1,200,393 shares of Common
Stock to an aggregate ten officers and key employees pursuant to the exemption
from registration under Section 4(2) of the Securities Act of 1933.
 
                                       16
<PAGE>   19
 
ITEM 6.  SELECTED FINANCIAL DATA
 
     RailWorks acquired the Founding Companies concurrently with the
consummation of the IPO on August 4, 1998. For accounting and financial
statement purposes, Comstock Holdings, Inc. (one of the Founding Companies) was
identified as the "accounting acquirer" consistent with the requirements of SAB
No. 97 of the Securities and Exchange Commission. All other acquisitions have
been accounted for as purchases in accordance with APB No. 16.
 
<TABLE>
<CAPTION>
                                                     PREDECESSOR COMPANY              RAILWORKS
                                          -----------------------------------------   ---------
                                                         YEAR ENDED DECEMBER 31,
                                          -----------------------------------------------------
                                          1994(1)    1995(1)    1996(1)    1997(1)     1998(2)
                                          --------   --------   --------   --------   ---------
                                              (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                       <C>        <C>        <C>        <C>        <C>
STATEMENT OF OPERATIONS DATA:
Revenue.................................  $157,749   $181,616   $188,767   $153,610   $212,533
Cost of revenue.........................   137,607    164,777    169,303    136,678    182,817
                                          --------   --------   --------   --------   --------
Gross profit............................    20,142     16,839     19,464     16,932     29,716
Selling, general and administrative
  expenses..............................    16,963     15,624     15,053     13,733     17,040
Non-recurring expenses..................        --         --         --         --     19,965(3)
Transaction fees........................        --         --         --         --      1,281(4)
Depreciation and amortization...........     1,447      1,263      1,365       (213)     2,105
                                          --------   --------   --------   --------   --------
Operating income (loss).................     1,732        (48)     3,046      3,412    (10,675)
Interest expense........................       (38)      (871)    (2,023)    (1,761)    (2,334)
Interest and other income...............     2,401      2,115        476        975      1,634
Income (loss) before income taxes.......     3,134    (19,822)       558      2,626    (11,375)
Net income (loss).......................     2,782    (19,972)        58      1,428    (12,847)
Basic and diluted earnings (loss) per
  share.................................                                        .48      (1.67)
</TABLE>
 
<TABLE>
<CAPTION>
                                                      PREDECESSOR COMPANY             RAILWORKS
                                            ---------------------------------------   ---------
                                                            AS OF DECEMBER 31,
                                            ---------------------------------------------------
                                            1994(1)    1995(1)    1996(1)   1997(1)    1998(2)
                                            --------   --------   -------   -------   ---------
                                                          (DOLLARS IN THOUSANDS)
<S>                                         <C>        <C>        <C>       <C>       <C>
BALANCE SHEET DATA:
Working capital(5)........................  $ 30,456   $ 31,915   $19,257   $26,500   $ 67,391
Total assets..............................    89,168     86,108    84,344    68,352    228,636
Total debt................................        --     19,241    24,890    15,004     51,504
Stockholders' equity......................    56,329     20,567    16,990     1,438    110,008
</TABLE>
 
---------------
 
(1) The selected historical consolidated financial data as of and for the fiscal
    years ended December 31, 1994, 1995, 1996 and 1997 are derived from the
    financial statements of Comstock Holdings, Inc., the accounting acquirer,
    and its predecessor, L.K. Comstock & Company, Inc., for the respective
    periods.
(2) The selected historical consolidated financial data for the fiscal year
    ended and as of December 31, 1998 are derived from the Company's
    Consolidated Financial Statements, which are comprised of financial data of:
     - Comstock Holdings, Inc., the accounting acquirer, for the year ended
       December 31, 1998;
     - the Founding Companies, other than Comstock Holdings, Inc., for the
       period from August 1, 1998 through December 31, 1998; and
     - the 1998 Acquired Companies for the period from November 4, 1998 through
       December 31, 1998.
(3) Consists of $14.5 million in restricted common stock granted to the
    Company's officers, $2.9 million related to the settlement of employee
    benefit obligations of one of the operating companies and corporate
    relocation costs, $2.2 million in estimated legal and settlement costs in
    connection with former operations of one of the operating companies and
    $400,000 in common stock gifts made by certain employees of an operating
    company to other employees of that operating company.
 
                                       17
<PAGE>   20
 
(4) Represents offering expenses incurred in connection with the IPO.
(5) Working capital is the sum of cash, accounts receivable, costs and estimated
    earnings in excess of billings on uncompleted contracts, inventories,
    deferred tax asset and other current assets, less the sum of current
    maturities of long-term debt, accounts payable and accrued liabilities,
    accrued payroll and related withholdings, billings in excess of costs and
    estimated earnings on uncompleted contracts and other current liabilities.
 
ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         OF OPERATIONS
 
     The following discussion of the financial condition and results of
operations of the Company should be read in conjunction with the Company's
Consolidated Financial Statements and the related Notes thereto appearing
elsewhere herein.
 
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
 
     Certain statements made in this report, and other written or oral
statements made by or on behalf of the Company, may constitute "forward-looking
statements" within the meaning of the federal securities laws. Statements
regarding future events and developments and the Company's future performance,
as well as management's expectations, beliefs, plans, estimates or projections
relating to the future, are forward-looking statements within the meaning of
these laws. All forward-looking statements are subject to certain risks and
uncertainties that could cause actual events to differ materially from those
projected. Such risks and uncertainties include, among others, the lack of a
combined operating history of the Company's operating companies and the possible
failure to integrate their decentralized operations, the inability to complete
and finance acquisitions, the inability to grow internally, the Company's
dependence on a principal customer, a history of losses of certain of the
Company's operating companies, competitive factors, the Company's dependence on
public sector contracts and funding, the nature of fixed priced contracts
pursuant to which the Company provides services and products, the Company's
reliance on subcontractors and suppliers, the cyclical nature of the rail system
industry, the Company's exposure to downturns in commercial construction, the
unionization of the Company's workforce, the impact of various regulations on
the Company's business, the Company's dependence on key personnel, the Company's
ability to pay its indebtedness and the Company's ability to address Year 2000
problems. Management believes that these forward-looking statements are
reasonable; however, you should not place undue reliance on such statements.
These statements are based on current expectations and speak only as of the date
of such statements. The Company undertakes no obligation to publicly update or
revise any forward-looking statement, whether as a result of future events, new
information or otherwise. Additional information concerning the risk and
uncertainties listed above, and other factors that you may wish to consider, is
contained below in this Item under the sections entitled "Year 2000" and "Risk
Factors."
 
GENERAL
 
     RailWorks was formed in March 1998 to become a leading nationwide provider
of rail system services, including construction and rehabilitation, repair and
maintenance, and related products. The Company primarily performs services
pursuant to contracts for the completion of specific projects, some of which
take up to five years to complete. On most projects, the Company contracts
directly with rail system operators, while on other projects the Company acts as
a subcontractor.
 
     In August 1998, RailWorks acquired in separate concurrent transactions 14
Founding Companies engaged principally in the rail system services and products
business and RailWorks consummated its IPO. In November 1998, RailWorks acquired
the two 1998 Acquired Companies and, in the first quarter of 1999, RailWorks
acquired the four 1999 Acquired Companies. Except for the acquisition of
Comstock Holdings, Inc., ("Comstock"), a Founding Company, all of the
acquisitions have been accounted for as purchases in accordance with APB No. 16.
 
     For accounting and financial statement purposes, Comstock has been
identified as the accounting acquirer consistent with Staff Accounting Bulletin
("SAB") No. 97 of the Securities and Exchange
 
                                       18
<PAGE>   21
 
Commission 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. The historical financial statements prior to August 4, 1998
are those of Comstock.
 
     The Company's consolidated balance sheet as of December 31, 1998, includes
the Founding Companies and the 1998 Acquired Companies. The results of
operations for the year ended December 31, 1998, and the statement of cash flows
for the year ended December 31, 1998 include the results of operations and cash
flows of Comstock for the entire period, the results of operations and cash
flows of the Founding Companies from August 1, 1998 and the results of
operations and cash flows of the 1998 Acquired Companies from November 4, 1998.
RailWorks conducted no operations prior to the consummation of its IPO other
than the acquisitions of the Founding Companies and the financing activities
related thereto, including the IPO, and had no revenue or operating expenses
prior to August 1, 1998. Consequently, management believes that RailWorks, or
individual Founding Company and 1998 Acquired Company financial comparisons, are
not meaningful.
 
     The Founding Companies and the Acquired Companies have operated
historically under varying tax structures, including both S and C corporations,
which have influenced the historical level of owners' compensation. Certain
executive officers of each of the Founding Companies and the Acquired Companies
have entered into employment agreements with the Company. The aggregate
compensation paid to such executive officers was reduced following the IPO.
Following the initial two-year term of the employment agreements, the Company
will reevaluate its compensation structure after examining operating results and
the value of the services such individuals are providing the Company.
 
     Prior to their affiliation with RailWorks, the Founding Companies and the
Acquired Companies were privately owned and managed as separate entities.
Operating performance and management compensation depended on regional market
conditions and the priorities and strategies of individual owners. For example,
under private ownership these companies experienced limitations on project
bonding capacity, access to capital and human resources. In addition, many of
these companies operated under an S corporation tax structure. In many
instances, management and employee compensation was not necessarily directed
toward the achievement of growth in profitability. As part of RailWorks, these
businesses have access to significantly more resources, including higher bonding
capacity, lower input costs through greater purchasing power, access to lower
cost capital and cross-selling opportunities.
 
REVENUE AND COSTS
 
     The Company recognizes revenue from fixed price contracts using the
percentage-of-completion method, measured by the percentage of costs incurred to
date to management's estimate of total cost for each contract. Changes in job
performance, job conditions and estimated profitability may result in revisions
to cost and income, which are recognized in the period in which the revisions
are determined. Revenue from time-and-material contracts are recognized
currently as the work is performed.
 
     Contract costs consist principally of wages and benefits of employees,
subcontracted services, materials, parts and supplies, depreciation and other
vehicle expenses and equipment rental, as well as indirect costs related to
contract performance. Contract costs are charged to expense as incurred.
Provisions for estimated losses on uncompleted contracts are made in the period
in which such losses are determined.
 
     In the case of product sales, the Company recognizes revenue when products
are delivered to customers pursuant to shipping agreements. Cost of goods sold
includes raw materials cost and production cost.
 
RESULTS OF OPERATIONS
 
     Historical -- Year Ended December 31, 1998
 
     Revenue was $212.5 million for the year ended December 31, 1998. Cost of
revenue was $182.8 million. Gross profit for the year ended December 31, 1998
was $29.7 million. Selling, general and administrative expenses were $38.3
million, including non-recurring expenses of $20.0 million and transaction fees
of $1.3 million recorded during the third quarter related to the IPO. The $20.0
million of non-recurring expenses
 
                                       19
<PAGE>   22
 
consists of a non-cash compensation charge of $14.9 million for stock grants
issued to management resulting from the consummation of the IPO, $2.9 million
related to the settlement of certain employee benefit obligations and relocation
expenses and $2.2 million for estimated legal and settlement costs in connection
with certain claims and litigation associated with the Company's former west
coast operations. Included in other income in the fourth quarter was a gain of
$861,000 on the disposition of the Company's Longview, Washington industrial
electrical contracting division. This divestiture was in conjunction with
Comstock's change in strategic focus to rail-based transit projects. The net
loss for the year ended December 31, 1998 was $12.8 million.
 
    Pro Forma Founding Companies -- Year Ended December 31, 1998 Compared to the
    Year Ended December 31, 1997
 
     The presentation below provides the pro forma results of operations of the
Founding Companies as if the Founding Companies had been acquired on January 1,
1997. The presentation only includes the results of the 1998 Acquired Companies
from November 4, 1998 to December 31, 1998. Acquired Companies are otherwise
excluded. The presentation includes pro forma results of the Founding Companies
and the Acquired Companies on a combined basis.
 
     The pro forma results of operations of the Company for the periods
presented may not be comparable to, and may not be indicative of, the Company's
actual results of operations because (1) the Founding Companies and the Acquired
Companies were not under common control or management during the periods
presented and (2) the pro forma data do not reflect all of the potential
benefits and cost savings the Company expects to realize as a result of
operating as a combined entity.
 
     The following table sets forth selected pro forma financial data for the
periods indicated.
 
<TABLE>
<CAPTION>
                                                                    UNAUDITED PRO FORMA
                                                                   RESULTS OF OPERATIONS
                                                            ------------------------------------
                                                                  YEAR ENDED DECEMBER 31,
                                                            ------------------------------------
                                                                  1997                1998
                                                            ----------------    ----------------
                                                                   (DOLLARS IN THOUSANDS)
<S>                                                         <C>        <C>      <C>        <C>
Revenue...................................................  $256,508   100.0%   $269,498   100.0%
Cost of revenue...........................................   219,400    85.5     227,052    84.2
                                                            --------            --------
Gross profit..............................................    37,108    14.5      42,446    15.8
Selling, general and administrative expenses..............    20,848     8.1      19,317     7.2
Depreciation and amortization.............................     5,038     2.0       5,389     2.0
                                                            --------            --------
Operating income..........................................    11,222     4.4      17,740     6.6
Interest and other income (expenses), net.................    (1,063)   (0.4)       (833)   (0.3)
                                                            --------            --------
Income before income taxes................................    10,159     4.0      16,907     6.3
Net income................................................     5,438     2.1       8,812     3.3
</TABLE>
 
     Revenue.  Revenue increased $13.0 million, or 5.1%, from $256.5 million for
the year ended December 31, 1997 to $269.5 million for the year ended December
31, 1998. The increase was primarily due to growth of the Company's transit
services segment, which grew at 7.1% and represented $11.0 million in additional
revenue.
 
     Gross Profit.  Gross profit increased $5.3 million, or 14.4%, from $37.1
million for the year ended December 31, 1997 to $42.4 million for the year ended
December 31, 1998. As a percentage of revenue, gross profit increased to 15.8%
for the year ended December 31, 1998 from 14.5% for the year ended December 31,
1997. The increase in gross profit was due to the higher revenue base and
improved revenue mix as a result of higher margin contracts.
 
     Selling, General and Administrative Expenses.  Selling, general and
administrative expenses decreased $1.5 million, or 7.3%, from $20.8 million for
the year ended December 31, 1997 to $19.3 million for the year ended December
31, 1998. As a percentage of revenue, selling, general and administrative
expenses decreased
 
                                       20
<PAGE>   23
 
from 8.1% for the year ended December 31, 1997 to 7.2% for the year ended
December 31, 1998. The decrease in selling, general and administrative expenses
was the result of decreased salaries and wages during 1998.
 
     Net Income.  Net income increased to $8.8 million for the year ended
December 31, 1998 from $5.4 million for the year ended December 31, 1997, an
increase of $3.4 million, or 62.0%. As a percentage of revenue, net income
increased to 3.3% for the year ended December 31, 1998 from 2.1% for the year
ended December 31, 1997. The increase was the result of the increase in revenue
and profitability discussed above.
 
     Historical -- December 31, 1997 Compared to December 31, 1996 -- Comstock
Holdings, Inc.
 
     Founded in 1904, L.K. Comstock & Co., Inc. ("L.K. Comstock"), a
wholly-owned subsidiary of Comstock, is one of the largest electrical
contractors in the United States based on revenue. L.K. Comstock specializes in
power, communication and signaling installations for rail-based transit systems
and also provides electrical contracting services for commercial buildings,
heavy industrial and manufacturing plants and power plants. Through incremental
investments from 1986 through 1989, L.K. Comstock's former parent company,
Comstock Group, Inc. ("CGI"), was acquired by Spie Enertrans S.A. ("Spie"), a
multinational electrical engineering firm headquartered in Paris, France. During
Spie's ownership, L.K. Comstock sought to increase revenue by expanding its
non-transit operations in California and entering into joint ventures to design
and build large power and industrial projects in other locations. Effective
January 1, 1997, L.K. Comstock was acquired (the "Comstock Acquisition") from
Spie by Comstock, a corporation owned by certain employees of L.K. Comstock.
 
     Following the Comstock Acquisition, Comstock's management instituted a plan
to reduce Comstock's costs and improve profitability. As a result of this plan,
Comstock has reduced general and administrative expenses by eliminating certain
management positions, including those of several French expatriates, and
reducing its Los Angeles-based staff. Comstock also improved gross profit
margins through (1) improved control over contract costs by consolidating
transit project estimating and bidding functions and (2) exiting unprofitable,
risky operations which had been expanded under Spie's ownership (such as
electrical projects for traffic systems, non-rail projects in California and
large joint ventures for the design and construction of power and industrial
plants). Under joint ventures with general construction contractors, as
preferred by Spie, Comstock had limited management control and was subject to
increased costs due to general contract conditions. Following the Comstock
Acquisition, management focused the business to benefit from its core
competencies, including rail-based transit projects. However, Comstock's
electricians and supervisors are capable of performing services on rail and
non-rail projects, thus enabling the efficient use of experienced labor on
projects in response to demand. Additionally, its accounting and management
systems are designed to provide necessary information for both rail and non-rail
projects. In 1997, Comstock derived 56.7% of its revenue and 58.6% of its gross
profit from rail-related projects as compared to 48.1% and 48.5%, respectively,
in 1996.
 
     Revenue.  Revenue decreased to $153.6 million for the year ended December
31, 1997 from $188.8 million for the year ended December 31, 1996, a decrease of
$35.2 million, or 18.6%. This decrease was due to a decrease in revenue from
Comstock's power and industrial operations attributable to the completion of
certain large projects in 1996 and early 1997 that were not immediately
replaced, as well as a decrease in revenue from Comstock's traffic operations,
offset in part by an increase in revenue from Comstock's commercial operations.
The decrease in revenue from traffic operations, as well as a portion of the
decrease in revenue from power and industrial operations, were due to the change
in strategic focus discussed above and it is unlikely that such projects will be
replaced. Rail-related revenue did not change significantly from 1996 to 1997
due to limited bonding capacity.
 
     Gross Profit.  Gross profit decreased to $16.9 million for the year ended
December 31, 1997 from $19.5 million for the year ended December 31, 1996, a
decrease of $2.5 million, or 13.0%. As a percentage of revenue, gross profit
increased to 11.0% for the year ended December 31, 1997 from 10.3% for the year
ended December 31, 1996. Gross profit decreased as a result of the decline in
revenue, offset in part by tighter cost controls implemented by management and a
reduction in the amount of activity in traffic and Los Angeles-based non-rail
projects which had significantly lower margins. Additionally, 1996 gross profit
benefitted from a
 
                                       21
<PAGE>   24
 
reduction in contract reserves of approximately $3.0 million related to the
settlement of outstanding project contingencies.
 
     General and Administrative Expenses.  General and administrative expenses
decreased to $13.7 million for the year ended December 31, 1997 from $15.1
million for the year ended December 31, 1996, a decrease of $1.3 million, or
8.8%. This decrease was a result of the tighter cost controls implemented by
management, including reductions in executive and administrative staff in the
power, industrial and Los Angeles-based non-rail operations. As a percentage of
revenue, general and administrative expenses increased to 8.9% for the year
ended December 31, 1997 from 8.0% for the year ended December 31, 1996. This
increase was the result of the decrease in revenue.
 
     Net Income.  Net income increased to $1.4 million for the year ended
December 31, 1997 from $58,000 for the year ended December 31, 1996, an increase
of $1.3 million. For each period, net income as a percentage of revenue was less
than 1%. The increase in net income was partially due to the reduction of
general and administrative expenses discussed above and the elimination of
management expenses of $941,000 paid to Spie and related entities in 1996. In
addition, as a result of the Comstock Acquisition and the related purchase
accounting, approximately $1.6 million of depreciation and amortization were
eliminated in 1997 as compared to 1996. These factors were partially offset by
the decrease in gross profit due to the factors discussed above.
 
FLUCTUATIONS IN QUARTERLY OPERATING RESULTS
 
     The Founding Companies and the Acquired Companies have in the past
experienced 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 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 particularly
pronounced, and net losses have been incurred, in the first and fourth calendar
quarters, generally due to adverse weather conditions. The Company expects to
continue to experience such quarterly fluctuations in operating results,
including possible net losses.
 
LIQUIDITY AND CAPITAL RESOURCES
 
     On August 4, 1998, the Company completed the IPO of 5.0 million shares of
its Common Stock at a price of $12.00 per share. The capital raised by this
offering was approximately $52.5 million, net of underwriting discounts and
other offering expenses, of which approximately $51.1 million was used for the
cash portion of the Company's acquisitions of the Founding Companies and
approximately $1.4 million was used for the repayment of debt.
 
     At December 31, 1998, RailWorks had working capital of approximately $67.4
million. Net cash used in operating activities for the year ended December 31,
1998, was approximately $13.9 million. Net cash used in investing activities for
the year ended December 31, 1998 was approximately $54.4 million which consisted
of $52.5 million of cash for acquisitions (including $49.9 million for the
Founding Companies) and $1.3 million for purchase of equipment and leasehold
improvements. Net cash provided by financing activities for the year ended
December 31, 1998 was approximately $70.0 million, which included $52.5 million
from the issuance of common stock relating to the IPO and borrowings of
approximately $61.3 million, offset by debt repayment of approximately $41.2
million.
 
     Capital expenditures were $1.3 million, $448,000 and $690,000 in fiscal
1998, 1997 and 1996, respectively. Historically, capital expenditures have been,
and future expenditures are anticipated to be, primarily to support expansion of
the Company's operations, including its management information systems. The
Company's capital expenditures over the next several years, as a percentage of
its revenues, are expected to decrease compared to those of the past three
fiscal years.
 
                                       22
<PAGE>   25
 
     Capital expenditures of approximately $5.0 million for equipment and
leasehold improvements are anticipated in 1999. This investment, which is
expected to be able to be financed primarily by working capital and vendor
financing, relates to the anticipated facility consolidations of the operating
companies, the installation of a comprehensive financial reporting computer
system and the purchase of supplemental machinery and equipment needed to meet
operational demands. There are no other significant commitments for future
capital expenditures, although it is likely that cash outflows for business
acquisitions and equipment leases will continue.
 
     Cash for acquisitions and working capital are financed by funds generated
from operations, together with borrowings under the Company's credit facilities
with NationsBank, N.A. The Company has in place a three-year, $75 million senior
revolving credit facility. The Company also has a $25 million senior term credit
facility that matures upon the earlier of June 30, 1999 and consummation of a
debt or equity offering. The credit facilities are secured by a first lien on
all of the capital stock of the Company's subsidiaries and on all accounts
receivable of the Company and its subsidiaries. The credit facilities contain a
negative pledge on all other assets of the Company and its subsidiaries and
other usual and customary covenants and events of default for transactions of
the type contemplated by the credit facilities. Borrowings under the credit
facilities bear interest, at the option of the Company, at an interest rate
equal to (1) LIBOR plus the applicable margin for LIBOR loans, which ranges from
125 basis points to 250 basis points based on the ratio of Funded Debt to EBITDA
(as such terms are defined in the credit facility) or (2) the Alternate Base
Rate (defined as the higher of (a) the NationsBank prime rate and (b) the
Federal Funds rate plus 50 basis points) plus up to 125 basis points based on
the ratio of Funded Debt to EBITDA. The Company may also finance future
acquisitions with shares of common stock and contingent consideration.
 
     In connection with certain acquisitions, the Company has agreed, and in the
future may agree, to pay additional consideration based on operating results of
the acquired entity. The payment of any such earnouts could result in an
increase in the purchase prices of such acquisitions and, as a result,
additional goodwill.
 
     The Company believes that funds generated from operations, together with
existing cash and borrowings under the $75 million credit facility, will be
sufficient to finance its current operations, planned capital expenditures,
pending acquisitions and internal growth for at least the next several years. If
the Company were to make a significant acquisition for cash, it may be necessary
for the Company to obtain additional debt or equity financing.
 
INFLATION
 
     The Company does not believe that inflation has had a material effect on
its results of operations in recent years. However, there can be no assurance
that the Company's business will not be affected by inflation in the future.
 
YEAR 2000
 
     The Company has developed a plan to address Year 2000 issues. The plan
addresses three main areas: (a) information systems; (b) embedded chips; and (c)
supply chain readiness (including customers as well as inventory and
non-inventory suppliers). To oversee the process, the Company has established a
committee comprised of accounting and information systems personnel who are
reporting regularly to the board of directors and the Audit Committee.
 
     The Company has identified potential deficiencies related to Year 2000 in
its information systems and is in the process of addressing them through
upgrades and other remediation. The Company expects to complete remediation and
testing of its internal systems in the summer of 1999. With respect to other
equipment with date sensitive operating controls, such as manufacturing
equipment, HVAC, security and other similar systems, the Company is in the
process of identifying those items which may require remediation or replacement.
The Company expects to complete remediation or replacement and testing of these
internal systems in the summer of 1999. The Company is in the process of
identifying and contacting suppliers, both inventory and non-inventory, and
customers to determine the state of their Year 2000 readiness.
 
                                       23
<PAGE>   26
 
     Based upon the Company's current estimates, incremental out-of-pocket costs
of its Year 2000 program are expected to be approximately $250,000. As of
December 31, 1998, none of these funds had been spent. These costs are expected
to include third party consultants, remediation of existing computer software
and replacement and remediation of embedded chips. These costs do not include
internal management time and the deferral of other projects, the effects of
which are not expected to be material to the Company's results of operations or
financial condition.
 
     At this stage of the process, the Company believes that it is difficult to
specifically identify the most reasonably likely worst case Year 2000 scenario.
As with all service providers and manufacturers, a reasonably likely worst case
scenario would be the result of failures of third parties (including, without
limitation, governmental entitles and entities with which the Company has no
direct involvement) that continue for more than several days in various
geographic areas where the Company provides services, its products are
manufactured or from which the Company's raw materials and components are
sourced. In connection with its manufacturing and supply of raw materials and
components, the Company is considering various contingency plans. Any such plans
would necessarily be limited to matters which the Company can reasonably
control.
 
     The Company's Year 2000 efforts are ongoing and its overall plan, as well
as the consideration of contingency plans, will continue to evolve as new
information becomes available. While the Company anticipates continuity of its
business activities, that continuity will be dependent upon its ability, and the
ability of third parties upon whom the Company relies directly or indirectly, to
be Year 2000 compliant.
 
RISK FACTORS
 
     The Operating Companies Do Not Have a Combined Operating History; The
Company May be Unsuccessful Integrating Their Decentralized
Operations.  RailWorks was founded in March 1998 but conducted no operations and
generated no revenue until it completed its IPO in August 1998. The Company
acquired the Founding Companies concurrently with the completion of the IPO, has
acquired six additional operating companies since that time, and has entered
into letters of intent to acquire four additional operating companies. The
operating companies were separate independent entities before RailWorks acquired
them and to a certain extent they continue to operate as independent entities
because the Company conducts its operations on a decentralized basis. The
integration of the operating companies, while allowing them to retain
decentralized operations and management, is important to the Company's operating
and growth strategies and the achievement of efficiencies in the combined
operation. Management 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 the Company's management group have only recently
joined RailWorks and there can be no assurance that the management group will be
able to implement the Company's acquisition and operating strategies. There can
be no assurance that the Company will be able to establish, maintain or increase
the profitability of the operating companies. RailWorks' pro forma financial
statements include results of operations for certain operating companies when
they were not under common control or management. As a result, the pro forma
financial statements may not be indicative of the Company's future results of
operations. Any failure by management to implement the Company's strategies,
integrate the operating companies without substantial costs, delays or other
operational or financial difficulties, or oversee effectively the combined
entity could have a material adverse effect on the Company's business, financial
condition and results of operations.
 
     The Company May be Unable to Complete and Finance Acquisitions.  The
Company has completed six acquisitions since the IPO and intends to grow
significantly through the acquisition of additional businesses. The Company's
acquisition strategy entails reviewing acquired business operations, corporate
infrastructure and systems and financial controls. Unforeseen expenses,
difficulties, complications and delays frequently encountered in connection with
the rapid expansion of operations could inhibit RailWorks' growth or adversely
affect its financial performance.
 
     In March 1999, the Company signed letters of intent to purchase four
operating companies. Management expects to execute definitive purchase
agreements, which will have customary closing conditions (including
 
                                       24
<PAGE>   27
 
completion of due diligence), in the second quarter of 1999. However, there can
be no assurance that the Company will acquire any or all of these companies.
 
     There can be no assurance that the Company will maintain or accelerate its
growth or anticipate all of the changing demands that expanding operations will
impose on its management, personnel, operational and management information
systems and financial systems. Management may not be able to identify, acquire
or manage profitably additional businesses or to integrate successfully any
acquired businesses without substantial costs, delays or other operational or
financial difficulties. Any such occurrence could have a material adverse effect
on the Company's business, financial condition and results of operations.
 
     Management cannot predict the timing, size and success of RailWorks'
acquisition efforts and any associated capital commitments. The Company
currently intends to finance future acquisitions by bank borrowings, shares of
RailWorks Common Stock, internally generated funds or a combination of Common
Stock and cash. If RailWorks Common Stock does not maintain a sufficient market
value, or if potential acquisition candidates are otherwise unwilling to accept
Common Stock as part of the consideration for the sale of their businesses, the
Company may be required to utilize more of its cash resources or borrowings to
maintain its acquisition program. In addition, the Company's acquisitions
typically provide for the sellers to receive contingent consideration, which is
only paid if the acquired companies achieve certain operating results. These
payments could be substantial.
 
     The Company May be Unable to Generate Internal Growth.  RailWorks' ability
to grow will be affected by various factors, including demand for rail system
services and products, the Company's success in bidding on new projects, the
success of cross-selling efforts and management's ability to develop a national
accounts program. The Company's growth may also depend on increased outsourcing
by rail system operators. Many of these factors are beyond the Company's
control. The Company's strategies may not be successful or the Company 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 the Company's business, financial
condition and results of operations.
 
     The Company Has Been Dependent on Certain Customers.  The Company derived
approximately 43.7% of its pro forma revenue for the year ended December 31,
1998 from its top ten customers. Approximately 21.1% of RailWorks' 1998 pro
forma revenue was derived from projects undertaken for the 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 the Company or
determine not to do business with the Company in the future, it would have a
material adverse effect on the Company's business, financial condition and
results of operations.
 
     Certain Operating Companies Have a History of Losses.  From time to time,
primarily due to industry cyclicality and uncertainties inherent in the
competitive bidding process, certain of the Company's operating companies have
experienced net losses. There can be no assurance that the Company or its
operating companies will be profitable in the future.
 
     The Company May Face Intense Competition.  The rail system services and
products industry is highly competitive. There are numerous companies that
provide services to transit authorities, construct and repair rail systems or
sell related products or supplies, and some of these companies operate in more
than one of these lines of business. Some of the Company's competitors have
greater resources than the Company has, 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 the Company's existing and future competitors would have a material
adverse effect on the Company's business, financial condition and results of
operations. Certain of the Company's operating companies also provide electrical
contracting services to non-rail industrial and commercial customers. While
management believes that the Company currently competes 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
 
                                       25
<PAGE>   28
 
companies. Additionally, the Company could face competition in the future from
other competitors entering the Company's markets.
 
     The Company is Dependent on 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 ("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, which in turn 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. There can be no
assurance that these factors or others unique to public sector contracts will
not have a material adverse effect on the Company's business, financial
condition and results of operations.
 
     Fixed Price Contracts Expose the Company to Significant Risks.  Fixed price
contracts are typically awarded in the rail system services industry pursuant to
a competitive bidding process. In compiling the Company's bid on a particular
project, management 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 the Company's control. If
management is unable to predict accurately the costs of fixed price contracts,
certain projects could have lower margins than anticipated or the Company could
suffer losses on the projects. This could have a material adverse effect on the
Company's business, financial condition and results of operations.
 
     The Company Relies on Subcontractors and Suppliers.  The Company generally
performs electrical contracting services for transit signaling and communication
systems as a subcontractor to companies that design the systems and manufacture
or purchase the necessary equipment. In other instances, the Company acts as the
prime contractor and subcontracts the design of the signal or communication
system and necessary equipment. When the Company is a prime contractor for such
projects, management generally requires subcontractors to post performance
bonds. Management 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 the Company as prime contractor. The Company is sometimes
dependent upon the subcontractor to perform design and other services and
provide equipment. For certain projects there are a limited number of companies
that can perform the subcontract if the initial subcontractor defaults. As a
result, the Company is dependent upon its subcontractors to perform under the
subcontracts. Further, the major components of signaling and communication
systems for transit authorities are manufactured to specifications and require
long lead times for production. If a subcontractor or supplier defaults, or if a
supplier refuses or is unable to do business with the Company, it could have a
material adverse effect on the Company's business, financial condition and
results of operations.
 
     The Rail System Industry is Cyclical.  A substantial portion of RailWorks'
revenue is derived from public contracts, which are expected to constitute a
relatively stable source of business due to funding provided by TEA 21. However,
demand for rail system services and products could fluctuate in conjunction with
overall economic conditions. In economic downturns, rail system operators may
defer certain construction and rehabilitation projects and purchases of related
products to conserve cash in the short term. Reductions in freight traffic due
to economic downturns or other factors may also reduce demand for our
construction and rehabilitation services and related products. In economic
upturns, railroads, particularly Class I railroads, experience heavier traffic
demands that can cause problems associated with congestion. The operational
problems related to congestion have an unpredictable impact on railroad
expenditures for construction and rehabilitation services and related products,
including those provided by the Company. During periods of peak usage, rail
system owners may defer certain expenditures because they may need to address
operational challenges caused by these conditions. Such uncertainties may be
exacerbated by certain other issues, such as the possibility of heightened
government regulation during periods of congestion and the internal challenges
of managing railroad operations as the Class I railroads continue to
consolidate.
 
                                       26
<PAGE>   29
 
     Exposure to Downturns in Commercial Construction.  Approximately 16.2% of
RailWorks' pro forma revenue for the year ended December 31, 1998, was derived
from installation of electrical systems in newly constructed or renovated
commercial buildings and power and industrial plants. The demand for electrical
installation services is affected by fluctuations in the level of new
construction and renovation of commercial buildings. These fluctuations reflect
the cyclical nature of the construction industry and depend upon general
economic conditions, changes in interest rates and other related factors.
Downturns in levels of commercial construction and renovation could have a
material adverse effect on the Company's business, financial condition and
results of operations. Further, the Company's electrical installation business
is focused in the northeastern United States and is therefore particularly
susceptible to economic downturns in that region.
 
     The Company's Workforce is Unionized.  As of December 31, 1998,
approximately 66.9% of RailWorks' employees were covered under collective
bargaining agreements. In June 1994, one of RailWorks' operating companies was
affected by a one-week work stoppage by the United Brotherhood of Teamsters.
There can be no assurance that future work stoppages will not affect the
Company. In addition, labor agreements are generally negotiated on an
industry-wide basis and the terms and conditions of future labor agreements
could be beyond the Company's control. The Company may be subject to terms and
conditions in future labor agreements that could have a material adverse effect
on its business, financial condition and results of operations.
 
     The Company is Subject to Extensive Environmental and Government
Regulation.  RailWorks' 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. The Company could incur significant
ongoing costs associated with environmental regulatory compliance. Further, the
Company sometimes uses hazardous materials in connection with its operations.
Although the Company believes it is in material compliance with all of the
various environmental regulations applicable to its business, there can be no
assurance that requirements will not change in the future or that the Company
will not incur significant costs to comply with such requirements.
 
     In addition to safety, health and other regulations of general
applicability, the Company's 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
the Company's business, financial condition and results of operations.
 
     The Company is Dependent on Key Personnel.  The Company's success depends
to a significant extent upon the efforts and abilities of John G. Larkin,
Chairman of the Board and Chief Executive Officer, and Michael R. Azarela,
Executive Vice President and Chief Financial Officer. The Company also relies on
senior management of its operating companies. While the Company has entered into
employment agreements with Messrs. Larkin and Azarela and certain senior
managers of the operating companies, the Company cannot be certain that such
individuals will remain with the Company throughout the terms of their
agreements, or thereafter. Further, the Company likely will depend on the senior
management of any significant businesses the Company acquires in the future. The
loss of the services of one or more of these key employees before the Company is
able to attract and retain qualified replacement personnel could have a material
adverse effect on the Company's business, financial condition and results of
operation.
 
     The Company's Systems May Not be Year 2000 Compliant.  Management
identified potential deficiencies related to the Year 2000 in the Company's
information systems, and the Company is in the process of addressing them
through upgrades and other remediation.
 
     The Company's Year 2000 efforts are ongoing and its overall plan, as well
as the consideration of contingency plans, will continue to evolve as new
information becomes available. While the Company anticipates continuity of its
business activities, that continuity will be dependent upon its ability, and the
 
                                       27
<PAGE>   30
 
ability of third parties upon whom it relies directly or indirectly, to be Year
2000 compliant. For a further discussion of the risks associated with the Year
2000, see the section above entitled "Year 2000" in this Item.
 
     The Company May be Unable to Service Debt.  To service the Company's
indebtedness, the Company will require a significant amount of cash. The
Company's ability to make payments on its debt, and to fund planned capital
expenditures and acquisitions will depend on its future operating performance
and on its ability to successfully implement its business strategy. Prevailing
general economic conditions and financial, business, regulatory and other
factors, many of which are beyond its control, will affect its ability to make
these payments.
 
ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
     The Company is subject to market risk associated principally with changes
in interest rates. Interest rate exposure has been principally limited to the
$49.3 million of long-term debt under the Company's revolving credit agreement
outstanding at December 31, 1998. Approximately 80% of that debt is priced at
interest rates that float with the market. A 50 basis point movement in the
interest rate on the floating rate debt would have resulted in an approximate
$200,000 annualized increase or decrease in interest expense and cash flows. The
remaining debt is either fixed rate debt or debt that has been essentially fixed
through the use of interest rate swaps. The Company will from time to time enter
into interest rate swaps on its debt, when it believes there is a clear
financial advantage for doing so. The Company does 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 the Company's
outstanding long-term debt. The Company's exposure related to such derivative
instruments is, in the aggregate, not material to the Company's financial
position, results of operations and cash flows.
 
     In March 1999, RailWorks entered into a hedge instrument with First Union
National Bank known as a "swaption," or a collared swap for a notional amount of
$50.0 million. This agreement, which carries no premium, allows the Company to
"swap" into a fixed interest rate beginning March 31, 1999 at no lower than
5.73% and no higher than 6.23% against the current swap rate, which was 5.93% at
the time of trade. This instrument protects the Company against dramatic swings
in interest rates.
 
ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
     The financial statements are listed under Item 14(a) and are filed as part
of this report on the pages indicated. The supplementary data are included in
Note 17 of the Notes to the Consolidated Financial Statements of the Company.
 
ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
         FINANCIAL DISCLOSURE
 
     Not applicable.
 
                                       28
<PAGE>   31
 
                                    PART III
 
ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
 
     The information required by this Item with respect to directors and
executive officers of the Registrant, except certain information regarding
executive officers which is contained in Part I of this Report pursuant to
General Instruction G, is included under the heading "Election of Directors" of
the Proxy Statement for the Annual Meeting of Stockholders to be held on May 27,
1999 and is incorporated herein by reference.
 
     The information required by this Item with respect to compliance with
Section 16(a) of the Securities Exchange Act of 1934 is included under the
heading "16(a) Beneficial Ownership Reporting Compliance" of the Proxy Statement
for the Annual Meeting of Stockholders to be held May 27, 1999 and is
incorporated herein by reference.
 
ITEM 11.  EXECUTIVE COMPENSATION
 
     The information included under the heading "Executive Compensation" in the
subsections entitled "Employment Agreements," "Executive Compensation Summary
Table," "Option Grants During 1998 and Year-End Option Values" and "Aggregate
Option Exercises During 1998 and Year-End Option Values" of the Proxy Statement
for the Annual Meeting of Stockholders to be held on May 27, 1999 is
incorporated herein by reference.
 
ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
 
     The information required by this Item is included under the heading
"Beneficial Ownership of Common Stock" of the Proxy Statement for the Annual
Meeting of Stockholders to be held on May 27, 1999 and is incorporated herein by
reference.
 
ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
 
     The information required by this Item is included under the heading
"Certain Relationships and Related Party Transactions" of the Proxy Statement
for the Annual Meeting of Stockholders to be held on May 27, 1999 and is
incorporated herein by reference.
 
                                       29
<PAGE>   32
 
                                    PART IV
 
ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
 
(A) FINANCIAL STATEMENTS AND SCHEDULES
 
     1. Financial Statements
 
<TABLE>
<CAPTION>
                                                              PAGE
                                                              -----
<S>                                                           <C>
RAILWORKS CORPORATION
Consolidated Financial Statements:
  Report of Independent Public Accountants..................    F-1
  Consolidated Balance Sheets as of December 31, 1998 and
     1997...................................................    F-2
  Consolidated Statements of Operations for the Years Ended
     December 31, 1998, 1997 and 1996.......................    F-3
  Consolidated Statements of Stockholders' Equity for the
     Years Ended December 31, 1998, 1997 and 1996...........    F-4
  Consolidated Statements of Cash Flows for the Years Ended
     December 31, 1998, 1997 and 1996.......................    F-5
  Notes to Consolidated Financial Statements................    F-6
Financial Statements:
  Report of Independent Public Accountants..................   F-21
  Balance Sheet as of July 31, 1998.........................   F-22
  Statement of Operations for the Period From April 1, 1998
     to July 31, 1998.......................................   F-23
  Statement of Cash Flows for the Period From April 1, 1998
     to July 31, 1998.......................................   F-24
  Notes to Financial Statements.............................   F-25
ANNEX RAILROAD BUILDERS, INC. AND AFFILIATES
  Report of Independent Public Accountants..................   F-26
  Combined Balance Sheets as of July 31, 1998 and December
     31, 1997...............................................   F-27
  Combined Statements of Operations for the Seven Months
     Ended July 31, 1998, Nine Months Ended December 31,
     1997 and Year Ended March 31, 1997.....................   F-28
  Combined Statements of Stockholders' Equity for the
     Periods Ended March 31, 1996, March 31, 1997, December
     31, 1997 and July 31, 1998.............................   F-29
  Combined Statements of Cash Flows for the Seven Months
     Ended July 31, 1998, Nine Months Ended December 31,
     1997 and Year Ended March 31, 1997.....................   F-30
  Notes to Combined Financial Statements....................   F-31
CPI CONCRETE PRODUCTS INCORPORATED
  Report of Independent Public Accountants..................   F-37
  Balance Sheet as of July 31, 1998.........................   F-38
  Statement of Operations for the Six Months Ended July 31,
     1998...................................................   F-39
  Statement of Stockholders' Equity for the Six Months Ended
     July 31, 1998..........................................   F-40
  Statement of Cash Flows for the Six Months Ended July 31,
     1998...................................................   F-41
  Notes to Financial Statements.............................   F-42
CONDON BROTHERS, INC.
  Report of Independent Public Accountants..................   F-46
  Balance Sheets as of July 31, 1998 and December 31,
     1997...................................................   F-47
  Statements of Operations for the Seven Months Ended July
     31, 1998 and the Years Ended December 31, 1997 and
     1996...................................................   F-48
  Statements of Stockholders' Equity for the Periods Ended
     December 31, 1995, 1996 and 1997 and July 31, 1998.....   F-49
  Statements of Cash Flows for the Seven Months Ended July
     31, 1998 and the Years Ended December 31, 1997 and
     1996...................................................   F-50
  Notes to Financial Statements.............................   F-51
</TABLE>
 
                                       30
<PAGE>   33
 
<TABLE>
<CAPTION>
                                                              PAGE
                                                              -----
<S>                                                           <C>
H.P. McGINLEY, INCORPORATED
  Report of Independent Public Accountants..................   F-57
  Balance Sheets as of July 31, 1998 and December 31,
     1997...................................................   F-58
  Statements of Operations for the Seven Months Ended July
     31, 1998, the Ten Months Ended December 31, 1997 and
     the Year Ended February 28, 1997.......................   F-59
  Statements of Stockholder's Equity for the Periods Ended
     February 29, 1996, February 28, 1997, December 31, 1997
     and July 31, 1998......................................   F-60
  Statements of Cash Flows for the Seven Months Ended July
     31, 1998, the Ten Months Ended December 31, 1997 and
     the Year Ended February 28, 1997.......................   F-61
  Notes to Financial Statements.............................   F-62
KENNEDY RAILROAD BUILDERS, INC. AND ASSOCIATED COMPANIES
  Report of Independent Public Accountants..................   F-66
  Combined Balance Sheets as of July 31, 1998 and December
     31, 1997...............................................   F-67
  Combined Statements of Operations for the Seven Months
     Ended July 31, 1998, the Nine Months Ended December 31,
     1997 and the Year Ended March 31, 1997.................   F-68
  Combined Statements of Stockholders' Equity for the
     Periods Ended March 31, 1996 and 1997, December 31,
     1997 and July 31, 1998.................................   F-69
  Combined Statements of Cash Flows for the Seven Months
     Ended July 31, 1998, the Nine Months Ended December 31,
     1997 and the Year Ended March 31, 1997.................   F-70
  Notes to Combined Financial Statements....................   F-71
MERIT RAILROAD CONTRACTORS, INC.
  Report of Independent Public Accountants..................   F-78
  Balance Sheets as of July 31, 1998 and December 31,
     1997...................................................   F-79
  Statements of Operations for the Seven Months Ended July
     31, 1998 and the Years Ended December 31, 1997 and
     1996...................................................   F-80
  Statements of Stockholders' Equity for the Periods Ended
     December 31, 1995, 1996 and 1997 and July 31, 1998.....   F-81
  Statements of Cash Flows for the Seven Months Ended 1998
     and the Years Ended 1997 and 1996......................   F-82
  Notes to Financial Statements.............................   F-83
MIDWEST CONSTRUCTION SERVICES, INC.
  Report of Independent Public Accountants..................   F-89
  Balance Sheets as of July 31, 1998 and December 31,
     1997...................................................   F-90
  Statements of Operations and Retained Earnings for the
     Seven Months Ended July 31, 1998 and the Years Ended
     December 31, 1997 and 1996.............................   F-91
  Statements of Cash Flows for the Seven Months Ended July
     31, 1998 and the Years Ended December 31, 1997 and
     1996...................................................   F-92
  Notes to the Financial Statements.........................   F-93
NEW ENGLAND RAILROAD CONSTRUCTION COMPANY, INC.
  Report of Independent Public Accountants..................   F-99
  Balance Sheet as of July 31, 1998.........................  F-100
  Statement of Operations for the Seven Months Ended July
     31, 1998...............................................  F-101
  Statement of Stockholders' Equity for the Seven Months
     Ended July 31, 1998....................................  F-102
  Statement of Cash Flows for the Seven Months Ended July
     31, 1998...............................................  F-103
  Notes to Financial Statements.............................  F-104
RAILROAD SERVICES, INC. AND MINNESOTA RAILROAD SERVICES,
  INC.
  Report of Independent Public Accountants..................  F-108
  Combined Balance Sheets as of July 31, 1998 and December
     31, 1997...............................................  F-109
  Combined Statements of Operations for the Seven Months
     Ended July 31, 1998 and the Years Ended December 31,
     1997 and 1996..........................................  F-110
</TABLE>
 
                                       31
<PAGE>   34
 
<TABLE>
<CAPTION>
                                                              PAGE
                                                              -----
<S>                                                           <C>
  Combined Statements of Stockholders' Equity as of December
     31, 1995, 1996 and 1997 and July 31, 1998..............  F-111
  Combined Statements of Cash Flows for the Seven Months
     Ended July 31, 1998 and the Years Ended December 31,
     1997 and 1996..........................................  F-112
  Notes to Combined Financial Statements....................  F-113
SOUTHERN INDIANA WOOD PRESERVING COMPANY, INC.
  Report of Independent Public Accountants..................  F-120
  Balance Sheets as of July 31, 1998 and December 31,
     1997...................................................  F-121
  Statements of Operations for the Seven Months Ended July
     31, 1998 and the Year Ended December 31, 1997..........  F-122
  Statements of Stockholder's Equity for the Periods Ended
     December 31, 1996 and 1997 and July 31, 1998...........  F-123
  Statements of Cash Flows for the Seven Months Ended July
     31, 1998 and the Year Ended December 31, 1997..........  F-124
  Notes to Financial Statements.............................  F-125
US. TRACKWORKS, INC. AND NORTHERN RAIL SERVICE AND SUPPLY
  CO.
  Report of Independent Public Accountants..................  F-128
  Combined Balance Sheets as of July 31, 1998 and December
     31, 1997...............................................  F-129
  Combined Statements of Operations for the Seven Months
     Ended July 31, 1998 and December 31, 1997 and 1996.....  F-130
  Combined Statements of Changes in Stockholders' Equity as
     of December 31, 1995, 1996 and 1997 and July 31,
     1998...................................................  F-131
  Combined Statements of Cash Flows for the Seven Months
     Ended July 31, 1998 and the Years Ended December 31,
     1997 and 1996..........................................  F-132
  Notes to Combined Financial Statements....................  F-133
</TABLE>
 
     2. Financial Statement Schedules
 
                                  SCHEDULE II
                       VALUATION AND QUALIFYING ACCOUNTS
 
<TABLE>
<CAPTION>
                                                                  ADDITIONS
                                        BALANCE AT                CHARGES TO
                                       BEGINNING OF   COSTS AND     OTHER                       BALANCE AT END
             DESCRIPTION                   YEAR       EXPENSES     ACCOUNTS    DEDUCTIONS (1)      OF YEAR
             -----------               ------------   ---------   ----------   --------------   --------------
   ALLOWANCE FOR DOUBTFUL ACCOUNTS
<S>                                    <C>            <C>         <C>          <C>              <C>
Year Ended December 31, 1998.........       58            0          399             (15)            442
Year Ended December 31, 1997.........      363            0          185            (490)             58
Year Ended December 31, 1996.........      238            0          125               0             363
</TABLE>
 
(1) Deductions, represent uncollectible balances of accounts receivable written
    off, net of recoveries.
 
     3. Exhibits
 
     The following list of exhibits includes both exhibits submitted with this
Report as filed with the Securities and Exchange Commission and those
incorporated by reference to other filings:
 
<TABLE>
<CAPTION>
EXHIBIT
NUMBER                            NUMBER DESCRIPTION
-------                           ------------------
<C>     <S>  <C>
 3.1    --   Restated Certificate of Incorporation of the Company
             (incorporated by reference to Exhibit 3.1 to Registration
             Statement on Form S-1, File No. 333-53483)
 3.2    --   Bylaws of the Company (incorporated by reference to Exhibit
             3.2 to Registration Statement on Form S-1, File No.
             333-53483)
</TABLE>
 
                                       32
<PAGE>   35
 
<TABLE>
<CAPTION>
EXHIBIT
NUMBER                            NUMBER DESCRIPTION
-------                           ------------------
<C>     <S>  <C>
 3.3    --   Certificate of Designation of the Series A Convertible
             Preferred Stock (incorporated by reference to Exhibit 3.1 to
             the Registrant's Current Report on Form 8-K filed on October
             14, 1998)
 4.1    --   Specimen Common Stock Certificate (incorporated by reference
             to Exhibit 4.1 to Registration Statement on Form S-1, File
             No. 333-53483)
10.1    --   Uniform Provisions for the Acquisition of Founding Companies
             (incorporated by reference to Exhibit 10.1 to Registration
             Statement on Form S-1, File No. 333-53483)
10.2    --   Agreement and Plan of Reorganization dated as of May 21,
             1998 by and between RailWorks Corporation, Wildcats
             Alpha-Keystone Company, Alpha-Keystone Engineering, Inc. and
             the stockholders named therein (incorporated by reference to
             Exhibit 10.2 to Registration Statement on Form S-1, File No.
             333-53483)
10.3    --   Agreement and Plan of Reorganization dated as of May 21,
             1998 by and between RailWorks Corporation, Bulldog Comtrak
             Company, Comtrak Construction, Inc. and the stockholders
             named therein (incorporated by reference to Exhibit 10.3 to
             Registration Statement on Form S-1, File No. 333-53483)
10.4    --   Agreement and Plan of Reorganization dated as of May 21,
             1998 by and between RailWorks Corporation, Cardinal Annex
             Railroad Builders Company, Annex Railroad Builders, Inc. and
             the stockholders named therein (incorporated by reference to
             Exhibit 10.4 to Registration Statement on Form S-1, File No.
             333-53483)
10.5    --   Agreement and Plan of Reorganization dated as of May 21,
             1998 by and between RailWorks Corporation, Huskies Condon
             Brothers Company, Condon Brothers Inc. and the stockholders
             named therein (incorporated by reference to Exhibit 10.5 to
             Registration Statement on Form S-1, File No. 333-53483)
10.6    --   Agreement and Plan of Reorganization dated as of May 21,
             1998 by and between RailWorks Corporation, Commodores
             Concrete Company, CPI Concrete Products, Inc. and the
             stockholders named therein (incorporated by reference to
             Exhibit 10.6 to Registration Statement on Form S-1, File No.
             333-53483)
10.7    --   Agreement and Plan of Reorganization dated as of May 21,
             1998 by and between RailWorks Corporation, Nittany Lions
             McGinley Company, HP McGinley Inc. and the stockholders
             named therein (incorporated by reference to Exhibit 10.7 to
             Registration Statement on Form S-1, File No. 333-53483)
10.8    --   Agreement and Plan of Reorganization dated as of May 21,
             1998 by and between RailWorks Corporation, Owls Kennedy
             Railroad Builders Company, Kennedy Railroad Builders, Inc.
             and the stockholders named therein (incorporated by
             reference to Exhibit 10.8 to Registration Statement on Form
             S-1, File No. 333-53483)
10.9    --   Agreement and Plan of Reorganization dated as of May 21,
             1998 by and between RailWorks Corporation, Red Storm
             Comstock Company, Inc., L.K. Comstock & Company, Inc. and
             the stockholders named therein (incorporated by reference to
             Exhibit 10.9 to Registration Statement on Form S-1, File No.
             333-53483)
10.10   --   Agreement and Plan of Reorganization dated as of May 21,
             1998 by and between RailWorks Corporation, Sycamores Midwest
             Construction Company, Midwest Construction Services, Inc.
             and the stockholders named therein (incorporated by
             reference to Exhibit 10.10 to Registration Statement on Form
             S-1, File No. 333-53483)
10.11   --   Agreement and Plan of Reorganization dated as of May 21,
             1998 by and between RailWorks Corporation, Bears Merit
             Company, Merit Railroad Contractors, Inc. and the
             stockholders named therein (incorporated by reference to
             Exhibit 10.11 to Registration Statement on Form S-1, File
             No. 333-53483)
</TABLE>
 
                                       33
<PAGE>   36
 
<TABLE>
<CAPTION>
EXHIBIT
NUMBER                            NUMBER DESCRIPTION
-------                           ------------------
<C>     <S>  <C>
10.12   --   Agreement and Plan of Reorganization dated as of May 21,
             1998 by and between RailWorks Corporation, Hoosier Mize
             Company, Mize Construction Company and the stockholders
             named therein (incorporated by reference to Exhibit 10.12 to
             Registration Statement on Form S-1, File No. 333-53483)
10.13   --   Agreement and Plan of Reorganization dated as of May 21,
             1998 by and between RailWorks Corporation, Husky New England
             Railroad Construction Company, New England Railroad
             Construction Company Inc. and the stockholders named therein
             (incorporated by reference to Exhibit 10.13 to Registration
             Statement on Form S-1, File No. 333-53483)
10.14   --   Agreement and Plan of Reorganization dated as of May 21,
             1998 by and between RailWorks Corporation, Wolverines
             Northern Rail Services Company, Northern Rail Service and
             Supply Company, Inc. and the stockholders named therein
             (incorporated by reference to Exhibit 10.14 to Registration
             Statement on Form S-1, File No. 333-53483)
10.15   --   Agreement and Plan of Reorganization dated as of May 21,
             1998 by and between RailWorks Corporation, Big Orange
             Minnesota Company, Minnesota Railroad Service Company and
             the stockholders named therein (incorporated by reference to
             Exhibit 10.15 to Registration Statement on Form S-1, File
             No. 333-53483)
10.16   --   Agreement and Plan of Reorganization dated as of May 21,
             1998 by and between RailWorks Corporation, Buckeye Railcorp,
             Inc., Railcorp Inc. and the stockholders named therein
             (incorporated by reference to Exhibit 10.16 to Registration
             Statement on Form S-1, File No. 333-53483)
10.17   --   Agreement and Plan of Reorganization dated as of May 21,
             1998 by and between RailWorks Corporation, Runnin' Rebels
             Railroad Service Company, Railroad Service, Inc. and the
             stockholders named therein (incorporated by reference to
             Exhibit 10.17 to Registration Statement on Form S-1, File
             No. 333-53483)
10.18   --   Agreement and Plan of Reorganization dated as of May 21,
             1998 by and between RailWorks Corporation, Crusader Railroad
             Specialties Company, Railroad Specialties, Inc. and the
             stockholders named therein (incorporated by reference to
             Exhibit 10.18 to Registration Statement on Form S-1, File
             No. 333-53483)
10.19   --   Agreement and Plan of Reorganization dated as of May 21,
             1998 by and between RailWorks Corporation, Screaming Eagle
             Wood Preserving Company, Southern Indiana Wood Preserving
             Company, Inc. and the stockholders named therein
             (incorporated by reference to Exhibit 10.19 to Registration
             Statement on Form S-1, File No. 333-53483)
10.20   --   Agreement and Plan of Reorganization dated as of May 21,
             1998 by and between RailWorks Corporation, Fighting
             Irish-U.S. Railway Supply Company, U.S. Railway Supply, Inc.
             and the stockholders named therein (incorporated by
             reference to Exhibit 10.20 to Registration Statement on Form
             S-1, File No. 333-53483)
10.21   --   Agreement and Plan of Reorganization dated as of May 21,
             1998 by and between RailWorks Corporation, Spartans
             Trackworks Company, U.S. Trackworks, Inc. and the
             stockholders named therein (incorporated by reference to
             Exhibit 10.21 to Registration Statement on Form S-1, File
             No. 333-53483)
10.22   --   Agreement and Plan of Reorganization dated as of May 21,
             1998 by and between RailWorks Corporation, Mustang Smith
             Construction Company, Wm. A. Smith Construction Co., Inc.
             and the stockholders named therein (incorporated by
             reference to Exhibit 10.22 to Registration Statement on Form
             S-1, File No. 333-53483)
10.23   --   Agreement and Plan of Reorganization dated as of May 21,
             1998 by and between RailWorks Corporation, Longhorn Smith
             Rerailing Company, Wm. A. Smith Rerailing Services, Inc. and
             the stockholders named therein (incorporated by reference to
             Exhibit 10.23 to Registration Statement on Form S-1, File
             No. 333-53483)
</TABLE>
 
                                       34
<PAGE>   37
 
<TABLE>
<CAPTION>
EXHIBIT
NUMBER                            NUMBER DESCRIPTION
-------                           ------------------
<C>     <S>  <C>
10.24   --   Amended and Restated Employment Agreement between RailWorks
             Corporation and John G. Larkin dated as of August 4, 1998
             (incorporated by reference to Exhibit 10.1 to the
             Registrant's Quarterly Report on Form 10-Q filed on
             September 11, 1998)
10.25   --   Amended and Restated Employment Agreement between RailWorks
             Corporation and Michael R. Azarela dated as of August 4,
             1998 (incorporated by reference to Exhibit 10.2 to the
             Registrant's Quarterly Report on Form 10-Q filed on
             September 11, 1998)
10.26   --   Amended and Restated Employment Agreement between RailWorks
             Corporation and John Kennedy dated as of August 4, 1998
             (incorporated by reference to Exhibit 10.3 to the
             Registrant's Quarterly Report on Form 10-Q filed on
             September 11, 1998)
10.27   --   Amended and Restated Employment Agreement between RailWorks
             Corporation and Harold C. Kropp, Jr. dated as of August 4,
             1998 (incorporated by reference to Exhibit 10.4 to the
             Registrant's Quarterly Report on Form 10-Q filed on
             September 11, 1998)
10.28   --   Form of Employment Agreement between each Founding Company
             and Founding Company Officer (incorporated by reference to
             Exhibit 10.28 to Registration Statement on Form S-1, File
             No. 333-53483)
10.29   --   1998 Incentive Stock Plan (incorporated by reference to
             Exhibit 10.29 to Registration Statement on Form S-1, File
             No. 333-53483)
10.30   --   Indemnity and Cooperation Agreement dated as of April 3,
             1997 between Spie Enertrans S.A., Comstock Group, Inc., L.K.
             Comstock & Company and LKC Acquisition Corp., together with
             Memorandum of Understanding dated August 20, 1997 between
             Spie Enertrans S.A., Comstock Group, Inc., L.K. Comstock &
             Company and LKC Acquisition Corp. (incorporated by reference
             to Exhibit 10.30 to Registration Statement on Form S-1, File
             No. 333-53483)
10.31   --   Stock Purchase Agreement dated April 3, 1997 between
             Comstock Group, Inc. and LKC Acquisition Corp., as amended
             (incorporated by reference to Exhibit 10.31 to Registration
             Statement on Form S-1, File No. 333-53483)
10.32   --   Contingent Promissory Note dated April 3, 1997 made by L.K.
             Comstock & Company, Inc. to the order of Spie Enertrans S.A.
             (incorporated by reference to Exhibit 10.32 to Registration
             Statement on Form S-1, File No. 333-53483)
10.33   --   Employment Agreement dated as of January 7, 1999 between
             Robert D. Wolff and MidWest Railroad Construction and
             Maintenance Corporation of Wyoming
10.34   --   Credit Agreement dated as of August 4, 1998 among RailWorks
             Corporation, as Borrower, Certain Subsidiaries, as
             Guarantors, the Lenders named therein, First Union National
             Bank, as Documentation Agent and NationsBank, N.A., as
             Administrative Agent
10.35   --   Amendment No. 1 to Credit Agreement dated December   , 1998
             among RailWorks Corporation, as Borrower, the Guarantors and
             Lenders named therein and NationsBank, N.A., as
             Administrative Agent
10.36   --   Amendment No. 2 to Credit Agreement dated February 2, 1999
             among RailWorks Corporation, and as Borrower, the Guarantors
             and Lenders named therein and NationsBank, N.A., as
             Administrative Agent
10.37   --   Credit Agreement dated as of February 2, 1999 among
             RailWorks Corporation, as Borrower, Certain Subsidiaries, as
             Guarantors, the Lenders named therein and NationsBank, N.A.,
             as Administrative Agent
21.1    --   List of Subsidiaries
</TABLE>
 
                                       35
<PAGE>   38
 
<TABLE>
<CAPTION>
EXHIBIT
NUMBER                            NUMBER DESCRIPTION
-------                           ------------------
<C>     <S>  <C>
27.1    --   Financial Data Schedule (for SEC use only) (incorporated by
             reference to Exhibit 27.1 to the Registrant's Current Report
             on Form 8-K filed on March 17, 1999)
99.1    --   Stock Exchange Agreement dated October 8, 1998 between the
             Registrant and BT Alex. Brown Incorporated (incorporated by
             reference to Exhibit 99.1 to the Registrant's Current Report
             on Form 8-K filed on October 14, 1998)
</TABLE>
 
(B) REPORTS ON FORM 8-K
 
     One report on Form 8-K was filed during the quarter ended December 31,
1998:
 
<TABLE>
<CAPTION>
ITEM REPORTED                                             FINANCIAL STATEMENTS FILED   DATE OF REPORT
-------------                                             --------------------------   ---------------
<S>                                                       <C>                          <C>
On October 14, 1998, the Registrant filed a Form 8-K to
  report the issuance on October 8, 1998 of 13,700
  shares of its non-voting Series A Convertible
  Preferred Stock to BT Alex. Brown Incorporated in
  exchange for 1,370,000 shares of its Common Stock.....             None              October 8, 1998
</TABLE>
 
(C) EXHIBITS
 
     Exhibits are listed in Item 14(a).
 
(D) FINANCIAL STATEMENT SCHEDULES
 
     Schedules are listed in Item 14(a).
 
                                       36
<PAGE>   39
 
                                   SIGNATURES
 
     Pursuant to requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, as amended, the Registrant has duly caused this Report to be signed
on its behalf by the undersigned, thereunto duly authorized on the 29 day of
March, 1999.
 
                                          RAILWORKS CORPORATION
                                          (Registrant)
 
                                          By:      /s/ JOHN G. LARKIN
                                            ------------------------------------
                                                       John G. Larkin
                                              Chairman of the Board and Chief
                                                     Executive Officer
 
     Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed by the following persons on behalf of the Registrant and
in the capacities indicated on March 29, 1999.
 
<TABLE>
<CAPTION>
                      SIGNATURE                                            TITLE
                      ---------                                            -----
<C>                                                    <S>
 
               /s/ MICHAEL R. AZARELA                  Executive Vice President, Chief Financial
-----------------------------------------------------    Officer and Director (Principal Financial
                 Michael R. Azarela                      Officer)
 
              /s/ HAROLD C. KROPP, JR.                 Vice President and Chief Accounting Officer
-----------------------------------------------------    (Principal Accounting Officer)
                Harold C. Kropp, Jr.
 
                  /s/ JOHN KENNEDY                     Vice President, Chief Operating
-----------------------------------------------------    Officer -- Track Contractors and Director
                    John Kennedy
 
                /s/ PETER ALAN PASCH                   Vice President, Chief Operating
-----------------------------------------------------    Officer -- Transit Operations and Director
                  Peter Alan Pasch
 
                 /s/ SCOTT D. BRACE                    Director
-----------------------------------------------------
                   Scott D. Brace
 
              /s/ LAMBERTUS L. TAMELING                Director
-----------------------------------------------------
                Lambertus L. Tameling
 
                /s/ RONALD W. DRUCKER                  Director
-----------------------------------------------------
                  Ronald W. Drucker
 
                   /s/ R.C. MATNEY                     Director
-----------------------------------------------------
                     R.C. Matney
</TABLE>
 
                                       37
<PAGE>   40
 
                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
 
To RailWorks Corporation:
 
     We have audited the accompanying consolidated balance sheets of RailWorks
Corporation (a Delaware corporation) and Subsidiaries and its predecessor entity
(the "Company"), as of December 31, 1998 and 1997 and the related consolidated
statements of operations, stockholders' equity and cash flows for the three
years in the period ended December 31, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
 
     We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and the disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
 
     In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of the Company
as of December 31, 1998 and 1997 and the results of its operations and its cash
flows for the three years in the period ended December 31, 1998 in conformity
with generally accepted accounting principles.
 
     Our audit was made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedules listed in the index of
financial statements are presented for purposes of complying with the Securities
and Exchange Commissions rules and are not part of the basic financial
statements. These schedules have been subjected to the auditing procedures
applied in the audit of the basic financial statements and, in our opinion,
fairly state in all material respects the financial data required to be set
forth therein in relation to the basic financial statements taken as a whole.
 
                                          Arthur Andersen LLP
 
Stamford, Connecticut
February 8, 1999
 
                                       F-1
<PAGE>   41
 
                     RAILWORKS CORPORATION AND SUBSIDIARIES
 
                          CONSOLIDATED BALANCE SHEETS
                           DECEMBER 31, 1998 AND 1997
                (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
 
<TABLE>
<CAPTION>
                                                                1998      1997
                                                              --------   -------
<S>                                                           <C>        <C>
ASSETS
Current Assets:
  Cash and cash equivalents.................................  $  2,846   $ 1,120
  Accounts receivable, net of allowance for doubtful
    accounts of $442 and $58................................    77,181    46,436
  Costs and estimated earnings in excess of billings on
    uncompleted contracts...................................    24,792    17,149
  Inventories:
    Raw materials...........................................     7,535     1,240
    Finished goods..........................................     1,550        --
  Deferred tax asset........................................       870     1,020
  Other current assets......................................     3,401       977
                                                              --------   -------
         Total current assets...............................   118,175    67,942
                                                              --------   -------
PROPERTY, PLANT AND EQUIPMENT...............................    14,514       448
LESS ACCUMULATED DEPRECIATION AND
  AMORTIZATION..............................................     1,122        56
                                                              --------   -------
PROPERTY, PLANT AND EQUIPMENT, NET..........................    13,392       392
                                                              --------   -------
OTHER ASSETS:
  Excess of cost over net assets acquired, net of
    amortization............................................    93,845        --
  Deferred tax asset........................................        85        --
  Loans to officers.........................................       959        --
  Other.....................................................     2,180        18
                                                              --------   -------
         Total other assets.................................    97,069        18
                                                              --------   -------
                                                              $228,636   $68,352
                                                              ========   =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
  Current maturities of long-term debt......................  $    931   $ 2,555
  Accounts payable and accrued liabilities..................    35,436    22,547
  Accrued payroll and related withholdings..................     3,777     4,711
  Billings in excess of costs and estimated earnings on
    uncompleted contracts...................................     5,958     8,510
  Other current liabilities.................................     4,682     3,119
                                                              --------   -------
         Total current liabilities..........................    50,784    41,442
                                                              --------   -------
  Long-term debt............................................    50,573    12,449
  Excess of acquired net assets over cost, net of
    amortization............................................     8,662    10,210
  Other liabilities.........................................     8,609     2,813
                                                              --------   -------
         Total long-term liabilities........................    67,844    25,472
                                                              --------   -------
         Total liabilities..................................   118,628    66,914
                                                              --------   -------
Stockholders' Equity:
  Series A, convertible preferred stock, $1.00 par value,
    authorized 10,000,000 shares, 13,700 shares issued and
    outstanding.............................................        14        --
  Common stock, $0.01 par value, authorized 100,000,000
    shares, 13,703,530 shares issued and outstanding in
    1998, 2,959,291 issued and outstanding in 1997..........       137        30
  Additional paid-in capital................................   121,296        --
  Retained earnings (deficit)...............................   (11,439)    1,408
                                                              --------   -------
         Total stockholders' equity.........................   110,008     1,438
                                                              --------   -------
                                                              $228,636   $68,352
                                                              ========   =======
</TABLE>
 
                See Notes to Consolidated Financial Statements.
 
                                       F-2
<PAGE>   42
 
                     RAILWORKS CORPORATION AND SUBSIDIARIES
 
                     CONSOLIDATED STATEMENTS OF OPERATIONS
              FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
                (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
 
<TABLE>
<CAPTION>
                                                                                       PREDECESSOR
                                                                                         COMPANY
                                                                1998         1997         1996
                                                             ----------   ----------   -----------
<S>                                                          <C>          <C>          <C>
Revenue....................................................  $  212,533   $  153,610    $188,767
Cost of revenue............................................     182,817      136,678     169,303
                                                             ----------   ----------    --------
Gross profit...............................................      29,716       16,932      19,464
Selling, general and administrative expenses...............      17,040       13,733      15,053
Non-recurring expenses.....................................      19,965           --          --
Transaction fees...........................................       1,281           --          --
Depreciation and amortization expense......................       2,105         (213)      1,365
                                                             ----------   ----------    --------
Operating (loss) income....................................     (10,675)       3,412       3,046
                                                             ----------   ----------    --------
Other income(expense):
  Interest expense.........................................      (2,334)      (1,761)     (2,023)
  Interest and other income................................       1,634          975         476
  Management fee to former parent..........................          --           --        (941)
                                                             ----------   ----------    --------
  Other expense, net.......................................        (700)        (786)     (2,488)
                                                             ----------   ----------    --------
(Loss) income before income taxes..........................     (11,375)       2,626         558
Provision for income taxes.................................       1,472        1,198         500
                                                             ----------   ----------    --------
Net (loss) income..........................................  $  (12,847)  $    1,428    $     58
                                                             ==========   ==========    ========
Basic and diluted (loss) earnings per share................  $    (1.67)  $      .48
                                                             ==========   ==========
Weight average shares used in computing (loss) earnings per
  share....................................................   7,694,267    2,959,291
                                                             ==========   ==========
</TABLE>
 
                See Notes to Consolidated Financial Statements.
 
                                       F-3
<PAGE>   43
 
                     RAILWORKS CORPORATION AND SUBSIDIARIES
 
                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
              FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
                                 (IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                              COMMON STOCK     PREFERRED STOCK     ADDITIONAL
                                             ---------------   ---------------       PAID-IN       RETAINED EARNINGS
                                             SHARES   AMOUNT   SHARES   AMOUNT       CAPITAL           (DEFICIT)        TOTAL
                                             ------   ------   ------   ------   ---------------   -----------------   --------
<S>                                          <C>      <C>      <C>      <C>      <C>               <C>                 <C>
PREDECESSOR COMPANY
BALANCE, DECEMBER 31, 1995.................   1,200    $ --      --      $--        $ 22,114           $ (1,547)       $ 20,567
  Capital contribution.....................      --      --      --       --           1,110                 --           1,110
  Transfer of note receivable..............      --      --      --       --          (4,745)                --          (4,745)
  Net income...............................      --      --      --       --              --                 58              58
                                             ------    ----      --      ---        --------           --------        --------
BALANCE DECEMBER 31, 1996..................   1,200    $ --      --      $--        $ 18,479           $ (1,489)       $ 16,990
                                             ======    ====      ==      ===        ========           ========        ========
-------------------------------------------------------------------------------------------------------------------------------
 
BALANCE JANUARY 1, 1997....................      --    $ --      --      $--        $     --           $     --        $     --
  Capital contribution.....................     111       1      --       --               9                 --              10
  Recapitalization.........................   2,849      29      --       --              (9)               (20)             --
  Net income...............................      --      --      --       --              --              1,428           1,428
                                             ------    ----      --      ---        --------           --------        --------
BALANCE DECEMBER 31, 1997..................   2,960      30      --       --              --              1,408           1,438
  Issuance of common stock.................   5,908      59      --       --          54,023                 --          54,082
  Non-cash compensation charge.............   1,206      12      --       --          14,861                 --          14,873
  Initial public offering, net of
    underwriting discount and offering
    expenses...............................   5,000      50      --       --          52,412                 --          52,462
  Issuance of preferred stock..............  (1,370)    (14)     14       14              --                 --              --
  Net loss.................................      --      --      --       --              --            (12,847)        (12,847)
                                             ------    ----      --      ---        --------           --------        --------
BALANCE, DECEMBER 31, 1998.................  13,704    $137      14      $14        $121,296           $(11,439)       $110,008
                                             ======    ====      ==      ===        ========           ========        ========
</TABLE>
 
                See Notes to Consolidated Financial Statements.
 
                                       F-4
<PAGE>   44
 
                     RAILWORKS CORPORATION AND SUBSIDIARIES
 
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
              FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
                       (IN THOUSANDS, EXCEPT SHARE DATA)
 
<TABLE>
<CAPTION>
                                                                                    PREDECESSOR
                                                                                      COMPANY
                                                                1998       1997        1996
                                                              --------   --------   -----------
<S>                                                           <C>        <C>        <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income...........................................  $(12,847)  $  1,428    $     58
Adjustments to reconcile net (loss) income to net cash used
  in operating activities:
  Depreciation and amortization.............................     2,105       (213)      1,365
  Non-cash compensation charge..............................    14,873         --          --
  Deferred taxes............................................        65        664          --
  Gain on sale of division..................................      (861)        --          --
  Gain on sale of equipment.................................        (3)      (194)        (39)
  Change in contract reserves...............................        --         --      (3,000)
  Change in operating assets and liabilities:
    Accounts receivable and costs and estimated earnings in
     excess of billings on uncompleted contracts............   (15,236)    (8,176)     (6,231)
    Inventory...............................................      (274)       296        (947)
    Other current assets....................................    (1,066)      (271)     (4,209)
    Accounts payable and accrued liabilities................     2,726     (1,159)     (1,772)
    Accrued payroll and related withholdings................    (1,269)       549         365
    Billings in excess of costs and estimated earnings on
     uncompleted contracts..................................    (4,458)     3,320       2,307
    Other current liabilities...............................    (1,252)       909        (103)
    Other assets............................................    (1,145)       (18)         (3)
    Other liabilities.......................................     4,713       (336)        257
                                                              --------   --------    --------
        Net cash used in operating activities...............   (13,929)    (3,201)    (11,952)
                                                              --------   --------    --------
CASH FLOWS FROM INVESTING ACTIVITIES:
  Proceeds from sale of division............................     1,000         --          --
  Proceeds from sale of equipment...........................        32        194         130
  Purchase of equipment and leasehold improvements..........    (1,280)      (448)       (690)
  Acquisition of subsidiaries, net of cash acquired.........   (52,535)        --          --
  Contingent earnout payment................................    (1,600)        --          --
                                                              --------   --------    --------
        Net cash used in investing activities...............   (54,383)      (254)       (560)
                                                              --------   --------    --------
CASH FLOWS FROM FINANCING ACTIVITIES:
  Payment of loan origination fee...........................    (1,615)        --          --
  Proceeds from issuance of common stock, net...............    52,462         --       1,110
  Proceeds from contingent promissory notes.................        --     14,608          --
  Repayment of contingent promissory notes..................        --       (157)         --
  Loans to officers.........................................      (959)        --          --
  Proceeds from note payable................................        --      4,000          --
  Repayments of note payable................................        --     (4,000)         --
  Proceeds from long-term borrowing.........................    61,325     16,937       7,961
  Repayment of long-term borrowing..........................   (41,175)   (26,823)     (2,312)
                                                              --------   --------    --------
        Net cash provided by financing activities...........    70,038      4,565       6,759
                                                              --------   --------    --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........     1,726      1,110      (5,753)
CASH AND CASH EQUIVALENTS, beginning of year................     1,120         10       9,924
                                                              --------   --------    --------
CASH AND CASH EQUIVALENTS, end of year......................  $  2,846   $  1,120    $  4,171
                                                              ========   ========    ========
SUPPLEMENTARY DISCLOSURES OF CASH FLOW INFORMATION:
  Cash paid during the year for interest....................  $  2,107   $  1,478    $  1,305
                                                              ========   ========    ========
  Cash paid during the year for income taxes................  $    392   $    188    $     57
                                                              ========   ========    ========
</TABLE>
 
NON-CASH OPERATING, INVESTING AND FINANCING ACTIVITIES: The Company issued
8,867,648 shares of common stock in exchange for 100% of the outstanding common
stock of the Subsidiaries.
 
                See Notes to Consolidated Financial Statements.
 
                                       F-5
<PAGE>   45
 
                     RAILWORKS CORPORATION AND SUBSIDIARIES
 
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
1. BASIS OF PRESENTATION
 
     RailWorks Corporation, a Delaware corporation, ("RailWorks" or the
"Company"), was formed in March 1998 to acquire, integrate and facilitate the
growth of similar and complementary companies in the rail system services and
products industry.
 
     On July 29, 1998, RailWorks announced the initial public offering ("IPO")
of 5,000,000 shares of its common stock at a price of $12.00 per share. The
initial public offering was consummated on August 4, 1998. The capital raised by
this offering was $55,800,000 net of underwriting discounts.
 
     Concurrent with the consummation of the IPO, the Company acquired 14 groups
of companies (the "Founding Companies") in the rail system services and related
products industry. The aggregate consideration paid by the Company to acquire
these companies was approximately $51,100,000 in cash and 8,867,648 shares of
RailWorks common stock.
 
     For accounting and financial statement purposes, Comstock Holdings, Inc.
(one of the Founding Companies) ("Comstock" or the "Accounting Acquirer") has
been identified as the accounting acquirer consistent with Staff Accounting
Bulletin ("SAB") No. 97 of the Securities and Exchange Commission. The
acquisitions of the remaining Founding Companies were accounted for using the
purchase method of accounting and accordingly, the purchase price has been
allocated to the assets acquired and the liabilities assumed based upon the fair
values at the date of acquisition. The acquisitions of the Founding Companies
resulted in the recording of goodwill of approximately $94,817,000, which is
being amortized over 40 years.
 
     On November 4, 1998, the Company acquired substantially all of the net
assets of Sheldon Electric, Inc. ("Sheldon"). Also, on November 4, 1998, the
Company acquired the stock of Armcore Railroad Contractors, Inc. ("Armcore"), an
Indiana corporation located in Frankfurt, Indiana. The aggregate price paid for
these acquisitions was approximately $3,100,000 in cash. The acquisitions of
Sheldon and Armcore were accounted for using the purchase method of accounting.
The estimated goodwill associated with these acquisitions aggregated
approximately $2,449,000.
 
     Comstock was incorporated on November 20,1996 as a Delaware corporation for
the purpose of acquiring L.K. Comstock & Company, Inc. (the "Predecessor
Company"). Comstock had no operations from incorporation through January 1,
1997.
 
     Effective January 1, 1997, Comstock purchased the stock of the Predecessor
Company. The financial statements, including those of the Predecessor Company
prior to its acquisition, have been prepared by Comstock management and present
the financial position and results of operations of Comstock as of and for the
year ended December 31, 1997 and of the Predecessor Company for the periods
prior to January 1, 1997. Accordingly, the financial information for periods
prior to 1997 do not reflect the significant impact of the Predecessor Company
acquisition or of the purchase accounting adjustments on the financial position
and results of operations of Comstock.
 
     The Predecessor Company was acquired by Comstock through various agreements
(the "Agreements") entered into with Comstock Group, Inc. ("Group", the
Predecessor Company's former parent), Spie Group Inc. ("Spie", the parent of
Group), Spie Enertrans SA ("Enertrans", the former parent of Spie) and Schneider
Electric Comstock Inc. ("Schneider", parent of Spie). The Agreements principally
called for: (1) the sale of the common stock of the Predecessor Company to
Comstock (the "Sale"), (2) the issuance of various contingent promissory notes
by Comstock to Enertrans and Group in exchange for approximately $18,903,000,
(3) the transfer of various intangible assets of Spie to Comstock, (4) the
provision for various income tax elections and indemnifications, and (5) certain
other indemnifications and cooperative understandings. The effects of the
Agreements have been accounted for as a purchase in the accompanying financial
statements as of and for the year ended December 31, 1997. In connection with
the IPO of RailWorks, Group agreed to accept a one-time payment of $1,600,000 to
satisfy all potential contingent
 
                                       F-6
<PAGE>   46
                     RAILWORKS CORPORATION AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
payments owed in connection with the Agreements. Such payment was made by
RailWorks on September 8, 1998.
 
     As part of the Agreements, certain intangible assets (recorded at no value)
were assigned to Comstock. In addition, Comstock issued a promissory note (the
"Contingent Promissory Note"), collateralized by certain investments related to
customer contracts involving claims and an investment in a joint venture (the
"Investments"). The remaining balance of the Contingent Promissory Note of
$12,240,000 at December 31, 1998 is payable only from amounts collected by
Comstock relating to the Investments until April 3, 2007, at which time the note
is cancelled. As such, Enertrans and any successor to it or creditor may not
look to any other Comstock assets to satisfy this indebtedness. Accordingly,
management believes a right of offset exists for financial reporting purposes
and the Investments and the Contingent Promissory Note have been offset in the
accompanying balance sheets at December 31, 1998 and 1997 in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 125 "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities."
 
     In connection with the Sale, $5,095,000 of cash from the Predecessor
Company was used by Comstock to fund its acquisition of the Predecessor Company.
Accordingly, and as a result of the purchase price adjustments, the fair value
of the net assets acquired exceeds the purchase price funded solely by Comstock.
In accordance with Accounting Principles Board Opinion No. 16 "Business
Combinations", the excess of the cost of net assets acquired first reduced the
non current assets to zero with the remainder allocated to "Excess of Acquired
Net Assets Over Cost", (negative goodwill) which amount is being amortized over
40 years.
 
2. NATURE OF BUSINESS
 
     RailWorks 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.
 
     During 1998, the Company adopted SFAS No. 131 "Disclosures about Segments
of an Enterprise and Related Information" ("SFAS No. 131"). In accordance with
SFAS No. 131, the Company has three reportable segments: (1) transit services,
(2) rail construction, rehabilitation, repair and maintenance services and (3)
rail products and supplies. The transit services segment provides transit
construction and rehabilitation services, as well as installation of signaling,
communications and electrical systems. The rail construction services segment
provides design, engineering, construction, rehabilitation and repair and
maintenance of track systems. The rail products and supplies segment provides a
broad range of rail related products, including treated wood ties. The
accounting policies of the segments are the same as those described in the
summary of significant accounting policies. RailWorks evaluates performance
based on profit or loss from operations before income taxes, interest income and
expense, and non-recurring gains and losses.
 
3. SIGNIFICANT ACCOUNTING POLICIES
 
PRINCIPLES OF CONSOLIDATION
 
     The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries. All significant intercompany
transactions have been eliminated.
 
     The Company accounts for intersegment sales and transfers as if the sales
or transfers were to third parties, utilizing current market prices and arms
length terms and conditions.
 
                                       F-7
<PAGE>   47
                     RAILWORKS CORPORATION AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
USE OF ESTIMATES
 
     The preparation of financial statements in conformity with generally
accepted accounting principles 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.
 
REVENUE RECOGNITION
 
     The Company recognizes revenues from fixed-fee contracts using the
percentage-of-completion method, measured by the percentage of cost incurred to
date to management's estimated total cost for each contract. This method is used
because management considers total cost to be the best available measure of
progress on the contracts. Changes in job performance, job conditions and
estimated profitability may result in revisions to cost and income, which are
recognized in the period in which the revisions are determined. Revenues from
time-and-material contracts are recognized currently as the work is performed.
 
     Contract costs include all direct material, labor and equipment costs and
those indirect costs related to contract performance and are charged to cost of
revenues as incurred. Provisions for estimated losses on uncompleted contracts
are made in the period in which such losses are determined.
 
     The asset, "Costs and estimated earnings in excess of billings on
uncompleted contracts," represents revenues recognized in excess of amounts
billed. The liability, "Billings in excess of costs and estimated earnings on
uncompleted contracts," represents billings in excess of revenues recognized.
 
     With regard to the rail products segment, the Company recognizes revenue
when products are delivered to customers pursuant to shipping agreements. Cost
of goods sold includes the raw materials cost, labor and overhead costs of
producing the product.
 
     In accordance with industry practice, the Company classifies as current all
assets and liabilities related to the performance of long-term contracts. The
contracting cycle for certain long-term contracts may extend beyond one year
and, accordingly, collection or payment of amounts related to these contracts
may extend beyond one year.
 
CASH AND CASH EQUIVALENTS
 
     The Company considers cash and cash equivalents to include cash on hand and
temporary cash investments purchased with an original maturity of three months
or less.
 
INVENTORIES
 
     Inventories are stated at the lower of cost or market. Cost is determined
by the first-in, first-out (FIFO) method. Inventory consists of stored materials
and parts to be used in long-term construction contracts and raw materials and
finished goods produced by the rail products segment companies.
 
                                       F-8
<PAGE>   48
                     RAILWORKS CORPORATION AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
PROPERTY, PLANT AND EQUIPMENT
 
     Property, plant and equipment are recorded at cost. Included in machinery
and equipment is specialty construction tools and other equipment which,
although purchased in connection with a particular contract, is expected to be
used in future contracts. Depreciation is computed using the straight-line
method over the estimated useful lives of the assets as follows:
 
<TABLE>
<S>                                                           <C>
Building and improvements...................................  15 - 30 years
Machinery and equipment.....................................    3 - 7 years
Office furniture and equipment..............................    5 - 7 years
Transportation equipment....................................    5 - 7 years
</TABLE>
 
     Leasehold improvements are capitalized and amortized over the shorter of
the estimated useful lives of the assets or the terms of the related leases.
 
     Expenditures for repairs and maintenance are charged to expense when
incurred. Expenditures for major renewals and betterments, which extend the
useful lives of existing equipment, are capitalized and depreciated. Upon
retirement or disposition of property and equipment, the cost and related
accumulated depreciation are removed from the accounts and any resulting gain or
loss is recognized in the statements of operations.
 
INCOME TAXES
 
     The Company follows the liability method of accounting for income taxes in
accordance with SFAS No. 109. Under this method, deferred income taxes are
recorded based upon differences between the financial reporting and tax bases of
assets and liabilities and are measured using the enacted tax rates and laws
that will be in effect when the underlying assets or liabilities are received or
settled. Valuation allowances are established when necessary to reduce deferred
tax assets to the amount expected to be realized.
 
                                       F-9
<PAGE>   49
                     RAILWORKS CORPORATION AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
EARNINGS PER SHARE
 
     In February 1997, the Financial Accounting Standards Board issued SFAS No.
128, "Earnings per Share". This statement supersedes APB Opinion No. 15,
"Earnings per Share" and simplifies the computation of earnings per share
("EPS"). Primary EPS is replaced with a presentation of basic EPS. 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. Fully diluted EPS is replaced with diluted EPS. 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 (in thousands, except per share data):
 
<TABLE>
<CAPTION>
                                                                1998      1997
                                                              --------   ------
<S>                                                           <C>        <C>
Net (loss) income...........................................  $(12,847)  $1,428
                                                              ========   ======
Shares used for determining basic EPS.......................     7,694    2,960
Dilutive effect of:
  Stock options.............................................         *       --
  Convertible preferred shares..............................         *       --
                                                              --------   ------
Shares used for determining diluted EPS.....................     7,694    2,960
                                                              ========   ======
Basic EPS...................................................  $  (1.67)  $  .48
                                                              ========   ======
Diluted EPS.................................................  $  (1.67)  $  .48
                                                              ========   ======
</TABLE>
 
---------------
 
* Outstanding stock options and convertible preferred shares would be
  antidilutive in 1998 and therefore were excluded.
 
     No stock options or convertible preferred shares were outstanding in 1997.
 
INTANGIBLE ASSETS
 
     Intangible assets consist primarily of excess purchase price over net
assets acquired (goodwill), which is being amortized over its estimated useful
life of 40 years. In conformance with SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of",
the Company's management regularly evaluates whether events and circumstances
indicate that the remaining balance of intangibles or other long-lived assets
may not be recoverable.
 
     The Excess of Acquired Net Assets Over Cost (negative goodwill) was
generated from the acquisition of the Predecessor Company. The amortization
period of the negative goodwill is 40 years. During 1998, the negative goodwill
was reduced by the additional $1,600,000 purchase price paid to Group.
 
     Amortization expense, including negative amortization of $252,000 in 1998
and $269,000 in 1997, of the years ended December 31, 1998, 1997 and 1996
amounted to $965,000, $(269,000) and $16,000, respectively.
 
4. ACCOUNTS RECEIVABLE AND CONTRACTS IN PROGRESS
 
     Accounts receivable at December 31, 1998 and 1997 consisted of the
following (in thousands):
 
<TABLE>
<CAPTION>
                                                               1998      1997
                                                              -------   -------
<S>                                                           <C>       <C>
Billed......................................................  $58,702   $31,400
Retainages..................................................   18,479    15,036
                                                              -------   -------
                                                              $77,181   $46,436
                                                              =======   =======
</TABLE>
 
                                      F-10
<PAGE>   50
                     RAILWORKS CORPORATION AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     Retainages of approximately $5,783,000 and $4,388,000 at December 31, 1998
and 1997 are invested in U.S. government obligations and municipal bonds. The
Company anticipates that 47% of all retainages at December 31, 1998 will be
collected within one year.
 
     Costs and estimated earnings in excess of billings on uncompleted contracts
arise when revenues have been recorded but the amounts cannot be billed
currently under the terms of the contracts. Such amounts are recoverable from
customers upon various measures of performance, including achievement of certain
milestones, completion of specified units or completion of the contract. The
Company anticipates that substantially all amounts, other than unanticipated
additional contract costs (see below), will be billed and collected within one
year.
 
     The Company has recorded as costs and estimated earnings in excess in
billings on uncompleted contracts amounts that it seeks or will seek to collect
from customers or others for error or changes in contract specifications or
design, contract change orders in dispute or unapproved as to both scope and
price, or other customer-related causes of unanticipated additional contract
costs (pending change orders or claims). These amounts are recorded at their
estimated net realizable value when realization is probable and can be
reasonably estimated. No profit is recognized on the construction costs incurred
in connection with these amounts. Pending change orders and claims involve the
use of estimates and it is reasonably possible that revisions to the estimated
recoverable amounts of recorded pending change orders and claims may be made in
the near-term. Claims made by the Company involve negotiation and, in certain
cases litigation. The Company expenses such costs as incurred, although it may
seek to recover these costs as part of the claim. The Company believes that it
has established legal bases for pursuing recovery of recorded claims and it is
management's intention to pursue and litigate these claims, if necessary, until
a decision or settlement is reached.
 
     The Company is pursuing unanticipated additional contract costs on certain
completed contracts. Costs and estimated earnings in excess of billings on
uncompleted contracts includes unbilled revenues of approximately $11,054,000
and $3,915,000 at December 31, 1998 and 1997, respectively, related to these
contracts. In addition, billed accounts receivable and retainages include
contractually billed amounts related to these contracts of approximately
$3,105,000 and $2,257,000 at December 31, 1998 and 1997, respectively. Certain
contractually billed amounts related to these contracts may not be paid by the
customer to the Company until final resolution of the contract. At December 31,
1998 and 1997, the Company had reserves of approximately $4,500,00 and
$2,285,000, respectively, related to unbilled revenue and estimated legal costs
to settle.
 
     Costs and estimated earnings at December 31, 1998 and 1997, on uncompleted
contracts and related amounts billed are as follows (in thousands):
 
<TABLE>
<CAPTION>
                                                                1998       1997
                                                              --------   --------
<S>                                                           <C>        <C>
Costs.......................................................  $429,114   $363,561
Estimated earnings..........................................    47,575     46,027
                                                              --------   --------
                                                               476,689    409,588
Billings....................................................   457,855    400,949
                                                              --------   --------
                                                              $ 18,834   $  8,639
                                                              ========   ========
</TABLE>
 
                                      F-11
<PAGE>   51
                     RAILWORKS CORPORATION AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     Such amounts are included in the accompanying consolidated balance sheets
under the following captions (in thousands):
 
<TABLE>
<CAPTION>
                                                               1998      1997
                                                              -------   -------
<S>                                                           <C>       <C>
Costs and estimated earnings in excess of billings on
  uncompleted contracts.....................................  $24,792   $17,149
Billings in excess of costs and estimated earnings on
  uncompleted contracts.....................................   (5,958)   (8,510)
                                                              -------   -------
                                                              $18,834   $ 8,639
                                                              =======   =======
</TABLE>
 
     At December 31, 1998, 1997 and 1996, earned revenues from government
related funding sources were 40%, 66% and 61%, respectively, of total earned
revenues. Approximately 27%, 30% and 27% of total earned revenues for 1998, 1997
and 1996, respectively, were from a single government customer.
 
5. PROPERTY, PLANT AND EQUIPMENT
 
     Property, plant and equipment consists of the following at December 31,
1998 and 1997 (in thousands):
 
<TABLE>
<CAPTION>
                                                               1998     1997
                                                              -------   ----
<S>                                                           <C>       <C>
Land and buildings..........................................  $ 1,780   $ --
Transportation equipment....................................    2,121     --
Machinery and equipment.....................................   10,038    448
Office furniture and equipment..............................      326     --
Leasehold improvements......................................      249     --
                                                              -------   ----
                                                               14,514    448
Less accumulated depreciation and amortization..............    1,122     56
                                                              -------   ----
Property, plant and equipment, net..........................  $13,392   $392
                                                              =======   ====
</TABLE>
 
     Depreciation and amortization expense on property, plant and equipment
charged to operations for the years ended December 31, 1998, 1997 and 1996 was
approximately $1,140,000, $56,000 and $1,349,000, respectively.
 
6. LONG-TERM DEBT
 
     Long-term debt consists of the following at December 31, 1998 and 1997 (in
thousands):
 
<TABLE>
<CAPTION>
                                                               1998      1997
                                                              -------   -------
<S>                                                           <C>       <C>
Revolving credit agreement(a)...............................  $49,300   $    --
Revolving credit agreement(b)...............................       --    12,057
Temporary revolver(c).......................................       --       550
Promissory note(d)..........................................       --     1,700
Fixed asset notes...........................................    2,204       697
                                                              -------   -------
                                                               51,504    15,004
Less current portion........................................      931     2,555
                                                              -------   -------
                                                              $50,573   $12,449
                                                              =======   =======
</TABLE>
 
---------------
 
(a)  On August 4, 1998, the Company entered into a secured $75,000,000 revolving
     credit agreement with NationsBank, N.A. (the "Credit Facility"). The Credit
     Facility expires on August 4, 2001; however, the Company may request the
     bank to extend the agreement for two, one-year periods. The proceeds of the
     Credit Facility are to be utilized for working capital, future acquisitions
     and letters of credit. The aggregate amount of letter of credit obligations
     that can be drawn against the Credit Facility shall not
 
                                      F-12
<PAGE>   52
                     RAILWORKS CORPORATION AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     exceed $20,000,000. There were no letters of credit outstanding at December
     31, 1998. Interest on loans, commitment fees, and letter of credit fees are
     based upon consolidated leverage ratios in a pricing matrix which may be
     based on prime or LIBOR. The annual interest rates in effect at December
     31, 1998, for prime and LIBOR borrowings were 8.5% and 7.26%, respectively.
     A one time facility fee of 2% was paid on the total Credit Facility.
 
(b)  On April 4, 1997, the Company entered into a secured revolving credit
     agreement (the "Revolver") with a maximum aggregate principal amount of
     $15,000,000 (the "Commitment"). Interest on Base Rate loans was at a rate
     of 1% plus the Base Rate, as defined (approximately prime rate); interest
     on Eurodollar loans was at 3.25% plus the Eurodollar Rate, as defined
     (approximately LIBOR). An annual facility fee of 1% and a commitment fee of
     1/2 of 1% were payable on the total Commitment and the total unused
     Commitment, respectively. Up to $10,000,000 of letters of credit could be
     drawn against the Commitment, $2,911,655 of which was drawn at December 31,
     1997. This obligation was repaid in its entirety on August 4, 1998.
 
(c)  On December 11, 1997, the Company entered into a short-term secured
     revolving credit agreement (the "Temporary Revolver") with a maximum
     principal amount of $2,000,000. Interest on the unpaid principal was at a
     rate of 2% plus the Base Rate (approximately prime rate). The Temporary
     Revolver was extended from its original maturity and was repaid in its
     entirety on August 4, 1998.
 
(d)  Interest on this agreement was payable semi-annually at a rate of 8.5%.
     This obligation was repaid in its entirety on August 4, 1998.
 
     The Credit Facility is secured by a first lien on all of the capital stock
of the Company's subsidiaries and on all accounts receivable of the Company and
its subsidiaries. In addition, the Credit Facility contains a negative pledge on
all other assets of the Company and its subsidiaries. The Credit Facility
contains restrictive covenants that, among other things impose limitations on
the Company with respect to its ability to incur additional indebtedness, make
certain investments, sell assets or pay dividends. The Credit Facility also
contains various financial covenants which require the Company to meet certain
targets including, but not limited to, the maintenance of net worth, earnings
before interest, taxes, depreciation and amortization (EBITDA) to debt ratio and
fixed charge coverage ratio.
 
7. INCOME TAXES
 
     The Company files a consolidated federal income tax return. The Predecessor
Company's results were included in the consolidated federal income tax return of
Spie.
 
     The income tax provision in the accompanying consolidated statements of
operations for the years ended December 31, 1998, 1997 and 1996 consists of (in
thousands):
 
<TABLE>
<CAPTION>
                                                                               PREDECESSOR
                                                                                 COMPANY
                                                              1998     1997       1996
                                                             ------   ------   -----------
<S>                                                          <C>      <C>      <C>
Current:
  Federal..................................................  $   --   $   --      $150
  State....................................................     895      132       268
                                                             ------   ------      ----
                                                                895      132       418
                                                             ------   ------      ----
Deferred:
  Federal..................................................     503      941        70
  State....................................................      74      125        12
                                                             ------   ------      ----
                                                                577    1,066        82
                                                             ------   ------      ----
                                                             $1,472   $1,198      $500
                                                             ======   ======      ====
</TABLE>
 
                                      F-13
<PAGE>   53
                     RAILWORKS CORPORATION AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     Factors accounting for the variation from U.S. statutory income tax rates
relating to continuing operations for the years ended December 31, 1998, 1997
and 1996 are as follows (in thousands):
 
<TABLE>
<CAPTION>
                                                                               PREDECESSOR
                                                                                 COMPANY
                                                             1998      1997       1996
                                                            -------   ------   -----------
<S>                                                         <C>       <C>      <C>
Federal income taxes at the statutory rate................  $(3,981)  $  893      $189
Benefit of NOL............................................       --       --      (189)
Federal alternative minimum tax...........................       --       --       150
State and local taxes.....................................     (680)     206       242
Other.....................................................      229       99       108
Valuation allowance.......................................    5,904       --        --
                                                            -------   ------      ----
                                                            $ 1,472   $1,198      $500
                                                            =======   ======      ====
</TABLE>
 
     The components of the net deferred income tax asset in the accompanying
consolidated balance sheets at December 31, 1998 and 1997 are as follows (in
thousands):
 
<TABLE>
<CAPTION>
                                                               1998      1997
                                                              -------   ------
<S>                                                           <C>       <C>
Deferred tax assets:
  Net operating loss carryforward...........................  $ 3,005   $  317
  Excess of amounts expensed for financial statement
     purposes over amounts deducted for income tax
     purposes...............................................    4,097    1,451
  State and local income taxes, net of federal tax
     benefits...............................................      915      481
                                                              -------   ------
Total deferred tax asset....................................    8,017    2,249
                                                              -------   ------
Deferred tax liability,
  Costs capitalized for financial statement purposes and
     deducted for income tax purposes.......................    1,158    1,229
                                                              -------   ------
Total deferred tax liability................................    1,158    1,229
                                                              -------   ------
Net deferred tax asset before valuation allowance...........    6,859    1,020
Valuation allowance for net deferred tax asset..............   (5,904)      --
                                                              -------   ------
                                                              $   955   $1,020
                                                              =======   ======
</TABLE>
 
8. PREFERRED STOCK
 
     The Company has authorized 10,000,000 shares of Series A convertible
preferred stock. The stock has no voting rights, shares dividends ratably with
the common stock, is non-cumulative and has a liquidation preference over shares
of common stock. Each share of preferred stock is convertible into 100 shares of
the Company's common stock.
 
     On October 8, 1998, the Company issued 13,700 shares of its nonvoting
Series A convertible preferred stock in exchange for 1,370,000 shares of common
stock. Each share of Series A convertible preferred stock is convertible to 100
shares of common stock upon five days prior written notice from the holder,
subject to certain conditions.
 
9. STOCK OPTION PLAN
 
     On August 13, 1998, the Company approved the 1998 Stock Incentive Plan (the
"Plan") which provides for the granting or awarding of stock options and stock
appreciation rights to non-employee directors, officers and other key employees
(including officers of the Subsidiaries) and consultants. The Plan reserves for
 
                                      F-14
<PAGE>   54
                     RAILWORKS CORPORATION AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
issuance 2,000,000 shares of common stock. 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 1998 options covering an aggregate of 30,000 shares of common stock
were issued under the Plan. Two non-employee directors were each issued options
to purchase 10,000 shares of common stock at the IPO price. Options to purchase
10,000 shares were also issued to a President of one of the Subsidiaries at the
price of the common stock on the date of the grant. The options expire ten years
after the date of grant.
 
     At December 31, 1998, 30,000 options were outstanding:
 
<TABLE>
<CAPTION>
                                                                       WEIGHTED AVERAGE
                                                              SHARES    EXERCISE PRICE
                                                              ------   ----------------
<S>                                                           <C>      <C>
Balance at inception........................................      --        $   --
Granted.....................................................  30,000         10.02
Exercised...................................................      --            --
                                                              ------        ------
Balance, December 31, 1998..................................  30,000        $10.02
                                                              ======        ======
Exercisable, December 31, 1998..............................      --        $   --
                                                              ======        ======
</TABLE>
 
     The weighted average fair value of options granted in 1998 at market value
was $4.79.
 
     The fair value of each stock option grant is estimated as of the date of
grant using the Black-Scholes option pricing model with the following weighted
average assumptions:
 
<TABLE>
<S>                                                           <C>
Risk-free interest rate at date of grants...................  5.25 - 5.79%
Expected lives..............................................  3 to 6 years
Expected volatility.........................................  44.0%
Expected dividend yield.....................................  0%
</TABLE>
 
     The following table summarizes information about stock options outstanding
at December 31, 1998:
 
<TABLE>
<CAPTION>
                                                NUMBER OF
                                                 OPTIONS            WEIGHTED           WEIGHTED
                                             OUTSTANDING AT     AVERAGE REMAINING      AVERAGE
EXERCISE PRICE                              DECEMBER 31, 1998   CONTRACTUAL LIFE    EXERCISE PRICE
--------------                              -----------------   -----------------   --------------
<S>                                         <C>                 <C>                 <C>
$6.06 to 12.00............................       30,000               9.59              $10.02
                                                 ======               ====              ======
</TABLE>
 
     The Company applies APB No. 25 and related interpretations in accounting
for its stock option plans. Accordingly, no compensation cost has been
recognized in the accompanying consolidated statements of operations for the
year ended December 31, 1998 for options granted during that year. Had
compensation expense for all stock options granted in 1998 been determined
consistent with SFAS No. 123, the Company's net income per share would have been
as follows:
 
<TABLE>
<S>                                                           <C>
Net loss:
  As Reported...............................................  $(12,847)
                                                              ========
  Pro Forma.................................................  $(12,864)
                                                              ========
Net loss per share:
  As Reported -- basic and diluted..........................  $  (1.67)
                                                              ========
  Pro Forma -- basic and diluted............................  $  (1.67)
                                                              ========
</TABLE>
 
The effects of applying SFAS No. 123 in this pro forma disclosure are not
indicative of future amounts and additional awards in future years are
anticipated.
 
                                      F-15
<PAGE>   55
                     RAILWORKS CORPORATION AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
10. EMPLOYEE BENEFIT PLANS
 
     Certain of the acquired companies have qualified defined contribution
employee benefit plans (the "Plans"), the majority of which allowed for
voluntary pretax contributions by employees. The Subsidiaries paid all general
and administrative expenses of the Plans and in some cases, the Subsidiaries
made matching and discretionary contributions to the Plans. The Subsidiaries
currently offer no post-employment or post-retirement benefits. The expense
incurred related to the Plans by the Company was approximately $367,000,
$321,000 and $337,000 for the years ended December 31, 1998, 1997 and 1996,
respectively.
 
     Prior to 1997, Comstock was generally self insured for its automobile and
general liability insurance and, to a lesser extent, for workers' compensation.
Included primarily in accrued payroll and related withholdings, and other
liabilities at December 31, 1998 and 1997 are reserves of $2,348,000 and
$3,574,000, respectively, relating to these insurance liabilities. The Company,
including Comstock, currently participates in a paid indemnity plan for these
insurance coverages.
 
     Comstock sponsored an unfunded, fully insured postretirement medical plan
covering eligible retirees and their dependents which it elected to terminate
effective December 31, 1997. In 1996 Comstock offered, at group rates,
comprehensive medical care benefits to retirees and their covered dependents.
Comstock contributed approximately one-half of the total premium medical cost.
Under the plan, employees were eligible to enroll on the first day of the month
following retirement from Comstock after age 55 and ten years of service. Upon
adoption of SFAS No. 106, "Employers' Accounting for Postretirement Benefits
other than Pensions" the accumulated postretirement benefit obligation was
$943,000. This amount was amortized over 20 years.
 
     The postretirement benefit cost for 1996 included the following items (in
thousands):
 
<TABLE>
<CAPTION>
                                                              PREDECESSOR
                                                                COMPANY
                                                                 1996
                                                              -----------
<S>                                                           <C>
Service cost................................................     $ 42
Interest cost...............................................       81
Transition amortization.....................................       47
                                                                 ----
                                                                 $170
                                                                 ====
</TABLE>
 
     The assumed discount rate used to measure the accumulated postretirement
benefit obligation was 7.25% in 1996. The assumed health care cost trend rate
was 9.5% in December 31, 1996, gradually decreasing to an ultimate rate of 5% in
2004 for participants under age 65. For those above age 65, a rate of 7.5% was
used in 1996, gradually decreasing to an ultimate rate of 5% in 2004. A one
percent increase in the assumed health care cost trend rate would increase costs
by $25,000 in 1996. This plan was discontinued in 1997.
 
     The Company also has nonqualified defined benefit plans covering certain
current and former employees of one of the Subsidiaries which provide benefits
based on years of service and compensation. In aggregate, at December 31, 1998
and 1997 approximately $3,007,000 and $1,518,000, respectively relating to these
programs is included in the accompanying balance sheets.
 
     The Company's self-insurance programs and certain employee benefit plan
liabilities are estimated using actuarial estimates and management assumptions.
These estimates are based on historical information, along with certain
assumptions about future events. Changes in assumptions, as well as changes in
actual experience could cause these estimates to change.
 
     The Company has established two bonus incentive plans (the "Plans")
covering certain employees. The first bonus pool consists of 10% of the
Company's pre-tax profits and the second bonus pool consists of 15% of
 
                                      F-16
<PAGE>   56
                     RAILWORKS CORPORATION AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
the amount by which the Company's net income exceeds certain benchmarks. No
benefits were earned or paid under either of the Plans during 1998.
 
11. LEASE COMMITMENTS
 
     The Company and its subsidiaries lease various office buildings, machinery,
equipment, and vehicles under operating leases expiring at various dates through
2004. Most of the real property leases have escalation clauses related to
increases in real property taxes. Future minimum lease payments under operating
leases are as follows (in thousands):
 
<TABLE>
<S>                                                           <C>
Years Ending December 31
  1999......................................................  $2,163
  2000......................................................   1,252
  2001......................................................   1,070
  2002......................................................   1,046
  2003......................................................     930
</TABLE>
 
     Rent expense for all operating leases, including amounts charged to cost of
revenues, for the year ended December 31, 1998, 1997 and 1996 was approximately
$3,047,000, $2,685,000 and $3,527,000, respectively.
 
12. RELATED-PARTY TRANSACTIONS
 
LEASING TRANSACTIONS
 
     Certain of the subsidiaries lease their operating facilities from former
Founding Company owners who remained employees or directors of the Company.
Total rent paid to related parties for 1998 was $330,000. The Company believes
the rents to be the fair market rental value of the property.
 
13. COMMITMENTS AND CONTINGENCIES
 
PERFORMANCE BONDS
 
     The Company's performance under certain construction contracts is secured
by performance bonds for which the Company pays a separate fee.
 
EMPLOYMENT CONTRACTS
 
     Certain executives of the Company have entered into employment agreements
with the Company. In general, the employment agreements provide that, in the
event of a termination of employment by the Company without cause, such employee
will be entitled to receive from the Company an amount in cash equal to the
employee's then current annual base salary for the remainder of the term.
 
CONTINGENT PURCHASE PRICE FOR ACQUISITIONS
 
     The sellers of Sheldon and Armcore are eligible to receive additional cash
amounts ("earnouts"), consisting of cash, as adjustments to the purchase prices
paid for those companies. Such cash payments are contingent upon the achievement
of earnings targets for 1999, 2000 and 2001.
 
ENVIRONMENTAL
 
     The Company's operations are subject to extensive federal, state and local
regulations under environmental laws and regulations concerning, among other
things, emissions to the air, discharges to waters and the generation, handling,
storage, transportation, treatment and disposal of waste, hazardous substances,
underground and aboveground storage tanks and soil and groundwater
contamination. The Company is also subject to certain Federal, state and local
environmental laws and regulations relating to the use of creosote.
                                      F-17
<PAGE>   57
                     RAILWORKS CORPORATION AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
Creosote is used in certain of the Company's manufacturing processes to treat
wood railroad ties so that they can withstand exposure to outside elements.
Creosote, a coal tar treated derivative, has been recognized by the
environmental regulating agencies as a hazardous material. The Company believes
that it is in material compliance with all of the various regulations applicable
to their businesses and has not been notified of any violations by regulatory
agencies.
 
LITIGATION
 
     The Company is involved in legal proceedings and claims, asserted by and
against the Company, which have arisen in the ordinary course of business. The
Company believes it has a number of valid defenses to these actions and the
Company intends to vigorously defend or assert these claims. Management
believes, upon advice of outside counsel, that none of these actions will have a
material adverse effect on the financial position or results of operations of
the Company.
 
14. LOANS TO OFFICERS
 
     Pursuant to their employment agreements, certain officers of the Company
have been granted loans for the payment of income taxes related to stock grants.
These loans have a term of five years, are interest bearing and are
collateralized by the stock granted.
 
15. FINANCIAL INSTRUMENTS
 
     In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133").
SFAS 133 establishes accounting and reporting standards requiring that every
derivative instrument be recorded in the balance sheet as either an asset or a
liability measured at its fair value. SFAS 133 requires that changes in each
derivative's fair value be recognized into earnings unless specific hedge
accounting criteria are met. The Company does not anticipate that SFAS 133 will
have a material impact upon its operations.
 
INTEREST RATE SWAPS
 
     The Company has entered into an interest rate swap agreement to manage
exposure to interest rate fluctuations. The outstanding agreement involves the
exchange of floating rate interest payments for fixed rate interest payments
over a specified time period without the exchange of any underlying principal
amounts. The Company's credit exposure is limited to the fair value of the
agreements, and the Company only enters into agreements with highly rated
counterparties. The Company does not enter into interest rate swap agreements
for trading or speculative purposes and matches the terms and contract notional
amounts to existing debt. The net amounts paid or received under interest rate
swap agreements are recognized as an adjustment to interest expense.
 
     At December 31, 1998, the Company had an interest rate swap agreement with
a total notional value of $10,000,000, expiring December 7, 2001 or December 7,
2000 at the counterparties' option. The agreements effectively convert floating
rate obligations to a fixed rate of 4.85 percent. If the Company were to
terminate its existing interest rate swap agreements, any resulting gain or loss
would be deferred and recognized over the remaining life of the related debt.
 
     RailWorks uses the following methods and assumptions in estimating the fair
value of its financial instruments:
 
          Cash and Cash Equivalents -- The carrying amount is equal to fair
     market value due to their short-term nature.
 
                                      F-18
<PAGE>   58
                     RAILWORKS CORPORATION AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
          U.S. Government and Municipal Bonds -- These securities are classified
     as held to maturity and are valued at cost which approximates market value.
 
          Debt -- The Company's bank loans and floating rate debt approximate
     fair value. The fair value of fixed rate long-term debt is based upon
     quoted market prices for these or similar issues, or rates currently
     available to the Company for debt with similar terms and maturities.
 
          Interest Rate Swap Agreements -- The fair value of interest rate swap
     agreements is based upon the estimated cost to terminate the agreements,
     taking into account current interest rates and creditworthiness of the
     counterparties. The fair value at December 31, 1998 was approximately
     $10,500.
 
16. SEGMENT REPORTING
 
     Comstock and the Predecessor Company operated in one reportable segment:
transit services. Accordingly, no additional disclosures are required under SFAS
No. 131. The following matrix presents operational and financial condition data
as of and for the year ended December 31, 1998 for analysis by reportable
segment (in thousands):
 
<TABLE>
<CAPTION>
                                   TRANSIT    RAIL PRODUCTS       RAIL        OTHER/
                                   SERVICES   AND SUPPLIES    CONSTRUCTION   CORPORATE    TOTAL
                                   --------   -------------   ------------   ---------   --------
<S>                                <C>        <C>             <C>            <C>         <C>
Revenues from external
  customers......................  $165,989      $11,195        $37,184      $     --    $214,368
Intersegmental revenue...........        --          952            883            --       1,835
Depreciation/amortization........       (17)         192            709         1,221       2,105
Segment operating profit
  (loss).........................     6,084        1,683          4,596       (23,038)    (10,675)
Costs and estimated earnings in
  excess of billings on
  uncompleted contracts..........    22,897           --          1,895            --      24,792
Segment assets...................    58,224        8,299         26,676       159,677     252,876
Capital Expenditures.............       676           29            490            85       1,280
</TABLE>
 
     The Company's reconciliation of segment totals to enterprise values are as
follows (in thousands):
 
<TABLE>
<S>                                                           <C>
REVENUES:
  Total revenues for reportable segments....................  $214,368
  Elimination of intersegment revenues......................    (1,835)
                                                              --------
  Consolidated revenues.....................................  $212,533
                                                              ========
OPERATING PROFIT OR LOSS:
  Total profit or loss for reportable segments..............  $(10,675)
                                                              ========
ASSETS:
  Total assets for reportable segments......................  $252,876
  Elimination of intercompany receivables/payables..........      (826)
  Elimination of investments in subsidiaries................   (23,414)
                                                              --------
  Consolidated assets.......................................  $228,636
                                                              ========
</TABLE>
 
                                      F-19
<PAGE>   59
                     RAILWORKS CORPORATION AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
17. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
 
     Quarterly financial information for the years ended December 31, 1998 and
1997 are summarized as follows (in thousands, except per share data):
 
<TABLE>
<CAPTION>
                                                        YEAR ENDED DECEMBER 31, 1998
                                                    -------------------------------------
                                                     FIRST    SECOND     THIRD    FOURTH
                                                    QUARTER   QUARTER   QUARTER   QUARTER
                                                    -------   -------   -------   -------
<S>                                                 <C>       <C>       <C>       <C>
Revenues..........................................  $41,628   $44,752   $53,077   $73,076
Operating income (loss)...........................    1,237     1,172   (18,404)    5,320
Net income (loss).................................      666       456   (19,036)    5,067
Basic EPS.........................................      .23       .15     (1.72)      .37
Diluted EPS.......................................      .23       .15     (1.72)      .34
</TABLE>
 
<TABLE>
<CAPTION>
                                                        YEAR ENDED DECEMBER 31, 1997
                                                    -------------------------------------
                                                     FIRST    SECOND     THIRD    FOURTH
                                                    QUARTER   QUARTER   QUARTER   QUARTER
                                                    -------   -------   -------   -------
<S>                                                 <C>       <C>       <C>       <C>
Revenues..........................................  $32,401   $34,739   $41,197   $45,273
Operating income..................................      604     1,105       992       711
Net income........................................      440       418       467       103
Basic EPS.........................................      .15       .14       .16       .03
Diluted EPS.......................................      .15       .14       .16       .03
</TABLE>
 
18. SUBSEQUENT EVENTS (UNAUDITED)
 
     On January 7, 1999, the Company acquired all the stock of Mid West Railroad
Construction Maintenance Corporation of Wyoming (Mid West) which specializes in
construction, repair and maintenance of railroad tracks in various western
states. On January 26, 1999, the Company acquired all the stock of Gantrex Group
(Gantrex) which manufactures and supplies crane rail fastening systems including
pad manufacturing, extrusion and continuous vulcanizing capabilities. On January
29, 1999, the Company acquired all the stock of FCM Rail, Ltd. (FCM) which
provides customized leasing services to users of on track rail equipment. On
February 1, 1999, the Company acquired all of the stock of F & V Metro
Contracting Corp. and Affiliates (F & V) which performs electrical and
mechanical installations for transit and transportation agencies in the
metropolitan New York City area. The acquisitions were accounted for using the
purchase method of accounting and accordingly, the purchase price has been
allocated to the assets acquired and the liabilities assumed based upon the fair
values at the date of acquisition. The combined purchase price was $26,000,000
in cash, $8,833,000 of promissory notes payable and 100,000 shares of Common
Stock, plus the potential to receive earnouts if targeted revenue and profit
goals are achieved over the next 5 years. The estimated fair market value of
assets purchased was approximately $6,300,000 and the estimated goodwill was
$29,500,000. Any additional purchase price paid will increase the goodwill
reported. The estimated fair market values reflected above are based on
preliminary estimates and assumptions and are subject to revision.
 
                                      F-20
<PAGE>   60
 
                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
 
To RailWorks Corporation:
 
     We have audited the accompanying balance sheet of RAILWORKS CORPORATION (a
Delaware Corporation), as of July 31, 1998, and the related statements of
operations and cash flows for the period from April 1 to July 31, 1998. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
 
     We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
 
     In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of RAILWORKS CORPORATION as of
July 31, 1998, and the results of its operations and cash flows for the period
from April 1 to July 31, 1998 in conformity with generally accepted accounting
principles.
 
                                          Arthur Andersen LLP
 
Stamford, Connecticut
February 8, 1999
 
                                      F-21
<PAGE>   61
 
                             RAILWORKS CORPORATION
 
                                 BALANCE SHEET
                                 JULY 31, 1998
                                 (IN THOUSANDS)
 
<TABLE>
<S>                                                           <C>
                             ASSETS
CURRENT ASSETS:
  Cash......................................................  $89
                                                              ---
          Total current assets..............................   89
                                                              ---
          Total assets......................................  $89
                                                              ===
              LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
  Advances from founding companies..........................  $89
                                                              ---
          Total current liabilities.........................   89
                                                              ---
          Total liabilities.................................   89
                                                              ---
STOCKHOLDER'S EQUITY:
  Preferred stock, $1.00 par value authorized 10,000,000
     shares. No shares issued...............................   --
  Common stock, $0.01 par value authorized 100,000,000
     shares, 10 shares issued and outstanding...............   --
  Paid-in capital...........................................   --
                                                              ---
          Total stockholder's equity........................   --
                                                              ---
          Total liabilities and stockholder's equity........  $89
                                                              ===
</TABLE>
 
                       See Notes to Financial Statements.
 
                                      F-22
<PAGE>   62
 
                             RAILWORKS CORPORATION
 
                            STATEMENT OF OPERATIONS
               FOR THE PERIOD FROM APRIL 1, 1998 TO JULY 31, 1998
                                 (IN THOUSANDS)
 
<TABLE>
<S>                                                           <C>
Revenues....................................................  $--
Selling, general and administrative expenses................   --
                                                              ---
Income before income taxes..................................   --
Provision for income taxes..................................   --
                                                              ---
Net income..................................................  $--
                                                              ===
</TABLE>
 
                       See Notes to Financial Statements.
 
                                      F-23
<PAGE>   63
 
                             RAILWORKS CORPORATION
 
                            STATEMENT OF CASH FLOWS
               FOR THE PERIOD FROM APRIL 1, 1998 TO JULY 31, 1998
                                 (IN THOUSANDS)
 
<TABLE>
<S>                                                           <C>
CASH FLOWS FROM OPERATING ACTIVITIES........................  $ --
CASH FLOWS FROM INVESTING ACTIVITIES........................    --
CASH FLOWS FROM FINANCING ACTIVITIES,                           34
       Advances from founding companies.....................
          Net cash provided by financing activities.........    34
                                                              ----
NET INCREASE IN CASH........................................    34
CASH, beginning of period...................................    55
                                                              ----
CASH, end of period.........................................  $ 89
                                                              ====
SUPPLEMENTARY DISCLOSURES OF CASH FLOW INFORMATION:
  Cash paid during the period for interest..................  $ --
                                                              ====
  Cash paid during the period for income taxes..............  $ --
                                                              ====
</TABLE>
 
                       See Notes to Financial Statements.
 
                                      F-24
<PAGE>   64
 
                             RAILWORKS CORPORATION
 
                         NOTES TO FINANCIAL STATEMENTS
 
1. BUSINESS AND ORGANIZATION
 
     RailWorks Corporation ("RailWorks" or the "Company"), was formed in March
1998 to become a leading nationwide provider of rail services, including system
construction and rehabilitation, repair and maintenance services and related
products. RailWorks acquired fourteen U.S. businesses (the "Acquisitions") and,
completed an initial public offering (the "Offering") of its common stock in
August, 1998. Subsequent to the Offering, the Company intends to continue to
acquire, through merger or purchase, similar companies to expand its national
operations.
 
     RailWorks did not conduct any operations, and all activities to date have
related to the Acquisitions and the Offering. Cash of $100 was generated from
the initial capitalization of the Company (see Note 2).
 
2. STOCKHOLDER'S EQUITY
 
     In connection with the organization and initial capitalization of
RailWorks, the Company issued 10 shares of common stock for $100.
 
3. SUBSEQUENT EVENTS
 
     RailWorks and its newly formed, wholly owned subsidiaries have acquired by
merger, the Founding Companies as follows: Annex Railroad Builders, Inc. and
Affiliates, Comtrak Construction, Inc., Comstock Holdings, Inc., Condon
Brothers, Inc., CPI Concrete Products Incorporated, H.P. McGinley, Incorporated,
Kennedy Railroad Builders, Inc. and Associated Companies, Merit Railroad
Contractors, Inc., Midwest Construction Services, Inc., New England Railroad
Construction Company, Inc., Railroad Service, Inc. and Minnesota Railroad
Service, Inc., Southern Indiana Wood Preserving Company, Inc., U.S. Trackworks,
Inc. and Northern Rail Service and Supply Co., and Wm. A. Smith Construction Co.
and Wm. A. Smith Rerailing Service, Inc. Consideration paid by RailWorks to
acquire the Founding Companies consisted of a combination of cash and common
stock.
 
     Additionally, RailWorks granted 1,205,872 shares of its common stock to its
executive management team. The Company recorded compensation expense upon
granting the shares of approximately $14,500,000.
 
                                      F-25
<PAGE>   65
 
                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
 
To Annex Railroad Builders, Inc. and Affiliates:
 
     We have audited the accompanying combined balance sheets of ANNEX RAILROAD
BUILDERS, INC. (an Indiana corporation) AND AFFILIATES (collectively, the
"Company") as of July 31, 1998 and December 31, 1997, and the related combined
statements of operations, stockholders' equity and cash flows for the seven
months ended July 31, 1998, the nine months ended December 31, 1997 and year
ended March 31, 1997. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
 
     We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
 
     In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of ANNEX RAILROAD BUILDERS,
INC. AND AFFILIATES as of July 31, 1998, and December 31, 1997 and the results
of their operations and their cash flows for the seven months ended July 31,
1998, the nine months ended December 31, 1997 and the year ended March 31, 1997
in conformity with generally accepted accounting principles.
 
                                          Arthur Andersen LLP
 
Nashville, Tennessee
September 18, 1998
 
                                      F-26
<PAGE>   66
 
                  ANNEX RAILROAD BUILDERS, INC. AND AFFILIATES
 
                            COMBINED BALANCE SHEETS
 
<TABLE>
<CAPTION>
                                                               JULY 31,    DECEMBER 31,
                                                                 1998          1997
                                                              ----------   ------------
<S>                                                           <C>          <C>
                                        ASSETS
CURRENT ASSETS:
  Cash and cash equivalents.................................  $  578,622    $  201,016
  Accounts receivable, net of allowance of $52,306 and
     $20,000, respectively..................................   2,731,322     2,775,817
  Employee loans and advances...............................      14,075        16,360
  Costs and estimated earnings in excess of billings on
     uncompleted contracts..................................     701,652     1,162,368
  Inventory.................................................     153,930       166,718
  Prepaid expenses..........................................      26,373        27,663
  Income tax receivable.....................................     520,792            --
  Deferred tax assets.......................................       7,856        48,683
                                                              ----------    ----------
          Total current assets..............................   4,734,622     4,398,625
                                                              ----------    ----------
PROPERTY, PLANT AND EQUIPMENT:
  Land and buildings........................................     137,314       279,853
  Machinery and equipment...................................   2,219,467     2,269,335
  Office furniture and equipment............................      74,516        56,343
                                                              ----------    ----------
                                                               2,431,297     2,605,531
     Less accumulated depreciation..........................   1,831,816     1,779,337
                                                              ----------    ----------
Property, plant and equipment, net..........................     599,481       826,194
                                                              ----------    ----------
OTHER ASSET:
  Cash value of life insurance, face value of $1,810,000....          --       295,448
                                                              ----------    ----------
                                                              $5,334,103    $5,520,267
                                                              ==========    ==========
                         LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
  Accounts payable..........................................  $  969,510    $1,337,542
  Line of credit............................................   1,075,000        50,000
  Current obligations under capital leases..................      87,766        99,604
  Billings in excess of costs and estimated earnings on
     uncompleted contracts..................................     322,828       213,703
  Accrued wages.............................................     653,086       142,839
  Accrued expenses..........................................     248,444       453,115
  Current maturities of long-term debt......................      29,489        93,763
                                                              ----------    ----------
          Total current liabilities.........................   3,386,123     2,390,566
                                                              ----------    ----------
Long-term debt, net of current maturities...................       7,613       105,102
                                                              ----------    ----------
Capital lease obligations, net of current obligations.......          --        42,935
                                                              ----------    ----------
Commitments and contingencies...............................          --            --
                                                              ----------    ----------
STOCKHOLDERS' EQUITY:
  Common Stock, no par value; 8,000 shares authorized, 5,750
     outstanding............................................      56,769        56,769
  Retained earnings.........................................   1,883,598     2,924,895
                                                              ----------    ----------
          Total stockholders' equity........................   1,940,367     2,981,664
                                                              ----------    ----------
                                                              $5,334,103    $5,520,267
                                                              ==========    ==========
</TABLE>
 
                  See Notes to Combined Financial Statements.
 
                                      F-27
<PAGE>   67
 
                  ANNEX RAILROAD BUILDERS, INC. AND AFFILIATES
 
                       COMBINED STATEMENTS OF OPERATIONS
 
<TABLE>
<CAPTION>
                                                          SEVEN MONTHS   NINE MONTHS
                                                             ENDED          ENDED       YEAR ENDED
                                                            JULY 31,     DECEMBER 31,    MARCH 31,
                                                              1998           1997          1997
                                                          ------------   ------------   -----------
<S>                                                       <C>            <C>            <C>
Revenue.................................................   $7,410,225    $15,098,726    $15,467,498
Contract costs..........................................    7,211,829     12,405,910     12,948,083
                                                           ----------    -----------    -----------
  Gross profit..........................................      198,396      2,692,816      2,519,415
General and administrative expenses.....................      932,604      1,326,435      1,674,321
                                                           ----------    -----------    -----------
(Loss) income from operations...........................     (734,208)     1,366,381        845,094
                                                           ----------    -----------    -----------
Other income (expense):
  Interest income.......................................        7,227         15,065         31,216
  Interest expense......................................      (23,400)       (42,530)       (47,956)
                                                           ----------    -----------    -----------
                                                              (16,173)       (27,465)       (16,740)
                                                           ----------    -----------    -----------
(Loss) income before (benefit) provision for income
  taxes.................................................     (750,381)     1,338,916        828,354
(Benefit) provision for income taxes....................     (367,074)       369,011        228,946
                                                           ----------    -----------    -----------
Net (loss) income.......................................   $ (383,307)   $   969,905    $   599,408
                                                           ==========    ===========    ===========
</TABLE>
 
                  See Notes to Combined Financial Statements.
 
                                      F-28
<PAGE>   68
 
                  ANNEX RAILROAD BUILDERS, INC. AND AFFILIATES
 
                  COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY
 
<TABLE>
<CAPTION>
                                          NUMBER OF
                                           COMMON      COMMON    TREASURY     RETAINED
                                           SHARES      STOCK       STOCK      EARNINGS      TOTAL
                                          ---------   --------   ---------   ----------   ----------
<S>                                       <C>         <C>        <C>         <C>          <C>
BALANCE, MARCH 31, 1996.................    5,750     $56,769    $(109,274)  $2,300,628   $2,248,123
  Net income............................       --          --           --      599,408      599,408
  Dividends.............................       --          --           --     (386,300)    (386,300)
                                            -----     -------    ---------   ----------   ----------
BALANCE, MARCH 31, 1997.................    5,750      56,769     (109,274)   2,513,736    2,461,231
  Net income............................       --          --           --      969,905      969,905
  Dividends.............................       --          --           --     (449,472)    (449,472)
  Retirement of treasury stock..........       --          --      109,274     (109,274)          --
                                            -----     -------    ---------   ----------   ----------
BALANCE, DECEMBER 31, 1997..............    5,750      56,769           --    2,924,895    2,981,664
  Net loss..............................       --          --           --     (383,307)    (383,307)
  Dividends.............................       --          --           --     (657,990)    (657,990)
                                            -----     -------    ---------   ----------   ----------
BALANCE, JULY 31, 1998..................    5,750     $56,769    $      --   $1,883,598   $1,940,367
                                            =====     =======    =========   ==========   ==========
</TABLE>
 
                  See Notes to Combined Financial Statements.
 
                                      F-29
<PAGE>   69
 
                  ANNEX RAILROAD BUILDERS, INC. AND AFFILIATES
 
                       COMBINED STATEMENTS OF CASH FLOWS
 
<TABLE>
<CAPTION>
                                                              SEVEN MONTHS   NINE MONTHS
                                                                 ENDED          ENDED       YEAR ENDED
                                                                JULY 31,     DECEMBER 31,   MARCH 31,
                                                                  1998           1997          1997
                                                              ------------   ------------   ----------
<S>                                                           <C>            <C>            <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net (loss) income.........................................   $(383,307)      $969,905      $599,408
  Adjustments to reconcile net (loss) income to net cash
    provided by operating activities:
    Deferred income tax provision (benefit).................      40,827        (19,924)           --
    Depreciation and amortization...........................     142,404        192,773       250,215
    (Gain)/loss from sale of equipment......................        (706)           145         1,117
    Non-cash compensation expense...........................     295,448             --            --
    Change in operating assets and liabilities:
       Accounts receivable..................................      44,495       (234,939)     (677,293)
       Costs and estimated earnings in excess of billings on
         uncompleted contracts..............................     460,716       (361,290)     (287,483)
       Inventory............................................      12,788        (82,633)      (25,290)
       Prepaid expenses.....................................       1,290        104,356      (106,458)
       Income tax receivable................................    (520,792)            --            --
       Accounts payable.....................................    (368,032)      (170,342)      577,961
       Accrued expenses.....................................     305,576        252,961      (107,036)
       Billings in excess of costs and estimated earnings on
         uncompleted contracts..............................     109,125         87,005       (59,381)
                                                               ---------       --------      --------
         Net cash provided by operating activities..........     139,832        738,017       165,760
                                                               ---------       --------      --------
CASH FLOWS FROM INVESTING ACTIVITIES:
  Net employee advances (payments)..........................       2,285          5,920          (728)
  Increase in cash value of life insurance..................          --        (45,145)      (53,796)
  Proceeds from life insurance policies.....................          --         56,163            --
  Decrease in notes receivable..............................          --             --        43,574
  Purchases of property, plant, and equipment...............     (51,735)      (146,640)     (110,932)
  Proceeds from sale of equipment...........................      14,995         20,011            --
                                                               ---------       --------      --------
         Net cash used in investing activities..............     (34,455)      (109,691)     (121,882)
                                                               ---------       --------      --------
CASH FLOWS FROM FINANCING ACTIVITIES:
  Net borrowings (payments) under line of credit............   1,025,000       (275,000)       75,000
  Principal payments on capital lease obligations...........     (54,773)       (97,144)      (17,712)
  Principal payments on long-term debt......................     (73,747)       (73,290)     (131,138)
  Borrowings under long-term debt...........................          --         70,272        19,752
  Dividends paid............................................    (624,251)      (449,472)     (386,300)
                                                               ---------       --------      --------
         Net cash provided by (used in) financing
           activities.......................................     272,229       (824,634)     (440,398)
                                                               ---------       --------      --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........     377,606       (196,308)     (396,520)
CASH AND CASH EQUIVALENTS, beginning of period..............     201,016        397,324       793,844
                                                               ---------       --------      --------
CASH AND CASH EQUIVALENTS, end of period....................   $ 578,622       $201,016      $397,324
                                                               =========       ========      ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
  Cash paid during the period for:
  Interest..................................................   $  14,910       $ 52,894      $ 55,023
                                                               =========       ========      ========
  Income taxes..............................................   $  35,548       $218,799      $235,131
                                                               =========       ========      ========
</TABLE>
 
                  See Notes to Combined Financial Statements.
 
                                      F-30
<PAGE>   70
 
                  ANNEX RAILROAD BUILDERS, INC. AND AFFILIATES
 
                     NOTES TO COMBINED FINANCIAL STATEMENTS
 
1. ORGANIZATION AND BUSINESS ACTIVITIES
 
     The accompanying combined financial statements of Annex Railroad Builders,
Inc. and Affiliates (collectively the "Company") include the accounts of Annex
Railroad Builders, Inc. ("Annex") (an Indiana corporation), R. & M. B. Rail Co.,
d/b/a Mize Construction Company ("Mize") (an Indiana corporation), Railroad
Specialties, Inc., ("RSI") (an Indiana corporation) and U.S. Railway Supply,
Inc. ("US Rail") (an Indiana corporation). These entities are included in the
combined financial statements due to certain shareholder's majority ownership in
each. The majority of the Company operates as a construction contractor
constructing, repairing, and maintaining railroad tracks for private and
government customers located throughout the Midwest. This work is performed
under various forms of contracts, including fixed-fee and time-and-material
contracts. One entity operates a supply company that provides railroad
construction supplies to certain railroad construction contractors.
 
2. SIGNIFICANT ACCOUNTING POLICIES
 
PRINCIPLES OF COMBINATION
 
     The above companies have been included in the combined financial
statements. All material intercompany transactions and balances have been
eliminated. Although the fiscal year of Annex used to be March 31, the
affiliates are included in the combined financial statements on the basis of
fiscal years ending December 31. In 1997, Annex changed its financial reporting
year-end to December 31.
 
RECLASSIFICATIONS
 
     Certain reclassifications have been made in the December 31, 1997 combined
financial statements to conform with the July 31, 1998 presentation.
 
USE OF ESTIMATES
 
     The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could vary from the estimates that were assumed
in preparing the financial statements.
 
REVENUE AND COST RECOGNITION
 
     The Company recognizes revenues from fixed-fee contracts using the
percentage-of-completion method, measured by the percentage of cost incurred to
date to management's estimated total cost for each contract. This method is used
because management considers total cost to be the best available measure of
progress on the contracts. Changes in job performance, job conditions and
estimated profitability may result in revisions to cost and income, which are
recognized in the period in which the revisions are determined.
 
     Revenues from time-and-material contracts are recognized currently as the
work is performed.
 
     Contract costs include all direct material, labor and equipment costs and
those indirect costs related to contract performance and are charged to expense
as incurred. Provisions for estimated losses on uncompleted contracts are made
in the period in which such losses are determined.
 
     The asset, "Costs and estimated earnings in excess of billings on
uncompleted contracts," represents revenues recognized in excess of amounts
billed. The liability, "Billings in excess of costs and estimated earnings on
uncompleted contracts," represents billings in excess of revenues recognized.
 
                                      F-31
<PAGE>   71
                  ANNEX RAILROAD BUILDERS, INC. AND AFFILIATES
 
             NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
 
CASH AND CASH EQUIVALENTS
 
     The Company considers cash and cash equivalents to include cash on hand and
temporary cash investments purchased with an original maturity of three months
or less.
 
FINANCIAL INSTRUMENTS AND CREDIT RISK
 
     The Company operates primarily in the Midwestern United States. As such,
the Company's accounts receivable are from the same geographic region. The terms
of sales give rise to unsecured accounts receivable, as is common industry
practice. Contract revenue earned from three customers comprised approximately
29%, 29% and 23% of total contract revenue for the seven months ended July 31,
1998, the nine months ended December 31, 1997 and the twelve months ended March
31, 1997, respectively.
 
INVENTORY
 
     Inventory, consisting principally of stored materials and parts to be used
for contracts, is stated at the lower of cost or market. Cost is determined by
the first-in, first-out (FIFO) method.
 
PROPERTY, PLANT AND EQUIPMENT
 
     The Company records property, plant and equipment at cost. Depreciation is
computed using the straight-line and accelerated methods over the estimated
useful life of the asset as follows:
 
<TABLE>
<S>                                                           <C>
Buildings...................................................  27.5 - 39 years
Machinery and equipment.....................................          5 years
Office furniture and equipment..............................          7 years
</TABLE>
 
     As assets are retired or otherwise disposed of, the cost and accumulated
depreciation are eliminated from the accounts, and any gain or loss is reflected
in net income.
 
INCOME TAXES
 
     Mize, RSI and U.S. Rail operate as Sub-Chapter S Corporations. Accordingly,
the taxable income of Mize, RSI, and US Rail included in the combined financial
statements of the Company is reported by the owners in their respective
individual tax returns; therefore, the combined financial statements of the
Company do not reflect an income tax provision for these entities.
 
     The provision for (benefit from) income taxes is based on earnings (losses)
reported by Annex. In accordance with Statement of Financial Accounting
Standards No. 109, a deferred income tax asset or liability is determined by
applying currently enacted tax laws and rates to the expected reversal of the
cumulative temporary differences between the carrying value of assets and
liabilities for financial statement and income tax purposes.
 
                                      F-32
<PAGE>   72
                  ANNEX RAILROAD BUILDERS, INC. AND AFFILIATES
 
             NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
 
3. ACCOUNTS RECEIVABLE
 
     Accounts receivable at July 31, 1998 and December 31, 1997, consisted of
the following:
 
<TABLE>
<CAPTION>
                                                              JULY 31,    DECEMBER 31,
                                                                1998          1997
                                                             ----------   ------------
<S>                                                          <C>          <C>
Contract receivables.......................................  $1,347,155    $1,633,139
Contract retainages........................................   1,436,473     1,162,678
                                                             ----------    ----------
                                                              2,783,628     2,795,817
Less allowance for doubtful accounts.......................      52,306        20,000
                                                             ----------    ----------
                                                             $2,731,322    $2,775,817
                                                             ==========    ==========
</TABLE>
 
     Contract retainages have been billed but are not due pursuant to contract
provisions until contract completion. Such contract retainages are expected to
be collected within the following year.
 
4. COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
 
     Information with respect to contracts in process at July 31, 1998 and
December 31, 1997, is as follows:
 
<TABLE>
<CAPTION>
                                                             JULY 31,     DECEMBER 31,
                                                               1998           1997
                                                            -----------   ------------
<S>                                                         <C>           <C>
Costs incurred on uncompleted contracts...................  $13,921,261   $ 9,508,537
Estimated earnings........................................    5,435,876     3,477,468
                                                            -----------   -----------
                                                             19,357,137    12,986,005
Less billings to date.....................................   18,978,313    12,037,340
                                                            -----------   -----------
                                                            $   378,824   $   948,665
                                                            ===========   ===========
</TABLE>
 
     Contracts in process are included in the accompanying combined balance
sheets under the following captions:
 
<TABLE>
<CAPTION>
                                                             JULY 31,    DECEMBER 31,
                                                               1998          1997
                                                             ---------   ------------
<S>                                                          <C>         <C>
Costs and estimated earnings in excess of billings on
  uncompleted contracts....................................  $ 701,652    $1,162,368
Billings in excess of costs and estimated earnings on
  uncompleted contracts....................................   (322,828)     (213,703)
                                                             ---------    ----------
                                                             $ 378,824    $  948,665
                                                             =========    ==========
</TABLE>
 
5. LINE OF CREDIT
 
     The Company maintained a revolving line of credit with maximum borrowings
of $1,500,000. The line of credit bears interest at prime plus .75% (9% at July
31, 1998) which is payable monthly. The collateral for the line of credit
includes the Company's accounts receivable, inventory, machinery and equipment.
In addition, it is personally guaranteed up to $500,000 by one of the principal
stockholders. During the seven months ended July 31, 1998, nine months ended
December 31, 1997 and the year ended March 31, 1997, the weighted average amount
outstanding on the line of credit was approximately $327,000, $221,000, and
$356,000 respectively, and the maximum amount outstanding was approximately
$1,075,000, $500,000 and $575,000, respectively. The outstanding balance of the
revolving credit facility at July 31, 1998 and December 31, 1997 was $1,075,000,
and $50,000 respectively. In connection with the transaction discussed in Note
13, the line of credit was repaid subsequent to July 31, 1998.
 
                                      F-33
<PAGE>   73
                  ANNEX RAILROAD BUILDERS, INC. AND AFFILIATES
 
             NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
 
6. CAPITAL LEASES
 
     The Company's capital leases relate to machinery and equipment which have
net book values of $174,142 and $205,916 at July 31, 1998 and December 31, 1997
respectively. The terms of these leases range from 15 to 24 months. The
effective interest rates on these leases range from 5% to 11%. Future minimum
lease payments under capital leases for the period ending July 31, 1999 are
$87,766.
 
7. LONG-TERM DEBT
 
     At July 31, 1998 and December 31, 1997, long-term debt consisted of the
following:
 
<TABLE>
<CAPTION>
                                                              JULY 31,   DECEMBER 31,
                                                                1998         1997
                                                              --------   ------------
<S>                                                           <C>        <C>
Note payable to bank, interest at 8.90%, payable in monthly
  installments of $3,811, maturing September 1998, secured
  by equipment..............................................  $ 7,407      $ 32,927
Mortgage note payable to bank, interest at 7.125%, payable
  in monthly installments of $996, assumed by stockholder in
  1998......................................................       --        90,802
Note payable to bank, interest at 8.42%, payable in monthly
  installments of $1,367, matured March 1998................       --         4,009
Note payable to bank, interest at 7.90%, payable in monthly
  installments of $892, maturing October 1998, secured by
  equipment.................................................    2,707         8,675
Note payable to bank, interest at 8.50%, payable in monthly
  installments of $738, maturing February 2000, secured by
  equipment.................................................   12,964        17,359
Other notes payable.........................................   14,024        45,093
                                                              -------      --------
                                                               37,102       198,865
Less current maturities.....................................   29,489        93,763
                                                              -------      --------
                                                              $ 7,613      $105,102
                                                              =======      ========
</TABLE>
 
     The future maturities of long-term debt as of July 31, 1998 are as follows:
 
<TABLE>
<CAPTION>
PERIOD ENDING JULY 31,
----------------------
<S>                                                           <C>        <C>
  1999......................................................               $29,489
  2000......................................................                 7,613
                                                                           -------
                                                                           $37,102
                                                                           =======
</TABLE>
 
     Both long-term debt and the line of credit contain certain restrictive
covenants which place requirements and restrictions on the Company regarding
disposition of assets, financial ratios, capital expenditures, acquisitions and
operations. The Company was in compliance with these covenants at July 31, 1998.
 
8. PROFIT SHARING PLAN
 
     The Company maintains a profit sharing plan for full-time, non-union
employees. To be eligible, an employee must be employed with the Company for two
years. All contributions, which are at management's discretion, are vested after
six years. Company contributions to the plan were $0, $121,421 and $117,717, for
the seven months ended July 31, 1998, the nine months ended December 31, 1997,
and the year ended March 31, 1997, respectively.
 
                                      F-34
<PAGE>   74
                  ANNEX RAILROAD BUILDERS, INC. AND AFFILIATES
 
             NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
 
9. INCOME TAXES
 
     The income tax provision (benefit) for the seven months ended July 31,
1998, the nine months ended December 31, 1997, and the year ended March 31, 1997
consisted of the following:
 
<TABLE>
<CAPTION>
                                                  JULY 31,    DECEMBER 31,   MARCH 31,
                                                    1998          1997         1997
                                                  ---------   ------------   ---------
<S>                                               <C>         <C>            <C>
Current provision (benefit):
  Federal.......................................  $(324,826)    $309,722     $186,675
  State.........................................    (83,075)      79,213       42,271
                                                  ---------     --------     --------
                                                   (407,901)     388,935      228,946
Deferred provision (benefit)....................     40,827      (19,924)          --
                                                  ---------     --------     --------
                                                  $(367,074)    $369,011     $228,946
                                                  =========     ========     ========
</TABLE>
 
     The income tax provision (benefit) as reported in the combined statements
of operations differs from the amounts computed by applying federal statutory
rates due to the following:
 
<TABLE>
<CAPTION>
                                                      JULY 31,    DECEMBER 31,   MARCH 31,
                                                        1998          1997         1997
                                                      ---------   ------------   ---------
<S>                                                   <C>         <C>            <C>
Federal income tax at statutory rate................  $(323,454)    $322,899     $179,709
State income taxes, net of federal income tax
  benefit...........................................    (52,370)      52,281       27,899
Other...............................................      8,750       (6,169)      21,338
                                                      ---------     --------     --------
Income tax (benefit) provision......................  $(367,074)    $369,011     $228,946
                                                      =========     ========     ========
</TABLE>
 
     The tax effect of temporary differences that give rise to significant
portions of deferred tax assets at July 31, 1998 and December 31, 1997 consisted
of the following:
 
<TABLE>
<CAPTION>
                                                              JULY 31,   DECEMBER 31,
                                                                1998         1997
                                                              --------   ------------
<S>                                                           <C>        <C>
Deferred tax assets:
  Allowance for doubtful accounts...........................   $7,856      $ 7,856
  Accrued management bonus..................................       --       40,827
                                                               ------      -------
          Total deferred tax assets.........................   $7,856      $48,683
                                                               ======      =======
</TABLE>
 
10. RELATED PARTY TRANSACTIONS
 
     The Company has sales and purchases of supplies and services with related
parties under common ownership. Sales to these companies were $17,830, $58,752
and $105,840 for the seven months ended July 31, 1998, the nine months ended
December 31, 1997 and the year ended March 31, 1997, respectively. The Company
had receivables from these companies totaling $12,883 and $17,771 at July 31,
1998 and December 31, 1997, respectively.
 
     During 1998, the Company distributed certain property with a net book value
of $121,745 to the principal stockholder along with the assumption of $88,016 of
outstanding debt by the stockholder. In addition, during 1998 the Company
transferred certain officer life insurance policies to the stockholders in the
form of compensation expense.
 
                                      F-35
<PAGE>   75
                  ANNEX RAILROAD BUILDERS, INC. AND AFFILIATES
 
             NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
 
11. COMMITMENTS AND CONTINGENCIES
 
     The Company is engaged in various lawsuits arising in the ordinary course
of business. In the opinion of management, based upon the advice of counsel, the
ultimate outcome of these lawsuits will not have a material impact on the
Company's financial statements.
 
12. FAIR VALUE OF FINANCIAL INSTRUMENTS
 
     The following disclosure of estimated fair values of financial instruments
is made in accordance with the requirements of SFAS No. 107, "Disclosures about
Fair Value of Financial Instruments." The estimated fair value amounts have been
determined by the Company using available market information and appropriate
valuation methodologies.
 
CASH, ACCOUNTS RECEIVABLE AND ACCOUNTS PAYABLE
 
     The carrying amounts of these items are a reasonable estimate of their fair
value due to their short-term nature.
 
LINE OF CREDIT, LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
 
     The carrying amount of the line of credit facility approximates fair value
as the interest rate fluctuates with changes in market conditions. The carrying
amount of long-term debt and capital lease obligations based on borrowing rates
currently available to the Company is a reasonable estimation of fair value.
 
13. SUBSEQUENT EVENT
 
     On May 21, 1998, the stockholders of the Company entered into an Agreement
and Plan of Reorganization (the "Agreement") with RailWorks Corporation. Under
the terms of the Agreement, the stockholders exchanged their stock of the
Company for cash and stock of RailWorks Corporation. The transaction was
completed on August 4, 1998.
 
                                      F-36
<PAGE>   76
 
                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
 
To CPI Concrete Products Incorporated:
 
     We have audited the accompanying balance sheet of CPI CONCRETE PRODUCTS
INCORPORATED, (a Tennessee Corporation), as of July 31, 1998, and the related
statements of operations, stockholders' equity and cash flows for the six months
ended July 31, 1998. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
 
     We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
 
     In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of CPI CONCRETE PRODUCTS
INCORPORATED, as of July 31, 1998, and the results of its operations and its
cash flows for the six months then ended in conformity with generally accepted
accounting principles.
 
                                          Arthur Andersen LLP
 
Stamford, Connecticut
September 18, 1998
 
                                      F-37
<PAGE>   77
 
                       CPI CONCRETE PRODUCTS INCORPORATED
 
                                 BALANCE SHEET
                                 JULY 31, 1998
 
<TABLE>
<CAPTION>
                                                               JULY 31,
                                                                 1998
                                                              ----------
<S>                                                           <C>
                                 ASSETS
CURRENT ASSETS:
  Cash......................................................  $  635,416
  Accounts receivable.......................................     993,633
  Inventory.................................................   1,434,823
  Prepaid expenses..........................................      41,255
  Deferred tax assets.......................................      16,847
                                                              ----------
          Total current assets..............................   3,121,974
                                                              ----------
EQUIPMENT...................................................   2,752,519
LESS ACCUMULATED DEPRECIATION...............................   1,885,315
                                                              ----------
EQUIPMENT, NET..............................................     867,204
                                                              ----------
OTHER ASSETS:
  Loan costs, net of accumulated amortization of $11,154....      15,092
  Refundable deposits.......................................         550
                                                              ----------
          Other assets, net.................................      15,642
                                                              ----------
                                                              $4,004,820
                                                              ==========
                  LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
  Accounts payable..........................................  $  413,156
  Customer deposits.........................................      41,731
  Accrued wages.............................................      47,352
  Taxes withheld and accrued................................      51,789
  Accrued expenses..........................................     169,450
  Accrued income taxes......................................     235,712
  Current portion of long-term debt.........................     212,089
                                                              ----------
          Total current liabilities.........................   1,171,279
LONG-TERM DEBT, less current portion........................     473,188
DEFERRED INCOME TAXES.......................................      42,477
                                                              ----------
          Total liabilities.................................   1,686,944
                                                              ----------
STOCKHOLDERS' EQUITY:
  Common Stock, no par value; shares authorized 3,000;
     shares issued 2,161 (8 in Treasury, 253 in ESOP).......     428,700
  Retained earnings.........................................   1,892,392
                                                              ----------
                                                               2,321,092
  Less treasury stock, 8 shares at cost.....................       3,216
                                                              ----------
          Stockholders' equity, net.........................   2,317,876
                                                              ----------
                                                              $4,004,820
                                                              ==========
</TABLE>
 
                       See Notes to Financial Statements.
 
                                      F-38
<PAGE>   78
 
                       CPI CONCRETE PRODUCTS INCORPORATED
 
                            STATEMENT OF OPERATIONS
 
<TABLE>
<CAPTION>
                                                              SIX MONTHS ENDED
                                                               JULY 31, 1998
                                                              ----------------
<S>                                                           <C>
Revenue.....................................................     $3,642,118
Cost of goods sold..........................................      3,085,629
                                                                 ----------
Gross profit................................................        556,489
Selling, general and administrative expenses................        602,071
                                                                 ----------
Loss from operations........................................        (45,582)
                                                                 ----------
Other Income (expense):
  Interest expense..........................................        (31,821)
  Loss on sale of equipment.................................         (2,975)
  Rental income.............................................          9,571
  Interest income...........................................         17,437
  Miscellaneous income......................................         28,673
                                                                 ----------
Other income, net...........................................         20,885
                                                                 ----------
Loss before provision for income taxes......................        (24,697)
Provision for income taxes..................................        400,008
                                                                 ----------
Net loss....................................................     $ (424,705)
                                                                 ==========
</TABLE>
 
                       See Notes To Financial Statements.
 
                                      F-39
<PAGE>   79
 
                       CPI CONCRETE PRODUCTS INCORPORATED
 
                       STATEMENT OF STOCKHOLDERS' EQUITY
 
<TABLE>
<CAPTION>
                                            NUMBER OF
                                             COMMON      COMMON    TREASURY    RETAINED
                                             SHARES      STOCK      STOCK      EARNINGS      TOTAL
                                            ---------   --------   --------   ----------   ----------
<S>                                         <C>         <C>        <C>        <C>          <C>
BALANCE, January 31, 1998.................    2,161     $428,700   $(3,216)   $2,864,039   $3,289,523
  Net loss................................       --           --        --      (424,705)    (424,705)
  Dividends...............................       --           --        --      (546,942)    (546,942)
                                              -----     --------   -------    ----------   ----------
BALANCE, July 31, 1998....................    2,161     $428,700   $(3,216)   $1,892,392   $2,317,876
                                              =====     ========   =======    ==========   ==========
</TABLE>
 
                       See Notes to Financial Statements.
 
                                      F-40
<PAGE>   80
 
                       CPI CONCRETE PRODUCTS INCORPORATED
 
                            STATEMENT OF CASH FLOWS
 
<TABLE>
<CAPTION>
                                                              SIX MONTHS ENDED
                                                                  JULY 31,
                                                                    1998
                                                              ----------------
<S>                                                           <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Adjustments to reconcile net loss to net cash provided by
  operating activities:
  Net loss..................................................     $(424,705)
  Amortization..............................................         1,312
  Depreciation..............................................       147,809
  Loss on sale of equipment.................................         2,975
  Change in operating assets and liabilities:
     Accounts receivable....................................       135,415
     Inventory..............................................       296,698
     Prepaid expenses.......................................        16,588
     Deferred tax assets....................................         4,529
     Accounts payable.......................................       (85,699)
     Customer deposits......................................       (51,365)
     Accrued wages..........................................         4,656
     Taxes withheld and accrued.............................       178,991
     Accrued expenses.......................................         1,860
     Accrued income taxes...................................        (6,974)
     Deferred income taxes..................................        16,477
                                                                 ---------
          Net cash provided by operating activities.........       238,567
                                                                 ---------
CASH FLOWS USED IN INVESTING ACTIVITIES:
  Purchase of equipment.....................................      (103,342)
                                                                 ---------
CASH FLOWS USED IN FINANCING ACTIVITIES:
  Repayment of long-term debt...............................      (156,380)
                                                                 ---------
NET DECREASE IN CASH AND CASH EQUIVALENTS...................       (21,155)
CASH AND CASH EQUIVALENTS, beginning of period..............       656,571
                                                                 ---------
CASH AND CASH EQUIVALENTS, end of period....................     $ 635,416
                                                                 =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
  Income taxes..............................................     $ 206,985
                                                                 =========
  Interest..................................................     $      --
                                                                 =========
</TABLE>
 
                       See Notes to Financial Statements.
 
                                      F-41
<PAGE>   81
 
                       CPI CONCRETE PRODUCTS INCORPORATED
 
                         NOTES TO FINANCIAL STATEMENTS
 
1. NATURE OF BUSINESS
 
     The accompanying financial statements include the accounts of CPI Concrete
Products Incorporated (The "Company") as of July 31, 1998. The Company is
located in Memphis, Tennessee and is in the business of processing and selling
concrete poles and concrete products in the Mid-South geographical region. The
Company extends credit to their customers, with the majority of customers
located in Tennessee, Mississippi and Arkansas. No collateral is required for
trade accounts receivable.
 
2. SIGNIFICANT ACCOUNTING POLICIES
 
USE OF ESTIMATES
 
     The preparation of the financial statements in conformity with generally
accepted accounting principles requires the use of management estimates and
assumptions that affect the reported amounts of 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 vary from the
estimates that were assumed in preparing the financial statements.
 
INVENTORY
 
     Inventory is valued at the lower of cost (first-in, first-out method) or
market. At July 31, 1998 inventory consisted of the following:
 
<TABLE>
<S>                                                           <C>
Raw Materials...............................................  $  375,150
Finished Goods..............................................   1,059,673
                                                              ----------
                                                              $1,434,823
                                                              ==========
</TABLE>
 
REVENUE RECOGNITION
 
     These statements reflect the accrual basis of accounting which requires
recognition of revenues when earned and expenses when incurred without regard to
the exchange of each.
 
EQUIPMENT
 
     Equipment is stated at cost. Depreciation is provided on the straight-line
and declining balance methods over the estimated useful lives of the various
assets. Lives used for calculating depreciation are: machinery and equipment
3-10 years. Amortization of loan costs is made over a 120 month period.
 
     Expenditures for maintenance, repairs and minor renewals are expenses as
incurred; expenditures for improvements, replacements and major renewals are
capitalized. Assets retired, or otherwise disposed of, are eliminated from the
asset accounts along with related amounts of accumulated depreciation. Any gains
or losses from disposals are included in income.
 
INCOME TAXES
 
     The Company has adopted Statement of Financial Accounting Standards No.
109, "Accounting for Income Taxes", which requires recognition of deferred tax
liabilities and assets for the expected future tax consequences of events that
have been included in the financial statements or tax returns. Under this
method, deferred tax liabilities and assets are determined based on the
difference between the financial statement and tax bases of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse.
 
                                      F-42
<PAGE>   82
                       CPI CONCRETE PRODUCTS INCORPORATED
 
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
 
FINANCIAL INSTRUMENTS AND CREDIT RISK
 
     As of July 31, 1998, the Company has deposits in a financial institution
which exceed the FDIC insured limit by $268,528.
 
CASH AND CASH EQUIVALENTS
 
     For the purposes of the statement of cash flows, the Company considers all
highly liquid debt instruments purchased with a maturity of three months or less
to be cash equivalents.
 
INTANGIBLE ASSETS
 
     Amortizable assets are recorded at cost. Amortization is calculated by the
straight-line method over a 5 year life. Amortization expense for the seven
months ended July 31, 1998 was $1,312.
 
3. LONG-TERM DEBT
 
     Long-term debt as of July 31, 1998 consisted of the following:
 
<TABLE>
<S>                                                             <C>
Union Planters National Bank SBA loan payable in monthly
  installments of $11,453 through April, 2004, including
  interest at a variable rate adjustable to 1% above prime,
  currently at 8.5%; secured by equipment, mortgage on
  property and a personal guarantee by stockholders.........    $441,574
Tennessee Small Business Energy Loan Program note payable
  for purchasing boiler; payable in monthly installments of
  $1,808 through April, 2000, including interest at 5%;
  collateralized by boiler and associated equipment.........      36,295
Union Planters Bank note payable for conversion of two
  operating leases to term debt; payable in monthly
  installments of $5,914 through April, 2001, including
  interest at 8.15%; secured by equipment...................     169,571
Union Planters Bank note payable for purchasing travel lift;
  payable in monthly installments of $4,861 through April,
  1999, including interest at 8.15%; collateralized by
  travel lift...............................................      37,837
                                                                --------
                                                                 685,277
Less current maturities.....................................     212,089
                                                                --------
                                                                $473,188
                                                                ========
</TABLE>
 
     Aggregate maturities on principal under long-term obligations are as
follows:
 
<TABLE>
<CAPTION>
PERIOD ENDING DECEMBER 31,
--------------------------
<S>                                                           <C>
  1998......................................................  $118,130
  1999......................................................   201,004
  2000......................................................   198,672
  2001......................................................   149,190
  2002......................................................    18,281
                                                              --------
                                                              $685,277
                                                              ========
</TABLE>
 
                                      F-43
<PAGE>   83
                       CPI CONCRETE PRODUCTS INCORPORATED
 
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
 
4. LEASE AGREEMENTS
 
     The Company leases certain autos and trucks under the classification of
operating leases. The following is a schedule of future minimum lease payments
for operating leases as of July 31, 1998:
 
<TABLE>
<CAPTION>
PERIOD ENDING DECEMBER 31,
--------------------------
<S>                                                           <C>
  1998......................................................  $39,468
  1999......................................................   30,174
  2000......................................................    3,661
                                                              -------
                                                              $73,303
                                                              =======
</TABLE>
 
     Rent expense under operating leases totaled $56,889 for the seven months
ended July 31, 1998.
 
5. INCOME TAXES
 
     The provision for income taxes for the seven months ended July 31, 1998
consisted of the following:
 
<TABLE>
<S>                                                           <C>
Currently payable:
  Federal...................................................  $339,361
  State.....................................................    63,706
                                                              --------
                                                               403,067
                                                              --------
Deferred taxes:
  Federal...................................................    (2,576)
  State.....................................................      (483)
                                                              --------
                                                                (3,059)
                                                              --------
Provision for income taxes..................................  $400,008
                                                              ========
</TABLE>
 
     The Items which give rise to temporary differences at July 31, 1998 are as
follows:
 
<TABLE>
<S>                                                           <C>
Deferred Tax Assets:
  Uniform capitalization of inventory -- federal............  $15,836
  Uniform capitalization of inventory -- state..............    1,011
                                                              -------
                                                              $16,847
                                                              =======
Deferred Tax Liabilities:
  Excess tax depreciation -- federal........................  $39,929
  Excess tax depreciation -- state..........................    2,548
                                                              -------
                                                              $42,477
                                                              =======
</TABLE>
 
6. EMPLOYEE BENEFIT PLANS
 
     In 1986, the Company established an Employee Stock Ownership Plan (ESOP) to
provide additional retirement benefits to employees. The vesting provisions of
the ESOP trust instrument are based on vesting years of service. A participant
will always be 100% vested at normal retirement age. At July 31,1998, the ESOP
owned 253 shares of the Company's Common Stock at a cost of $212,995. There were
no contributions by the Company to the ESOP for the seven months ended July 31,
1998. In connection with the Company's acquisition (see Note 10), the ESOP
shares were purchased by RailWorks and the plan was terminated.
 
     In June 1996, the Company adopted a 401(k) plan covering substantially all
employees who have met the minimum age requirements and who have completed one
year of continuous service. The Company's
 
                                      F-44
<PAGE>   84
                       CPI CONCRETE PRODUCTS INCORPORATED
 
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
 
contribution is equal to 50% of each participant's contribution of up to 3% of
salary. Contributions totaled $15,250 for the seven months ended July 31, 1998.
 
7. TREASURY STOCK
 
     The Company purchased Common Stock from employees who had been participants
in the ESOP as follows:
 
<TABLE>
<S>                                                           <C>
September 9, 1988...........................................  2.22 Shares
September 1, 1989...........................................  4.41 Shares
December 27, 1989...........................................  1.85 Shares
                                                              -----------
          Total.............................................  8.48 Shares
                                                              ===========
</TABLE>
 
     No activity from December 28, 1989 to July 31, 1998.
 
8. CONTINGENCIES AND COMMITMENTS
 
     The Company and its two principal shareholders are parties to a stock
retirement agreement which requires the Company, upon the death of any of these
shareholders, to purchase his holdings of the Company's Common Stock at a price
of $514 per share. The Company has life insurance policies on the lives of the
aforementioned shareholders to fund substantially all of such obligation in the
event of their death.
 
     At July 31, 1998, the Company had an unused line of credit with a bank. The
line totals $800,000, has an interest rate of prime plus 1.0%, and the principal
and interest are due on the first day of each month. No gains or losses were
recorded with respect to this transaction.
 
9. RELATED PARTY TRANSACTION
 
     In July 1998, the Company redeemed the outstanding shares of one
shareholder in exchange for the Company's land and building. No gain or loss was
recorded with respect to this transaction.
 
10. SUBSEQUENT EVENT
 
     On May 21, 1998, the stockholders of the Company entered into an Agreement
and Plan of Reorganization (the "Agreement") with RailWorks Corporation. Under
the terms of the Agreement, the stockholders exchanged their stock of the
Company for cash and stock of RailWorks Corporation. The transaction was
completed on August 4, 1998.
 
                                      F-45
<PAGE>   85
 
                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
 
To Condon Brothers, Inc.:
 
     We have audited the accompanying balance sheets of CONDON BROTHERS, INC. (a
Washington corporation) as of July 31, 1998 and December 31, 1997, and the
related statements of operations, stockholders' equity and cash flows for the
seven months ended July 31, 1998 and the two years in the period ended December
31, 1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
 
     We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
 
     In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of CONDON BROTHERS, INC. as of
July 31, 1998 and December 31, 1997, and the results of its operations and its
cash flows for the seven months ended July 31, 1998 and for each of the two
years in the period ended December 31, 1997 in conformity with generally
accepted accounting principles.
 
                                          Arthur Andersen LLP
 
Boise, Idaho
September 30, 1998
 
                                      F-46
<PAGE>   86
 
                             CONDON BROTHERS, INC.
 
                                 BALANCE SHEETS
 
<TABLE>
<CAPTION>
                                                               JULY 31,    DECEMBER 31,
                                                                 1998          1997
                                                              ----------   ------------
<S>                                                           <C>          <C>
                                        ASSETS
CURRENT ASSETS:
  Cash and cash equivalents.................................  $      488    $    1,096
  Accounts receivable, net of allowance of $28,725 and
    $30,060, respectively...................................     865,758       445,677
  Costs and estimated earnings in excess of billings on
    uncompleted contracts...................................     127,914        75,987
  Inventory.................................................   1,517,372     1,172,193
  Prepaid expenses..........................................      38,632        40,839
  Shareholder receivable....................................      50,000            --
                                                              ----------    ----------
         Total current assets...............................   2,600,164     1,735,792
                                                              ----------    ----------
PLANT AND EQUIPMENT:
  Machinery and equipment...................................   1,301,153     1,072,916
  Vehicles..................................................     467,587       473,128
  Office furniture and equipment............................      32,933        30,021
                                                              ----------    ----------
                                                               1,801,673     1,576,065
    Less accumulated depreciation...........................     821,772       720,374
                                                              ----------    ----------
    Plant and equipment, net................................     979,901       855,691
                                                              ----------    ----------
OTHER ASSETS:
  Cash surrender value of life insurance....................      35,150        28,338
  Investments -- land.......................................          --        20,800
                                                              ----------    ----------
         Total other assets.................................      35,150        49,138
                                                              ----------    ----------
                                                              $3,615,215    $2,640,621
                                                              ==========    ==========
                         LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
  Accounts payable and accrued expenses.....................  $1,013,344    $  847,919
  Deferred compensation.....................................      83,989        82,910
  Due to related party......................................          --        10,000
  Lines of credit...........................................   1,498,407            --
  Current maturities of long-term debt......................     539,385       214,718
  Billings in excess of costs and estimated earnings on
    uncompleted contracts...................................          --         7,949
                                                              ----------    ----------
         Total current liabilities..........................   3,135,125     1,163,496
LONG-TERM DEBT, NET OF CURRENT MATURITIES...................      55,367       491,307
                                                              ----------    ----------
         Total liabilities..................................   3,190,492     1,654,803
                                                              ----------    ----------
STOCKHOLDERS' EQUITY:
  Common Stock, $.05 par value; authorized shares,
    1,000,000; issued and outstanding shares, 580,000.......      29,000        29,000
  Additional paid-in capital................................     118,055        24,155
  Retained earnings.........................................     277,668       932,663
                                                              ----------    ----------
         Total stockholders' equity.........................     424,723       985,818
                                                              ----------    ----------
                                                              $3,615,215    $2,640,621
                                                              ==========    ==========
</TABLE>
 
                       See Notes to Financial Statements.
 
                                      F-47
<PAGE>   87
 
                             CONDON BROTHERS, INC.
 
                            STATEMENTS OF OPERATIONS
 
<TABLE>
<CAPTION>
                                                            SEVEN MONTHS         YEAR ENDED
                                                               ENDED            DECEMBER 31,
                                                              JULY 31,     -----------------------
                                                                1998          1997         1996
                                                            ------------   ----------   ----------
<S>                                                         <C>            <C>          <C>
Revenue...................................................   $3,390,320    $4,487,098   $5,516,610
Contract costs............................................    2,222,026     3,370,548    4,115,260
                                                             ----------    ----------   ----------
  Gross profit............................................    1,168,294     1,116,550    1,401,350
General and administrative expenses.......................      699,534       983,116      838,725
                                                             ----------    ----------   ----------
Income from operations....................................      468,760       133,434      562,625
Other income (expense):
  Other revenue, net......................................      109,397        59,729      141,342
  Interest income.........................................          432         1,608           --
  Interest expense........................................      (67,984)      (75,625)     (55,834)
                                                             ----------    ----------   ----------
          Net income......................................   $  510,605    $  119,146   $  648,133
                                                             ==========    ==========   ==========
</TABLE>
 
                       See Notes to Financial Statements.
 
                                      F-48
<PAGE>   88
 
                             CONDON BROTHERS, INC.
 
                       STATEMENTS OF STOCKHOLDERS' EQUITY
 
<TABLE>
<CAPTION>
                                          NUMBER OF             ADDITIONAL
                                           COMMON     COMMON     PAID-IN      RETAINED
                                           SHARES      STOCK     CAPITAL      EARNINGS        TOTAL
                                          ---------   -------   ----------   -----------   -----------
<S>                                       <C>         <C>       <C>          <C>           <C>
BALANCE, DECEMBER 31, 1995..............   580,000    $29,000    $ 24,155    $   317,786   $   370,941
  Net income............................        --         --          --        648,133       648,133
  Dividends.............................        --         --          --        (43,478)      (43,478)
                                           -------    -------    --------    -----------   -----------
BALANCE, DECEMBER 31, 1996..............   580,000     29,000      24,155        922,441       975,596
  Net income............................        --         --          --        119,146       119,146
  Dividends.............................        --         --          --       (108,924)     (108,924)
                                           -------    -------    --------    -----------   -----------
BALANCE, DECEMBER 31, 1997..............   580,000     29,000      24,155        932,663       985,818
  Net income............................        --         --          --        510,605       510,605
  Dividends.............................        --         --          --     (1,165,600)   (1,165,600)
  Obligation transferred to owners......        --         --      93,900             --        93,900
                                           -------    -------    --------    -----------   -----------
BALANCE, JULY 31, 1998..................   580,000    $29,000    $118,055    $   277,668   $   424,723
                                           =======    =======    ========    ===========   ===========
</TABLE>
 
                       See Notes to Financial Statements.
 
                                      F-49
<PAGE>   89
 
                             CONDON BROTHERS, INC.
 
                            STATEMENTS OF CASH FLOWS
 
<TABLE>
<CAPTION>
                                                              SEVEN MONTHS         YEAR ENDED
                                                                 ENDED            DECEMBER 31,
                                                                JULY 31,     ----------------------
                                                                  1998         1997         1996
                                                              ------------   ---------   ----------
<S>                                                           <C>            <C>         <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net income................................................  $   510,605    $ 119,146   $  648,133
  Adjustments to reconcile net income to net cash provided
    by (used in) operating activities:
    Depreciation............................................      169,541      184,479      139,772
    Gain from sale of equipment.............................     (110,813)     (60,858)    (120,468)
    Reserve for losses on uncompleted contracts.............           --     (167,107)     167,107
    Other...................................................       15,955       (7,944)     (20,411)
  Change in working capital Items:
    Accounts receivable.....................................     (420,081)     832,378     (954,769)
    Costs and estimated earnings in excess of billings on
      uncompleted contracts.................................      (51,927)     129,249      (86,695)
    Inventory...............................................     (345,179)    (239,276)    (502,304)
    Prepaid expenses........................................        2,207        6,226        2,065
    Accounts payable and accrued expenses...................      280,125      (37,537)     528,659
    Deferred compensation...................................        1,079       (2,500)          --
    Due to related party....................................      (10,000)      (2,788)      (7,961)
    Billings in excess of costs and estimated earnings on
      uncompleted contracts.................................       (7,949)     (62,872)      66,783
                                                              -----------    ---------   ----------
         Net cash provided by (used in) operating
           activities.......................................       33,563      690,596     (140,089)
                                                              -----------    ---------   ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
  Capital expenditures......................................     (375,627)    (372,987)    (432,024)
  Proceeds from sale of plant and equipment.................      169,922       97,624      126,943
                                                              -----------    ---------   ----------
         Net cash used in investing activities..............     (205,705)    (275,363)    (305,081)
                                                              -----------    ---------   ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
  Proceeds from lines of credit.............................    1,600,000      428,425    1,173,106
  Payments on lines of credit...............................     (101,593)    (628,425)    (593,521)
  Payments on long-term debt................................     (111,273)    (105,862)     (90,730)
  Dividends paid............................................   (1,165,600)    (108,924)     (43,478)
  Loan to shareholder.......................................      (50,000)          --           --
                                                              -----------    ---------   ----------
         Net cash provided by (used in) financing
           activities.......................................      171,534     (414,786)     445,377
                                                              -----------    ---------   ----------
  NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS......         (608)         447          207
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD..............        1,096          649          442
                                                              -----------    ---------   ----------
CASH AND CASH EQUIVALENTS, END OF PERIOD....................  $       488    $   1,096   $      649
                                                              ===========    =========   ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
  INFORMATION:
  Cash paid during the period for interest..................  $    67,984    $  75,625   $   55,834
                                                              ===========    =========   ==========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING
  AND FINANCING ACTIVITIES:
  Refinance of lines of credit and long-term debt...........  $        --    $ 450,000   $       --
                                                              ===========    =========   ==========
  Transfer of accounts payable to related parties...........  $   114,700    $      --   $       --
                                                              ===========    =========   ==========
  Transfer of land to related party.........................  $    20,800    $      --   $       --
                                                              ===========    =========   ==========
</TABLE>
 
                       See Notes to Financial Statements.
 
                                      F-50
<PAGE>   90
 
                             CONDON BROTHERS, INC.
 
                         NOTES TO FINANCIAL STATEMENTS
 
1. NATURE OF BUSINESS
 
     Condon Brothers, Inc. (the "Company"), a Washington corporation, is in the
business of railroad track construction, maintenance, salvage and related sales
primarily in the Pacific Northwest. The majority of construction and maintenance
work is performed under fixed price contracts. The duration of the Company's
contracts is typically less than one year.
 
2. SIGNIFICANT ACCOUNTING POLICIES
 
REVENUE AND CONTRACT COST RECOGNITION
 
     The Company recognizes revenues from fixed-fee contracts using the
percentage-of-completion method, measured by the percentage of contract cost
incurred to date to management's estimated total cost for each contract.
Management considers comparison of costs incurred to date to total cost to be
the best available measure of progress on the contracts. Changes in job
performance, job conditions and estimated profitability may result in revisions
to total expected project costs and the anticipated gross profit and are
recognized in the period in which determined.
 
     Revenues from time-and-material contracts are recognized as the work
progresses.
 
     Contract costs include all direct material, labor and equipment costs and
those indirect costs related to contract performance and are charged to expense
as incurred. Provisions for estimated losses on uncompleted contracts are made
in the period in which such losses are determined.
 
     The asset, "Costs and estimated earnings in excess of billings on
uncompleted contracts", represents revenues recognized in excess of amounts
billed. The liability, "Billings in excess of costs and estimated earnings on
uncompleted contracts", represents billings in excess of revenues recognized.
 
CASH AND CASH EQUIVALENTS
 
     The Company considers cash and cash equivalents to include cash on hand and
temporary cash investments purchased with an original maturity of three months
or less.
 
FINANCIAL INSTRUMENTS AND CREDIT RISK
 
     The Company operates primarily in the Pacific Northwest. As such, the
Company's revenues and related accounts receivable are principally from the same
geographic region. The terms of the sales give rise to unsecured accounts
receivable, as is common industry practice.
 
INVENTORY
 
     Inventory consists principally of stored rails, ties and other track
materials ("OTM") and parts to be used for contracts or resale and are stated at
the lower of cost or market. Market is based on estimated proceeds expected to
be obtained upon ultimate sale.
 
     The Company's principal method of acquiring inventory items is through
salvage operations. Items acquired through salvage operations are valued based
on costs incurred to acquire the items, including payments to third parties,
direct labor and other direct contract costs, and those indirect costs related
to contract performance. These costs are netted with any third party payments
received for the salvage operations. The Company compares total cost of salvaged
materials to market for rails, ties and OTM recovered and adjustments are made
if the calculated market value is less than the total salvage cost. In addition,
the Company evaluates amounts held in inventory and adjusts for rails, ties and
OTM quantities that exceed anticipated usage.
 
                                      F-51
<PAGE>   91
                             CONDON BROTHERS, INC.
 
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
 
     Inventory at July 31, 1998 and December 31, 1997 consisted of the
following:
 
<TABLE>
<CAPTION>
                                                               JULY 31,    DECEMBER 31,
                                                                 1998          1997
                                                              ----------   ------------
<S>                                                           <C>          <C>
Rails.......................................................  $  962,283    $  536,825
Ties........................................................     154,585       210,932
Other track material........................................     233,938       229,005
                                                              ----------    ----------
          Total rail inventory..............................   1,350,806       976,762
Mining equipment and other items............................     166,566       195,431
                                                              ----------    ----------
          Total Inventory...................................  $1,517,372    $1,172,193
                                                              ==========    ==========
</TABLE>
 
     The Company has salvaged and recorded at cost $166,566 and $195,431 at July
31, 1998 and December 31, 1997, respectively, inventory which is comprised of
various mine equipment, small locomotives and other items. The Company believes
it will realize amounts recorded upon disposition.
 
PLANT AND EQUIPMENT
 
     The Company records plant and equipment at cost. Depreciation is computed
using the straight-line method over the estimated useful life of the asset as
follows:
 
<TABLE>
<S>                                                           <C>
Machinery and equipment.....................................  5 - 10 years
Vehicles....................................................   5 - 7 years
Office furniture and equipment..............................       5 years
</TABLE>
 
     As assets are retired or otherwise disposed of, the cost and accumulated
depreciation are eliminated from their respective accounts and any gain or loss
is reflected in net income.
 
     Maintenance, repairs and minor replacements are expensed as incurred and
were $241,585 for the seven months ended July 31, 1998, $353,428 in 1997 and
$256,727 in 1996.
 
INCOME TAXES
 
     The Company operates as a sub-chapter S corporation. Accordingly, the
income taxes for the earnings of the Company are the responsibility of the
owners; therefore, these financial statements do not reflect any current or
deferred federal or state income taxes for the Company.
 
USE OF ESTIMATES
 
     The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could vary from the estimates that were assumed
in preparing the financial statements.
 
RECLASSIFICATIONS
 
     Certain reclassifications have been made to conform prior years'
information to the current year's presentation.
 
                                      F-52
<PAGE>   92
                             CONDON BROTHERS, INC.
 
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
 
3. ACCOUNTS RECEIVABLE
 
     Accounts receivable at July 31, 1998 and December 31, 1997 consisted of the
following:
 
<TABLE>
<CAPTION>
                                                              JULY 31,   DECEMBER 31,
                                                                1998         1997
                                                              --------   ------------
<S>                                                           <C>        <C>
Contract receivables........................................  $793,899     $401,698
Contract retainages.........................................    90,061       53,186
Other.......................................................    10,523       20,853
                                                              --------     --------
                                                               894,483      475,737
Less allowance for doubtful accounts........................    28,725       30,060
                                                              --------     --------
                                                              $865,758     $445,677
                                                              ========     ========
</TABLE>
 
     Contract retainages have been billed but are not considered due until
contract completion. Such contract retainage is expected to be collected within
the following year. Other accounts receivable consist primarily of amounts due
from current and former employees.
 
4. COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
 
     Information with respect to contracts in process at July 31, 1998 and
December 31, 1997 consisted of the following:
 
<TABLE>
<CAPTION>
                                                              JULY 31,   DECEMBER 31,
                                                                1998         1997
                                                              --------   ------------
<S>                                                           <C>        <C>
Costs incurred on uncompleted contracts.....................  $729,944     $626,543
Estimated earnings..........................................   231,880      129,903
                                                              --------     --------
                                                               961,824      756,446
Less billings to date.......................................   833,910      688,408
                                                              --------     --------
                                                              $127,914     $ 68,038
                                                              ========     ========
</TABLE>
 
     Contracts in process at July 31, 1998 and December 31, 1997 are included in
the accompanying balance sheets under the following captions:
 
<TABLE>
<CAPTION>
                                                              JULY 31,   DECEMBER 31,
                                                                1998         1997
                                                              --------   ------------
<S>                                                           <C>        <C>
Costs and estimated earnings in excess of billings on
  uncompleted contracts.....................................  $127,914     $75,987
Billings in excess of costs and estimated earnings on
  uncompleted contracts.....................................        --      (7,949)
                                                              --------     -------
                                                              $127,914     $68,038
                                                              ========     =======
</TABLE>
 
     Provisions for losses on uncompleted contracts are recognized when it is
determined that total costs will exceed the allowable contract revenue.
 
                                      F-53
<PAGE>   93
                             CONDON BROTHERS, INC.
 
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
 
5. OPERATING LEASES
 
     The Company leases from C. B. Enterprises, a related party, the Spokane,
Washington yard, which includes a maintenance shop and office building under an
agreement expiring on November 1, 1999. Minimum rental commitments under the
noncancellable lease agreement are:
 
<TABLE>
<CAPTION>
PERIOD ENDING DECEMBER 31,
--------------------------
<S>                                                           <C>
  1998......................................................  $25,000
  1999......................................................   55,000
                                                              -------
                                                              $80,000
                                                              =======
</TABLE>
 
     Total rental expense for the seven months ended July 31, 1998 and the years
ended December 31, 1997 and 1996 for all operating leases amounted to $40,969,
$109,989 and $77,086, respectively.
 
6. LINES OF CREDIT
 
     At July 31, 1998, the Company had a total of four operating lines of credit
with Washington Trust Bank. Interest was payable monthly at the Bank's prime
rate plus .75% - 1%. Advances on the operating line were $1,498,407, as of July
31, 1998. The operating lines expire on varying maturities in 1998. At December
31, 1997, the Company had a $300,000 operating line of credit at an interest
rate of prime plus .75%. No amounts were outstanding against this line at
December 31, 1997. Security for the line is accounts receivable, inventory and
equipment.
 
     In addition to the above operating lines of credit with Washington Trust
Bank, two additional lines of credit were issued during the year ended December
31, 1996, for operations. These additional lines allow draws up to $350,000.
Advances on the lines were $350,000 as of December 31, 1996. Interest accrues
monthly at the Bank's prime rate plus .75%. Security for the lines is accounts
receivable, inventory and equipment. These operating lines were repaid during
1997.
 
7. LONG-TERM DEBT
 
     Long-term debt at July 31, 1998 and December 31, 1997 consisted of the
following:
 
<TABLE>
<CAPTION>
                                                              JULY 31,   DECEMBER 31,
                                                                1998         1997
                                                              --------   ------------
<S>                                                           <C>        <C>
Note payable to Washington Trust Bank, payable in monthly
  installments of $11,226 including interest at 9% with the
  balance due January 30, 1999. Secured by accounts
  receivable, inventory and equipment.......................  $402,482     $450,000
Note payable to Washington Trust Bank, payable in monthly
  installments of $11,305 including interest at 9.50% and
  matures January 1, 2000. Secured by accounts receivable,
  inventory and equipment...................................   192,270      256,025
                                                              --------     --------
                                                               594,752      706,025
Less current maturities.....................................   539,385      214,718
                                                              --------     --------
                                                              $ 55,367     $491,307
                                                              ========     ========
</TABLE>
 
                                      F-54
<PAGE>   94
                             CONDON BROTHERS, INC.
 
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
 
     Aggregate maturities on principal under long-term debt obligations are as
follows:
 
<TABLE>
<CAPTION>
PERIOD ENDING JULY 31,
----------------------
<S>                                                           <C>
  1999......................................................  $539,385
  2000......................................................    55,367
                                                              --------
                                                              $594,752
                                                              ========
</TABLE>
 
8. RELATED PARTY TRANSACTIONS
 
     Payments were made to C. B. Enterprises (a partnership), a related party,
under an operating lease for the Spokane, Washington yard and buildings. Such
payments totaled $35,000 for the seven months ended July 31, 1998 and $60,000
for the years ended December 31, 1997 and 1996. The Company also leases certain
equipment to C. B. Enterprises, which is recognized as revenue. Revenue
recognized totaled $0 for the seven months ended July 31, 1998 and $12,683 and
$8,085 for the years ended December 31, 1997 and 1996. Amounts due to C. B.
Enterprises are classified as Due to related party in the Balance Sheets and are
zero as of July 31, 1998 and $10,000 as of December 31, 1997, respectively.
 
     The Company had recorded $114,700 in accounts payable and accrued expenses
in the Balance Sheets related to amounts owed for materials recovered during a
1993 salvage operation. Included in this salvage operation was land acquired for
$20,800. This asset and liability were transferred to C.B. Enterprises, with the
offsetting difference reflected as an increase in additional paid-in capital.
The Company's management and counsel have drafted all agreements related to the
transfer of the liability and asset. For purposes of the Statements of Cash
Flows, these transfers of $114,700 and $20,800, have been treated as a noncash
transaction.
 
     In 1998, the Company loaned, on an interest free basis, $50,000 to a
principal stockholder of the Company. The loan is payable on demand and is
non-collateralized. It is reflected as Shareholder receivable in the
accompanying Balance Sheets.
 
9. PROFIT SHARING PLAN
 
     The Company has adopted a profit-sharing plan (the Plan) covering all full
time employees with one year of service. Participants become fully vested after
six years of service. Contributions to the Plan amounted to $14,000 for the
seven months ended July 31, 1998. Contributions made to the Plan for the years
ended December 31, 1997 and 1996, were $100,000 and $50,000, respectively.
 
10. DEFERRED COMPENSATION PAYABLE
 
     In 1993, the Company and one of its officers entered into a discretionary
deferred compensation agreement. The deferred compensation was to be payable to
the officer 90 days following the date on which he gives written notification to
Condon Brothers, Inc. of his retirement from the Company. During 1995, the
Company made the decision to suspend the agreement. During 1998, the Company
made the decision to re-initiate the agreement. At July 31, 1998 and December
31, 1997, the Company has a $83,989 and a $82,910 deferred compensation
liability, respectively, to the officer which will be paid to him upon his
retirement. The amount charged to operations was $10,000 for 1998 and zero for
1997 and 1996.
 
11. CASH SURRENDER VALUE OF LIFE INSURANCE
 
     The Company maintains life insurance policies on two officers. The face
value of these policies was $300,000 each at July 31, 1998 and December 31,
1997. The cash surrender value on these policies was $35,150 and $28,338 as of
July 31, 1998 and December 31, 1997, respectively.
 
                                      F-55
<PAGE>   95
                             CONDON BROTHERS, INC.
 
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
 
12. FAIR VALUE OF FINANCIAL INSTRUMENTS
 
     The following estimated fair values of financial instruments are provided
pursuant to the requirements of Statement of Financial Accounting Standards No.
107, "Disclosures about Fair Value of Financial Instruments." The estimated fair
value amounts have been determined by the Company using available market
information and appropriate valuation methodologies.
 
ACCOUNTS RECEIVABLE AND ACCOUNTS PAYABLE
 
     The carrying amounts of these items at July 31, 1998 and December 31, 1997,
are a reasonable estimate of their fair value due to their short-term and liquid
nature.
 
LONG-TERM DEBT
 
     The carrying amount of the line of credit facility approximates fair value
as the interest rate fluctuates with changes in market conditions. It is
estimated that the fair value of the long-term debt is approximately market.
Management estimated the fair value of the long-term debt based on the remaining
term to maturity and a comparison of their current interest rates to market
rates for similar obligations.
 
13. CONTINGENCIES
 
     The Company is engaged in various lawsuits arising in the ordinary course
of business. In the opinion of management, based upon the advice of counsel, the
ultimate outcome of these lawsuits will not have a material adverse impact on
the Company's financial position, operations or liquidity.
 
     The Company has accrued $120,000 in accounts payable and accrued expenses
in the Balance Sheets associated with a 1997 railroad salvage contract. The
total amount of the salvage contract was originally $174,000. Due to a reduction
in the amount of rail, ties and OTM allowed to be salvaged, the Company is
presently in negotiations to have the contract obligation reduced. If the
Company is unsuccessful in obtaining a change-order for the contract, an
additional cost of $54,000 will be recognized in the financial statements as
inventory to the extent the value is supported by comparison to the Company's
expected market value.
 
14. EQUITY
 
     In 1998, the original shareholders of the Company redistributed a limited
number of previously issued shares to various family members.
 
15. SUBSEQUENT EVENT
 
     On May 21, 1998, the stockholders of the Company entered into an Agreement
and Plan of Reorganization (the "Agreement") with RailWorks Corporation. Under
the terms of the Agreement, the stockholders exchanged their stock of the
Company for cash and stock of RailWorks Corporation. The transaction was
completed on August 4, 1998.
 
                                      F-56
<PAGE>   96
 
                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
 
To H.P. McGinley, Incorporated:
 
     We have audited the accompanying balance sheets of H.P. MCGINLEY,
INCORPORATED (the "Company") (a Pennsylvania corporation) as of July 31, 1998
and December 31, 1997, and the related statements of operations, stockholder's
equity and cash flows for the seven months ended July 31, 1998, the ten months
ended December 31, 1997 and the year ended February 28, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
 
     We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
 
     In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of H.P. MCGINLEY, INCORPORATED
as of July 31, 1998 and December 31, 1997, and the results of its operations and
its cash flows for the seven months ended July 31, 1998, the ten months ended
December 31, 1997 and the year ended February 28, 1997 in conformity with
generally accepted accounting principles.
 
                                          Arthur Andersen LLP
 
Nashville, Tennessee
August 21, 1998
 
                                      F-57
<PAGE>   97
 
                          H.P. MCGINLEY, INCORPORATED
 
                                 BALANCE SHEETS
 
<TABLE>
<CAPTION>
                                                               JULY 31,    DECEMBER 31,
                                                                 1998          1997
                                                              ----------   ------------
<S>                                                           <C>          <C>
                                        ASSETS
CURRENT ASSETS:
  Cash and cash equivalents.................................  $    1,390    $  575,514
  Accounts receivable.......................................   1,148,755       975,707
  Inventory.................................................   1,002,344       893,783
  Prepaid expenses..........................................       4,441         8,083
                                                              ----------    ----------
          Total current assets..............................   2,156,930     2,453,087
                                                              ----------    ----------
PROPERTY, PLANT AND EQUIPMENT:
  Land and improvements.....................................      98,982        98,982
  Buildings and improvements................................     231,891       231,891
  Machinery and equipment...................................   1,433,821     1,433,821
  Office furniture and equipment............................      76,805        76,805
  Transportation equipment..................................     678,066       574,578
                                                              ----------    ----------
                                                               2,519,565     2,416,077
  Less accumulated depreciation.............................   1,860,652     1,836,255
                                                              ----------    ----------
          Property, plant and equipment, net................     678,913       579,822
                                                              ----------    ----------
OTHER ASSETS:
  Deferred income taxes.....................................       5,815         6,500
                                                              ----------    ----------
                                                              $2,841,658    $3,039,409
                                                              ==========    ==========
                         LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
  Accounts payable..........................................  $   78,840    $   79,668
  Demand note payable to stockholder........................     593,922       946,375
  Accrued expenses..........................................      50,783        10,186
  Income taxes payable......................................     169,037       336,100
                                                              ----------    ----------
          Total current liabilities.........................     892,582     1,372,329
                                                              ----------    ----------
COMMITMENTS AND CONTINGENCIES...............................          --            --
                                                              ----------    ----------
STOCKHOLDER'S EQUITY:
  Common Stock, $1 par value; authorized shares, 10,000;
     issued and outstanding shares, 1,000...................       1,000         1,000
  Retained earnings.........................................   1,948,076     1,666,080
                                                              ----------    ----------
          Total stockholder's equity........................   1,949,076     1,667,080
                                                              ----------    ----------
                                                              $2,841,658    $3,039,409
                                                              ==========    ==========
</TABLE>
 
                       See Notes to Financial Statements.
 
                                      F-58
<PAGE>   98
 
                          H.P. MCGINLEY, INCORPORATED
 
                            STATEMENTS OF OPERATIONS
 
<TABLE>
<CAPTION>
                                                                        TEN MONTHS
                                                SEVEN MONTHS ENDED         ENDED            YEAR ENDED
                                                  JULY 31, 1998      DECEMBER 31, 1997   FEBRUARY 28, 1997
                                                ------------------   -----------------   -----------------
<S>                                             <C>                  <C>                 <C>
Revenue.......................................      $3,931,653          $5,909,679          $4,425,187
Cost of goods sold............................       2,775,459           3,356,518           3,016,827
                                                    ----------          ----------          ----------
  Gross profit................................       1,156,194           2,553,161           1,408,360
Selling, general and
  administrative expenses.....................         650,059           1,834,752           1,294,731
                                                    ----------          ----------          ----------
Income from operations........................         506,135             718,409             113,629
Other income (expense):
  Interest income.............................           7,761              23,054               4,697
  Interest expense............................         (25,000)            (24,832)                 --
                                                    ----------          ----------          ----------
Income before provision for
  income taxes................................         488,896             716,631             118,326
Provision for income taxes....................         206,900             286,100              46,790
                                                    ----------          ----------          ----------
Net income....................................      $  281,996          $  430,531          $   71,536
                                                    ==========          ==========          ==========
</TABLE>
 
                       See Notes to Financial Statements.
 
                                      F-59
<PAGE>   99
 
                          H.P. MCGINLEY, INCORPORATED
 
                       STATEMENTS OF STOCKHOLDER'S EQUITY
 
<TABLE>
<CAPTION>
                                            NUMBER OF
                                          COMMON SHARES   COMMON STOCK   RETAINED EARNINGS     TOTAL
                                          -------------   ------------   -----------------   ----------
<S>                                       <C>             <C>            <C>                 <C>
BALANCE, FEBRUARY 29, 1996..............      1,000          $1,000         $1,164,013       $1,165,013
  Net income............................         --              --             71,536           71,536
                                              -----          ------         ----------       ----------
BALANCE, FEBRUARY 28, 1997..............      1,000           1,000          1,235,549        1,236,549
  Net income............................         --              --            430,531          430,531
                                              -----          ------         ----------       ----------
BALANCE, DECEMBER 31, 1997..............      1,000           1,000          1,666,080        1,667,080
  Net income............................         --              --            281,996          281,996
                                              -----          ------         ----------       ----------
BALANCE, JULY 31, 1998..................      1,000          $1,000         $1,948,076       $1,949,076
                                              =====          ======         ==========       ==========
</TABLE>
 
                       See Notes to Financial Statements.
 
                                      F-60
<PAGE>   100
 
                          H.P. MCGINLEY, INCORPORATED
 
                            STATEMENTS OF CASH FLOWS
 
<TABLE>
<CAPTION>
                                                            SEVEN MONTHS    TEN MONTHS        YEAR
                                                               ENDED          ENDED          ENDED
                                                              JULY 31,     DECEMBER 31,   FEBRUARY 28,
                                                                1998           1997           1997
                                                            ------------   ------------   ------------
<S>                                                         <C>            <C>            <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net income..............................................    $281,996       $430,531      $  71,536
  Adjustments to reconcile net income to net cash used in
     operating activities:
     Depreciation.........................................      24,397         65,323         68,359
     Deferred income taxes................................         685           (500)        (3,210)
     Change in operating assets and liabilities:
       Accounts receivable................................    (173,048)      (637,678)       (19,476)
       Inventory..........................................    (108,561)      (205,203)      (277,170)
       Prepaid expenses...................................       3,642          7,552         31,927
       Accounts payable...................................        (828)       (21,157)        19,225
       Accrued expenses...................................      40,597        (48,156)       (39,262)
       Income taxes payable...............................    (167,063)       286,100         50,000
                                                              --------       --------      ---------
          Net cash used in operating activities...........     (98,183)      (123,188)       (98,071)
                                                              --------       --------      ---------
CASH USED IN INVESTING ACTIVITIES,
  Capital expenditures....................................    (123,488)            --       (174,921)
                                                              --------       --------      ---------
CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES,
  Net (repayments) borrowings from stockholder............    (352,453)       689,236            858
                                                              --------       --------      ---------
NET INCREASE (DECREASE) IN CASH...........................    (574,124)       566,048       (272,134)
CASH AND CASH EQUIVALENTS,
  beginning of period.....................................     575,514          9,466        281,600
                                                              --------       --------      ---------
CASH AND CASH EQUIVALENTS,
  end of period...........................................    $  1,390       $575,514      $   9,466
                                                              ========       ========      =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
  Cash paid during the period for interest................    $ 25,000       $ 24,832      $      --
                                                              ========       ========      =========
  Cash paid during the period for income taxes............    $373,278       $     --      $      --
                                                              ========       ========      =========
</TABLE>
 
                       See Notes to Financial Statements.
 
                                      F-61
<PAGE>   101
                          H.P. MCGINLEY, INCORPORATED
 
                         NOTES TO FINANCIAL STATEMENTS
 
1. NATURE OF BUSINESS
 
     H.P. McGinley, Inc. (the "Company") (a Pennsylvania corporation) operates
as a manufacturer of specialty hardwood products, including railroad ties and
shipping materials. The Company services customers in Pennsylvania and
surrounding states.
 
2. SIGNIFICANT ACCOUNTING POLICIES
 
YEAR-END
 
     In 1997, the Company changed its financial reporting year-end to December
31. These financial statements reflect the results of operations for the seven
months ended July 31, 1998, the ten months ended December 31, 1997 and the year
ended February 28, 1997.
 
USE OF ESTIMATES
 
     The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could vary from the estimates that were assumed
in preparing the financial statements.
 
REVENUE AND COST RECOGNITION
 
     The Company recognizes revenue when products are delivered to customers
pursuant to shipping agreements. Cost of goods sold includes the raw materials
cost and costs of producing the product, including milling and preservative
treatment.
 
CASH AND CASH EQUIVALENTS
 
     The Company considers cash and cash equivalents to include cash on hand and
temporary cash investments purchased with an original maturity of three months
or less.
 
FINANCIAL INSTRUMENTS AND CREDIT RISK
 
     The Company operates primarily in the northeast United States. As such, the
Company's accounts receivable are from the same geographic region. In addition,
the Company's customers are primarily in the railroad/railroad construction
business or the transportation business. The terms of the sales give rise to
unsecured accounts receivable, as is common industry practice.
 
INVENTORY
 
     Inventory, consisting principally of raw materials and finished goods, is
stated at the lower of cost (first-in, first-out) or market.
 
                                      F-62
<PAGE>   102
                          H.P. MCGINLEY, INCORPORATED
 
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
 
PROPERTY, PLANT AND EQUIPMENT
 
     The Company records property, plant and equipment at cost. Depreciation is
computed using the straight-line and accelerated methods over the estimated
useful lives of the assets as follows:
 
<TABLE>
<S>                                                           <C>
Buildings and improvements..................................  15 to 30 years
Machinery and equipment.....................................    5 to 7 years
Office furniture and equipment..............................    5 to 7 years
Transportation equipment....................................    5 to 7 years
</TABLE>
 
     As assets are retired or otherwise disposed of, the cost and accumulated
depreciation are eliminated from the accounts, and any gain or loss is reflected
in net income. Normal maintenance and repairs are charged to expense as
incurred; major renewals or betterments which extend the life or increase the
value of assets are capitalized.
 
INCOME TAXES
 
     The provision for income taxes is based on earnings reported by the
Company. In accordance with Statement of Financial Accounting Standards ("SFAS")
No. 109, a deferred income tax asset or liability is determined by applying
currently enacted tax laws and rates to the expected reversal of the cumulative
temporary differences between the carrying value of assets and liabilities for
financial statement and income tax purposes.
 
3. INVENTORIES
 
     The principal components of inventories at July 31, 1998 and December 31,
1997 are as follows:
 
<TABLE>
<CAPTION>
                                                               JULY 31,    DECEMBER 31,
                                                                 1998          1997
                                                              ----------   ------------
<S>                                                           <C>          <C>
Raw materials...............................................  $  663,983     $378,814
Finished goods..............................................     338,361      514,969
                                                              ----------     --------
                                                              $1,002,344     $893,783
                                                              ==========     ========
</TABLE>
 
4. EMPLOYEE BENEFIT PLANS
 
     The Company had a defined benefit pension plan (the "Plan") for all
employees meeting certain age and length of service requirements. Benefits were
based primarily on years of service and average annual compensation during the
highest five consecutive years. In fiscal 1997, the Company terminated the Plan
and distributed vested benefits in accordance with ERISA requirements. The
Company made a final contribution to the Plan of $26,377 during the year ended
February 28, 1997.
 
     The Company maintains a defined contribution benefit plan which covers
substantially all eligible employees. Contributions to the defined contribution
benefit plan during the seven months ended July 31, 1998, the ten months ended
December 31, 1997 and the year ended February 28, 1997 amounted to $18,465, $0,
and $40,922, respectively.
 
5. INCOME TAXES
 
     Under the asset and liability method of SFAS 109, deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences
 
                                      F-63
<PAGE>   103
                          H.P. MCGINLEY, INCORPORATED
 
                  NOTES TO FINANCIAL STATEMENTS -- (Continued)
 
are expected to be recovered or settled. Under SFAS 109, the effect on deferred
tax assets and liabilities of a change in tax rates is recognized in income in
the period that includes the enactment date.
 
     A reconciliation of the United States income tax expense at the statutory
corporate rate to the reported income tax expense is as follows:
 
<TABLE>
<CAPTION>
                                                    SEVEN MONTHS     TEN MONTHS
                                                        ENDED          ENDED        YEAR ENDED
                                                      JULY 31,      DECEMBER 31,   FEBRUARY 28,
                                                        1998            1997           1997
                                                    -------------   ------------   ------------
<S>                                                 <C>             <C>            <C>
Tax charge at standard U.S. rate of 34%...........    $166,225        $243,655       $40,231
State taxes, net of Federal benefit...............      40,675          43,194         6,334
Other.............................................          --            (749)          225
                                                      --------        --------       -------
                                                      $206,900        $286,100       $46,790
                                                      ========        ========       =======
</TABLE>
 
     The components of the net deferred income tax asset at July 31, 1998 and
December 31, 1997 are as follows:
 
<TABLE>
<CAPTION>
                                                              JULY 31,   DECEMBER 31,
                                                                1998         1997
                                                              --------   ------------
<S>                                                           <C>        <C>
Non-current asset (liability):
  Inventory.................................................  $10,990      $10,125
  Property, plant and equipment.............................   (5,175)      (3,645)
  Other.....................................................       --           20
                                                              -------      -------
          Total non-current asset...........................  $ 5,815      $ 6,500
                                                              =======      =======
</TABLE>
 
     State income taxes totaling approximately $40,675, $42,915 and $7,019 have
been provided for the seven months ended July 31, 1998, the ten months ended
December 31, 1997 and the year ended February 28, 1997, respectively.
 
6. RELATED PARTY TRANSACTIONS
 
     The Company's stockholder periodically advances funds to the Company. Such
advances were noninterest bearing through February 28, 1997. Subsequent to March
1, 1997, the advances bear interest at 9% per annum. The advances are due on
demand and repayment is expected as funds become available. Amounts advanced
from the stockholder totaled $593,922 and $946,375 as of July 31, 1998 and
December 31, 1997, respectively.
 
7. COMMITMENTS AND CONTINGENCIES
 
LITIGATION
 
     The Company is subject to various claims and legal actions incidental to
the Company's business. Management is not aware of any claims against the
Company which might have a material impact on the Company's results of
operations or financial position.
 
8. FAIR VALUE OF FINANCIAL INSTRUMENTS
 
     The following estimated fair values of financial instruments is made in
accordance with the requirements of SFAS No. 107, "Disclosures about Fair Value
of Financial Instruments." The estimated fair value amounts have been determined
by the Company using available market information and appropriate valuation
methodologies.
 
                                      F-64
<PAGE>   104
                          H.P. MCGINLEY, INCORPORATED
 
                  NOTES TO FINANCIAL STATEMENTS -- (Continued)
 
CASH, ACCOUNTS RECEIVABLE AND ACCOUNTS PAYABLE
 
     The carrying amounts of these Items are a reasonable estimate of their fair
value due to their short-term nature.
 
9. SIGNIFICANT CUSTOMERS
 
     A significant portion of the Company's sales were to one unaffiliated
customer. Amounts due from this customer represented 42% and 25% of the total
accounts receivable at July 31, 1998 and December 31, 1997 and 19% and 14% of
sales for the periods then ended. The loss of this customer would have a
material effect on the Company's business if this loss was not offset by
additional business from other sources.
 
10. SUBSEQUENT EVENT
 
     On May 21, 1998, the stockholder of the Company entered into an Agreement
and Plan of Reorganization (the "Agreement") with RailWorks Corporation. Under
the terms of the Agreement, the stockholder exchanged his stock of the Company
for cash and stock of RailWorks Corporation. The transaction was completed on
August 4, 1998.
 
                                      F-65
<PAGE>   105
 
                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
 
To Kennedy Railroad Builders, Inc.:
 
     We have audited the accompanying combined balance sheets of KENNEDY
RAILROAD BUILDERS, INC. (a Pennsylvania corporation) AND ASSOCIATED COMPANIES
(collectively, the "Company") as of July 31, 1998 and December 31, 1997 the
related combined statements of operations, stockholders' equity and cash flows
for the seven months ended July 31, 1998, the nine months ended December 31,
1997 and the year ended March 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
 
     We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
 
     In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the combined financial position of KENNEDY
RAILROAD BUILDERS, INC. AND ASSOCIATED COMPANIES as of July 31, 1998 and
December 31, 1997 and the results of their operations and their cash flows for
the seven months ended July 31, 1998, the nine months ended December 31, 1997
and the year ended March 31, 1997 in conformity with generally accepted
accounting principles.
 
                                          Arthur Andersen LLP
 
Stamford, Connecticut
October 16, 1998
 
                                      F-66
<PAGE>   106
 
                        KENNEDY RAILROAD BUILDERS, INC.
                            AND ASSOCIATED COMPANIES
 
                            COMBINED BALANCE SHEETS
 
<TABLE>
<CAPTION>
                                                               JULY 31,    DECEMBER 31,
                                                                 1998          1997
                                                              ----------   ------------
<S>                                                           <C>          <C>
                                        ASSETS
CURRENT ASSETS:
  Cash and cash equivalents.................................  $  226,839    $  170,289
  Accounts receivable, net of allowance of $66,609 and
     $25,000, respectively..................................   1,154,987     1,543,062
  Officer and affiliate notes receivable....................      33,940       102,431
  Costs and estimated earnings in excess of billings on
     uncompleted contracts..................................     240,079       292,611
  Inventory.................................................     853,015       855,723
  Prepaid expenses..........................................      73,308       106,115
  Deferred income taxes.....................................      26,977        10,125
                                                              ----------    ----------
          Total current assets..............................   2,609,145     3,080,356
                                                              ----------    ----------
PROPERTY, PLANT AND EQUIPMENT:
  Buildings.................................................      51,085       153,910
  Machinery and equipment...................................   2,926,109     2,228,879
  Office furniture and equipment............................     100,455        96,194
  Transportation equipment..................................   1,230,991     1,182,299
  Leasehold improvements....................................      92,717        63,325
                                                              ----------    ----------
                                                               4,401,357     3,724,607
     Less accumulated depreciation..........................   2,238,047     1,952,101
                                                              ----------    ----------
Property, plant and equipment, net..........................   2,163,310     1,772,506
                                                              ----------    ----------
OTHER ASSETS,
  Cash surrender value of officer's life insurance..........      36,871        19,330
                                                              ----------    ----------
                                                              $4,809,326    $4,872,192
                                                              ==========    ==========
                         LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
  Accounts payable..........................................  $1,223,124    $1,208,485
  Line of credit............................................   1,078,170       562,705
  Current maturities of long-term debt and capital leases...     369,169       315,324
  Officer notes payable.....................................      22,860        80,000
  Billings in excess of costs and estimated earnings on
     uncompleted contracts..................................      24,217       280,569
  Accrued expenses..........................................     266,191       136,767
  Income taxes payable......................................          --       123,828
                                                              ----------    ----------
          Total current liabilities.........................   2,983,731     2,707,678
Long-term debt and capital leases, net of current
  maturities................................................     954,318       806,466
Deferred income taxes.......................................      24,647        14,580
                                                              ----------    ----------
          Total liabilities.................................   3,962,696     3,528,724
                                                              ----------    ----------
Commitments and contingencies...............................          --            --
                                                              ----------    ----------
STOCKHOLDERS' EQUITY:
  Contributed capital.......................................      20,000        20,000
  Retained earnings.........................................     826,630     1,323,468
                                                              ----------    ----------
          Total stockholders' equity........................     846,630     1,343,468
                                                              ----------    ----------
                                                              $4,809,326    $4,872,192
                                                              ==========    ==========
</TABLE>
 
                  See Notes to Combined Financial Statements.
 
                                      F-67
<PAGE>   107
 
                        KENNEDY RAILROAD BUILDERS, INC.
                            AND ASSOCIATED COMPANIES
 
                       COMBINED STATEMENTS OF OPERATIONS
 
<TABLE>
<CAPTION>
                                                   SEVEN MONTHS   NINE MONTHS
                                                      ENDED          ENDED       YEAR ENDED
                                                     JULY 31,     DECEMBER 31,   MARCH 31,
                                                       1998           1997          1997
                                                   ------------   ------------   ----------
<S>                                                <C>            <C>            <C>
Revenue..........................................   $5,240,278     $8,295,814    $9,703,996
Contract costs...................................    4,630,579      6,605,074     7,967,579
                                                    ----------     ----------    ----------
     Gross profit................................      609,699      1,690,740     1,736,417
General and administrative expenses..............    1,162,717      1,163,290     1,497,998
                                                    ----------     ----------    ----------
(Loss) income from operations....................     (553,018)       527,450       238,419
Other income (expense):
  Interest income................................       38,374         10,408        13,566
  Interest expense...............................      (41,557)      (113,486)     (108,736)
  Other income...................................       23,462             --            --
                                                    ----------     ----------    ----------
(Loss) income before provision (benefit) for
  income taxes...................................     (532,739)       424,372       143,249
Provision (benefit) for income taxes.............      (53,839)       178,587        65,206
                                                    ----------     ----------    ----------
Net (loss) income................................   $ (478,900)    $  245,785    $   78,043
                                                    ==========     ==========    ==========
</TABLE>
 
                  See Notes to Combined Financial Statements.
 
                                      F-68
<PAGE>   108
 
                        KENNEDY RAILROAD BUILDERS, INC.
                            AND ASSOCIATED COMPANIES
 
                  COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY
 
<TABLE>
<CAPTION>
                                                          CONTRIBUTED    RETAINED
                                                            CAPITAL      EARNINGS      TOTAL
                                                          -----------   ----------   ----------
<S>                                                       <C>           <C>          <C>
BALANCE, MARCH 31, 1996.................................    $19,000     $1,024,640   $1,043,640
  Net income............................................         --         78,043       78,043
  Issuance of equity....................................      1,000             --        1,000
  Dividends.............................................         --        (15,000)     (15,000)
                                                            -------     ----------   ----------
BALANCE, MARCH 31, 1997.................................     20,000      1,087,683    1,107,683
  Net income............................................         --        245,785      245,785
  Dividends.............................................         --        (10,000)     (10,000)
                                                            -------     ----------   ----------
BALANCE, DECEMBER 31, 1997..............................     20,000      1,323,468    1,343,468
  Net loss..............................................         --       (478,900)    (478,900)
  Dividends.............................................         --        (17,938)     (17,938)
                                                            -------     ----------   ----------
BALANCE, JULY 31, 1998..................................    $20,000     $  826,630   $  846,630
                                                            =======     ==========   ==========
</TABLE>
 
                  See Notes to Combined Financial Statements.
 
                                      F-69
<PAGE>   109
 
                        KENNEDY RAILROAD BUILDERS, INC.
                            AND ASSOCIATED COMPANIES
 
                       COMBINED STATEMENTS OF CASH FLOWS
 
<TABLE>
<CAPTION>
                                                              SEVEN MONTHS    NINE MONTHS
                                                                  ENDED          ENDED       YEAR ENDED
                                                                JULY 31,      DECEMBER 31,    MARCH 31,
                                                                  1998            1997          1997
                                                              -------------   ------------   -----------
<S>                                                           <C>             <C>            <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net (loss) income.........................................    $(478,900)      $245,785      $  78,043
  Adjustments to reconcile net (loss) income to net cash
    provided by operating activities:
    Depreciation............................................      294,427        397,230        460,577
    Deferred income taxes...................................       (6,785)         6,054         (1,599)
    Loss from sale of equipment.............................           71             --             --
    Allowance for doubtful accounts.........................       41,609             --             --
    Change in operating assets and liabilities:
      Accounts receivable...................................      346,466          6,885       (759,843)
      Costs and estimated earnings in excess of billings on
        uncompleted contracts...............................       52,532         67,775       (261,195)
      Inventory.............................................        2,708       (330,097)       163,460
      Prepaid expenses......................................       32,807        (73,093)        14,092
      Cash value of life insurance..........................      (17,541)            --         (9,937)
      Accounts payable and accrued expenses.................      144,063       (120,396)       712,030
      Billings in excess of costs and estimated earnings on
        uncompleted contracts...............................     (256,352)        52,225        202,873
      Income taxes payable..................................     (123,828)       111,825        (24,793)
      Other.................................................           --        (42,986)       (49,413)
                                                                ---------       --------      ---------
        Net cash provided by operating activities...........       31,277        321,207        524,295
                                                                ---------       --------      ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
  Proceeds from sale of equipment...........................        1,460             --             --
  Proceeds from officer notes receivable....................       68,491         16,661         10,651
  Capital expenditures......................................     (725,681)      (240,058)      (237,369)
                                                                ---------       --------      ---------
        Net cash used in investing activities...............     (655,730)      (223,397)      (226,718)
                                                                ---------       --------      ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
  Principal payments on long-term debt......................     (205,193)      (286,281)      (241,567)
  Long-term borrowings......................................      457,871             --             --
  Line of credit, net.......................................      515,465        312,705       (133,000)
  Notes payable to officers, net............................      (57,140)       (12,088)      (150,234)
  Payment of dividends......................................      (30,000)       (10,000)       (15,000)
  Proceeds from equity issuance.............................           --             --          1,000
                                                                ---------       --------      ---------
        Net cash provided by (used in) financing
          activities........................................      681,003          4,336       (538,801)
                                                                ---------       --------      ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........       56,550        102,146       (241,224)
CASH AND CASH EQUIVALENTS, beginning of period..............      170,289         68,143        309,367
                                                                ---------       --------      ---------
CASH AND CASH EQUIVALENTS, end of period....................    $ 226,839       $170,289      $  68,143
                                                                =========       ========      =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
  Cash paid during the period for:
    Interest................................................    $  51,817       $113,486      $ 109,075
                                                                =========       ========      =========
    Income taxes............................................    $  17,592       $ 66,869      $  85,766
                                                                =========       ========      =========
</TABLE>
 
NONCASH INVESTING AND FINANCING TRANSACTIONS:
 
    The Company incurred long-term liabilities for the purchase of equipment
totaling $57,170, $323,861 and $527,744 for the seven months ended July 31,
1998, the nine months ended December 31, 1997, and the year ended March 31,
1997, respectively.
 
                  See Notes to Combined Financial Statements.
 
                                      F-70
<PAGE>   110
 
                        KENNEDY RAILROAD BUILDERS, INC.
                            AND ASSOCIATED COMPANIES
 
                     NOTES TO COMBINED FINANCIAL STATEMENTS
 
1. ORGANIZATION AND NATURE OF BUSINESS
 
     The accompanying combined financial statements include the accounts of
Kennedy Railroad Builders, Inc. ("Kennedy"), Railcorp, Inc. ("Railcorp") and
Alpha-Keystone Engineering, Inc. ("Alpha") (collectively, referred to as the
"Company"). Each of these companies are subject to common control and are
presented on a combined basis.
 
     The Company operates as a contractor, constructing, repairing and
maintaining railroad tracks for private and government customers located
throughout the northeastern region of the United States. The work is performed
under various forms of contracts, including fixed-fee and time-and-material
contracts.
 
2. SIGNIFICANT ACCOUNTING POLICIES
 
YEAR-END
 
     In 1997, the Company changed its financial reporting year-end to December
31. These combined financial statements reflect the results of operations for
the seven months ended July 31, 1998, the nine months ended December 31, 1997
and the year ended March 31, 1997.
 
COMBINATION POLICIES
 
     The Company includes the combined accounts of three companies subject to
common control. All significant transactions between the three companies are
eliminated in combination. Alpha was incorporated in February 1996. The results
for Alpha for the period from inception to March 31, 1997 are included in the
Company's financial statements for the year ended March 31, 1997.
 
USE OF ESTIMATES
 
     The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could vary from the estimates that were assumed
in preparing the financial statements.
 
REVENUE AND COST RECOGNITION
 
     The Company recognizes revenues from fixed-fee contracts using the
percentage-of-completion method, measured by the percentage of cost incurred to
date to management's estimated total cost for each contract. That method is used
because management considers total cost to be the best available measure of
progress on the contracts. Changes in job performance, job conditions and
estimated profitability may result in revisions to cost and income, which are
recognized in the period in which the revisions are determined.
 
     Revenues from time-and-material contracts are recognized currently as the
work is performed.
 
     Contract costs include all direct material, labor and equipment costs and
those indirect costs related to contract performance and are charged to expense
as incurred. Provisions for estimated losses on uncompleted contracts are made
in the period in which such losses are determined.
 
     The asset, "Costs and estimated earnings in excess of billings on
uncompleted contracts", represents revenues recognized in excess of amounts
billed. The liability, "Billings in excess of costs and estimated earnings on
uncompleted contracts", represents billings in excess of revenues recognized.
 
                                      F-71
<PAGE>   111
                        KENNEDY RAILROAD BUILDERS, INC.
                            AND ASSOCIATED COMPANIES
 
             NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
 
CASH AND CASH EQUIVALENTS
 
     The Company considers cash and cash equivalents to include cash on hand and
temporary cash investments purchased with an original maturity of three months
or less.
 
FINANCIAL INSTRUMENTS AND CREDIT RISK
 
     The Company operates primarily in the northeastern region of the United
States. As such, the Company's accounts receivable are from the same geographic
region. The terms of the sales give rise to unsecured accounts receivable, as is
common industry practice.
 
INVENTORIES
 
     Inventories, consisting principally of stored materials and parts to be
used for contracts, are stated at the lower of cost or market. Cost is
determined by the first-in, first-out (FIFO) method.
 
PROPERTY, PLANT AND EQUIPMENT
 
     The Company records property, plant and equipment at cost. Depreciation is
computed using the straight-line and the accelerated methods over the estimated
useful life of the asset as follows:
 
<TABLE>
<S>                                                           <C>
Buildings...................................................       39 years
Machinery and equipment.....................................    3 - 7 years
Office furniture and equipment..............................    5 - 8 years
Leasehold improvements......................................  31 - 39 years
</TABLE>
 
     As assets are retired or otherwise disposed of, the cost and accumulated
depreciation are eliminated from the accounts, and any gain or loss is reflected
in net income. The cost of maintenance and repair is charged to income as
incurred. Significant renewals and betterments are capitalized and depreciated
over the assets remaining useful life.
 
INCOME TAXES
 
     The provision for income taxes is based on earnings reported by the
Company. In accordance with Statement of Financial Accounting Standards ("SFAS")
No. 109, a deferred income tax asset or liability is determined by applying
currently enacted tax laws and rates to the expected reversal of the cumulative
temporary differences between the carrying value of assets and liabilities for
financial statement and income tax purposes.
 
     Kennedy and Railcorp are both C corporations for federal income tax
purposes. Alpha is a S corporation. As a result, the income of the Alpha is not
taxed at the corporate level. For purposes of the accompanying financial
statements, Alpha has been treated as a C corporation and income taxes have been
provided at the statutory rate and recorded using the provisions of SFAS No.
109.
 
                                      F-72
<PAGE>   112
                        KENNEDY RAILROAD BUILDERS, INC.
                            AND ASSOCIATED COMPANIES
 
             NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
 
3. ACCOUNTS RECEIVABLE
 
     Accounts receivable at July 31, 1998 and December 31,1997 consisted of the
following:
 
<TABLE>
<CAPTION>
                                                               JULY 31,    DECEMBER 31,
                                                                 1998          1997
                                                              ----------   ------------
<S>                                                           <C>          <C>
Contract receivables........................................  $1,180,568    $1,415,973
Contract retainages.........................................      41,028       152,089
Other.......................................................          --       102,431
                                                              ----------    ----------
                                                               1,221,596     1,670,493
Less allowance for doubtful accounts........................      66,609        25,000
                                                              ----------    ----------
                                                              $1,154,987    $1,645,493
                                                              ==========    ==========
</TABLE>
 
     Contract retainages have been billed but are not due pursuant to contract
provisions until contract completion. Such contract retainage is expected to be
collected within the following year.
 
4. COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
 
     Information with respect to contracts in process at July 31, 1998 and
December 31,1997 are as follows:
 
<TABLE>
<CAPTION>
                                                               JULY 31,    DECEMBER 31,
                                                                 1998          1997
                                                              ----------   ------------
<S>                                                           <C>          <C>
Costs incurred on uncompleted contracts.....................  $2,798,847    $2,997,477
Estimated earnings..........................................     835,938     1,267,960
                                                              ----------    ----------
                                                               3,634,785     4,265,437
Less billings, plus retainage...............................   3,418,923     4,253,395
                                                              ----------    ----------
                                                              $  215,862    $   12,042
                                                              ==========    ==========
</TABLE>
 
     Contracts in process are included in the accompanying balance sheets under
the following captions:
 
<TABLE>
<S>                                                           <C>        <C>
Costs and estimated earnings in excess of billings on
  uncompleted contracts.....................................  $240,079   $292,611
  Billings in excess of costs and estimated earnings on
     uncompleted contracts..................................   (24,217)  (280,569)
                                                              --------   --------
                                                              $215,862   $ 12,042
                                                              ========   ========
</TABLE>
 
5. LINE OF CREDIT
 
     The Company has a revolving line of credit agreement with a bank. The line
of credit includes maximum borrowings totaling $1,300,000. Borrowing under the
line of credit shall not exceed 80% of qualified accounts receivable and 50% of
inventory. It bears interest at the bank's prime rate (8.5% at July 31, 1998)
which is payable due monthly and expires on April 30, 1999. The line of credit
is secured by all of Kennedy's assets and is guaranteed by the officers of
Kennedy. The outstanding principal totals $971,905 and $562,705 as of July 31,
1998 and December 31, 1997, respectively.
 
     The company has an additional line of credit agreement with the bank. The
line of credit includes maximum borrowings totaling $106,265. It bears interest
at the bank's prime rate (8.5% at July 31, 1998) which is payable monthly and
expires four months after origination. The line of credit is secured by
Kennedy's inventory and accounts receivable. The outstanding principle totals
$106,265 as of July 31, 1998.
 
                                      F-73
<PAGE>   113
                        KENNEDY RAILROAD BUILDERS, INC.
                            AND ASSOCIATED COMPANIES
 
             NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
 
6. LONG-TERM DEBT
 
     Long-term debt at July 31, 1998 and December 31, 1997 consisted of the
following:
 
<TABLE>
<CAPTION>
                                                               JULY 31,    DECEMBER 31,
                                                                 1998          1997
                                                              ----------   ------------
<S>                                                           <C>          <C>
Note payable to a bank, interest at 8.25%, payable in
  monthly installments of $418, maturing August 2007,
  secured by real property..................................  $   31,944    $   33,449
Mortgage note payable to Alliance Benefit Group, interest at
  9.00%, payable in monthly installments of $878 with a
  balloon payment due July 1999, secured by real property...          --       108,605
Equipment notes payable, principal and interest at rates
  from 4.8% to 15.48%, payable monthly, maturing from
  January 1998 to October 2003, secured by equipment........   1,291,543       979,736
                                                              ----------    ----------
                                                               1,323,487     1,121,790
Less current maturities.....................................     369,169       315,324
                                                              ----------    ----------
                                                              $  954,318    $  806,466
                                                              ==========    ==========
</TABLE>
 
     Aggregate principal payments as of July 31, 1998 on long-term debt
(excluding the line of credit) are scheduled as follows:
 
<TABLE>
<CAPTION>
PERIOD ENDING DECEMBER 31,
--------------------------
<S>                                                           <C>
  1998......................................................  $  169,657
  1999......................................................     349,275
  2000......................................................     308,022
  2001......................................................     235,438
  2002......................................................     194,410
  Thereafter................................................      66,685
                                                              ----------
                                                              $1,323,487
                                                              ==========
</TABLE>
 
7. PROFIT SHARING PLAN
 
     The Company maintains a 401(k) plan that allows eligible employees to defer
a portion of their income through contributions to the plan. Under the
provisions of the plan, employees may contribute a portion of their
compensation, and the Company matches up to 2.00% percent of the employees
qualified wages. In addition, the Company can make additional discretionary
contributions. Company contributions to the plan were $18,098, $27,788 and
$52,420, for the seven months ended July 31, 1998, the nine months ended
December 31, 1997 and the year ended March 31, 1997, respectively.
 
8. INCOME TAXES
 
     In accordance with SFAS No. 109, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled. Under
SFAS 109, the effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.
 
                                      F-74
<PAGE>   114
                        KENNEDY RAILROAD BUILDERS, INC.
                            AND ASSOCIATED COMPANIES
 
             NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
 
     A reconciliation of the United States statutory corporate rate to the
effective tax rate is as follows:
 
<TABLE>
<CAPTION>
                                                    SEVEN MONTHS   NINE MONTHS
                                                       ENDED          ENDED       YEAR ENDED
                                                      JULY 31,     DECEMBER 31,   MARCH 31,
                                                        1998           1997          1997
                                                    ------------   ------------   ----------
<S>                                                 <C>            <C>            <C>
Tax charge (benefit) at standard U.S. rate of
  34%.............................................   $(181,131)      $144,286      $48,705
State taxes.......................................       5,886         27,852        9,454
Life insurance premiums...........................       3,712          6,075        6,485
Valuation allowance against deferred tax asset....     117,694             --           --
Other.............................................          --            374          562
                                                     ---------       --------      -------
                                                     $ (53,839)      $178,587      $65,206
                                                     =========       ========      =======
</TABLE>
 
     The components of the net deferred income tax asset (liability) at July 31,
1998 and December 31, 1997 are as follows:
 
<TABLE>
<CAPTION>
                                                              JULY 31,   DECEMBER 31,
                                                                1998         1997
                                                              --------   ------------
<S>                                                           <C>        <C>
Current Asset:
  Accounts receivable valuation.............................  $26,977      $10,125
                                                              -------      -------
          Total current asset...............................   26,977       10,125
                                                              -------      -------
Non-current liability:
  Tax over book depreciation................................  (24,647)     (14,580)
                                                              -------      -------
          Total non-current liability.......................  (24,647)     (14,580)
                                                              -------      -------
Net deferred tax asset (liability)..........................  $ 2,300      $(4,455)
                                                              =======      =======
</TABLE>
 
     The Company has provided state income taxes totaling $8,918, $29,421 and
$10,465 for the seven months ended July 31, 1998, the nine months ended December
31, 1997 and the year ended March 31, 1997, respectively.
 
9. RELATED PARTY TRANSACTIONS
 
     Payments were made to certain shareholders of the Company under operating
leases for office facilities and a storage area. Such payments totaled $13,847,
$29,128 and $36,552 for the seven months ended July 31, 1998, the nine months
ended December 31, 1997 and the year ended March 31, 1997, respectively.
 
     The Company has notes receivable from officers of Kennedy. Monthly payments
of $500 and $508 include principal and interest at 6%. The notes receivable are
unsecured.
 
     The Company has a note payable to a shareholder in the amount of $22,860
and $80,000, as of July 31, 1998 and December 31, 1997. The note is unsecured
and bears interest at 9%.
 
                                      F-75
<PAGE>   115
                        KENNEDY RAILROAD BUILDERS, INC.
                            AND ASSOCIATED COMPANIES
 
             NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
 
10. COMMITMENTS AND CONTINGENCIES
 
OPERATING LEASES
 
     The Company leases office space and equipment under agreements expiring at
various dates through the year 1999, including leases with certain shareholders
of the Company. Remaining minimum rental commitments under these noncancellable
lease agreements in effect at July 31, 1998 are as follows:
 
<TABLE>
<CAPTION>
                                                                                 THIRD
                 PERIOD ENDING DECEMBER 31,                   SHAREHOLDERS      PARTIES
                 --------------------------                   ------------      -------
<S>                                                           <C>            <C>
  1998......................................................     $9,891         $3,270
  1999......................................................      5,934          3,270
</TABLE>
 
     Rental expense including leases with certain shareholders of the Company
and cancelable leases totaled $80,714, $416,012 and $344,277 for the seven
months ended July 31, 1998, the nine months ended December 31, 1997 and the year
ended March 31, 1997, respectively.
 
LITIGATION
 
     The Company is subject to various claims and legal actions incidental to
the Company's business. Management is not aware of any claims against the
Company which might have a material impact on the Company's results of
operations or financial position.
 
11. SHAREHOLDERS' EQUITY
 
     The combined contributed capital of the Company at July 31, 1998 and
December 31, 1997 is as follows:
 
<TABLE>
<CAPTION>
                                                              JULY 31,   DECEMBER 31,
                                                                1998         1997
                                                              --------   ------------
<S>                                                           <C>        <C>
Kennedy -- Common Stock, par value $1 per share; authorized
  1,000,000 shares, issued and outstanding 18,000 shares....  $18,000      $18,000
Railcorp -- Common Stock, par value $1 per share; authorized
  10,000 shares, issued and outstanding 1,000 shares........    1,000        1,000
Alpha -- Common Stock, par value $.02 per share; authorized
  100,000 shares, issued and outstanding 50,000 shares......    1,000        1,000
                                                              -------      -------
                                                              $20,000      $20,000
                                                              =======      =======
</TABLE>
 
12. FAIR VALUE OF FINANCIAL INSTRUMENTS
 
     The following estimated fair values of financial instruments is made in
accordance with the requirements of SFAS No. 107, "Disclosures about Fair Value
of Financial Instruments." The estimated fair value amounts have been determined
by the Company using available market information and appropriate valuation
methodologies.
 
CASH, ACCOUNTS RECEIVABLE AND ACCOUNTS PAYABLE
 
     The carrying amounts of these items are a reasonable estimate of their fair
value due to their short-term nature.
 
                                      F-76
<PAGE>   116
                        KENNEDY RAILROAD BUILDERS, INC.
                            AND ASSOCIATED COMPANIES
 
             NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
 
LONG-TERM DEBT
 
     The carrying amount of the line of credit facility approximates fair value
as the interest rate fluctuates with changes in market conditions. The carrying
value of other loans relating to real estate, vehicles and equipment approximate
fair value as the interest rates are comparable to current market rates.
 
13. SUBSEQUENT EVENT
 
     On May 21, 1998, the stockholders of the Company entered into an Agreement
and Plan of Reorganization (the "Agreement") with RailWorks Corporation. Under
the terms of the Agreement, the stockholders exchanged their stock of the
Company for cash and stock of RailWorks Corporation. The transaction was
completed on August 4, 1998.
 
                                      F-77
<PAGE>   117
 
                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
 
To Merit Railroad Contractors, Inc.:
 
     We have audited the accompanying balance sheets of MERIT RAILROAD
CONTRACTORS, INC. (a Missouri corporation) as of July 31, 1998 and December 31,
1997 and the related statements of operations, stockholders' equity and cash
flows for the seven months ended July 31, 1998 and for each of the two years in
the period ended December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
 
     We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
 
     In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of MERIT RAILROAD CONTRACTORS,
INC. as of July 31, 1998 and December 31, 1997, the results of its operations
and its cash flows for the seven months ended July 31, 1998 and for each of the
two years in the period ended December 31, 1997 and in conformity with generally
accepted accounting principles.
 
                                          Arthur Andersen LLP
 
St. Louis, Missouri
September 22, 1998
 
                                      F-78
<PAGE>   118
 
                        MERIT RAILROAD CONTRACTORS, INC.
 
                                 BALANCE SHEETS
 
<TABLE>
<CAPTION>
                                                               JULY 31,    DECEMBER 31,
                                                                 1998          1997
                                                              ----------   ------------
<S>                                                           <C>          <C>
                                        ASSETS
CURRENT ASSETS:
  Cash and cash equivalents.................................  $    9,005    $   35,313
  Accounts receivable, net of allowance of $75,317..........   1,890,468       930,307
  Costs and estimated earnings in excess of billings on
     uncompleted contracts..................................     308,749        38,638
  Other receivables.........................................          --            --
  Inventories...............................................     428,284       312,392
  Prepaid expenses..........................................          --        17,130
  Other assets..............................................      15,393            --
                                                              ----------    ----------
          Total current assets..............................   2,651,899     1,333,780
                                                              ----------    ----------
PROPERTY AND EQUIPMENT:
  Machinery and equipment...................................   1,003,092       985,419
  Automobiles and trucks....................................     705,934       619,928
  Office furniture and equipment............................     130,670       126,446
  Leasehold improvements....................................      54,244        54,244
                                                              ----------    ----------
                                                               1,893,940     1,786,037
  Less accumulated depreciation.............................   1,129,311     1,064,361
                                                              ----------    ----------
          Property and equipment, net.......................     764,629       721,676
                                                              ----------    ----------
                                                              $3,416,528    $2,055,456
                                                              ==========    ==========
 
                         LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
  Accounts payable..........................................  $  973,383    $  210,222
  Current maturities of long-term debt......................      40,800        78,125
  Revolving line of credit..................................     450,000       300,000
  Billings in excess of costs and estimated earnings on
     uncompleted contracts..................................     308,749       162,559
  Accrued expenses..........................................     248,701       165,057
  Payable to affiliate......................................      58,169        58,169
                                                              ----------    ----------
          Total current liabilities.........................   2,079,802       974,132
                                                              ----------    ----------
LONG-TERM DEBT, net of current maturities...................     183,667       138,373
                                                              ----------    ----------
COMMITMENTS AND CONTINGENCIES...............................          --            --
                                                              ----------    ----------
STOCKHOLDERS' EQUITY:
  Common Stock, $1 par value; authorized shares, 30,000;
     issued and outstanding shares, 1,000...................       1,000         1,000
  Additional paid-in capital................................      99,000        99,000
  Retained earnings.........................................   1,053,059       842,951
                                                              ----------    ----------
          Total stockholders' equity........................   1,153,059       942,951
                                                              ----------    ----------
                                                              $3,416,528    $2,055,456
                                                              ==========    ==========
</TABLE>
 
                       See Notes to Financial Statements.
 
                                      F-79
<PAGE>   119
 
                        MERIT RAILROAD CONTRACTORS, INC.
 
                            STATEMENTS OF OPERATIONS
 
<TABLE>
<CAPTION>
                                                                                  YEAR ENDED
                                                            SEVEN MONTHS         DECEMBER 31,
                                                           ENDED JULY 31,   -----------------------
                                                                1998           1997         1996
                                                           --------------   ----------   ----------
<S>                                                        <C>              <C>          <C>
Revenue..................................................    $5,279,397     $6,949,859   $9,931,173
Contract costs...........................................     4,239,726      6,202,588    8,160,424
                                                             ----------     ----------   ----------
Gross profit.............................................     1,039,671        747,271    1,770,749
General and administrative expenses......................       785,768        970,941    1,126,280
                                                             ----------     ----------   ----------
Income (loss) from operations............................       253,903       (223,670)     644,469
Other income (expense)
  Interest income........................................            --            416        8,806
  Interest expense.......................................       (31,334)       (40,972)     (17,371)
  Other, net.............................................       (12,461)      (121,865)      17,264
                                                             ----------     ----------   ----------
Net income (loss)........................................    $  210,108     $ (386,091)  $  653,168
                                                             ==========     ==========   ==========
</TABLE>
 
                       See Notes to Financial Statements.
 
                                      F-80
<PAGE>   120
 
                        MERIT RAILROAD CONTRACTORS, INC.
 
                       STATEMENTS OF STOCKHOLDERS' EQUITY
 
<TABLE>
<CAPTION>
                                              NUMBER
                                                OF
                                              COMMON   COMMON    PAID-IN    RETAINED
                                              SHARES    STOCK    CAPITAL    EARNINGS      TOTAL
                                              ------   -------   -------   ----------   ----------
<S>                                           <C>      <C>       <C>       <C>          <C>
BALANCE, DECEMBER 31, 1995..................  1,000    $1,000    $99,000   $  944,671   $1,044,671
  Dividends paid............................     --        --         --     (263,302)    (263,302)
  Net income................................     --        --         --      653,168      653,168
                                              -----    ------    -------   ----------   ----------
BALANCE, DECEMBER 31, 1996..................  1,000     1,000     99,000    1,334,537    1,434,537
  Dividends paid............................     --        --         --     (105,495)    (105,495)
  Net loss..................................     --        --         --     (386,091)    (386,091)
                                              -----    ------    -------   ----------   ----------
BALANCE, DECEMBER 31, 1997..................  1,000     1,000     99,000      842,951      942,951
  Net income................................     --        --         --      210,108      210,108
                                              -----    ------    -------   ----------   ----------
BALANCE, JULY 31, 1998......................  1,000    $1,000    $99,000   $1,053,059   $1,153,059
                                              =====    ======    =======   ==========   ==========
</TABLE>
 
                       See Notes to Financial Statements.
 
                                      F-81
<PAGE>   121
 
                        MERIT RAILROAD CONTRACTORS, INC.
 
                            STATEMENTS OF CASH FLOWS
 
<TABLE>
<CAPTION>
                                                             SEVEN MONTHS        YEAR ENDED
                                                                ENDED       ---------------------
                                                                 1998         1997        1996
                                                             ------------   ---------   ---------
<S>                                                          <C>            <C>         <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net income (loss)........................................   $ 210,108     $(386,091)  $ 653,168
  Adjustments to reconcile net income (loss) to net cash
     provided by (used in) operating activities:
     Depreciation and amortization.........................     124,812       194,915     199,096
     Loss (gain) from sale of equipment....................          --        14,865     (12,181)
     Change in operating assets:
       Accounts receivable, net............................    (960,161)      480,367     247,728
       Costs and estimated earnings in excess of billings
          on uncompleted contracts.........................    (270,111)      242,212    (263,696)
       Other receivables...................................          --        97,500       5,000
       Inventory...........................................    (115,892)     (112,392)    132,455
       Prepaid expenses....................................      17,130         1,870      31,130
       Accounts payable....................................     763,161      (408,474)   (215,773)
       Billings in excess of costs and estimated earnings
          on uncompleted contracts.........................     146,190        32,449    (578,630)
       Accrued expenses....................................      83,644       (97,883)     49,549
       Other assets........................................     (15,393)           --          --
                                                              ---------     ---------   ---------
          Net cash (used in) provided by operating
            activities.....................................     (16,512)       59,338     247,846
                                                              ---------     ---------   ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
  Proceeds from sale of property and equipment.............          --        10,052       3,300
  Capital expenditures.....................................     (97,349)     (244,459)   (234,413)
  Proceeds from repayment of affiliate loans...............          --            --      39,327
                                                              ---------     ---------   ---------
          Net cash used in investing activities............     (97,349)     (234,407)   (191,786)
                                                              ---------     ---------   ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
  Principal payments on long-term debt.....................      87,553      (105,397)   (126,725)
  Borrowings under line of credit..........................          --       300,000          --
  Payable to affiliate.....................................          --            --      58,169
  Dividends paid...........................................          --      (105,495)   (263,302)
                                                              ---------     ---------   ---------
          Net cash provided by (used in) financing
            activities.....................................      87,553        89,108    (331,858)
                                                              ---------     ---------   ---------
NET DECREASE IN CASH AND CASH EQUIVALENTS..................     (26,308)      (85,961)   (275,798)
CASH AND CASH EQUIVALENTS, beginning of period.............      35,313       121,274     397,072
                                                              ---------     ---------   ---------
CASH AND CASH EQUIVALENTS, end of period...................   $   9,005     $  35,313   $ 121,274
                                                              =========     =========   =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
  Cash paid during the period for:
     Interest..............................................   $  27,695     $  40,972   $  17,371
                                                              =========     =========   =========
  Noncash transactions:
     Purchase of property and equipment under long-term
       debt................................................   $  60,250     $ 130,385   $  87,093
                                                              =========     =========   =========
</TABLE>
 
                       See Notes to Financial Statements.
 
                                      F-82
<PAGE>   122
 
                        MERIT RAILROAD CONTRACTORS, INC.
 
                         NOTES TO FINANCIAL STATEMENTS
 
1. NATURE OF BUSINESS
 
     Merit Railroad Contractors, Inc. (the "Company"), a Missouri corporation
operates as a construction contractor, constructing, repairing and maintaining
railroad tracks for private and government customers located throughout
Illinois, Kentucky, Missouri, Tennessee and Wisconsin. The work is performed
under various forms of contracts, including fixed-fee, unit-price and
time-and-material contracts. The length of the contracts vary, but is typically
less than one year.
 
2. SIGNIFICANT ACCOUNTING POLICIES
 
USE OF ESTIMATES
 
     The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could vary from the estimates that were assumed
in preparing the financial statements.
 
REVENUE AND COST RECOGNITION
 
     The Company recognizes revenues from fixed-fee contracts using the
percentage-of-completion method, measured by the percentage of cost incurred to
date to management's estimated total cost for each contract. This method is used
because management considers total cost to be the best available measure of
progress on the contracts. Changes in job performance, job conditions and
estimated profitability may result in revisions to cost and income, which are
recognized in the period in which the revisions are determined.
 
     Revenues from time-and-material contracts are recognized as the work is
performed.
 
     Contract costs include all direct material, labor and equipment costs and
those indirect costs related to contract performance and are charged to expense
as incurred. Provisions for estimated losses on uncompleted contracts are made
in the period in which such losses are determined.
 
     The asset, "Costs and estimated earnings in excess of billings on
uncompleted contracts", represents revenues recognized in excess of amounts
billed. The liability, "Billings in excess of costs and estimated earnings on
uncompleted contracts", represents billings in excess of revenues recognized.
 
CASH AND CASH EQUIVALENTS
 
     The Company considers cash and cash equivalents to include cash on hand and
temporary cash investments purchased with an original maturity of three months
or less.
 
FINANCIAL INSTRUMENTS AND CREDIT RISK
 
     The Company operates primarily in Illinois, Kentucky, Missouri, Tennessee
and Wisconsin. As such, the Company's accounts receivable are from the same
geographic region. The Company's customers are not concentrated in any specific
industry group. Although the Company limits its credit risk by exercising lien
rights when available, terms of the majority of sales give rise to unsecured
accounts receivable, as is common industry practice.
 
     During the periods ended July 31, 1998, December 31, 1997 and 1996, one
customer accounted for 13% of revenue, one customer accounted for 11% of revenue
and one customer accounted for 37% of revenue, respectively.
 
                                      F-83
<PAGE>   123
                        MERIT RAILROAD CONTRACTORS, INC.
 
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
 
INVENTORIES
 
     Inventories, consisting principally of stored materials and parts to be
used for contracts, are stated at the lower of cost or market. Cost is
determined by the first-in, first-out (FIFO) method.
 
PROPERTY AND EQUIPMENT
 
     The Company records property and equipment at cost. Depreciation is
computed using the straight-line and accelerated methods over the estimated
useful lives of the assets as follows:
 
<TABLE>
<S>                                                      <C>
Machinery and equipment................................  5-7 years
Automobiles and trucks.................................  5 years
Office furniture and equipment.........................  5-7 years
Leasehold improvements.................................  Lesser of 5 years or lease terms
</TABLE>
 
     As assets are retired or otherwise disposed of, the cost and accumulated
depreciation are eliminated from the accounts, and any gain or loss is reflected
in other income.
 
ASSET IMPAIRMENT
 
     If facts and circumstances suggest that a long-lived asset may be impaired,
the carrying value is reviewed. If this review indicates that the value of the
asset will not be recoverable, as determined based on projected undiscounted
cash flows related to the asset over its remaining life, then the carrying value
of the asset is reduced to its estimated fair value.
 
OTHER INCOME (EXPENSE)
 
     Other income (expense) includes gain and loss on disposition of property
and equipment, sale of scrap and other miscellaneous income and expense, all of
which are not directly related to the Company's primary business. During 1997,
the Company incurred $107,000 of costs related to the movement of inventory and
equipment from an old location to a new location.
 
INCOME TAXES
 
     The Company operates as a sub-chapter S corporation. Accordingly, the
income taxes are the responsibility of the owners; and the accompanying
financial statements do not reflect any federal or state income taxes for the
Company.
 
     The Company uses different methods of accounting for tax and financial
reporting. The primary difference relates to the use of the accrual basis for
financial reporting and the cash basis for tax reporting.
 
                                      F-84
<PAGE>   124
                        MERIT RAILROAD CONTRACTORS, INC.
 
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
 
3. ACCOUNTS RECEIVABLE
 
     Accounts receivable at July 31, 1998 and December 31, 1997 consisted of the
following:
 
<TABLE>
<CAPTION>
                                                               JULY 31,    DECEMBER 31,
                                                                 1998          1997
                                                              ----------   ------------
<S>                                                           <C>          <C>
Contract receivables........................................  $1,887,702    $  919,270
Contract retainage..........................................      78,083        86,354
                                                              ----------    ----------
                                                               1,965,785     1,005,624
Less allowance for doubtful accounts........................      75,317        75,317
                                                              ----------    ----------
                                                              $1,890,468    $  930,307
                                                              ==========    ==========
</TABLE>
 
     Contract retainage have been billed but are not due pursuant to contract
provisions until contract completion. Such contract retainage is expected to be
collected within the following year.
 
4. COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
 
     Information with respect to contracts in process at July 31, 1998 and
December 31, 1997, is as follows:
 
<TABLE>
<CAPTION>
                                                               JULY 31,    DECEMBER 31,
                                                                 1998          1997
                                                              ----------   ------------
<S>                                                           <C>          <C>
Costs incurred on uncompleted contracts.....................  $2,558,171    $1,383,021
Estimated earnings..........................................     686,360       203,021
                                                              ----------    ----------
                                                               3,244,531     1,586,042
Less billings to date.......................................   3,244,531     1,709,963
                                                              ----------    ----------
                                                              $       --    $ (123,921)
                                                              ==========    ==========
</TABLE>
 
     Contracts in process are included in the accompanying balance sheets under
the following captions:
 
<TABLE>
<CAPTION>
                                                              JULY 31,   DECEMBER 31,
                                                                1998         1997
                                                              --------   ------------
<S>                                                           <C>        <C>
Costs and estimated earnings in excess of billings on
  uncompleted contracts.....................................  $308,749    $  38,638
Billings in excess of costs and estimated earnings on
  uncompleted contracts.....................................  (308,749)    (162,559)
                                                              --------    ---------
                                                              $     --    $(123,921)
                                                              ========    =========
</TABLE>
 
                                      F-85
<PAGE>   125
                        MERIT RAILROAD CONTRACTORS, INC.
 
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
 
5. OPERATING LEASES
 
     The Company leases office space and a storage yard under an agreement
expiring in June 2001. Minimum rental commitments under this noncancelable lease
agreement in effect at July 31, 1998, are:
 
<TABLE>
<CAPTION>
PERIOD ENDING DECEMBER 31,
--------------------------
<S>                                                           <C>
  1998......................................................  $ 49,200
  1999......................................................    49,200
  2000......................................................    49,200
  2001......................................................    20,500
  2002......................................................
  Thereafter................................................
                                                              --------
                                                              $168,100
                                                              ========
</TABLE>
 
     Total rental expense for 1998, 1997 and 1996 for all operating leases
amounted to $39,600, $68,000 and $60,700, respectively.
 
6. LINE OF CREDIT
 
     The Company has a revolving line of credit agreement with a bank. The line
of credit has a maximum borrowing limit of $450,000 and is payable on demand. It
bears interest at prime plus 1% which is due monthly. The outstanding principle
was $450,000 and $300,000 at July 31, 1998 and December 31, 1997, respectively.
The line is collateralized by accounts receivable, property and equipment, and
personal guarantees of certain stockholders.
 
7. LONG-TERM DEBT
 
     Long-term debt at July 31, 1998 and December 31, 1997 consisted of the
following:
 
<TABLE>
<CAPTION>
                                                              JULY 31,   DECEMBER 31,
                                                                1998         1997
                                                              --------   ------------
<S>                                                           <C>        <C>
Notes payable to banks and equipment
  Company; interest varying from 7.5% to
  11.75%, per annum; payable in monthly
  installments, maturities ranging from July
  1997 through August 2002..................................  $224,467     $216,498
Less current maturities.....................................    40,800       78,125
                                                              --------     --------
                                                              $183,667     $138,373
                                                              ========     ========
</TABLE>
 
     Several of the notes payable bear interest at prime plus 1%.
 
     The notes payable are collateralized by accounts receivable and property
and equipment.
 
     Aggregate principal payments as of July 31, 1998 on long-term debt are
scheduled as follows:
 
<TABLE>
<CAPTION>
PERIOD ENDING DECEMBER 31,
--------------------------
<S>                                                           <C>
  1998......................................................  $ 40,800
  1999......................................................   100,316
  2000......................................................    62,632
  2001......................................................    18,283
  2002......................................................     2,436
                                                              --------
                                                              $224,467
                                                              ========
</TABLE>
 
                                      F-86
<PAGE>   126
                        MERIT RAILROAD CONTRACTORS, INC.
 
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
 
8. PROFIT SHARING PLAN
 
     The Company maintains a 401(k) Salary Deferral Plan (the "401(k) Plan")
that allows eligible employees to defer a portion of their income through
contributions to the plan. Under the provisions of the plan, employees may
contribute up to a maximum of 15 percent of employee compensation or limitations
established pursuant to the Internal Revenue Code. The Company's contribution to
the 401(k) Plan is discretionary and determined annually by the Board of
Directors. The Company made no contributions to the 401(k) plan for the seven
months ended July 31, 1998 and for the years ended December 31, 1997 and 1996.
 
     The Company also maintains a Money Purchase Plan whereby mandatory
contributions are made by the Company. The Company makes contributions to this
Plan based on 5% of employee eligible compensation. The Company contributed
$17,500 to the Money Purchase Plan for the seven months ended July 31, 1998. The
Company contributed $32,500 and $33,700 to the Money Purchase Plan for the years
ended December 31, 1997 and 1996, respectively.
 
9. RELATED PARTY TRANSACTIONS
 
     The Company's office and storage yard are leased from an affiliated Company
under a five year lease that expires in June 2001, with monthly payments of
$4,100. In addition to the minimum rent, the Company is required to pay a
percentage rent amount equal to 1% of gross receipts in excess of $6,100,000.
The amount of rent charged to operations was, $57,900 , $57,200 and $58,700 for
the seven months ended July 31, 1998 and the years ended December 31, 1997 and
1996 and, respectively. The Company also leases certain equipment from another
affiliated entity on a month-to-month basis and was charged $124,500, $181,500
and $89,800 during 1998, 1997 and 1996, respectively.
 
     The payable to affiliate arose in 1996 and is payable on demand. No
interest is due on the note.
 
10. COMMITMENTS AND CONTINGENCIES
 
LITIGATION
 
     The Company is engaged in various lawsuits arising in the ordinary course
of business. In the opinion of management, based upon the advice of legal
counsel, the ultimate outcome of these lawsuits will not have a material adverse
impact on the Company's financial position or results of operations.
 
CONTINGENCY
 
     The Company completed a contract during 1995, on which a dispute arose with
a subcontractor to the job. The subcontractor has indicated additional charges
are due as a result of work performed over the amounts due under its original
contract with the Company. Specifically, the subcontractor alleges the
engineering firm contracted by the Company's customer grossly underestimated the
amount of excavation work required at the job site. Although no evaluation of
the threatened litigation can be determined at this time, management believes
the Company's exposure for monetary damages should be minimal due to the fact
that the subcontractor's claims are essentially against the Company's customer
and the customer's engineering firm. At December 31, 1997, the Company was owed
$81,000 from its customer that is being withheld pending resolution of the
dispute and owed its subcontractor $38,053 in connection with the original
contract terms. An allowance of $40,000 has been specifically provided for the
potential uncollectibility of amounts due from the customer.
 
                                      F-87
<PAGE>   127
                        MERIT RAILROAD CONTRACTORS, INC.
 
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
 
11. FAIR VALUE OF FINANCIAL INSTRUMENTS
 
     The carrying amounts of cash, accounts receivable and accounts payable are
a reasonable estimate of their fair value due to their short-term nature.
 
     The carrying amount of the line of credit facility approximates fair value
as the interest rate fluctuates with changes in market conditions. The carrying
amount of long-term debt approximates fair value.
 
12. SUBSEQUENT EVENT
 
     On May 21, 1998, the stockholders of the Company entered into an Agreement
and Plan of Reorganization (the "Agreement") with RailWorks Corporation. Under
the terms of the Agreement, the stockholders exchanged their stock of the
Company for cash and stock of RailWorks Corporation. The transaction was
completed on August 4, 1998.
 
                                      F-88
<PAGE>   128
 
                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
 
To Midwest Construction Services, Inc.:
 
     We have audited the accompanying balance sheets of MIDWEST CONSTRUCTION
SERVICES, INC. ("the Company") (an Indiana corporation), as of July 31, 1998 and
December 31, 1997, and the related statements of operations and retained
earnings and cash flows for the seven months ended July 31, 1998 and for the two
years in the period ended December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
 
     We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
 
     In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of MIDWEST CONSTRUCTION
SERVICES, INC. as of July 31, 1998 and December 31, 1997, and the results of its
operations and its cash flows for the seven months ended July 31, 1998 and each
of the two years in the period ended December 31, 1997 in conformity with
generally accepted accounting principles.
 
                                          Arthur Andersen LLP
 
Nashville, Tennessee
September 29, 1998
 
                                      F-89
<PAGE>   129
 
                      MIDWEST CONSTRUCTION SERVICES, INC.
 
                                 BALANCE SHEETS
 
<TABLE>
<CAPTION>
                                                               JULY 31,    DECEMBER 31,
                                                                 1998          1997
                                                              ----------   ------------
<S>                                                           <C>          <C>
                                        ASSETS
CURRENT ASSETS:
  Cash and cash equivalents.................................  $   12,575    $  260,631
  Accounts receivable -- net of allowance of $12,623 and
    $12,623, respectively...................................   1,897,589       999,168
  Other receivables.........................................          --           896
  Costs and estimated earnings in excess of billings on
    uncompleted contracts...................................       7,213        17,571
  Inventory.................................................     628,450       637,367
  Prepaid expenses..........................................     147,782        45,486
                                                              ----------    ----------
         Total current assets...............................   2,693,609     1,961,119
                                                              ----------    ----------
PROPERTY AND EQUIPMENT:
  Autos and trucks..........................................     680,003       723,803
  Construction equipment....................................   1,659,542     1,650,838
  Office equipment..........................................     102,547       101,712
  Leasehold improvements....................................      26,131        26,131
                                                              ----------    ----------
                                                               2,468,223     2,502,484
  Less accumulated depreciation.............................   1,850,577     1,738,885
                                                              ----------    ----------
         Property and equipment, net........................     617,646       763,599
                                                              ----------    ----------
                                                              $3,311,255    $2,724,718
                                                              ==========    ==========
                         LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
  Notes payable.............................................  $  722,259    $  354,066
  Notes payable -- stockholders.............................       4,213         3,389
  Distribution payable......................................     250,000            --
  Accounts payable..........................................     586,557       248,069
  Other accrued expenses....................................     104,230       208,051
  Accrued salaries..........................................      78,807        35,531
  Billings in excess of costs and estimated earnings on
    uncompleted contracts...................................      39,761        81,957
                                                              ----------    ----------
         Total current liabilities..........................   1,785,827       931,063
                                                              ----------    ----------
LONG-TERM LIABILITIES:
  Notes payable.............................................          --        24,665
  Notes payable -- stockholders.............................      26,688        37,436
                                                              ----------    ----------
         Total long-term liabilities........................      26,688        62,101
                                                              ----------    ----------
         Total liabilities..................................   1,812,515       993,164
                                                              ----------    ----------
STOCKHOLDERS' EQUITY:
  Common Stock, no par value, 1,000 shares authorized,
    issued and outstanding..................................      10,000        10,000
  Retained earnings.........................................   1,488,740     1,721,554
                                                              ----------    ----------
         Total stockholders' equity.........................   1,498,740     1,731,554
                                                              ----------    ----------
                                                              $3,311,255    $2,724,718
                                                              ==========    ==========
</TABLE>
 
                       See Notes to Financial Statements.
 
                                      F-90
<PAGE>   130
 
                      MIDWEST CONSTRUCTION SERVICES, INC.
 
                 STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
 
<TABLE>
<CAPTION>
                                                                                  YEAR ENDED
                                                           SEVEN MONTHS          DECEMBER 31,
                                                          ENDED JULY 31,   ------------------------
                                                               1998           1997         1996
                                                          --------------   ----------   -----------
<S>                                                       <C>              <C>          <C>
Revenue.................................................    $6,001,993     $9,675,673   $10,842,457
Cost of revenue.........................................     5,178,675      8,636,800     9,338,686
                                                            ----------     ----------   -----------
Gross profit............................................       823,318      1,038,873     1,503,771
General and administrative expenses.....................       356,470        644,871       649,368
                                                            ----------     ----------   -----------
Income from operations..................................       466,848        394,002       854,403
Other income............................................        28,348         38,801        38,909
                                                            ----------     ----------   -----------
Net income..............................................       495,196        432,803       893,312
Retained earnings:
  Beginning of period...................................     1,721,554      1,983,852     1,090,540
  Less -- dividend distributions........................       728,010        695,101            --
                                                            ----------     ----------   -----------
  End of period.........................................    $1,488,740     $1,721,554   $ 1,983,852
                                                            ==========     ==========   ===========
</TABLE>
 
                       See Notes to Financial Statements.
 
                                      F-91
<PAGE>   131
 
                      MIDWEST CONSTRUCTION SERVICES, INC.
 
                            STATEMENTS OF CASH FLOWS
 
<TABLE>
<CAPTION>
                                                                                  YEAR ENDED
                                                           SEVEN MONTHS          DECEMBER 31,
                                                          ENDED JULY 31,   ------------------------
                                                               1998           1997          1996
                                                          --------------   -----------   ----------
<S>                                                       <C>              <C>           <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net income............................................    $  495,196     $   432,803   $  893,312
  Adjustments to reconcile net income to net cash
     provided by (used in) operating activities:
     Depreciation.......................................       175,360         317,538      316,434
     Gain on sale of assets.............................       (25,323)        (15,235)     (20,230)
     Change in operating assets and liabilities:
       Accounts receivable, net.........................      (898,421)         16,561      390,776
       Other receivables................................           896            (896)          --
       Costs and estimated earnings in excess of
          billings on uncompleted contracts.............        10,358         (17,571)     303,051
       Inventory........................................         8,917         (10,803)     (83,786)
       Prepaid expenses.................................      (102,296)         14,926       19,257
       Accounts payable.................................       338,488          56,495     (268,563)
       Other accrued expenses...........................      (103,821)         98,383      (34,554)
       Accrued salaries.................................        43,276         (31,022)      15,922
       Billings in excess of costs and estimated
          earnings on uncompleted contracts.............       (42,196)         81,957           --
                                                            ----------     -----------   ----------
          Net cash (used in) provided by operating
            activities..................................       (99,566)        943,136    1,531,619
                                                            ----------     -----------   ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
  Purchase of equipment.................................       (44,082)       (117,161)    (385,683)
  Proceeds from sale of assets..........................        40,000          18,250       27,790
                                                            ----------     -----------   ----------
          Net cash used in investing activities.........        (4,082)        (98,911)    (357,893)
                                                            ----------     -----------   ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
  Additional borrowing from notes payable...............     1,092,719       1,301,390      797,311
  Reduction of principal of notes payable...............      (749,191)     (1,125,628)    (880,483)
  Dividend distribution.................................      (478,012)       (695,101)          --
  Additional borrowing from notes payable,
     stockholder........................................            --              --       16,368
  Reduction of principal of notes payable,
     stockholder........................................        (9,924)       (438,159)    (764,696)
                                                            ----------     -----------   ----------
          Net cash used in financing activities.........      (144,408)       (957,498)    (831,500)
                                                            ----------     -----------   ----------
NET (DECREASE) INCREASE IN CASH.........................      (248,056)       (113,273)     342,226
CASH AND CASH EQUIVALENTS, beginning of period..........       260,631         373,904       31,678
                                                            ----------     -----------   ----------
CASH AND CASH EQUIVALENTS, end of period................    $   12,575     $   260,631   $  373,904
                                                            ==========     ===========   ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION:
  Cash paid for interest................................    $   22,538     $    23,733   $   88,344
                                                            ==========     ===========   ==========
</TABLE>
 
                       See Notes to Financial Statements.
 
                                      F-92
<PAGE>   132
 
                      MIDWEST CONSTRUCTION SERVICES, INC.
 
                       NOTES TO THE FINANCIAL STATEMENTS
 
1. NATURE OF BUSINESS
 
     Midwest Construction Services, Inc. (the "Company") operates as a
construction contractor, constructing, repairing and maintaining railroad tracks
primarily to steel processors throughout Northwest Indiana. The work is
performed under various forms of contracts, including fixed-fee and
time-and-material contracts.
 
2. SIGNIFICANT ACCOUNTING POLICIES
 
REVENUE AND COST RECOGNITION
 
     The Company recognizes revenues from fixed-price construction contracts
using the percentage-of-completion method, measured by the percentage of cost
incurred to date to management's estimated total cost for each contract. That
method is used because management considers total cost to be the best available
measure of progress on the contracts. Changes in job performance, job conditions
and estimated profitability may result in revisions to cost and income, which
are recognized in the period in which the revisions are determined.
 
     Revenues from time-and-material contracts are recognized as the work is
performed.
 
     Contract costs include all direct material and labor costs and those
indirect costs related to contract performance. General and administrative costs
are charged to expense as incurred. Provisions for estimated losses on
uncompleted contracts are made in the period in which such losses are
determined.
 
     The asset, "Costs and estimated earnings in excess of billings on
uncompleted contracts," represents revenues recognized in excess of amounts
billed. The liability, "Billings in excess of costs and estimated earnings on
uncompleted contracts," represents billings in excess of revenues recognized.
 
USE OF ESTIMATES
 
     The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could vary from the estimates that were assumed
in preparing the financial statements.
 
CASH AND CASH EQUIVALENTS
 
     Cash and cash equivalents, as reported on the accompanying balance sheets
and statements of cash flows, includes all amounts in non-interest-bearing
checking accounts and interest-bearing money market accounts.
 
FINANCIAL INSTRUMENTS AND CREDIT RISK
 
     The Company operates primarily in Northwest Indiana and primarily serves
the steel industry. As such, the Company's accounts receivable are from the same
geographic region. The terms of the sales give rise to unsecured accounts
receivable, as is common industry practice. The Company is dependent on the
steel industry and the economic trends that affect the steel industry.
 
INVENTORY
 
     Inventories are stated at the lower of cost or market. Cost is determined
by the first-in, first-out ("FIFO") method. Market is based on estimated net
realizable value.
 
                                      F-93
<PAGE>   133
                      MIDWEST CONSTRUCTION SERVICES, INC.
 
                NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
 
PROPERTY AND EQUIPMENT
 
     Property and equipment is recorded at cost. Depreciation is computed using
the straight-line and the accelerated method over the estimated useful life of
the asset as follows:
 
<TABLE>
<S>                                                           <C>
Autos and trucks............................................  5 years
Construction equipment......................................  5-7 years
Office equipment............................................  3-10 years
Leasehold improvements......................................  39 years
</TABLE>
 
     When assets are retired or otherwise disposed of, the cost and related
accumulated depreciation are removed from the accounts and any gain or loss is
reflected in net income. Maintenance and repairs are charged to income as
incurred; significant renewals and betterments are capitalized.
 
INCOME TAXES
 
     Effective April 1, 1991, the Company has elected to be taxed as an "S"
Corporation under the provision of Subchapter "S" of the Internal Revenue Code.
As such, the Corporation pays no income tax, and revenue and expenses pass
through to the shareholders who pay income taxes on the earnings at their
respective tax rates. Therefore, these financial statements do not reflect any
federal or state income taxes for the Company.
 
3. ACCOUNTS RECEIVABLE
 
     Accounts receivable July 31, 1998 and December 31, 1997, consisted of the
following:
 
<TABLE>
<CAPTION>
                                                               JULY 31,    DECEMBER 31,
                                                                 1998          1997
                                                              ----------   ------------
<S>                                                           <C>          <C>
Billed receivables..........................................  $1,813,861    $  834,840
Unbilled receivables........................................      96,351       176,951
                                                              ----------    ----------
                                                               1,910,212     1,011,791
Less allowance for uncollectible accounts...................      12,623        12,623
                                                              ----------    ----------
                                                              $1,897,589    $  999,168
                                                              ==========    ==========
</TABLE>
 
4. COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
 
     Information with respect to contracts in process at July 31, 1998 and
December 31, 1997, are as follows:
 
<TABLE>
<CAPTION>
                                                              JULY 31,    DECEMBER 31,
                                                                1998          1997
                                                              ---------   ------------
<S>                                                           <C>         <C>
Costs incurred on uncompleted contracts.....................  $  73,161    $ 262,907
Estimated earnings..........................................     10,124       32,619
                                                              ---------    ---------
                                                                 83,285      295,526
Less billings to date.......................................   (115,833)    (359,912)
                                                              ---------    ---------
                                                              $ (32,548)   $ (64,386)
                                                              =========    =========
</TABLE>
 
                                      F-94
<PAGE>   134
                      MIDWEST CONSTRUCTION SERVICES, INC.
 
                NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
 
     Contracts in process are included in accompanying balance sheets under the
following captions:
 
<TABLE>
<CAPTION>
                                                              JULY 31,   DECEMBER 31,
                                                                1998         1997
                                                              --------   ------------
<S>                                                           <C>        <C>
Costs and estimated earnings in excess of billings on
  uncompleted contracts.....................................  $  7,213     $ 17,571
Billings in excess of costs and estimated earnings on
  uncompleted contracts.....................................   (39,761)     (81,957)
                                                              --------     --------
                                                              $(32,548)    $(64,386)
                                                              ========     ========
</TABLE>
 
5. NOTES PAYABLE
 
     Notes payable at July 31, 1998 and December 31, 1997, consisted of the
following:
 
<TABLE>
<CAPTION>
                                                              JULY 31,   DECEMBER 31,
                                                                1998         1997
                                                              --------   ------------
<S>                                                           <C>        <C>
National City Bank, $750,000 revolving line of credit,
  interest at bank's base rate, due August 1998, secured by
  accounts receivable, inventory and general intangibles and
  stockholders' guarantee...................................  $535,000     $325,000
National City Bank, 7.9%, monthly payments of $1,986
  including interest, due January 2000, secured by four
  vehicles..................................................        --       45,636
A.I. Credit Corp., 7.06%, monthly payments of $24,031
  including interest, due April 1999........................   187,259        8,095
                                                              --------     --------
          Total notes payable...............................   722,259      378,731
Less current portion........................................   722,259      354,066
                                                              --------     --------
                                                              $     --     $ 24,665
                                                              ========     ========
</TABLE>
 
     Aggregate principal payments as of July 31, 1998, on the notes payable are
scheduled as follows:
 
<TABLE>
<CAPTION>
PERIOD ENDING JULY 31,
----------------------
<S>                                                           <C>
  1998......................................................  $535,000
  1999......................................................   187,259
                                                              --------
                                                              $722,259
                                                              ========
</TABLE>
 
6. NOTES PAYABLE, STOCKHOLDERS
 
     Notes payable, stockholders at July 31, 1998 and December 31, 1997
consisted of the following:
 
<TABLE>
<CAPTION>
                                                              JULY 31,   DECEMBER 31,
                                                                1998         1997
                                                              --------   ------------
<S>                                                           <C>        <C>
Stockholder, 8%, monthly payments of $385 including
  interest, balloon payment due January 2001, secured by
  inventory, chattel paper, accounts receivable, equipment
  and general intangibles...................................  $30,901      $40,825
Less current portion........................................    4,213        3,389
                                                              -------      -------
                                                              $26,688      $37,436
                                                              =======      =======
</TABLE>
 
                                      F-95
<PAGE>   135
                      MIDWEST CONSTRUCTION SERVICES, INC.
 
                NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
 
     Aggregate principal payments as of July 31, 1998, on the notes payable to
stockholders are scheduled as follows:
 
<TABLE>
<CAPTION>
PERIOD ENDING JULY 31,
----------------------
<S>                                                           <C>
  1999......................................................  $ 4,213
  2000......................................................    4,563
  2001......................................................    4,941
  2002......................................................    4,298
  2003......................................................      917
  Thereafter................................................   11,969
                                                              -------
                                                              $30,901
                                                              =======
</TABLE>
 
7. OPERATING LEASES
 
     The Company leases its office facility on a month-to-month basis. Monthly
rent was $1,200 until June 30, 1998, thereafter the rent increased to $1,400
monthly. Rent expense for the seven months ended July 31, 1998 and the years
ended December 31, 1997 and 1996, amounted to $8,600, $14,400, and $14,400,
respectively. Management expects the future minimum lease obligation for the
lease for its office facility to be $20,640, annually.
 
     The Company leases two vehicles under an operating lease. Total monthly
lease payments are $1,197. The down payment of $12,600 for both vehicles is
being amortized over the terms of the leases. The leases are for two years and
expire in May, 1999. The vehicle lease payments for the seven months ended July
31, 1998 and the year ended December 31, 1997 were $12,053 and $15,506. The
prepaid lease expense for the period ended July 31, 1998 and December 31, 1997
was $5,425 and $9,100, respectively. The expected minimum lease payments and
amortization of the down payment for the remainder of the leases are as follows:
 
<TABLE>
<CAPTION>
PERIOD ENDING DECEMBER 31,
--------------------------
<S>                                                           <C>
  1998......................................................  $8,611
  1999......................................................   8,610
</TABLE>
 
8. MAJOR CUSTOMERS
 
     The Company had two major customers for the seven months ended July 31,
1998 and the year ended December 31, 1997, each having sales exceeding 10% of
total sales. Sales to these customers as a percentage of total revenues for the
seven months ended July 31, 1998 and the year ended December 31, 1997, are as
follows:
 
<TABLE>
<CAPTION>
                                                              JULY 31,   DECEMBER 31,
                                                                1998         1997
                                                              --------   ------------
<S>                                                           <C>        <C>
USX Corp....................................................    38.28%       46.4%
Bethlehem Steel.............................................    41.59        37.9
All other customers.........................................    20.13        15.7
                                                               ------       -----
          Total.............................................    100.0%      100.0%
                                                               ======       =====
</TABLE>
 
                                      F-96
<PAGE>   136
                      MIDWEST CONSTRUCTION SERVICES, INC.
 
                NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
 
9. MAINTENANCE AGREEMENTS
 
     The Company is currently operating under the following open purchase orders
or maintenance contracts:
 
<TABLE>
<CAPTION>
                                      EXPIRATION
CUSTOMER                                 DATE      DESCRIPTION
--------                              ----------   -----------
<S>                                   <C>          <C>
NIPSCO -- Schafer Generating Station   12-31-99    Cost-plus; supervision, labor and
                                                   equipment for railroad track
                                                   maintenance
NIPSCO -- Michigan City Generating     12-31-99    Cost-plus; labor, material and
  Station                                          equipment to perform repairs to
                                                   railroad tracks and switches
NIPSCO -- Mitchell Generating          12-31-99    Cost-plus; supervision and labor to
  Station                                          replace rails, ties and ballast as
                                                   needed on plant railroad tracks
NIPSCO -- Bailey Generating Station    12-31-99    Cost-plus; supervision, material,
                                                   labor and equipment to make
                                                   emergency repairs to plant track
                                                   system
Philip Services Corp.                  12-31-98    Cost-plus; supervision, labor,
                                                   tools, equipment and material to
                                                   maintain entire track system
Bethlehem Steel Corp. -- Burns         12-31-00    Time and materials; supervision,
  Harbor Plant                                     labor, material, insurance and
                                                   equipment to perform general track
                                                   maintenance and snow removal
USX Corporation                        09-22-02    Time and materials; supervision,
                                                   labor, material, insurance and
                                                   equipment to perform general track
                                                   maintenance and snow removal
</TABLE>
 
10. RETIREMENT PLAN
 
     As of January 1, 1996, the Company implemented a salary reduction
simplified employee pension plan covering all eligible employees over the age of
21, who have completed a specific period of service, and are not covered by a
collective bargaining agreement. Employer contributions are 5% of employees'
gross income. The pension expense for the seven months ended July 31, 1998 and
the year ended December 31, 1997, were $13,358 and $23,038, respectively.
 
11. COMMITMENTS AND CONTINGENCIES
 
LITIGATION
 
     In the ordinary course of business, the Company enters into contracts that
require the Company to provide general liability insurance coverage which names
their customer as the co-insured policyholder. In addition, some contracts
require that the Company indemnify their customers against certain legal claims
related to the contracted work the Company will perform. As a result, the
Company from time to time is involved in their customer's lawsuits and is
contingently liable for the outcome of such legal cases.
 
     In 1994, an accident occurred on a customer's property that resulted in the
death of two Company employees and the injury of two other Company employees.
Settlements have been achieved in the fatality and injury cases which were
funded by the Company's insurance carriers and the customer.
 
                                      F-97
<PAGE>   137
                      MIDWEST CONSTRUCTION SERVICES, INC.
 
                NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
 
     The Company is direct party to an uninsured personal injury suit resultant
from a 1994 accident at a customer location that occurred in proximity to where
the Company was working. The Company is vigorously defending this case and
believes that it has both adequate reserves and good defenses to any claim of
liability that may be asserted against it related to this personal injury case.
 
     The Company is involved in three other personal injury suits (one in which
the Company is direct party and two in which the Company is indirectly involved)
that are all covered by the Company's insurance policies.
 
     In the case of all known contingencies, the Company accrues a charge for a
loss when it is probable and the amount is reasonably estimable. Based on the
current available information, the Company believes that the established
reserves are adequate to cover all known contingencies and that future costs
related to these contingent liabilities will not have a material adverse effect
on the Company's financial statements.
 
12. FAIR VALUE OF FINANCIAL INSTRUMENTS
 
     The following estimated fair values of financial instruments is made in
accordance with the requirements of Statement of Financial Accounting Standards
No. 107, "Disclosure about Fair Value of Financial Instruments." The estimated
fair value amounts have been determined by the Company using available market
information and appropriate valuation methodologies.
 
CASH, ACCOUNTS RECEIVABLE AND ACCOUNTS PAYABLE
 
     The carrying amounts of these Items are a reasonable estimate of their fair
value due to their short-term nature.
 
LINE-OF-CREDIT FACILITY
 
     The carrying amount of the line-of-credit facility approximates fair value
as the interest rate fluctuates with changes in market conditions.
 
13. SUBSEQUENT EVENT
 
     On May 21, 1998, the stockholders of the Company entered into an Agreement
and Plan of Reorganization (the "Agreement") with RailWorks Corporation. Under
the terms of the Agreement, the stockholders exchanged their stock of the
Company for cash and stock of RailWorks Corporation. The transaction was
completed on August 4, 1998.
 
                                      F-98
<PAGE>   138
 
                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
 
To New England Railroad Construction Company, Inc.:
 
     We have audited the accompanying balance sheet of NEW ENGLAND RAILROAD
CONSTRUCTION COMPANY, INC. (a Connecticut corporation) as of July 31, 1998, and
the related statements of operations and stockholders' equity and cash flows for
the seven months ended July 31, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
 
     We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
 
     In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of NEW ENGLAND RAILROAD
CONSTRUCTION COMPANY, INC. as of July 31, 1998, and the results of its
operations and its cash flows for the seven months then ended, in conformity
with generally accepted accounting principles.
 
                                          Arthur Andersen LLP
 
Stamford, Connecticut
October 16, 1998
 
                                      F-99
<PAGE>   139
 
                NEW ENGLAND RAILROAD CONSTRUCTION COMPANY, INC.
 
                                 BALANCE SHEET
 
<TABLE>
<CAPTION>
                                                               JULY 31,
                                                                 1998
                                                              ----------
<S>                                                           <C>
                                 ASSETS
CURRENT ASSETS:
  Cash and cash equivalents.................................  $  108,588
  Contract and retainage receivables (net of allowance of
     $30,000)...............................................   1,539,947
  Accounts receivable, related parties......................      30,000
  Inventory.................................................     145,405
  Costs and estimated earnings in excess of billings on
     uncompleted contracts..................................     219,111
  Prepaid expenses and other................................      25,297
                                                              ----------
          Total current assets..............................   2,068,348
                                                              ----------
EQUIPMENT:
  Vehicles and equipment....................................   2,455,873
  Tools.....................................................      49,487
  Office equipment..........................................      67,481
                                                              ----------
                                                               2,572,841
  Less accumulated depreciation.............................   1,951,882
                                                              ----------
  Equipment, net............................................     620,959
                                                              ----------
OTHER ASSET, Deferred tax asset.............................      32,166
                                                              ----------
                                                              $2,721,473
                                                              ==========
 
                  LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
  Current portion of long-term debt.........................  $  350,267
  Accounts payable..........................................     724,937
  Accrued expenses..........................................      28,561
  Deferred income taxes.....................................      52,940
  Billings in excess of costs and estimated earnings on
     uncompleted contracts..................................     273,917
                                                              ----------
          Total current liabilities.........................   1,430,622
                                                              ----------
LONG-TERM DEBT, net of current portion......................     256,146
                                                              ----------
STOCKHOLDERS' EQUITY:
  Common Stock, no par value; authorized 5,000 shares;
     issued and outstanding 1,320 shares....................     114,000
  Retained earnings.........................................     920,705
                                                              ----------
          Total Stockholders' equity........................   1,034,705
                                                              ----------
                                                              $2,721,473
                                                              ==========
</TABLE>
 
                       See Notes to Financial Statements.
 
                                      F-100
<PAGE>   140
 
                NEW ENGLAND RAILROAD CONSTRUCTION COMPANY, INC.
 
                            STATEMENT OF OPERATIONS
 
<TABLE>
<CAPTION>
                                                              SEVEN MONTHS
                                                                 ENDED
                                                                JULY 31,
                                                                  1998
                                                              ------------
<S>                                                           <C>
Earned revenue..............................................   $2,314,851
Cost of earned revenue......................................    2,122,159
                                                               ----------
     Gross profit...........................................      192,692
General and administrative expenses.........................      407,915
                                                               ----------
Loss from operations........................................     (215,223)
                                                               ----------
Other income (expense):
  Gain on disposition of equipment..........................          448
  Other income..............................................        5,594
  Interest expense..........................................      (36,533)
                                                               ----------
Other expense, net..........................................      (30,491)
                                                               ----------
Loss before income taxes....................................     (245,714)
                                                               ----------
Income taxes (benefit):
  Current...................................................     (108,508)
  Deferred..................................................       27,300
                                                               ----------
                                                                  (81,208)
                                                               ----------
Net loss....................................................   $ (164,506)
                                                               ==========
</TABLE>
 
                       See Notes to Financial Statements.
 
                                      F-101
<PAGE>   141
 
                NEW ENGLAND RAILROAD CONSTRUCTION COMPANY, INC.
 
                       STATEMENT OF STOCKHOLDERS' EQUITY
 
<TABLE>
<CAPTION>
                                                   NUMBER OF      COMMON     RETAINED
                                                 COMMON SHARES    STOCK      EARNINGS      TOTAL
                                                 -------------   --------   ----------   ----------
<S>                                              <C>             <C>        <C>          <C>
Balance, DECEMBER 31, 1997.....................      1,320       $114,000   $1,271,303   $1,385,303
  Net loss.....................................         --             --     (164,506)    (164,506)
  Dividend.....................................         --             --     (186,092)    (186,092)
                                                     -----       --------   ----------   ----------
Balance, JULY 31, 1998.........................      1,320       $114,000   $  920,705   $1,034,705
                                                     =====       ========   ==========   ==========
</TABLE>
 
                       See Notes to Financial Statements.
 
                                      F-102
<PAGE>   142
 
                NEW ENGLAND RAILROAD CONSTRUCTION COMPANY, INC.
 
                            STATEMENT OF CASH FLOWS
 
<TABLE>
<CAPTION>
                                                              SEVEN MONTHS
                                                                 ENDED
                                                                JULY 31,
                                                                  1998
                                                              ------------
<S>                                                           <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net loss..................................................   $(164,506)
  Adjustments to reconcile net loss to net cash provided by
     operating activities:
     Depreciation and amortization..........................     101,691
     Gain on disposition of equipment.......................        (448)
     Deferred income taxes..................................     (49,626)
     Change in operating assets and liabilities:
       Contract and retainage receivables...................     (48,022)
       Accounts receivable, related parties.................       9,544
       Inventory............................................      (1,874)
       Costs and estimated earnings in excess of billings on
        uncompleted contracts...............................    (219,111)
       Prepaid expenses and other...........................      75,640
       Accounts payable.....................................     509,293
       Accrued expenses.....................................    (152,156)
       Billings in excess of costs and estimated earnings on
        uncompleted contracts...............................     (10,762)
                                                               ---------
          Net cash provided by operating activities.........      49,663
                                                               ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
  Proceeds from sale of equipment...........................         448
  Purchases of equipment....................................     (44,991)
                                                               ---------
          Net cash used in investing activities.............     (44,543)
                                                               ---------
CASH FROM FINANCING ACTIVITIES:
  Proceeds from issuance of debt............................     146,625
  Principal payments on long-term debt......................    (293,835)
                                                               ---------
          Net cash used in financing activities.............    (147,210)
                                                               ---------
NET DECREASE IN CASH........................................    (142,090)
CASH AND CASH EQUIVALENTS, beginning of period..............     250,678
                                                               ---------
CASH AND CASH EQUIVALENTS, end of period....................   $ 108,588
                                                               =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
  Cash paid during the period for:
     Interest...............................................   $  37,128
                                                               =========
     Income taxes...........................................   $  45,325
                                                               =========
</TABLE>
 
                       See Notes to Financial Statements.
 
                                      F-103
<PAGE>   143
 
                NEW ENGLAND RAILROAD CONSTRUCTION COMPANY, INC.
 
                         NOTES TO FINANCIAL STATEMENTS
 
1. NATURE OF BUSINESS
 
     The Company performs railroad repair and construction projects primarily
for state and city governments located in the Northeastern United States.
 
2. SIGNIFICANT ACCOUNTING POLICIES
 
USE OF ESTIMATES
 
     The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could vary from the estimates that were assumed
in preparing the financial statements.
 
FAIR VALUE OF FINANCIAL INSTRUMENTS:
 
     The carrying amounts of cash and cash equivalents, contract and retainage
receivable and accounts payable approximate fair value because of their
short-term nature. The carrying amount of long-term debt approximates fair value
based on the borrowing rates currently available to the Company for bank loans
with similar terms and maturities.
 
REVENUE AND COST RECOGNITION
 
     The Company recognizes revenues from fixed-fee construction contracts using
the percentage-of-completion method, measured by the percentage of cost incurred
to date to management's estimated total cost for each contract. That method is
used because management considers total cost to be the best available measure of
progress on the contracts. Changes in job performance, job conditions and
estimated profitability may result in revisions to cost and income, which are
recognized in the period in which the revisions are determined.
 
     Revenues from time-and-material contracts are recognized as the work is
performed.
 
     Contract costs include all direct material and labor costs and those
indirect costs related to contract performance. General and administrative costs
are charged to expense as incurred. Provisions for estimated losses on
uncompleted contracts are made in the period in which such losses are
determined.
 
     The asset, "Costs and estimated earnings in excess of billings on
uncompleted contracts," represents revenues recognized in excess of amounts
billed. The liability, "Billings in excess of costs and estimated earnings on
uncompleted contracts," represents billings in excess of revenues recognized.
 
INVENTORY
 
     Inventory, principally materials and supplies, is stated at the lower of
cost or net realizable value. Cost is determined by the first-in, first-out
(FIFO) method.
 
PROPERTY, PLANT AND EQUIPMENT:
 
     Property, plant and equipment is stated at cost. Depreciation is provided
principally by use of the straight-line method over the estimated useful life of
the related asset. Accelerated methods are used for income tax reporting
purposes.
 
                                      F-104
<PAGE>   144
                NEW ENGLAND RAILROAD CONSTRUCTION COMPANY, INC.
 
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
 
INCOME TAXES
 
     Deferred income taxes are determined based on the difference between the
financial statement and income tax basis of assets and liabilities using tax
rates expected to be in effect in the years in which the differences are
expected to reverse. The temporary differences related primarily to the
reporting of revenue recognition on long-term contracts, depreciation and net
operating loss carryforwards.
 
CASH AND CASH EQUIVALENTS
 
     From time to time, the Company's cash balance with financial institutions
exceeds the maximum FDIC insured balance of $100,000. The Company has not
experienced any losses in such accounts and believes it is not exposed to any
significant credit risk on cash and cash equivalents.
 
     For the reporting of cash flows, the Company considers savings accounts and
certificate of deposits with original maturities of three months or less to be
cash and cash equivalents.
 
3. ACCOUNTS RECEIVABLE:
 
     Contracts and retainage receivable at July 31, 1998, consisted of the
following:
 
<TABLE>
<S>                                                           <C>
Contract Receivables........................................  $1,353,948
Retainage...................................................     215,999
                                                              ----------
                                                               1,569,947
Less allowance for doubtful accounts........................      30,000
                                                              ----------
                                                              $1,539,947
                                                              ==========
</TABLE>
 
     Contract retainage have been billed but are not due pursuant to contract
provisions until contract completion. Such contract retainage is expected to be
collected within the following year.
 
4. COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS:
 
     Information with respect to contracts in process at July 31, 1998, are as
follows:
 
<TABLE>
<S>                                                           <C>
Costs incurred on uncompleted contracts.....................  $1,139,214
Estimated earnings..........................................     272,862
                                                              ----------
                                                               1,412,076
Less billings to date.......................................   1,466,882
                                                              ----------
                                                              $  (54,806)
                                                              ==========
</TABLE>
 
     Included in the balance sheet under the following captions:
 
<TABLE>
<S>                                                           <C>
Costs and estimated earnings in excess of billings on
  uncompleted contracts.....................................  $ 219,111
Billings in excess of costs and estimated earnings on
  uncompleted contracts.....................................   (273,917)
                                                              ---------
                                                              $ (54,806)
                                                              =========
</TABLE>
 
5. RELATED PARTY TRANSACTIONS
 
     The Company has transactions in the normal course of business with various
related parties. Balances with related parties are included in the balance
sheets under the following captions:
 
<TABLE>
<S>                                                           <C>
Contract and retainage receivables..........................  $310,014
Accounts receivable, related parties........................    30,000
Due to affiliates...........................................   146,625
</TABLE>
 
                                      F-105
<PAGE>   145
                NEW ENGLAND RAILROAD CONSTRUCTION COMPANY, INC.
 
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
 
     Transactions with related parties are included in the statement of
operations under the following captions:
 
<TABLE>
<S>                                                           <C>
Cost of earned revenue......................................  $221,596
Rent expense................................................    35,000
</TABLE>
 
     The Company rents a storage yard on a month to month basis, from a related
party for $5,000 per month. In July 1998, the Company dividended the land and
building to the stockholders.
 
6. LONG-TERM DEBT
 
     Long-term debt consists of the following:
 
<TABLE>
<S>                                                           <C>
Note payable, bank, payable in monthly installments of
  $5,000 plus interest at prime plus 1.5% through October
  2000. Substantially all assets are pledged as collateral
  and repayment is guaranteed by the stockholders...........  $ 75,000
Notes payable, stockholders, due on demand plus interest at
  prime plus 1%.............................................   146,625
Notes payable, equipment, due in aggregate monthly
  installments of $8,942 including interest ranging from
  7.9% to 9.3% maturing at various dates through October
  2002. Collateralized by equipment.........................   337,650
Note payable, mortgage, payable in monthly installments of
  $1,190 including interest at prime plus 1.5% through
  September 2002............................................    47,138
                                                              --------
                                                               606,413
Less current maturities.....................................   350,267
                                                              --------
                                                              $256,146
                                                              ========
</TABLE>
 
     Aggregate principal payments as of July 31, 1998, on long-term debt are as
follows:
 
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
------------------------
<S>                                                           <C>
  1998......................................................  $350,267
  1999......................................................    88,859
  2000......................................................    96,883
  2001......................................................    59,682
  2002......................................................    10,722
                                                              --------
                                                              $606,413
                                                              ========
</TABLE>
 
     Both the long-term debt and the line of credit contain certain restrictive
covenants which place some requirements and restrictions on the Company
regarding the maintenance of certain financial ratios measured on an annual
basis.
 
7. MAJOR CUSTOMERS
 
     Approximately 69% of earned revenue was derived from the customers for the
seven months ended July 31, 1998.
 
8. PROFIT SHARING PLAN
 
     The Company sponsors a noncontributory trusteed profit sharing plan
covering substantially all of its employees not covered by a collective
bargaining agreement meeting certain minimum requirements. The plan provides for
contributions by the Company in such amounts as the Board of Directors may
annually determine. Profit sharing expense was $21,010 for the seven months
ended July 31, 1998.
 
                                      F-106
<PAGE>   146
                NEW ENGLAND RAILROAD CONSTRUCTION COMPANY, INC.
 
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
 
9. INCOME TAXES
 
     The income tax benefit for the seven months ended July 31, 1998, consisted
of the following:
 
<TABLE>
<S>                                                           <C>
Current benefit:
  Federal...................................................  $(77,056)
  State.....................................................   (31,452)
                                                              --------
                                                              (108,508)
                                                              --------
Deferred provision:
  Federal...................................................    19,409
  State.....................................................     7,891
                                                              --------
                                                                27,300
                                                              --------
                                                              $(81,208)
                                                              ========
</TABLE>
 
     The income tax benefit as reported in the combined statements of operations
differs from the amounts computed by applying federal statutory rates due to the
following:
 
<TABLE>
<S>                                                           <C>
Federal income tax at statutory rate........................  $(83,543)
Non deductible expenses.....................................     2,335
                                                              --------
Benefit for income taxes....................................  $(81,208)
                                                              ========
</TABLE>
 
     The tax effect of temporary differences that give rise to significant
portions of deferred tax liability at July 31, 1998 consisted of the following:
 
<TABLE>
<S>                                                           <C>
Current asset (liability):
  Deferred gross profit on contracts in progress............  $(63,290)
  Accounts receivable.......................................    10,350
                                                              --------
                                                               (52,940)
Non-current asset (liability):
  Tax depreciation in excess of book depreciation...........   (49,119)
Net operating loss carryforward.............................    81,285
                                                              --------
Net deferred tax liability..................................  $(20,774)
                                                              ========
</TABLE>
 
10. CONCENTRATION OF LABOR
 
     Approximately 72% of the Company's labor force is subject to a union
contract expiring in March 1999.
 
11. SUBSEQUENT EVENT:
 
     On May 21, 1998, the stockholders of the Company entered into an Agreement
and Plan of Reorganization (the "Agreement") with RailWorks Corporation. Under
the terms of the Agreement, the stockholders exchanged their stock of the
Company for cash and stock of RailWorks Corporation. The transaction was
completed on August 4, 1998.
 
                                      F-107
<PAGE>   147
 
                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
 
To Railroad Service, Inc. and Minnesota Railroad Service, Inc.:
 
     We have audited the accompanying combined balance sheets of RAILROAD
SERVICE, INC. (a Nevada corporation) and MINNESOTA RAILROAD SERVICE, INC. (a
Tennessee corporation) as of July 31, 1998 and December 31, 1997, and the
related combined statements of operations, stockholders' equity and cash flows
for and the seven months ended July 31, 1998 and the two years in the period
ended December 31, 1997. These combined financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these combined financial statements based on our audits.
 
     We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the combined financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
 
     In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the combined financial position of RAILROAD
SERVICE, INC. AND MINNESOTA RAILROAD SERVICE, INC. as of July 31, 1998 and
December 31, 1997, and the results of their combined operations and their
combined cash flows for the seven months ended July 31, 1998 and each of the two
years in the period ended December 31, 1997 in conformity with generally
accepted accounting principles.
 
                                          Arthur Andersen LLP
 
Stamford, Connecticut
September 4, 1998
 
                                      F-108
<PAGE>   148
 
                             RAILROAD SERVICE, INC.
                                      AND
                        MINNESOTA RAILROAD SERVICE, INC.
 
                            COMBINED BALANCE SHEETS
 
<TABLE>
<CAPTION>
                                                               JULY 31,    DECEMBER 31,
                                                                 1998          1997
                                                              ----------   ------------
<S>                                                           <C>          <C>
                                        ASSETS
CURRENT ASSETS:
  Cash and cash equivalents.................................  $  417,923    $  839,210
  Accounts receivable.......................................   1,812,942       918,794
  Costs and estimated earnings in excess of billings on
    uncompleted contracts...................................     621,766       155,140
  Notes receivable, current portion.........................      78,387        66,666
  Other receivables.........................................      16,806            --
  Inventories...............................................     217,553       240,131
                                                              ----------    ----------
         Total current assets...............................   3,165,377     2,219,941
                                                              ----------    ----------
PROPERTY, PLANT AND EQUIPMENT:
  Tools and equipment.......................................   2,993,114     2,803,466
  Vehicles and trailers.....................................     891,343       881,053
  Office equipment..........................................     108,450       129,612
  Leasehold improvements....................................      91,041       125,119
                                                              ----------    ----------
                                                               4,083,948     3,939,250
  Less accumulated depreciation and amortization............   3,032,759     2,991,931
                                                              ----------    ----------
         Property and equipment, net........................   1,051,189       947,319
                                                              ----------    ----------
OTHER ASSETS:
  Notes receivable, long-term portion.......................      66,668        66,668
  Notes receivable, related parties.........................          --       170,577
  Cash value of life insurance..............................          --       571,629
  Loan origination costs, net...............................          --         2,794
                                                              ----------    ----------
         Total other assets.................................      66,668       811,668
                                                              ----------    ----------
                                                              $4,283,234    $3,978,928
                                                              ==========    ==========
 
                         LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
  Accounts payable..........................................  $1,464,835    $  445,800
  Accrued expenses..........................................     123,082       149,141
  Billings in excess of costs and estimated earnings on
    uncompleted contracts...................................     282,113        79,733
  Current maturities of long-term debt......................     378,246       278,246
                                                              ----------    ----------
         Total current liabilities..........................   2,248,276       952,920
                                                              ----------    ----------
NOTES PAYABLE -- RELATED PARTIES............................          --       246,798
LONG-TERM DEBT, net of current maturities...................     927,596       594,075
                                                              ----------    ----------
         Total noncurrent liabilities.......................     927,596       840,873
                                                              ----------    ----------
         Total liabilities..................................   3,175,872     1,793,793
                                                              ----------    ----------
COMMITMENTS.................................................          --            --
                                                              ----------    ----------
STOCKHOLDERS' EQUITY:
  Common Stock..............................................     172,700       172,700
  Additional paid-in capital................................   1,216,877       838,731
  Retained earnings (deficit)...............................    (282,215)    1,173,704
                                                              ----------    ----------
         Total stockholders' equity.........................   1,107,362     2,185,135
                                                              ----------    ----------
                                                              $4,283,234    $3,978,928
                                                              ==========    ==========
</TABLE>
 
                  See Notes to Combined Financial Statements.
 
                                      F-109
<PAGE>   149
 
                             RAILROAD SERVICE, INC.
                                      AND
                        MINNESOTA RAILROAD SERVICE, INC.
 
                       COMBINED STATEMENTS OF OPERATIONS
 
<TABLE>
<CAPTION>
                                                                                  YEAR ENDED
                                                      SEVEN MONTHS ENDED         DECEMBER 31,
                                                           JULY 31,        ------------------------
                                                             1998             1997         1996
                                                      ------------------   ----------   -----------
<S>                                                   <C>                  <C>          <C>
Revenue.............................................      $6,223,925       $9,363,191   $10,708,870
Contract costs incurred.............................       5,285,256        7,065,419     8,199,458
                                                          ----------       ----------   -----------
  Gross profit......................................         938,669        2,297,772     2,509,412
General and administrative expenses.................       1,172,023        1,449,737     1,417,546
                                                          ----------       ----------   -----------
Operating (loss) income.............................        (233,354)         848,035     1,091,866
                                                          ----------       ----------   -----------
Other income (expense):
  Interest income...................................          26,600           38,464        15,352
  Interest expense..................................         (50,445)        (116,345)     (137,763)
  Gain on disposal of equipment.....................             464          207,160        31,763
  Other income, net.................................           4,519               --         5,106
                                                          ----------       ----------   -----------
Other (expense) income, net.........................         (18,862)         129,279       (85,542)
                                                          ----------       ----------   -----------
Net (loss) income...................................      $ (252,216)      $  977,314   $ 1,006,324
                                                          ==========       ==========   ===========
</TABLE>
 
                  See Notes to Combined Financial Statements.
 
                                      F-110
<PAGE>   150
 
                             RAILROAD SERVICE, INC.
                                      AND
                        MINNESOTA RAILROAD SERVICE, INC.
 
                  COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY
 
<TABLE>
<CAPTION>
                                                            ADDITIONAL
                                                  COMMON      PAID-IN      RETAINED
                                                  STOCK       CAPITAL      EARNINGS        TOTAL
                                                 --------   -----------   -----------   -----------
<S>                                              <C>        <C>           <C>           <C>
BALANCE, DECEMBER 31, 1995.....................  $172,700   $  838,731    $   169,266   $ 1,180,697
  Net income...................................        --           --      1,006,324     1,006,324
  Distributions to shareholders................        --           --       (356,220)     (356,220)
                                                 --------   ----------    -----------   -----------
BALANCE, DECEMBER 31, 1996.....................   172,700      838,731        819,370     1,830,801
  Net income...................................        --           --        977,314       977,314
  Distributions to shareholders................        --           --       (622,980)     (622,980)
                                                 --------   ----------    -----------   -----------
BALANCE, DECEMBER 31, 1997.....................   172,700      838,731      1,173,704     2,185,135
  Net income...................................        --           --       (252,216)     (252,216)
  Gifted stock.................................        --      378,146             --       378,146
  Distributions to stockholders................        --           --     (1,203,703)   (1,203,703)
                                                 --------   ----------    -----------   -----------
BALANCE, JULY 31, 1998.........................  $172,700   $1,216,877    $  (282,215)  $ 1,107,362
                                                 ========   ==========    ===========   ===========
</TABLE>
 
                  See Notes to Combined Financial Statements.
 
                                      F-111
<PAGE>   151
 
                             RAILROAD SERVICE, INC.
                                      AND
                        MINNESOTA RAILROAD SERVICE, INC.
 
                       COMBINED STATEMENTS OF CASH FLOWS
 
<TABLE>
<CAPTION>
                                                                                      YEAR ENDED
                                                               SEVEN MONTHS          DECEMBER 31,
                                                              ENDED JULY 31,    -----------------------
                                                                   1998            1997         1996
                                                              ---------------   ----------   ----------
<S>                                                           <C>               <C>          <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net income (loss).........................................    $  (252,216)    $  977,314   $1,006,324
  Adjustments to reconcile net income to net cash provided
    by operating activities:
    Depreciation and amortization...........................        172,357        305,730      295,660
    Gain on sale of equipment...............................           (464)      (207,160)     (31,763)
    Compensation in exchange for paid-in capital............        378,146             --           --
    Change in assets and liabilities:
       Decrease (increase) in:
       Accounts receivable..................................       (894,148)       738,225     (400,191)
       Other Receivables....................................        (16,806)         9,558        1,442
       Costs and estimated earnings in excess of billings on
         uncompleted contracts..............................       (466,626)       (92,298)      23,450
       Inventories..........................................         22,578         62,736       93,611
       Prepaid expenses.....................................             --             --       65,574
       Loan origination costs...............................          2,794             --           --
       Accounts payable.....................................      1,019,035         11,234     (149,087)
       Accrued expenses.....................................        (26,059)         3,446       53,068
       Billings in excess of costs and estimated earnings on
         uncompleted contracts..............................        202,380         (5,108)     (56,648)
                                                                -----------     ----------   ----------
         Net cash provided by operating activities..........        140,971      1,803,677      901,440
                                                                -----------     ----------   ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
  Proceeds from sale of property and equipment..............          2,748        122,634       42,500
  Capital expenditures......................................       (278,513)      (320,023)    (532,158)
  Receipts on notes receivable..............................        158,856         66,666           --
  Cash value of life insurance..............................        571,629        (43,930)     (37,577)
                                                                -----------     ----------   ----------
         Net cash provided by (used in) investing
           activities.......................................        454,720       (174,653)    (527,235)
                                                                -----------     ----------   ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
  Principal payments on long-term debt......................       (523,943)      (414,523)    (370,360)
  Long-term borrowings......................................        957,466        186,460      354,130
  Proceeds from issuance of notes payable -- related
    parties.................................................             --        119,433       39,865
  Principal payments on notes payable -- related parties....       (246,798)       (80,000)    (130,114)
  Distribution to stockholders..............................     (1,203,703)      (622,980)    (356,220)
                                                                -----------     ----------   ----------
         Net cash used in financing activities..............     (1,016,978)      (811,610)    (462,699)
                                                                -----------     ----------   ----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........       (421,287)       817,414      (88,494)
CASH AND CASH EQUIVALENTS, beginning of period..............        839,210         21,796      110,290
                                                                -----------     ----------   ----------
CASH AND CASH EQUIVALENTS, end of period....................    $   417,923     $  839,210   $   21,796
                                                                ===========     ==========   ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
  Cash paid during the period for:
    Interest................................................    $    47,842     $  113,647   $  135,940
                                                                ===========     ==========   ==========
</TABLE>
 
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING AND INVESTING ACTIVITIES:
 
During 1997 a note receivable in the amount of $200,000 was issued in exchange
for fixed assets.
 
                  See Notes to Combined Financial Statements.
 
                                      F-112
<PAGE>   152
 
                             RAILROAD SERVICE, INC.
                                      AND
                        MINNESOTA RAILROAD SERVICE, INC.
 
                     NOTES TO COMBINED FINANCIAL STATEMENTS
 
1. NATURE OF BUSINESS
 
     Railroad Service, Inc. (RSI) and Minnesota Railroad Service, Inc. (MRSI)
(together the "Companies") operate as a construction contractor, constructing,
repairing and maintaining railroad tracks for private and government customers
located throughout the United States with concentrations of work primarily in
the upper midwest. The work is performed under various forms of contracts,
including fixed-fee and time-and-material contracts. The time period of the
contracts vary, but they are generally less than one year.
 
     The Companies have common ownership and share management personnel and
facilities. The combined statements of financial position, income and cash flows
are presented in these financial statements. All intercompany transactions and
balances have been eliminated.
 
2. SIGNIFICANT ACCOUNTING POLICIES
 
USE OF ESTIMATES
 
     The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could vary from the estimates that were assumed
in preparing the financial statements.
 
REVENUE AND COST RECOGNITION
 
     The Companies recognize revenues from fixed-fee contracts using the
percentage-of-completion method, measured by the percentage of cost incurred to
date to management's estimated total cost for each contract. That method is used
because management considers total cost to be the best available measure of
progress on the contracts. Changes in job performance, job conditions and
estimated profitability may result in revisions to cost and revenue, which are
recognized in the period in which the revisions are determined.
 
     Revenues from time-and-material contracts are recognized currently as the
work is performed.
 
     Contract costs include all direct material, labor, equipment costs and
those indirect costs related to contract performance which are charged to
expense as incurred. Provisions for estimated losses on uncompleted contracts
are made in the period in which such losses are determined.
 
CASH AND CASH EQUIVALENTS
 
     The Companies consider cash and cash equivalents to include cash on hand
and temporary cash investments purchased with an original maturity of three
months or less.
 
FINANCIAL INSTRUMENTS AND CREDIT RISK
 
     The Companies operate primarily in the upper midwestern region of the
United States. The Companies' accounts receivable are from the same geographic
region. The terms of the sales give rise to unsecured accounts receivable, as is
common industry practice. The Companies periodically assess collection of its
receivables and provide allowance for doubtful accounts as appropriate. No such
allowances were deemed necessary as of July 31, 1998 and December 31, 1997.
 
                                      F-113
<PAGE>   153
                             RAILROAD SERVICE, INC.
                                      AND
                        MINNESOTA RAILROAD SERVICE, INC.
 
             NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
 
CONCENTRATIONS OF CUSTOMERS
 
     Approximately 47% and 55% of accounts receivable at July 31, 1998 and
December 31, 1997 were with three and four customers, respectively. For the
seven months ended July 31, 1998 and the year ended December 31, 1997, two and
three customers, respectively, accounted for approximately 26% and 40% of
revenues.
 
INVENTORIES
 
     Inventories principally consist of stored materials and parts to be used
for contracts and have been stated at the lower of cost or market. Cost is
determined by the first-in, first-out (FIFO) method.
 
PROPERTY, PLANT AND EQUIPMENT
 
     The Companies record property, plant and equipment at cost. Depreciation
and amortization is computed using the straight-line method over the estimated
useful life of the asset as follows:
 
<TABLE>
<S>                                                           <C>
Tools and equipment.........................................   4 - 7 years
Vehicles and trailers.......................................   4 - 7 years
Office equipment............................................  4 - 10 years
Leasehold improvements......................................  7 - 18 years
</TABLE>
 
     As assets are retired or otherwise disposed of, the cost and accumulated
depreciation and amortization are eliminated from the accounts, and any gain or
loss is reflected in net income.
 
INCOME TAXES
 
     The Companies operate as sub-chapter S corporations for Federal and certain
state income tax reporting purposes. Accordingly, the income taxes for the
earnings of the Companies are the responsibility of the owners. Therefore, these
financial statements do not reflect any Federal income taxes for the Companies.
 
COMMON STOCK
 
     Common Stock of the Companies consists of the following:
 
<TABLE>
<CAPTION>
                                                              JULY 31,   DECEMBER 31,
                                                                1998         1997
                                                              --------   ------------
<S>                                                           <C>        <C>
Railroad Service, Inc.
  Authorized shares, no par value...........................  $  2,500     $  2,500
                                                              --------     --------
  Issued and outstanding....................................     1,577        1,577
                                                              --------     --------
  Stated at.................................................   157,700      157,700
                                                              --------     --------
Minnesota Railroad Service, Inc.
  Authorized shares, no par value...........................     2,500        2,500
                                                              --------     --------
  Issued and outstanding....................................       150          150
                                                              --------     --------
  Stated at.................................................    15,000       15,000
                                                              --------     --------
          Total Common Stock................................  $172,700     $172,700
                                                              ========     ========
</TABLE>
 
                                      F-114
<PAGE>   154
                             RAILROAD SERVICE, INC.
                                      AND
                        MINNESOTA RAILROAD SERVICE, INC.
 
             NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
 
3. ACCOUNTS RECEIVABLE
 
     Accounts receivable consist of the following at July 31, 1998 and December
31, 1997:
 
<TABLE>
<CAPTION>
                                                               JULY 31,    DECEMBER 31,
                                                                 1998          1997
                                                              ----------   ------------
<S>                                                           <C>          <C>
Contract receivables........................................  $1,628,877     $887,194
Contract retainages.........................................     184,065       31,600
                                                              ----------     --------
                                                              $1,812,942     $918,794
                                                              ==========     ========
</TABLE>
 
     Contract retainages have been billed but are not due pursuant to contract
provisions until contract completion. Such contract retainage is expected to be
collected within the following year.
 
4. COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
 
     Information with respect to contracts in process at July 31, 1998 and
December 31, 1997 are as follows:
 
<TABLE>
<CAPTION>
                                                               JULY 31,    DECEMBER 31,
                                                                 1998          1997
                                                              ----------   ------------
<S>                                                           <C>          <C>
Costs incurred on uncompleted contracts.....................  $3,980,353    $1,150,665
Estimated earnings..........................................     664,642       400,247
                                                              ----------    ----------
                                                               4,644,995     1,550,912
Less billings to date.......................................   4,305,342     1,475,505
                                                              ----------    ----------
                                                              $  339,653    $   75,407
                                                              ==========    ==========
</TABLE>
 
     Contracts in process are included in the accompanying combined balance
sheets under the following captions:
 
<TABLE>
<CAPTION>
                                                              JULY 31,   DECEMBER 31,
                                                                1998         1997
                                                              --------   ------------
<S>                                                           <C>        <C>
Costs and estimated earnings in excess of billings on
  uncompleted contracts.....................................  $621,766     $155,140
Billings in excess of costs and estimated earnings on
  uncompleted contracts.....................................   282,113       79,733
                                                              --------     --------
                                                              $339,653     $ 75,407
                                                              ========     ========
</TABLE>
 
     The asset, "Costs and estimated earnings in excess of billings on
uncompleted contracts," represents revenues recognized in excess of amounts
billed. The liability, "Billings in excess of costs and estimated earnings on
uncompleted contracts", represents billings in excess of revenues recognized.
 
                                      F-115
<PAGE>   155
                             RAILROAD SERVICE, INC.
                                      AND
                        MINNESOTA RAILROAD SERVICE, INC.
 
             NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
 
5. OPERATING LEASES
 
     The Companies lease office space and equipment under agreements expiring at
various dates through the year 2000. Minimum rental commitments under these
noncancelable lease agreements in effect at July 31, 1998, are:
 
<TABLE>
<CAPTION>
                 PERIOD ENDING DECEMBER 31,
                 --------------------------
<S>                                                           <C>
1998........................................................  $32,857
1999........................................................   28,658
2000........................................................    1,977
2001........................................................       --
2002........................................................       --
Thereafter..................................................       --
                                                              -------
                                                              $63,492
                                                              =======
</TABLE>
 
     Total rental expense for the seven months ended July 31, 1998 and years
ended December 31, 1997 and 1996 for all operating leases amounted to $24,250,
$60,000 and $67,000, respectively.
 
6. LINE OF CREDIT
 
     RSI has a $300,000 line of credit, with an additional seasonal limit of
$100,000 from a bank. Interest is payable monthly at 1% over the bank's
reference rate of interest for the seven months ended July 31, 1998, at 1% over
the bank's reference rate of interest for the year ended December 31, 1997 and
at 2.5% over the bank's reference rate of interest for the years ended December
31, 1996. The line is secured by accounts receivable, material on hand,
equipment and assignment of certain life insurance policies. The line is also
personally guaranteed by certain shareholders of the Companies. At July 31, 1998
and December 31, 1997, there were no borrowings against the line.
 
                                      F-116
<PAGE>   156
                             RAILROAD SERVICE, INC.
                                      AND
                        MINNESOTA RAILROAD SERVICE, INC.
 
             NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
 
7. LONG-TERM DEBT
 
     Long-term debt consists of the following:
 
<TABLE>
<CAPTION>
                                                               JULY 31,    DECEMBER 31,
                                                                 1998          1997
                                                              ----------   ------------
<S>                                                           <C>          <C>
Note payable to insurance company (RSI), interest at 8%,
  with no monthly principal installments or maturity date,
  secured by the life insurance policy......................  $       --    $  410,140
Note payable to bank (RSI), interest at 9.5%, payable in six
  monthly installments of $42,222 each year (May-October),
  maturing December 1999, secured by all of RSI's assets....     357,420       399,642
Note payable to shareholder (RSI), interest at 9.5%, with no
  monthly installments, maturing April 2000, unsecured......          --       246,799
Various notes payable to banks and finance companies (RSI
  and MRSI), interest rates from 2.9% to 11.75%, due in even
  monthly principal and interest payments, secured by
  vehicles and equipment....................................      48,366        62,538
Note payable to bank (RSI), interest at 9.0%, with monthly
  payments of $6,374, maturing May 2001, secured by all
  Company assets............................................     200,000            --
Note payable to bank (RSI), interest at 9.5%, maturing April
  1999, secured by all Company assets.......................      50,000            --
Note payable to shareholder's (RSI/MRSI), no interest rate
  with no monthly payments 7/28/98..........................     650,056            --
                                                              ----------    ----------
Total debt..................................................   1,305,842     1,119,119
Less current maturities.....................................     378,246       278,246
                                                              ----------    ----------
Long-term portion...........................................  $  927,596    $  840,873
                                                              ==========    ==========
</TABLE>
 
     Aggregate principal payments, as of July 31, 1998, on long-term debt are
scheduled as follows:
 
<TABLE>
<S>                                                           <C>
1998........................................................  $       --
1999........................................................   1,282,389
2000........................................................      23,453
2001........................................................          --
2002........................................................          --
                                                              ----------
                                                              $1,305,842
                                                              ==========
</TABLE>
 
     Certain of the long-term debt instruments and the line of credit agreement
contain restrictive covenants which places requirements and restrictions on the
Companies regarding disposition of assets, financial ratios, capital
expenditures, acquisitions and operations. The Companies were not in compliance
with certain covenants at July 31, 1998; however, waivers for the covenants were
obtained from the bank.
 
8. PROFIT SHARING PLAN
 
     The Companies have 401(k) profit sharing plans covering substantially all
employees not covered under collective bargaining agreements. The Companies may
contribute a discretionary amount as determined each year by the Companies. The
discretionary contribution is subject to a six-year vesting schedule. The
discretionary contribution expense for the Companies was $50,000, $80,485 and
$101,683 for the seven months ended July 31, 1998 and the years ended December
31, 1997 and 1996, respectively.
 
                                      F-117
<PAGE>   157
                             RAILROAD SERVICE, INC.
                                      AND
                        MINNESOTA RAILROAD SERVICE, INC.
 
             NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
 
9. SALE OF BRANCH
 
     Effective March 1997, RSI sold all assets relating to the Milwaukee branch
operations. RSI received an initial $75,000 payment and a note receivable for
$200,000 with an interest rate of 2% over the base rate paid by RSI to a certain
bank. RSI realized a gain of $160,603 on the sale. For the year ended December
31, 1997, the note had a remaining balance of $133,334 which is included in
other income in the combined 1997 statement of income. The balance due on the
note receivable as of July 31, 1998 is $133,334. This amount is due on December
31, 1999. This receivable is secured by the equipment involved in the sale and
is personally guaranteed by the owners of the acquiring Company.
 
     In connection with the sale, the Companies and their shareholders have
entered into a covenant not to compete for a period of five years from the date
of the agreement, subject to certain geographical and size limitations. The
Companies may bid new work in the circumscribed area if certain restrictions are
met.
 
10. RELATED PARTY TRANSACTIONS
 
     Related parties of the Companies include the shareholders of the Companies
and various entities related through common ownership and management. The
Companies and related parties provide products and services to each other.
Transactions with related parties included in the combined financial statements
resulted in the recognition of approximately $92,902, $15,300 and $26,900 of
income and approximately $43,400, $72,400 and $86,400 of expense for the seven
months ended July 31, 1998 and the years ended December 31, 1997 and 1996,
respectively.
 
     Due from related parties consists of charges from the Companies to
affiliated companies for labor, equipment and administrative services.
 
     Effective January 2, 1998, the majority stockholder gifted 55 shares of
Railroad Service, Inc. stock and 5 shares of Minnesota Railroad Service, Inc.
stock to another shareholder. Accordingly, $378,146 was recorded as a charge to
compensation expense and a contribution of paid-in capital.
 
11. FAIR VALUE OF FINANCIAL INSTRUMENTS
 
     The following estimated fair values of financial instruments is made in
accordance with the requirements of SFAS No. 107, "Disclosures about Fair Value
of Financial Instruments." The estimated fair value amounts have been determined
by the Companies using available market information and appropriate valuation
methodologies.
 
CASH, ACCOUNTS RECEIVABLE AND ACCOUNTS PAYABLE
 
     The carrying amounts of these Items are a reasonable estimate of their fair
value due to their short-term nature.
 
LONG-TERM DEBT
 
     The line of credit facility approximates fair value as the interest rate
fluctuates with changes in market conditions. It is estimated that the carrying
amount of the long-term debt approximates market. Management estimated the fair
value of the long-term debt based on the remaining term to maturity and the
current interest rate environment as a market does not exist for the debt or
similar debt of the Companies.
 
                                      F-118
<PAGE>   158
                             RAILROAD SERVICE, INC.
                                      AND
                        MINNESOTA RAILROAD SERVICE, INC.
 
             NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
 
12. SUBSEQUENT EVENTS
 
     On May 21, 1998, the stockholders of the Company entered into an Agreement
and Plan of Reorganization (the "Agreement") with RailWorks Corporation. Under
the terms of the Agreement, the stockholders exchanged their stock of the
Company for cash and stock of RailWorks Corporation. The transaction was
completed on August 4, 1998.
 
                                      F-119
<PAGE>   159
 
                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
 
To Southern Indiana Wood Preserving Company, Inc.:
 
     We have audited the accompanying balance sheets of SOUTHERN INDIANA WOOD
PRESERVING COMPANY, INC. (the "Company") (an Indiana corporation) as of July 31,
1998 and December 31, 1997, and the related statements of operations,
stockholder's equity and cash flows for the seven months ended July 31, 1998 and
for the year ended December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
 
     We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
 
     In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of SOUTHERN INDIANA WOOD
PRESERVING COMPANY, INC. as of July 31, 1998 and December 31, 1997, and the
results of its operations and its cash flows for the seven months ended July 31,
1998 and the year ended December 31, 1997, in conformity with generally accepted
accounting principles.
 
                                          Arthur Andersen LLP
 
Nashville, Tennessee
September 25, 1998
 
                                      F-120
<PAGE>   160
 
                 SOUTHERN INDIANA WOOD PRESERVING COMPANY, INC.
 
                                 BALANCE SHEETS
 
<TABLE>
<CAPTION>
                                                               JULY 31,    DECEMBER 31,
                                                                 1998          1997
                                                              ----------   ------------
<S>                                                           <C>          <C>
                                        ASSETS
CURRENT ASSETS:
  Cash and cash equivalents.................................  $       --    $       --
  Receivables, net of allowance of $94,347 and
     $78,119, respectively..................................   1,405,108     1,510,605
  Inventory.................................................   2,098,122     2,171,870
  Prepaid expenses and other................................      48,308        16,870
                                                              ----------    ----------
          Total current assets..............................   3,551,538     3,699,345
                                                              ----------    ----------
PROPERTY, PLANT AND EQUIPMENT:
  Land and improvements.....................................       7,372         7,372
  Buildings and improvements................................      84,697        84,697
  Leasehold improvements....................................     128,328       128,328
  Machinery and equipment...................................   1,452,699     1,309,439
  Transportation equipment..................................     226,340       258,074
  Office furniture and equipment............................      34,578        34,578
                                                              ----------    ----------
                                                               1,934,014     1,822,488
  Less accumulated depreciation.............................   1,161,868     1,143,341
                                                              ----------    ----------
          Property, plant and equipment, net................     772,146       679,147
                                                              ----------    ----------
OTHER ASSETS................................................       1,802         1,802
                                                              ----------    ----------
                                                              $4,325,486    $4,380,294
                                                              ==========    ==========
 
                         LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
  Cash overdraft............................................  $   64,932    $   70,680
  Accounts payable..........................................     131,438       186,685
  Line of credit/note payable...............................   4,009,034       680,000
  Accrued expenses..........................................      87,940       134,160
  Taxes payable.............................................      11,138        11,570
                                                              ----------    ----------
          Total current liabilities.........................   4,304,482     1,083,095
                                                              ----------    ----------
COMMITMENTS AND CONTINGENCIES...............................
                                                              ----------    ----------
STOCKHOLDER'S EQUITY:
  Common Stock, no par value; authorized shares,
     1,000; issued and outstanding shares, 100..............       1,000         1,000
  Additional paid-in capital................................     194,100       194,100
  Retained earnings (deficit)...............................    (174,096)    3,102,099
                                                              ----------    ----------
          Total stockholder's equity........................      21,004     3,297,199
                                                              ----------    ----------
                                                              $4,325,486    $4,380,294
                                                              ==========    ==========
</TABLE>
 
                       See Notes to Financial Statements.
 
                                      F-121
<PAGE>   161
 
                 SOUTHERN INDIANA WOOD PRESERVING COMPANY, INC.
 
                            STATEMENTS OF OPERATIONS
 
<TABLE>
<CAPTION>
                                                              SEVEN MONTHS       YEAR
                                                                 ENDED          ENDED
                                                                JULY 31,     DECEMBER 31,
                                                                  1998           1997
                                                              ------------   ------------
<S>                                                           <C>            <C>
Sales.......................................................   $6,567,727     $8,900,635
Cost of sales...............................................    5,071,098      7,538,546
                                                               ----------     ----------
  Gross profit..............................................    1,496,629      1,362,089
Selling, general and administrative expenses................      433,933        529,106
                                                               ----------     ----------
Income from operations......................................    1,062,696        832,983
                                                               ----------     ----------
Other income (expense):
  Interest income...........................................          947         10,966
  Interest expense..........................................      (32,491)        (5,132)
  Gain on sale of equipment.................................           --          5,000
  Miscellaneous income (expense)............................        1,297         (2,807)
                                                               ----------     ----------
     Other (expense) income, net............................      (30,247)         8,027
                                                               ----------     ----------
Net income..................................................   $1,032,449     $  841,010
                                                               ==========     ==========
</TABLE>
 
                       See Notes to Financial Statements.
 
                                      F-122
<PAGE>   162
 
                 SOUTHERN INDIANA WOOD PRESERVING COMPANY, INC.
 
                       STATEMENTS OF STOCKHOLDER'S EQUITY
 
<TABLE>
<CAPTION>
                                            NUMBER OF             ADDITIONAL
                                             COMMON     COMMON     PAID-IN      RETAINED
                                             SHARES      STOCK     CAPITAL      EARNINGS      TOTAL
                                            ---------   -------   ----------   ----------   ----------
<S>                                         <C>         <C>       <C>          <C>          <C>
BALANCE, DECEMBER 31, 1996................     100      $1,000     $194,100    $3,346,357   $3,541,457
  Net income..............................      --          --           --       841,010      841,010
  Distributions...........................      --          --           --    (1,085,268)  (1,085,268)
                                               ---      ------     --------    ----------   ----------
BALANCE, DECEMBER 31, 1997................     100       1,000      194,100     3,102,099    3,297,199
  Net income..............................      --          --           --     1,032,449    1,032,449
  Distributions...........................      --          --           --    (4,308,644)  (4,308,644)
                                               ---      ------     --------    ----------   ----------
BALANCE, JULY 31, 1998....................     100      $1,000     $194,100    $ (174,096)  $   21,004
                                               ===      ======     ========    ==========   ==========
</TABLE>
 
                       See Notes to Financial Statements.
 
                                      F-123
<PAGE>   163
 
                 SOUTHERN INDIANA WOOD PRESERVING COMPANY, INC.
 
                            STATEMENTS OF CASH FLOWS
 
<TABLE>
<CAPTION>
                                                              SEVEN MONTHS       YEAR
                                                                 ENDED          ENDED
                                                                JULY 31,     DECEMBER 31,
                                                                  1998           1997
                                                              ------------   ------------
<S>                                                           <C>            <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net income................................................   $1,032,449    $   841,010
  Adjustments to reconcile net income to net cash used in by
     operating activities:
     Depreciation and amortization..........................       78,024        121,416
     Gain on sale of equipment..............................           --         (5,000)
     Change in operating assets and liabilities:
       Receivables..........................................      105,495       (659,924)
       Inventory............................................       73,748       (708,084)
       Prepaid expenses and other...........................      (31,438)        11,577
       Cash overdraft.......................................       (5,748)        70,680
       Accounts payable.....................................      (55,247)       159,321
       Accrued expenses.....................................      (46,650)        11,778
                                                               ----------    -----------
          Net cash provided by (used in) operating
            activities......................................    1,150,633       (157,226)
                                                               ----------    -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
  Capital expenditures......................................     (171,023)      (260,417)
  Proceeds from sale of equipment...........................           --          5,000
                                                               ----------    -----------
          Net cash used in investing activities.............     (171,023)      (255,417)
                                                               ----------    -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
  Short-term borrowings.....................................    3,329,034        680,000
  Payments of distributions.................................   (4,308,644)    (1,085,268)
                                                               ----------    -----------
          Net cash used in financing activities.............     (979,610)      (405,268)
                                                               ----------    -----------
NET DECREASE IN CASH AND CASH EQUIVALENTS...................           --       (817,911)
                                                               ----------    -----------
CASH AND CASH EQUIVALENTS, beginning of period..............           --        817,911
                                                               ----------    -----------
CASH AND CASH EQUIVALENTS, end of period....................   $       --    $        --
                                                               ==========    ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
  Cash paid during the period for interest..................   $   32,491    $     5,132
                                                               ==========    ===========
</TABLE>
 
                       See Notes to Financial Statements.
 
                                      F-124
<PAGE>   164
 
                 SOUTHERN INDIANA WOOD PRESERVING COMPANY, INC.
 
                         NOTES TO FINANCIAL STATEMENTS
 
1. NATURE OF BUSINESS
 
     Southern Indiana Wood Preserving Company, Inc. (the "Company") (an Indiana
corporation) operates as a wood preserving Company specializing in producing
pressure, creosote treated wood products for private and government customers
located throughout the United States, primarily in the Midwest.
 
2. SIGNIFICANT ACCOUNTING POLICIES
 
USE OF ESTIMATES
 
     The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could vary from those estimates.
 
REVENUE RECOGNITION
 
     The Company recognizes revenues at the time of shipment of goods.
 
FINANCIAL INSTRUMENTS AND CREDIT RISK
 
     The Company operates in Indiana. However, the Company's accounts receivable
include other geographic regions of the United States. The terms of the sales
give rise to unsecured accounts receivable, as is common industry practice.
During the seven months ended July 31, 1998, 17.97% of sales were to one
government entity.
 
INVENTORY
 
     Inventory, consisting principally of trimmed and graded railroad ties, is
stated at the lower of cost or market. Cost is determined by the weighted
average cost method.
 
PROPERTY, PLANT AND EQUIPMENT
 
     The Company records property, plant and equipment at cost. Depreciation is
computed using straight-line and accelerated methods over the estimated useful
lives of the assets as follows:
 
<TABLE>
<S>                                                           <C>
Buildings...................................................      25 Years
Machinery and equipment.....................................  7 - 10 Years
Office furniture and equipment..............................  5 - 10 Years
Leasehold improvements......................................      10 Years
</TABLE>
 
     As assets are retired or otherwise disposed of, the cost and accumulated
depreciation are eliminated from the accounts, and any gain or loss is reflected
in the statement of income.
 
INCOME TAXES
 
     The Company operates as an S corporation. Accordingly, the income taxes for
the earnings of the Company are the responsibility of the owner; therefore,
these financial statements do not reflect any Federal or state income taxes.
 
                                      F-125
<PAGE>   165
                 SOUTHERN INDIANA WOOD PRESERVING COMPANY, INC.
 
                  NOTE TO FINANCIAL STATEMENTS -- (CONTINUED)
 
3. RECEIVABLES
 
     Receivables consist of the following at July 31, 1998 and December 31,
1997:
 
<TABLE>
<CAPTION>
                                                               JULY 31,    DECEMBER 31,
                                                                 1998          1997
                                                              ----------   ------------
<S>                                                           <C>          <C>
Trade receivables...........................................  $1,484,005    $1,545,035
Supplier receivables........................................      15,050        43,259
Other receivables...........................................         400           430
                                                              ----------    ----------
                                                               1,499,455     1,588,724
Less allowance for doubtful accounts........................      94,347        78,119
                                                              ----------    ----------
                                                              $1,405,108    $1,510,605
                                                              ==========    ==========
</TABLE>
 
4. INVENTORY
 
     Inventory consists of the following at July 31, 1998 and December 31, 1997:
 
<TABLE>
<CAPTION>
                                                               JULY 31,    DECEMBER 31,
                                                                 1998          1997
                                                              ----------   ------------
<S>                                                           <C>          <C>
Raw materials...............................................  $  384,726    $  143,140
Work in process.............................................   1,620,649     1,743,072
Finished goods..............................................      92,747       285,658
                                                              ----------    ----------
                                                              $2,098,122    $2,171,870
                                                              ==========    ==========
</TABLE>
 
5. OPERATING LEASES
 
     The Company leases production space under an agreement expiring May 1,
1999. Minimum future lease payments under the current lease agreement in effect
at July 31, 1998 are:
 
<TABLE>
PERIOD ENDING DECEMBER 31,
------------------------------------------------------------
<S>                                                           <C>
  1998......................................................  $10,031
  1999......................................................   11,034
                                                              -------
                                                              $21,065
                                                              =======
</TABLE>
 
     Total rental expense for the seven months ended July 31, 1998 and for the
year ended December 31, 1997 was $5,851 and $9,119, respectively.
 
6. LINE OF CREDIT AND SHORT TERM NOTE PAYABLE
 
     The Company has a revolving line of credit agreement with a bank. The line
of credit has a limit of $2,000,000 and is secured by the Company's trade
receivables and inventories. Interest is at prime (8.5% at July 31, 1998) which
is payable monthly. The outstanding principle at July 31, 1998 is $309,034.
 
     In July of 1998, the Company obtained a note payable in the amount of
$3,700,000 with a bank with a maturity date of August 23, 1998. Interest is at
prime and the outstanding balance at July 31, 1998 is $3,700,000. Both the
revolving line of credit and the short-term note payable were repaid in
connection with the transaction discussed in Note 10.
 
7. EMPLOYEE STOCK OWNERSHIP PLAN (ESOP)
 
     The Company has adopted a noncontributory cash employees' stock ownership
plan (ESOP) covering all full-time employees who have met certain service
requirements. The plan provides for discretionary
 
                                      F-126
<PAGE>   166
                 SOUTHERN INDIANA WOOD PRESERVING COMPANY, INC.
 
                  NOTE TO FINANCIAL STATEMENTS -- (CONTINUED)
 
contributions by the corporation up to the maximum amount permitted under
Internal Revenue Code. The plan has received IRS approval under Sec. 401(A) and
501(A) of the Internal Revenue Code.
 
     Total contributions made to the plan for the seven months ended July 31,
1998 and the year ended December 31, 1997 were $55,374 and $157,480,
respectively.
 
8. CONTINGENCIES
 
     The Company is subject to certain Federal, state and local environmental
laws and regulations relating to the use of creosote. Creosote is used in the
Company's manufacturing process to treat the ties so that they can withstand
exposure to outside elements. Creosote, a coal tar treated derivative, has been
recognized by environmental regulating agencies as a hazardous material. The
Company currently believes that it is in compliance with the environmental laws
and regulations surrounding creosote. The Company has not been notified of any
violations of the regulations by regulatory agencies.
 
9. FAIR VALUE OF FINANCIAL INSTRUMENTS
 
     The estimated fair values of financial instruments is determined in
accordance with the requirements of Statement of Financial Accounting Standards
No. 107, "Disclosures About Fair Value of Financial Instruments." The carrying
value of receivables, accounts payable, the line of credit and the short-term
note payable have been determined by the Company to approximate their fair value
using available market information and appropriate valuation methodologies.
 
10. SUBSEQUENT EVENT
 
     On May 21, 1998, the stockholders of the Company entered into an Agreement
and Plan of Reorganization (the "Agreement") with RailWorks Corporation. Under
the terms of the Agreement, the stockholders exchanged their stock of the
Company for cash and stock of RailWorks Corporation. The transaction was
completed on August 4, 1998.
 
                                      F-127
<PAGE>   167
 
                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
 
To U.S. Trackworks, Inc. and
Northern Rail Service and Supply Co.:
 
     We have audited the accompanying combined balance sheets of U.S.
TRACKWORKS, INC. AND NORTHERN RAIL SERVICE AND SUPPLY CO. (Michigan
corporations) as of July 31, 1998 and December 31, 1997, and the related
combined statements of operations, changes in stockholders' equity and cash
flows for the seven months ended July 31, 1998 and the years ended December 31,
1997 and 1996. These financial statements are the responsibility of the
Companies' management. Our responsibility is to express an opinion on these
financial statements based on our audits.
 
     We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
 
     In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of U.S. TRACKWORKS,
INC. AND NORTHERN RAIL SERVICE AND SUPPLY CO. as of July 31, 1998 and December
31, 1997, and the results of their operations and their cash flows for the seven
months ended July 31, 1998 and the years ended December 31, 1997 and 1996 in
conformity with generally accepted accounting principles.
 
                                          Arthur Andersen LLP
 
Nashville, Tennessee
October 2, 1998
 
                                      F-128
<PAGE>   168
 
                           U.S. TRACKWORKS, INC. AND
                      NORTHERN RAIL SERVICE AND SUPPLY CO.
 
                            COMBINED BALANCE SHEETS
 
<TABLE>
<CAPTION>
                                                               JULY 31,    DECEMBER 31,
                                                                 1998          1997
                                                              ----------   ------------
<S>                                                           <C>          <C>
                                        ASSETS
CURRENT ASSETS:
  Cash and cash equivalents.................................  $  211,440    $  124,522
  Accounts receivable.......................................     540,113       992,277
  Costs and estimated earnings in excess of billings on
     uncompleted contracts..................................      92,495       259,388
  Inventory.................................................     321,677       259,427
  Prepaid expenses..........................................      87,407        30,418
                                                              ----------    ----------
          Total current assets..............................   1,253,132     1,666,032
                                                              ----------    ----------
PROPERTY AND EQUIPMENT:
  Construction equipment....................................   1,095,748     1,012,099
  Transportation equipment..................................     471,957       468,783
  Office equipment..........................................      10,101        10,101
                                                              ----------    ----------
                                                               1,577,806     1,490,983
  Less accumulated depreciation.............................   1,083,252       995,245
                                                              ----------    ----------
          Property and equipment, net.......................     494,554       495,738
                                                              ----------    ----------
OTHER ASSETS, net...........................................       5,144        89,468
                                                              ----------    ----------
                                                              $1,752,830    $2,251,238
                                                              ==========    ==========
 
                         LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
  Accounts payable..........................................  $  236,480    $  611,430
  Current maturities of long-term debt......................          --        68,015
  Billings in excess of costs and estimated earnings on
     uncompleted contracts..................................       3,000        21,303
  Accrued expenses..........................................     139,882       113,447
  Line of credit............................................     500,000       465,000
  Short-term note payable...................................      96,311            --
                                                              ----------    ----------
          Total current liabilities.........................     975,673     1,279,195
DEFERRED COMPENSATION.......................................          --        83,135
LONG-TERM DEBT, net of current maturities...................          --        13,123
COMMITMENTS AND CONTINGENCIES...............................          --            --
                                                              ----------    ----------
          Total liabilities.................................     975,673     1,375,453
                                                              ----------    ----------
STOCKHOLDERS' EQUITY:
  Common Stock..............................................     431,550       431,550
  Additional paid-in capital................................      45,291        45,291
  Retained earnings.........................................     300,316       398,944
                                                              ----------    ----------
          Total stockholders' equity........................     777,157       875,785
                                                              ----------    ----------
                                                              $1,752,830    $2,251,238
                                                              ==========    ==========
</TABLE>
 
                  See Notes to Combined Financial Statements.
 
                                      F-129
<PAGE>   169
 
                           U.S. TRACKWORKS, INC. AND
                      NORTHERN RAIL SERVICE AND SUPPLY CO.
 
                       COMBINED STATEMENTS OF OPERATIONS
 
<TABLE>
<CAPTION>
                                                                                  YEAR ENDED
                                                       SEVEN MONTHS ENDED        DECEMBER 31,
                                                            JULY 31,        -----------------------
                                                              1998             1997         1996
                                                       ------------------   ----------   ----------
<S>                                                    <C>                  <C>          <C>
Revenues.............................................      $2,108,331       $4,814,005   $4,819,123
Cost of revenues.....................................       1,806,110        3,740,346    4,466,547
                                                           ----------       ----------   ----------
Gross profit.........................................         302,221        1,073,659      352,576
General and administrative expenses..................         277,924          736,138      442,754
                                                           ----------       ----------   ----------
Income (loss) from operations........................          24,297          337,521      (90,178)
                                                           ----------       ----------   ----------
Other income (expense):
  Interest income....................................             104              179          509
  Interest expense...................................         (23,029)         (40,841)     (38,555)
                                                           ----------       ----------   ----------
Other expense, net...................................         (22,925)         (40,662)     (38,046)
                                                           ----------       ----------   ----------
Net income (loss)....................................      $    1,372       $  296,859   $ (128,224)
                                                           ==========       ==========   ==========
</TABLE>
 
                  See Notes to Combined Financial Statements.
 
                                      F-130
<PAGE>   170
 
                           U.S. TRACKWORKS, INC. AND
                      NORTHERN RAIL SERVICE AND SUPPLY CO.
 
             COMBINED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
 
<TABLE>
<CAPTION>
                                             NUMBER OF              ADDITIONAL
                                              COMMON      COMMON     PAID-IN     RETAINED
                                              SHARES      STOCK      CAPITAL     EARNINGS      TOTAL
                                             ---------   --------   ----------   ---------   ---------
<S>                                          <C>         <C>        <C>          <C>         <C>
BALANCE, DECEMBER 31, 1995.................   43,155     $431,550    $45,291     $ 503,785   $ 980,626
  Distributions to stockholders............       --           --         --      (224,728)   (224,728)
  Net loss.................................       --           --         --      (128,224)   (128,224)
                                              ------     --------    -------     ---------   ---------
BALANCE, DECEMBER 31, 1996.................   43,155      431,550     45,291       150,833     627,674
  Distributions to stockholders............       --           --         --       (48,748)    (48,748)
  Net income...............................       --           --         --       296,859     296,859
                                              ------     --------    -------     ---------   ---------
BALANCE, DECEMBER 31, 1997.................   43,155      431,550     45,291       398,944     875,785
  Distributions to stockholders............       --           --         --      (100,000)   (100,000)
  Net income...............................       --           --         --         1,372       1,372
                                              ------     --------    -------     ---------   ---------
BALANCE, JULY 31, 1998.....................   43,155     $431,550    $45,291     $ 300,316   $ 777,157
                                              ======     ========    =======     =========   =========
</TABLE>
 
                  See Notes to Combined Financial Statements.
 
                                      F-131
<PAGE>   171
 
                           U.S. TRACKWORKS, INC. AND
                      NORTHERN RAIL SERVICE AND SUPPLY CO.
 
                       COMBINED STATEMENTS OF CASH FLOWS
 
<TABLE>
<CAPTION>
                                                           SEVEN MONTHS           YEAR ENDED
                                                               ENDED             DECEMBER 31,
                                                             JULY 31,        ---------------------
                                                               1998            1997        1996
                                                         -----------------   ---------   ---------
<S>                                                      <C>                 <C>         <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net income (loss)....................................      $   1,372       $ 296,859   $(128,224)
  Adjustments to reconcile net income (loss) to net
     cash provided by (used in) operating activities:
     Depreciation......................................         88,006         133,904     136,968
     Amortization......................................          1,189           2,000       2,124
     Gain from sales of property and equipment.........             --          (2,051)       (615)
     Changes in operating assets and liabilities:
       Accounts receivable.............................        452,164        (171,073)   (129,595)
       Costs and estimated earnings in excess of
          billings on uncompleted contracts............        166,893        (238,811)    (20,577)
       Inventory.......................................        (62,250)        (42,082)    (57,410)
       Prepaid expenses................................        (56,989)          3,395     (40,494)
       Accounts payable................................       (374,950)        447,676     (49,843)
       Billings in excess of costs and estimated
          earnings on uncompleted contracts............        (18,303)         21,303          --
       Accrued expenses................................         26,435          19,020    (116,927)
                                                             ---------       ---------   ---------
          Net cash (used in) provided by operating
            activities.................................        223,567         470,140    (404,593)
                                                             ---------       ---------   ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
  Proceeds from sales of property and equipment........             --          25,600       7,100
  Purchases of property and equipment..................        (86,822)       (215,511)    (64,995)
                                                             ---------       ---------   ---------
          Net cash used in investing activities........        (86,822)       (189,911)    (57,895)
                                                             ---------       ---------   ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
  Principal payments on long-term debt.................        (81,138)       (136,464)    (33,917)
  Proceeds from long-term debt.........................             --         133,219      26,634
  Line of credit borrowings (repayments), net..........         35,000         (25,000)    440,000
  Note payable -- related party borrowings
     (repayments), net.................................             --        (100,000)    100,000
  Principal payments on short-term note payable........        (10,922)             --          --
  Proceeds from short-term note payable................        107,233              --          --
  Distributions to stockholders........................       (100,000)        (48,748)   (224,728)
                                                             ---------       ---------   ---------
          Net cash (used in) provided by financing
            activities.................................        (49,827)       (176,993)    307,989
                                                             ---------       ---------   ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS...         86,918         103,236    (154,499)
CASH AND CASH EQUIVALENTS, beginning of period.........        124,522          21,286     175,785
                                                             ---------       ---------   ---------
CASH AND CASH EQUIVALENTS, end of period...............      $ 211,440       $ 124,522   $  21,286
                                                             =========       =========   =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
  Cash paid during the period for:
  Interest.............................................      $  23,029       $  20,878   $  33,283
                                                             =========       =========   =========
</TABLE>
 
                  See Notes to Combined Financial Statements.
 
                                      F-132
<PAGE>   172
 
                           U.S. TRACKWORKS, INC. AND
                      NORTHERN RAIL SERVICE AND SUPPLY CO.
 
                     NOTES TO COMBINED FINANCIAL STATEMENTS
 
1. NATURE OF BUSINESS
 
     U.S. Trackworks, Inc. (a Michigan corporation) operates as a construction
contractor, constructing, repairing and maintaining railroad tracks for private
and government customers located primarily in the Midwest United States. The
work is performed under various forms of contracts, including fixed-fee and
time-and-material contracts. Northern Rail Service and Supply Co. (a Michigan
corporation) operates in Michigan and provides maintenance services on railroad
tracks primarily under time-and-material contracts.
 
2. SIGNIFICANT ACCOUNTING POLICIES
 
PRINCIPLES OF COMBINATION
 
     These combined financial statements include the accounts and results of
operations of both U.S. Trackworks, Inc. and Northern Rail Service and Supply
Co., which are commonly owned. U.S. Trackworks, Inc. and Northern Rail Service
and Supply Co. are collectively referred to as the "Company." All significant
intercompany transactions and balances have been eliminated in combination.
 
CASH AND CASH EQUIVALENTS
 
     For purposes of the combined balance sheets and the combined statements of
cash flows, the Company considers cash and cash equivalents to include cash on
hand and highly liquid debt instruments with an original maturity of three
months or less.
 
INVENTORY
 
     Inventory, consisting principally of stored materials and parts to be used
for contracts, is stated at the lower of cost or market. Cost is determined by
the first-in, first-out (FIFO) method.
 
PROPERTY AND EQUIPMENT
 
     The Company records property and equipment at cost. Depreciation is
computed using the straight-line method over the estimated useful life of the
asset. Newly purchased equipment is depreciated over eight years and used
equipment is depreciated over five years. Repairs to existing equipment that
lengthen the asset's useful life are depreciated over three years.
 
     When assets are retired or otherwise disposed of, the cost and accumulated
depreciation are removed from the accounts and any gain or loss is reflected in
the combined statements of operations.
 
CONCENTRATION OF CREDIT RISK
 
     The Company's credit risk primarily relates to cash and accounts
receivable. Cash is primarily held in bank accounts. Accounts receivable
represent amounts due from the Company's customers. The Company performs
continual credit evaluations of its customers and, from time to time, an
individual customer's accounts receivable balance may represent a significant
portion of the Company's total accounts receivable balance. At July 31, 1998,
three customers individually accounted for 10% to 15% and in the aggregate
accounted for approximately 39% of the Company's total accounts receivable
balance. At December 31, 1997, one customer accounted for approximately 36% of
the accounts receivable balance.
 
REVENUE AND COST RECOGNITION
 
     The Company recognizes revenues from fixed-fee contracts using the
percentage-of-completion method, measured by the percentage of cost incurred to
date to management's estimated total cost for each contract. That method is used
because management considers total cost to be the best available measure of
progress on
 
                                      F-133
<PAGE>   173
                           U.S. TRACKWORKS, INC. AND
                      NORTHERN RAIL SERVICE AND SUPPLY CO.
 
             NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
 
the contracts. Changes in job performance, job conditions and estimated
profitability may result in revisions to cost and income, which are recognized
in the period in which the revisions are determined.
 
     Revenues from time-and-material contracts are recognized currently as the
work is performed.
 
     Contract costs include all direct material, labor and equipment costs
related to contract performance. General and administrative costs are charged to
expense as incurred. Provisions for estimated losses on uncompleted contracts
are made in the period in which such losses are determined.
 
     The asset, "Costs and estimated earnings in excess of billings on
uncompleted contracts", represents revenues recognized in excess of amounts
billed. The liability, "Billings in excess of costs and estimated earnings on
uncompleted contracts", represents billings in excess of revenues recognized.
 
INCOME TAXES
 
     The Company operates as an S Corporation. Accordingly, the income taxes
related to the earnings of the Company are the responsibility of the owners;
therefore, these combined financial statements do not reflect any federal or
state income taxes for the Company.
 
SINGLE BUSINESS TAX
 
     The Company is subject to a single business tax in its incorporated state
of Michigan. The tax is calculated on the apportioned activity of the Company in
Michigan and is included in general and administrative expenses in the
accompanying combined statements of operations.
 
USE OF ESTIMATES
 
     Management uses estimates and assumptions in preparing financial
statements. Those estimates and assumptions affect the reported amounts of
assets and liabilities, the disclosure of contingent assets and liabilities, and
the reported revenues and expenses. Actual results could vary from the estimates
that were assumed in preparing the financial statements.
 
3. ACCOUNTS RECEIVABLE
 
     Accounts receivable consist of the following at July 31, 1998 and December
31, 1997:
 
<TABLE>
<CAPTION>
                                                              JULY 31,   DECEMBER 31,
                                                                1998         1997
                                                              --------   ------------
<S>                                                           <C>        <C>
Contract receivables........................................  $497,956     $966,668
Retainage...................................................    42,157       25,609
                                                              --------     --------
                                                              $540,113     $992,277
                                                              ========     ========
</TABLE>
 
     Retained accounts receivable represents amounts retained by customers from
contract billings and are payable to the Company upon satisfactory completion of
contract terms. At July 31, 1998, all retainage was expected to be collected
within one year.
 
                                      F-134
<PAGE>   174
                           U.S. TRACKWORKS, INC. AND
                      NORTHERN RAIL SERVICE AND SUPPLY CO.
 
             NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
 
4. COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
 
     Information with respect to contracts in process at July 31, 1998 and
December 31, 1997:
 
<TABLE>
<CAPTION>
                                                              JULY 31,   DECEMBER 31,
                                                                1998         1997
                                                              --------   ------------
<S>                                                           <C>        <C>
Costs incurred on uncompleted contracts.....................  $416,459    $  730,843
Estimated earnings..........................................   158,638       352,761
                                                              --------    ----------
                                                               575,097     1,083,604
Less billings to date.......................................   485,602       845,519
                                                              --------    ----------
                                                              $ 89,495    $  238,085
                                                              ========    ==========
</TABLE>
 
     Contracts in process are included in the accompanying combined balance
sheets under the following captions at July 31, 1998 and December 31, 1997:
 
<TABLE>
<CAPTION>
                                                              JULY 31,   DECEMBER 31,
                                                                1998         1997
                                                              --------   ------------
<S>                                                           <C>        <C>
Costs and estimated earnings in excess of billings on
  uncompleted contracts.....................................  $92,495      $259,388
Billings in excess of costs and estimated earnings on
  uncompleted contracts.....................................   (3,000)      (21,303)
                                                              -------      --------
                                                              $89,495      $238,085
                                                              =======      ========
</TABLE>
 
5. LINE OF CREDIT
 
     The Company has a revolving line of credit agreement collateralized by the
assets of the Company with a credit limit of $550,000. The line of credit bears
interest at the prime rate plus  1/2% (9% at July 31, 1998) which is payable
monthly. The Company is subject to ongoing compliance with financial and other
covenants under the line of credit, all of which the Company is in compliance or
has obtained appropriate waivers at July 31, 1998. During the seven months ended
July 31, 1998 and the year ended December 31, 1997, the weighted average amount
outstanding on the line of credit was approximately $460,000 and $360,000,
respectively, and the maximum amount outstanding was approximately $645,000 and
$590,000, respectively. At July 31, 1998 and December 31, 1997, the balance
outstanding under the line of credit is $500,000 and $465,000, respectively, and
is due on demand. The line of credit was paid off in connection with the
subsequent event discussed in Note 12.
 
6. LONG-TERM DEBT
 
     Long-term debt consists of the following at July 31, 1998 and December 31,
1997:
 
<TABLE>
<CAPTION>
                                                              JULY 31,   DECEMBER 31,
                                                                1998         1997
                                                              --------   ------------
<S>                                                           <C>        <C>
Long-term note, paid off in 1998............................    $--        $24,416
Long-term note, paid off in 1998............................     --         19,096
Long-term note, paid off in 1998............................     --         15,886
Unsecured long-term note, paid off in 1998..................     --         21,740
                                                                ---        -------
                                                                 --         81,138
Less current maturities.....................................     --         68,015
                                                                ---        -------
                                                                $--        $13,123
                                                                ===        =======
</TABLE>
 
                                      F-135
<PAGE>   175
                           U.S. TRACKWORKS, INC. AND
                      NORTHERN RAIL SERVICE AND SUPPLY CO.
 
             NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
 
7. BENEFIT PLANS
 
     The Company participates in a defined contribution pension plan for certain
union employees. The plan provides benefits to all employees covered under the
union's collective bargaining agreement. The benefits are based upon the number
of hours worked. The Company's practice is to fund amounts that are tax
deductible and that are required by statute and applicable regulations. The
Company contributed $15,460 related to the seven months ended July 31, 1998 and
$33,167 and $31,118 related to the 1997 and 1996 plan years, respectively.
 
     The Company participates in a discretionary contribution pension plan for
certain union employees. The plan provides for annual contributions at the
discretion of management during years when the Company generates a profit. The
Company contributed $7,000 related to the seven months ended July 31, 1998 and
approximately $12,000 for both the 1997 and 1996 plan years.
 
     The Company maintains a non-contributory profit sharing plan for all
non-union employees. The plan provides for annual contributions of up to 15% of
wages earned during years when the Company generates a profit. The Company
contributed $13,320 for the seven months ended July 31, 1998 and $20,952 for the
1997 plan year. No plan contributions were made in 1996.
 
     The Company maintains a 401(k) plan for certain employees of the Company
that is funded by these employees through payroll deductions. The Company does
not make any contributions to this plan.
 
     The Company also maintained life insurance policies on certain management
personnel. These policies were designed to transfer to the insured personnel
upon retirement and were included in deferred compensation in the accompanying
combined balance sheet at December 31, 1997. During the seven months ended July
31, 1998, the Company transferred these policies to the insured personnel.
 
8. COMMON STOCK
 
     Common Stock consists of the following at July 31, 1998 and December 31,
1997:
 
<TABLE>
<CAPTION>
                                                              JULY 31,   DECEMBER 31,
                                                                1998         1997
                                                              --------   ------------
<S>                                                           <C>        <C>
U.S. Trackworks, Inc. -- $10 par value; 45,000 shares
  authorized, 26,314 shares issued and outstanding..........  $263,140     $263,140
Northern Rail Service and Supply Co. -- $10 par value;
  16,841 shares authorized, issued and outstanding..........   168,410      168,410
                                                              --------     --------
                                                              $431,550     $431,550
                                                              ========     ========
</TABLE>
 
9. RELATED PARTY TRANSACTIONS
 
     Two management companies that are owned by a member of management provide
certain management services to the Company, as well as lease office space and
equipment to the Company. The Company incurred management fees to these
management companies of approximately $48,000, $450,000 and $225,000 in the
seven months ended July 31, 1998 and the years ended December 31, 1997 and 1996,
respectively.
 
     The Company maintains a relationship with a subcontracting Company that is
owned by a stockholder of the Company. Fees paid to the subcontractor in the
seven months ended July 31, 1998 and December 31, 1997 were approximately $6,200
and $80,000, respectively. No fees were paid in 1996.
 
                                      F-136
<PAGE>   176
                           U.S. TRACKWORKS, INC. AND
                      NORTHERN RAIL SERVICE AND SUPPLY CO.
 
             NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
 
10. COMMITMENTS AND CONTINGENCIES
 
LEASES
 
     The Company leases certain equipment under a noncancellable operating lease
that expires in 1998. The remaining commitment under this operating lease was
$4,365 and $14,550 at July 31, 1998 and December 31, 1997, respectively. Rent
expense for the seven months ended July 31, 1998 and for the years ended
December 31, 1997 and 1996 amounted to $24,232, $70,134 and $130,777,
respectively.
 
LITIGATION
 
     The Company is engaged in various lawsuits arising in the ordinary course
of business. In the opinion of management, based upon the advice of counsel, the
ultimate outcome of these lawsuits will not have a material impact on the
Company's financial statements.
 
11. FAIR VALUE OF FINANCIAL INSTRUMENTS
 
     The following estimated fair values of financial instruments is made in
accordance with the requirements of Statement of Financial Accounting Standards
No. 107, "Disclosures About Fair Value of Financial Instruments." The estimated
fair value amounts have been determined by the Company using available market
information and appropriate valuation methodologies.
 
CASH, ACCOUNTS RECEIVABLE AND ACCOUNTS PAYABLE
 
     The carrying amounts of these Items are a reasonable estimate of their fair
value due to their short-term nature.
 
LINE OF CREDIT AND LONG-TERM DEBT
 
     The carrying amount of the line of credit facility approximates fair value
as the interest rate fluctuates with changes in market conditions. The carrying
amount of long-term debt, based on borrowing rates currently available to the
Company, is a reasonable estimation of fair value.
 
12. SUBSEQUENT EVENT
 
     On May 21, 1998, the stockholders of the Company entered into an Agreement
and Plan of Reorganization (the "Agreement") with RailWorks Corporation. Under
the terms of the Agreement, the stockholders exchanged their stock of the
Company for cash and stock of RailWorks Corporation. The transaction was
completed on August 4, 1998.
 
                                      F-137