<PAGE>

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                                 UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION

                             Washington, D.C. 20549

                                   Form 10-K

                Annual Report Pursuant to Section 13 or 15(d) of
                      The Securities Exchange Act of 1934

For the fiscal year ended                           Commission File No. 0-22145
    December 31, 1999

                             RWD TECHNOLOGIES, INC.
               (Exact name of registrant as specified in charter)

        Maryland                                               52-1552720
(State or other jurisdiction of                               (IRS employer
 incorporation or organization)                             identification No.)

10480 Little Patuxent Parkway, Columbia, Maryland                 21044
(Address of principal executive office)                         (Zip Code)


      Registrant's telephone number, including area code:  (410) 730-4377

          Securities Registered Pursuant to Section 12(b) of the Act:
                                      None

          Securities Registered Pursuant to Section 12(g) of the Act:

                                Title of Class:
                                ---------------

                     Common Stock, par value $.10 per share

     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 [ ].

     As of March 10, 2000, the aggregate market value of the voting stock held
by nonaffiliates was approximately $43,682,000.

     As of March 10, 2000, 14,787,601 shares of Common Stock were outstanding.

                      DOCUMENTS INCORPORATED BY REFERENCE
     Specified portions of the definitive Proxy Statement for the Annual Meeting
of Stockholders, of RWD Technologies, Inc., are incorporated by reference in
Part III.

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<PAGE>

                             RWD TECHNOLOGIES, INC.
                                   FORM 10-K

                               TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                       Page
<S>        <C>                                                         <C>
                                     PART I

ITEM 1.    BUSINESS....................................................  1

ITEM 2.    PROPERTIES..................................................  9

ITEM 3.    LEGAL PROCEEDINGS...........................................  9

ITEM 4.    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.........  9

                                    PART II

ITEM 5.    MARKET FOR THE COMPANY'S COMMON EQUITY AND
           RELATED STOCKHOLDER MATTERS ...............................  10

ITEM 6.    SELECTED CONSOLIDATED FINANCIAL DATA.......................  11

ITEM 7.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
           CONDITION AND RESULTS OF OPERATIONS .......................  12

ITEM 7A.   QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK..  20

ITEM 8.    FINANCIAL STATEMENTS.......................................  20

ITEM 9.    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
           AND FINANCIAL DISCLOSURE ..................................  20

                                   PART III

ITEM 10.   DIRECTORS AND EXECUTIVE OFFICERS OF RWD TECHNOLOGIES, INC..  20

ITEM 11.   EXECUTIVE COMPENSATION.....................................  20

ITEM 12    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
           AND MANAGEMENT.............................................  21

ITEM 13.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............  21

                                   PART IV

ITEM 14.   EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
           REPORTS ON FORM 8-K .......................................  22

SIGNATURES............................................................  23

</TABLE>

                                       i
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                                     PART I

Item 1.  Business

  RWD Technologies, Inc., ("RWD" or the "Company") provides a broad range of
integrated solutions designed to improve the productivity and effectiveness of
workers in complex operating environments. As the scope and complexity of
technology used by businesses accelerates and the global business environment
becomes more competitive, companies are increasingly focused on maximizing the
return on their advanced technology and e-Commerce investments. To achieve this
goal, companies must ensure their employees receive effective support, including
information systems, performance support tools, manufacturing processes,
documentation systems, and training to operate these advanced systems
effectively.

  Since the Company's founding in 1988, it has expanded its key service areas to
meet the needs of its clients and to address market demands. The Company's
principal service areas are: Information Technology Services, Enterprise
Resource Planning Services, Lean Manufacturing Consulting, and Technology
Performance Support. Within these four key service areas, the Company delivers a
broad array of solutions to its clients including:

 . Enterprise Relationship Management ("ERM") systems
 . Web-based solutions for workplace performance support
 . Enterprise Resource Planning ("ERP") services
 . Lean manufacturing consulting
 . Custom software development
 . Knowledge management systems and services
 . Project management consulting
 . Change management
 . Distance learning
 . Plant and manufacturing line start-up and troubleshooting services
 . Electronic and traditional training and documentation solutions

  Examples of specific solutions RWD provides to its clients are
Internet/intranet applications, enhanced user interface ("EUI") systems,
electronic performance support systems ("EPSS"), electronic document management
systems ("EDMS"), machinery diagnostic systems and sales force automation.

  The Company's services are designed to improve its clients' product quality,
worker productivity, and competitiveness and to ensure its clients receive an
attractive return on their technology investments. RWD's services integrate
comprehensive expertise in information technology, enterprise resource planning
("ERP") software implementation services, performance support, and lean
manufacturing consulting in a coordinated manner, with services customized to
the individual needs of each client. The Company believes its focus on end user
performance, embedded in all its service offerings, differentiates the Company
from many of its competitors in the e-Commerce planning, performance support,
and information technology services marketplaces. The Company's registered
service mark, "We bring people and technology together," succinctly describes
the Company's unique focus.

  RWD was founded in January 1988 by Dr. Robert W. Deutsch and co-founded by Mr.
John H. Beakes. For the 21 years prior to founding RWD, Dr. Deutsch was the
Chief Executive Officer of General Physics Corporation, a company he founded
while a professor of nuclear science and engineering at The Catholic University
of America in Washington, D.C. Mr. Beakes is a graduate of the U.S. Naval
Academy and served for 8 years in the U.S. Navy's Nuclear Submarine Service. He
joined General Physics in 1974 and had advanced to the position of Executive
Vice President and Chief Operating Officer by 1985. A change of control and
resulting shift in operating philosophy precipitated Dr. Deutsch's and Mr.
Beakes' decision to leave General Physics at the end of 1987.

  Dr. Deutsch and Mr. Beakes believed large U.S. industrial companies were
making substantial investments in automation and other advanced operating
technologies but achieving relatively low returns on those investments. They
concluded this was the result of plant workers having inadequate training and
performance support systems. Dr. Deutsch and Mr. Beakes formed RWD with the
objective of applying proven performance support methodologies to large U.S.
industrial companies. The Company's first significant client was Chrysler.

                                       1
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  The Company's client list represents clients in more than 25 industries
including the automotive industry, financial and banking, telecommunications,
consumer products, equipment manufacturing, pharmaceutical, and petrochemical
industries, among others. The Company targets selected industries where its
extensive experience matches the unique needs of clients in specific industries.
During 1999, the Company established three Industry Centers of Excellence
(ICOEs) for concentrated focus: Automotive Manufacturing, Pharmaceuticals, and
Petroleum & Chemicals. This strategic industry focus brings together teams with
special industry expertise and draws on the full range of services RWD has to
offer to provide solutions tailored to specific industries.


RWD's Services

  The Company's services and solutions are outlined below in four business
segment descriptions: Information Technology Services, Enterprise Resource
Planning Services, Lean Manufacturing Consulting, and Technology Performance
Support which represented 27.1, 29.9, 18.0, and 25.0 percent, respectively, of
the Company's 1999 revenue. Solutions delivered by the Company often are
associated with more than one of the four identified business segments. For
example, solutions delivered outside of the information technology segment, such
as in ERP, frequently have significant information technology components, such
as Web-based documentation, on-line help and knowledge management systems,
packaged software implementation and configuration and electronic performance
support. The Company's ability to deliver integrated solutions that leverage the
full breadth of its expertise in such areas as information technology, end user
support, performance analysis and documentation is a significant differentiation
and competitive advantage.

  Information Technology Services.  Information Technology services generated
$22.8 million (or 26.5 percent), $27.1 million (or 23.6 percent), and $33.7
million (or 27.1 percent) of RWD's total revenue in 1997, 1998, and 1999,
respectively. The Company's services in this domain include next generation Web-
based solutions and a full spectrum of supporting technologies and services to
include strategic consulting, custom software development, packaged software
integration and implementation, and operations and maintenance services. RWD has
significant expertise in Web-based technologies as platforms for communication
and information transfer in a variety of industries. These projects include the
deployment of full service e-Commerce sites, developing intranets, and designing
remote diagnostic information systems and their support infrastructure. RWD's
solutions also include Web-based information systems; the design and
implementation of customized enhanced user interface (``EUI'') systems;
electronic performance support systems (``EPSS''); and electronic document
management systems (``EDMS''); all of which enhance  the end user's access to
critical information. RWD's information technology solutions also include
customer relationship management ("CRM") systems; Internet/intranet technology
solutions; remote worker automation; machinery diagnostics; client/server
applications development; e-Commerce and training products; systems integration;
knowledge management systems; and strategic consulting. RWD has extensive
packaged software implementation capabilities, and its services in this area
support partnerships or alliances with Documentum, Siebel, Lotus, Netscape,
Microsoft, POINT, DLB, Dataware, and other industry leaders. The Company has
also developed Web-based, real-time learning technologies that "latch on" to
existing enterprise and customer relationship management solutions in order to
reduce the end user's time to competency in these and other custom developed
applications.

  The following are examples of the Company's Information Technology solutions:

  . RWD created and implemented a sophisticated customer service system for one
    of the world's largest broadband communications companies. This application
    helps position the client as a leading provider of cable television,
    telephony, and high-speed data services for new customers around the world,
    while providing exemplary service for today's customers.

  . A major automobile manufacturer asked RWD to build an intranet-based service
    system to help its dealers diagnose and repair automobiles. By providing
    service-bay technicians with up-to-date repair information from a
    centralized repository, this system, one of the world's largest Web-based
    Java application implementations, dramatically increased the speed of
    information dissemination, technician repair efficiency and accuracy, plus
    improved brand loyalty and customer satisfaction.

  . RWD designed and developed an extensive Web-based knowledge management
    system for a major consumer durables company that enables employer and
    partner companies to collaboratively share product, engineering,
    manufacturing, and marketing information.

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<PAGE>

  . RWD implemented an e-Commerce PC-based home banking system that has been
    deployed by several financial institutions to provide their customers with a
    PC-based banking and bill paying service.

  . RWD helped a large retail financial institution to implement an integrated
    customer relationship management strategy aimed at integrating processes,
    technologies and channels of customer interaction to improve customer
    relations and provide consistent high-quality service across channels
    through a state-of the-art Customer Interaction Center.

  . RWD is working with a pool manufacturer to identify and capture business
    objectives and define a comprehensive strategy to advance their competitive
    position using the Internet. Using RWD's expertise in strategic analysis,
    the Company is assisting its client through the development of an effective
    approach to increase revenue and sales through site advertising and lead
    generation, integrate Internet solutions with back office finance and supply
    chain systems, and enhance its brand and positioning.

  Enterprise Resource Planning Services.  ERP services generated $18.2 million
(or 21.3 percent), $38.4 million (or 33.5 percent), and $37.3 million (or 29.9
percent) of RWD's total revenue in 1997, 1998, and 1999, respectively.
Capitalizing on its end user focus and performance support expertise, RWD has
developed a growing service area supporting the implementation of enterprise-
wide software applications, principally software from SAP, the world's leading
ERP software company. During 1999, the Company also expanded its support to
organizations implementing PeopleSoft, Oracle, and other custom ERP
applications.

  RWD provides its services through a wide array of tools and accelerators;
those supplied by the applications providers and those developed by the Company.
The use of these accelerators and tools substantially enhance the efficiency and
effectiveness of the development and deployment of end user performance support
solutions. The Company uses its unique end user support approach to support ERP
software implementation efforts of Fortune 1,000 companies. This approach is
designed to ensure that system end users have the knowledge, skills, and tools
necessary to operate effectively during and after ERP software implementations.

  In addition to its end user performance support solutions, RWD developed and
deployed a range of consulting services designed to optimize performance of the
enterprise applications. These post implementation optimization services provide
our clients with a rapid assessment of performance improvement opportunities
associated with their organization, user population, technology applications and
business processes.

  The Company's services to clients implementing enterprise systems include:

  . End user support services, including context-sensitive on-line help systems,
    electronic document management, electronic performance support systems, e-
    Learning, knowledge management, end user training and support strategies,
    SAP R/3 Knowledge Warehouse implementations, PeopleSoft End User Training
    Product implementations, training delivery and evaluation, and Web-based
    solutions.

  . Implementation services, such as implementation planning, project
    management, data conversion, hardware and software installation, prototyping
    and cycle testing, and system configuration, integration and rollout.
    Implementation support focuses on support for SAP R/3 version 4.6 upgrades,
    mySAP.com implementation support, along with support for deployment of SAP's
    new dimension products.

  . Consulting services, such as post implementation optimization and support,
    business process analysis and mapping, information planning, organization
    performance assessments, and strategic planning.

    In 1999, the Company leveraged its relationship with SAP and unique
expertise with InfoDB/Knowledge Warehouse and established a second laboratory in
the U.K. This laboratory, like the original laboratory in the U.S., is used to
demonstrate SAP's InfoDB/Knowledge Warehouse product, to jointly market
implementation services with SAP, and to provide services directly to SAP. The
Company is also a designated service partner of PeopleSoft and has also provided
end user support services to clients implementing Oracle and i2 software.

                                       3
<PAGE>

  Lean Manufacturing Consulting.  Lean Manufacturing Consulting services
generated $12.9 million (or 15.1 percent), $18.2 million (or 15.8 percent),
and $22.3 million (or 18.0 percent) of total revenue in 1997, 1998, and 1999,
respectively. RWD is a leading provider of lean manufacturing expertise to
industry. Lean manufacturing is an integrated operational system, developed and
refined by the Japanese over many years, which addresses all aspects of
manufacturing operations and results in high quality products, low cost and
timely delivery. The system is comprised of a number of elements that eliminate
waste, support the individual operator, and promote continuous improvement. The
Company's Lean Manufacturing service offerings include developing and deploying
improvements to the entire production system through all levels of the
organization. Not limited to the plant floor, this is an enterprise-wide systems
approach to continuous improvement. RWD also designs, develops and presents
specialized lean manufacturing training workshops to illustrate and teach the
benefits of lean manufacturing and help organizations recognize the need for
change.

  The major components of lean manufacturing include high machine reliability,
level production, just-in-time material control, ``stop-the-line'' operating
procedures, and the human systems that support this manufacturing philosophy.
This system combines many elements, many of which are specific, simple-to-
understand tools such as error-proofing, standardized work procedures, and
housekeeping techniques. Implementation of the entire process becomes a complex
and lengthy undertaking because all elements must be implemented together over
time to achieve the full benefits of this approach. RWD provides lean
manufacturing implementation guidance through a team of experts who have
substantial experience using and deploying this systems approach to
manufacturing.

  The following is an example of the Company's Lean Manufacturing Consulting
projects:

  . A major automotive manufacturer asked RWD to deploy lean techniques across
    their manufacturing facility during a new vehicle launch. Working directly
    with the plant personnel, RWD formed a "Core Team" to deploy lean principles
    throughout the plant, address change management, and begin the knowledge
    transfer process. The team leveraged standardized work and the Andon
    Principles as the main drivers and implemented a 100 percent smart card
    "Kanban" part system to control the flow of material through the plant. The
    implementation of lean principles at this facility resulted in significant
    quality improvements over previous launches. Productivity improvements
    resulted in savings of $3.4 million annually. Material flow improvements
    reduced work-in-process by $2.5 million. Based on the outstanding success of
    the effort, this manufacturer is now working with RWD to integrate lean
    concepts into several new vehicle programs.

  Technology Performance Support.  Technology Performance Support services
generated $31.8 million (or 37.1 percent), $31.0 million (or 27.1 percent),
and $31.1 million (or 25.0 percent) of RWD's total revenue in 1997, 1998, and
1999, respectively. RWD provides a broad range of end user performance support
services. These services encompass the design, development, and delivery of
information to end users of technology and complex equipment and use the full
spectrum of electronic as well as paper-based delivery technologies, including
designing and presenting classroom and plant floor training; developing and
managing hard copy training materials, technical procedures, and documentation;
designing and developing customized job aids; and acting as plant floor
consultants to ensure proper integration of equipment and systems and reduction
of plant downtime. RWD uses a performance-based approach to training and
documentation that focuses on streamlining training content to include only the
information required to perform each task effectively.

  During 1999, RWD expanded its technology performance support offerings to
include Internet enabled Web-based training delivery and knowledge management.
This strategy enabled RWD to provide considerable value to clients through
industry-customized application of its cutting-edge capabilities in areas such
as expert knowledge capture, lessons learned systems, implementation of best
practices, accelerated learning, process optimization, global standardization,
systems implementation support, and change management.

  RWD's performance support services are delivered to many industries including
automotive, pharmaceuticals and biotechnology, petroleum and chemicals,
telecommunications, and consumer products. The following are examples of the
Company's Technology Performance Support projects:

  . Since 1990, RWD has worked with the major U.S. automobile manufacturers to
    provide technical training to the manufacturers' plant-floor workers in
    locations worldwide. This training is designed to increase worker competency
    in connection with the launch of new and redesigned vehicles. RWD's
    customized performance-based training programs have resulted in
    significantly reduced classroom time and training costs. RWD also implements
    plant information systems, accelerates the time for product changeover, and
    helps launch new manufacturing lines.

                                       4
<PAGE>

  . Two major pharmaceutical companies engaged RWD to help reduce the time it
    takes to execute the drug discovery and clinical trials processes required
    to achieve FDA approval for new products. RWD has helped to streamline the
    information management processes and improved project management systems and
    skills. RWD also introduced new technology that leverages the Internet to
    help expedite these processes.

  . The merger of two major oil companies created the need to "harvest" highly
    valued knowledge resources so that they would not be lost forever as a
    result of the merger. RWD rapidly developed and implemented a knowledge
    management solution to capture over 100,000 knowledge assets (including
    documents, database records, and employee computer files) and make critical
    information easy to find and retrieve in the post-merger environment.


Industries and Clients Served

  The Company has provided services to clients in the following industries:

                                   Industries

<TABLE>

<S>                                      <C>                                  <C>
Aerospace                                Financial Services                   Photographic Film and Equipment
Automotive Equipment/Parts Manuf.        Furniture                            Publishing
Automotive Manufacturing                 Government                           Rubber Products
Biotechnology                            Hospitality                          Software
Chemical                                 Industrial Manufacturing             Telecommunications
Computers                                Package Delivery                     Utilities
Consumer Products                        Paper Products                       Wholesale/Retail
Education                                Petroleum
Electronics                              Pharmaceuticals
</TABLE>

                                       5
<PAGE>

  The following is a list of representative clients served by the Company during
1999. These clients generated, in the aggregate, more than 80 percent of the
Company's 1999 revenue.

                                    Clients

<TABLE>
<S>                     <C>                      <C>
Amerada Hess            Giddings & Lewis         PeopleSoft
AMP                     Goodyear                 Pioneer Hi-Bred
Bell Canada             Harvard University       POINT
Bell Atlantic           Hewlett Packard          Polaroid
Bell South              IBM                      Port Authority of NY & NJ
Bethlehem Steel         Incentive                Pratt Whitney
Chevron                 John Deere               Procter & Gamble
Citigroup               Kodak                    Roche Molecular Systems
Citgo ARCO              Kohler                   SAP America
Conectiv                Korn Ferry               Sealed Air
DaimlerChrysler         London Taxi              Sommer International
Dow Chemical            Lucent Technologies      Steelcase
Equistar (Lyondell)     MediaOne                 Tenneco
Ferro                   Merck                    Teradyne
Ford Motor Company      MetLife                  Vencor
Frito-Lay               Mobil Oil Corporation    Warner-Lambert
Fujitsu                 Moen                     World Bank
Genentech               NASD
General Motors          Pennzoil-Quaker State
</TABLE>

  In 1999, RWD provided services to 175 companies in more than 25 industries.
DaimlerChrysler, the Company's largest client, generated 28.1 percent, 22.4
percent, and 20.4 percent of total revenue in 1997, 1998, and 1999,
respectively. Ford generated 14.0 percent, 12.7 percent, and 10.9 percent of
total revenue in 1997, 1998, and 1999, respectively. No other client generated
more than 10 percent of total revenue in any of these periods. The Company's top
five clients in 1997, 1998, and 1999 generated an aggregate of 56.8 percent,
50.0 percent, and 43.5 percent, respectively, of total revenue in each of these
periods. Automotive industry clients generated an aggregate of 44.4 percent,
37.9 percent and 37.5 percent of total revenue in 1997, 1998, and 1999,
respectively.


Sales and Marketing

  RWD's business is principally developed by senior management and technical
personnel who manage client relationships and propose solutions for clients. In
addition, the Company has over 20 dedicated sales people with extensive
experience in the pharmaceutical, petroleum-chemical, automotive, and advanced
Internet technology industries specifically focused on business development.
Industry-focused RWD professionals, who work closely with clients to solve
complex technical problems, are best able to understand and communicate the
Company's skills and services to existing and prospective clients. This approach
also contributes to the Company's ability to establish and maintain long-term
client relationships. In addition to supporting existing client relationships,
RWD's senior management markets the Company's services at industry trade shows
and delivers presentations and papers at conferences. As a result, potential
clients in new and currently served industries have an opportunity to learn more
about Company services. The Company also actively seeks strategic relationships
with leading software companies whose high-quality products and need for
implementation expertise present significant opportunity for the Company. RWD's
primary business alliances include ones with SAP, Documentum, Siebel, Lotus,
POINT, Dataware, DLB, Microsoft, Netscape,  PeopleSoft, and Asymetrix.

                                       6
<PAGE>

Geographic Expansion

  The Company has often delivered solutions outside the U.S. for its domestic
multinational clients. From 1996 to 1999, international revenue expanded from
1.7 percent to 14.1 percent of total revenue. During 1998, the Company began
actively expanding its capabilities in continental Europe and the U.K.,
primarily by marketing directly to European companies and opening offices in the
U.K. These efforts to accelerate business overseas entail significant costs in
overhead and marketing, as well as high initial costs for expatriated personnel
to establish European operations. In 1997, the Company opened it's first office
in Birmingham, England, primarily to support Ford Motor Company's European lean
manufacturing initiatives. In 1998, RWD opened an office in the London area,
primarily to support European-based ERP initiatives. In 1999, RWD opened an
office in Walldorf, Germany, near SAP's world headquarters, which includes one
of the first SAP InfoDB labs in Europe. The Company believes the long-term
opportunities in international markets for its services are significant, and has
plans to extend its facilities in the future.


Competition

  The Company's service areas are highly competitive and subject to both low
barriers to entry and rapid change. The Company faces competition for client
assignments from a number of companies having significantly greater financial,
technical, and marketing resources and greater name recognition than RWD.
Principal competitors for the Company's services include the consulting
practices of the largest international accounting firms, as well as professional
services groups of many large technology and management consulting companies.
The Company also competes with smaller regional or local service providers,
whose specific, more narrowly focused service offerings may be more attractive
to potential clients of the Company. The Company also faces competition from
software companies, including its alliance organizations who, through their
client services groups, may choose to compete with RWD. In addition, clients may
elect to use internal resources to satisfy their needs for the services the
Company provides. The Company believes that the principal competitive factors in
its industry are quality of service, breadth of service offerings, reputation of
the service provider, and price. The Company believes it competes effectively
with respect to each of these factors.


Company Organization and Methodologies

  Project Management.  RWD's project management process is critical to the
Company's ability to satisfy its clients. The Company's proprietary project
management process is used throughout all phases of an engagement and includes
controls and review processes designed to ensure each project is delivered in a
high-quality, cost-effective, and timely manner. The project manager has primary
responsibility for the success of the engagement, including managing project
costs and staff schedules, service quality, and the client relationship. The
project manager is supported in these efforts by the project director, a
designated senior individual with extensive project management experience.
Project managers are certified by the Company only after completing a rigorous
one-year training process that includes classroom and on-the-job training and an
oral examination before senior Company management. The project management
process includes processes for identifying and assessing project risks, as well
as mechanisms to help the project manager communicate project challenges to the
project director and senior management before those challenges escalate. In
addition, the process places significant emphasis on client feedback through
regular client alignment meetings. These client review meetings ensure agreement
on project goals and expectations, leading ultimately to client satisfaction.
Once an engagement is completed, the Company assesses the extent to which the
project team met client expectations and evaluates the effectiveness of RWD's
project management process. The Company uses this analysis to support its
continuous improvement process, and market follow-on services.

  Technical and Management Skills Training.  The Company's employees have
diverse educational and employment backgrounds, including engineering, advanced
manufacturing, advanced Internet technologies, computer systems analysis and
design, technical writing and editing, and graphic arts. Many have advanced
degrees in a wide range of technical disciplines, including chemical, computer
systems, electrical, industrial, mechanical, nuclear, and software engineering;
instructional system design; and organizational development. This breadth of
expertise enables the Company's professionals to interact with and understand
the performance challenges encountered by client personnel across a broad range
of industries. The Company employed 1,101 persons as of December 31, 1999.

  The Company believes its use of internally developed, standardized tools and
methodologies and its strict adherence to a structured project management
process enable the Company to deliver consistent, high-quality services while
rapidly increasing the size of its workforce. The Company places significant
emphasis on training its employees to understand and apply the Company's service
methodologies and management processes. The Company uses a combination of more
than 200

                                       7
<PAGE>

hours of internally developed courses, as well as externally provided courses,
to provide this and other technical training. Employees are encouraged to become
trained in the Company's proprietary service methodologies. Employees also
participate in internal and external training in specific technologies such as
ERP software systems, object-oriented design, relational database design,
software configuration management, software programming languages (e.g., Visual
C++, Visual Basic, MacApp, Java and JavaScript), document management software,
and the software systems of its alliance organizations. Employees are encouraged
and provided with financial support to enroll in advanced training and degree
programs to increase their technical and management capabilities.

  Recruiting and Employee Retention.  RWD places significant emphasis on
attracting, developing, and retaining a highly skilled and motivated workforce.
The Company recruits personnel through a variety of methods, including on-campus
recruiting, Internet recruiting, postings at conferences, and advertising in
newspapers and technical publications. The Company actively recruits entry-level
personnel at selected college campuses and maintains a Web site targeted in part
to potential recruits. The Company has a policy of promoting from within
whenever appropriate and also actively recruits employees with in-depth
expertise in technical areas in which the Company currently provides services or
expects to provide services in the future. From time to time, the Company uses
technical recruiters to fill specific staffing needs. The Company engages a
limited number of technical personnel on a consulting basis when appropriate to
support particular client needs.

  The Company's culture, its emphasis on training, and the design of its
compensation structure have been developed to attract, develop, and retain
qualified and motivated professionals. The Company's culture is captured and
communicated through its Mission, Values, and Guiding Principles. Senior
management expends significant effort in communicating these principles to new
employees and to incorporating these values into the day-to-day operation of the
Company. The Company believes this effort has played a significant role in
maintaining its culture and guiding the actions of its employees. The Company
also strives to provide a challenging work environment and competitive employee
reward system. Additionally, the Company is committed to significant and broad-
based employee stock ownership, believing this maximizes employees' dedication
to the Company's growth and profitability. The Company's employees as of
December 31, 1999, held options to purchase, in aggregate, 4.5 million shares of
the Company's Common Stock.

  RWD believes these policies have resulted in an employee turnover rate which
compares favorably to its competitors. The Company's turnover rates in 1998 and
1999 were approximately 17.2 percent and 19.1 percent, respectively. The Company
considers its culture, morale, and employee motivation to be excellent and key
components of its success to date.


Intellectual Property and Other Proprietary Rights

  The Company relies on a combination of confidentiality and other contractual
arrangements and trade secret, copyright, and trademark laws to protect its
proprietary rights. The Company generally enters into confidentiality agreements
with its employees, alliance organizations, and clients, thereby seeking to
limit distribution of confidential and proprietary information. A substantial
majority of the Company's employees are not bound by confidentiality agreements
once their employment has been terminated, although the Company believes common
law generally prohibits these employees from disclosing to third parties
proprietary information of the Company. There can be no assurance that the steps
taken by the Company in this regard will be adequate to deter misappropriation
of proprietary information or that the Company will be able to detect
unauthorized use of and take steps to enforce its intellectual property rights.

  Ownership of software developed and other materials prepared by RWD in
connection with client engagements is usually assigned to the clients. The
Company retains the right to its general know-how and general applications such
as software diagnostic and development tools.

  The Company's registered service marks include "RWD Technologies, Inc." logo,
"RWD ProVision," "RWD PerformanceVision," "RWD InfoVision," "Continuous
Improvement by All Employees," and the phrase, "We bring people and technology
together," as well as various logos. Additionally, the Company has a number of
trade and service marks including "Globally Serving a High-tech World," "RWD
PBA," "RWD LeanVision," "RWD Multimedia Web Player," "RWD ProAction," "RWD User
Performance Pak," "RWD WILS" and "We bring people and technology together" (with
graphic). The Company holds no patents. The Company may file additional
copyright applications for certain software it develops in the future.

                                       8
<PAGE>

Risk Management

  The Company is subject to potential claims by dissatisfied clients that the
Company's services did not achieve the results expected by those clients or that
errors or omissions by the Company's employees contributed to disruptions in the
clients' operations. To mitigate this risk, RWD seeks to clearly articulate,
prior to commencement of each project, both the scope of services to be provided
and the solution to be achieved. The Company's Project Management methodology is
designed to minimize this risk by training all project management personnel on
particular ways to avoid the common pitfalls that are evident in all projects.
This methodology includes holding regular alignment meetings with each client
while services are being provided so that any problems can be discovered and
then corrected as early in the project as possible. This procedure is intended
to allow RWD to regularly ascertain and meet client expectations during all
phases of each project. In addition, in most cases, RWD's standard contract
terms limit the Company's liability to the amount of the fee payable to RWD
under the contract. Despite these procedures, it is possible that the Company
may become subject to a claim from a dissatisfied client, although the Company
has never been subject to litigation by a client arising out of RWD's services.

  The Company carries comprehensive general liability, property damage, director
and officer, and other insurance in amounts it considers either sufficient or
cost-effective to cover its insurable risks. In addition, the Company carries a
limited amount of professional liability insurance against claims by clients
related to services provided by RWD. The Company is self-insured with respect to
client claims in excess of the limits on its professional liability coverage.


Item 2.  Properties

  RWD leases approximately 128,300 square feet of space for its headquarters in
Columbia, Maryland. This lease expires on December 31, 2003. The Company leases
additional offices covering an aggregate of approximately 103,000 square feet in
Atlanta, Georgia; Auburn Hills, Michigan; Boston, Massachusetts; Cincinnati,
Ohio; Dearborn, Michigan; Houston, Texas; Lexington, Kentucky; Princeton, New
Jersey; Sacramento, California; San Ramon, California; Merritt Island, Florida;
Baltimore, Maryland; Maple Shade, New Jersey; Walldorf, Germany;  Birmingham,
England; and London, England.

  Historically, about half of the Company's employees have been located at its
Columbia, Maryland, headquarters. This trend is likely to continue, resulting in
continual expansion of required office space at the Columbia, Maryland, location
for the foreseeable future. In addition, expansion space will likely be required
at other existing locations and new locations.

  In 1999, the Company committed to lease a newly constructed, 40,000 square
foot facility on the campus of the University of Maryland, Baltimore County
("UMBC"). The facility will house RWD's new Applied Technology Laboratory. The
Applied Technology Laboratory will be designed to accommodate up to 200 people,
including RWD's personnel, students from UMBC, and RWD's client personnel
working to develop advanced Internet and information technology solutions for
its clients. Construction is scheduled to begin in 2000 and occupancy is
anticipated in the third quarter of 2001.

  The Company believes that additional office space will be required within the
next 12 months and that its leases can be renewed or alternative and expansion
space obtained as needed. In 1999, aggregate annual rent for the Company's
corporate headquarters and satellite offices was approximately $4.4 million.
From time to time, the Company uses office space provided at client sites to
facilitate performance of its services and to maximize client contact.


Item 3.  Legal Proceedings

  From time to time, the Company is a party to routine litigation in the
ordinary course of business. The Company is not currently a party to any
material litigation.


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

  No matters were submitted to a vote of security holders during the fourth
quarter ended December 31, 1999.

                                       9
<PAGE>

                                    PART II.

Item 5.  Market for The Company's Common Equity and Related Stockholder Matters

  The Company's Common Stock has traded on The Nasdaq Stock Market since its
initial public offering on June 19, 1997, under the symbol RWDT. The following
table sets forth, for each quarterly period indicated, the high and low last
sale price for the Common Stock as reported by The Nasdaq Stock Market.
<TABLE>
<CAPTION>

                                           High    Low
                                          ------  ------
<S>                                       <C>     <C>
       1997
       2nd Quarter (beginning June 19)..  $18.25  $16.88
       3rd Quarter......................   25.63   16.75
       4th Quarter......................   25.75   18.00

       1998
       1st Quarter......................   27.50   17.25
       2nd Quarter......................   28.00   22.69
       3rd Quarter......................   22.75   16.13
       4th Quarter......................   23.13   13.00


       1999
       1st Quarter......................   22.00   13.13
       2nd Quarter......................   18.00    9.63
       3rd Quarter......................   10.75    7.56
       4th Quarter......................   10.38    6.50

       2000
       1st Quarter (through March 10)...  $10.50  $ 8.00
</TABLE>

  No dividends were declared on the Company's Common Stock during the year ended
December 31, 1999, and the Company does not anticipate paying dividends in the
foreseeable future.

  The number of shareholders of record as of March 10, 2000, was 2,837.

                                       10
<PAGE>

Item 6.  Selected Consolidated Financial Data

  The following selected financial data should be read in conjunction with
``Management's Discussion and Analysis of Financial Condition and Results of
Operations,'' the Company's Financial Statements, and related Notes thereto and
other financial information included elsewhere in this 10-K. The balance sheet
and income statement data at and for the years ended December 31, 1995, 1996,
1997, 1998, and 1999, are derived from the Company's Financial Statements, which
have been audited by Arthur Andersen LLP, independent public accountants.

<TABLE>
<CAPTION>
                                                                         Year Ended December 31,
                                                ------------------------------------------------------------------------
                                                      1995           1996           1997          1998          1999
                                                  -------------  -------------  ------------  ------------  ------------
                                                                  (In thousands, except per share data)
<S>                                               <C>            <C>            <C>           <C>           <C>
Income Statement Data:
  Revenue.......................................       $47,132        $65,006        $85,670      $114,719      $124,433
  Cost of services..............................        35,269         48,132         60,785        80,763       100,482
                                                       -------        -------        -------      --------      --------
  Gross profit..................................        11,863         16,874         24,885        33,956        23,951
  General and administrative expenses...........         5,212          8,137         11,141        14,474        16,951
                                                       -------        -------        -------      --------      --------
  Operating income..............................         6,651          8,737         13,744        19,482         7,000
  Other income (expense), net...................          (121)          (123)           982         1,765         1,109
                                                       -------        -------        -------      --------      --------
  Income before taxes...........................         6,530          8,614         14,726        21,247         8,109
  Provision for income taxes....................           168            365          8,053         8,131         3,041
                                                       -------        -------        -------      --------      --------
  Net income....................................       $ 6,362        $ 8,249        $ 6,673      $ 13,116      $  5,068
                                                       =======        =======        =======      ========      ========
  Pro Forma Data1:
    Provision for income taxes..................       $ 2,612        $ 3,446        $ 5,725      $  8,131      $  3,041
    Net income..................................       $ 3,918        $ 5,168        $ 9,001      $ 13,116      $  5,068
                                                       =======        =======        =======      ========      ========
    Earnings per share:
     Diluted calculation........................         $0.32          $0.40          $0.62         $0.82         $0.33
                                                       =======        =======        =======      ========      ========
     Basic calculation..........................         $0.38          $0.47          $0.71         $0.88         $0.34
                                                       =======        =======        =======      ========      ========
    Weighted average shares outstanding.........
     Diluted calculation........................        12,348         13,030         14,470        16,016        15,503
                                                       =======        =======        =======      ========      ========
     Basic calculation..........................        10,220         10,902         12,747        14,895        14,769
                                                       =======        =======        =======      ========      ========

Balance Sheet Data (end of year):
  Cash and marketable securities................       $ 2,394        $ 5,534        $40,045      $ 51,224      $ 28,214
  Working capital...............................        11,439         12,053         49,381        66,399        47,065
  Total assets..................................        23,658         29,858         67,887        90,394        87,261
  Total debt....................................         6,500          3,925          1,101           865         1,669
  Stockholders' equity..........................        12,758         20,132         54,964        73,961        73,341
</TABLE>
_______
/1/ Prior to June 13, 1997, the Company was an S Corporation and, accordingly,
was not subject to federal and certain state corporate income taxes. The pro
forma information has been computed as if the Company were subject to federal
and all applicable state corporate income taxes for all periods presented.

                                       11
<PAGE>

Item 7.  Management's Discussion and Analysis of Financial Condition and Results
         of Operations

Overview

  RWD Technologies, Inc., provides a broad range of integrated solutions
designed to improve the productivity and effectiveness of workers in complex
operating environments. The Company's principal service segments are:
Information Technology Services, Enterprise Resource Planning Services, Lean
Manufacturing Consulting, and Technology Performance Support.

  The substantial majority of the Company's contracts are on a time-and-
materials basis, although many of these contracts contain initial ``not-to-
exceed'' fees and Company performance obligations. The remainder of the
Company's contracts are on a fixed-price basis, particularly those related to
the Company's Information Technology services. All revenue is recognized using
the percentage-of-completion method. The Company typically bills contracts
monthly, and senior management reviews outstanding accounts receivable balances
regularly to monitor client satisfaction and collections. Historically, a large
percentage of the Company's revenue has come from follow-on business from its
existing clients. For example, in each of the past five years, more than 80
percent of the year's total revenue was generated by clients who had been
clients in the previous year.

  Gross profit margins per project and professional staff utilization rates are
critical to the Company's financial performance. The Company manages these
parameters by carefully establishing and monitoring project budgets and
timetables and by closely tracking staffing requirements for projects in
progress and projects that are anticipated. The status of all projects in
progress and personnel utilization are reviewed semi-monthly by project
managers, first-line supervisors, and senior management to ensure client
satisfaction and to monitor performance relative to internal financial and
operating expectations. The number of professionals assigned to a project varies
according to the size, complexity, duration, and demands of the project.
Professional staff utilization rates vary from period to period not only because
of variations in the Company's volume of business, but because of the timing of
employee vacations, hiring and training, the amount of time spent by employees
on marketing, and project terminations or postponements.

  The Company continues its strategic relationships with several companies that
have become significant to the success of RWD and its growth in the past several
years. The Company has strategic alliances or partner status with software
companies and provides services to clients implementing software products of
SAP, as well as Documentum, Siebel, Lotus, POINT, Dataware, DLB, Microsoft,
Netscape, and PeopleSoft. These relationships are generally terminable upon
little or no notice, and an unanticipated change in the working relationship
with a strategic alliance organization could materially impact the Company's
results and prospects for future growth.

  The Company experienced a significant reduction in its business in the second
half of 1999, with a higher level of profitability in the first quarter of the
year. This resulted primarily from reduced staff utilization due to declining
demand for IT and ERP services in the second half of the year. In addition,
quarterly revenue growth and margins are substantially dependent on many
factors, which are outside of the Company's control, including the timing of new
contract awards, the timing of individual project start-ups, and the level of
activity with ongoing projects. Client engagements are generally terminable with
little or no notice or penalty, and a client's unanticipated decision to
terminate or postpone a project may result in revenue fluctuations as well as
higher than expected unassigned Company professionals or severance expenses.

  The principal components of cost of services are compensation and benefits to
the Company's professional staff. Cost of services also includes training and
travel expenses for the Company's professional staff, fees paid to
subcontractors, facilities costs, and depreciation of capital equipment provided
to the professional staff. Time devoted by professional personnel to marketing
is included in cost of services, as are costs associated with administrative
personnel who directly support the Company's professional staff. General and
administrative expenses are primarily composed of salaries for corporate,
accounting, dedicated sales and other headquarters executive and administrative
personnel, as well as other corporate overhead.

                                       12
<PAGE>

Results of Operations

  The following table sets forth, for the periods indicated, income statement
data expressed as a percentage of revenue and the percentage change in such
items versus the previous comparable period.

<TABLE>
<CAPTION>
                                                         Percentage of Revenue                  Percentage Increase (Decrease)
                                           -------------------------------------------------  -----------------------------------
                                                        Year Ended December 31,
                                           -------------------------------------------------
                                                1997             1998             1999          1997 to 1998      1998 to 1999
                                           ---------------  ---------------  ---------------  ----------------  -----------------
<S>                                        <C>              <C>              <C>              <C>               <C>
Revenue..................................      100.0%           100.0%           100.0%             33.9%              8.5%
Cost of services.........................       71.0             70.4             80.8              32.9              24.4
                                         -----------      -----------      -----------      ------------      ------------
Gross profit.............................       29.0             29.6             19.2              36.5             (29.5)
General and administrative expenses......       13.0             12.6             13.6              29.9              17.1
                                         -----------      -----------      -----------      ------------      ------------
Operating income.........................       16.0             17.0              5.6              41.7             (64.1)
Other income (expense), net..............        1.2              1.5              0.9              79.8             (37.2)
                                         -----------      -----------      -----------      ------------      ------------
Income before taxes......................       17.2             18.5              6.5              44.3             (61.8)
Provision for income taxes...............        9.4/1/           7.1              2.4               1.0/1/          (62.6)
                                         -----------      -----------      -----------      ------------      ------------
Net income...............................        7.8%            11.4%             4.1%             96.6%            (61.4)%
                                         ===========      ===========      ===========      ============      ============
Pro Forma Data/1/
  Provision for income taxes.............        6.7%             7.1%             2.4%             42.0%            (62.6)%
  Net income.............................       10.5%            11.4%             4.1%             45.7%            (61.4)%
                                         ===========      ===========      ===========      ============      ============
</TABLE>
--------------
/1/ During 1997, the Company converted from S corporation to C corporation tax
status and, as a result, recognized a $4.5 million charge to establish a
deferred tax liability. The pro forma information has been computed as if the
Company were subject to corporate income taxes for all periods.

Year Ended December 31, 1999, Compared to Year Ended December 31, 1998

  Prior to December 31, 1998, the Company reported revenue by service line
irrespective of the division or operating segment in which the revenue was
generated. Effective December 31, 1998, with the adoption of the Statement of
Financial Accounting Standards (SFAS) No. 131, "Disclosure about Segments of an
Enterprise and Related Information," the Company changed to reporting revenue by
operating segment as defined by Statement No. 131, instead of reporting revenue
by service line.

  Solutions delivered by the Company often can be associated with more than one
of the four identified business segments. For example, solutions delivered
outside of the Information Technology segment, such as in ERP, frequently have
significant information technology components, such as electronic information
delivery; Web-based documentation, on-line help and knowledge management
systems; packaged software implementation and configuration; and electronic
performance support. The Company's ability to deliver integrated solutions that
leverage the full breadth of its expertise in such areas as information
technology, end user support, performance analysis, and documentation is a
significant differentiator and competitive advantage. Nevertheless, the
Company's financial results reported herein have been categorized within the
operating business segments as required by SFAS No. 131.

  Revenue. Revenue for the total Company increased by $9.7 million (or 8.5
percent), from $114.7 million in 1998 to $124.4 million in 1999. Performance by
segment was as follows:

  . Information Technology Services. Revenue for the Company's Information
    Technology services increased by $6.7 million (or 24.6 percent), from $27.1
    million in 1998 to $33.7 million in 1999, representing 23.6 percent of the
    Company's total revenue in 1998 and 27.1 percent in 1999. A significant
    portion of this growth in 1999 was realized in the first half of the year.
    The second half of 1999 was materially impacted by several projects being
    delayed or cancelled as a result of concerns relative to clients' Y2K
    mitigation efforts.

  . Enterprise Resource Planning Services. Revenue for the Company's Enterprise
    Resource Planning services decreased by $1.2 million (or 3.1 percent), from
    $38.4 million in 1998 to $37.3 million in 1999, representing 33.5 percent of
    the Company's total revenue in 1998 and 29.9 percent in 1999. This segment
    also realized a significant downturn in revenue in the second half of 1999
    as a result of several projects being delayed or cancelled as a result of
    concerns relative to clients' Y2K mitigation efforts.

                                       13
<PAGE>

  . Lean Manufacturing Consulting Services. Revenue for the Company's Lean
    Manufacturing Consulting services increased by $4.2 million (or 22.9
    percent), from $18.2 million in 1998 to $22.3 million in 1999, representing
    15.8 percent of the Company's revenue in 1998 and 18.0 percent in 1999. This
    increase in revenue was attributable to growth in business with Ford, other
    automotive suppliers, and new lean manufacturing clients in Europe.

  . Technology Performance Support Services. Revenue for the Company's
    Technology Performance Support services increased by 0.2 percent, from $31.0
    million in 1998 to $31.1 million in 1999, representing 27.1 percent of the
    Company's total revenue in 1998 and 25.0 percent in 1999. This segment's
    minor growth was the result of two-thirds of the Company's performance
    support services revenue being derived from a mature relationship with the
    Company's largest client, DaimlerChrysler, which grew only slightly in 1999.

  The Company's total number of employees grew 11.4 percent, from 988 at the end
of 1998 to 1,101 at the end of 1999.

  Gross Profit. Gross profit for the total Company decreased by $10.0 million
(or 29.5 percent), from $34.0 million in 1998 to $24.0 million in 1999, and
decreased from 29.6 percent of revenue in 1998 to 19.2 percent of revenue in
1999. Gross profit for individual operating segments was as follows:

  . Information Technology Services. Gross profit for Information Technology
    services decreased by 38.0 percent from $9.9 million in 1998 to $6.2 million
    in 1999. Gross profit margin for Information Technology services decreased
    from 36.7 percent of this segment's revenue in 1998 to 18.3 percent in 1999.
    This decrease in gross profit and the gross profit margin resulted primarily
    from decreases in staff utilization as a result of diminished demand for
    services in the second half of the year.

  . Enterprise Resource Planning Services. Gross profit for Enterprise Resource
    Planning services decreased by 63.8 percent from $11.1 million in 1998 to
    $4.0 million in 1999. Gross profit margin for Enterprise Resource Planning
    services decreased from 28.8 percent of this segment's revenue in 1998 to
    10.7 percent in 1999. This decrease in gross profit and the gross profit
    margin resulted primarily from decreases in staff utilization as a result of
    diminished demand for services in the second half of the year.

  . Lean Manufacturing Consulting Services. Gross profit for Lean Manufacturing
    Consulting services increased by 10.5 percent from $6.1 million in 1998 to
    $6.7 million in 1999. Gross profit margin for Lean Manufacturing Consulting
    services decreased from 33.3 percent of this segment's revenue in 1998 to
    29.9 percent in 1999. This decrease in gross profit margin resulted
    primarily from an increased investment in European operations.

  . Technology Performance Support Services. Gross profit for Technology
    Performance Support services increased by 2.8 percent from $6.9 million in
    1998 to $7.1 million in 1999. Gross profit margin for Technology Performance
    Support services increased from 22.3 percent of this segment's revenue in
    1998 to 22.8 percent in 1999. This modest increase in gross profit margin
    resulted primarily from decreased employee-related expenses and a slight
    increase in employee staff utilization.

  General and Administrative Expenses.  General and administrative expenses
increased by $2.5 million (or 17.1 percent), from $14.5 million in 1998 to $17.0
million in 1999, increasing from 12.6 percent of total revenue in 1998 to 13.6
percent of total revenue in 1999. This increase in general and administrative
expenses as a percentage of revenue resulted primarily from slower growth in
revenue in 1999, and moderate increases in administrative staff salaries and
benefits.

  Operating Income.  As a result of the foregoing, the Company's operating
income decreased by $12.5 million (or 64.1 percent), from $19.5 million in 1998
to $7.0 million in 1999 and decreased from 17.0 percent of revenue in 1998 to
5.6 percent of revenue in 1999.

  Other Income.  Other income was $1.8 million in 1998 and $1.1 million in 1999.
In both periods, this income consisted primarily of interest income from cash
and investment balances. Cash and investment balances decreased in 1999 as a
result of the Merrimac acquisition and stock repurchases. As a result, interest
income from cash and investment balances declined from 1998 to 1999.

  Net Income.  Net income decreased by $8.0 million (or 61.4 percent), from
$13.1 million in 1998 to $5.1 million in 1999 decreasing from 11.4 percent of
revenue in 1998 to 4.1 percent of revenue in 1999.

                                       14
<PAGE>

Year Ended December 31, 1998, Compared to Year Ended December 31, 1997

  Solutions delivered by the Company often could be associated with more than
one of the four identified business segments. For example, solutions delivered
outside of the information technology segment, such as in ERP, frequently have
significant information technology components, such as electronic information
delivery; Web-based documentation, on-line help and knowledge management
systems; packaged software implementation and configuration; and electronic
performance support. The Company's ability to deliver integrated solutions that
leverage the full breadth of its expertise in such areas as information
technology, end user support, performance analysis and documentation is a
significant differentiator and competitive advantage. Nevertheless, the
Company's financial results are reported herein categorized within the operating
business segments as required by SFAS No. 131.

  Revenue.  Revenue for the total Company increased by $29.0 million (or 33.9
percent), from $85.7 million in 1997 to $114.7 million in 1998. Performance by
segment was as follows:

  . Information Technology Services. Revenue for the Company's Information
    Technology services increased by $4.3 million (or 19.0 percent), from $22.8
    million in 1997 to $27.1 million in 1998, representing 26.5 percent of the
    Company's total revenue in 1997 and 23.6 percent in 1998. Key factors in
    revenue increases included strong follow-on business with existing clients
    as well as business deriving from expansion into strategic IT consulting and
    alliance relationships.

  . Enterprise Resource Planning Services. Revenue for the Company's Enterprise
    Resource Planning services increased by $20.2 million (or 111.1 percent),
    from $18.2 million in 1997 to $38.4 million in 1998, representing 21.3
    percent of the Company's total revenue in 1997 and 33.5 percent in 1998.
    This rapid growth was due in part to strong demand in the market for the
    kind of services offered by the Company as well as the Company's alliances
    with SAP America and PricewaterhouseCoopers.

  . Lean Manufacturing Consulting Services. Revenue for the Company's Lean
    Manufacturing Consulting services increased by $5.3 million (or 40.5
    percent), from $12.9 million in 1997 to $18.2 million in 1998, representing
    15.1 percent of the Company's revenue in 1997 and 15.8 percent in 1998. The
    increase in revenue was attributable to growth in business with Ford and
    DaimlerChrysler and new lean manufacturing clients including clients outside
    of the automotive industry.

  . Technology Performance Support Services. Revenue for the Company's
    Technology Performance Support services decreased by 2.4 percent, from $31.8
    million in 1997 to $31.0 million in 1998, representing 37.1 percent of the
    Company's total revenue in 1997 and 27.1 percent in 1998. This decrease
    resulted primarily from two factors. First, two-thirds of the Company's
    performance support services revenue are derived from a mature relationship
    with the Company's largest client, DaimlerChrysler, which grew modestly in
    1998. Second, personnel assigned to the performance support area were
    transferred during the year to the ERP area to take advantage of the strong
    demand in ERP in 1998.

  The Company's total number of employees grew 24.9 percent, from 791 at the end
of 1997 to 988 at the end of 1998.

  Gross Profit.  Gross profit for the total Company increased by $9.1 million
(or 36.5 percent), from $24.9 million in 1997 to $34.0 million in 1998, and
increased from 29.0 percent of revenue in 1997 to 29.6 percent of revenue in
1998. This increase in gross profit margin resulted primarily from decreases as
a percent of revenue in fixed overhead costs, partially offset by lower staff
utilization and increases as a percent of revenue in employee-related expenses.
Gross profit for individual operating segments was as follows:

  . Information Technology Services. Gross profit for Information Technology
    services increased by 6.8 percent from $9.3 million in 1997 to $9.9 million
    in 1998. Gross profit margin for Information Technology services decreased
    from 40.9 percent of this segment's revenue in 1997 to 36.7 percent in 1998.
    This decrease in gross profit margin resulted primarily from decreases in
    staff utilization as well as increases as a percent of revenue in employee-
    related expenses.

  . Enterprise Resource Planning Services. Gross profit for Enterprise Resource
    Planning services increased by 132.1 percent from $4.8 million in 1997 to
    $11.1 million in 1998. Gross profit margin for Enterprise Resource Planning
    services increased from 26.2 percent of this segment's revenue in 1997 to
    28.8 percent in 1998. This increase in gross profit margin resulted
    primarily from higher average billing rates and increases in the proportion
    of labor revenue to other revenue, partially offset by increases as a
    percent of revenue in employee-related expenses.

                                       15
<PAGE>

  . Lean Manufacturing Consulting Services. Gross profit for Lean Manufacturing
    Consulting services increased by 90.7 percent from $3.1 million in 1997 to
    $6.1 million in 1998. Gross profit margin for Lean Manufacturing Consulting
    services increased from 24.5 percent of this segment's revenue in 1997 to
    33.3 percent in 1998. This increase in gross profit margin resulted
    primarily from significant increases in staff utilization and higher average
    billing rates, partially offset by increases as a percent of revenue in
    employee-related expenses.

  . Technology Performance Support Services. Gross profit for Technology
    Performance Support services decreased by 9.6 percent from $7.7 million in
    1997 to $6.9 million in 1998. Gross profit margin for Technology Performance
    Support services decreased from 24.1 percent of this segment's revenue in
    1997 to 22.3 percent in 1998. This decrease in gross profit margin resulted
    primarily from increased overhead and increases as a percent of revenue in
    employee-related expenses, partially offset by increases in staff
    utilization, as well as higher average billing rates.

  General and Administrative Expenses.  General and administrative expenses
increased by $3.3 million (or 29.9 percent), from $11.1 million in 1997 to $14.5
million in 1998, decreasing from 13.0 percent of total revenue in 1997 to 12.6
percent of total revenue in 1998. This decrease in general and administrative
expenses as a percentage of revenue resulted primarily from slower growth in
fixed overhead costs than in revenue, partially offset by increases as a percent
of revenue in general and administrative salaries and employee-related expenses.

  Operating Income.  As a result of the foregoing, the Company's operating
income increased by $5.7 million (or 41.7 percent), from $13.7 million in 1997
to $19.5 million in 1998 and increased from 16.0 percent of revenue in 1997 to
17.0 percent of revenue in 1998.

  Other Income.  Other income was $982,000 in 1997 and $1.8 million in 1998. In
1997 and 1998, this income consisted primarily of interest income from cash and
investment balances including the proceeds from the Company's June 1997, initial
public offering. In 1997, this interest income was partially offset by interest
expense paid on the Stockholder Notes. The Stockholder Notes were repaid during
the second quarter of 1997.

  Pro Forma Net Income.  Pro forma net income increased by $4.1 million (or 45.7
percent), from $9.0 million in 1997 to $13.1 million in 1998 increasing from
10.5 percent of revenue in 1997 to 11.4 percent of revenue in 1998. Net income
for 1997 is pro forma and assumes the Company was a C corporation for the entire
year. During the second quarter of 1997, the Company converted from S
corporation to C corporation tax status and, as a result, recognized a $4.5
million charge to establish a deferred tax liability.

                                       16
<PAGE>

Selected Quarterly Operating Results

  The following tables set forth income statement data for each of the eight
quarters in the period beginning January 1, 1998, and ending December 31, 1999,
as well as the percentage of the Company's total revenue represented by each
item. The operating results for any quarter are not necessarily indicative of
results for any future period.

<TABLE>
<CAPTION>
                                                                           Three-Month Period Ended
                                        -------------------------------------------------------------------------------------------
                                          March 31,   June 30,   Sept. 30,   Dec. 31,   March 31,   June 30,   Sept. 30,   Dec. 31,
                                          ----------  ---------  ----------  ---------  ----------  ---------  ----------  ---------
                                             1998       1998        1998       1998        1999       1999        1999       1999
                                          ----------  ---------  ----------  ---------  ----------  ---------  ----------  ---------
                                                                    (In thousands, except per share data)
<S>                                       <C>         <C>        <C>         <C>        <C>         <C>        <C>         <C>
Income Statement Data:
  Revenue...............................    $26,204    $27,413     $30,151    $30,951     $33,242    $32,437     $29,096    $29,658
  Cost of services......................     18,411     19,250      20,952     22,150      23,592     24,834      24,804     27,252
                                          ----------  ---------  ----------  ---------  ----------  ---------  ----------  ---------
  Gross profit..........................      7,793      8,163       9,199      8,801       9,650      7,603       4,292      2,406
  General and administrative
    expenses............................      3,446      3,502       3,804      3,722       4,024      4,310       4,395      4,222
                                          ----------  ---------  ----------  ---------  ----------  ---------  ----------  ---------
  Operating income (loss)...............      4,347      4,661       5,395      5,079       5,626      3,293        (103)    (1,816)
  Other income, net.....................        439        453         294        579         460        397         135        117
                                          ----------  ---------  ----------  ---------  ----------  ---------  ----------  ---------
  Income (loss) before taxes............      4,786      5,114       5,689      5,658       6,086      3,690          32     (1,699)
  Provision for (benefit from)
    income taxes........................      1,819      1,944       2,190      2,178       2,282      1,384          12       (637)
                                          ----------  ---------  ----------  ---------  ----------  ---------  ----------  ---------
  Net income (loss).....................    $ 2,967    $ 3,170     $ 3,499    $ 3,480     $ 3,804    $ 2,306     $    20    $(1,062)
                                          ==========  =========  ==========  =========  ==========  =========  ==========  =========
   Earnings (loss) per share:
    Diluted calculation.................    $  0.19    $  0.20     $  0.22    $  0.22     $  0.24    $  0.15     $  0.00    $ (0.07)
                                          ==========  =========  ==========  =========  ==========  =========  ==========  =========
    Basic calculation...................    $  0.20    $  0.21     $  0.23    $  0.23     $  0.25    $  0.15     $  0.00    $ (0.07)
                                          ==========  =========  ==========  =========  ==========  =========  ==========  =========
   Weighted average shares
     outstanding:
    Diluted calculation.................     15,947     16,090      16,005     16,020      15,920     15,783      15,156     15,152
                                          ==========  =========  ==========  =========  ==========  =========  ==========  =========
    Basic calculation...................     14,766     14,858      14,938     15,018      15,032     14,971      14,481     14,594
                                          ==========  =========  ==========  =========  ==========  =========  ==========  =========


  Revenue...............................      100.0%     100.0%      100.0%     100.0%      100.0%     100.0%      100.0%     100.0%
  Cost of services......................       70.3       70.2        69.5       71.6        71.0       76.5        85.3       91.9
                                          ----------  ---------  ----------  ---------  ----------  ---------  ----------  ---------
  Gross profit..........................       29.7       29.8        30.5       28.4        29.0       23.5        14.7        8.1
  General and administrative
   expenses.............................       13.1       12.8        12.6       12.0        12.1       13.3        15.1       14.2
                                          ----------  ---------  ----------  ---------  ----------  ---------  ----------  ---------
  Operating income (loss)...............       16.6       17.0        17.9       16.4        16.9       10.2        (0.4)      (6.1)
  Other income, net.....................        1.7        1.7         1.0        1.9         1.4        1.2         0.5        0.4
                                          ----------  ---------  ----------  ---------  ----------  ---------  ----------  ---------
  Income (loss) before taxes............       18.3       18.7        18.9       18.3        18.3       11.4         0.1       (5.7)
  Provision for (benefit from) income
   taxes................................        7.0        7.1         7.3        7.1         6.9        4.3         0.0       (2.1)
                                          ----------  ---------  ----------  ---------  ----------  ---------  ----------  ---------
  Net income (loss).....................       11.3%      11.6%       11.6%      11.2%       11.4%       7.1%        0.1%     (3.6)%
                                          ==========  =========  ==========  =========  ==========  =========  ==========  =========
</TABLE>

                                       17
<PAGE>

Liquidity and Capital Resources

  The Company's cash and investments were $28.2 million at December 31, 1999,
compared to $51.2 million at December 31, 1998. The decrease in cash and
investments during 1999 was attributable to two major factors: the Company
purchased Merrimac Interactive Media Corp. in June 1999 for $13.5 million in
cash, and the Company repurchased 805,000 shares of its stock at prices ranging
between $9.64 and $15.50 during the year. The Company's working capital was
$47.1 million at December 1999, and $66.4 million at December 31, 1998.

  The Company's operating activities provided cash of $6.4 million for the year
ended December 31, 1999, compared to $14.0 million for 1998. The decrease in
cash provided from operations resulted primarily from decreases in net income
and increases in trade accounts receivable and prepaid expenses.

  Investing activities used cash of $8.8 million for the year ended December 31,
1999, compared to $5.8 million in 1998. Cash used for investing activities in
1999 consisted primarily of the purchase of Merrimac Interactive Media Corp.,
and the purchase of fixed assets, partially offset by the sale of investments.
Cash used for investing activities in 1998 consisted primarily of the purchase
of fixed assets, and the purchase of investments.

  Financing activities used cash of $7.1 million for the year ended December 31,
1999, compared to providing cash of $1.4 million in 1998. Cash used for
financing activities in 1999 consisted primarily of the repurchase of the
Company's Common Stock throughout the year, partially offset by the issuance of
Common Stock due to the exercise of employee stock options. Cash provided from
financing activities in 1998 consisted primarily of proceeds from the issuance
of Common Stock due to the exercise of employee stock options.

  The Company has a $10.0 million unsecured revolving line of credit with a
commercial bank, which bears interest at the 30-day LIBOR rate (3.8 percent on
December 31, 1999), plus 0.875 percent. The Company utilizes this line of credit
to finance a portion of its working capital needs. There was no balance
outstanding on the line of credit as of December 31, 1999 or December 31, 1998.

  During 1999, the Company made $6.0 million in capital expenditures, primarily
for office furniture, computer and office equipment, and leasehold improvements
to support the growth in its professional and administrative staff. During 2000,
the Company expects to make between $9.0 million and $11.0 million in capital
expenditures, primarily for office furniture, computer and office equipment,
computer software, and leasehold improvements. Capital expenditures currently
are funded from available cash, although the Company may consider alternative
financing methods, such as equipment leases or asset-based borrowings in future
periods. The Company believes its available cash balances, cash provided by
future operations and its line of credit will be sufficient to meet the
Company's working capital and other cash needs at least through the year 2000.

Effects of Inflation

  Inflation has not had a significant effect on the Company's business during
the past three years. The Company cannot predict what effect, if any, inflation
may have on its future results of operations.

                                       18
<PAGE>

2000 Business Risks

  Certain statements contained herein, including statements regarding
development of the Company's services, markets, and future demand for the
Company's services, and other statements regarding matters that are not
historical facts, are forward-looking statements (as defined in the Private
Securities Litigation Reform Act of 1995). Such forward-looking statements
include risks and uncertainties; consequently, actual results may differ
materially from those expressed or implied thereby. The following are some of
the factors that could cause the Company's actual future results of operations
to differ materially from management's expectations and historic trends:

  .  Strategic Alliances. The Company's relationships with allies, particularly
     SAP and Siebel, as well as Documentum, Lotus, POINT, Dataware, Microsoft,
     Netscape, PeopleSoft, and Asymetrix have been, or are anticipated to be,
     important sources of revenue. The Company also faces potential competition
     from software companies, including its alliance organizations who, through
     their client services groups, may choose to compete with the Company. Most
     of these relationships are informal or terminable by either party with
     minimal notice. The termination of, or adverse change in, any of these
     alliances or relationships, particularly SAP, could impact the Company's
     ability to achieve its 2000 revenue and profitability goals.

  .  Geographic Expansion. The Company continues to expand its operations and
     marketing efforts in Europe and the United Kingdom, including establishing
     offices and expatriating employees, thereby incurring significant operating
     costs. If these efforts fail to produce revenue at expected levels or
     within the timeframe predicted by management, operating margins in 2000
     would be adversely impacted. Also, international operations present a
     number of risks, such as adverse currency exchange rate fluctuations, trade
     barriers, cultural differences and possible changes in taxes, laws, and
     policies governing the operations of foreign-based companies. The Company
     has no control over these factors, any of which could adversely affect the
     Company's results of operations and demand for its services abroad.

  .  Enterprise Resource Planning Industry. During 1998, a substantial portion
     of the Company's revenue growth came from services provided to clients
     implementing ERP software systems developed by SAP and others. During 1999,
     sales of ERP software by the major software vendors slowed significantly,
     and industry observers are predicting a modest increase in demand for ERP
     implementation services in 2000. As a result, the Company expects that in
     2000, its ERP service sector will improve its financial performance, but
     not experience the unusually high growth it experienced in 1998. Results
     for ERP services remain difficult to forecast.

  .  Rapidly Changing Information Technology Sector. The Information Technology
     industry is subject to significant and rapid changes in technology and the
     demand for particular products and services. Recent examples include the
     shift in demand away from custom software development in favor of e-
     Commerce and Web-based solutions. If the Company fails to identify shifting
     demand in the Information Technology sector or does not develop the
     expertise necessary to provide services for which there is new demand, the
     Company's revenue growth and profitability could be adversely affected.
     During the second half of 1999, revenues for the Company's Information
     Technology Services declined primarily because clients delayed or canceled
     several projects as a result of concerns about their Y2K mitigation
     efforts. The Company expects improved performance from its Information
     Technology Services during 2000.

  .  Customer and Industry Revenue Concentration. The Company continues to
     derive a substantial amount of its revenue from a limited number of key
     clients. In 1999, the Company's top five clients and ten clients
     represented 43.5 percent and 55.6 percent of the Company's total revenue
     respectively, with clients in the automotive industry generating 37.5
     percent of total revenue. Most of the Company's engagements have no minimum
     purchase requirements and may be terminated by the client with little or no
     notice to the Company. Many of these clients operate in cyclical
     industries, such as petrochemicals and automobiles, which are subject to
     economic factors that affect the clients' revenue and profitability. If any
     of the Company's major clients discontinue doing business with the Company
     or reduce the amount of services they purchase from the Company, the
     Company's revenue growth and profitability could be adversely affected.

  .  Attracting and Retaining Personnel. As is the case with most technology
     companies, the Company experiences significant turnover in its technical
     staff. The Company's growth will continue to depend on its ability to
     attract, develop, and retain a sufficient number of skilled professional
     employees. Technically qualified personnel are in short supply, and there
     is intense competition for qualified people. Also, the Company will need to
     ensure that its technical personnel keep current on rapid changes in
     technology. The Company's operating costs may be higher than management
     expects if competition for qualified people increases.

                                       19
<PAGE>

  .  Increasing Competition. In recent years, the Company has experienced
     heightened competition, particularly in the ERP and IT segments of its
     business. If competition continues to intensify, the Company may find it
     more difficult to grow its revenue at rates comparable to historic growth
     rates and to maintain its profit margins at historic levels.

Year 2000 Compliance

  The Company completed Year 2000 compliance testing/certifying of all hardware,
software, and ancillary equipment critical to continuous business operations by
September 30, 1999. All operations related hardware, software, and ancillary
equipment was compliant by that date. The Company experienced no Year 2000
related business interruptions subsequent to January 1, 2000.

  The Company is not aware of any non-compliance that would have a material
effect on its operations if not replaced or that would be costly to replace.

  The Company delivers software solutions to clients and believes that all such
software delivered over the past several years is Year 2000 compliant. Because
some such software becomes the property of the client, the Company has no
control over modifications to the software by the client or over its integration
with other software, either of which could potentially cause Year 2000
compliance difficulties.

Item 7A.  Quantitative and Qualitative Disclosure About Market Risk

  The Company does not have significant interest rate risk related to its line
of credit, which has an interest rate equivalent to the 30-day LIBOR rate (3.8
percent on December 31, 1999) plus .875 percent. The Company does not have
significant foreign currency risk related to foreign sales because of the
minimal amount of funds maintained in foreign payroll and operating accounts,
and since most non-United States revenues are paid in U.S. currency by U.S.
national firms. The Company does not have any derivative commodity instruments
or other financial instruments such as interest swaps, foreign currency
forwards, futures and options, and foreign currency denominated debt. The
Company does not have commodity price risk or other relevant market risks.

Item 8.  Financial Statements

  The financial statements of the Company are included on pages 25 through 28.

Item 9.  Changes In And Disagreements With Accountants On Accounting And
Financial Disclosure

  There were no changes in accountants, disagreements, or other events requiring
reporting under this item.


                                    Part III

Item 10.  Directors And Executive Officers Of RWD Technologies, Inc.

  Information required under this caption will be included in the Company's
Definitive Proxy Statement prepared in connection with the 2000 Annual Meeting
of Stockholders, which will be filed on or before April 7, 2000, and is
incorporated herein by reference.

Item 11.  Executive Compensation

  Information required under this caption will be included in the Company's
Definitive Proxy Statement prepared in connection with the 2000 Annual Meeting
of Stockholders, which will be filed on or before April 7, 2000, and is
incorporated herein by reference.

                                       20
<PAGE>

Item 12.  Security Ownership Of Certain Beneficial Owners And Management

  Information required under this caption will be included in the Company's
Definitive Proxy Statement prepared in connection with the 2000 Annual Meeting
of Stockholders, which will be filed on or before April 7, 2000, and is
incorporated herein by reference.

Item 13.  Certain Relationships And Related Transactions

  Information required under this caption will be included in the Company's
Definitive Proxy Statement prepared in connection with the 2000 Annual Meeting
of Stockholders, which will be filed on or before April 7, 2000, and is
incorporated herein by reference.

                                       21
<PAGE>

                                    PART IV.

Item 14.  Exhibits, Financial Statement Schedules, And Reports On Form 8-K

  (a) The following documents are filed as a part of this report:

      1.  Financial Statements

          The response to this portion of Item 14 is submitted as a separate
          section of this report.

      2.  Financial Statement Schedules

          Schedule II -Valuation and Qualifying Accounts

          All other schedules for which provision is made in the applicable
          accounting regulation of the Securities and Exchange Commission are
          inapplicable and therefore have been omitted.

      3.  Exhibits

          (a).  Exhibits
<TABLE>
<CAPTION>

  Exhibit No                                             Description
---------------       --------------------------------------------------------------------------------
<S>                   <C>
      3.01            Articles of Amendment and Restatement of the Charter**
      3.02            Amended and Restated Bylaws**
      4.01            Specimen Common Stock Certificate**
     10.01            Maryland Full-Service Office Lease between the Company and Columbia Management,
                      Inc., dated as of January 1, 1994, as amended**
     10.02            Amended and Restated Equity Participation Plan**
     10.03            Employee Stock Purchase Plan**
     10.04            Chrysler Corporation General Terms & Conditions/Clause Manual--Facilities and
                      Material Purchasing--General Terms and Conditions**
     10.05            Letter Agreement from First National Bank of Maryland to the Company, dated
                      February 27, 1996, regarding $7.5 million unsecured line of credit**
     10.06            Form of Executive Employment Agreement**
     10.07            1998 Omnibus Stock Incentive Plan*
     10.08            Amendment, dated February 24, 2000, to 1998 Omnibus Stock Incentive Plan
     21.01            Subsidiaries of the Registrant***
     23.01            Consent of Arthur Andersen LLP***
     24.01            Powers of Attorney***
     27.01            Financial Data Schedule***
</TABLE>
___________________
*   Incorporated by reference to the Exhibits to the Company's 1997 Form 10-K,
    dated March 25, 1998 (No. 000-22145).
**  Incorporated by reference to the Exhibits to the Company's Registration
    Statement on Form S-1 dated February 14, 1997 (No. 333-21779), as amended.
*** Filed herewith.

       (b). Reports on Form 8-K. None were filed during the fourth quarter of
1999.

                                       22
<PAGE>

                                   SIGNATURES

  Pursuant to the requirements of Section 13 of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized on March 30, 2000.

                                RWD TECHNOLOGIES, INC.
                                (Registrant)

                                By:  /s/ Robert W. Deutsch
                                     ---------------------
                                     Robert W. Deutsch
                                     Chairman of the Board, Chief Executive
                                     Officer, and Director (Principal Executive
                                     Officer)

                                By:  /s/ William M. Bambarger, Jr.
                                     -----------------------------
                                     William M. Bambarger, Jr.
                                     Vice President, Chief Financial Officer
                                     (Principal Financial and Accounting
                                     Officer)

                                       23
<PAGE>

                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Board of Directors and Stockholders of
RWD Technologies, Inc.:

  We have audited the accompanying consolidated balance sheets of RWD
Technologies, Inc., (a Maryland corporation) and subsidiaries as of December 31,
1998 and 1999, and the related consolidated statements of income, changes in
stockholders' equity, and cash flows for each of the three years in the period
ended December 31, 1999. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.

  We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated 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 RWD
Technologies, Inc., and subsidiaries as of December 31, 1998 and 1999, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1999, in conformity with accounting principles
generally accepted in the United States.


/s/ Arthur Andersen LLP
-----------------------


Baltimore, Maryland
January 18, 2000

                                       24
<PAGE>

RWD Technologies, Inc., and Subsidiaries
Consolidated Balance Sheets
(In thousands, except share data)



<TABLE>
<CAPTION>

                                                 As of December 31,
                                              -----------------------------
                                                     1998            1999
                                                    ------          ------
<S>                                                 <C>             <C>
Assets
Current Assets:
 Cash and cash equivalents..................        $ 13,328       $  3,760
 Investments, available-for-sale............          37,896         24,454
 Contract accounts receivable, net of
  allowance for doubtful accounts of $239...          20,388         21,731

 Costs and estimated earnings in excess of
  billings on uncompleted contracts.........           7,889          7,232
 Income tax refund receivable...............              --          1,692
 Prepaid expenses and other.................           1,199          1,257
 Deferred tax asset.........................              --             19
                                                    --------       --------
         Total Current Assets...............          80,700         60,145
                                                    --------       --------
Fixed Assets:
 Furniture and fixtures.....................           6,710          8,339
 Office equipment...........................           1,767          2,427
 Computer equipment.........................          10,370         11,579
 Leasehold improvements.....................           1,130          1,528
                                                    --------       --------
         Total Fixed Assets.................          19,977         23,873
 Less accumulated depreciation
  and amortization..........................          10,583         12,409
                                                    --------       --------
Net Fixed Assets............................           9,394         11,464
                                                    --------       --------
Goodwill, net of accumulated
 amortization of $340.......................              --         13,421
                                                    --------       --------
Other Assets................................             300          2,231
                                                    --------       --------
         Total Assets.......................        $ 90,394       $ 87,261
                                                    ========       ========

        Liabilities and Stockholders' Equity

Current Liabilities:
 Accounts payable and accrued expenses......        $  2,538       $  2,774
 Accrued payroll and other..................           5,279          3,317
 Accrued vacation payable...................           1,428          1,933
 Note payable...............................              --          1,026
 Billings in excess of costs and
  estimated earnings on
  uncompleted contracts.....................           4,554          4,005
  Deferred tax liability....................             471             --
  Current portion of capital
   lease obligation.........................              31             25
                                                    --------       --------
Total Current Liabilities...................          14,301         13,080
Noncurrent Liabilities:
 Capital lease obligation, net of
  current portion...........................              --             26
 Deferred tax liability.....................           1,298            222
 Other liabilities..........................             834            592
                                                    --------       --------
         Total Liabilities..................          16,433         13,920
                                                    --------       --------
Commitments and Contingencies
Stockholders' Equity:
 Common stock, $.10 par value:
   authorized-50,000,000 shares;
   issued and outstanding-15,017,731
   and 14,695,550, respectively.............           1,502          1,470
 Accumulated comprehensive income...........              81            (45)
 Additional paid-in capital.................          52,461         47,210
 Retained earnings..........................          19,917         24,706
                                                    --------       --------
         Total Stockholders' Equity.........          73,961         73,341
                                                    --------       --------
          Total Liabilities and Stockholders'
             Equity.........................        $ 90,394       $ 87,261
                                                    ========       ========
</TABLE>

  The accompanying notes are an integral part of these consolidated financial
                                  statements.

                                       25
<PAGE>

                    RWD Technologies, Inc., and Subsidiaries
                       Consolidated Statements of Income
                     (In thousands, except per share data)

<TABLE>
<CAPTION>
                                                                 Years Ended December 31,
                                                    -----------------------------------------------
                                                         1997             1998             1999
                                                    ------------      -----------      -----------
<S>                                                   <C>             <C>             <C>
Revenue...............................              $      85,670     $    114,719     $    124,433
Cost of services......................                     60,785           80,763          100,482
                                                    -------------     ------------     ------------
  Gross profit........................                     24,885           33,956           23,951
General and administrative expenses...                     11,141           14,474           16,951
                                                    -------------     ------------     ------------
Operating income......................                     13,744           19,482            7,000
Interest expense......................                       (191)             (29)             (31)
Interest and other income.............                      1,173            1,794            1,140
                                                    -------------     ------------     ------------
  Income before taxes.................                     14,726           21,247            8,109
Provision for income taxes (including the
  $4,500 deferred tax liability related to
  C corp. conversion in 1997)..........                     8,053            8,131            3,041
                                                    -------------     ------------     ------------
  Net income...........................             $       6,673     $     13,116     $      5,068
                                                    =============     ============     ============
  Earnings per share:
   Diluted calculation.................             $        0.46     $       0.82     $       0.33
                                                    =============     ============     ============
   Basic calculation...................             $        0.53     $       0.88     $       0.34
                                                    =============     ============     ============
Pro Forma Information (for 1997):
   Income before taxes, as reported....             $      14,726     $     21,247     $      8,109
   Pro forma income tax provision......                     5,725            8,131            3,041
                                                    -------------     ------------     ------------
   Pro forma net income.................            $       9,001     $     13,116     $      5,068
                                                    =============     ============     ============
   Pro forma earnings per share:
     Diluted calculation................            $        0.62     $       0.82     $       0.33
                                                    =============     ============     ============
     Basic calculation..................            $        0.71     $       0.88     $       0.34
                                                    =============     ============     ============
Weighted average shares outstanding:
     Diluted calculation................                   14,470           16,016           15,503
                                                    =============     ============     ============
     Basic calculation..................                   12,747           14,895           14,769
                                                    =============     ============     ============
</TABLE>

  The accompanying notes are an integral part of these consolidated financial
                                  statements.

                                       26
<PAGE>

                    RWD Technologies, Inc., and Subsidiaries
           Consolidated Statements of Changes in Stockholders' Equity
             For the Years Ended December 31, 1997, 1998, and 1999
                                 (In thousands)

<TABLE>
<CAPTION>
                                                                                   Accumulated
                                                                                      Other             Additional
                                              Common         Comprehensive       Comprehensive            Paid-In         Retained
                                               Stock            Income               Income               Capital         Earnings
                                           -----------------------------------------------------------------------------------------
<S>                                          <C>              <C>                  <C>                  <C>               <C>
BALANCE, DECEMBER 31, 1996.................       $   486                             $  --              $ 2,754         $ 16,893
  Comprehensive income:
     Net income............................            --         $ 6,673                --                   --            6,673
     Unrealized gain on securities.........            --              25                25                   --               --
                                                                  -------
  Comprehensive income.....................            --         $ 6,698                --                   --               --
                                                                  =======
  Stock options exercised..................           637                                --                6,200               --
  Common stock repurchased.................            (9)                               --                 (481)            (332)
  S Corporation distributions..............            --                                --                   --          (16,364)
  Initial Public Offering..................           328                                --               38,154               --
                                                  -------                         ---------              -------          -------
BALANCE, DECEMBER 31, 1997                          1,442                                25               46,627            6,870
  Comprehensive income:
     Net income............................            --         $13,116                --                   --           13,116
     Unrealized gain on securities.........            --              56                56                   --               --
                                                                  -------
  Comprehensive income.....................            --         $13,172                --                   --               --
                                                                  =======
  Stock options exercised..................            56                                --                  920               --
  Directors' and other option grants.......            --                                --                   53               --
  Common stock repurchased.................            --                                --                   (4)             (69)
  Tax effect of non-qualified
     stock option exercises................            --                                --                4,270               --
  Employee stock purchase plan
     purchases.............................             4                                --                  595               --
                                                  -------                            ------             --------          ---------
BALANCE, DECEMBER 31, 1998.................         1,502                                81               52,461           19,917
  Comprehensive income:
     Net income............................            --         $ 5,068                --                   --            5,068
     Unrealized loss on securities.........            --            (126)             (126)                  --               --
                                                                  -------
  Comprehensive income.....................            --         $ 4,942                --                   --               --
                                                                  =======
  Stock options exercised..................            37                                --                  554               --
  Directors' and other option grants.......            --                                --                    7               --
  Common stock repurchased.................           (81)                               --               (8,416)            (279)
  Tax effect of non-qualified stock option
     exercises.............................            --                                --                1,398               --
  Employee stock purchase plan
     purchases.............................            12                                --                1,124               --
  Accelerated vesting of stock options.....            --                                --                   82               --
                                                  -------                            ------             --------        ---------
BALANCE, DECEMBER 31, 1999.................        $1,470                             $ (45)             $47,210         $ 24,706
                                                  =======                            ======             ========        =========
</TABLE>


  The accompanying notes are an integral part of these consolidated financial
                                  statements.

                                       27
<PAGE>

                    RWD Technologies, Inc., and Subsidiaries
                     Consolidated Statements of Cash Flows
                                 (In thousands)

<TABLE>
<CAPTION>
                                                                                   Years Ended December 31,
                                                                     -------------------------------------------------
                                                                           1997              1998              1999
                                                                     -------------     -------------     -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S>                                                                <C>               <C>               <C>
      Net Income.                                                    $       6,673   $        13,116   $         5,068
      Adjustments to reconcile net income to net cash provided
      by operating activities:
                Depreciation and amortization....................            3,104             3,542             4,598
                (Gain) Loss on sale of fixed assets..............              (19)              274                10
                Deferred income taxes............................            3,281            (1,411)           (1,042)
                Effect of changes in:
                   Contract accounts receivable..................           (1,347)           (7,060)           (1,261)
                   Costs and estimated earnings in excess of
                     billings on uncompleted contracts...........           (1,448)           (3,110)              657
                   Prepaid expenses and other....................             (154)             (227)           (1,489)
                   Accounts payable and accrued expenses.........            3,552             8,172               801
                   Billings in excess of costs and estimated
                     earnings on uncompleted contracts...........              957               908              (749)
                   Other liabilities.............................            1,018              (184)             (241)
                                                                      -------------     -------------     -------------
                Net cash from operating activities...............           15,617            14,020             6,352
                                                                      -------------     -------------     -------------

CASH FLOWS FROM INVESTING ACTIVITIES:
                (Purchase) sale of investments, net..............          (34,399)           (1,414)           13,315
                Payments related to acquisition..................               --                --           (14,404)
                Purchase of fixed assets.........................           (3,719)           (4,315)           (5,996)
                Payments for other assets........................             (123)              (54)           (1,765)
                Proceeds from sale of fixed assets...............               36                26                46
                                                                      -------------     -------------     -------------
                Net cash from investing activities...............          (38,205)           (5,757)           (8,804)
                                                                      -------------     -------------     -------------

CASH FLOWS FROM FINANCING ACTIVITIES:
                Principal portion paid on capital lease..........              (42)              (52)              (31)
                Borrowings under line of credit..................               --                --             4,725
                Payments under line of credit....................               --                --            (4,725)
                Payments of stockholder loans....................           (3,800)               --                --
                Distributions to stockholders....................          (16,364)               --                --
                Public offering costs............................           (4,042)               --                --
                Issuance of common stock.........................           47,744             1,571             1,691
                Repurchase of common stock.......................             (820)              (73)           (8,776)
                                                                     -------------     -------------     -------------

                Net cash from financing activities...............           22,676             1,446            (7,116)
                                                                     -------------     -------------     -------------

NET INCREASE (DECREASE) IN CASH
   AND CASH EQUIVALENTS.........................................                88             9,709            (9,568)
CASH AND CASH EQUIVALENTS, beginning of year....................             3,531             3,619            13,328
                                                                     -------------     -------------     -------------
CASH AND CASH EQUIVALENTS, end of year..........................     $       3,619   $        13,328   $         3,760
                                                                     =============     =============     =============
      Supplemental Cash Flow Disclosures:
                   Income taxes paid.............................    $       2,735   $         3,223   $         5,620
                   Interest paid.................................    $         188   $            17   $            10
</TABLE>

  The accompanying notes are an integral part of these consolidated financial
                                  statements.


                                       28
<PAGE>

                   RWD Technologies, Inc., and Subsidiaries
                   Notes to Consolidated Financial Statements

1.  Summary of Significant Accounting Policies:

Organization and Business
-------------------------

    RWD Technologies, Inc., and subsidiaries (the ``Company'') was incorporated
on January 22, 1988, in the State of Maryland. The Company provides a broad
range of integrated solutions designed to improve the productivity and
effectiveness of workers in complex operating environments.

    The Company's operations depend upon, among other things, the Company's
ability to attract, develop, and retain a sufficient number of highly skilled
professional employees. In addition, the Company's revenue is generated from a
limited number of clients in specific industries. Future operations may be
affected by its ability to retain these clients and cyclical and economic
factors that could have an impact on those industries.

Basis of Presentation
---------------------

    The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries and are presented on the accrual
basis of accounting in accordance with generally accepted accounting principles.
All significant intercompany balances and transactions have been eliminated in
consolidation. The preparation of consolidated 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 as of the date
of the consolidated financial statements and the reported amounts of total
revenue and expenses during the reporting period. Actual results could differ
from those estimates.

Initial Public Offering (IPO)
-----------------------------

    The Company effected an initial public offering (IPO) of common stock during
1997, in which it sold 3.3 million shares of its common stock, par value $0.10
per share. The Company realized $38,500,000 from the offering, net of expenses.
Also during 1997, prior to the IPO, the Company made a $16,364,000 S Corporation
distribution, representing earnings accumulated by the Company while it was
taxed as a Subchapter S Corporation, which had not been previously distributed
to the stockholders. The proceeds of the IPO were used to retire $3,800,000 of
shareholder notes, and the Company continues to use the remaining proceeds for
working capital to support its planned growth and for other general corporate
purposes.

Stock Split
-----------

    The Company effected a three-for-one stock split, effective March 21, 1997.
All share data included in the accompanying consolidated financial statements
and notes thereto are as if the stock split had occurred prior to the periods
presented.

Investments
-----------

    Investments as of December 31, 1998 and 1999, consisted of U.S. government
and tax-exempt municipal securities that mature within one year. As of December
31, 1998 and 1999, $37,896,000 and $24,454,000, respectively, were classified as
available-for-sale and were recorded at market value, with the change in market
value being recorded as a component of stockholders' equity as of December 31,
1998 and 1999.

                                       29
<PAGE>

Financial Instruments
---------------------

    Financial instruments as of December 31, 1998 and 1999, consist of cash and
cash equivalents, investments, receivables, payables, debt, and a capital lease
obligation, for which the carrying amounts approximate market value.

Fixed Assets
------------

    Fixed assets are stated at cost. Depreciation is computed using the
straight-line method based on the estimated useful lives, as follows:



        Furniture and fixtures                    7 years
        Office equipment                          5 years
        Computer equipment                        3 years
        Leasehold improvements                    4-10 years


    The depreciation expense for 1997, 1998, and 1999, was $3,104,000,
$3,542,000 and $4,258,000, respectively.

Other Assets
------------

    Included in other assets is the $1,800,000 cost of a computer system under
construction by the Company during the year. The total cost of the computer
system will be amortized using the straight-line method on a five-year useful
life commencing in May 2000 when the system is expected to be placed in
operation.

Revenue Recognition
-------------------

    The majority of the Company's revenue is generated from professional fees.
The majority of the Company's contracts are on a time-and-materials basis,
although many of the contracts contain initial ``not-to-exceed'' fees and
Company performance obligations. The remainder of the Company's contracts are on
a fixed-bid basis. Revenue is recognized using the percentage of completion
method. The Company's contracts generally vary in length from one to 36 months.

    Earned revenue is based on the percentage that direct labor and other
contract costs incurred to date bear to total estimated costs, after giving
effect to the most recent estimates of total cost. The cumulative impact of
revisions in total cost estimates during the progress of work is reflected in
the period in which these changes become known. Earned revenue reflects the
original contract price adjusted for agreed-upon claim and change order revenue,
if any. Losses expected to be incurred on jobs in process, after consideration
of estimated minimum recoveries from claims and change orders, are charged to
income as soon as such losses are known.

Income Taxes
------------

    Prior to June, 1997, the Company had elected to be taxed under the
provisions of Subchapter S of the Internal Revenue Code, which provide that, in
lieu of corporate, federal, and some state income taxes, the stockholders are
taxed on their proportionate share of the Company's taxable income. In
conjunction with the IPO of the Company's common stock during 1997, the Company
elected to change its tax status from an S Corporation to a C Corporation. As a
result of the Company's Subchapter S election, the accompanying consolidated
statements of income do not include an income tax provision for federal and most
state income taxes during the periods of the S Corporation election; however,
pro forma adjustments have been made to reflect the income tax provision as if
the Company was taxed as a C Corporation during all periods. The pro forma
adjustments have been made at an effective rate of 40.0 percent, which is the
tax rate that would have been in effect had the Company been taxed as a C
Corporation for the duration of each of those periods.

                                       30
<PAGE>

Earnings Per Share (EPS)-
------------------------

    The weighted average shares used to calculate basic and diluted earnings per
share for 1997, 1998, and 1999 are as follows:

<TABLE>
<CAPTION>
                                                               For the Years Ended December 31,
                                                    -------------------------------------------------------
                                                          1997               1998               1999
                                                    -----------------  -----------------  -----------------
<S>                                                 <C>                <C>                <C>
 Basic EPS:
 Common stock outstanding                                   6,703,000         14,895,000         14,769,000
 Majority stockholder shares issued in
   conjunction with the IPO                                 5,370,000
 Assumed IPO shares for S Corp. distribution                  674,000
                                                           ----------         ----------         ----------
      Weighted average shares outstanding
          for basic EPS (pro forma for 1997)               12,747,000         14,895,000         14,769,000

 Diluted EPS:
 Dilutive effect of common stock
   equivalents                                              1,723,000          1,121,000            734,000
                                                           ----------         ----------         ----------
      Weighted average shares outstanding
          for diluted EPS (pro forma for 1997)             14,470,000         16,016,000         15,503,000
                                                           ==========         ==========         ==========
</TABLE>

    The majority stockholder exercised options to acquire 5,370,000 shares
concurrent with the completion of the IPO during 1997. The weighted average
shares outstanding during 1997 have been pro forma adjusted as if the majority
stockholder's 5,370,000 shares exercised were outstanding for all periods
presented and to include the effect of shares that would have had to have been
issued during 1997, prior to the IPO (at the IPO price of $13.00 per share, less
the underwriting discount expenses) to generate sufficient cash to fund the
portion of the $16,400,000 S Corporation distribution that was in excess of the
net income for 1996. While this assumption of how the S Corporation distribution
was funded was made to calculate the EPS for 1997, the Company used operating
cash flows, and not IPO proceeds, to fund the S Corporation distribution.
Weighted average shares outstanding for calculating diluted EPS includes basic
shares outstanding, plus shares issuable upon the exercise of stock options,
using the treasury stock method. Market value of the Company's stock prior to
the IPO was assumed to be the IPO price per share of $13.00.

2.  Acquisition:

    During 1999, the Company acquired all of the outstanding stock of Merrimac
Interactive Media Corp. for a purchase price of $13,500,000 plus certain other
costs. Net assets of Merrimac were $(520,000). Merrimac is recognized as a
leader in providing e-Learning solutions to Blue Chip companies. The excess
purchase price over the fair value of the net assets acquired resulted in the
recognition of approximately $13,800,000 of goodwill, which is being amortized
over the estimated useful life of 20 years. Amortization expense for 1999 was
$340,000. The business combination was accounted for under the purchase method
of accounting, in accordance with Accounting Principles Board (APB) Opinion No.
16, "Business Combinations." Pro forma results of operations for the current and
preceding periods as though the companies had been combined at the beginning of
the periods have not been disclosed, since the acquired company was a start-up
company which had minimal operating activity prior to acquisition which was not
material.

                                       31
<PAGE>

3. Costs and Estimated Earnings on Contracts in Process:

<TABLE>
<CAPTION>
                                                                                              As of December 31,
                                                                                      -----------------------------------
                                                                                            1998               1999
                                                                                      -----------------  ----------------

<S>                                                                                   <C>                <C>
Cost incurred and estimated earnings on uncompleted contracts                               $88,248,000      $100,681,000
Less:  Billings to date on uncompleted contracts                                             84,913,000        97,454,000
                                                                                            -----------      ------------
        Net unbilled revenues                                                               $ 3,335,000      $  3,227,000
                                                                                            ===========      ============

Included in the accompanying consolidated balance sheets under the following
 captions:
    Costs and estimated earnings in excess of billings on uncompleted contracts             $ 7,889,000      $  7,232,000
    Billings in excess of costs and estimated earnings on uncompleted contracts               4,554,000         4,005,000
                                                                                            -----------      ------------
        Net unbilled revenues                                                               $ 3,335,000      $  3,227,000
                                                                                            ===========      ============
</TABLE>


    Generally, contracts provide for the billing of costs incurred and estimated
fees on primarily a monthly basis. Amounts recorded in "costs and estimated
earnings in excess of billings on uncompleted contracts" in the accompanying
consolidated financial statements will be billed within twelve months of the
balance sheet date.


4. Debt:

    During 1997, the Company had two loans payable to principal stockholders of
the Company which were repaid during 1997. Interest expense on these loans
during 1997 was $165,000.

    In addition to the cash payment resulting from the June, 1999 acquisition of
Merrimac Interactive Media Corp., the Company signed a promissory note in the
amount of $1,026,000, due January 1, 2000, which bore interest at the fixed rate
of 5% per annum. The Note represented the balance of funds to be held in escrow
as part of the purchase agreement. On January 5, 2000, the Company paid
$1,055,000, representing the entire principal and interest necessary to satisfy
the terms of the Note.

    In 1999, the Company entered into a new line of credit agreement with a bank
that extends to working capital. The unsecured line of $10,000,000 has an
interest rate equivalent to the 30-day LIBOR rate plus .875 percent, and expires
May 31, 2000. During 1999, the Company drew on the credit line during the months
of September and October. The highest balance outstanding was $2,232,000. There
was no outstanding balance on the credit line as of December 31, 1998 and 1999.

                                       32
<PAGE>

5.  Business Segments:

    The Company has identified four distinct operating segments: Information
Technology Services; Enterprise Resource Planning Services; Lean Manufacturing
Consulting Services; and Technology Performance Support Services.

    The accounting policies for these segments are the same as those described
in the summary of significant accounting policies. Depreciation and amortization
expense is reported in each operating segment. However, the Company's tangible
assets are not managed as distinct asset groups. All tangible assets are
recorded at the corporate level with depreciation expense allocated to operating
segments based on headcount. Interest expense, interest income, and income taxes
are reported at the corporate level only and are not disclosed below.

<TABLE>
<CAPTION>
                                                                        For the Years Ended December 31,
                                                              ----------------------------------------------------
                                                                   1997              1998               1999
                                                              ---------------  -----------------  ----------------
<S>                                                           <C>              <C>                <C>
Revenue (all external):
    Information Technology                                        $22,725,000       $ 27,050,000      $ 33,706,000
    Enterprise Resource Planning                                   18,204,000         38,437,000        37,254,000
    Lean Manufacturing Consulting                                  12,936,000         18,181,000        22,346,000
    Technology Performance Support                                 31,805,000         31,051,000        31,127,000
                                                                  -----------       ------------      ------------
Total Revenue                                                     $85,670,000       $114,719,000      $124,433,000
                                                                  ===========       ============      ============

Gross Profit:
    Information Technology                                        $ 9,292,000       $  9,925,000      $  6,158,000
    Enterprise Resource Planning                                    4,768,000         11,065,000         4,002,000
    Lean Manufacturing Consulting                                   3,174,000          6,052,000         6,685,000
    Technology Performance Support                                  7,651,000          6,914,000         7,106,000
                                                                  -----------       ------------      ------------
Total Gross Profit                                                $24,885,000       $ 33,956,000      $ 23,951,000
                                                                  ===========       ============      ============

Depreciation and Amortization Expense Allocated  To Segments:
    Information Technology                                        $   468,000       $    592,000      $    904,000
    Enterprise Resource Planning                                      443,000            838,000         1,180,000
    Lean Manufacturing Consulting                                     168,000            206,000           271,000
    Technology Performance Support                                    812,000            788,000           813,000
                                                                  -----------       ------------      ------------
Total Allocated to Segments                                         1,891,000          2,424,000         3,168,000
Amount not Allocated to Segments                                    1,213,000          1,118,000         1,430,000
                                                                  -----------       ------------      ------------
Total Depreciation and Amortization Expense                       $ 3,104,000       $  3,542,000      $  4,598,000
                                                                 ===========        ============      ============

Revenue (by geography):
    United States                                                $76,757,000        $101,626,000      $112,212,000
    Non-United States                                              8,913,000          13,093,000        12,221,000
                                                                 -----------        ------------      ------------
Total Revenue                                                    $85,670,000        $114,719,000      $124,433,000
                                                                 ===========        ============      ============
</TABLE>

Significant Clients
-------------------

    Automobile industry clients generated an aggregate of 44.4 percent, 37.9
percent, and 37.5 percent of the Company's total revenue in 1997, 1998, and
1999, respectively. Telecommunications industry clients generated an aggregate
of 10.1 percent, 10.4 percent, and 7.0 percent of the Company's total revenue in
1997, 1998, and 1999, respectively. Financial industry clients generated an
aggregate of  10.0 percent of the Company's total revenue in 1999. Sales to one
client during 1997, 1998, and 1999 were approximately 28.1 percent, 22.4
percent, and 20.4 percent respectively, of total revenue. Sales to another
client were approximately 14.0 percent, 12.7 percent, and 10.9 percent of total
revenue in 1997, 1998, and 1999 respectively. No other client represented more
than 10 percent of the Company's total revenue in any of these periods.

                                       33
<PAGE>

6.  Commitments and Contingencies:

Commitments
-----------

    The Company leases office facilities under various operating leases that
expire through July 31, 2009. The leases require the Company to pay for a
portion of common area maintenance expenses and real estate taxes. Rent expense
was $2,567,000, $3,162,000, and $4,369,000 in 1997, 1998, and 1999,
respectively. During 1999, the Company assumed two capital leases, through the
Merrimac acquisition, for computer equipment. Future minimum payments under
these leases, as of December 31, 1999, were as follows:

<TABLE>
<CAPTION>
                                                     Capital         Operating
Year Ending December 31,                              Lease            Leases
------------------------                             -------         ---------
<S>                                                  <C>                <C>
    2000                                             $28,000          $4,550,000
    2001                                              25,000           4,075,000
    2002                                               2,000           3,710,000
    2003                                                  --           3,561,000
    2004 and thereafter                                   --             679,000
                                                     -------
      Total minimum lease payments                    55,000
      Less:  Amounts representing imputed interest     4,000
                                                     -------
      Present value of net minimum payments          $51,000
                                                     =======
</TABLE>


    The Company has entered into employment agreements with five key employees
with initial terms of three years, and subject to successive one year renewals.
Four of these agreements ended in January, 2000 and are continuing for
successive one-year renewals. The fifth agreement ends in January, 2002.

Litigation
----------

    The Company is party to litigation from time to time arising in the ordinary
course of its business. It is management's opinion, after consultation with its
legal counsel, that none of the outcomes of known claims, whether individually
or in the aggregate, will have a material adverse effect on the Company's
financial position or results of operations.


7.  Stock Option and Purchase Agreements:

    The Company has stock option plans whereby the Board of Directors, at its
discretion, can award employees and outside directors options to purchase shares
of the Company's common stock. Options for 6,065,000 shares are authorized under
these plans. The options granted to employees under these plans vest over
periods of three to seven years. Some options vest evenly over the vesting
period and others vest at the end. Options have been granted with expiration
dates that vary from ten years following the date of grant to eleven years after
the first vesting date. In addition, all options expire within 30 days of any
individual employee's termination of employment. The options granted to non-
employee directors vest ratably over a three-year period, beginning one year
after grant, and expire ten years after the first vesting date. The Company has
also granted stock options to certain key employees under terms similar to other
employee option grants.

                                       34
<PAGE>

    The Company accounts for its stock-based compensation plans as permitted by
FASB Statement No. 123, "Accounting for Stock-Based Compensation," which allows
the Company to follow Accounting Principles Board Opinion No. 25 (``APB No.
25''), ``Accounting for Stock Issued to Employees'' and recognize no
compensation cost for options granted at fair market prices. The Company has
computed, for pro forma disclosure purposes, the value of all compensatory
options granted during 1997, 1998, and 1999, using the Black-Scholes option
pricing model. The following assumptions were used for grants:

<TABLE>
<CAPTION>
                                               For the Years Ended December 31,
                                            -----------------------------------
                                            1997         1998          1999
                                            -----        ----          ----
     <S>                                    <C>          <C>           <C>
     Risk-free interest rate (range)        5.5%-6.5%    4.5%-5.5%    4.8%-6.5%
     Expected dividend yield                   0.0%         0.0%         0.0%
     Expected lives                          5 years      5 years     5-7 years
     Expected volatility                     42.0%        51.0%        57.0%
</TABLE>

    Options were assumed to be exercised upon vesting for the purposes of this
valuation. Adjustments were also made for options assumed forfeited prior to
vesting. Had compensation costs for compensatory options been determined
consistent with SFAS No. 123, the Company's pro forma net income and earnings
per share information reflected on the accompanying consolidated statements of
income would have been reduced to the following ``as adjusted'' amounts:

<TABLE>
<CAPTION>
                                         For the Years Ended December 31,
                                    -------------------------------------------
                                       1997              1998            1999
                                      ------            ------          ------
     <S>                            <C>                <C>             <C>
    Net Income:
       As reported                  $9,001,000       $13,116,000      $5,068,000
       As adjusted                   8,606,000        11,814,000       2,425,000
    Diluted Earnings Per Share:
       As reported                  $     0.62       $      0.82      $     0.33
       As adjusted                        0.59              0.74            0.16
    Basic Earnings Per Share:
       As reported                  $     0.71       $      0.88      $     0.34
       As adjusted                        0.68              0.79            0.16
</TABLE>

  The Company's stock did not trade prior to June 1997.

                                       35
<PAGE>

  The following table summarizes all stock option and purchase right activity
during 1997, 1998, and 1999.

<TABLE>
<CAPTION>
                                                           Number of Shares
                                       ----------------------------------------------------------
                                          Key Party Option        Employee        Exercise Price
                                             Agreements             Plan            Per Share
                                       -----------------------------------------------------------
<S>                                         <C>                 <C>                 <C>
Outstanding as of December 31, 1996              5,990,000           3,204,000        $  0.67-6.00
 Granted                                                --             755,000          6.00-20.00
 Exercised                                      (5,944,000)           (388,000)         0.67-20.00
 Terminated                                        (39,000)           (239,000)         0.67-20.00
                                                ----------           ---------
Outstanding as of December 31, 1997                  7,000           3,332,000          0.67-20.00
 Granted                                                --           1,039,000         17.38-24.00
 Exercised                                          (6,000)           (552,000)         0.67-20.00
 Terminated                                             --            (263,000)         0.67-24.00
                                                ----------           ---------
Oustanding as of December 31, 1998                   1,000           3,556,000          0.67-24.00
 Granted                                                --           1,582,000          6.75-10.00
 Exercised                                              --            (365,000)         0.67-19.75
 Terminated                                             --            (283,000)         0.83-24.00
                                                ----------           ---------
Outstanding as of December 31, 1999                  1,000           4,490,000          0.67-24.00
                                                ==========           =========
</TABLE>



    Weighted average fair value of options granted for the years ended December
31, 1997, 1998, and 1999 was $8.68, $8.98, and $5.16, respectively. These fair
values were calculated using the Black-Scholes option pricing model.

    The Company has approved an employee stock purchase plan (the ``Stock
Purchase Plan''). The Stock Purchase Plan qualifies as an ``employee stock
purchase plan'' under Section 423 of the Code. All regular full-time employees
of the Company (including officers), and all other employees whose customary
employment is for more than 20 hours per week are eligible to participate in the
Stock Purchase Plan. Directors who are not employees are not eligible. A maximum
of 175,000 shares of the Company's common stock were reserved for issuance under
the Stock Purchase Plan and during the year an additional 300,000 shares were
made available for purchase thereunder, subject to antidilution adjustments in
the event of certain changes in the capital structure of the Company.
Participants are permitted to withhold up to 10 percent of eligible
compensation. No more than 2,000 shares of stock can be purchased by a
participant. The purchase price of stock is 85 percent of the fair market value
of the Company's common stock on the first or last business day of the offering
period, whichever is lower. Offering periods will run for consecutive six-month
periods, with the current offering period ending April 30, 2000. At year end,
317,000 shares remained available for sale.

A summary of the Stock Purchase Plan is as follows:

<TABLE>
<CAPTION>
   Offering  Period               Began                     Ended                Shares Purchased           Exercise Price
-----------------------  ------------------------  ------------------------  ------------------------  ------------------------
<S>                      <C>                       <C>                       <C>                       <C>
         1                   April 16, 1998                October 31, 1998           38,000                    $15.81
         2                   November 1, 1998              April 30, 1999             45,000                    $13.71
         3                   May 1, 1999                   October 31, 1999           75,000                    $ 6.91
         4                   November 1, 1999              April 30, 2000                 --                        --
</TABLE>


8.  Retirement Savings Plan:

    The Company has a retirement savings plan (401(k) plan) whereby employees
may contribute up to the limits established by the Internal Revenue Service. The
Company, at the discretion of the Board of Directors, may choose to match
employee contributions up to 15 percent of each employee's compensation. The
Company's contribution expense during 1997, 1998, and 1999 was $1,247,000,
$1,615,000, and $1,816,000, respectively.

                                       36
<PAGE>

9.  Income Taxes:

    In connection with the Company's conversion from an S Corporation to a C
Corporation during 1997, the Company recognized a $4,500,000 income tax
provision during 1997 to establish deferred taxes related to the conversion.

    The provisions for income taxes were as follows:

<TABLE>
<CAPTION>
                                               As of December 31,
                          ------------------------------------------------------
                                 1997                 1998              1999
                          ------------------  --------------------  -----------
<S>                       <C>                 <C>                   <C>
Current:
  Federal                    $3,752,000          $ 8,198,000         $3,375,000
  State                       1,020,000            1,344,000            708,000
Deferred:
  Federal                     2,981,000           (1,242,000)          (872,000)
  State                         300,000             (169,000)          (170,000)
                             ----------          -----------         ----------
Total provision              $8,053,000          $ 8,131,000         $3,041,000
                             ==========          ===========         ==========
</TABLE>


  The statutory federal income tax rate, reconciled to the effective tax rate
provision is as follows:

<TABLE>
<CAPTION>
                                                                       For the Years Ended December 31,
                                                          ----------------------------------------------------------
                                                                  1997                1998                1999
                                                          --------------------  -----------------  ------------------
<S>                                                       <C>                   <C>                <C>
Statutory federal income tax rate (34 %)                          $ 5,007,000          $7,224,000         $2,757,000
State income taxes, net of federal income tax effect                  700,000             887,000            467,000
Effect of S Corporation income taxes  shareholders                 (1,945,000)                 --                 --
Effect of change to C Corporation  shareholders                     4,500,000                  --                 --
Other                                                                (209,000)             20,000           (183,000)
                                                                  -----------          ----------         ----------
      Total                                                       $ 8,053,000          $8,131,000         $3,041,000
                                                                  ===========          ==========         ==========
</TABLE>

                                       37
<PAGE>

  Temporary differences arise between the financial reporting and income tax
basis carrying amounts of assets and liabilities, which gives rise to deferred
income taxes. The Company's deferred taxes as of December 31, 1998 and 1999, and
the elements of the deferred taxes are as follows:

<TABLE>
<CAPTION>
Current Deferred Taxes:                                 1998          1999
                                                        ----          ----
<S>                                                    <C>            <C>
Deferred tax assets
   Accrued compensation                             $   470,000     $   712,000
   Allowance for bad debts                               92,000          90,000
   Debt forgiveness                                      93,000          23,000
   Deferred rent credits                                164,000         157,000
   Net operating loss                                        --         272,000
                                                    -----------     -----------
      Deferred tax asset                                819,000       1,254,000
                                                    -----------     -----------

  Deferred tax (liabilities):
   Prepaid expenses                                     (59,000)        (36,000)
   Cash basis of accounting for income taxes         (1,231,000)     (1,199,000)
                                                    -----------     -----------
      Deferred tax (liability)                       (1,290,000)     (1,235,000)
                                                    -----------     -----------
        Net current deferred asset (liability)      $  (471,000)    $    19,000
                                                    ===========     ===========
Noncurrent Deferred Taxes:
Deferred tax assets
   Business expansion costs                         $        --     $    34,000
                                                    -----------     -----------

  Deferred tax (liabilities):
   Cash basis of accounting for income taxes         (1,231,000)             --
   Depreciation and amortization                        (67,000)       (256,000)
                                                    -----------     -----------
    Deferred tax (liability)                         (1,298,000)       (256,000)
                                                    -----------     -----------
     Net noncurrent deferred tax asset (liability)  $(1,298,000)    $  (222,000)
                                                    ===========     ===========
</TABLE>

                                       38
<PAGE>

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Board of Directors and Stockholders of

RWD Technologies, Inc:

    We have audited in accordance with auditing standards generally accepted in
the United States, the consolidated financial statements of RWD Technologies,
Inc., (a Maryland corporation) and subsidiaries included in this Form 10-K and
have issued our report thereon dated January 18, 2000. Our audit was made for
the purpose of forming an opinion on the basic consolidated financial statements
taken as a whole. The accompanying schedule is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not part of
the basic consolidated financial statements. This schedule has been subjected to
the auditing procedures applied in the audit of the basic consolidated financial
statements and, in our opinion, fairly states in all material respects the
financial data required to be set forth therein in relation to the basic
consolidated financial statements taken as a whole.


/s/ Arthur Andersen LLP
-----------------------


Baltimore, Maryland
January 18, 2000

                                       39
<PAGE>

                    RWD Technologies, Inc., And Subsidiaries
                Schedule II - Valuation and Qualifying Accounts
             For the Years Ended December 31, 1997, 1998, and 1999
                                 (In thousands)


<TABLE>
<CAPTION>
                                             Balance as of         Additions                             Balance as of
                                               Beginning           Charges to                                End of
                                               of Period            Expense            Deductions            Period
                                           ------------------  ------------------  ------------------  ------------------
<S>                                        <C>                 <C>                 <C>                 <C>
Allowance for doubtful accounts

Year ended December 31, 1997                  $  384              $   44            $     --                $  428

Year ended December 31, 1998                     428                  --                 189                   239

Year ended December 31, 1999                     239               1,639               1,639                   239
</TABLE>

                                       40