<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, 2000

                            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 $0.10 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 9, 2001, the aggregate market value of the voting stock held by
nonaffiliates was approximately $19,381,000.

   As of March 9, 2001, 15,160,112 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>
                                                   PART I
<S>         <C>                                                                                       <C>
ITEM 1.     BUSINESS.................................................................................  1
ITEM 2.     PROPERTIES...............................................................................  7
ITEM 3.     LEGAL PROCEEDINGS........................................................................  8
ITEM 4.     SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS......................................  8

                                                  PART II

ITEM 5.     MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS...................  8
ITEM 6.     SELECTED CONSOLIDATED FINANCIAL DATA.....................................................  9
ITEM 7.     MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.... 10
ITEM 7A.    QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK................................ 17
ITEM 8.     FINANCIAL STATEMENTS..................................................................... 17
ITEM 9.     CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE..... 17

                                                 PART III

ITEM 10.    DIRECTORS AND EXECUTIVE OFFICERS OF RWD TECHNOLOGIES, INC................................ 17
ITEM 11.    EXECUTIVE COMPENSATION................................................................... 17
ITEM 12.    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT........................... 17
ITEM 13.    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS........................................... 17

                                                 PART IV

ITEM 14.    EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K........................ 18
SIGNATURES.......................................................................................... 19
</TABLE>

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                                    PART I

Item 1.  Business

  RWD Technologies, Inc., ("RWD" or the "Company") provides a broad range of
integrated products and 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 eCommerce 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 services to meet
the needs of its clients and to address market demands. As the business evolves,
strategic initiatives focus on aligning the organization to best serve the
customers, emphasizing learning products, expanding strategic partnerships, and
pursuing additional international business. One of the Company's strategic
initiatives in 2000 was a major reorganization into three autonomous operating
groups. These service segments are: Enterprise Systems, which provides products
and services supporting the implementation of enterprise-wide software products
and applications; Manufacturing Performance, which addresses all aspects of
manufacturing processes in order to promote continuous improvements; and
Latitude360, which encompasses the design and delivery of information to end
users of technology as well as Web-based training. Each segment leverages the
technological capabilities of the other groups and pursues integrated marketing
to deliver a broad array of solutions to its clients including:

  .  Customer Relationship Management ("CRM") systems
  .  Web-based solutions for workplace performance support
  .  Enterprise Resource Planning ("ERP") services
  .  Lean manufacturing consulting
  .  Custom software development and systems integration
  .  Knowledge management systems and services
  .  Project management consulting
  .  Change management
  .  eLearning
  .  Plant and manufacturing line start-up and troubleshooting services
  .  Web content management
  .  Data warehouse services

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

  The Company's products and 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, 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 eCommerce planning, performance support, and information
technology services marketplaces. The Company's registered service mark, "We
bring people and technology together,"(R) succinctly describes the Company's
unique focus.

  RWD was founded in January 1988 with the objective of applying proven
performance support methodologies to large U.S. industrial companies. RWD's
founders believed that U.S. industrial companies were making substantial
investments in automation and other advanced operating technologies but
achieving relatively low returns on those investments. These low returns
appeared to result from inadequate training and performance support systems
provided to employees. The Company's first major client was DaimlerChrysler.

                                       1
<PAGE>

  The Company's client list represents over 30 industries including automotive,
financial and banking, telecommunications, consumer products, equipment
manufacturing, pharmaceutical, and petrochemical. The Company targets industries
where its extensive experience matches the unique needs of clients in those
industries.

RWD Services

  The Company's products and services are outlined below in three business
segments: Enterprise Systems, Manufacturing Performance, and Latitude360 which
represented 34.9, 36.6, and 28.5 percent, respectively, of the Company's 2000
revenue. Solutions delivered by the Company often are associated with more than
one of the three identified business segments. For example, solutions delivered
outside of Latitude360, such as in Enterprise Systems, 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 differentiator and competitive advantage.

  Enterprise Systems. These products and services generated $38.4 million (or
33.5 percent), $37.3 million (or 29.9 percent), and $46.9 million (or 34.9
percent) of RWD's total revenue in 1998, 1999, and 2000, 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, but also including 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 enhances 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 1000 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
clients with a rapid assessment of performance improvement opportunities
associated with their organization, user population, technology applications,
and business processes.

  The Company's products and 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, eLearning, 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 support strategies.

  .  Implementation services, such as implementation planning, project
     management, data conversion, hardware and software installation prototyping
     and cycle testing, system configuration, integration, and rollout.
     Implementation support focuses on support for SAP R/3 version 4.6 upgrades,
     mySAP.com implementations, along with 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, strategic planning, and change management.

  As an example, Enterprise Systems is currently supporting the global rollout
of SAP for a major soft drink producer. As part of this effort, RWD has
developed an internal academy to train client staff on the rollout methodology
and other critical aspects of the project plan. In addition, RWD developed end
user training to support the global rollout including customizing the curriculum
to meet local needs.

  In 2000, Enterprise Systems received SAP's Award of Excellence and was
selected as a strategic alliance partner by SAP America. In addition, in
December an Asia Pacific joint venture between RWD and SAP was incorporated in
Singapore which management expects will achieve significant growth in the
enterprise business. These relationships are expected to increase revenues and
reduce the variability of enterprise services.

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<PAGE>

  Manufacturing Performance. Manufacturing Performance services generated $39.7
million (or 34.6 percent), $45.1 million (or 36.2 percent), and $49.1 million
(or 36.6 percent) of RWD's total revenue in 1998, 1999, and 2000, respectively.
RWD is a world-wide full service provider of manufacturing expertise in leading-
edge technologies and processes. The activities of this segment are arranged
into three major categories: eManufacturing and Support Services, Lean
Manufacturing, and Performance Support.

  eManufacturing and Support Service's role is building mutually-beneficial
relationships by providing information technology services, strategic
consulting, and engineering services. Projects in this group focus on the
performance of the end users of technology that have a measurable impact on the
client organization and strive to increase the value of the organization. The
activities fall into three categories: Information Technology, which supports
the lean value business model for manufacturing clients who operate on a global
scale; Strategic Consulting, which provides integrated services in vital areas
such as streamlining processes throughout customers' value chains; and
Engineering Services, which focus on manufacturing planning and implementation.

  The Lean Manufacturing area of Manufacturing Performance specializes in
providing lean manufacturing services to its clients. These services are based
upon an integrated operational system, developed and refined by the Japanese
over many years, that 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 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 work
station organization 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 third area of Manufacturing Support is Performance Support which provides
high-quality improvement solutions ranging from training to technology-based
solutions. Services encompass technical consulting, business and work process
optimization/integration, new product launch support services plus a range of
corporate education design, development, and delivery solutions.

  As an example of work done in this segment, during 2000, RWD began a multi-
year program with a major automotive manufacturer to improve the quality and
productivity in four pilot plants. The initiative began with an assessment of
the current state of the manufacturing processes in each facility. The
assessment team then met with plant and union management to define the goals and
establish a plan. Using lean manufacturing techniques, the team began
implementing the plans which involved modification or redesigns of line balance,
material flow, and equipment layout as well as implementation of signal systems,
error proofing systems, and visual factory practices.

  Latitude360. Latitude360 services generated $36.5 million (or 31.8 percent),
$42.1 million (or 33.8 percent), and $38.3 million (or 28.5 percent) of RWD's
total revenue for 1998, 1999, and 2000, respectively. The focus of this segment
is connecting technology, culture, and business to deliver the information
companies need to make important business decisions. These services include next
generation Web-based solutions and a full spectrum of supporting technologies
and services including 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. Projects
range from deployment of eCommerce sites, to developing intranets, to designing
remote diagnostic information systems. Business solutions which enhance end
users' access to critical information include customized enhanced user interface
systems, electronic performance support systems, and document management
systems.

  RWD's information solutions also include customer relationship management
systems, remote worker automation, knowledge management systems, and strategic
consulting. Latitude360 provides a full spectrum of solutions for distance-based
education and certification via Web-based products.

Client requirements can be customized to include only the components critical to
their education and training process and can be extensive enough to establish a
complete corporate online university. RWD fulfills this through a variety of
training

                                       3
<PAGE>

products such as CertificationNet, ConferenceNet, and University360. These
solutions incorporate customized content development and commercial off-the-
shelf software to allow for easier integration with other applications.

  As an example, Latitude360 is assisting a major manufacturer to streamline the
delivery of its marketing collateral by creating a common, Web-based repository
of information. Partners, operations staff, and employees can access this
warehouse of text and graphical information to efficiently update and archive
critical pieces of data. By streamlining the process and providing better
control over the information, the manufacturer can reduce errors, waste, and
other costs.

Industries and Clients Served

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

                                   Industries

<TABLE>
<S>                                  <C>                                  <C>
Aerospace                            Food & Beverage                      Photographic Film and Equipment
Automotive Equipment/Parts Manuf.    Furniture                            Publishing
Automotive Manufacturing             Government                           Pulp & Paper
Biotechnology                        Healthcare Delivery                  Railroad
Chemical                             Hospitality                          Rubber Products
Computer Hardware/Software           Industrial Manufacturing             Software
Consumer Products                    Other Manufacturing                  Telecommunications
Education                            Package Delivery                     Utilities
Electronics                          Paper Products                       Wholesale/Retail
Entertainment & Media                Petroleum
Financial Services                   Pharmaceuticals
</TABLE>

  The following is a list of representative clients served by the Company during
2000. These clients generated, in the aggregate, more than 80 percent of the
Company's 2000 revenue.

                                    Clients

<TABLE>
<S>                                  <C>                                  <C>
Alexus International                 Equistar Chemicals (Lyondell)        National Assoc for Security Dealers
AstraZeneca UK, Ltd.                 ExxonMobil                           New Venture Gear
Beckman Coulter                      Ford Motor Company                   Phillips Petroleum
Bristol-Myers Squibb                 Florida Power and Light              Proctor & Gamble
Coca-Cola                            Frito-Lay                            SAP America
DaimlerChrysler                      Fujitsu Network Communications       Schering Plough Research Inst.
Danfoss Fluid Power A/S              General Motors                       S.C. Johnson & Son
Deere and Company                    Genentech                            SmithKline Beecham
Delphi Automotive Systems LLC        Glaxo Wellcome                       Solutia
Delta Air Lines                      IBM                                  Solvay Information Technologies
Documentum                           Jaguar Cars Limited                  State University of New York
Dow Chemical                         M/A-COM                              Tellabs Operations
Eli Lilly                            Merck & Co.                          Toyota (GB)
</TABLE>

  In 2000, RWD provided services to over 200 companies in more than 30
industries. DaimlerChrysler, the Company's largest client, generated 22.4
percent, 20.4 percent and 18.6 percent of total revenue in 1998, 1999, and 2000,
respectively. Ford Motor Company generated 12.7 percent, 10.9 percent, and 14.0
percent of total revenue in 1998, 1999, and 2000, respectively. No other client
generated more than 10 percent of total revenue in any of these periods. The
Company's top five clients in 1998, 1999, and 2000 generated an aggregate of
50.0 percent, 43.5 percent, and 48.3 percent, respectively, of total revenue in
each of these periods. Automotive industry clients generated an aggregate of
37.9 percent, 37.5 percent, and 36.3 percent of total revenue in 1998, 1999, and
2000, respectively. Telecommunications clients generated an aggregate of 10.4
percent, 7.0 percent, and 1.7 percent of total revenue in 1998, 1999, and 2000,
respectively. Financial industry clients generated an aggregate of 10.0 percent
and 7.5 percent of the Company's total revenue in 1999 and 2000, respectively.

                                       4
<PAGE>

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 business development people with
extensive experience in the pharmaceutical, petrochemical, automotive, and
advanced Internet technology industries. The Company believes its industry-
focused 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
products and services. The Company also actively seeks strategic relationships
with leading software companies whose high-quality products and need for
implementation expertise present significant opportunities for the Company.
RWD's primary business alliances include those with SAP, Documentum, Siebel,
Lotus, POINT, Dataware, Microsoft, Saba, WBT Systems, Centra Software, O'Reilly
and Associates, Experient Technologies, SAS Institute, and Netscape.

Geographic Expansion

  The Company has often delivered solutions outside the U.S. for its domestic
multinational clients. From 1996 to 2000, international revenue expanded from 2
percent to 10 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 its 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, which includes one of the first SAP InfoDB labs in Europe
near SAP's world headquarters. In 2000, the Company opened an office in Mexico
to support SAP initiatives in the region. At year-end, the Company was actively
involved in forming SAP Learning Solutions, a new joint venture with SAP Asia.
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 businesses with
consulting practices formerly affiliated with 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

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<PAGE>

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, 2000.

  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. 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 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, an employee referral
program, 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 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, 2000, held
options to purchase, in aggregate, 4.9 million shares of the Company's Common
Stock.

  RWD believes these policies have generally resulted in an employee turnover
rate which compares favorably to its competitors. A higher rate was incurred in
2000 due to industry-wide competition for technically skilled professionals. 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. As a standard practice, the Company 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

                                       6
<PAGE>

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," with graphic, the phrase, "We bring people and
technology together," "We bring people and technology together" with graphic,
"Accelerating Learning Through Technology," "CertificationNet," "RWD" logo,
Training Support Performance Continuous Learning for World Class Manufacturing"
with graphic, as well as various other logos. Additionally, the Company has a
number of trade and service marks including "Globally Serving a High Tech
World," "RWD PBA," "RWD LeanVision," "RWD ProAction," "RWD User Performance
Pak," "End2End eLearning," "Latitude360," "Latitude360" logo, "Latitude360.com,"
"University360," "LeanTrials Consulting Services," "RWD.com," "RWD
ConferenceNet," "RWD eLearning," "RWD eTrials," "RWD Info Pak," "RWD iVision,"
"RWD LeanVision," "RWD Technologies," "RWD TOPS," "RWD User Performance Pak,"
and "Smart Thinking Smarter." The Company holds no patents. The Company may
register additional copyrights for certain software it develops in the future.

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 100,000 square feet in
Waltham, Massachusetts; Boston, Massachusetts; Cincinnati, Ohio; Chicago,
Illinois; King of Prussia, Pennsylvania; Dearborn, Michigan; Troy, Michigan;
Houston, Texas; Lexington, Kentucky; Princeton, New Jersey; Sacramento,
California; San Ramon, California; Merritt Island, Florida; Baltimore, Maryland;
Mexico City, Mexico; Walldorf, Germany; Birmingham, England; and London,
England.

  In 1999, the Company committed to lease a 63,000 square foot facility to be
constructed 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 300 people,
including RWD's personnel, students from UMBC, and RWD's client personnel
working to develop advanced internet and information technology solutions for
RWD clients. Construction began in late 2000 and occupancy is anticipated in the
fourth quarter of 2001.

                                       7
<PAGE>

  The Company believes that additional office space could be required within the
next 12 months and that its leases can be renewed or alternative and expansion
space obtained as needed. In 2000, aggregate annual rent for the Company's
corporate headquarters and other offices was approximately $5.3 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 of 2000.

                                    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 National 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 National Market.

                                              High       Low
                                             ------     ------
          1999
          1/st/ Quarter......................$22.00     $13.13
          2/nd/ Quarter...................... 18.00       9.63
          3/rd/ Quarter...................... 10.75       7.56
          4/th/ Quarter...................... 10.38       6.50

          2000
          1/st/ Quarter...................... 10.50       8.00
          2/nd/ Quarter......................  9.22       3.38
          3/rd/ Quarter......................  8.50       3.88
          4/th/ Quarter......................  8.50       3.06

  No dividends were declared on the Company's Common Stock during the year ended
December 31, 2000, and the Company does not anticipate paying dividends in the
foreseeable future.

  The number of shareholders of record as of March 9, 2001, was 2,637.

                                       8
<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 Form 10-K. The balance
sheet and income statement data at and for the years ended December 31, 1996,
1997, 1998, 1999 and 2000, 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,
                                                 -------------------------------------------------
                                                     1996      1997      1998      1999      2000
                                                   -------   -------  --------  --------  --------
                                                        (In thousands, except per share data)
<S>                                                <C>       <C>      <C>       <C>       <C>
Income Statement Data:
   Revenue.......................................  $65,006   $85,670  $114,719  $124,433  $134,310
   Cost of services..............................   47,180    59,585    76,416    95,024   101,390
                                                   -------   -------  --------  --------  --------
   Gross profit..................................   17,826    26,085    38,303    29,409    32,920
   Selling, general and administrative expenses..    9,089    12,341    18,821    22,409    25,694
                                                   -------   -------  --------  --------  --------
   Operating income..............................    8,737    13,744    19,482     7,000     7,226
   Other (expense) income, net...................     (123)      982     1,765     1,109       (96)
                                                   -------   -------  --------  --------  --------
   Income before taxes...........................    8,614    14,726    21,247     8,109     7,130
   Provision for income taxes....................      365     8,053     8,131     3,041     2,538
                                                   -------   -------  --------  --------  --------
   Net income....................................  $ 8,249   $ 6,673  $ 13,116  $  5,068  $  4,592
                                                   =======   =======  ========  ========  ========
   Pro Forma Data/1/:
   Provision for income taxes....................  $ 3,446   $ 5,725
   Net income....................................  $ 5,168   $ 9,001
                                                   =======   =======
   Earnings per share:
   Diluted calculation...........................  $  0.40   $  0.62  $   0.82  $   0.33  $   0.30
                                                   =======   =======  ========  ========  ========
   Basic calculation.............................  $  0.47   $  0.71  $   0.88  $   0.34  $   0.31
                                                   =======   =======  ========  ========  ========
   Weighted average shares outstanding:
   Diluted calculation...........................   13,030    14,470    16,016    15,503    15,518
                                                   =======   =======  ========  ========  ========
   Basic calculation.............................   10,902    12,747    14,895    14,769    14,943
                                                   =======   =======  ========  ========  ========

Balance Sheet Data (end of year):
   Cash and marketable securities................  $ 5,534   $40,045  $ 51,224  $ 28,214  $ 27,340
   Working capital...............................   12,053    49,381    66,399    47,065    50,623
   Total assets..................................   29,858    67,887    90,394    87,261    97,826
   Total debt....................................    3,925     1,101       865     1,669       607
   Stockholders' equity..........................   20,132    54,964    73,961    73,341    79,301
</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.

                                       9
<PAGE>

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

Overview

  RWD Technologies 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: Enterprise Systems,
which provides products and services supporting the implementation of
enterprise-wide software products and applications; Manufacturing Performance,
which addresses all aspects of manufacturing processes in order to promote
continuous improvements; and Latitude360, which encompasses the design and
delivery of information to end users of technology including Web-based training.

  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" amounts and Company performance obligations. The remainder of the
Company's contracts are on a fixed-price basis, particularly those related to
Latitude360. All service 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 from clients who had been clients in the previous
year. In addition to service contracts, during 2000, the Company expanded its
offerings to include training-based products. Although this is not currently a
significant source of revenue, the Company expects to offer a variety of
training-based products across all segments in the future.

  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.

  Business in 2000 grew sequentially quarter on quarter from the reduced volume
experienced in 1999 before flattening out in the fourth quarter due to reduced
information technology (IT) and training expenditures by businesses in general.
The Company experienced turnover at levels higher than that incurred in prior
years, primarily due to the competitive market for technically skilled
professionals.

  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 Enterprise Resource Planning (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 to marketing by professional personnel
normally assigned to client work is included in cost of services, as are costs
associated with administrative personnel who directly support the Company's
professional staff. Selling, general and administrative expenses are composed
primarily of salaries for corporate, accounting, dedicated sales and other
headquarters executive and administrative personnel, as well as other corporate
overhead.

                                       10
<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 these
items from the prior year:

<TABLE>
<CAPTION>

                                                                Percentage of Revenue                           Percentage Increase
                                                               Year Ended December 31,                              (Decrease)
                                                  ------------------------------------------------    ------------------------------
                                                        1998            1999            2000          1998 to 1999     1999 to 2000
                                                        -----           -----           -----         ------------     ------------
<S>                                                    <C>             <C>             <C>                <C>              <C>
Revenue..........................................      100.0%          100.0%           100.0%             8.5%             7.9%
Cost of services.................................       66.6            76.4             75.5             24.3              6.7
                                                       -----           -----            -----
Gross profit.....................................       33.4            23.6             24.5            (23.2)            11.9
Selling, general and administrative expenses.....       16.4            18.0             19.1             19.1             14.7
                                                       -----           -----            -----
Operating income.................................       17.0             5.6              5.4            (64.1)             3.2
Other income (expense), net......................        1.5             0.9             (0.1)           (37.2)              --
                                                       -----           -----            -----
Income before taxes..............................       18.5             6.5              5.3            (61.8)           (12.1)
Provision for income taxes.......................        7.1             2.4              1.9            (62.6)           (16.5)
                                                       -----           -----            -----
Net income.......................................       11.4%            4.1%             3.4%           (61.4)            (9.4)
                                                       =====           =====            =====
</TABLE>

Year Ended December 31, 2000, Compared to Year Ended December 31, 1999

     During the three months ended March 31, 2000, the Company reorganized into
three operating segments and realigned certain profit centers. As a result of
this reorganization, the Company has changed its discussion of operating results
from the four segments previously discussed to the present three segments.

     Solutions delivered by the Company often can be associated with more than
one of the three identified business segments. For example, solutions delivered
outside of the Latitude360 segment, such as in ERP, frequently have significant
IT 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 IT, end user support, performance analysis,
and documentation is a significant differentiator and competitive advantage.

     During 2000, the Company changed the way it reports gross profit margins.
The Company previously included all selling expenses with cost of services and
now includes these expenses with selling, general and administrative expenses
except for time devoted to marketing by professional personnel normally assigned
to client work. Those costs remain in cost of services. The amounts for the
prior years were reclassified to conform to the 2000 period presentation.

     Revenue. Revenue for the total Company increased by $9.9 million (or 7.9
percent) from $124.4 million in 1999 to $134.3 million in 2000. Performance by
segment was as follows:

     .  Enterprise Systems. Revenue increased by $9.6 million (or 25.9 percent)
        from $37.3 million in 1999 to $46.9 million in 2000, representing 29.9
        percent of the Company's total revenue in 1999 and 34.9 percent in 2000.
        This growth resulted from a general increase in demand in the ERP market
        throughout the year and the Company's key relationships with ERP related
        companies.

     .  Manufacturing Performance. Revenue increased by $4.0 million (or 8.9
        percent) from $45.1 million in 1999 to $49.1 million in 2000,
        representing 36.2 percent of the Company's total revenue in 1999 and
        36.6 percent in 2000. Growth occurred sequentially throughout the year
        and included an increase in work performed under a significant contract
        for an important established client.

     .  Latitude360. Revenue decreased by $3.8 million (or 9.0 percent) from
        $42.1 million in 1999 to $38.3 million in 2000, representing 33.8
        percent of the Company's revenue in 1999 and 28.5 percent in 2000. This
        decrease in revenue was attributable to the Company's shift in emphasis
        to Web-related and eLearning IT activities where investments in services
        of this type have significant future market potential.

                                       11
<PAGE>

     The Company experienced a high level of turnover of professional employees
during the year due to intense competition for qualified people. However, the
Company's total number of employees at year-end was 1,101 for both 2000 and
1999.

     Gross Profit. Gross profit for the total Company increased by $3.5 million
(or 11.9 percent) from $29.4 million in 1999 to $32.9 million in 2000, and
increased from 23.6 percent of revenue in 1999 to 24.5 percent of revenue in
2000. Gross profit for the individual operating segments was as follows:

     .  Enterprise Systems. Gross profit increased significantly (by 102.6
        percent) from $6.3 million in 1999 to $12.8 million in 2000. Gross
        profit margin for Enterprise Systems increased from 17.0 percent of this
        segment's revenue in 1999 to 27.3 percent in 2000. This significant
        increase in gross profit was due primarily to increased staff
        utilization.

     .  Manufacturing Performance. Gross profit increased slightly (by 2.2
        percent) from $13.5 million in 1999 to $13.8 million in 2000. Gross
        profit margin decreased from 29.9 percent of this segment's revenue in
        1999 to 28.0 percent in 2000. The decline in gross profit margin
        resulted primarily from holding the Company's rates at the same level
        for 2000 for a significant client and decreases in staff utilization.

     .  Latitude360. Gross profit declined by 34.1 percent from $9.6 million in
        1999 to $6.3 million for 2000. Gross profit margin decreased from 22.8
        percent of this segment's revenue in 1999 to 16.5 percent in 2000. This
        decrease in gross profit resulted primarily from the decline in revenue
        while the Company maintained its infrastructure and technical work-force
        to support anticipated future business growth.

     Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased by $3.3 million (or 14.7 percent) from $22.4
million in 1999 to $25.7 million in 2000, increasing from 18.0 percent of total
revenue in 1999 to 19.1 percent of total revenue in 2000. This increase in
selling, general and administrative expenses as a percentage of revenue resulted
primarily from increases in facility costs, depreciation, indirect travel
associated with marketing efforts, and professional services associated with the
corporate computer conversion.

     Operating Income. As a result of the foregoing, the Company's operating
income increased by $0.2 million (or 3.2 percent) from $7.0 million in 1999 to
$7.2 million in 2000 and decreased from 5.6 percent of revenue in 1999 to 5.4
percent of revenue in 2000.

     Other Income (Expense). Other income (expense) was $1.1 million of income
in 1999 and $0.1 million in expense in 2000. The decline was primarily a result
of increased interest expense for working capital needs, decreased interest
income, and foreign currency fluctuations related to increases in working
capital requirements.

     Net Income. Net income decreased by $0.5 million (or 9.4 percent) from $5.1
million in 1999 to $4.6 million in 2000, decreasing from 4.1 percent of revenue
in 1999 to 3.4 percent of revenue in 2000.

                                       12
<PAGE>

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

     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:

     .  Enterprise Systems. Revenue 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 realized a significant downturn in revenue in the second
        half of 1999 as a result of several projects being delayed or canceled
        as a result of clients' concerns relative to their Y2K mitigation
        efforts.

     .  Manufacturing Performance. Revenue increased $5.4 million (or 13.4
        percent) from $39.7 million in 1998 to $45.1 million in 1999,
        representing 34.6 percent of the Company's total revenue in 1998 and
        36.2 percent in 1999. The increase in revenue was attributable to growth
        in business with a significant client, other automotive suppliers, and
        new lean manufacturing clients in Europe.

     .  Latitude360. Revenue for the Company's eSolutions and eLearning services
        increased $5.6 million (or 15.2 percent) from $36.5 million in 1998 to
        $42.1 million in 1999, representing 31.8 percent of the Company's total
        revenue in 1998 and 33.8 percent in 1999. This increase resulted from
        the activities of the Merrimac acquisition and from a significant
        increase in business volume for two major clients.

     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 $8.9 million
(or 23.2 percent) from $38.3 million in 1998 to $29.4 million in 1999, and
decreased from 33.4 percent of revenue in 1998 to 23.6 percent of revenue in
1999. Gross profit for individual operating segments was as follows:

     .  Enterprise Systems. Gross profit decreased by 51.1 percent from $12.9
        million in 1998 to $6.3 million in 1999. Gross profit margin for
        Enterprise Systems decreased from 33.7 percent of this segment's revenue
        in 1998 to 17.0 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.

     .  Manufacturing Performance. Gross profit increased by 8.4 percent from
        $12.4 million in 1998 to $13.5 million in 1999. Gross profit margin
        decreased from 31.3 percent of this segment's revenue in 1998 to 29.9
        percent in 1999. This decrease in gross profit margin resulted primarily
        from increased investments in European operations.

     .  Latitude 360. Gross profit for eSolutions and eLearning services
        decreased by 25.7 percent from $12.9 million in 1998 to $9.6 million in
        1999. Gross profit margin decreased from 35.4 percent of this segment's
        revenue in 1998 to 22.8 percent in 1999. This decrease in 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.

     Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased by $3.6 million (or 19.1 percent) from $18.8
million in 1998 to $22.4 million in 1999, increasing from 16.4 percent of total
revenue in 1998 to 18.0 percent of total revenue in 1999. This increase in
selling, 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 open-market 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.

                                       13
<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, 1999, and ending December 31, 2000,
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 Months Ended
                                          -------------------------------------------------------------------------------------
                                          March 31,  June 30,  Sept. 30,   Dec. 31,   March 31,  June 30,  Sept. 30,   Dec. 31,
                                          ---------  --------  ----------  ---------  ---------  --------  ----------  ---------
                                             1999      1999       1999       1999        2000      2000       2000       2000
                                             ----      ----       ----       ----        ----      ----       ----       ----
                                                                  (In thousands, except per share data)
<S>                                         <C>       <C>        <C>        <C>         <C>       <C>        <C>        <C>
Income Statement Data:
  Revenue...............................    $33,242   $32,437    $29,096    $29,658     $30,814   $33,527    $35,670    $34,299
  Cost of services......................     22,388    23,435     23,403     25,798      23,966    25,280     26,296     25,848
                                          -------------------------------------------------------------------------------------
  Gross profit..........................     10,854     9,002      5,693      3,860       6,848     8,247      9,374      8,451
  Selling, general and administrative
    expenses............................      5,228     5,709      5,796      5,676       6,080     6,632      6,899      6,083
                                          -------------------------------------------------------------------------------------
  Operating income (loss)...............      5,626     3,293       (103)    (1,816)        768     1,615      2,475      2,368
  Other income (loss), net..............        460       397        135        117          88        46        (82)      (148)
                                          -------------------------------------------------------------------------------------
  Income (loss) before taxes............      6,086     3,690         32     (1,699)        856     1,661      2,393      2,220
  Provision for (benefit from)
    income taxes........................      2,282     1,384         12       (637)        317       615        885        721
                                          -------------------------------------------------------------------------------------
  Net Income (loss).....................    $ 3,804   $ 2,306    $    20    $(1,062)    $   539   $ 1,046    $ 1,508    $ 1,499
                                          =====================================================================================

  Earnings (loss) per share:
    Diluted calculation.................    $  0.24   $  0.15    $  0.00    $ (0.07)    $  0.04   $  0.07    $  0.10    $  0.10
                                          =====================================================================================
    Basic calculation...................    $  0.25   $  0.15    $  0.00    $ (0.07)    $  0.04   $  0.07    $  0.10    $  0.10
                                          =====================================================================================
  Weighted average shares
    outstanding:
    Diluted calculation.................     15,920    15,783     15,156     15,152      15,404    15,260     15,706     15,702
                                          =====================================================================================
    Basic calculation...................     15,032    14,971     14,481     14,594      14,757    14,912     15,012     15,093
                                          =====================================================================================
  Revenue...............................      100.0%    100.0%     100.0%     100.0%      100.0%    100.0%     100.0%     100.0%
  Cost of services......................       67.3      72.2       80.4       87.0        77.8      75.4       73.7       75.4
                                          -------------------------------------------------------------------------------------
  Gross profit..........................       32.7      27.8       19.6       13.0        22.2      24.6       26.3       24.6
  Selling, general and administrative
    expenses............................       15.8      17.6       20.0       19.1        19.7      19.8       19.4       17.7
                                          -------------------------------------------------------------------------------------
  Operating income (loss)...............       16.9      10.2       (0.4)      (6.1)        2.5       4.8        6.9       6.9
  Other income (loss), net..............        1.4       1.2        0.5        0.4         0.3       0.2       (0.2)     (0.4)
                                          ------------------------------------------------------------------------------------
  Income (loss) before taxes............       18.3      11.4        0.1       (5.7)        2.8       5.0        6.7       6.5
  Provision for (benefit from)
    income taxes........................        6.9       4.3        0.0       (2.1)        1.0       1.9        2.5       2.1
                                          ------------------------------------------------------------------------------------
  Net income (loss).....................       11.4%      7.1%       0.1%      (3.6)%       1.8%      3.1%       4.2%      4.4%
                                          ====================================================================================
</TABLE>

                                       14
<PAGE>

Liquidity and Capital Resources

     The Company's cash and investments were $27.3 million as of December 31,
2000, compared to $28.2 million as of December 31, 1999. During 2000, the
Company utilized its bank line of credit for general working capital needs and
to fund the Company's enterprise-wide computer conversion. The Company
experienced a delay in billing and collections mid-year which caused an increase
in cash requirements. By year-end, billing and accounts receivable collections
returned to more normal levels and no borrowings were outstanding under the bank
line of credit. The Company's working capital was $50.6 million as of December
31, 2000 and $47.1 million as of December 31, 1999.

     The Company's operating activities provided cash of $8.7 million in 2000,
compared to $6.4 million for 1999. This increase in cash provided from
operations resulted primarily from increases in accounts payable and accrued
expenses, partially offset by increases in accounts receivable.

     Investing activities used cash of $11.3 million in 2000, compared to an
$8.8 million use of cash in 1999. Cash used for investing activities in 2000
consisted primarily of the purchase of fixed assets. Cash used for investing
activities in 1999 consisted primarily of the Merrimac acquisition and the
purchase of fixed assets, partially offset by the sale of investments.

     Financing activities provided cash of $1.4 million in 2000, compared to a
use of cash of $7.1 million in 1999. Cash provided by financing activities in
2000 related primarily to the issuance of the Company's Common Stock upon
exercise of employee stock options. Cash used for financing activities in 1999
consisted primarily of the Company's open-market repurchases of its Common Stock
at various times during the year, partially offset by the issuance of Common
Stock upon 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 (6.56 percent on
December 31, 2000), plus 0.875 percent. The Company utilizes this line of credit
from time to time to finance a portion of its working capital needs. There was
no balance outstanding on the line of credit as of December 31, 2000 or December
31, 1999.

     During 2000, the Company made $7.5 million in capital expenditures,
primarily for office furniture, computer/office equipment, and leasehold
improvements to support its professional and administrative staff. During 2001,
the Company anticipates it will make approximately the same level of capital
expenditures as in the prior year. The Company expects to fund those capital
expenditures from available cash, although the Company may consider alternative
financing methods, such as equipment leases or asset-based borrowings. The
Company believes its existing 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 2001.

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.

2001 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). These forward-looking statements
include risks and uncertainties. Consequently, actual results may differ
materially from those expressed or implied by these forward-looking statements.
The following are some of the factors that may 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 its strategic
        allies, particularly SAP and Siebel, as well as Documentum, Lotus,
        POINT, Dataware, Microsoft, Saba, WBT Systems, Centra Software, O'Reilly
        and Associates, Experient Technologies, SAS Institute, and Netscape have
        been, or are anticipated to be, important sources of revenue. The
        Company also faces potential competition from software companies,
        including its strategic allies who, through their client services
        groups, may choose to compete with the Company. Many of these alliances
        are informal

                                       15
<PAGE>

        or terminable by either party with minimal notice. The termination of,
        or any adverse change in any of these alliances, particularly SAP or
        Siebel, could adversely affect the Company's ability to achieve its 2001
        revenue and profitability goals.

     .  Geographic Expansion. The Company continues to expand its operations and
        marketing efforts in Europe, Mexico, and Asia, 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 2001 would be adversely affected. 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 Systems. In 2000, sales and services relating to ERP software
        rebounded from the slowdown that the major software vendors experienced
        in 1999 as IT spending focus returned to business improvements. As a
        result of improved market conditions and the Company's emphasis on
        strategic alliances, the Company expects that in 2001, its ERP service
        sector will improve its financial performance. However, the actual
        demand for ERP services remains 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 eCommerce and Web-based solutions. If the
        Company fails to identify shifting demand for particular information
        technology services or does not develop the expertise necessary to
        provide services for which there is new demand, the Company's revenue
        growth and profitability are likely to 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 their concerns about their Y2K mitigation
        efforts. In 2000, business stabilized due to a stronger market and the
        Company's alliances with key companies, although some slowing in IT
        spending was experienced toward the end of the year. The Company cannot
        be certain that it will experience continued growth in demand for these
        services.

     .  Customer and Industry Revenue Concentration. The Company continues to
        derive a substantial amount of its revenue from a limited number of key
        clients. In 2000, the Company's top five clients and ten clients
        represented 48.3 percent and 57.5 percent of total revenue,
        respectively, with clients in the automotive industry generating 36.3
        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 automotive and petrochemicals, which are
        subject to economic factors that affect the clients' revenue and
        profitability. Automotive industry sales are expected to be down in
        2001. While the Company anticipates less work in 2001 with its key
        automobile manufacturing clients, Manufacturing Performance has several
        initiatives in other business areas within and outside the automotive
        industry. If any of the Company's major clients discontinue doing
        business with the Company or significantly reduce the amount of services
        they purchase from the Company, the Company's revenue growth and
        profitability are likely to 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 and the
        Company experiences higher turnover levels.

        As of December 31, 2000, Mr. John H. Beakes, co-founder of the Company,
        retired as President and Chief Operating Officer. Mr. Kenneth J. Rebeck,
        who has significant senior management experience at the Company, was
        appointed President and Chief Operating Officer.

     .  Increasing Competition. In recent years, the Company has experienced
        heightened competition, particularly in the ERP, eSolutions, and
        eLearning areas 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.

                                       16
<PAGE>

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
(6.56 percent on December 31, 2000), plus 0.875 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 21 through
24.

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 2001 Annual Meeting
of Stockholders, which will be filed on or before April 5, 2001, 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 2001 Annual Meeting
of Stockholders, which will be filed on or before April 5, 2001, and is
incorporated herein by reference.

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 2001 Annual Meeting
of Stockholders, which will be filed on or before April 5, 2001, 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 2001 Annual Meeting
of Stockholders, which will be filed on or before April 5, 2001, and is
incorporated herein by reference.

                                       17
<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.  The 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

  Exhibit No.                                   Description
-------------  -----------------------------------------------------------------

     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***
______________________
*       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.
****    Incorporated by reference to the Exhibits to the Company's 2nd quarter
        2000 Form 10-Q, dated August 11, 2000 (No. 000-22145).

            (b). Reports on Form 8-K. None were filed during the fourth quarter
of 2000.

                                       18
<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
of the undersigned, thereunto duly authorized on March 22, 2001.

                              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/ Robert T. O'Connell
                                   ---------------------------------------------
                                   Robert T. O'Connell
                                   Senior Vice President, Chief Financial
                                   Officer
                                   (Principal Financial and Accounting
                                   Officer)

                                       19
<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 (the Company) as
of December 31, 1999 and 2000, 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, 2000. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

     We conducted our audits in accordance with 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 financial statements. An audit also includes assessing the accounting
principles 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, 1999 and 2000, and the
results of their operations and their cash flows for the three years in the
period ended December 31, 2000, in conformity with accounting principles
generally accepted in the United States.

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

Baltimore, Maryland
February 6, 2001

                                       20
<PAGE>

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

<TABLE>
<CAPTION>
                                                                                                As of December 31,
                                                                                         -----------------------------
                                      Assets                                                 1999                 2000
                                                                                             ----                 ----
<S>                                                                                      <C>                    <C>
Current Assets:
 Cash and cash equivalents..........................................................       $  3,760             $  2,596
 Investments, available-for-sale....................................................         24,454               24,744
 Contract accounts receivable, net of allowance for doubtful accounts
  of $239 and $345..................................................................         21,731               26,556
 Cost and estimated earnings in excess of billings on uncompleted contracts.........          7,232               10,273
 Income tax refund receivable.......................................................          1,692                   --
 Prepaid expenses and other.........................................................          1,257                2,153
 Deferred tax asset.................................................................             19                  929
                                                                                           --------             --------
   Total Current Assets.............................................................         60,145               67,251
                                                                                           --------             --------

Fixed Assets:
 Furniture and fixtures.............................................................          8,339                9,703
 Office equipment...................................................................          2,427                3,082
 Computer equipment.................................................................         11,579               18,113
 Leasehold improvements.............................................................          1,528                1,831
                                                                                           --------             --------
   Total Fixed Assets...............................................................         23,873               32,729
 Less accumulated depreciation and amortization.....................................         12,409               17,464
                                                                                           --------             --------
   Net Fixed Assets.................................................................         11,464               15,265
                                                                                           --------             --------
Goodwill, net of accumulated amortization of $340 and $1,046........................         13,421               13,244
                                                                                           --------             --------
Other assets........................................................................          2,231                2,066
                                                                                           --------             --------
     Total Assets...................................................................       $ 87,261             $ 97,826
                                                                                           ========             ========

                         Liabilities and Stockholders' Equity
Current Liabilities:
 Accounts payable and accrued expenses..............................................       $  2,793             $  3,863
 Accrued payroll and other..........................................................          3,298                7,471
 Accrued vacation payable...........................................................          1,933                2,335
 Note payable.......................................................................          1,026                   --
 Billings in excess of costs and estimated earnings on uncompleted contracts........          4,005                2,902
 Current portion of capital lease obligation........................................             25                   57
                                                                                           --------             --------
   Total Current Liabilities........................................................         13,080               16,628
Noncurrent Liabilities:
 Capital lease obligation, net of current portion...................................             26                   18
 Deferred tax liability.............................................................            222                1,347
 Other liabilities..................................................................            592                  532
                                                                                           --------             --------
   Total Liabilities................................................................         13,920               18,525
                                                                                           --------             --------
Commitments and Contingencies
Stockholders' Equity:
 Common stock, $0.10 par value: authorized-50,000,000 shares;
  issued and outstanding-14,695,550 and 15,124,094, respectively....................          1,470                1,512
 Accumulated comprehensive income...................................................            (45)                (606)
 Additional paid-in capital.........................................................         47,210               49,097
 Retained earnings..................................................................         24,706               29,298
                                                                                           --------             --------
   Total Stockholders' Equity.......................................................         73,341               79,301
                                                                                           --------             --------
    Total Liabilities and Stockholders' Equity......................................       $ 87,261             $ 97,826
                                                                                           ========             ========
</TABLE>

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

                                       21
<PAGE>

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

<TABLE>
<CAPTION>
                                                                                   Year Ended December 31,
                                                                   ----------------------------------------------------
                                                                            1998              1999                2000
                                                                            ----              -----               -----
<S>                                                                <C>                    <C>                 <C>
Revenue.......................................................          $114,719           $124,433            $134,310
Cost of services..............................................            76,416             95,024             101,390
                                                                        --------           --------            --------
   Gross profit...............................................            38,303             29,409              32,920
Selling, general and administrative expenses..................            18,821             22,409              25,694
                                                                        --------           --------            --------
Operating income..............................................            19,482              7,000               7,226
Interest expense..............................................               (29)               (31)               (285)
Interest and other income (expense)...........................             1,794              1,140                 189
                                                                        --------           --------            --------
      Income before taxes.....................................            21,247              8,109               7,130
Provision for income taxes....................................             8,131              3,041               2,538
                                                                        --------           --------            --------
      Net income..............................................          $ 13,116           $  5,068            $  4,592
                                                                        ========           ========            ========
Earnings per share:
      Diluted calculation.....................................          $   0.82           $   0.33            $   0.30
                                                                        ========           ========            ========
      Basic calculation.......................................          $   0.88           $   0.34            $   0.31
                                                                        ========           ========            ========
Weighted average shares outstanding:
      Diluted calculation.....................................            16,016             15,503              15,518
                                                                        ========           ========            ========
      Basic calculation.......................................            14,895             14,769              14,943
                                                                        ========           ========            ========
</TABLE>

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

                                       22
<PAGE>

                   RWD Technologies, Inc., and Subsidiaries
 Consolidated Statements of Changes in Stockholders' Equity and Comprehensive
                                    Income
             For the Years Ended December 31, 1998, 1999 and 2000
                                (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, 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
   Comprehensive income:
     Net income..............................            --             $ 4,592                 --              --           4,592
     Unrealized gain on securities...........            --                  90                 90              --              --
     Unrealized loss on foreign exchange.....            --                (651)              (651)             --              --
                                                                        -------
   Comprehensive income......................            --             $ 4,031                 --              --              --
                                                                        =======
   Stock options exercised...................            29                                     --             464              --
   Directors' and other option grants........            --                                     --              40              --
   Tax effect of non-qualified stock
     option exercises........................            --                                     --             614              --
   Employee stock purchase plan
     purchases...............................            13                                     --             834              --
   Accelerated vesting of stock
     options.................................            --                                     --             (65)             --
                                                     ------                            -----------         -------      ----------
BALANCE, DECEMBER 31, 2000...................        $1,512                            $      (606)        $49,097      $   29,298
                                                     ======                            ===========         =======      ==========
</TABLE>

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

                                       23
<PAGE>

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

<TABLE>
<CAPTION>
                                                                                          Year Ended December 31,
                                                                     --------------------------------------------------------------
                                                                          1998                   1999                    2000
                                                                     ---------------      ------------------      -----------------
<S>                                                                  <C>                  <C>                     <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
   Net Income......................................................          $13,116                $  5,068               $  4,592
   Adjustments to reconcile net income to net cash provided
     by operating activities:
     Depreciation and amortization.................................            3,542                   4,598                  6,669
     Loss (gain) on sale of fixed assets...........................              274                      10                    (13)
     Deferred income taxes.........................................           (1,411)                 (1,042)                  (100)
     Effect of changes in:
          Contract accounts receivable.............................           (7,060)                 (1,261)                (4,890)
          Costs and estimated earnings in excess of billings on
             uncompleted contracts.................................           (3,110)                    657                 (3,432)
          Prepaid expenses and other...............................             (227)                 (1,489)                 1,216
          Accounts payable and accrued expenses....................            8,172                     801                  5,949
          Billings in excess of costs and estimated earnings on
            uncompleted contracts..................................              908                    (749)                (1,216)
          Other liabilities........................................             (184)                   (241)                   (60)
                                                                             -------                --------               --------

   Net cash from operating activities..............................           14,020                   6,352                  8,715
                                                                             -------                --------               --------

CASH FLOWS FROM INVESTING ACTIVITIES:
   (Purchase) sale of investments, net.............................           (1,414)                 13,315                   (200)
   Payments related to acquisition.................................               --                 (14,404)                (1,380)
   Purchase of fixed assets........................................           (4,315)                 (5,996)                (7,495)
   Payments for other assets.......................................              (54)                 (1,765)                (2,261)
   Proceeds from sale of fixed assets..............................               26                      46                     83
                                                                             -------                --------               --------

   Net cash from investing activities..............................           (5,757)                 (8,804)               (11,253)
                                                                             -------                --------               --------

CASH FLOWS FROM FINANCING ACTIVITIES:
   Principal portion paid on capital lease.........................              (52)                    (31)                    --
   Borrowings under line of credit.................................               --                   4,725                 44,206
   Payments under line of credit...................................               --                  (4,725)               (44,206)
   Issuance of common stock........................................            1,571                   1,691                  1,389
   Repurchase of common stock......................................              (73)                 (8,776)                    --
                                                                             -------                --------               --------

   Net cash from financing activities..............................            1,446                  (7,116)                 1,389
                                                                             -------                --------               --------

NET INCREASE (DECREASE) IN CASH
   AND CASH EQUIVALENTS............................................            9,709                  (9,568)                (1,149)
Effect Of Exchange Rate Changes On Cash............................               --                      --                    (15)
CASH AND CASH EQUIVALENTS, beginning of year.......................            3,619                  13,328                  3,760
                                                                             -------                --------               --------

CASH AND CASH EQUIVALENTS, end of year.............................          $13,328                $  3,760               $  2,596
                                                                             =======                ========               ========

   Supplemental Cash Flow Disclosures:
     Income taxes paid.............................................          $ 3,223                $  5,620               $  2,326
     Interest paid.................................................          $    17                $     10               $    224
</TABLE>

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

                                       24
<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 accounting principles generally accepted in the
United States. All significant intercompany balances and transactions have been
eliminated in consolidation. The preparation of consolidated financial
statements in conformity with accounting principles generally accepted in the
United States, requires management to make estimates and assumptions that affect
the reported 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.

Cash and Cash Equivalents
-------------------------

  Cash and cash equivalents consists of cash and investments with original
maturities not exceeding 90 days.

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

  Investments as of December 31, 1999 and 2000 consisted of U.S. Government and
tax-exempt municipal securities that mature within one year. As of December 31,
1999 and 2000, $24,454,000 and $24,744,000, 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,
1999 and 2000.

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

  Financial instruments as of December 31, 1999 and 2000 consist of cash and
cash equivalents, investments, receivables, payables, debt, and capital lease
obligations, for which the carrying amounts approximate market value.

  Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for
Derivative Instruments and Hedging Activities", was issued in June 1998. SFAS
No. 133 specifies recognition of all derivative instruments in the balance sheet
as assets or liabilities measured at fair value. Derivatives can be specifically
designated as hedges. The Company has identified that it has no financial
instruments that qualify under the definition in SFAS No. 133.

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

  Depreciation expense for 1998, 1999, and 2000 was $3,542,000, $4,258,000, and
$5,841,000, respectively.

                                       25
<PAGE>

Software Development Costs
--------------------------

  The Company accounts for software development costs in accordance with SFAS
No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased or
Otherwise Marketed". Costs incurred prior to the establishment of technological
feasibility are expensed as incurred.

  Deferred computer software development costs are amortized, beginning when the
product is first available for general release to customers. Periodic
amortization is computed on a product-by-product basis at the greater of the
amount determined with reference to total estimated revenues to be generated by
the product or the amount computed on a straight-line basis with reference to
the product's expected life cycle. Product amortization expense for the year
ended December 31, 2000 was $122,000. Unamortized software development costs of
$1,174,000 are included in Other assets at December 31, 2000.

  Costs incurred in the search for, or the evaluation of, software product
alternatives and for the conceptual formulation and the translation of knowledge
into a design are considered research and development expenses and are charged
to expense as incurred. Software maintenance costs are also expensed as
incurred.

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

  The majority of the Company's service 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" amounts and
Company performance obligations. The remainder of the Company's contracts are on
a fixed-price basis. Revenue is recognized using the percentage of completion
method. The Company's contracts generally vary in length from 1 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.

  The Company recognizes revenue from the sale of software license agreements in
accordance with Statement of Position (SOP) No. 97-2, "Software Revenue
Recognition" and SOP 98-9, "Modification of SOP 97-2 with Respect to Certain
Transactions."

  Revenue from the sale of software license agreements is recognized at the time
of shipment of software products to the customer, when collectibility is
probable. The Company does not grant its customers a right of return for a full
or partial refund on its products. Revenue from all maintenance and customer
support agreements is recognized ratably over the term of the agreement,
generally one year. Revenue from professional services and training are
recognized as the services are performed.

Foreign Currency Translation
----------------------------

  The Company follows SFAS No. 52, "Foreign Currency Translation" when
translating its foreign subsidiaries' accounts into U.S. dollars. All assets and
liabilities are translated at the current exchange rate while stockholders'
equity accounts are translated at the appropriate historical rate. Revenues and
expenses are translated at the current exchange rate in effect at the time of
the transaction.

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

  Basic earnings per share consists of the weighted average of shares
outstanding during the year. Diluted earnings per share consists of the basic
weighted average shares outstanding plus the weighted average of common stock
equivalents which consist of stock options outstanding.

                                       26
<PAGE>

Reclassifications
-----------------

  Certain reclassifications were made to prior years amounts to conform to
current year presentation.

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). 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 and 2000 was
$340,000 and $706,000, respectively. 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 years ended December 31, 1998 and 1999 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.

3.   Costs and Estimated Earnings on Contracts in Process:

<TABLE>
<CAPTION>
                                                                                              As of December 31,
                                                                                        -----------------------------------
                                                                                           1999                   2000
                                                                                        ------------           ------------
<S>                                                                                     <C>                    <C>
Cost incurred and estimated earnings on uncompleted contracts                           $100,681,000           $139,919,000
Less: Billings to date on uncompleted contracts                                           97,454,000            132,548,000
                                                                                        ------------           ------------
   Net unbilled revenues                                                                $  3,227,000           $  7,371,000
                                                                                        ============           ============
Included in the accompanying consolidated balance sheets under the following
 captions:
   Costs and estimated earnings in excess of billings on uncompleted contracts          $  7,232,000           $ 10,273,000
   Billings in excess of costs and estimated earnings on uncompleted contracts             4,005,000              2,902,000
                                                                                        ------------           ------------
     Net unbilled revenues                                                              $  3,227,000           $  7,371,000
                                                                                        ============           ============
</TABLE>

  Generally, contracts provide for the billing of costs incurred and estimated
fees on 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:

  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 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 is intended for working capital purposes. The unsecured line of $10,000,000
has an interest rate equivalent to the 30-day LIBOR rate plus 0.875 percent, and
expires May 31, 2001. During 1999, the Company drew on the credit line during
the months of September and October when the weighted average interest rate was
6.282 percent. The highest balance outstanding was $2,232,000. During 2000, the
Company drew on the credit line in all months except February. The weighted
average interest rate for 2000 was 7.274 percent and the highest balance
outstanding was $8,986,000. There was no outstanding balance on the credit line
as of December 31, 1999 and 2000.

  Interest expense for the years ended December 31, 1998, 1999, and 2000 was
$29,000, $27,000, and $285,000, respectively.

                                       27
<PAGE>

5.   Business Segments:

  The Company believes it has reportable operating segments, as defined by SFAS
No. 131. The Company has identified three distinct operating segments:
Enterprise Systems, Manufacturing Performance, and Latitude360.

  During the year ended December 31, 2000, the Company changed its reportable
segments from Information Technology, Enterprise Resource Planning, Lean
Manufacturing Consulting, and Technology Performance Support to Enterprise
Systems, Manufacturing Performance, and Latitude360. The change in reporting
conforms to how the Company presently manages its business. As a result, the
Company has restated the results of the two years ended December 31, 1998 and
1999 segment reporting disclosure to conform to its new segments.

  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 not
specifically identified to a segment 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 Year Ended December 31,
                                                                 ----------------------------------------------------------
                                                                     1998                   1999                   2000
                                                                 ------------           ------------           ------------
<S>                                                              <C>                    <C>                    <C>
Revenue (all external):
   Enterprise Systems                                            $ 38,436,000           $ 37,255,000           $ 46,895,000
   Manufacturing Performance                                       39,746,000             45,083,000             49,103,000
   Latitude360                                                     36,537,000             42,095,000             38,312,000
                                                                 ------------           ------------           ------------
Total Revenue                                                    $114,719,000           $124,433,000           $134,310,000
                                                                 ============           ============           ============

Gross Profit:
   Enterprise Systems                                            $ 12,949,000           $  6,331,000           $ 12,825,000
   Manufacturing Performance                                       12,429,000             13,479,000             13,773,000
   Latitude360                                                     12,925,000              9,599,000              6,322,000
                                                                 ------------           ------------           ------------
Total Gross Profit                                               $ 38,303,000           $ 29,409,000           $ 32,920,000
                                                                 ============           ============           ============

Depreciation and Amortization Expense Allocated to Segments:
   Enterprise Systems                                            $    802,000           $  1,067,000           $  1,446,000
   Manufacturing Performance                                          663,000                799,000                941,000
   Latitude360                                                        863,000              1,120,000              1,704,000
                                                                 ------------           ------------           ------------

Total Allocated to Segments                                         2,328,000              2,986,000              4,091,000

Amount not Allocated to Segments                                    1,214,000              1,612,000              2,578,000
                                                                 ------------           ------------           ------------

Total Depreciation and Amortization Expense                      $  3,542,000           $  4,598,000           $  6,669,000
                                                                 ============           ============           ============

Revenue (by geography):
   United States                                                 $101,626,000           $112,212,000           $121,301,000
   Non-United States                                               13,093,000             12,221,000             13,009,000
                                                                 ------------           ------------           ------------
Total Revenue                                                    $114,719,000           $124,433,000           $134,310,000
                                                                 ============           ============           ============
</TABLE>

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

  Automobile industry clients generated an aggregate of 37.9 percent, 37.5
percent, and 36.3 percent of the Company's total revenue in 1998, 1999, and
2000, respectively. Telecommunications industry clients generated an aggregate
of 10.4 percent, 7.0 percent, and 1.7 percent of the Company's total revenue in
1998, 1999, and 2000, respectively. Financial industry clients generated an
aggregate of 10.0 percent and 7.5 percent of the Company's total revenue in 1999
and 2000, respectively. Sales to one client during 1998, 1999, and 2000 were
approximately 22.4 percent, 20.4 percent, and 18.6 percent, respectively, of
total

                                       28
<PAGE>

revenue. Sales to another client were approximately 12.7 percent, 10.9 percent,
and 14.0 percent of total revenue in 1998, 1999, and 2000, respectively. No
other client represented more than 10 percent of the Company's total revenue in
any of these periods.

6.   Commitments and Contingencies:

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

  The Company leases office facilities under various operating leases that
expire through September 30, 2011. The leases require the Company to pay for a
portion of common area maintenance expenses and real estate taxes. Rent expense
was $3,162,000, $4,369,000, and $5,318,000 in 1998, 1999, and 2000,
respectively. During 2000, the Company entered into three capital lease
agreements for copy machines. Future minimum payments under these leases, as of
December 31, 2000, were as follows:

<TABLE>
<CAPTION>
          Year Ending December 31,                             Capital           Operating
          ------------------------                              Lease             Leases
                                                             -----------       -------------
          <S>                                                <C>               <C>
             2001                                                $62,000          $5,375,000
             2002                                                 12,000           5,676,000
             2003                                                  7,000           5,489,000
             2004                                                     --           2,308,000
             2005 and thereafter                                      --           8,865,000
                                                                 -------
             Total minimum lease payments                         81,000
             Less: Amounts representing imputed interest           6,000
                                                                 -------

             Present value of net minimum payments                75,000
             Less: Current portion                                57,000
                                                                 -------

             Long-term portion                                   $18,000
                                                                 =======
</TABLE>

  The Company has entered into employment agreements with four key employees
with initial terms of three years and subject to successive one-year annual
renewals. Three of these agreements have initial terms that ended in January
2000 and are continuing for successive one-year annual renewals. The fourth
agreement has an initial term that ends in January 2002 and can be extended for
successive one-year annual renewals thereafter. The Company is currently
negotiating employment agreements with two additional key employees. These
agreements are expected to have an initial term that will end on the anniversary
date of the agreement and be subject to successive one-year annual renewals.

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.

                                       29
<PAGE>

  The Company accounts for its stock-based compensation plans as permitted by
SFAS Statement No. 123, "Accounting for Stock-Based Compensation," which allows
the Company to follow APB No. 25, "Accounting for Stock Issued to Employees" and
recognize no compensation cost for options granted at fair market value. The
Company has computed, for pro forma disclosure purposes, the value of all
compensatory options granted during 1998, 1999, and 2000, using the Black-
Scholes option pricing model. The following assumptions were used for grants:

<TABLE>
<CAPTION>
                                                            For the Year Ended December 31,
                                                   -----------------------------------------------
                                                     1998               1999                2000
                                                   --------           --------            --------
            <S>                                    <C>                <C>                 <C>
            Risk-free interest rate (range)        4.5%-5.5%          4.8%-6.5%           5.0%-6.7%
            Expected dividend yield                     0.0%               0.0%                0.0%
            Expected lives                                5 years          5-7 years             5 years
            Expected volatility                        51.0%              57.0%               74.0%
</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 Year Ended December 31,
                                                ---------------------------------------
                                                    1998          1999          2000
                                                -----------    ----------    ----------
            <S>                                 <C>            <C>           <C>
            Net Income:
              As reported                       $13,116,000    $5,068,000    $4,592,000
              As adjusted                        11,814,000     2,425,000     2,057,000

            Diluted Earnings Per Share:
              As reported                       $      0.82    $     0.33    $     0.30
              As adjusted                              0.74          0.16          0.13

            Basic Earnings Per Share:
              As reported                       $      0.88    $     0.34    $     0.31
              As adjusted                              0.79          0.16          0.14
</TABLE>

  The following table summarizes all stock option and purchase right activity
during 1998, 1999, and 2000.

<TABLE>
<CAPTION>
                                                Number of Shares
                                        --------------------------------
                                         Key Party
                                           Option              Employee        Exercise Price
                                         Agreements              Plan             Per Share
                                        --------------------------------   ----------------------
<S>                                     <C>                   <C>          <C>
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
                                           ------             ----------

Outstanding 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
   Granted                                     --              1,732,000        3.13   -     9.00
   Exercised                                   --               (290,000)       0.67   -     6.00
   Terminated                                  --             (1,012,000)       1.00   -    24.00
                                           ------             ----------

Outstanding as of December 31, 2000         1,000              4,920,000        0.67   -    24.00
                                           ======             ==========
</TABLE>

                                       30
<PAGE>

  The number of options exercisable as of December 31, 1998, 1999, and 2000 were
733,000, 1,109,000, and 1,531,000, respectively. The weighted average fair value
of options granted for the years ended December 31, 1998, 1999, and 2000 was
$8.98, $5.16, and $2.52, respectively. These fair values were calculated using
the Black-Scholes option pricing model.

  The following table summarizes information about fixed stock options
outstanding as of December 31, 2000.

<TABLE>
<CAPTION>
                                   Options Outstanding                           Options Exercisable
                     --------------------------------------------------  -------------------------------
                        Number                                               Number
                     Outstanding at  Weighted Average       Weighted     Exercisable at      Weighted
Range of Exercise     December 31,      Remaining           Average       December 31,       Average
    Prices               2000        Contractual Life    Exercise Price      2000         Exercise Price
------------------   --------------  -----------------   --------------  --------------   --------------
<S>                  <C>             <C>                 <C>             <C>              <C>
  $ 0.67  -   1.00          559,000         5.22 years         $ 0.89          487,000         $ 0.87
    3.13  -   6.75        2,014,000         8.87                 4.10          287,000           6.00
    7.25  -  13.00        1,249,000         8.86                 8.36          278,000           9.07
   17.38  -  24.00        1,098,000         8.28                18.54          479,000          18.57
                          ---------                                          ---------

    0.67  -  24.00        4,920,000         8.32                 8.04        1,531,000           8.86
                          =========                                          =========
</TABLE>

  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 475,000
shares of the Company's common stock were reserved for issuance under the Stock
Purchase Plan. 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, 2001. At year-end,
approximately 183,000 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           66,000             6.69
      5           May 1, 2000        October 31, 2000         68,000             5.92
      6           November 1, 2000   April 30, 2001               --               --
</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 1998, 1999, and 2000 was $1,615,000,
$1,816,000, and $897,000, respectively.

                                       31
<PAGE>

9.   Income Taxes:

  The provisions for income taxes were as follows:

<TABLE>
<CAPTION>
                                                          For the Year Ended December 31,
                                                  -----------------------------------------------
                                                      1998              1999              2000
                                                  -----------        ----------        ----------
      <S>                                         <C>                <C>               <C>
      Current:
        Federal                                   $ 8,198,000        $3,375,000        $2,192,000
        State                                       1,344,000           708,000           553,000
      Deferred:
        Federal                                    (1,242,000)         (872,000)         (165,000)
        State                                        (169,000)         (170,000)          (42,000)
                                                  -----------        ----------        ----------

      Total provision                             $ 8,131,000        $3,041,000        $2,538,000
                                                  ===========        ==========        ==========
</TABLE>

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

<TABLE>
<CAPTION>
                                                                    For the Year Ended December 31,
                                                           ---------------------------------------------------
                                                              1998                1999                 2000
                                                           ----------          ----------           ----------
<S>                                                        <C>                 <C>                  <C>
Statutory federal income tax rate (34%)                    $7,224,000          $2,757,000           $2,424,000
State income taxes, net of federal income tax effect          887,000             467,000              376,000
Other                                                          20,000            (183,000)            (262,000)
                                                           ----------          ----------           ----------
   Total provision                                         $8,131,000          $3,041,000           $2,538,000
                                                           ==========          ==========           ==========
</TABLE>

  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, 1999 and 2000, and
the elements of the deferred taxes are as follows:

<TABLE>
<CAPTION>
                                                                         As of December 31,
                                                                   -------------------------------
        Current Deferred Taxes:                                        1999                2000
                                                                   -----------         -----------
        <S>                                                        <C>                 <C>
          Deferred tax assets:
            Accrued compensation                                   $   712,000         $   696,000
            Allowance for bad debts                                     90,000             129,000
            Debt forgiveness                                            23,000                  --
            Deferred rent credits                                      157,000             139,000
            Net operating loss                                         272,000                  --
                                                                   -----------         -----------
              Deferred tax asset                                     1,254,000             964,000
                                                                   -----------         -----------

          Deferred tax liabilities:
            Prepaid expenses                                           (36,000)            (35,000)
            Cash basis of accounting for income taxes               (1,199,000)                 --
                                                                   -----------         -----------
              Deferred tax liability                                (1,235,000)            (35,000)
                                                                   -----------         -----------
                 Net current deferred tax asset                    $    19,000         $   929,000
                                                                   ===========         ===========

        Noncurrent Deferred Taxes:
          Deferred tax assets:
            Business expansion costs                               $    34,000         $    23,000
                                                                   -----------         -----------

          Deferred tax liabilities:
            Depreciation and amortization                             (256,000)         (1,370,000)
                                                                   -----------         -----------
                 Net noncurrent deferred tax liability             $  (222,000)        $(1,347,000)
                                                                   ===========         ===========
</TABLE>

                                       32
<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 February 6, 2001. 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
February 6, 2001

                                       33
<PAGE>

                   RWD Technologies, Inc., And Subsidiaries
                Schedule II - Valuation and Qualifying Accounts
             For the Years Ended December 31, 1998, 1999 and 2000
                                (In thousands)

<TABLE>
<CAPTION>
                                 Balance as of    Additions                 Balance as of
                                   Beginning     Charges to                     End of
Allowance for Doubtful Accounts    of Period      Expense     Deductions       Period
-------------------------------  -------------   ----------   ----------    -------------
<S>                              <C>             <C>          <C>           <C>
Year ended December 31, 1998          428              --          189              239

Year ended December 31, 1999          239           1,639        1,639              239

Year ended December 31, 2000          239             297          191              345
</TABLE>

                                       34