SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

             ------------------------------------------------------

                                   FORM 10-K/A
                                 Amendment No. 2

         |X|   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934

       For the Fiscal Year Ended                   Commission File Number.
           December 31, 1999                              0-29292

             ------------------------------------------------------
                               HAGLER BAILLY, INC.
             ------------------------------------------------------
             (Exact name of Registrant as specified in its charter)

                    Delaware                                54-1759180
          (State or other jurisdiction                  (I.R.S. Employer
       of incorporation or organization)               Identification No.)

  1530 Wilson Boulevard, Suite 400, Arlington,
                    Virginia                                   22209
    (Address of principal executive offices)                 (zip code)

                                 (703) 351-0300
              (Registrant's telephone number, including area code:)

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:

                     COMMON STOCK, PAR VALUE $0.01 PER SHARE
                                (Title of Class)

      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. |_|
<PAGE>

      As of March 1, 2000, 17,927,812 shares of the Registrant's common stock,
par value $0.01 per share, were outstanding. The aggregate market value of the
voting stock held by non-affiliates* of the Registrant, (based upon the closing
price of such shares on the Nasdaq National Market on March 1, 2000) was
approximately $40,830,202.

      The Registrant's Proxy Statement for the Annual Meeting of Stockholders
scheduled to be held May 11, 2000 is incorporated by reference into Part III of
this Annual Report on Form 10-K.

* For the purposes of this calculation, the registrant is not including stock
held by executive officers, directors and beneficial owners of more than five
percent (5%) of the registrant's outstanding common stock.

--------------------------------------------------------------------------------

<PAGE>

                      HAGLER BAILLY, INC. AND SUBSIDIARIES
                    FORM 10-K ANNUAL REPORT (AMENDMENT NO. 2)
                        FOR YEAR ENDED DECEMBER 31, 1999

                                      NOTE

            THIS AMENDMENT NO. 2 AMENDS AND RESTATES IN ITS ENTIRETY
                      THE COMPANY'S FORM 10-K ANNUAL REPORT
                   FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
                        INITIALLY FILED ON MARCH 30, 2000

                                TABLE OF CONTENTS

PART I.........................................................................1

   ITEM 1 - BUSINESS...........................................................1
   ITEM 2 - PROPERTIES........................................................21
   ITEM 3 - LEGAL PROCEEDINGS.................................................21
   ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...............21

PART II.......................................................................22

   ITEM 5 - MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
   STOCKHOLDER MATTERS........................................................22
   ITEM 6 -- SELECTED FINANCIAL DATA..........................................22
   ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
   AND RESULTS OF OPERATIONS..................................................25
   ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.......37
   ITEM 8 - CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA...........38
   ITEM 9 - CHANGES IN AND DISAGREEMENT WITH ACCOUNTANTS ON ACCOUNTING
   AND FINANCIAL DISCUSSIONS..................................................38

PART III......................................................................38

   ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF HAGLER BAILLY................38
   ITEM 11 - EXECUTIVE COMPENSATION...........................................38
   ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT...39
   ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS...................40

PART IV.......................................................................40

   ITEM 14 - EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K...........40

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS....................................41


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<PAGE>

      Except for any historical information contained herein, the matters
discussed in this Annual Report on Form 10-K of Hagler Bailly, Inc. and its
subsidiaries ("Hagler Bailly" or the "Company") contain forward-looking
statements. For this purpose, any statements contained herein that are not
statements of historical fact, are intended, and are hereby identified as,
"forward-looking statements" for the purpose of the safe harbor provided by
Section 21E of the Securities Exchange Act of 1934, as amended by Public Law
104-67. Without limiting the foregoing, the words "anticipates," "believes,"
"estimates," "expects," "intends," "plans" and similar expressions are intended
to identify forward-looking statements. The important factors discussed below in
this Item 1 under the caption "Risk Factors", as well as other factors
identified in the Company's filings with the Securities and Exchange Commission
("SEC") and those presented elsewhere by management from time to time, could
cause actual results to differ materially from those indicated by
forward-looking statements made herein.

      The Company is subject to the reporting requirements of the Securities
Exchange Act of 1934 and files periodic reports, including Current Reports on
Form 8-K, Quarterly Reports on Form 10-Q, Annual Reports on Form 10-K and Proxy
Statements with the SEC.

      The public may read and copy materials filed by the Company with the SEC
at the SEC's Public Reference Room at 450 Fifth Street, NW, Washington, DC
20549. The public may obtain information on the operation of the Public
Reference Room by calling the SEC at 1-800-SEC-0300. The SEC maintains an
Internet site that contains reports, proxy and information statements and other
information regarding companies that file electronically (such as the Company)
with the SEC. The SEC's internet address is http://www.sec.gov. The Company's
Internet address is http://www.haglerbailly.com.

PART I

ITEM 1 - BUSINESS

Introductory Note

      On February 8, 1999, the Company acquired all of the outstanding stock of
Lacuna Consulting Limited ("Lacuna"), a United Kingdom corporation, in exchange
for 65,000 shares of the Company's common stock. The acquisition was accounted
for as a purchase. Accordingly, the consolidated financial statements reflect
the results of operations of Lacuna since the date of acquisition.

      On March 22, 1999, the Company announced that its Board of Directors
authorized the repurchase of up to 1,500,000 shares of the Company's common
stock from time to time in the open market or in privately negotiated
transactions. As of December 31, 1999, the Company had reacquired 559,700 shares
of its stock at a total net cost of approximately $4.1 million.

      On April 30, 1999, the Company acquired all of the outstanding stock of
Washington International Energy Group, Ltd. ("WIEG"), a Washington, D.C.-based
worldwide provider of energy and environmental policy consulting research
services, in exchange for 144,210 shares of


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<PAGE>

the Company's common stock and approximately $850,000 in cash. The Company has
the right to repurchase up to 26,210 of these shares at $ 0.01 cents per share
if the price of the Company's stock meets certain price targets during the three
year period following the acquisition. The transaction was accounted for as a
purchase. Accordingly, the consolidated financial statements reflect the results
of operations of WIEG since the date of acquisition.

      On June 1, 1999, the Company and Objective Resources Group Risk Advisors,
LLC, its joint venture partner in Hagler Bailly Risk Advisors, LLC ("HBRA LLC"),
dissolved HBRA LLC. Following the dissolution of HBRA LLC, the Company continued
its risk advisory business through a wholly-owned subsidiary, Hagler Bailly Risk
Advisors, Inc.

      On August 12, 1999, the Company acquired all of the outstanding stock of
GKMG, Inc. ("GMKG"), a Washington, D.C.-based consulting firm specializing in
the economic, strategic, financial, and regulatory analysis of the aviation
industry, in exchange for 1,420,000 shares of the Company's common stock. Under
the terms of the Share Exchange Agreement by and among the Company, GKMG and
former shareholders of GKMG, the Company is obligated to issue additional shares
of its common stock to the former shareholders of GKMG with a fair market value
(as defined in the Share Exchange Agreement) up to $15 million if certain
earnings targets for GKMG are met for the periods July 1, 1999-June 30, 2000 and
July 1, 2000-June 30, 2001. In addition, the Company is obligated to issue up to
192,857 additional shares of its common stock to the former shareholders of GKMG
if certain stock price performance contingencies are not met. The transaction
was accounted for as a purchase. Accordingly, the consolidated financial
statements reflect the results of operations of GKMG since the date of
acquisition.

      On September 27, 1999, the Company announced that its Board of Directors
retained Banc of America Securities, LLC to assist the Company in exploring
strategic and financial alternatives to maximize shareholder value, including
the potential sale or merger of the Company.

      On December 31, 1999, the Company sold the assets of its wholly-owned
subsidiary Izsak, Grapin et Associes ("IGA"). As a result of the transaction,
the Company sold assets for approximately $0.6 million, resulting in a loss of
approximately $68,000.

      In December 1999, the Company announced a repositioning plan in which the
Company would focus on its core consulting business and streamline operations to
achieve manageable growth levels and enhance shareholder value in the future.


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<PAGE>

General

      The predecessor of the Company was founded in 1980 as Hagler, Bailly &
Company, Inc. In July 1984, RCG International, Inc. ("RCG"), an indirect
subsidiary of Reliance Group Holdings, Inc., acquired the Company, and in 1987
was renamed RCG/Hagler Bailly, Inc. In May 1995, the management of RCG/Hagler
Bailly, Inc. completed the purchase of RCG/Hagler Bailly, Inc. from RCG and the
successor to RCG/Hagler Bailly, Inc. became a wholly-owned subsidiary of the
Company. In July 1997, the Company completed its initial public offering.

      Over the past 20 years, the Company has developed expertise in management,
economic and operations consulting to clients in the energy, network (including
electric, gas and water utilities), transportation, and telecommunications
industries, commercial litigation and the environment. By maintaining its
industry focus, the Company has established itself as one of the premier
consulting firms in these fields.

Business Model

      The Company's business strategy is to combine proprietary knowledge and
methods with industry expertise and functional consulting skills to develop
customized solutions for its clients' complex business problems, then offer
resources such as information technologies needed to implement and sustain the
solutions, thereby creating tangible long-term value for the client.

      To better serve the varying needs of its clients, the Company provides its
services through the following subsidiaries, PHB Hagler Bailly, Inc. ("PHB
Hagler Bailly"), GKMG, Hagler Bailly Services, Inc. ("Hagler Bailly Services"),
Hagler Bailly Risk Advisors, Inc. ("HBRA"), and its joint venture Cap Gemini
Hagler Bailly, LLC ("Cap Gemini Hagler Bailly").

      Through PHB Hagler Bailly, the Company provides commercial rate consulting
services in the areas of strategic advice and analysis to commercial sector
clients (including businesses and governments) in developed countries helping
clients solve issues involving energy, telecommunications, transportation, water
resources, the environment, litigation and other matters. Referred to as the
commercial segment, PHB Hagler Bailly's consulting professionals have first-hand
experience in developing sound strategies and applying business principles that
focus on issues and increase enterprise value. PHB Hagler Bailly has been at the
forefront of assessing market strength, providing asset valuations and
performance measurements, analyzing competition, measuring risks, and improving
financial and operating performance.

      Through GKMG, the Company provides management and economic consulting to
the aviation industry on how to compete in the deregulated, competitive
transportation environment.

      Through Hagler Bailly Services, the Company provides government rate
consulting services in the areas of advisory and technical services to
government sector clients worldwide in energy, transportation, water,
telecommunications, and the environment. Referred to as the government segment,
Hagler Bailly Services, in addition to U.S. federal and state governments,


                                       3
<PAGE>

advises multilateral and bilateral donor and financial organizations as well as
foreign governments, and selected commercial clients in emerging or developing
markets. Hagler Bailly Services' consulting experts provide public policy
assistance by advising governments and business leaders on the evolution of
specific policies in each country and creating a global view of policy reforms.
Hagler Bailly Services has been at the forefront of developing policy and
pricing frameworks, formulating national and provincial strategy and planning,
drafting laws and regulations, managing the transition to competitive markets,
promoting investment and business creation, evaluating assets, and promoting
sustainable development.

      Through HBRA, the Company provides enterprise risk management for energy
companies.

      Through its joint venture Cap Gemini Hagler Bailly, the Company provides
information technology (IT) consulting services and customized solutions to
electricity, gas and water companies in the United States and Canada.

Service Offerings

      The Company's services are provided through specialized practices that are
designed to work together to provide clients with the full range of services and
capabilities of the Company. From an operational standpoint, the Company
regularly reviews and, as appropriate, restructures these practices and their
services to address the changing business problems, strategic alternatives and
policy issues facing its clients.

PHB Hagler Bailly

Energy Industry Management and Economic Consulting. The Company provides
management and economic consulting to clients in the energy industry through the
following practices:

      o     Corporate Strategy - helps clients reposition and reinvent their
            business in a rapidly changing environment to significantly enhance
            enterprise value.

      o     Asset Management - helps clients optimize existing portfolios of
            assets and evaluate purchases of new assets by providing economic
            and financial analysis. These services include analysis and advice
            regarding portfolio management, performance improvement involving
            benchmarking to assess best practices and relative performance, and
            revenue enhancement involving analysis of service line and market
            reach extension, bid support systems, market entry strategy and
            sales tactics.

      o     Retail Energy and eCommerce - helps clients launch new, or expand
            existing, retail businesses in response to the retail utility
            sector, which is evolving to encompass all utility content flows.
            Services include retail access & implementation, retail strategy and
            marketing, utility customer care strategy & implementation, and
            energy acquisition strategy involving the negotiation of energy
            supply contracts.


                                       4
<PAGE>

      o     Integration of Mergers & Acquisitions - helps clients better
            understand and manage the process by which decisions are made and by
            which mergers and acquisition are integrated. Services include:
            developing acquisition strategy, supporting management through the
            merger completion, and incorporating change management and
            information technology to achieve the expected results from the
            merger.

      o     Competition, Markets and Regulation - provides industry economics
            involving: the analysis of the economic ramifications of industry
            restructuring; market power and merger assistance to investor-owned
            utilities in federal and state regulatory proceedings involving the
            proposed business combinations; restructuring and market design and
            analysis; and the analysis of the impact of traditional and
            pro-competitive regulatory policy.

      o     Fuels - The Company's fuel practice generates current and historical
            information on the fuels consumed by generators and their operating
            characteristics. This information is used to model power markets and
            to assist generators and fuels producers in litigation and contract
            matters, and asset owners in their strategic planning activities.

Environmental Litigation and Management Consulting Services. The Company helps
domestic and international clients manage environmental issues and prevent
environmental problems through the following practices:

      o     Insurance Recovery - helps clients pursue and evaluate recovery of
            past and future costs through environmental insurance claims,
            assists with settlement negotiations as a strategic advisor or as a
            member of the negotiation team, and provides services related to
            litigation or expert testimony or both.

      o     Environmental Management - helps clients identify their existing
            systems that may be creating a business risk, either by exposing the
            company to potential violations or by creating unnecessary
            liabilities. The Company then designs specific measures to reduce
            these risks through improved management systems.

      o     Cost Recovery - provides expert analysis and opinion on the
            consistency of incurred costs with the requirements of the National
            Oil and Hazardous Substances Pollution Contingency Plan pursuant to
            the Comprehensive Environmental Response, Compensation and Liability
            Act ("CERCLA") actions and actions pursuant to equivalent state
            statutes, government agencies or private parties.

      o     Compliance - provides economic analysis and litigation support to
            clients and their counsel in environmental noncompliance penalty
            cases.

      o     General Environmental Litigation - provides damage testimony in
            contract disputes on a variety of environmental issues including the
            retention of environmental liabilities, natural resource damages and
            property damage rebuttals in toxic tort suits.

General Industries Litigation Consulting. The Company assists law firms and
corporate counsel with litigation, mediation and arbitration matters from
liability and causation


                                       5
<PAGE>

issues to determination of damages and prejudgment interests, litigation
strategy and settlement negotiations, and provides economic and business
analysis and expert testimony on liability and damages issues. In addition, the
Company helps clients develop litigation strategies, identify and select
potential witnesses, conduct discovery, and design and manage technical research
as well as assists counsel in reconstructing and critiquing the work of opposing
experts, preparing materials for use in depositions and cross-examination of
those experts.

Telecommunications Consulting. The Company provides a comprehensive approach to
competitive pressures, rapid technological change and unpredictable regulatory
developments in the telecommunications industry to clients through the following
practices:

      o     Market Research and Analysis - provides research on customer issues.

      o     Market Strategy - provides advice on market strategy and the
            development of processes and products to support growth strategies.

      o     Litigation Support - provides economic and business evidence and
            expert testimony in both commercial disputes and regulatory
            proceedings.

      o     Asset Valuation - analyzes the financial and operational performance
            of clients using proprietary performance measurement and modeling
            and provides benchmarking of operational performance to industry
            leaders.

      o     Restructuring, Mergers and Diversification - provides economic
            analysis of the potential competitive impact of proposed mergers and
            advice on deal structures and assists in identifying strategic
            partners and post-merger integration.

      o     eCommerce - provides analysis of eCommerce markets.

GKMG

Aviation Industry Management and Economic Consulting. Through the Company's
wholly-owned subsidiary, GKMG, Hagler Bailly provides the following services to
clients in the aviation industry through the following practices:

       o    Airport Services - provides strategic planning and forecasting, air
            service marketing, aeropolitical strategies, airline business
            relations and negotiations, cargo development and marketing, airport
            finance development plans and financing strategies and airport
            privatization involving providing turnkey services to governments
            desiring to privatize airports and airport facilities.

       o    Airline Services - provides strategic, technical, and analytic
            services to airlines including: alliance planning; negotiation and
            implementation; economic and financial feasibility studies; market
            analysis and hub analysis; strategic and aeropolitical


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<PAGE>

            planning; compliance with economic, safety and security
            requirements; labor strategies; and airline fleet planning, aircraft
            acquisition, and leasing strategies.

      o     Vendor Services - supports the business strategies of vendors to the
            airline and airport markets.

Hagler Bailly Services

Government Energy Consulting Practice. The Company supports government clients
in emerging market economies through the following practices:

      o     Energy Sector Reform - assists in the reformation of national energy
            policy to promote competition and foreign investment, and encourage
            privatization. Expert services include drafting and passage of
            revised energy legislation, establishment of independent energy
            regulatory agencies, assistance with licenses and tariffs and
            development of wholesale markets and their rules.

      o     Energy Efficiency - works on energy efficiency issues in emerging
            market countries. Global climate change is a key area of focus
            wherein the Company's experts conduct energy efficiency audits and
            energy management programs in industrial enterprises and district
            heating systems.

      o     Engineering - conducts specific engineering projects in support of
            the two primary functional areas of energy efficiency and energy
            sector reform.

Government Water and Environmental Consulting. The Company provides management
and analytical consulting to government clients in the water industries and the
environment through the following practices:

      o     Water Sector Strategy, Management and Operations - provides business
            process improvement, change management, cost, rate and financial
            analyses, asset management, revenue enhancement and financial
            planning, process benchmarking, performance measurement systems,
            regionalization of service and outsourcing and privatization
            support.

      o     Clean Technology and Environmental Sustainability - provides
            technical and engineering services supporting clean technology,
            water and energy use efficiency and pollution prevention.

      o     Policy and Applied Economics - provides policy and applied economic
            analysis in support of national and local environmental
            sustainability programs.

      o     Water Resources Systems Management - provides integrated,
            comprehensive water resources management services to clients
            worldwide.


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<PAGE>

Government Transportation Consulting. The Company provides clients with market
and operations strategy in finance, economics, and competitive positioning
through the following practices:

      o     Intelligent Transportation Systems (ITS) and Technology - provides
            innovative solutions to transportation and technology needs through
            program management, partnership building, market analysis and
            business planning.

      o     Planning and Economics - assists in linking multi-modal
            transportation investment plans, project capitalization and economic
            development to help government and commercial clients implement
            better decisions.

      o     Infrastructure Finance and Strategy - applies cutting-edge analysis
            and institutional know-how to help clients develop and implement
            infrastructure finance strategies at both the program and project
            levels.

      o     Policy and Strategy - provides policy analysis and strategic
            solutions that enable decision-makers to address emerging issues in
            transportation policy.

HBRA

Supply, Logistics, Trading and Risk Management. Through its wholly-owned
subsidiary HBRA, the Company provides clients with enterprise, revenue stream
and supply portfolio risk management services to energy companies and major
energy consumers. These services cover the full value chain of risk management,
from corporate governance and policies and procedures to analytics, business
processes, system selection and integration, and to strategy simulation and
trader training.

Cap Gemini Hagler Bailly

Information Technology (IT) Implementation Services. Though its joint venture
Cap Gemini Hagler Bailly, the Company provides IT implementation services. Cap
Gemini Hagler Bailly's personnel work closely with other Company consultants to
design and implement technology solutions for electricity, gas and water
industries clients, particularly in connection with customer relationship
management ("CRM"), solutions, e-business, merger and acquisition integration
activities, and enterprise risk management platforms.

Information Resources. The Company has assembled and integrated detailed network
industry experience with systems and resources that allow it to package and
deliver information and insights in a variety of forms. These include: a
benchmarking program of utility operations and management practices;
proprietary, comprehensive statistical databases; and state-of-the-art market
research capabilities.


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<PAGE>

Competitive Conditions

      The market for consulting services in energy, network industries and the
environment is intensely competitive, highly fragmented and subject to rapid
change. The market includes a large number of participants from a variety of
consulting market segments, both in the United States and abroad, including
general management consulting firms, the consulting practices of accounting
firms, consulting engineering firms, technical and economic advisory firms and
market research firms. Many information technology-consulting firms also
maintain significant energy, network industry and environmental practices and
others may enter the field in the future. Many of these companies are national
and international in scope and may have greater financial, technical and
marketing resources than the Company.

      Hagler Bailly believes that it is in a strong position to compete in this
market. The Company believes that several factors distinguish it from many of
its current and potential competitors in the consulting industry.

      o     Industry Focus. Since its inception, the Company has maintained its
            focus on providing a broad array of consulting services to clients
            in the energy and network industries and the environment. This focus
            differentiates the Company from general management consulting firms
            that serve a full range of industries and firms with limited skill
            sets and capabilities. The Company believes that the insights gained
            by working worldwide allow it to customize leading-edge-consulting
            concepts and tools to specific situations and thus provide tangible
            value, rather than just theories, to its clients.

      o     Full Service Capabilities. The Company's strategy is to partner with
            its clients in conceptualizing and implementing solutions, which
            significantly increase enterprise value, by building a broad range
            of consulting platforms enabling it to meet its clients' needs.
            These include strategy, asset management, marketing and sales,
            product development, energy supply, logistics and risk management,
            operations management, information systems and technology, economic
            analysis, environmental management and commercial litigation.

      o     Worldwide Presence and Reputation. The Company currently has a total
            of 18 principal offices, 10 of which are outside the continental
            United States: Argentina (Buenos Aires), Australia (Melbourne and
            Sydney), Canada (Toronto), China (Beijing), France (Paris),
            Indonesia (Jakarta), New Zealand (Wellington), and the United
            Kingdom (London and Rugby). The Company has employees from over 30
            nations giving it powerful insights into various cultures and ways
            of conducting business. The Company's international business mix and
            office locations reflect a conscious blend of business in developed
            and developing economies. In addition to its presence in the
            developed markets of Western Europe, Australia and New Zealand, the
            Company is positioned to support the development and growth of
            modern network industries in the rapidly evolving economies of the
            Asia/Pacific region.

      o     Longstanding Relationships with Substantial Clients. A substantial
            share of the Company's business has historically been derived from
            additional sales to existing


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<PAGE>

            customers. In 1999, the Company received additional business from
            approximately 50% of the clients who had engaged the firm in the
            prior year. During 1999, approximately 72% of the Company's revenue
            was from clients served in the prior year. In addition to
            continuity, the Company's client relationships are marked by the
            client size and importance in respective markets.

      o     Government Sector Insight. The Company has worked with a number of
            government sector organizations, including the United States Agency
            for International Development ("USAID"), the Environmental
            Protection Agency, the European Union, the U.K. Knowlton Fund, the
            Asian Development Bank, the European Bank for Reconstruction and
            Development, and the World Bank for many years. This gives the
            Company a special perspective on the energy, utility and
            environmental industries and enhances the Company's reputation and
            ability to compete successfully for consulting business.

      o     Proprietary Knowledge and Methods. The Company has developed
            proprietary information bases, analytical tools and methods
            providing it with distinct competitive advantages. Examples include:
            (i) Operating Plant Experience Code (OPEC), an analytical database
            of nuclear power experience that captures the causes and effects of
            outages and deratings at U.S. nuclear power plants; (ii) Competitive
            analysis screening Model (CASm), a proprietary model used to
            evaluate market power issues in electric generation; (iii) Strategy
            Enablers Protocol (SEP), a proprietary method that offers a highly
            disciplined executive level process to identify new avenues of
            growth; (iv) TB&A Benchmarking, a leading source of information on
            utility operations and management practices in distribution,
            transmission, customer service and marketing; and (v) Field Data, a
            set of linked databases which provides up to date information on
            current and historical fuel prices, emission allowances, power plant
            characteristics and fuel prediction statistics that are used in the
            Company's power modeling efforts and in its economic analysis.

      o     Experienced Team of Management and Consultants. The Company's
            management and senior consultants have a wide range of expertise and
            experience in the network industries, litigation and environmental
            consulting sectors. In addition, many of the senior management and
            consultants have worked extensively with one another. Management's
            average tenure with the Company is approximately 13 years.

      o     Established Global Visibility. The Company's staff frequently
            publishes articles and is invited to present at industry gatherings
            and conferences. The staff is also active in several industry groups
            and professional associations including elected or appointed
            positions.

Marketing and Sales

      The Company markets its services from its headquarters in Arlington,
Virginia and through each of its subsidiaries. The Company employs a number of
business development and marketing strategies to communicate with prospective
and current clients, including, but not


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<PAGE>

limited to, on-site presentations; industry seminars featuring presentations by
the Company's management and consultants; speeches; articles in industry,
business, economic, legal and scientific journals; and through other
publications and press releases regarding the energy, network industries and the
environment and the Company's methodologies. A significant portion of the new
business arises from prior client engagements. The Company often leverages
client relationships by cross-selling its services. Clients often expand the
scope of engagements during delivery to include follow-on complementary
activities.

      Also, the Company's on-site presence affords it opportunities to become
aware of, and to help define, additional project opportunities as they are
identified by the client. Strong client relationships arising out of many
engagements often facilitate the Company's ability to market additional
capabilities to its clients in the future.

      In the commercial sector, client acquisition techniques include referrals
and focused presentations to boards of directors and chief decision-makers of
prospective clients. Presentations generally focus on opportunities in the
market segments most relevant to the prospective clients, examples of the
Company's previous work in related industries and the Company's international
capabilities.

      In the government sector, contracts are awarded primarily on the basis of
competitive solicitation. The Company has developed strong capabilities to
prepare proposals that respond to complex requests and often require the
integration and coordination of the services of several subcontractors and
independent consultants. The Company has also developed a detailed understanding
of government and other institutional procurement regulations in the United
States and abroad. In addition, in order to obtain government contracts,
consultants must adhere to stringent cost, accounting and regulatory controls.
In order to comply with such requirements, the Company holds training seminars
to ensure compliance with applicable government regulations and uses a
sophisticated computer-based accounting system that allows it to track costs in
adherence to government standards. The Company also meets government sector
clients' cost guidelines through competitive pricing and internal cost
structures.

Human Resources

      As of December 31, 1999, the Company's personnel consisted of 776
full-time employees, including 481 full-time consultants with extensive
expertise in a variety of disciplines, including business, economics, finance
and accounting, decision theory, statistics, operations research and marketing.

      Approximately two-thirds of the full-time consulting staff have advanced
degrees. The Company integrates the diverse academic backgrounds and corporate
and government sector experience of its consultants into multidisciplinary teams
with solid analytical skills and broad practical experience. The Company's
management and practice leaders average over 20 years of experience.


                                       11
<PAGE>

      The Company supplements its consultants on certain engagements with
independent contractors and senior advisors. The Company believes that its
practice of retaining independent contractors on a per-engagement basis provides
it with greater flexibility in tailoring professional personnel to meet the
needs of its clients.

Risk Factors

      o     Attraction, Retention and Management of Professional and
            Administrative Staff. The Company's business involves the delivery
            of professional services and is labor intensive. The Company's
            future performance depends in large part upon its ability to
            attract, develop, motivate and retain highly skilled consultants,
            research associates and administrative staff, particularly senior
            professionals with business development skills.

            In connection with its recruiting efforts, the Company seeks
            employees from top graduate schools with prior relevant consulting
            experience and strong project management, analytic and
            communications skills in competitive and regulated industries,
            especially those with meaningful international experience. The
            Company also hires professionals with senior executive experience
            directly from the industry.

            Qualified consultants are in great demand, and there is significant
            competition for employees with these skills from other consulting
            and investment banking firms, research firms, energy companies and
            many other related enterprises. Although the Company attracts and
            motivates its professional and administrative staff by offering
            competitive packages of base and incentive cash compensation, stock
            options, bonuses and attractive benefits, many competing firms have
            greater financial resources than the Company, which they may use to
            attract and compensate qualified personnel. There can be no
            assurance that the Company will be able to attract and retain
            sufficient numbers of highly skilled consultants in the future. The
            loss of the services of a significant number of consultants,
            research associates or administrative personnel could have a
            material adverse effect on the Company's business, operating results
            and financial condition, including its ability to secure and
            complete engagements.

      o     Concentration of Revenues. Over half of the revenues of the Company
            are derived from commercial and government clients involved in the
            energy, network industries and environment. As a result of this
            focus, the Company's business, financial condition and results of
            operations are influenced by factors affecting these markets,
            including, but not limited to, changing political, economic and
            regulatory influences that may affect the procurement practices and
            operations. In particular, many electric and gas utilities are
            consolidating to create larger organizations or strategic alliances.
            These consolidations and alliances will reduce the number of
            potential customers for the Company and may also create conflicts of
            interest between clients. In addition, these consolidations and
            alliances may result in the acquisition of certain of the Company's
            key clients, and such clients may scale back or terminate their
            relationship with the Company following their acquisition.
            Similarly, cutbacks in the network industries


                                       12
<PAGE>

            and/or environmental budgets of the United States and other
            governments could result in the scale back or termination of some of
            the Company's government sector contracts. USAID is the Company's
            largest government sector client and accounts for approximately 56%
            of that segment's sales. The impact of these developments is
            difficult to predict and could have a material adverse effect on the
            Company's business, financial condition and results of operations.

      o     Ability to Sustain and Manage Growth. The Company has experienced
            rapid growth in recent years. The Company completed five
            acquisitions in 1998, including the acquisition of Putnam, Hayes and
            Bartlett, Inc. ("PHB") and three acquisitions in 1999. The Company
            believes that sustaining such growth places a strain on operational,
            human and financial resources. In order to manage its growth, the
            Company must continue to improve its operating and administrative
            systems and to attract and retain qualified management and
            professional, scientific and technical-operating personnel. Foreign
            operations also may involve the additional risks of assimilating
            differences in foreign business practices, hiring and retaining
            qualified personnel, and overcoming language barriers. Failure to
            manage such growth effectively could have a material adverse effect
            on the Company's business.

      o     Risks Related to Possible Acquisitions. An element of the Company's
            strategy is to expand its operations through the acquisition of
            complementary businesses. There can be no assurance that the Company
            will be able to identify, acquire, profitably manage or successfully
            integrate any acquired businesses into the Company without
            substantial expenses, delays or other operational or financial
            problems. Moreover, competitors of the Company are also soliciting
            acquisition candidates, which could result in an increase in the
            price of acquisition targets and a decrease in the number of
            attractive companies available for acquisition. Further,
            acquisitions may involve a number of special risks, including
            diversion of management's attention, failure to retain key acquired
            personnel, increased costs to improve managerial, operational,
            financial and administrative systems, unanticipated events or
            circumstances, legal liabilities, increased interest expense and
            amortization of acquired intangible assets, some or all of which
            could have a materially adverse impact on the Company's business,
            operating results and financial condition. Client satisfaction or
            performance problems at a single acquired firm could have a
            materially adverse impact on the reputation of the Company as a
            whole. In addition, there can be no assurance that acquired
            businesses, if any, will achieve anticipated revenues and earnings.
            The failure of the Company to manage its acquisition strategy
            successfully could have a material adverse effect on the Company's
            business, operating results and financial condition.

      o     Dependence on Key Clients. The Company derives a significant portion
            of its revenues from a relatively limited number of clients. For
            example, revenues from the Company's ten most significant clients
            accounted for approximately 31%, 39% and 35% of its total revenues
            in 1999, 1998 and 1997, respectively. USAID is the Company's largest
            client, accounting for approximately 18%, 22% and 20% of Hagler
            Bailly's total revenues in 1999, 1998 and 1997, respectively.
            Clients typically retain the Company as needed on


                                       13
<PAGE>

            an engagement basis rather than pursuant to long-term contracts, and
            a client can usually terminate an engagement at any time without a
            significant penalty. Moreover, there can be no assurance that the
            Company's existing clients will continue to engage it for additional
            assignments or do so at the same revenue levels. The loss of any
            significant client could have a material adverse effect on the
            Company's business, results of operations and financial condition.
            In addition, the level of the Company's consulting services required
            by an individual client can diminish over the life of its
            relationship with the Company, and there can be no assurance that
            the Company will be successful in establishing relationships with
            new clients as this occurs.

      o     Professional and Other Liability. The Company's services involve
            risks of professional and other liability. If the Company were found
            to have been negligent or to have breached its obligations to its
            clients, it could be exposed to significant liabilities and its
            reputation could be adversely affected. In connection with many of
            its government sector engagements, the Company employs the services
            of local staff and uses consultants who are independent contractors.
            Negligent or illegal acts, or ethical violations by these
            independent contractors could adversely affect the Company.

      o     Government Sector Market and Contracting Risks. A portion of the
            Company's revenues were derived from contracts or subcontracts with
            U.S. government sector clients. Providing consulting services to
            U.S. government sector clients is subject to detailed regulatory
            requirements and government policies as well as to funding
            priorities. Contracts with U.S. government sector clients may be
            conditioned upon the continuing availability of public funds, which
            in turn depends upon lengthy and complex budgetary procedures, and
            may be subject to certain pricing constraints. Moreover, U.S.
            government sector contracts may generally be terminated for a
            variety of factors, including when it is in the best interests of
            the respective government. There can be no assurance that these
            factors or others unique to contracting with governmental entities
            will not have a material adverse effect on the Company's business,
            results of operations and financial condition.

      o     Intense Competition. The market for consulting services in the
            energy, network and the environment industries is intensely
            competitive, highly fragmented and subject to rapid change, and such
            competition is likely to increase in the future. Many of the
            Company's competitors have greater personnel, financial, technical
            and marketing resources than the Company. The Company also competes
            with its clients' internal resources, particularly where such
            resources represent a fixed cost to the client. This source of
            competition may heighten as consolidation of electric and gas
            utility and other energy industry companies creates larger
            organizations. There can be no assurance that the Company will be
            able to compete successfully with its existing competitors or with
            any new competitors.

      o     Risk of International Operations. The Company operates either
            permanent or project offices in a number of foreign countries. The
            Company expects to continue to expand its international operations
            and offices primarily in Western Europe and in the Asia-


                                       14
<PAGE>

            Pacific region. Expansion requires considerable management and
            financial resources and may negatively impact the Company's
            near-term results of operations. The Company's international
            operations are subject to numerous potential challenges and risks,
            including war, civil disturbances, other political and economic
            conditions in various jurisdictions such as tariffs and other trade
            barriers, longer accounts receivable collection cycles, fluctuations
            in currency and potentially adverse tax consequences. There can be
            no assurance that such international factors will not have a
            material adverse effect on the Company's business, results of
            operations and financial condition.

      o     Dependence on Key Employees. The Company's business consists
            primarily of the delivery of professional services and, accordingly,
            its future success is highly dependent upon the efforts, abilities,
            business generation capabilities and project execution of its
            consultants. The Company's success is also dependent upon the
            managerial, operational and administrative skills of its officers.
            The loss of the services of any consultant or the failure of the
            Company's consultants to generate business or otherwise perform at
            or above historical levels could have a material adverse effect on
            the Company's business, financial condition and results of
            operations. The Company does not have employment or non-competition
            agreements with many of its consultants or officers; accordingly,
            such individuals may terminate their relationship with the Company
            at will and without notice and immediately begin to compete with the
            Company.

      o     Concentration of Ownership. As of December 31, 1999, the directors
            and senior management of the Company beneficially owned
            approximately 36% of the Company's outstanding shares of common
            stock. As a result, these stockholders will have substantial
            influence over the outcome of matters requiring a stockholder vote,
            including the election of the members of the Board of Directors.
            Such control could adversely affect the market price of the
            Company's common stock or delay or prevent a change of control of
            the Company at a price which might represent a premium over the
            market price of its common stock.

      o     Need to Develop New Offerings. The Company's future success will
            depend in significant part on its ability to successfully develop
            and introduce new service offerings and improved versions of
            existing service offerings. There can be no assurance that the
            Company will be successful in developing, introducing on a timely
            basis and marketing such service offerings, or that any service
            offerings will be accepted in the market. Moreover, services offered
            by others may render the Company's services non-competitive or
            obsolete.

      o     Project Risks. Many of the Company's engagements involve projects
            which are critical to the operations of its clients' businesses. The
            Company's failure or inability to meet a client's expectations in
            the performance of its services could result in the incurrence by
            the Company of a financial loss and could damage the Company's
            reputation and adversely affect its ability to attract new business.
            In addition, an unanticipated difficulty in completing a project
            could have an adverse effect on the Company's business and results
            of operations. Fees for the Company's engagements can be based on


                                       15
<PAGE>

            the project schedule, the Company's staffing requirements, the level
            of customer involvement and the scope of the project as agreed upon
            with the customer at the project's inception. The Company generally
            seeks to obtain an adjustment in its fees in the event of any
            significant change in any of the assumptions upon which the original
            estimate was based. However, there can be no assurance that the
            Company will be successful in obtaining any such adjustment in the
            future.

      o     Intellectual Property Rights. The Company's performance is in part
            dependent upon its internal information and communication systems,
            databases, tools, and the methods and procedures that it has
            developed specifically to serve its clients. The Company relies on a
            combination of nondisclosure and other contractual arrangements and
            copyright, trademark and trade secret laws to protect its
            proprietary systems, information and procedures. There can be no
            assurance that the steps taken by the Company to protect its
            proprietary rights will be adequate to prevent misappropriation of
            such rights or that the Company will be able to detect unauthorized
            use and take appropriate steps to enforce its proprietary rights.
            The Company believes that its systems and procedures and other
            proprietary rights do not infringe upon the rights of third parties.
            There can be no assurance, however, that third parties will not
            assert infringement claims against the Company in the future or that
            any such claims will not require the Company to enter into costly
            litigation or materially adverse settlements to litigation,
            regardless of the merits of such claims.

      o     Government Regulation of Immigration. Certain of the Company's
            employees are foreign nationals working in the United States under
            U.S. work authorizations. Congress and administrative agencies with
            jurisdiction over immigration matters have periodically expressed
            concerns over the levels of legal and illegal immigration into the
            U.S. These concerns have often resulted in proposed legislation,
            rules and regulations aimed at reducing the number of work permits
            that may be issued. Any changes in such laws making it more
            difficult to hire foreign nationals or limiting the ability of the
            Company to retain foreign employees could require the Company to
            incur additional unexpected labor costs and expenses.

      o     Fluctuations of Operating Results. The Company's future operating
            results will continue to be subject to quarterly fluctuations based
            upon a wide variety of factors, including the number and
            significance of client engagements commenced and completed during a
            quarter, delays incurred in connection with an engagement, the
            number of business days in a quarter, employee hiring and
            utilization rates, the ability of clients to terminate engagements
            without penalties, the size and scope of engagements, the nature of
            the fee arrangement, the seasonality of the spending cycle of
            government sector clients (especially that of the U.S. government),
            the timing of new office openings, return on investment capital, and
            the general economy, such as recessionary periods, political
            instability, changes in trade policies, fluctuations in interest or
            currency exchange rates and other competitive factors. Seasonality
            also affects the Company's operating results, particularly in the
            third and fourth quarters of each fiscal year. In addition, the
            Company's operating expenses are increasing as the


                                       16
<PAGE>

            Company continues to expand its operations, and future operating
            results will be adversely affected if revenues do not increase
            accordingly. Additionally, the Company plans to continue to evaluate
            and, when appropriate, make acquisitions of complementary
            businesses. As part of this process the Company will continue to
            evaluate the changing value of its assets, and when necessary, make
            adjustments thereto. While the Company cannot predict what effect
            these various factors may have on its financial results, the
            aggregate effect of these and other factors could result in
            significant volatility in the Company's future performance and stock
            price.

      o     Fluctuations in the General Economy. The general level of economic
            activity significantly affects demand for the Company's professional
            services. When economic activity slows, clients may delay or cancel
            plans that involve the hiring of consultants. The Company is unable
            to predict the level of economic activity at any particular time,
            and fluctuations in the general economy could adversely affect the
            Company's business, operating results and financial condition.

      o     Employment Liability Risks. The Company, as a provider of
            professional services, employs and places individuals in the
            workplace of other businesses. Inherent risks of such activity
            include possible claims of errors and omissions, misuse of client
            proprietary information, misappropriation of funds, discrimination
            and harassment, theft of client property, other criminal activity or
            torts and other claims. Although historically the Company has not
            experienced any material claims of these types, there can be no
            assurance that the Company will not experience such claims in the
            future.

      o     Certain Anti-takeover Effects. The Company's Amended and Restated
            Certificate of Incorporation, By-laws, and the Delaware General
            Corporation Law include provisions that may be deemed to have
            anti-takeover effects and may delay, defer or prevent a takeover
            attempt that stockholders might consider in their best interests.
            These include a Board of Directors which is divided into three
            classes, each of which is elected to serve staggered three-year
            terms, and by-law provisions under which only the President, a
            majority of the Board of Directors or stockholders owning at least
            50% of the Company's capital stock may call meetings of the
            stockholders. Also, the Board of Directors of the Company is
            authorized to issue up to 5,000,000 shares of preferred stock and to
            determine the price, rights, preferences and privileges of such
            shares, without any further stockholder action. The existence of
            this "blank-check" preferred stock could render more difficult or
            discourage an attempt to obtain control of the Company by means of a
            tender offer, merger, proxy contest or otherwise. Furthermore, the
            Company is subject to the anti-takeover provisions of Section 203 of
            the Delaware General Corporation Law that prohibits Hagler Bailly
            from engaging in a "business combination" with an "interested
            stockholder" unless the business combination is approved in a
            prescribed manner. These provisions could also have the effect of
            delaying or preventing a change of control of the Company, which
            could adversely affect the market price of the common stock.


                                       17
<PAGE>

      o     Fluctuations in Stock Price. The market price of the Company's
            common stock may fluctuate substantially due to a variety of
            factors, including quarterly fluctuations in results of operations,
            announcements or terminations of new services, offices, contracts,
            acquisitions or strategic alliances by the Company or its
            competitors, as well as changes in the market conditions in the
            energy, network and environmental industries, changes in earnings
            estimates by analysts, changes in accounting principles, sales of
            the Company's common stock by existing holders, loss of key
            personnel, a relatively small float of shares that are freely
            tradable without restriction or registration under the Securities
            Act of 1933 and other factors. The stock market has from time to
            time experienced extreme price and volume fluctuations that have
            particularly affected the market price for many companies and which,
            on occasion, have been unrelated to operating performance. To the
            extent the Company's performance may not meet expectations published
            by external sources, public reaction could result in a sudden and
            significantly adverse impact on the market price of the Company's
            securities, particularly on a short-term basis. In addition, such
            stock price volatility may provoke the initiation of securities
            litigation, which may divert substantial management resources and
            may have an adverse effect on the management of business operations.
            Any of these results could have a material adverse effect on the
            Company's business, operating results and financial condition.


                                       18
<PAGE>

Executive Officers

      The Company's Executive Officers and their respective ages, positions and
biographical information as of March 1, 2000 is as follows:

<TABLE>
<CAPTION>
Name                       Title                                                             Age
----                       -----                                                             ---
<S>                        <C>                                                                <C>
Henri-Claude A. Bailly     Chairman of the Board, Hagler Bailly, Inc., Cap Gemini Hagler      53
                           Bailly LLC and Hagler Bailly Risk Advisors, Inc.

Geoffrey W. Bobsin         Senior Vice President and Chief Financial Officer, Hagler          44
                           Bailly, Inc.

William E. Dickenson       President and Chief Executive Officer, Hagler Bailly, Inc.         51

Roger W. Gale              President and Chief Executive Officer, PHB Hagler Bailly, Inc.     53

Howard W. Pifer III        Chairman of the Board , PHB Hagler Bailly, Inc.                    57

Kenneth I. Rubin           President and Chief Executive Officer, Hagler Bailly Services,     47
                           Inc.

Stephen V. R. Whitman      Senior Vice President and General Counsel, Hagler Bailly, Inc.     53
</TABLE>

Henri-Claude A. Bailly - is chairman of Hagler Bailly's Board of Directors and
chairman of the Board of Directors of Cap Gemini Hagler Bailly and HBRA. He
served as the Company's president and chief executive officer from its founding
in 1980 until April 1999. From 1984 to 1995, Mr. Bailly was employed by RCG
International, the consulting arm of Reliance Group Holdings, in a series of
management positions culminating in senior vice president of RCG International
and chairman of the board and chief executive officer of RCG/Hagler Bailly,
Inc., a predecessor to the Company. Mr. Bailly serves on the board of directors
of the United States Energy Association, the Alliance to Save Energy and
Adsavers.com and is a member of the National Coal Council.

Geoffrey W. Bobsin - is senior vice president, chief financial officer,
treasurer and secretary of the Company. Prior to joining the Company, he served
as president and chief executive officer of Environmental Products Corporation
from 1995 to 1999, as the executive vice president and chief financial officer
from 1984 to 1995, and as the controller from 1982 to 1984. Prior to joining
Environmental Products Corporation, he served as audit supervisor at Grant
Thornton and Company from 1978 to 1982. Mr. Bobsin is a Certified Public
Accountant and a member of the American Institute of Certified Public
Accountants.

William E. Dickenson - is president and chief executive officer of the Company.
He served as president and chief executive officer of PHB Hagler Bailly from
March 1999 to February 2000. He served as president and chief executive officer
of PHB from 1992 to August 1998, and was the managing director responsible for
its litigation support practice from 1983 through 1992. From 1978 to 1983, Mr.
Dickenson managed major antitrust litigation and consulting assignments at
Dickenson, O'Brien & Associates, which he founded and served as president.


                                       19
<PAGE>

Prior to forming Dickenson, O'Brien & Associates, he was employed at Cambridge
Research Institute and served in a variety of positions at the Tennessee Valley
Authority.

Roger W. Gale - is president and chief executive officer of PHB Hagler Bailly.
He was president and founder of the WIEG until April 30, 1999 when the firm
merged with and into PHB Hagler Bailly. Dr. Gale leads a number of client
engagements with North American and international energy companies focusing on
strategic decision-making, convergence, and culture change. In addition, he
manages the firm's annual Energy Industry Outlook, an analysis of the advent of
competition in the electric industry. From 1987 to 1988, Dr. Gale was Director
of the Office of External Affairs for the U.S. Federal Energy Regulatory
Commission. From 1984 to 1987, he served as Director of the Office of Policy and
Outreach, Office of Civilian Radioactive Waste Management, at the U.S.
Department of Energy.

Howard W. Pifer III - is chairman of PHB Hagler Bailly's Board of Directors and
was chairman of Hagler Bailly's Board of Directors from August 1998 to August
1999. He served as chairman of the Board of Directors of PHB from 1991 to August
1998, having previously served as PHB's president and chief executive officer.
Prior to founding PHB in 1976, Dr. Pifer was a member of the Harvard Business
School faculty, where he taught courses in managerial economics, finance, public
policy and strategic planning. From 1973 to 1976, Dr. Pifer served as vice
president of the Energy & Environment Group at Temple, Barker & Sloane, Inc.

Kenneth I. Rubin - is president and chief executive officer of Hagler Bailly
Services. He joined the firm in 1997 as a result of Hagler Bailly's acquisition
of Apogee Research, Inc. ("Apogee"), a consulting firm he co-founded in 1986 and
where he served as president and chief executive officer. While at the U.S.
Congressional Budget Office from 1980-1986, Dr. Rubin had responsibility for
budget, finance, and policy research supporting authorizing, appropriations, and
budget committees with jurisdiction over all U.S. water and environmental
infrastructure agencies including the U.S. Army Corps of Engineers, the
Environmental Protection Agency, and the Bureau of Reclamation. Dr. Rubin
previously directed a multi-million technical assistance program supporting
state water management agencies at the U.S. Water Resources Council.

Stephen V. R. Whitman - is senior vice president and general counsel of Hagler
Bailly. Prior to joining the firm in July 1997, he spent four years in his own
private practice and previously was associated with the law firms of Kelley Drye
& Warren and White & Case, and served as attorney advisor (and regional legal
advisor in Lima, Peru) for USAID.


                                       20
<PAGE>

ITEM 2 - PROPERTIES

      The Company's headquarters is currently located in approximately 58,402
square feet of leased office space in Arlington, Virginia. The Company leases
office space as listed below. The Company believes that its facilities are
suitable for its current needs and that additional facilities can be leased to
meet future needs.

      The Company maintains principal offices in the following locations:

        United States                                International
------------------------------            --------------------------------------
Arlington, VA                             Beijing, People's Republic of China
Boulder, CO                               Buenos Aires, Argentina
Cambridge, MA                             Jakarta, Indonesia
Houston, TX                               London, England
Los Angeles, CA                           Melbourne, Australia
New York, NY                              Paris, France
Palo Alto, CA                             Rugby, England
Washington, DC                            Sydney, Australia
                                          Toronto, Canada
                                          Wellington, New Zealand

      Each principal office represents a permanent location servicing multiple
clients that is run by a member of Hagler Bailly's senior management. In
addition, from time to time the Company leases a project office to enable it to
service a specific international project involving a particular individual
client, in which case the office is paid for directly by the client. All of the
Company's principal and project offices are electronically linked together and
have access to all of the Company's capabilities and core consulting tools.

ITEM 3 - LEGAL PROCEEDINGS

      The Company and its subsidiaries are from time to time parties to
litigation arising in the ordinary course of business. Neither the Company nor
any of its subsidiaries is a party to any pending material litigation nor are
any of them aware of any pending or threatened litigation that would have a
material adverse effect on the Company or its business.

ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

      Not applicable.


                                       21
<PAGE>

PART II

ITEM 5 - MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS

      The Company's common stock was first offered to the public on July 3,
1997, and since that time has been traded on the Nasdaq National Market under
the symbol "HBIX." The following table sets forth the range of reported high and
low closing sales price for the Company's common stock, for the periods
indicated, as reported by the Nasdaq National Market.

1999                                                   High             Low
-------------------------------------------------   --------        --------
January - March                                      $22.313          $6.250
April - June                                         $10.375          $5.625
July - September                                     $10.375          $6.563
October - December                                    $7.750          $4.469

1998                                                   High             Low
-------------------------------------------------   --------        --------
January - March                                      $25.000         $18.625
April - June                                         $30.000         $22.500
July - September                                     $30.250         $16.750
October - December                                   $24.000         $13.563

1997                                                   High             Low
-------------------------------------------------   --------        --------
January - March                                          N/A             N/A
April - June                                             N/A             N/A
July 3 - September                                   $25.250         $17.000
October - December                                   $26.375         $18.250

      The Company had 244 holders of record of its common stock at March 1,
2000, and approximately 1,000 beneficial owners. The Company has never paid a
cash dividend on its common stock and does not expect to pay a cash dividend on
its common stock in the foreseeable future.

ITEM 6 -- SELECTED FINANCIAL DATA

      The following selected consolidated financial data for the year ended
December 31, 1995, combine the financial data of RCG/Hagler Bailly, Inc. (the
"Predecessor"), a wholly-owned subsidiary of RCG International Inc. which was
acquired on May 25, 1995, by the management of RCG/Hagler Bailly, Inc. and the
consolidated financial data of the Company from May 26, 1995 to December 31,
1995 derived from the consolidated financial statements of the Company. The
selected consolidated financial data as of December 31, 1995, is derived from
the consolidated financial statements of the Company. The selected consolidated
financial data as of


                                       22
<PAGE>

and for the years ended December 31, 1996, 1997, 1998 and 1999 have been derived
from the audited consolidated financial statements of the Company. The Company's
prior years have been restated to include the historical financial information
of Apogee Research, Inc. ("Apogee "), TB&A Group, Inc. and its wholly-owned
subsidiary Theodore, Barry & Associates (collectively "TB&A"), IGA and Putnam
Hayes & Bartlett, Inc. ("PHB ") as a result of business combinations accounted
for as poolings of interests.

      The results of operations for prior periods are not necessarily indicative
of the results that may be expected for future years. The information set forth
below should be read in conjunction with the Company's consolidated financial
statements and the notes thereto, "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included elsewhere in this Annual
Report on Form 10-K.

<TABLE>
<CAPTION>
                                                                  Years ended December 31,
                                                --------------------------------------------------------------
                                                1995 (1) (2)   1996 (2)     1997 (2)      1998       1999 (2)
                                                -----------   ---------    ---------    ---------    ---------
STATEMENT OF OPERATIONS DATA:                                (In thousands, except per share data)
<S>                                              <C>          <C>          <C>          <C>          <C>
Revenues                                         $ 120,566    $ 143,141    $ 160,615    $ 177,462    $ 181,981
Cost of services                                    94,163      110,500      120,585      126,204      147,294
                                                 ---------    ---------    ---------    ---------    ---------
Gross profit                                        26,403       32,641       40,030       51,258       34,687
Liquidation of subsidiary (4)                           --          662          328           --           --
Merger related and other nonrecurring costs (5)         --           --        1,235        8,275          292
Asset impairment (8)                                    --           --           --        1,107        4,591
Selling, general and administrative expenses        21,810       26,047       26,868       25,112       40,440
Stock and stock option compensation (3)                 --        6,172        9,965        2,595           --
                                                 ---------    ---------    ---------    ---------    ---------
Income/(loss) from operations                        4,593         (240)       1,634       14,169      (10,636)
Other income (expense), net (7)                       (799)        (853)        (400)         269          (73)
                                                 ---------    ---------    ---------    ---------    ---------
Income/(loss) before equity
   investment in joint venture,
   income tax expense and
   extraordinary gain                                3,794       (1,093)       1,234       14,438      (10,709)
Income tax expense (benefit)                         1,907        1,786        5,460        7,275       (1,212)
                                                 ---------    ---------    ---------    ---------    ---------
Income/(loss) before equity investment in joint
   venture and extraordinary gain                    1,887       (2,879)      (4,226)       7,163       (9,497)
(Loss) from equity investment in joint venture          --           --           --         (463)        (427)
                                                 ---------    ---------    ---------    ---------    ---------
Income (loss)  before extraordinary gain             1,887       (2,879)      (4,226)       6,700       (9,924)
Extraordinary gain (6)                               1,055          145        2,336           --           --
                                                 ---------    ---------    ---------    ---------    ---------
Net income (loss)                                $   2,942    $  (2,734)   $  (1,890)   $   6,700    $  (9,924)
                                                 =========    =========    =========    =========    =========
Net income (loss) per share
  Basic
    Net (loss) income before extraordinary gain          *    $   (0.25)   $   (0.32)   $    0.42    $   (0.58)
    Extraordinary gain                                   *    $    0.01    $    0.17           --           --
    Net (loss) income                                    *    $   (0.24)   $   (0.14)   $    0.42    $   (0.58)
  Dilutive
    Net (loss) income before extraordinary gain          *    $   (0.25)   $   (0.32)   $    0.40    $   (0.58)
    Extraordinary gain                                   *    $    0.01    $    0.17           --           --
    Net (loss) income                                    *    $   (0.24)   $   (0.14)   $    0.40    $   (0.58)
Weighted average shares outstanding
  Basic                                                  *       11,321       13,361       15,992       17,059
  Dilutive                                               *       11,321       13,361       16,772       17,059
</TABLE>

*     Due to the acquisition on May 25, 1995, and the related change in capital
      structure, earnings per share information for this period is not
      meaningful and, accordingly, is not presented.


                                       23
<PAGE>

<TABLE>
<CAPTION>
                                                                DECEMBER 31,
                                        -------------------------------------------------------------
                                          1995         1996          1997          1998         1999
                                        -------      -------       -------      --------      -------
BALANCE SHEET DATA                                             (In Thousands)
<S>                                     <C>          <C>           <C>          <C>           <C>
Cash and cash equivalents               $ 1,753      $ 3,218       $ 5,261      $ 16,165      $ 9,656
Working capital                           5,054        7,382        34,122        54,294       44,354
Total assets                             52,703       55,872        84,657       101,422      116,209
Total debt                               20,606       16,790         2,752         1,026          666
Total stockholders' equity                3,772        9,958        48,849        73,599       72,292
</TABLE>

(1)   The operating data for the year-ended December 31, 1995 reflect the
      combined results of operations of the Predecessor from January 1, 1995 to
      May 24, 1995, the Company from May 25, 1995 to December 31, 1995, and the
      annual results of Apogee, TB&A, IGA and PHB.
(2)   The statements of operations data for the years ended December 31, 1995,
      1996 and 1997 include performance incentive compensation paid to PHB
      senior staff members in excess of a standard bonus set for their
      respective staff levels. The excess performance incentive compensation was
      included in cost of services and selling, general and administrative
      expenses was $6,260, $9,588 and $7,294 for the years ended December 31,
      1995, 1996 and 1997, respectively. In addition, the year ended December
      31, 1996 includes approximately $500 of cost of services, representing
      that portion of officer compensation that exceeded the compensation that
      would have been paid had the compensation plan adopted in January 1997
      been in effect for all of 1996; and the year ended December 31, 1999
      includes $10,868 in bonuses paid to key staff. In 1997 the Board adopted a
      resolution limiting the amount that may be set aside for bonuses to forty
      percent (40%) of net income before bonuses and taxes. In approving bonuses
      for 1999 the Board of Directors made an exception to this limitation.
(3)   In connection with an amendment to the Hagler Bailly, Inc. Employee
      Incentive and Non-Qualified Stock Option and Restricted Stock Plan (the
      "Stock Option Plan") and a reclassification of its common stock, each
      effective December 31, 1996, Hagler Bailly incurred non-recurring,
      non-cash charges to operations amounting to approximately $4,600 for
      options and approximately $1,600 for stock in 1996. In connection with a
      stock bonus to an employee, the Company incurred a non-cash compensation
      charge to operations in the first quarter of 1997 of $65. PHB common stock
      issued or subject to issuance under subscriptions receivable entered into
      within 12 months preceding the closing of the merger were presumed to have
      been issued in contemplation of the proposed transaction and were
      accounted for at their fair market value at date of issuance. Accordingly,
      PHB recognized a non-recurring, non-cash, non-tax deductible compensation
      charges for the years ended December 31, 1997 and 1998 of approximately
      $9,900 and $2,600, respectively, representing the difference between the
      fair market and book value of shares of common stock then issuable.
(4)   On December 31, 1996, PHB liquidated its wholly-owned subsidiary in the
      U.K. Of PHB's loss of $662 in 1996, $549 represented cumulative foreign
      currency translation losses that had previously been recorded as a
      separate component of the PHB's shareholders' equity. In 1997, $328 was
      recorded as management's estimate of the uncollectable net proceeds
      resulting from the liquidation.
(5)   For the year ended December 31, 1997, 1998 and 1999, the Company recorded
      merger related and other nonrecurring costs of $1,235, $8,275 and $292,
      respectively, as a result of business combinations and related costs (see
      note 17 to the 1999 financial statements).
(6)   For the years ended December 31, 1995, 1996 and 1997, the Company recorded
      extraordinary gains of $1,055, $145 and $2,336, respectively, as a result
      of extinguishment of debt at beneficial terms by TB&A.
(7)   Other income (expenses), net includes interest income, interest expense,
      minority interest, other income, and other expenses.
(8)   For the years ended December 31, 1998 and 1999, the Company recorded asset
      impairment expenses of $1,107 and $4,591, respectively. In 1998, the
      expense was recorded as a result of certain software development costs
      which were impaired due to the duplication of technologies resulting from
      the Company's business combinations and its joint venture with Cap Gemini.
      In 1999, the expense was recorded as a result of the impairment of
      goodwill associated with certain subsidiaries (see note 18 to the 1999
      financial statements).


                                       24
<PAGE>

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

Overview

      The predecessor of the Company was founded in February 1980 as Hagler,
Bailly & Company, Inc. In July 1984, it was acquired by RCG International, Inc.
("RCG") an indirect subsidiary of Reliance Group Holdings, Inc. and in 1987 was
renamed RCG/Hagler Bailly, Inc. In May 1995, the management of RCG/Hagler
Bailly, Inc. completed the purchase of RCG/Hagler Bailly, Inc. from RCG (the
"Management Buy-Out"), and the successor to RCG/Hagler Bailly, Inc. became a
wholly-owned subsidiary of the Company. In July 1997, the Company completed an
initial public offering (the "IPO").

      Hagler Bailly, together with its wholly-owned subsidiaries, PHB Hagler
Bailly, Hagler Bailly Services and its other domestic and foreign wholly-owned
subsidiaries, is a leading worldwide provider of strategy, economics and
operations consulting services to clients in energy and network industries,
including electric power, natural gas and water utilities, fuel providers,
aviation transportation, telecommunications, commercial litigation and the
environment.

      The Company's revenues consist of commercial consulting revenues,
government consulting revenues and other revenues. Commercial consulting
revenues represent revenues billed at commercial rates for professional staff,
subcontractors and independent consultants, and client reimbursable expenses.
Commercial revenues are associated with the Company's primary business of
providing strategic advice and analysis to businesses in developed countries on
issues involving energy, transportation, telecommunications, commercial
litigation, the environment and other matters. Government consulting revenues
represent revenues billed at government rates for professional staff,
subcontractors and independent consultants, and client reimbursable expenses.
Government revenues are associated with providing advisory and technical
services to government sector clients worldwide in the energy and network
industries, particularly in water and transportation, and the environment. Other
revenues include those derived from information-based products and services,
financial advisory services, and publication of newsletters, reference manuals,
and data series for the energy and transportation industries services. Revenue
from commercial consulting is typically characterized by higher gross margins
than government consulting, yet generally requires a higher relative level of
infrastructure support. Consequently, the Company's operating performance is
affected by its commercial consulting / government consulting business mix.
Through strategic acquisitions and internal growth, the Company has increased
its commercial consulting client base, and will continue to pursue such
opportunities in the future.

      The Company derives substantially all of its revenues from fees for
professional services. Clients are typically invoiced on a monthly basis. The
majority of revenues are billed at standard daily rates, standard hourly rates,
or cost-plus fixed-fees. Revenues from standard daily rate contracts are
recognized at amounts represented by the agreed-upon billing amounts and costs
are recognized as incurred. Revenues from standard hourly rate engagements are
recognized as


                                       25
<PAGE>

hours are recorded and costs are recognized as they are incurred. Revenue from
cost-plus fixed-fee contracts is recognized as costs are incurred on the basis
of direct costs plus allowable indirect costs and a pro rata portion of
estimated fee. The remainder of the revenues are billed on a fixed-bid basis and
by lump sum fee arrangements. Revenues from fixed-bid type contracts are
recognized on the percentage-of-completion method of accounting with costs and
estimated profits included in contract revenues based on the relationship that
contract costs incurred bear to management's estimate of total contract costs.
Losses, if any, are accrued when they become known and the amount of the loss is
reasonably determinable. The Company's most significant expenses are project
personnel costs, which consist of consultant salaries and benefits (including
bonuses), and travel-related direct project expenses. Project personnel are
typically full-time professionals employed by the Company, although the Company
often supplements its professional project staff through the use of
subcontractors and independent consultants. The Company believes that retaining
subcontractors and independent consultants on a per-engagement basis provides it
with greater flexibility and reduced risk in adjusting professional staff levels
in response to changes in demand for its services.

Stock Based Compensation Charges

      The Company recognized a non-recurring, non-cash charge to operations of
approximately $10.0 million in the year ended December 31, 1997, and
approximately $2.6 million in the year ended December 31, 1998. These charges
are required under generally accepted accounting principles for stock issued, or
obligated to be issued, during the twelve months preceding the closing of a
pending merger based on the presumption that such issuances were in
contemplation of the merger. Substantially all of these costs were related to
the PHB merger and represent the difference between the fair market and book
value of PHB common stock issuable under subscriptions within one year of the
merger's close.

Recent Mergers and Events

      On December 1, 1997, the Company completed the merger of Apogee, whereby
Apogee became a wholly-owned subsidiary of Hagler Bailly. Apogee was a
consulting firm specializing in the economic and financial analysis of
infrastructure, including all aspects of transportation and environment. The
Company issued 409,985 shares of its common stock in exchange for all of the
common stock of Apogee. The business combination is accounted for as a pooling
of interests. Accordingly, the Company's financial statements have been restated
to reflect the merger for all periods presented.

      On January 28, 1998, the Company purchased the remaining minority interest
of its consolidated subsidiary, PT Hagler Bailly, a consulting firm located in
Jakarta, Indonesia, for $200,000 whereby PT Hagler Bailly became an indirect,
wholly-owned subsidiary of the Company. Total consideration of the acquisition
was $200,000 in cash. The acquisition was accounted for using the purchase
method.

      On February 23, 1998, the Company completed the merger of TB&A, whereby
TB&A became a wholly-owned subsidiary of the Company. TB&A is a management
consulting firm to


                                       26
<PAGE>

electric, gas and telecommunication companies. The Company issued 454,994 shares
of its common stock, in exchange for all of the common stock of TB&A. The
business combination is accounted for as a pooling of interests. Accordingly,
the Company's financial statements have been restated to reflect the merger for
all periods presented.

      On March 10, 1998, the Company purchased the remaining minority interest
of Hagler Bailly Indonesia, Inc., which holds all of the outstanding stock of PT
Hagler Bailly, whereby Hagler Bailly Indonesia, Inc. became an indirect
wholly-owned subsidiary of the Company. Total consideration of the acquisition
was $240,000 in cash. The acquisition was accounted for as a purchase.

      On April 28, 1998, the Company completed the acquisition of Estudio Q
Ingenieros Asociados S.R.L., an Argentinean company ("Estudio Q"), whereby
Estudio Q became a wholly-owned subsidiary of the Company. Total consideration
for the acquisition was approximately $2.4 million in the form of $800,000 cash
and an aggregate of 64,306 shares of the Company's common stock. The acquisition
was accounted for using the purchase method.

      On June 16, 1998, the Company and Cap Gemini S.A. and its wholly-owned
subsidiary, Cap Gemini America, Inc., entered into an exclusive joint venture to
deliver information technology consulting services and solutions to electric,
gas and water utilities, and service providers in the U.S. and Canada. The
Company expects the joint venture, Cap Gemini Hagler Bailly, L.L.C., to turn
profitable sometime late in the fiscal year ending December 31, 2000. The joint
venture is owned equally by the Company and Cap Gemini America and each has
invested capital in the venture and transferred key senior professionals to it.
Concurrently with the creation of the joint venture, Cap Gemini purchased
470,975 newly issued shares of the Company's stock at the current market price
for total consideration, after commissions and fees, of $11.8 million.

      On June 30, 1998, the Company completed the merger of IGA, whereby IGA
became a wholly-owned subsidiary of the Company. The Company issued 183,550
shares of its common stock in exchange for all the common stock of IGA. The
business combination was accounted for as a pooling of interests. Accordingly,
the Company's financial statements were restated to reflect the merger for all
periods presented.

      On August 28, 1998, the Company completed the merger of PHB, whereby PHB
became a wholly-owned subsidiary of the Company. Until the merger, PHB was the
largest privately owned independent economic and management consulting firm in
the United States. The Company issued 6,548,953 shares of its common stock in
exchange for all of the common stock of PHB. The business combination was
accounted for as a pooling of interests. Accordingly, the Company's financial
statements were restated to reflect the merger for all periods presented.

      On September 30, 1998, the Company sold certain assets of its public
sector environmental consulting operations. As a result of the transaction, the
Company sold assets for approximately $2.9 million, resulting in a gain of
approximately $282,000.

      On November 17, 1998, the Company completed the acquisition of certain
assets and the assumption of certain liabilities of The Fieldston Company
("TFC") and all of the outstanding


                                       27
<PAGE>

stock of Fieldston Publications, Inc. ("FPI"). Total consideration of the
acquisition was approximately $2.3 million in cash and 232,558 shares of Hagler
Bailly common stock. The acquisition was accounted for using the purchase
method.

      In December 1998, the Company made the decision to cease operations in its
financial advisory services business, HB Capital, Inc., resulting in expenses of
approximately $1.8 million.

      On February 8, 1999, the Company acquired all of the outstanding stock of
Lacuna Consulting Limited ("Lacuna"), a United Kingdom corporation, in exchange
for 65,000 shares of the Company's common stock. The acquisition was accounted
for as a purchase. Accordingly, the consolidated financial statements reflect
the results of operations of Lacuna since the date of acquisition.

      On March 22, 1999, the Company announced that its Board of Directors
authorized the repurchase of up to 1,500,000 shares of the Company's common
stock from time to time in the open market or in privately negotiated
transactions. As of December 31, 1999, the Company had reacquired 559,700 shares
of its stock at a total net cost of approximately $4.1 million.

      On April 30, 1999, the Company acquired all of the outstanding stock of
Washington International Energy Group, Ltd. ("WIEG"), a Washington, D.C.-based
worldwide provider of energy and environmental policy consulting research
services, in exchange for 144,210 shares of the Company's common stock and
approximately $850,000 in cash. The Company has the right to repurchase up to
26,210 of these shares at $ .01 cents per share if the price of the Company's
stock meets certain price targets during the three year period following the
acquisition. The transaction was accounted for as a purchase. Accordingly, the
consolidated financial statements reflect the results of operations of WIEG
since the date of acquisition.

      On June 1, 1999, the Company and Objective Resources Group Risk Advisors,
LLC, its joint venture partner in Hagler Bailly Risk Advisors, LLC ("HBRA LLC"),
dissolved HBRA LLC. Following the dissolution of HBRA LLC, the Company continued
its risk advisory business through a wholly-owned subsidiary, Hagler Bailly Risk
Advisors, Inc.

      On August 12, 1999, the Company acquired all of the outstanding stock of
GKMG, a Washington, D.C.-based consulting firm which provides economic,
strategic, financial, and regulatory analysis to the aviation industry, in
exchange for 1,420,000 shares of the Company's common stock. Under the terms of
the Share Exchange Agreement by and among the Company, GKMG and former
shareholders of GKMG, the Company is obligated to issue additional shares of its
common stock to the former shareholders of GKMG with a fair market value (as
defined in the Share Exchange Agreement) up to $15 million if certain earnings
targets for GKMG are met for the periods July 1, 1999-June 30, 2000 and July 1,
2000-June 30, 2001. In addition, the Company is obligated to issue up to 192,857
additional shares of its common stock to the former shareholders of GKMG if
certain stock price performance contingencies are not met. The transaction was
accounted for as a purchase. Accordingly, the consolidated financial statements
reflect the results of operations of GKMG since the date of acquisition.


                                       28
<PAGE>

      On September 27, 1999, the Company announced that its Board of Directors
retained Banc of America Securities, LLC to assist the Company in exploring
strategic and financial alternatives to maximize shareholder value, including
the potential sale or merger of the Company.

      On December 31, 1999, the Company sold the assets of wholly-owned
subsidiary IGA. The Company disposed of this subsidiary due to its inability to
successfully integrate IGA's operations into the Company's other European
operations. As a result of the transaction, the Company sold assets for
approximately $0.6 million, resulting in a loss of approximately $68,000. As a
result of this transaction the Company received a $550,000 note receivable from
the buyers of IGA. The note bears no interest and is secured by 99,516 shares of
the Company's common stock owned by IGA.


                                       29
<PAGE>

Results of Operations

      The following table presents for the periods indicated the percentage of
revenues represented by certain income and expense items:

<TABLE>
<CAPTION>
                                                  For the years ended December 31,
                                                    1997       1998       1999
                                                   -----      -----      -----
<S>                                                <C>        <C>        <C>
Revenues:
  Commercial revenues                               63.6%      65.2%      68.0%
  Government revenues                               35.3       33.7       31.2
  Other revenues                                     1.1        1.1        0.8
                                                   -----      -----      -----
    Total revenues                                 100.0      100.0      100.0
Cost of services                                    75.1       71.1       80.9
Merger related and other nonrecurring                0.8        4.7        0.2
costs
Asset impairment                                      --        0.6        2.5
Liquidation of subsidiary                            0.2         --         --
Selling, general, and administrative
expenses                                            16.7       14.2       22.2
Stock and stock option compensation                  6.2        1.5         --
                                                   -----      -----      -----
Income from operations                               1.0        7.9       (5.8)
  Interest income                                    0.8        0.2        0.1
  Interest expense                                  (0.8)      (0.2)      (0.1)
  Other income (expense), net                       (0.2)       0.2        0.0
  Minority interest                                   --        0.0        0.0
                                                   -----      -----      -----
Income (loss) before income tax
  expense, equity investment in joint
  venture and extraordinary gain                     0.8        8.1       (5.8)
Income tax expense (benefit)                         3.4        4.1       (0.7)
(Loss) income before equity investment in
joint venture and extraordinary gain                (2.6)       4.0       (5.1)
 (Loss) from equity investment in joint
   venture                                            --       (0.3)      (0.3)
                                                   -----      -----      -----
Net income (loss) before
   extraordinary gain                               (2.6)       3.7       (5.4)
Extraordinary gain                                   1.4         --         --
                                                   -----      -----      -----
Net income                                          (1.2)%      3.7%      (5.4)%
                                                   =====      =====      =====
</TABLE>


                                       30
<PAGE>

1999 Compared to 1998

      Revenues for the year ended December 31, 1999, increased by $4.5 million,
or 2.5%, to $182.0 million from the year ended December 31, 1998. For the year
ended December 31, 1999, revenues from the Company's commercial consulting
operating segment increased $8.0 million, or 6.9%, to $123.8 million from the
year ended December 31, 1998. This increase was attributable to approximately
$12.7 million of revenues from acquired companies. The increases resulting from
acquisitions was partially offset by the core commercial business which
experienced a decrease in revenues of approximately $4.7 million primarily due
to a reduction in staff and the number of overall contracts. For the year ended
December 31, 1999, revenues from the Company's government consulting operating
segment decreased approximately $2.9 million, or 4.8%, to $56.7 million from the
year ended December 31, 1998. Excluding the $5.6 million in 1998 revenues
resulting from certain assets of the Company's government sector consulting
practice which was sold in September 1998, the segment's core government
consulting business increased $2.7 million, primarily the result of increased
pass-thru equipment sales and a stronger international presence. Pass-thru
equipment sales pertain to equipment sold by the Company to clients at a nominal
mark-up. Other revenues for the year ended December 31, 1999 were $1.4 million.
In the year ended December 31, 1999, approximately 68.0% of the Company's
revenues were derived from commercial consulting revenues, as compared with
65.2% in the year ended December 31, 1998.

      Cost of services for the year ended December 31, 1999, increased by $21.1
million, or 16.7%, to $147.3 million from the year ended December 31, 1998. Cost
of services as a percentage of revenue increased from 71.1 % for the year ended
December 31, 1998, to 80.9% for the year ended December 31, 1999, primarily due
to an increase in bonuses for key consulting employees as a result of the
repositioning plan, an increase in compensation paid to consulting staff, an
increase in bad debt expense and an increase in pass-thru equipment costs
associated with the increase in pass-thru equipment sales. The bonus expense
included in cost of services totaled $7.2 million for the year ended December
31, 1999 and $1.2 million for the year ended December 31, 1998.

      Selling, general and administrative expenses ("SG&A") for the year ended
December 31, 1999, increased by approximately $15.3 million, or 61.0%, to $40.4
million from the year ended December 31, 1998. Expressed as a percentage of
total revenues, SG&A expenses increased from 14.2% for the year ended December
31, 1998, to 22.2% for the year ended December 31, 1999. This increase is
primarily reflective of an increase in bonuses paid to key employees resulting
from the repositioning plan and increased business development costs, as well as
costs related to the centralization of certain operating systems and
administrative functions. The bonus expense included in SG&A totaled $3.8
million for the year ended December 31, 1999 and $0.4 million for the year ended
December 31, 1998.

      The repositioning plan was drafted by senior management in the fourth
quarter of 1999. The objective was to enter 2000 with a focused business
strategy and streamlined operations in order to maximize future shareholder
value. The major component of the plan was a compensation program to retain and
motivate key professional staff. In addition, the plan


                                       31
<PAGE>

included other components such as the possible divestiture or exiting of
non-core business units, cost reductions and the streamlining of operations.

      Implementation of the repositioning plan commenced in the fourth quarter
of 1999 and a number of actions have been implemented to date. The Company's
efforts with the implementation are ongoing and the Company expects that the
implementation of the repositioning plan to be substantially completed by
mid-2001.

      The actual results to date have been positive. The Company implemented a
compensation program for key professional staff. The program included the
payment of performance bonuses to key staff at the end of 1999 and the payment
of retention bonuses to key staff in 2000 contingent upon their satisfactory
performance and continued employment. The Company believes that this
compensation program has been successful in retaining and motivating the key
professional staff to date. The Company has divested or exited non-core business
units, including the sale of Fieldston Publications. The Company has reduced and
continues its focus to reduce costs in personnel, facilities, employee-related
benefits, and other operating expenses. In addition, the Company engaged a
consulting firm to conduct a review of the administrative work process and to
identify and make recommendations for improvements. Due to the pending sale of
the Company, the Company has postponed the implementation of the recommended
actions.

      As a result of the repositioning plan, the Company anticipates that the
actions implemented to date along with the pending actions, have enabled the
Company to retain and motivate key professional staff and improve the Company's
financial condition and its results of operations for the year 2000 and
subsequent periods.

      Merger related and other nonrecurring costs for the year ended December
31, 1999, decreased by $8.0 million to $0.3 million as compared to the
comparable period of the prior year. In 1998, merger related and other
non-recurring costs totaled $8.3 million. Merger related costs totaled $6.5
million and consisted primarily of direct costs such as investment banking,
legal, accounting, and filing fees related to the Company's mergers accounted
for as poolings of interests, as well as consolidation costs from the closing of
duplicate locations, realigning regional and corporate functions, and reducing
personnel related to mergers accounted for as either poolings of interests or
purchases. Other non-recurring costs totaled $1.8 million and pertain to the
impairment of investments and related infrastructure related to termination of
financial advisory services operations. During the fourth quarter of 1998,
management determined that certain investments held by the Company and the
related infrastructure which managed such investments were impaired due to
events related to the Company's mergers. Accordingly, management decided to
cease operations of its financial advisory services operations and determined
that certain investments were fully impaired and recognized a loss of $1.8
million, which included the write off of a $1.0 million note receivable. The
decrease in merger related and other nonrecurring costs in 1999 was primarily
the result of a decrease in the size of acquisitions and the lack of poolings in
1999.

      Asset impairment costs for the year ended December 31, 1999 increased by
$3.5 million to $4.6 million as compared to the comparable period of the prior
year. Asset impairment


                                       32
<PAGE>

expenses in 1999 were the result of the impairment of intangible assets
associated with certain subsidiaries for which management has determined
realizable value of the related goodwill to be in excess of the future cash
flows from operations. The Company wrote off $2.7 million of goodwill relating
to entities within the government consulting operating segment and $1.9 million
of goodwill relating to an entity within other. Excluding the write-offs for
goodwill, the entities within the government consulting operating segment had
operating losses in 1999 of $644,000 and the entity within other had an
operating loss in 1999 of $410,000. The Company is evaluating its alternatives
for these entities, to include the possible disposition of them. Asset
impairment expenses in 1998 were the result of impaired software development
costs due to the duplication of technologies resulting from the Company's
business combinations and its joint venture with Cap Gemini.

      There was no stock and stock option compensation for the year ended
December 31, 1999. Stock and stock option compensation in 1998 was substantially
all related to PHB and included non-cash, non-tax deductible compensation based
on the difference between the fair market and book values of PHB common stock
issuable under subscriptions within one year of the companies' merger.

      The Company incurred a loss from operations for the year ended December
31, 1999 of $10.6 million compared to income from operations of $14.2 million
for the year ended December 31, 1998. The decrease in income from operations is
attributable primarily to the increase in compensation and bonus expenses and
other reasons as discussed above. For the year ended December 31, 1999, the
income from operations from the Company's commercial consulting operating
segment declined $25.9 million, or 90.2%, to $2.8 million from the year ended
December 31, 1998. For the year ended December 31, 1999, the company's
government consulting operating segment incurred a loss from operations of $5.1
million as compared to income from operations of $2.5 million from the year
ended December 31, 1998.

      Other income (expenses), net includes interest income, interest expense,
minority interest, and other income and expenses. Other income (expenses), net
decreased by approximately $342,000 from income of $269,000 for the year ended
December 31, 1998 to expense of $73,000 for the year ended December 31, 1999.
The primary reason for this decrease was the loss of approximately $68,000 from
the sale of IGA in December 1999 while the Company had a gain of approximately
$282,000 from the sale of certain assets of the Company's government sector
consulting practice in 1998.

      Loss from the Company's joint venture, Cap Gemini Hagler Bailly LLC, for
the fiscal year ending December 31, 1999 decreased by approximately $36,000 from
a loss of $463,000 in 1998 to a loss of $427,000 in 1999. Cap Gemini Hagler
Bailly LLC, began operations in the fourth quarter 1998 and was created to
deliver information technology consulting services and solutions to electric,
gas and water utilities and service providers in the U.S. and Canada. Margins on
the joint venture improved significantly over the last six months of 1999 and
the Company expects the joint venture to generate positive earnings for the year
ending December 31, 2000.


                                       33
<PAGE>

      The Company recorded an income tax benefit of $1.2 million, resulting in
an effective income tax benefit rate of 11.3% for the year ended December 31,
1999 as compared to a provision of $7.3 million resulting in an effective rate
of 50.4% in the prior period. The effective income tax rates in 1998 and 1999
differed from the provisional rates primarily due to the non-deductibility of
amortization of goodwill, certain non-deductible merger related costs, and the
non-deductibility of the compensation charge in connection with subscriptions
for the issuance of common stock.

      Net income for the year ended December 31, 1999 decreased by approximately
$16.6 million, to a net loss of $9.9 million, as a result of the reasons
discussed above.

1998 Compared to 1997

      Revenues for the year ended December 31, 1998, increased by $16.8 million,
or 10.5%, to $177.5 million from the year ended December 31, 1997. Revenues from
the Company's commercial consulting operating segment increased $13.7 million,
or 13.4%, to $115.8 million. This increase was primarily driven by the Company's
focus on the growth of private-sector engagements resulting in an increase of
$6.5 million, an increase internationally of $6.5 million resulting primarily
from growth in Hagler Bailly France and IGA and $0.7 million through the
purchase of Fieldston Consulting. Revenues from the Company's government
consulting operating segment increased approximately $2.9 million, or 5.1%, to
$59.6 million. This increase was primarily attributable to increased capacity
and capabilities through the purchase of Estudio Q, an Argentinean company, and
growth in PT Hagler Bailly Indonesia and Hagler Bailly Pakistan. Other revenues
for the year ended December 31, 1998 were $2.1 million. In the year ended
December 31, 1998, approximately 65.2% of the Company's revenues were derived
from commercial consulting revenues, as compared with 63.6% in the year ended
December 31, 1997.

      Cost of services for the year ended December 31, 1998, increased by $5.6
million, or 4.7%, to $126.2 million from the year ended December 31, 1997. Cost
of services as a percentage of revenue decreased from 75.1 % for the year ended
December 31, 1997, to 71.1% for the year ended December 31, 1998, primarily the
result of a reduction in cash compensation resulting from the integration of the
Company's and merged firms' operations, particularly PHB.

      Selling, general and administrative expenses ("SG&A") for the year ended
December 31, 1998, decreased by approximately $1.8 million, or 6.5%, to $25.1
million from the year ended December 31, 1997. Expressed as a percentage of
total revenues, SG&A expenses decreased from 16.7% for the year ended December
31, 1997, to 14.2% for the year ended December 31, 1998. This decrease is
primarily reflective of a reduction in cash compensation resulting from the
integration of the Company's and merged firms' operations, particularly PHB.

      In the year ended December 31, 1998, there were no expenses related to the
liquidation of a subsidiary, compared to approximately $328,000 in expenses
related to the liquidation of a subsidiary in the year ended December 31, 1997.

      Merger related and other nonrecurring costs for the year ended December
31, 1998, increased by $7.0 million to $8.3 million as compared to the
comparable period of the prior year.


                                       34
<PAGE>

The majority of the merger related costs in the year ended December 31, 1998,
were associated with the merger of PHB and exiting from the Company's financial
advisory services business, as well as the business combinations with TB&A, IGA,
Apogee, FPI, TFC and Estudio Q.

      Asset impairment costs for the year ended December 31, 1998 were $1.1
million. Asset impairment expenses in 1998 were the result of impaired software
development costs due to the duplication of technologies resulting from the
Company's business combinations and its joint venture with Cap Gemini. There
were no asset impairment costs in the year ended December 31, 1997.

      Stock and stock option compensation for the year ended December 31, 1998,
decreased by $7.4 million from the year ended December 31, 1997, to $2.6
million. Substantially all of these costs in both periods related to PHB and
include non-cash, non-tax deductible compensation based on the difference
between the fair market and book values of PHB common stock issuable under
subscriptions within one year of the companies' merger.

      Other income (expenses), net includes interest income, interest expense,
minority interest, and other income and expenses. Other income (expenses), net
increased by approximately $669,000 to income of $269,000 in the year ended
December 31, 1998. The primary reasons for this increase was a gain of
approximately $282,000 from the sale of certain assets of the Company's
environmental consulting business, as well as a decrease in interest expense
from the year ended December 31, 1997, due to the use of IPO proceeds to repay
the Company's outstanding debt.

      Loss from joint venture for the fiscal year ending December 31, 1998, was
approximately ($460,000), or (0.2%) expressed as a percentage of total revenues.
The joint venture, Cap Gemini Hagler Bailly LLC, was created to deliver
information technology consulting services and solutions to electric, gas and
water utilities and service providers in the U.S. and Canada.

      The Company's effective tax rate for the year ended December 31, 1998, was
50.4%. The 1998 provision for tax is higher than the provisional tax rate of
39.7% as a result of the non-deductibility for tax reporting purposes of the
compensation charge in connection with subscriptions for the issuance of common
stock, and certain non-deductible merger related costs.

      Net income before extraordinary gains for the year ended December 31,
1998, increased by approximately $10.9 million, to $6.7 million, as a result of
a combination of reasons discussed above.

      For the year ended December 31, 1998, there were no extraordinary gains,
compared to approximately $2.3 million in extraordinary gains, net of income tax
expense, for the year ended December 31, 1997. The gains in 1997 were the result
of extinguishment of debt at beneficial terms to the Company.

      Net income for the year ended December 31, 1998 increased by approximately
$8.6 million, to $6.7 million, as a result of the reasons discussed above.


                                       35
<PAGE>

Liquidity and Capital Resources

      As of December 31, 1999, working capital was $44.4 million as compared to
$54.3 million at December 31, 1998. The decrease was primarily due to an
increase in accrued compensation related to the Company's repositioning plan, as
well as the use of cash associated with the Company's treasury repurchase
program and the acquisition of property, plant and equipment.

      Cash provided from operating activities was approximately $3.3 million,
primarily the result of the principal element of the company's repositioning
plan which resulted in a $10.2 million increase in accrued compensation. Net
cash was also provided by approximately $5.8 million of depreciation and
amortization and approximately $8.4 million in other operating activities. These
increases in cash were partially offset by an $8.4 million decrease in taxes
payable, a net loss of approximately $9.9 million for the year and an increase
of approximately $2.8 million in accounts receivable.

      Investment activities used $5.5 million during the year ended December 31,
1999. The Company used approximately $4.1 million in the purchase of office and
computer equipment, leasehold improvements, and other resources necessary to
improve operating efficiencies of the Company, $0.7 million for the purchase of
acquired companies and $0.7 million to fund additional capital in the Cap Gemini
Hagler Bailly LLC joint venture.

      Financing activities used $4.3 million for the year ended December 31,
1999. The Company used approximately $4.1 million in funds for the repurchase of
559,700 shares of the Company's common stock. Under the stock buyback program
established by the Board of the Directors, as of December 31, 1999, the Company
is authorized to repurchase 940,300 additional shares of the Company's common
stock. Additionally, approximately $0.3 million was used to pay down an
outstanding loan related to the acquisition of TFC in 1998.

      The Company's primary source of liquidity for the past 12 months was cash
generated from operations, periodically supplemented by borrowings under a
revolving credit facility with Bank of America (formerly NationsBank.). The
maximum available balance under the line of credit is $50.0 million based on
certain financial formulas. Based on these formulas the current available
balance at December 31, 1999 was $12.2 million, due to charges from the
repositioning plan announced in December 1999. The Company was in non-compliance
with certain covenants that were subsequently waived by Bank of America. The
company is currently re-negotiating the terms of the credit facility to better
meet its future business needs. Based on the Company's current projected cash
flow and the availability of financing, including borrowings under the Company's
credit facility, management of the Company believes it will be able to meet its
anticipated cash requirements for the next 12 months and for the foreseeable
future.

Year 2000

      The Company experienced no significant system or application problems
resulting from the Year 2000 roll-over or from the Year 2000 "leap year" on
February 29, 2000. The Company


                                       36
<PAGE>

will continue to maintain Year 2000 contingency plans with regard to its
computer programs and systems and those of its clients, suppliers and vendors.

      The Company incurred approximately $0.3 million in 1999 implementing the
Year 2000 readiness plan.

Item 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

      The following discussion about the Company's market risk disclosures
involves forward-looking statements. Actual results could differ materially. The
Company is exposed to market risk from changes in interest rates and foreign
exchange rates. Adverse changes in either interest rates or foreign exchange
rates can have a material effect on the Company's operations.

      Interest Rate Risk: The Company is subject to risk from changes in
interest rates. The Company utilizes U.S. dollar denominated borrowings to fund
its operational needs, and as of December 31, 1999, had total outstanding debt
of approximately $666,666. A hypothetical 10% adverse change in interest rates
on the Company's total outstanding debt as of December 31, 1999 would not have
been material. Interest rates may move in the Company's favor. While the Company
does not expect to incur material losses as a result of this interest rate risk,
there can be no assurance that losses will not result.

      Foreign Currency Exchange Risk: The Company is subject to risk from
changes in foreign exchange rates for its subsidiaries which use a foreign
currency as their functional currency and are translated into U.S. dollars. Such
changes could result in cumulative translation gains or losses that are included
in shareholders' equity.

      In the year ended December 31, 1999, approximately 14.1% of the Company's
total revenues were derived from operations in foreign countries including
Argentina, Armenia, Australia, Canada, China, France, Ireland, India, Indonesia,
New Zealand, Pakistan, Russia and the United Kingdom. Exchange rate fluctuations
between the U.S. dollar and the currencies of these countries result in positive
or negative fluctuations in the amounts relating to foreign operations reported
in the Company's consolidated financial statements. None of the components of
the Company's financial statements were materially affected by exchange rate
fluctuations in the years ended December 31, 1997, 1998, or 1999.

      The potential loss resulting from a hypothetical uniform 10% strengthening
in the value of the U.S. dollar relative to the foreign currencies in which some
of the Company's sales are denominated would have resulted in a increase in
earnings of approximately $47,000. The potential impact of the same hypothetical
uniform change on the Company's cash flows would have resulted in an increase in
cash flows of approximately $158,000. This calculation assumes that each
exchange rate would change in the same direction relative to the U.S. dollar.
Foreign exchange rates may move not in the Company's favor.


                                       37
<PAGE>

      The sensitivity of earnings and cash flows to fluctuations in exchange
rates is periodically assessed by management by applying an appropriate range of
potential rate fluctuations to the Company's assets, liabilities, and projected
results of operations denominated in foreign currency. Historically, the Company
has not used foreign currency options and forward contracts to hedge against the
earnings effects of such fluctuations. While the Company does not expect to
incur material losses as a result of this currency risk, there can be no
assurance that losses will not result.

ITEM 8 - CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA

      The Consolidated Financial Statements of Hagler Bailly are annexed to the
report as pages FS-1 through FS-28. An index to the Financial Statements is set
forth on page 40.

ITEM 9 - CHANGES IN AND DISAGREEMENT WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCUSSIONS

      Not applicable.

PART III

      The information required by Items 10 through 13 of this Part III will be
provided in the definitive proxy statement for the Company's 1999 Annual Meeting
of Stockholders to be filed pursuant to Regulation 14A of the Securities
Exchange Act of 1934 no later than April 30, 1999, and is incorporated herein by
reference to the extent provided below.

ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF HAGLER BAILLY

      Certain information regarding executive officers of the Company is
included in Item 1 of Part I of this 1999 Annual Report on Form 10-K. Other
information in response to this item is incorporated by reference herein from
the sections of the Proxy Statement captioned "ELECTION OF DIRECTORS" and
"SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE."

ITEM 11 - EXECUTIVE COMPENSATION

      Information in response to this item is incorporated by reference herein
from the section of the Proxy Statement captioned "DIRECTOR COMPENSATION",
"COMPENSATION COMMITTEE REPORT ON COMPENSATION OF EXECUTIVE OFFICERS OF THE


                                       38
<PAGE>

COMPANY", "COMPENSATION INTERLOCKS AND INSIDER PARTICIPATION", "EXECUTIVE
COMPENSATION SUMMARY TABLE", "STOCK OPTION GRANTS DURING 1999", "STOCK OPTION
EXERCISES AND VALUES IN 1999", "EMPLOYMENT ARRANGEMENTS", "COMPARISON OF
FIVE-YEAR TOTAL RETURNS" AND "PERFORMANCE GRAPH".

ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

      Information in response to this item is incorporated by reference herein
from the section of the Proxy Statement captioned "SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS".

ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

      Information in response to this item is incorporated by reference herein
from the section of the Proxy Statement captioned "CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS".

PART IV

ITEM 14 - EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K

      The consolidated financial statements filed as part of this report are
listed in the accompanying Index to Consolidated Financial Statements. The
exhibits filed as part of this report are listed in the accompanying Exhibit
Index, which follows the signature pages to this report.


                                       39
<PAGE>

                               HAGLER BAILLY, INC.
                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Report of Independent Auditors                                              FS-1

Consolidated Balance Sheets at December 31, 1998 and 1999                   FS-2

Consolidated Statements of Operations for the years ended
December 31, 1997, 1998 and 1999                                            FS-3

Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1997, 1998 and 1999                                            FS-4

Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1998 and 1999                                            FS-5

Notes to Consolidated Financial Statements                                  FS-6


                                       40
<PAGE>

                         Report of Independent Auditors

Board of Directors and Stockholders
Hagler Bailly, Inc.

We have audited the accompanying consolidated balance sheets of Hagler Bailly,
Inc. as of December 31, 1998 and 1999, and the related consolidated statements
of operations, stockholders' equity, and cash flows for each of the three years
in the period ended December 31, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

We conducted our audits in accordance with 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 financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Hagler Bailly,
Inc. at December 31, 1998 and 1999, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 1999 in
conformity with accounting principles generally accepted in the United States.

                                                /s/ Ernst & Young LLP

March 24, 2000
McLean, Virginia


                                      FS-1
<PAGE>

                               HAGLER BAILLY, INC.
                           CONSOLIDATED BALANCE SHEETS
                                 (in thousands)

<TABLE>
<CAPTION>
                                                                     December 31,
                                                                   1998         1999
                                                                ---------    ---------
<S>                                                             <C>          <C>
Assets
Current assets:
  Cash and cash equivalents                                     $  16,165    $   9,656
  Accounts receivable, net of allowance for doubtful accounts
    of $3,888 and $5,604 as of December 31, 1998 and 1999,
    respectively                                                   59,092       63,034
  Current portion of notes receivable                                 382           80
  Prepaid expenses                                                  2,620        2,173
  Prepaid taxes                                                        --        5,915
  Deferred income taxes                                                --        1,701
  Other current assets                                                304          960
                                                                ---------    ---------
Total current assets                                               78,563       83,519
Property and equipment, net                                         6,463        8,271
Software development costs, net                                       898           --
Intangible assets, net                                             14,208       22,449
Other assets                                                        1,290        1,475
Note receivable, net of current portion                                --          495
                                                                ---------    ---------
Total assets                                                    $ 101,422    $ 116,209
                                                                =========    =========

Liabilities and stockholders' equity Current liabilities:
  Accounts payable and accrued expenses                         $   8,476    $  13,948
  Accrued compensation and benefits                                 8,713       19,072
  Billings in excess of cost                                        2,288        5,812
  Current portion of long-term debt                                   345          333
  Income taxes payable                                              2,547           --
  Deferred income taxes                                             1,900           --
                                                                ---------    ---------
Total current liabilities                                          24,269       39,165
Long-term debt, net of current portion                                681          333
Minority interest                                                     177            8
Deferred income taxes payable                                         927        2,383
Deferred rent and other deferred liabilities                        1,769        2,028
                                                                ---------    ---------
Total liabilities                                                  27,823       43,917

Stockholders' equity
Common stock:
    Par value $.01, 50,000 shares authorized, 16,483 and
      17,911 issued and outstanding at December 31, 1998 and
      1999, respectively                                              165          179
    Additional capital                                             72,322       80,996
    Retained earnings (deficit)                                     1,206       (8,718)
    Foreign currency translation (accumulated other
      comprehensive income)                                           (94)        (165)
                                                                ---------    ---------
Total stockholders' equity                                         73,599       72,292
                                                                ---------    ---------
Total liabilities and stockholders' equity                      $ 101,422    $ 116,209
                                                                =========    =========
</TABLE>

See accompanying consolidated notes.


                                      FS-2
<PAGE>

                               HAGLER BAILLY, INC.
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                      (in thousands, except per share data)

<TABLE>
<CAPTION>
                                                  For the years ended December 31,
                                                  1997         1998         1999
                                               ---------    ---------    ---------
<S>                                            <C>          <C>          <C>
Revenues:
  Commercial revenues                          $ 102,097    $ 115,772    $ 123,798
  Government revenues                             56,766       59,638       56,750
  Other revenues                                   1,752        2,052        1,433
                                               ---------    ---------    ---------
Total revenues                                   160,615      177,462      181,981
Cost of services                                 120,585      126,204      147,294
                                               ---------    ---------    ---------
Gross profit                                      40,030       51,258       34,687
Merger related and other nonrecurring costs        1,235        8,275          292
Asset impairment costs                                --        1,107        4,591
Liquidation of subsidiary                            328           --           --
Selling, general and administrative expenses      26,868       25,112       40,440
Stock and stock option compensation                9,965        2,595           --
                                               ---------    ---------    ---------
Income (loss) from operations                      1,634       14,169      (10,636)
Other income (expense)
  Interest income                                  1,192          349          127
  Interest expense                                (1,301)        (410)        (173)
  Other (expense) income, net                       (291)         411          (18)
  Minority interest                                   --          (81)          (9)
                                               ---------    ---------    ---------
 Income (loss) before income tax expense,
    equity investment in joint venture and
    extraordinary gain                             1,234       14,438      (10,709)
Income tax expense (benefit)                       5,460        7,275       (1,212)
                                               ---------    ---------    ---------
(Loss) income before equity investment in
    joint venture and extraordinary gain          (4,226)       7,163       (9,497)
Loss from equity investment in joint venture          --         (463)        (427)
                                               ---------    ---------    ---------
(Loss) income before extraordinary gain           (4,226)       6,700       (9,924)
Extraordinary gain                                 2,336           --           --
                                               ---------    ---------    ---------
Net (loss)  income                             $  (1,890)   $   6,700    $  (9,924)
                                               =========    =========    =========
Net (loss) income per share:
  Basic
    Net (loss) income per share before
      extraordinary gain                       $   (0.32)   $    0.42    $   (0.58)
    Net income per share extraordinary gain    $    0.17           --           --
    Net (loss) income  per share               $   (0.14)   $    0.42    $   (0.58)
  Diluted
    Net (loss) income per share before
      extraordinary gain                       $   (0.32)   $    0.40    $   (0.58)
    Net income per share extraordinary gain    $    0.17           --           --
    Net (loss) income per share                $   (0.14)   $    0.40    $   (0.58)
Weighted average shares outstanding:
  Basic                                           13,361       15,992       17,059
                                               ---------    ---------    ---------
  Diluted                                         13,361       16,772       17,059
                                               =========    =========    =========
</TABLE>

See accompanying consolidated notes.


                                      FS-3
<PAGE>

                               HAGLER BAILLY, INC
                CONSOLIDATED STATEMENTS OF STOCK HOLDERS' EQUITY
                                 (in thousands)

<TABLE>
<CAPTION>
                                                                              Retained        Other         Total
                                            Common               Additional   Earnings    Comprehensive  Stockholders'
                                            Shares      Amount     Capital    (Deficit)       Income        Equity
                                            ------      ------     -------    ---------       ------        ------
<S>                                         <C>       <C>         <C>         <C>           <C>           <C>
Balance, December 31, 1996                  11,620    $    116    $ 12,882    $ (3,038)     $     (3)     $  9,957
  Issuance of common stock - IPO             2,500          25      30,240          --            --        30,265
  Issuance of common stock - other             995          10         698          --            --           708
  Repurchase of common stock                  (126)         (1)        (81)         --            --           (82)
  Dividends paid - IGA                          --          --          --        (233)           --          (233)
  Compensatory stock & options                  --          --       9,965          --            --         9,965
  Exercise of stock options                    485           5         133          --            --           138
  Foreign currency translation                  --          --          --          --            21            21
  Net loss                                      --          --          --      (1,890)           --        (1,890)
                                          --------    --------    --------    --------      --------      --------
  Comprehensive income                                                                                      (1,869)
                                                                                                          --------
Balance, December 31, 1997                  15,474         155      53,837      (5,161)           18        48,849
  Sale of common stock - Cap Gemini            471           5      11,828          --            --        11,833
  Shares issued for acquisitions               297           3       4,120          --            --         4,123
  Compensatory stock & options                  --          --       2,595          --            --         2,595
  Issuance of common stock - other             193           2         544          --            --           546
  Purchase of common stock - dissenting
    shareholder                                (51)         (1)       (967)         --            --          (968)
  Dividends paid - IGA                          --          --          --        (333)           --          (333)
  Exercise of stock options                     99           1         365          --            --           366
  Foreign currency translation                  --          --          --          --          (112)         (112)
  Net income                                    --          --          --       6,700            --         6,700
                                          --------    --------    --------    --------      --------      --------
  Comprehensive income                                                                                       6,588
                                                                                                          --------
Balance, December 31, 1998                  16,483         165      72,322       1,206           (94)       73,599
                                          --------    --------    --------    --------      --------      --------
  Shares issued for acquisitions             1,629          16      12,643          --            --        12,659
  Stock repurchase plan                       (560)         (6)     (4,103)         --            --        (4,109)
  Exercise of stock options                    359           4         134          --            --           138
  Foreign currency translation                  --          --          --          --           (71)          (71)
  Net loss                                      --          --          --      (9,924)           --        (9,924)
                                          --------    --------    --------    --------      --------      --------
  Comprehensive income                                                                                      (9,995)
                                                                                                          --------
Balance, December 31, 1999                  17,911    $    179    $ 80,996    $ (8,718)     $   (165)     $ 72,292
                                          ========    ========    ========    ========      ========      ========
</TABLE>

See accompanying consolidated notes.


                                      FS-4
<PAGE>

                               HAGLER BAILLY, INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (in thousands)
<TABLE>
<CAPTION>

                                                            For the years ended December 31,
                                                            1997         1998         1999
                                                         ------------------------------------
<S>                                                      <C>           <C>           <C>
Operating activities
Net (loss) income                                        $ (1,890)     $  6,700      $ (9,924)
Adjustments to reconcile net (loss) income  to net
  cash provided by (used in) operating activities
    Depreciation and amortization                           2,908         4,320         5,772
    Provision for accounts receivable allowance               972            15         1,716
    Extraordinary gain                                     (2,336)           --            --
    Gain on sale of government sector assets                   --          (282)           --
    Provision for deferred income taxes                      (383)        1,530        (2,509)
    Stock and stock option compensation                     9,965         2,595            --
    Impairment of loan receivable                              --         1,000            --
    Minority interest                                          --           177          (169)
    Asset impairment                                           --         1,107         4,591
    Loss on equity investment in joint venture                 --           463           427
    Loss on liquidation of subsidiary                         328            --            --
    Changes in operating assets and liabilities:
      Accounts receivable                                 (17,115)       (9,401)       (2,837)
      Note Receivable                                          --            --          (193)
      Prepaid expenses                                       (328)       (1,118)         (286)
      Deferred compensation                                 1,050        (3,566)           --
      Deferred rent and other deferred liabilities             82           182           258
      Other current assets                                 (1,411)        1,553          (240)
      Other assets                                           (519)          470          (609)
      Accounts payable and accrued expenses                 1,741          (106)        2,273
      Accrued compensation and benefits                       670        (5,362)       10,174
      Income taxes payable                                  1,908           595        (8,409)
      Billings in excess of cost                             (409)       (1,213)        3,306
                                                         ------------------------------------
Net cash (used in) provided by operating activities        (4,767)         (341)        3,341
                                                         ------------------------------------
Investing activities
Proceeds from sale of government sector assets                 --         2,855            --
Sale of subsidiary                                             --            --           (27)
Amount paid in connection with liquidation of
  subsidiary                                                1,684            --            --
Purchase of minority interest in consulting business         (531)           --            --
Investment in note receivable                              (1,000)           --            --
(Purchase) sale of investments                             (6,551)        6,551            --
Purchase of acquired companies, net of cash received           --        (3,336)         (697)
Expenditures for software development                      (2,512)           --            --
Equity investment in joint venture                             --          (500)         (709)
Acquisition of property and equipment                      (3,209)       (3,988)       (4,098)
                                                         ------------------------------------
Net cash (used in)  provided by investing activities      (12,119)        1,582        (5,531)
                                                         ------------------------------------
Financing activities
Sale of common stock                                       31,111           912           138
Sale of common stock - Cap Gemini                              --        11,833            --
Repurchase of common stock                                    (82)         (968)       (4,109)
Net payments on bank line of credit                        (2,500)       (1,500)           --
Dividends paid                                               (233)         (333)           --
Proceeds from long-term financing                              --            --            --
Principal payments on long-term debt                       (9,368)         (281)         (348)
                                                         ------------------------------------
Net cash provided by (used in) financing activities        18,928         9,663        (4,319)
                                                         ------------------------------------
Net increase (decrease) in cash and cash equivalents        2,042        10,904        (6,509)
Cash and cash equivalents, beginning of year                3,219         5,261        16,165
                                                         ------------------------------------
Cash and cash equivalents, end of year                   $  5,261      $ 16,165      $  9,656
                                                         ====================================
</TABLE>

See accompanying consolidated notes.


                                      FS-5
<PAGE>

                               HAGLER BAILLY, INC.
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                 (in thousands except share and per share data)

1. Organization

      Hagler Bailly, Inc. ("Hagler Bailly" or the "Company") is a worldwide
provider of management consulting and other advisory services to the commercial
and government sectors. The Company operates in principally two business
segments: Commercial Consulting and Government Consulting. Commercial Consulting
consists primarily of providing strategic advice and analysis to businesses in
developed countries on issues involving energy, transportation,
telecommunications, the environment, litigation and other matters. Government
Consulting consists primarily of providing advisory and technical services to
government sector clients worldwide in the energy and network industries (mainly
in water and transportation) and the environment. The Company is headquartered
in Arlington, Virginia and has offices in the United States, Asia, Europe, and
Latin America.

      On July 3, 1997, the Company consummated an initial public offering of
2,500,000 shares at an offering price of $14 per share. The offering netted the
Company $30,300 used to pay off debt then outstanding, fund acquisitions, and
provide working capital needs.

2. Summary of Significant Accounting Policies

   Principles of Consolidation

      The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation.

      In 1997, the Company acquired a 7.8% minority ownership interest in a
consulting business in the United Kingdom for cash of $531. Due to the
uncertainty of recovery, the Company established a valuation allowance for this
investment. During 1998 and 1999, the Company provided services to, and
purchased consulting services from, this consulting business of $288 and $362,
$2 and $77, respectively. At December 31, 1998 and 1999, the accounts receivable
from this consulting business amounted to $543 and $617, respectively.


                                      FS-6
<PAGE>

                               HAGLER BAILLY, INC.
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                 (in thousands except share and per share data)

2. Summary of Significant Accounting Policies (continued)

Foreign Currency Translation

      The assets and liabilities of the Company's foreign subsidiaries are
translated into U.S. dollars using exchange rates at the balance sheet dates.
Income and expense items are translated at average exchange rates for the
respective periods. The effect of translating these amounts at different rates
is included as a component of comprehensive income in shareholders' equity.
Transaction gains and losses are charged to operations in the period in which
they occur. Transaction (loss) gains in 1997, 1998, and 1999 amounted to ($373),
$420, and $7, respectively.

Use of Estimates

      The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the consolidated financial
statements and accompanying notes, in particular, estimates of revenues and
contract costs used in the earnings recognition process. Actual results could
differ from those estimates.

Cash and Cash Equivalents

      Cash equivalents are short-term, highly liquid investments, which have an
original maturity when acquired of three months or less. At December 31, 1998
and 1999, respectively, cash equivalents include $6,810 and $3,040 in money
market funds.

Property and Equipment

      Property and equipment are recorded at original cost and depreciated using
a combination of straight-line and accelerated methods over their estimated
useful lives of three to ten years. Leasehold improvements are recorded at cost
and amortized over the shorter of their useful lives or the term of the related
leases by use of the straight-line method.

Revenue Recognition

      Consulting revenue represents revenue generated by professional staff of
the Company, and also includes subcontractor revenue that is principally related
to services provided by subcontractors and independent consultants which are
billed by the Company to its clients. Other revenue includes those derived from
information-based products and services, financial advisory services, and
publication services.


                                      FS-7
<PAGE>

                               HAGLER BAILLY, INC.
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                 (in thousands except share and per share data)

2. Summary of Significant Accounting Policies (continued)

Revenue Recognition (continued)

      Revenue from cost-plus fixed-fee contracts is recognized as costs are
incurred on the basis of direct costs plus allowable indirect costs and a pro
rata portion of estimated fee.

      Revenue from fixed-bid type contracts is recognized on the
percentage-of-completion method of accounting with costs and estimated profits
included in revenue based on the relationship that contract costs incurred bear
to management's estimate of total contract costs. Losses, if any, are accrued
when they become known and the amount of the loss is reasonably determinable.

      Revenue from time and materials contracts is recognized in the period the
work is performed. Estimated losses, if any, are provided for at the time such
losses become known.

      Revenue from standard daily rate contracts is recognized at amounts
represented by the agreed-upon billing amounts and costs are recognized as
incurred. Estimated losses, if any, are provided for at the time such losses
become known.

      Amounts billed or received in excess of revenue recognized in accordance
with the Company's revenue recognition policy are classified as billings in
excess of cost in the accompanying balance sheets.

Income Taxes

      The Company provides for income taxes in accordance with the liability
method. Under this method, deferred tax assets and liabilities are determined
based on temporary differences between financial and tax bases of assets and
liabilities and are measured using the enacted tax rates and laws that will be
in effect when the differences are expected to reverse.

Fair Value of Financial Instruments

      The Company considers the recorded value of its financial assets and
liabilities, which consist primarily of cash and cash equivalents, accounts
receivable, accounts payable, and accrued compensation to approximate the fair
value of the respective assets and liabilities at December 31, 1998 and 1999.


                                      FS-8
<PAGE>

                               HAGLER BAILLY, INC.
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                 (in thousands except share and per share data)

2. Summary of Significant Accounting Policies (continued)

Intangibles

      The purchase price of acquisitions is allocated to the assets acquired and
the liabilities assumed based upon their fair values as of the acquisition date.
The excess of the purchase price over the fair value of assets acquired in the
purchase is recorded as intangible assets, including goodwill, and is amortized
over 5 to 20 years on a straight-line basis. Intangible assets at December 31,
1998 and 1999 are net of accumulated amortization of $2,441 and $3,456,
respectively. Amortization expense for the years ended December 31, 1997, 1998
and 1999, was $736, $688 and $1,550, respectively.

Statement of Financial Accounting Standards No. 121

      The Company assesses the impairment of long-lived assets including
intangible assets in accordance with Statement of Financial Accounting Standards
No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of ("SFAS 121"). SFAS 121 requires impairment losses to be
recognized for long-lived assets when indicators of impairment are present and
the undiscounted cash flows are not sufficient to recover the assets' carrying
amount. Intangibles are also evaluated for recoverability by estimating the
projected undiscounted cash flows, excluding interest, of the related business
activities. The impairment loss of these assets, including goodwill, is measured
by comparing the carrying amount of the asset to its fair value with any excess
of carrying value over fair value written off. Fair value is based on market
prices where available, an estimate of market value, or determined by various
valuation techniques including discounted cash flow (see Note 18).

      Based on an evaluation of its intangible assets and in connection with the
Company's regular forecasting processes, the Company determined that $4,591 of
goodwill associated with Estudio Q Ingenieros Asociados S.R.L ("Estudio Q"), PT
Hagler Bailly and Fieldston Publications, Inc. ("FPI") were permanently
impaired. The write-offs are classified as asset impairment costs in the
consolidated statements of operations.

Merger Related and other Nonrecurring Costs

      For the years ended December 31, 1997, 1998 and 1999, merger related and
other nonrecurring costs were approximately $1,235, $8,275 and $292
respectively. Costs of effecting mergers accounted for as poolings of interests
and subsequently integrating the operations of the various companies merged in
either pooling or purchase transactions are recorded as merger related and other
nonrecurring costs when incurred. These costs consist primarily of direct merger
costs such as investment banking, legal, accounting and filing fees, as well as
related costs incurred to realign corporate, administrative, and personnel
functions, implement


                                      FS-9
<PAGE>

                               HAGLER BAILLY, INC.
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                 (in thousands except share and per share data)

2. Summary of Significant Accounting Policies (continued)

Merger Related and other Nonrecurring Costs (continued)

efficiencies with regard to information systems and offices, change the
corporate identity for the acquired companies, and other expenses incurred to
integrate operations.

Stock Repurchase Plan

      The Company is authorized to repurchase up to 1.5 million shares of the
Company's common stock in the open market or in a previously negotiated
transaction. As of December 31, 1999, the Company had repurchased 559,700 shares
for approximately $4,100 in cash.

Reclassification

      Certain amounts in the prior period's financial statements have been
reclassified to conform to the 1999 presentation.

3. Business Combinations and Joint Ventures

      On December 1, 1997, the Company exchanged 409,985 shares of its common
stock in exchange for all of the outstanding common stock of Apogee Research
Inc. ("Apogee"). The business combination was accounted for as a pooling of
interests. Accordingly, the consolidated financial statements include the
accounts of the Company, its subsidiaries and Apogee for all periods presented.

      On January 28, 1998, the Company purchased the remaining minority interest
of PT Hagler Bailly, a consulting firm located in Jakarta, Indonesia, bringing
the Company's ownership to 100 percent. Total consideration of the acquisition
was $200 in cash. Accordingly, the consolidated financial statements reflect the
results of operations of PT Hagler Bailly since the date of acquisition. As a
result of the transaction, the Company recorded goodwill of approximately $200.

      On February 23, 1998, the Company issued 454,994 shares of its common
stock in exchange for all the stock of TB&A Group ("TB&A"). The transaction was
accounted for as a pooling of interests. Accordingly, the consolidated financial
statements include the accounts of the Company, its subsidiaries and TB&A for
all periods presented. TB&A had revenue and net income of $2,491 and $534,
respectively, for the period from January 1, 1998, to the date of combination.


                                     FS-10
<PAGE>

                               HAGLER BAILLY, INC.
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                 (in thousands except share and per share data)

3. Business Combinations and Joint Ventures (continued)

      On March 10, 1998, the Company purchased the remaining minority interest
of Hagler Bailly Indonesia, Inc., and consolidated the subsidiary with PT Hagler
Bailly. Total consideration of the acquisition was $240 in cash. The acquisition
was accounted for as a purchase. The consolidated financial statements have
reflected the results of operations of Hagler Bailly Indonesia, Inc., since its
inception. As a result of the transaction, the Company recorded goodwill of
approximately $240.

      On April 30, 1998, the Company completed the acquisition of Estudio Q, an
Argentinean company, whereby Estudio Q became a wholly-owned subsidiary of the
Company. Total consideration for the acquisition was approximately $2,400 in the
form of $800 cash and an aggregate of 64,306 shares of Hagler Bailly common
stock. The acquisition was accounted for using the purchase method. Accordingly,
the consolidated financial statements reflect the results of operations of
Estudio Q since the date of acquisition. As a result of the transaction, the
Company recorded goodwill of approximately $2,700.

      On June 16, 1998, the Company and Cap Gemini S.A. and its wholly-owned
subsidiary, Cap Gemini America, Inc., entered into an exclusive joint venture to
deliver information technology consulting services and solutions to electric,
gas and water utilities, and service providers in the U.S. and Canada. The
Company has fulfilled it's commitment to provide $1,000 cash under the joint
venture agreements of which approximately $500 cash and approximately $200 in
software development costs were provided during the year ended December 31, 1998
and another $710 in cash was provided during the year ended December 31, 1999.
The Company accounts for its investment under the equity method and,
accordingly, recognized a loss on equity investment of $427 for the year ended
December 31, 1999.

      On June 30, 1998, the Company issued 183,550 shares of its common stock in
exchange for all of the stock of Izsak, Grapin et Associes ("IGA"). The
transaction was accounted for as a pooling of interests. Accordingly, the
consolidated financial statements include the accounts of the Company, its
subsidiaries and IGA for all periods presented. IGA had revenue and net income
of $2,342 and $333, respectively, for the period from January 1, 1998, to the
date of combination. On December 31, 1999 the Company sold IGA to its former
owners (see Note 15.)

      On August 28, 1998, the Company issued 6,548,953 shares of its common
stock in exchange for all of the stock of Putnam, Hayes & Bartlett, Inc.
("PHB"). The transaction was accounted for as a pooling of interests.
Accordingly, the consolidated financial statements include the accounts of the
Company, its subsidiaries and PHB for all periods presented. PHB had revenue and
net income of $44,903 and $1,869, respectively, for the period from January 1,
1998, to the date of combination.


                                     FS-11
<PAGE>

                               HAGLER BAILLY, INC.
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                 (in thousands except share and per share data)

3. Business Combinations and Joint Ventures (continued)

      On November 17, 1998, the Company completed the acquisition of certain of
the assets and the liabilities of TFC and the stock of FPI, which became a
wholly-owned subsidiary of the Company. Total consideration of the acquisition
was approximately $1,300 in cash, 232,558 shares of Hagler Bailly common stock,
and a note payable of $1,000. The acquisition was accounted for as a purchase.
Accordingly, the consolidated financial statements reflect the results of
operations of TFC since the date of acquisition. As a result of the transaction,
the Company recorded goodwill of approximately $5,215.

      On February 8, 1999, the Company acquired all of the outstanding stock of
Lacuna Consulting Limited ("Lacuna"), a United Kingdom corporation, in exchange
for 65,000 shares of the Company's common stock. The acquisition was accounted
for as a purchase. Accordingly, the consolidated financial statements reflect
the results of operations of Lacuna since the date of acquisition. As a result
of the transaction, the Company recorded goodwill of approximately $1,402.

      On April 30, 1999, the Company acquired all of the outstanding stock of
Washington International Energy Group, Ltd. ("WIEG"), a Washington, D.C.-based
worldwide provider of energy and environmental policy consulting research
services, in exchange for 144,210 shares of the Company's common stock and
approximately $850 in cash. The Company has the right to repurchase up to 26,210
of these shares at $ .01 cents per share if the price of the Company's stock
meets certain price targets during the three year period following the
acquisition. The transaction was accounted for as a purchase. Accordingly, the
consolidated financial statements reflect the results of operations of WIEG
since the date of acquisition. As a result of the transaction, the Company
recorded goodwill of approximately $1,574.

      On June 1, 1999, the Company and Objective Resources Group Risk Advisors,
LLC, its joint venture partner in Hagler Bailly Risk Advisors, LLC ("HBRA LLC"),
dissolved HBRA LLC. Following the dissolution of HBRA LLC, the Company continued
its risk advisory business through a wholly-owned subsidiary, Hagler Bailly Risk
Advisors, Inc.

      On August 12, 1999, the Company acquired all of the outstanding stock of
GKMG, Inc. ("GMKG"), a Washington, D.C.-based consulting firm specializing in
the economic, strategic, financial, and regulatory analysis of the aviation
industry, in exchange for 1,420,000 shares of the Company's common stock. Under
the terms of the Share Exchange Agreement by and among the Company, GKMG and
former shareholders of GKMG, the Company is obligated to issue additional shares
of its common stock to the former shareholders of GKMG with a fair market value
(as defined in the Share Exchange Agreement) up to $15 million if certain
earnings targets for GKMG are met for the periods July 1, 1999-June 30, 2000 and
July 1, 2000-June 30, 2001. In addition, the Company is obligated to issue up to
192,857 additional shares of its common stock to the former shareholders of GKMG
if certain stock price performance


                                     FS-12
<PAGE>

                               HAGLER BAILLY, INC.
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                 (in thousands except share and per share data)

3. Business Combinations and Joint Ventures (continued)

contingencies are not met. The transaction was accounted for as a purchase.
Accordingly, the consolidated financial statements reflect the results of
operations of GKMG since the date of acquisition. As a result of the
transaction, the Company recorded goodwill of approximately $11,042.

      Pro forma unaudited operating information reflecting the results of
business combinations accounted for as purchases as if these companies were
acquired on the first date of the respective periods were as follows:

<TABLE>
<CAPTION>
                                   Hagler Bailly  Fieldston    Estudio     WIEG        GKMG       Lacuna      Adj.(2)   Consolidated
                                        (1)                       Q
                                  --------------------------------------------------------------------------------------------------
<S>                                  <C>          <C>         <C>        <C>         <C>         <C>         <C>         <C>
Year ended December 31, 1997

Revenues                             $ 160,615    $   4,352   $   1,685  $   2,487   $   8,978   $      --   $      --   $ 178,117

Net (loss) income                       (1,890)         451         310        (35)        258          --      (1,067)     (1,973)

Dilutive weighted average shares        13,361                                                                              15,261

Dilutive earnings per share              (0.14)                                                                              (0.13)

Year ended December 31, 1998

Revenues                             $ 174,588    $   5,562   $   2,707  $   1,682   $   9,964   $   1,027   $      --   $ 195,530

Net income (loss)                        6,560        1,153         240        (89)        121         148        (984)      7,149

Dilutive weighted average shares        16,690                                                                              18,590

Dilutive earnings per share               0.39                                                                                0.38

Year ended December 31, 1999

Revenues                             $ 172,744    $      --   $      --  $   2,366   $  11,412   $   2,318   $      --   $ 188,840

Net (loss) income                      (10,195)                                529         771        (472)       (773)    (10,140)

Dilutive weighted average shares        16,367                                                                              17,970

Dilutive earnings per share              (0.62)                                                                              (0.56)
</TABLE>

      (1)   Hagler Bailly balance excludes 1997, 1998 and 1999 results of
            purchased companies.
      (2)   Amortization of estimated goodwill.


                                     FS-13
<PAGE>

                               HAGLER BAILLY, INC.
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                 (in thousands except share and per share data)

4. Earnings Per Share

      In 1997, the Financial Accounting Standards Board issued Statement No.
128, "Earnings per Share" ("Statement No. 128"). Statement No. 128 replaced the
calculation of primary and fully diluted earnings per share with basic and
diluted earnings per share. Unlike primary earnings per share, basic earnings
per share excludes any dilutive effects of options, warrants and convertible
securities. Diluted earnings per share is very similar to the previously
reported fully diluted earnings per share. All earnings per share amounts for
all periods have been presented, and where appropriate, restated to conform to
the Statement No. 128 requirements.

      The following table sets forth the computation of basic and diluted
earnings per share:

<TABLE>
<CAPTION>
                                                                For the years ended December 31,
                                                             1997             1998            1999
                                                       ------------------------------------------------
      <S>                                              <C>                <C>            <C>
      Net (loss) income before extraordinary gain      $       (4,226)    $     6,700    $       (9,924)

      Extraordinary gain                                        2,336              --                --
                                                       --------------     -----------    --------------
      Net (loss) income                                $       (1,890)    $     6,700    $       (9,924)
                                                       ==============     ===========    ==============
      Weighted average shares of common stock
        outstanding during the period                      13,361,000      15,992,000        17,059,000

      Effect of dilutive securities:
        Stock options                                              --         780,000                --
                                                       --------------     -----------    --------------
      Weighted average shares of common
        stock and dilutive securities                      13,361,000      16,772,000        17,059,000
                                                       ==============     ===========    ==============

      Basic earnings per share
        Net (loss) income before extraordinary gain    $        (0.32)    $      0.42    $        (0.58)
        Extraordinary gain                             $         0.17     $        --    $           --
        Net (loss) income                              $        (0.14)    $      0.42    $        (0.58)

      Dilutive earnings per share
        Net (loss) income before extraordinary gain    $        (0.32)    $      0.40    $        (0.58)
        Extraordinary gain                             $         0.17     $        --    $           --
        Net (loss) income                              $        (0.14)    $      0.40    $        (0.58)
</TABLE>


                                     FS-14
<PAGE>

                               HAGLER BAILLY, INC.
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                 (in thousands except share and per share data)

5. Accounts Receivable

      As of December 31 the components of accounts receivable are:

                                                      1998          1999
                                                    ---------------------
      Billed amounts                                $ 38,914     $ 42,010
      Unbilled amounts currently billable             23,305       25,604
      Retention not currently billable and other         761        1,024
      Allowance for possible losses                   (3,888)      (5,604)
                                                    ---------------------
      Total                                         $ 59,092     $ 63,034
                                                    =====================

      The activity in the allowance for possible losses for years ended December
      31 is as follows:

                                                      1998          1999
                                                    ---------------------
      Balance at beginning of year                  $  3,873     $  3,888
      Provision for losses charged to expense          1,135        6,520
      Charge-offs, net of recoveries                  (1,120)      (4,804)
                                                    ---------------------
      Balance at end of year                        $  3,888     $  5,604
                                                    =====================

      All billed and unbilled receivable amounts are expected to be collected
during the next fiscal year.

6. Property and Equipment

      Components of property and equipment at December 31 are as follows:

                                                      1998          1999
                                                    ---------------------
      Office equipment and furniture                $ 17,100     $ 17,544
      Leasehold improvements                           3,189        4,702
                                                    ---------------------
                                                      20,289       22,246
      Accumulated depreciation and amortization      (13,826)     (13,975)
                                                    ---------------------
                                                    $  6,463     $  8,271
                                                    =====================

      Depreciation and amortization expense on property and equipment for the
years ended December 31, 1997, 1998 and 1999, was approximately $2,123, $3,121
and $3,688 respectively. Costs of repairs and maintenance of property and
equipment are charged to expense as incurred.


                                     FS-15
<PAGE>

                               HAGLER BAILLY, INC.
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                 (in thousands except share and per share data)

7. Software Development Costs

      At December 31, 1998 and 1999 the Company had $898 and $0, respectively,
of capitalized software development costs. Amortization expense for the years
ended December 31, 1997, 1998 and 1999 was approximately $49, $511 and $898,
respectively. The Company accounts for these development costs in accordance
with FASB 86, "Accounting for the Costs of Computer Software to Be Sold, Leased,
or Otherwise Marketed."

      Capitalized software development costs are amortized on a product by
product basis starting when the product is available for general release to
customers. Amortization is calculated using the straight-line method over the
remaining estimated economic life of the product. The Company periodically
evaluates the net realizable value of all unamortized capitalized costs. During
1998, management determined that certain software development costs were fully
impaired due to the duplication of technologies resulting from the Company's
1998 mergers and the Cap Gemini Hagler Bailly L.L.C. joint venture. As a result
of these impairments, the Company expensed approximately $1,107 which are
classified as asset impairment costs on the statement of operations.

8. Notes Receivable

      During 1997, the Company loaned $1,000 to another company in accordance
with a bridge loan agreement. The loan was due in six equal installments
beginning June 1, 1998. The loan accrued interest at 15% and was secured by all
of the assets of the borrower. The loan agreement allowed the Company to
purchase an ownership interest of this company as defined in the loan agreement.
During 1998, the borrower defaulted on its obligation under the note and at that
time management determined that the loan was uncollectable and wrote off the
entire amount of the original loan as other nonrecurring costs.

      On December 31, 1999, the Company sold its IGA subsidiary back to its
former owners for $550 payable in three equal annual installments beginning
January 1, 2001. The note bears no interest and is secured by 99,516 shares of
the Company's stock owned by two former shareholders of IGA.

9. Bank Line of Credit

      On November 20, 1998, the Company entered into a line of credit
arrangement with a bank enabling the Company to borrow up to $50,000 subject to
certain restrictions. The Company paid all outstanding balances on its previous
lines of credit, which were terminated upon commencement of the new agreement.
Under the terms of the new agreement, interest is payable at the greater of the
bank's base rate or the Federal Funds effective rate plus 0.5%, or the
applicable London Inter-Bank Offered Rate ("LIBOR") plus an additional
percentage ranging


                                     FS-16
<PAGE>

                               HAGLER BAILLY, INC.
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                 (in thousands except share and per share data)

9. Bank Line of Credit (continued)

from 0.8% to 1.75% depending on certain financial ratios. The agreement also
requires a commitment fee of 0.19% plus an additional percentage ranging from
0.01% to 0.06% depending on certain financial ratios, based on the average daily
amount of the unborrowed portion of the commitment, payable quarterly in
arrears. The line of credit matures on November 20, 2001. As of December 31,
1999, the Company had $0.8 million in letters of credit outstanding and no
borrowings outstanding under the facilities. Based on the financial formulas
mentioned above, the available balance under the line of credit at December 31,
1999 was $12.2 million. As of December 31, 1999, the Company was in
non-compliance with certain covenants that were subsequently waived by the bank.

10. Notes Payable

      The Company has a note payable, related to an acquisition of certain of
the assets and liabilities of TFC. Principal balances under the note were $1,000
and $666 as of December 31, 1998 and 1999, respectively. The note accrues
interest at LIBOR rate plus 1.5%.

      For the year ended December 31, 1997, the Company settled several notes
payable with favorable terms to the Company, resulting in extraordinary gains of
approximately $2,336.

11. Income Taxes

      Prior to the IPO of the Company's common stock in 1997 the Company had
historically filed its consolidated federal income tax return on the cash basis,
whereby for tax purposes, revenue was recognized when received and expenses were
recognized when paid. In addition, prior to its merger with the Company, PHB had
also filed its consolidated federal income tax return on the cash basis. Under
this basis, the timing of certain transactions, primarily the collections of
accounts receivable and the payments of accounts payable and accrued expenses
were applied to different periods for financial statement and income tax
reporting purposes. Deferred federal and state income taxes were provided for
these temporary differences. Upon consummation of the IPO of the Company's
Common Stock during 1997, the Company was required to change to the accrual
method for income tax reporting.


                                     FS-17
<PAGE>

                               HAGLER BAILLY, INC.
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                 (in thousands except share and per share data)

11. Income Taxes (continued)

      Components of income tax expense (benefit) consisted of the following:

                                           For the years ended December 31,
                                             1997        1998        1999
                                           -------     -------     -------
      Current:

        Federal                            $ 4,483     $ 4,113     $  (157)
        State                                1,098         726         213
        Foreign                                215         879       1,241
                                           -------     -------     -------
                                             5,796       5,718       1,297

       Deferred                               (336)      1,557      (2,509)
                                           -------     -------     -------

      Income tax expense (benefit)         $ 5,460     $ 7,275     $(1,212)
                                           =======     =======     =======

      The Company paid income taxes of $3,117, $4,995, and $5,820 during 1997,
1998 and 1999, respectively.

      Income tax expense varies from the amount computed using statutory rates
as follows:

<TABLE>
<CAPTION>
                                                            For the years ended December 31,
                                                            1997        1998         1999
                                                           -------     -------      -------
         <S>                                               <C>         <C>          <C>
         Tax computed at the Federal statutory rate        $   428     $ 4,909      $(3,783)

         State income taxes, net of Federal income
             tax benefit                                        35         722         (276)
         Non-deductible charge for stock option
             Compensation                                    4,000       1,012           --

         Other allowances                                      754          --           --
         Non-deductible charge for goodwill
             amortization/asset impairment                      --          --        1,795
         Losses recorded on the equity method                   --          --          231
         Foreign tax credit                                     --          --         (192)
         Foreign tax in excess of U.S. statutory rate           --          --          539
         Non-deductible charge for merger related costs         --         876           62
         Other                                                 243        (244)         412
                                                           -------     -------      -------
         Income tax expense                                $ 5,460     $ 7,275      $(1,212)
                                                           =======     =======      =======
</TABLE>


                                     FS-18
<PAGE>

                               HAGLER BAILLY, INC.
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                 (in thousands except share and per share data)

11. Income Taxes (continued)

      The components of temporary differences are as follows:

                                                              December 31,
                                                           1998          1999
                                                         ---------    ---------
      Current deferred tax (liabilities) assets:
        Accounts receivable                              $  (2,116)   $  (1,559)
        Bad debt                                                --        1,860
        Accrued vacation                                        --        1,229
        Other                                                  216          171
                                                         ---------    ---------
      Total current deferred tax (liabilities) assets       (1,900)       1,701

      Non-current deferred tax assets:
        Merger related costs                                   448          206
        Provisions for losses                                  954           --
        Accrued compensation and benefits                    1,427           --
        Deferred compensation                                1,237          727
        Stock options                                           --         (359)
        Deferred rent                                          454          498
        Property, equipment and leasehold improvements         555          935
        Net operating loss carryforwards                        20           --
        Cash to accrual adjustment                          (5,941)      (4,004)
        Other                                                  (81)        (386)
                                                         ---------    ---------
      Total non-current deferred tax liabilities              (927)      (2,383)
                                                         ---------    ---------
      Net deferred tax liabilities                       $  (2,827)   $    (682)
                                                         =========    =========

12. Stockholders' Equity

      The issuance and repurchase of common stock for the years ended December
31, 1997 and 1998 is primarily the result of equity transactions entered into by
PHB and TB&A. These transactions were made under established company plans and
in a manner consistent with historic patterns of stock issuance or repurchase.

      In connection with the merger with the Company, PHB recognized non-cash,
non-tax deductible compensation charges for the years ended December 31, 1997
and 1998, of $9,885 and $2,595, respectively. These amounts reflect the
difference between the fair value and the book value of shares of common stock
issuable within one year of the merger's close.

      Options granted after 1996 vest over periods ranging from immediately to
four years. The majority of grants vest in equal installments over four years,
commencing one year from date of grant. All such options expire ten years from
date of grant. Options issued prior to 1996


                                     FS-19
<PAGE>

                               HAGLER BAILLY, INC.
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                 (in thousands except share and per share data)

12. Stockholders' Equity (continued)

generally vest 50% after eighteen months and fully after an additional year. The
majority of these options also expire ten years from date of grant.

        In August of 1998, the Company's shareholders approved an amendment to
the Stock Option Plan that increased the total number of shares of common stock
reserved for issuance from 3,200,000 to 5,000,000. At December 31, 1999
1,035,058 shares of common stock were available for grant under the Stock Option
Plan.

        The Company accounts for stock options issued to employees under APB 25,
while provided supplemental pro-forma disclosure under SFAS 123. Pro forma
information regarding net income (loss) and per share data required by SFAS No.
123, has been determined as if the Company had accounted for its stock options
under the fair value method therein. The fair value for options granted from May
25, 1997 to July 9, 1997 was estimated at the date of grant using a minimal
valuation method with the following weighted-average assumptions: risk free
interest rate of 5.25%, no expected dividends and an average expected life of
the options of four years.

        For options issued from July 9, 1997 to December 31, 1999, in accordance
with SFAS 123, the fair value was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted-average
assumptions for 1997 and 1998: risk-free interest rate of 5.25%; no dividends; a
volatility factor of the expected market price of the Company's common stock of
 .40 and a weighted-average expected life of the options of approximately five
years in 1997 and four years in 1998. Options issued from January 1, 1999 to
December 31, 1999 were valued using a risk-free interest rate of 6.44%; no
dividends; a stock price volatility factor of .848 and a weighted-average
expected life of the options of four years.

        The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options that have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.


                                     FS-20
<PAGE>

                               HAGLER BAILLY, INC.
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                 (in thousands except share and per share data)

12. Stockholders' Equity (continued)

      For purposes of the pro forma disclosure, the estimated fair value of the
options is amortized to expense over the options' vesting period.

      The Company's pro forma information follows:

                                               For the years ended December 31,
                                                1997         1998        1999
                                              --------     --------    --------
      Net (loss) income                       $ (1,890)    $  6,700    $ (9,924)
      FAS 123 expense, net of tax                  217        1,045       5,974
                                              --------     --------    --------
      Pro forma net (loss) income             $ (2,107)    $  5,655    $(15,898)

                                              ========     ========    ========
      Pro forma (loss) earnings per share:
            Basic                             $  (0.16)    $   0.35    $  (0.93)
            Diluted                           $  (0.16)    $   0.34    $  (0.93)

The following summarizes option activity:

                                                                     Weighted
                                                                     Average
                                                      Options     Exercise Price
                                                      -------     --------------
      Outstanding at December 31, 1996                 936,943     $      0.22

      1997
      Granted                                          677,135            8.34
      Exercised                                       (484,701)           0.20
      Canceled                                         (15,000)          10.00
                                                     ---------
      Outstanding at December 31, 1997               1,114,377            5.21

      1998
      Granted                                        1,149,760           20.32
      Exercised                                        (99,380)           3.49
      Canceled                                        (126,046)          12.60
                                                     ---------
      Outstanding at December 31, 1998               2,038,711           13.44

      1999
      Granted                                        1,686,202            9.24
      Exercised                                       (374,420)            .35
      Canceled                                        (370,718)          12.88
                                                     ---------
      Outstanding at December 31, 1999               2,979,775           12.80
                                                     =========
      Exercisable at December 31, 1999                 975,817     $     11.62
                                                     =========


                                     FS-21
<PAGE>

                               HAGLER BAILLY, INC.
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                 (in thousands except share and per share data)

12. Stockholders' Equity (continued)

      The grant date weighted average fair value of options granted in 1997,
1998, and 1999 was $1.98, $20.32 and $6.02, respectively.

      At December 31, 1999, the price range of options outstanding are as
follows:

                                                    Weighted
                                                     Average          Average
                                                    Exercise         Remaining
                                    Options         Price Per       Contractual
                                  Outstanding         Share            Life
                                  --------------------------------------------
    $1.00 - $9.99                   1,559,123          $6.61           8.54
    $10.00 - $19.99                   651,378          16.74           8.81
    $20.00 - $29.99                   760,274          21.93           8.45
    $30.00 & Over                       9,000          30.00           8.37
                                    ---------
      Total                         2,979,775          12.80           8.57
                                    =========

13. Operating Leases

      The Company leases office space and equipment located throughout the
United States and worldwide. Substantially all office space leases provide for
the Company to pay a pro rata share of annual increases above a stated base
amount of the landlords' related real estate taxes and operating expenses.
Management expects that in the normal course of business, operating leases will
be renewed or replaced by other operating leases.

      The following is a schedule of the annual minimum rental payments required
under the operating leases that have initial or remaining non-cancellable lease
terms in excess of one year as of December 31, 1999:

       Years ended December 31,
       ------------------------
                2000                                            9,998
                2001                                            9,488
                2002                                            6,605
                2003                                            5,779
                2004                                            5,758
           Thereafter                                          19,243
                                                           ----------
           Total minimum rental payments                   $   56,871
                                                           ==========

      Total rental expense for the years ended December 31, 1997, 1998 and 1999,
was approximately, $7,468, $8,451 and $9,885 respectively.


                                     FS-22
<PAGE>

                               HAGLER BAILLY, INC.
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                 (in thousands except share and per share data)

14. Retirement Plan

      The Company maintains tax-deferred savings plans under Section 401(k) of
the Internal Revenue Code to provide retirement benefits for all eligible
employees (the "Plan"). The Plan was amended in 1999 to consolidate the
retirement plans of the subsidiaries which the Company merged with or acquired
over the past two years. Employees may voluntarily contribute a percentage of
their annual compensation to the Plan, subject to Internal Revenue Service
limitations. The Company may, but has no obligation to, make matching
contributions. In addition, the Company may, but has no obligation to, make a
discretionary contribution to the Plan. Discretionary contributions are
allocated to participants' accounts in proportion to their compensation and
employment classification. Rights to benefits provided by the Company's
discretionary contributions vest as follows: 20% after two years, 40% after
three years, 60% after four years, 80% after five years and 100% after six years
of service. Participants are fully vested in their voluntary contributions.

      The Company's expenses related to its discretionary matching and other
contributions under all plans for 1997, 1998 and 1999 were approximately $2,628,
$925 and $3,289, respectively.

15. Divestitures / Sale of Assets

      On September 30, 1998, the Company sold certain assets of a portion of its
government sector consulting practice due to conflicts of interest resulting
from the Company's business combinations. As a result of the transaction, the
Company sold assets for approximately $2,855 resulting in a gain of
approximately $282 which was included in other income.

      In December 1998, the Company made the decision to cease operations in its
financial advisory services business, HB Capital, Inc., resulting in expenses of
approximately $1,800. In December 1999, the Company sold the assets of HB
Securities, a wholly-owned subsidiary of HB Capital, Inc., resulting in a gain
of approximately $26, which was included in other income.

      On December 31, 1999, the Company sold the assets of wholly-owned
subsidiary IGA. The Company disposed of this subsidiary due to its inability to
successfully integrate IGA's operations into the Company's other European
operations. As a result of the transaction, the Company sold assets for
approximately $600, resulting in a loss of approximately $68. As a result of
this transaction the Company received a $550 note receivable from the buyers of
IGA. The note bears no interest and is secured by 99,516 shares of the Company's
common stock owned by IGA.


                                     FS-23
<PAGE>

                               HAGLER BAILLY, INC.
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                 (in thousands except share and per share data)

16. Commitments and Contingencies

Cost Subject to Audit

      Under its United States government contracts, the Company is subject to
audit by the Defense Contract Audit Agency, whose audits could result in
adjustments of amounts previously billed. Management believes that the results
of such future audits will not have a material adverse effect on the Company's
financial position or results of operations.

Financial Instruments and Risk Management

      The Company operates around the world principally in United States
currency. The Company may reduce any periodic exposures to fluctuations in
foreign exchange rates by creating offsetting ("hedge") positions through the
use of derivative financial instruments. The Company currently does not use
derivative financial instruments for trading or speculative purposes, nor is the
Company a party to leverage derivatives. The Company regularly monitors any
foreign currency exposures and ensures that hedge contract amounts do not exceed
the amounts of the underlying exposures. The Company had no open hedge positions
at December 31, 1998 or 1999.

      Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of cash and cash equivalents
and trade accounts receivable.

Financial Instruments and Risk Management (continued)

      The Company maintains cash and cash equivalents with various financial
institutions. These financial institutions are located in many different
countries throughout the world, and the Company's policy is designed to limit
exposure with any one institution. As part of its cash management process, the
Company performs periodic evaluations of the relative credit standing of these
financial institutions.

      At December 31, 1998 and 1999, cash of approximately $4,087 and $633,
respectively, was located in foreign bank accounts.

Major Customers

      At December 31, 1998 and 1999, included in accounts receivable was $13,855
and $10,203, respectively, due from agencies of the United States government.
Credit risk with respect to the remaining trade accounts receivable is generally
diversified due to the large number of entities comprising the Company's
customer base and their dispersion across different industries and countries.
The Company performs ongoing credit evaluations of its customers financial
condition.


                                     FS-24
<PAGE>

                               HAGLER BAILLY, INC.
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                 (in thousands except share and per share data)

16. Commitments and Contingencies (continued)

Major Customers (continued)

      The Company generates revenues from contracts with government agencies and
private companies within the United States and worldwide. During 1997, 1998 and
1999, the Company recognized approximately $32,000, $39,000 and $32,000,
respectively, of its revenue from the United States Agency for International
Development ("USAID"), a U.S. government agency. Revenues earned from foreign
customers, both commercial and governmental, were approximately $14,000, $19,000
and $26,000 for the years ended December 31 1997, 1998 and 1999, respectively.

Commitments

      Certain officers and directors of the Company have agreements which
provide for severance and other benefits upon the occurrence of certain events,
including termination upon change of control, as defined in the agreements.

      On September 27, 1999, the Company retained Bank of America Securities LLC
to assist in exploring strategic and financial alternatives to maximize
shareholder value, including the potential sale or merger of the Company. The
sale or merger of the Company could potentially lead to the payment of benefits
under the agreements as discussed above.

17. Merger Related and Other Nonrecurring Costs

      Merger related and other nonrecurring costs were recorded in connection
with the business combinations during 1997, 1998 and 1999. The following
represents a detail of merger related and other nonrecurring costs:

                                                For the years ended December 31,

                                                  1997       1998        1999
                                                  ----       ----        ----

Merger related costs                             $1,235     $6,495     $  292

Impairment of investments and related
infrastructure related to termination of
financial advisory services operations               --      1,780         --
                                                 ----------------------------
Total                                            $1,235     $8,275     $  292
                                                 ============================


                                     FS-25
<PAGE>

                               HAGLER BAILLY, INC.
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                 (in thousands except share and per share data)

17. Merger Related and Other Nonrecurring Costs (continued)

      Merger related costs consist primarily of direct costs such as investment
banking, legal, accounting, and filing fees related to the Company's mergers
accounted for as poolings of interests, as well as consolidation costs from the
closing of duplicate locations, realigning regional and corporate functions, and
reducing personnel related to mergers accounted for as either poolings or
purchases. At December 31, 1998, the accompanying consolidated balance sheet
included accrued merger related costs of $546, classified as accrued expenses,
consisting of involuntary employee termination costs of $171 and facility
related expenses of $375.

      During the fourth quarter of 1998, management determined that certain
investments held by the Company and the related infrastructure which managed
such investments, were impaired due to events related to the Company's mergers.
Accordingly, management decided to cease operations of its financial advisory
services operations and determined that certain investments were fully impaired
and recognized a loss of $1,780, which included the write off of a $1,000 note
receivable. At December 31, 1998, the balance sheet included $616 of these
impairment costs classified as accrued expenses, consisting of legal expenses of
$140, involuntary employee termination costs of $170, lease termination and
other facility costs of $200, and other general accrued expenses of $106. The
Company had no accrued merger or merger related costs at December 31, 1999.

18. Asset Impairment

      The Company assesses the impairment of long-lived assets including
intangible assets in accordance with Statement of Financial Accounting Standards
No. 121.

      During 1998 management evaluated certain software development costs under
FAS 121 and determined that these assets were impaired due to the duplication of
technologies resulting from the Company's business combinations and its joint
venture with Cap Gemini. Management determined that as a result of these
transactions certain capitalized software balances would not generate future
cash flows. Consequently, management determined that the value of the related
assets had been impaired as the software would not be utilized by the Company
and has recorded a write off of approximately $1,107, classified as asset
impairment costs on the statement of operations.

      During 1999 management evaluated the net realizable value of intangibles
related to certain 1998 acquisitions. Impairment evaluations were performed due
to the poor performance of these entities as compared to management's original
expectations and the possibility of future disposition of these subsidiaries. As
a result of this analysis, the Company wrote off approximately $4,591 of
goodwill which represented the excess of the carrying value of these assets as
compared to the projected cash flows of the assets as determined in accordance
with


                                     FS-26
<PAGE>

                               HAGLER BAILLY, INC.
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                 (in thousands except share and per share data)

18. Asset Impairment (continued)

SFAS 121. The Company wrote off $2,663 of goodwill relating to entities within
the government consulting operating segment and $1,928 of goodwill relating to
an entity within other. Excluding the write-offs for goodwill, the entities
within the government consulting operating segment had operating losses in 1999
of $644 and the entity within other had an operating loss in 1999 of $410. The
Company is evaluating its alternatives for these entities, to include the
possible disposition of them.

19. Repositioning Plan

      In December 1999, the Board of Directors approved management's plan to
undertake a repositioning of the firm to focus on its core consulting business
and market position in order to maximize future shareholder value.

      The primary component of the Company's repositioning plan is a
supplemental bonus which consists of $10,868 of additional incentives paid to
the Company's key staff. In 1999 the consulting business experienced high
turnover. The Company's management believes the additional incentives are
essential to retain and motivate staff. At December 31, 1999, the accompanying
consolidated balance sheet includes $7,310 of accrued bonus, classified as
accrued compensation.

      In addition, as part of the Company's repositioning plan, management has
and continues to evaluate strategic opportunities for the Company (see Note 16)
including the possible disposition of non-performing subsidiaries (see Note 18.)

20. Segment Information

      In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131 Disclosures about Segments of an
Enterprise and Related Information ("FAS 131"). FAS 131 supercedes FAS 14
Financial Reporting for Segments of a Business Enterprise, replacing the
industry segment approach with the management approach, which requires
segmentation based upon the Company's internal organizational structure that is
used by management for making operating decisions and assessing performance as
the source of the Company's reportable segments.

      The Company began organizing, reporting and managing its business as two
segments in 1999. Accordingly, the Company adopted FAS 131 in 1999 and all prior
periods have been presented to conform to the requirements of this statement.
The segments, which are based on differences in its client base, are Commercial
Consulting and Government Consulting. Commercial Consulting consists primarily
of providing strategic advice and analysis to


                                     FS-27
<PAGE>

                               HAGLER BAILLY, INC.
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                 (in thousands except share and per share data)

20. Segment Information (continued)

businesses in developed countries on issues involving energy, transportation,
telecommunications, the environment, litigation and other matters. Government
Consulting consists primarily of providing advisory and technical services to
government sector clients worldwide in the energy and network industries (mainly
in water and transportation) and the environment.

      The Company has subsidiaries in 11 countries outside North America which,
in aggregate, represent 12.7% of the Company's consolidated revenues. There is
no single foreign country that exceeds 10% of consolidated revenues. USAID
revenues represent 56% of the Government Consulting segments consolidated
revenues and 17.5% of the Company's consolidated revenues. The loss of this
client could have a material adverse effect on the Company's business, financial
condition and results of operations.

      The following table presents revenue and income (loss) from operations
data by segment:

                                          For the years ended December 31,
         Segment Information             1997           1998          1999
      --------------------------------------------------------------------------
      Revenues
          Commercial consulting         $ 102,097      $ 115,772      $ 123,798
          Government consulting            56,766         59,638         56,750
          Other                             1,752          2,052          1,433
                                        ---------      ---------      ---------
      Total                             $ 160,615      $ 177,462      $ 181,981
                                        =========      =========      =========

      Income (loss) from operations
          Commercial consulting         $      --      $  28,684      $   2,820
          Government consulting                --          2,493         (5,117)
                                        ---------      ---------      ---------
          Segment Total                    13,162         31,177         (2,297)
          Merger related and other
           non recurring costs             (1,235)        (8,275)          (292)
          Asset impairment costs                          (1,107)        (4,591)
          Stock and stock option
            compensation                   (9,965)        (2,595)            --
          Liquidation of subsidiary          (328)            --             --
          Other                                --         (5,031)        (3,456)
                                        ---------      ---------      ---------
      Total                             $   1,634      $  14,169      $ (10,636)
                                        =========      =========      =========

* It was not practicable to present certain 1997 results to conform to the
current presentation. Accordingly, they have not been presented.


                                     FS-28
<PAGE>

                               HAGLER BAILLY, INC.
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                 (in thousands except share and per share data)

20. Segment Information (continued)

The following table presents assets data by segment:

                                                      As of December 31,
           ---------------------------------------------------------------
                                                     1998           1999
              Segment Information
           ---------------------------------------------------------------
           Total Assets
               Commercial consulting               $ 50,224       $ 61,737
               Government consulting                 22,658         24,089
               Other                                 28,539         30,383
                                                   --------       --------
           Total                                   $101,422       $116,209
                                                   ========       ========

      The table below presents information by geographic area. Revenues are
attributed to the countries based on the location of the subsidiary. North
America includes the United States and Canada and International includes all
else.

                                         For the years ended December 31,
                 Geographic
            Segment Information          1997           1998             1999
         -----------------------------------------------------------------------
          Revenues
              North America            $151,646        $159,536        $158,889
              International               8,969          17,926          23,092
                                       --------        --------        --------
          Total                        $160,615        $177,462        $181,981
                                       ========        ========        ========


                                     FS-29
<PAGE>

                                   SIGNATURES

      Pursuant to the requirements of Section 13 or 15 (d) of the Securities and
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.

Dated: September 21, 2000     By: /s/ Geoffrey W. Bobsin
                              --------------------------------------------------
                              Geoffrey W. Bobsin
                              Senior Vice President, Chief Financial Officer,
                              Treasurer and Secretary