SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
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                                  FORM 10-K

[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, 1997                                               0-29292

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            [GRAPHIC OMITTED] HAGLER BAILLY, INC.
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          (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 900, 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. [ ]

      The aggregate market value of the voting stock held by  non-affiliates* of
the registrant as of March 2, 1998 (based upon the closing sale price of $24.625
as quoted by the Nasdaq  National  MarketSM  as of such date) was  approximately
$148,351,490.

      As of March 2, 1998,  8,869,291  shares of the  registrant's  common stock
were outstanding.

*The registrant  considers the term "affiliate" to include  executive  officers,
directors  and  beneficial  owners of more than 5  percent  of the  registrant's
outstanding common stock.
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<PAGE>


i

                      HAGLER BAILLY, INC. AND SUBSIDIARIES
                             FORM 10-K ANNUAL REPORT
                        FOR YEAR ENDED DECEMBER 31, 1997

                                TABLE OF CONTENTS

                                                                    Page

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


ITEM 2 -- PROPERTIES..................................................15


ITEM 3 -- LEGAL PROCEEDINGS...........................................15


ITEM 4 -- SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.........15


ITEM 5 -- MARKET FOR THE REGISTRANT'S COMMON STOCK AND
              RELATED STOCKHOLDER MATTERS............. ...............16


ITEM 6 -- SELECTED FINANCIAL DATA.....................................16


ITEM 7 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF
              FINANCIAL CONDITION AND RESULTS OF OPERATIONS...  ......18


ITEM 8 -- CONSOLIDATED FINANCIAL STATEMENTS AND
              SUPPLEMENTAL DATA.......................................24


ITEM 10 -- DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.........25


ITEM 11 -- EXECUTIVE COMPENSATION.....................................29


ITEM 12 -- SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
               AND MANAGEMENT.........................................32


ITEM 13 -- CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............34


ITEM 14 -- EXHIBITS, FINANCIAL STATEMENTS AND REPORTS
               ON FORM 8-K............................................35


SIGNATURES............................................................37




<PAGE>



                                   PART I

ITEM 1 - BUSINESS

Forward Looking Statements

      This  Annual  Report  on  Form  10-K  of  Hagler  Bailly,   Inc.  and  its
subsidiaries  ("Hagler  Bailly"  or  the  "Company")  contains   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
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.

Introductory Note

        On March  22,  1998  the  Company  executed  a  non-binding  Preliminary
Agreement  to combine  with  Putnam,  Hayes &  Bartlett,  Inc.,  an  independent
economic  and   management   consulting   firm   headquartered   in   Cambridge,
Massachusetts.  See Item 7,  Management's  Discussion  and Analysis of Financial
Condition and Results of Operations.

      On February 23, 1998 the Company  completed the acquisition of TB&A Group,
Inc.  ("TB&A"),  which became a  wholly-owned  subsidiary of the Company.  TB&A,
through its  wholly-owned  subsidiary,  Theodore  Barry &  Associates,  supports
public and private clients in the gas, electric and  telecommunications  sectors
with  business   planning,   market  assessment  and  strategy,   organizational
effectiveness,  reengineering,  operational improvement,  bench-marking and best
practices,  customer  acquisition  and  aggregation,   regulatory  analysis  and
strategy,    affiliated   interests   reviews,   technology   commercialization,
procurement and materials  management,  product and service value analysis,  new
product development,  resource management and asset restructuring.  Although the
acquisition  of TB&A by the  Company  occurred  after  the end of the  Company's
fiscal year end, this Annual Report on Form 10-K  describes  certain  aspects of
the  business  of TB&A  relevant  to an  understanding  of the  business  of the
Company. The Consolidated Financial Statements for the Company contained in Item
8 do not,  however,  reflect the results of  operations  for TB&A for any of the
periods presented therein.

Hagler Bailly, Inc.

      The  predecessor  of the Company was founded in 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 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.

      Today the  Company,  together  with its primary  wholly-owned
subsidiaries,  Hagler  Bailly  Services,  Inc. ("Hagler Bailly Services"),
Hagler Bailly Consulting,  Inc. ("Hagler Bailly  Consulting"),
HB Capital,  Inc. ("HB Capital"),  Apogee Research,  Inc. ("Apogee") and, as of
February 23, 1998, TB&A, and several foreign  wholly-owned subsidiaries,
is a worldwide provider of consulting,  research and other professional
services to corporations and governments on energy, telecommunications,
transportation and the environment.

      Revenues  from  the  Company's   consulting   business  are  derived  from
management  consulting  services  provided  through  the  Company's  specialized
practices.  The  Company  has 280  consultants  on its  professional  staff  who
typically work on engagements  lasting from a few weeks to many years.  In 1997,
the Company  provided  consultants  to more than 400 clients in both private and
public sectors.  Financial information about the Company called for by this Item
1 is incorporated herein by reference to the Consolidated  Financial Statements,
and accompanying notes, which form a part of this Annual Report on Form 10-K.

Business Model

      Hagler Bailly is a worldwide  provider of  consulting,  research and other
professional  services to  corporations  and  governments.  The  Company  offers
corporate clients strategy and business operation  consulting,  economic counsel
and  litigation  support,  market  research  and  survey  analysis,  information
technology and financial  advisory  services with a commitment to open electric,
gas and  telecommunications  markets.  The Company also advises  governments  on
energy, water, transportation and environmental public policy.

      Hagler Bailly provides  solutions  custom-tailored  to the client's needs,
delivering  tangible value through its unique,  three-pronged,  "CPR"  approach.
This fully integrated approach provides depth of Content,  including proprietary
databases and years of cumulative  industry  knowledge.  These data are combined
with superior consulting Processes to develop appropriate  customized solutions.
Most importantly,  the Company offers Resource platforms,  including management,
information  technologies or financial  support,  that help clients to implement
the recommended solutions.

Industry Trends

      The  Company  believes  three  industry  trends  to  be  most  important
to  its  business:   globalization, restructuring and digitization.

      Globalization.  Although  the United  States  remains  the single  largest
     energy market,  many  international  markets are growing more rapidly.  For
     example,  industry  sources  project  that 88% of all new power  generation
     facilities  through  the year 2020  will be  constructed  outside  of North
     America.  In addition,  the  electric  power and gas  industries  are being
     globalized as utilities and independent  power producers move outside their
     traditional   markets.  The  Company  believes  that  nearly  100  electric
     companies  are  active  outside  their  home  country  markets  as over 100
     countries are now open to non-utility  ownership and operation in the power
     sector.  The Company believes this  globalization of the electric power and
     gas industries will continue to accelerate.

      Restructuring.  Worldwide,  the Company  believes  the  utility  sector is
     undergoing a fundamental restructuring driven primarily by an overabundance
     of energy in the developed world and a scarcity of energy in the developing
     world. In the United States, for example,  the Company believes pressure to
     deregulate and create "open access" in the electric  sector similar to that
     in the gas and telecommunications  industries is mounting.  Already several
     energy consumer states, such as California,  Massachusetts,  Michigan,  New
     York Pennsylvania and Rhode Island,  are moving to bring competition to the
     electric  industry  and to  permit  entry by  unregulated  wholesalers  and
     retailers. Outside the United States, a comprehensive reorganization of the
     electric  utility  sector  is  also  underway  as  many  countries  move to
     restructure,  corporatize and privatize  traditional public or quasi-public
     functions and operations. Beginning in Europe with the privatization of the
     non-nuclear  portion of the United Kingdom's electric utility sector,  this
     trend has  spread to Eastern  Europe,  the  former  Soviet  Union and Latin
     America, and is now expanding throughout Asia.

      Digitization.  The Company believes that industry restructuring,  combined
     with more  competitive  markets  and new  regulations,  such as  continuous
     emission  monitoring  in  the  United  States  and  the  new  international
     environmental  standard ISO 14000, requires new efficiencies in the energy,
     utilities,  transportation  and  environmental  industries for companies to
     stay competitive. The Company believes that the application of new and more
     sophisticated   information   systems  will  be  the   cornerstone  of  the
     efficiencies  necessary to succeed in these  industries.  In addition,  the
     Company   believes  that  the  advances  in  computing  and   communication
     technologies,   as  well  as  the   convergence   of  industries   such  as
     telecommunications  with electric utilities,  will have profound impacts on
     the marketing and operations of energy,  transportation  and  environmental
     companies. The Company refers to these developments as digitization.

Services

      Hagler Bailly believes that both in the private and public sectors,  these
trends toward  globalization,  restructuring and digitization continue to create
an  increasing  demand for the  services  offered by the  Company.  To meet this
demand the Company offers its clients a broad array of consulting services, from
assisting  the client to shape its vision to  strategic  planning,  selection of
appropriate solutions,  implementation,  financing and on-going management.  The
Company's  services  are  designed to provide  tangible  value to clients.  This
strategy entails less reliance on formulaic approaches and concepts, and more on
custom-tailored  solutions  based  on  an  assessment  of  the  client's  unique
situation and needs. At the Company,  we refer to this strategy as "CPR",  which
is delivered to clients  worldwide  through seven main practices  focused on the
energy,  including  electric and gas utilities,  water,  telecommunications  and
transportation industries - often referred to as network industries:

         Enhancing enterprise value by repositioning and reinventing businesses,
         and  creating  new  revenue  streams and assets  through the  Corporate
         Strategy practice.

         Strengthening  asset and  organizational  value by  improving  business
         processes and practices through the Business Operations practices.

         Counseling clients on public policy, regulatory economics and antitrust
         strategy,  conducting  asset valuation and providing  expert  testimony
         through the Economics practice.

         Advising  governments  on ways and means to  restructure  and privatize
         public  services  to  improve  economic  and  environmental  efficiency
         through the Energy Sector Reform practice.

         Offering environmental economics, scientific,  managerial and technical
         research and services through the Environmental Management practice.

         Delivering  insights  on  customers,  technologies,   competitors,  and
         changing  market  dynamics  using  quantitative  and  qualitative  data
         collection and analyses through the Market Research practice.

         Leveraging  information   technologies  and  financial  and  management
         resources to help clients implement and sustain  recommended  solutions
         through the Applications practice.

      These  practice  areas are designed to work  together  synergistically  to
provide clients the full range of services and capabilities of the Company. From
an operational  standpoint,  the Company  regularly reviews and, as appropriate,
restructures  these practice areas and services to address the changing business
problems,  strategic  alternatives  and policy  issues of its public and private
clients.

      The  Company   currently   conducts  these  services   through  five  main
subsidiaries:  Hagler Bailly  Consulting,  Hagler Bailly  Services,  HB Capital,
Apogee and TB&A.

Competitive Strengths

      Hagler Bailly  believes that it is in a strong  position to take advantage
of these  consulting  opportunities.  The Company  believes that several factors
differentiate  it  from  many of its  potential  competitors  in the  consulting
industry.

      Industry  Focus.  Since its inception in 1980,  the Company has maintained
     its focus on providing a broad range of consulting  services to the energy,
     utility and the environmental industries. With the acquisition of Apogee in
     December 1997, the Company has added the transportation sector to its areas
     of focus.  In addition,  with the acquisition of TB&A in February 1998, the
     Company   strengthened  its  environmental   practice  and  has  added  the
     telecommunications  sector to its areas of focus. 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.

      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'  consulting needs. These include
     corporate strategy, marketing and sales, product development, energy supply
     and logistics,  operations management,  information systems and technology,
     economic analysis,  environmental  management and finance. In addition, the
     Company  conducts its own market research using a  state-of-the-art  survey
     center  equipped  with  26  CATI  (Computer-Assisted  Telephone  Interview)
     stations.

      Existing Global  Infrastructure.  The Company operates from nine principal
     offices  in the  United  States  at  the  following  locations:  Arlington,
     Virginia;  Boston,  Massachusetts;  Boulder,  Colorado;  Chicago, Illinois;
     Houston, Texas; Los Angeles, California;  Madison, Wisconsin; New York, New
     York; and San Francisco,  California, and seven principal offices abroad at
     the  following  locations:   Buenos  Aires,  Argentina;   Dublin,  Ireland;
     Islamabad,  Pakistan;  Jakarta, Indonesia; Paris, France; Sao Paulo, Brazil
     and Toronto, Canada.

      Established Client Relationships.  In each of the last three fiscal years,
     the Company received repeat business from  approximately 50% of the clients
     who had engaged the Company in the year prior. Further, in each of the last
     three fiscal years,  revenues from clients served in the previous year were
     approximately  71% of the  Company's  total  revenues.  Over the past three
     years,  the  clients  have  included  approximately  100  electric  or  gas
     utilities located throughout the world and five  international  development
     banks.  Relationships with clients,  many of which date back over a decade,
     span various  levels within client  organizations,  ranging from  corporate
     boards,  chief executive officers and other senior management to functional
     managers.

      Public  Sector  Insight.  The  Company  has worked with a number of public
     sector organizations,  including the United States Agency for International
     Development  (USAID),  the Environmental  Protection  Agency,  the European
     Union, the Asian  Development Bank 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.

      Knowledge  Base.  Over 18 years,  the Company has  developed  an extensive
     knowledge  and  information  base.  The Company  owns  several  proprietary
     databases  and software  packages -- OPECSSM and NPESM,  two nuclear  power
     plant  operations  databases,  and IPPSM, a worldwide  information  base on
     independent  power  producers.  The Company has recently  developed  and is
     aggressively  marketing  its  proprietary  database,  RampUpSM,  to provide
     clients with unprecedented  information on U.S. utility operations and cost
     structure.  Finally, through the Company's proprietary Business Information
     and Knowledge  Exchange  Intranet  ("BIKEnetSM"),  Company  personnel  have
     direct  access to the  Company's  proprietary  knowledge  and  warehouse of
     information. This system is accessible from all of the Company's offices.

      Experienced Team of Management and Consultants.  The Company's  management
     and senior  consultants  have a wide  range of energy,  telecommunications,
     transportation and environmental  consulting  expertise and experience.  In
     addition,  many  of the  senior  management  and  consultants  have  worked
     extensively with one another.  Management's average tenure with the Company
     is  approximately  15 years.  This  consistency of leadership and teamwork,
     combined  with  training  provided by the  Company,  has  fostered a strong
     company culture and employee loyalty.

      Established  Global Visibility.  The Company's staff frequently  publishes
     articles and are invited to present at industry gatherings and conferences.
     The staff are also  active in  several  industry  groups  and  professional
     associations  including elected or appointed positions to the United States
     Energy  Association  (member of the Board of Directors),  the National Coal
     Council  (member),  the United  States  Environmental  Protection  Agency's
     Science  Advisory  Board  Committees  (consultant)  and the  Association of
     Energy Services Professionals (member of the Board of Directors).

      As a result of these  competitive  strengths,  the Company believes it has
emerged as one of the leading management consulting firms focused on the energy,
telecommunications, transportation and environmental industries.

Marketing and Sales

      Hagler Bailly's client  development  activities are a mixture of marketing
efforts, client acquisition techniques and development of repeat business.

      Marketing  efforts are  accomplished  through brand  development and brand
management.  The Company maintains and enhances its name and reputation  through
speeches,  presentations,  articles in industry,  business,  economic, legal and
scientific journals, and through other publications and press releases.

      The  Company  establishes  a  client  development  goal  for  each  of its
consulting  officers and principals and  systematically  reviews  individual and
group  performance  against  these goals.  The  Company's  compensation  system,
particularly  in the award of bonuses and stock  options,  is  weighted  towards
success in meeting these client development goals.

      Private  Sector.  In the private  sector,  client  acquisition  techniques
     include referrals and focused  presentations to boards of directors,  chief
     executive and operating officers and other executives of prospective client
     companies.  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.

      Public Sector.  In the public 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 internationally. 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  regularly  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 public sector clients' cost
     guidelines through competitive pricing.

Client and Representative Services

      In 1997,  Hagler Bailly  performed over 1200 assignments for more than 400
clients in over 22 countries. Revenues from Hagler Bailly's ten most significant
clients accounted for approximately  56.6%, 66.9% and 64.5% of its total revenue
for the years ended December 31, 1997, 1996 and 1995, respectively.  In the past
18 years, Hagler Bailly has grown from a single office to a worldwide network of
operations with principal  offices in nine cities in the United States and seven
other countries.  Over the past three years,  Hagler Bailly's total revenues and
consulting  revenues  have grown at a compound  annual  rate of 26.7% and 23.5%,
respectively, and have grown 25.2% and 13.9%, respectively, from 1996 to 1997.

      Because  of the nature and scope of many of the  Company's  projects,  the
Company derives a significant  portion of its revenues from a relatively limited
number of clients that operate  exclusively  in the energy,  telecommunications,
transportation and environment sectors.

Competition

      The   market   for   consulting   services   in  the   fields  of  energy,
telecommunications, transportation 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  internationally,  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
practices and others may enter the field in the future.  Many of these companies
are national and  international in scope and have greater  financial,  technical
and marketing  resources than the Company.  In the private  sector,  the Company
believes the key competitive factors are quality and service, followed by price,
while in the public sector the Company believes the key competitive  factors are
price  and  service.  The  Company  believes  that its  experience,  reputation,
industry focus,  and broad range of services have and will continue to enable it
to compete  effectively  in the  private  and public  sector  both in the United
States and internationally.


Employees

      As of March 2, 1998,  the Company's  personnel  consisted of 418 full-time
employees,  including  280  consultants,  and  138  support  personnel,  and  59
part-time  employees.  The two largest  offices of the  Company  are  Arlington,
Virginia  and   Boulder,   Colorado   with  155  and  78  full-time   employees,
respectively.  Eighty nine (89)  full-time  employees are stationed  outside the
United States.  This number  excludes the personnel of the Company's  non-wholly
owned   subsidiaries   in  Argentina,   Indonesia   and  Pakistan   which  have,
respectively,  8, 12 and 28 full-time employees.  It also excludes locally hired
independent  contractors.  The  Company  supplements  its  full-time  staff with
outside  consultants with proven experience in their respective fields.  Several
of these outside consultants are well-known professors at leading universities.

      The Company's 36 consulting  officers  average sixteen years of management
consulting  experience,   most  of  which  has  been  in  the  energy,  utility,
transportation  and  environmental  industries.  Several of its most experienced
consultants have worked together for over ten years. Hagler Bailly believes that
this long-term  experience of working  together as a team enables the Company to
respond  quickly to changing  market  conditions and  consistently  deliver high
quality consulting services in response to the complex demands of its clients.

      The  Company  believes  its success  depends in large part on  attracting,
retaining and motivating  talented,  creative and professional  employees at all
levels.  The  Company  de-emphasizes  hiring  directly  from  graduate  schools,
instead,  seeking  graduates  from top 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 industry.

      The Company  attracts and motivates its  professional  and  administrative
staff by offering competitive packages of base and incentive  compensation,  and
benefits.  All full-time and part-time staff members are eligible for bonuses. A
significant  percentage  of the  Company's  income  before  bonuses and taxes is
distributed as bonuses to its staff,  the majority of which is targeted  towards
the Company's top performers -- usually its consulting officers, principals, and
managers.  The bonus awards are the result of measurement of performance against
predetermined  target  compensation  goals  that  balance  individual  and  team
performance.  This structure gives senior staff members a vested interest in the
Company's  overall  success and  performance  while still  promoting  individual
initiative and excellence. The Company appreciates the importance of recognition
and a promotion  track for its  administrative  staff and fully  integrates this
staff into the conduct of its  business.  The  performance  of all  employees is
reviewed annually for compensation and promotion purposes.

Risk Factors

      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. 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.  Many of these firms have substantially  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.

      Concentration  of  Revenues.  Substantially  all  of the  revenues  of the
Company  are derived  from  private and  institutional  clients  involved in the
energy,  telecommunications,  transportation and environmental  industries. As a
result of this focus, the Company's business, financial condition and results of
operations  are  influenced by factors  affecting  these  industries,  including
changing  political,  economic  and  regulatory  influences  that may affect the
procurement    practices   and   operation   of   energy,    telecommunications,
transportation and environmental service providers. 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's 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   energy,   telecommunications,
transportation  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  public  sector  contracts.  The impact of these  developments  in the
energy,  utility,  transportation  and environmental  industries is difficult to
predict  and could have a material  adverse  effect on the  Company's  business,
financial condition and results of operations.

      Ability to Sustain and Manage Growth.  The Company has  experienced  rapid
growth in  recent  years,  including  two  acquisitions  and an  initial  public
offering  of its  securities  in the last year.  The Company  believes  that its
sustained 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  growth
effectively could have a material adverse effect on the Company's business.

      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
Hagler Bailly's business, operating results and financial condition.

      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
56.6%,   66.9%  and  64.5%  of  its  total  revenues  in  1997,  1996  and  1995
respectively.  A U.S. government agency, USAID, is the Company's largest client,
accounting for  approximately  37.3%,  38.3% and 34.3% of Hagler  Bailly's total
revenues  in 1997,  1996 and 1995  respectively.  Clients  typically  retain the
Company as needed on 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 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.

      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 public sector engagements,  the Company
employs  the  services  of  local  staff  and  consultants  who are  treated  as
independent  contractors.  Negligent or illegal acts,  or ethical  violations by
these independent  contractors  could adversely affect the Company.  The Company
maintains  professional  liability  insurance to an  aggregate  maximum of $10.0
million.

      Partnering  Arrangements.  Historically,  the Company's revenues have been
generated either on a standard daily rates basis or a cost plus fixed-fee basis.
The Company  anticipates  an  increasing  portion of its  management  consulting
services will be billed pursuant to alternative  pricing  arrangements which may
include incentive and success-based fees. In addition,  the Company is pursuing,
in certain select  instances,  opportunities to invest its own capital and other
resources  in  partnering  arrangements  involving  early  stage  energy-related
technologies and projects in the energy, telecommunications,  transportation and
environmental  industries.  Hagler Bailly has limited prior experience investing
its  own  funds  in  external  ventures.  Such  compensation   arrangements  and
investments  may result in  significant  time delays  between the  incurrence of
costs in  delivering  services  and the  receipt of the related fee or return on
invested capital, as the case may be.

      Public Sector Market and  Contracting  Risks.  Approximately  59.6% of the
Company's  total  revenues in 1997, and 52.3% in 1996  (approximately  45.9% and
37.2% of consulting  revenues in 1997 and 1996,  respectively) were derived from
contracts or  subcontracts  with public  sector  clients.  Providing  consulting
services  to  public  sector   customers  is  subject  to  detailed   regulatory
requirements  and public  policies as well as to funding  priorities.  Contracts
with public sector customers 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, public
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 contracts  with  governmental
entities  will not have a material  adverse  effect on the  Company's  business,
results of operations and financial condition.

      Intense  Competition.  The market for  consulting  services in the energy,
telecommunications,  transportation  and  environmental  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.

      Risk of International Operations. The Company operates either permanent or
project  offices  in a total of 27 foreign  countries.  The  Company  expects to
continue to expand its international operations and offices.  Expansion into new
geographic regions 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.

      Dependence  on Key  Employees.  The  success  of  the  Company  is  highly
dependent upon the efforts,  abilities,  business  generation  capabilities  and
project execution of its officers and those of its  subsidiaries,  in particular
those of Henri-Claude Bailly, the Company's  President,  Chief Executive Officer
and Chairman of the Board. The loss of the services of any of these  individuals
for any reason,  in particular Mr. Bailly,  could have a material adverse effect
upon  the  Company's  business,   operating  results  and  financial  condition,
including its ability to secure and complete engagements.  With the exception of
Mr. Bailly, the Company does not have an employment agreement with many of these
individuals. The Company maintains a key-man life insurance policy on Mr. Bailly
in the amount of $2.0 million. The Company also has entered into non-competition
agreements  with those of its  officers  who were  selling  stockholders  in the
Company's  initial public  offering in July 1997,  which provides that each will
not compete with the Company for a two-year period ending July 9, 1999.

      Concentration  of  Ownership.  As of  March 2,  1998,  the  directors  and
officers of the Company (including officers of subsidiaries)  beneficially owned
approximately  56.77% 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.

      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.

      Project Risks.  Many of the Company's  engagements  involve projects which
are critical to the  operations of its  customers'  businesses and which provide
benefits that may be difficult to quantify.  The Company's  failure or inability
to meet a customer'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 typically are based on 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.

      Intellectual  Property  Rights.  Hagler  Bailly'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.

      Government  Regulation of Immigration.  Certain of the Company's employees
are foreign  nationals  working in the United  States  under U.S.  visas or work
permits. 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.

      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 public sector clients  (especially that
of the United States 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  quarter of each
fiscal year. In addition, the Company's operating expenses are increasing as the
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.

      Fluctuations in the General Economy. Demand for the Company's professional
services is  significantly  affected by the general level of economic  activity.
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.

      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.

      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 Chairman of the Board, 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  and which require  certain advance
notice  procedures  for  nominating  candidates  for  election  to the  Board of
Directors. 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.

      Shares  Eligible  for Future  Sale.  As of March 2, 1998,  the Company has
8,869,291  shares of Common Stock  outstanding,  of which  3,622,500  shares are
freely  tradeable  without   restriction  or  further   registration  under  the
Securities  Act of  1933  (the  "Act"),  unless  such  shares  are  acquired  by
"affiliates"  of the  Company,  as that term is  defined  in Rule 144 of the Act
("Rule  144").  Holders of the  remaining  shares  will be eligible to sell such
shares  pursuant  to Rule 144 at  prescribed  times and subject to the manner of
sale,  volume,  notice and  information  restrictions  of Rule 144. In addition,
1,246,137 shares of the Company's Common Stock are issuable upon the exercise of
outstanding  stock  options  (of which  options  to acquire  504,038  shares are
currently exercisable).

      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, telecommunications, transportation 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 and other
factors.  The stock market has from time to time  experienced  extreme price and
volume  fluctuations which 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.


ITEM 2 - PROPERTIES

      In aggregate,  the Company  leases  approximately  186,586  square feet of
office  space  in  the  following   principal   offices:   Arlington,   Virginia
(headquarters);  Boston,  Massachusetts;  Boulder, Colorado;  Chicago, Illinois;
Houston, Texas; Los Angeles, California; Madison, Wisconsin; New York, New York;
and San  Francisco,  California.  Hagler  Bailly  also  leases an  aggregate  of
approximately  6,590  square  feet of office  space in the  following  principal
foreign offices: Buenos Aires, Argentina; Dublin, Ireland; Islamabad,  Pakistan,
Jakarta,  Indonesia,  Paris,  France, Sao Paulo, Brazil and Toronto,  Canada. In
addition,  the Company  leases 1,955 square feet for branch offices in Brussels,
Belgium;  Philadelphia,  Pennsylvania;  and Manila, Philippines.  Each principal
office represents a permanent  location  servicing multiple clients which 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. The Company currently has project
offices in 17 foreign locations totaling  approximately  25,696 square feet. All
of the Company's principal, branch and project offices are electronically linked
together  and  have  access  to all  of  the  Company's  capabilities  and  core
consulting  tools. The Company believes that its facilities are adequate for its
current needs and that additional facilities can be leased to meet future needs.


ITEM 3 -- LEGAL PROCEEDINGS

      The Company's  indirect  subsidiary,  Theodore  Barry &  Associates,  is a
defendant  in a lawsuit  brought in the  United  States  District  Court for the
Northern District of Illinois,  Michael A. Laros v. Theodore Barry & Associates,
No.  95-C4175,  by one of its former  executives  seeking payment of a bonus and
salary allegedly due him and payment of principal and interest on a subordinated
note of TB&A held by Mr. Laros, prejudgment interest and costs and fees. TB&A is
defending  the suit.  The Company does not believe that the  resolution  of this
lawsuit will have a material adverse effect on its business, financial condition
or results of operations.

      The  Company  and its  subsidiaries  are from  time to time a  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.
                                  PART II


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

      The  Company's  Common  Stock,  $.01 par value,  was first  offered to the
public on July 3, 1997 and since that time has been  traded on the Nasdaq  Stock
MarketSM  ("Nasdaq")  under the symbol "HBIX".  The following  table sets forth,
during the period  indicated,  high and low closing prices as reported by Nasdaq
for the last fiscal year.

Fiscal Year Ended December 31, 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

Dividends

      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.

Holders of Record of Hagler Bailly Common Stock

      The  Company  had 77 holders of record of its Common  Stock as of March 2,
1998 and approximately 700 beneficial owners.

      The Company  issued an aggregate of 409,985  shares of its Common Stock on
December  1,  1997 to  approximately  30 former  shareholders  (and  holders  of
unvested  options to purchase the common stock) of Apogee in connection with the
Company's  acquisition  of Apogee.  The  offering  was exempt  under Rule 506 of
Regulation D and Section 4(2) of the Securities Act.

ITEM 6 -- SELECTED FINANCIAL DATA

      The  following  selected  financial  data as of December 31, 1993 and 1994
have been derived from the audited Financial Statements of the Predecessor.  The
selected  consolidated  financial  data as of  December  31, 1995  includes  the
combined  financial data of the Predecessor  derived from the audited  Financial
Statements from January 1, 1995 to May 25, 1995 and the  consolidated  financial
data of the  Company  from May 26, 1995 to December  31, 1995  derived  from the
audited   Consolidated   Financial  Statements  of  the  Company.  The  selected
consolidated  financial  data as of December 31, 1996 and 1997 have been derived
from the audited Consolidated Financial Statements of the Company. The Company's
prior years have been restated to include the Apogee acquisition.

      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 Form
10-K Annual Report and the Predecessor Financial  Statements,  which is filed in
the  Financial  Statements  in  Amendment  No. 2 to the  Company's  Registration
Statement Form S-1 filed with the Securities and Exchange Commission on June 12,
1997, and is incorporated by reference herein.
<TABLE>
<CAPTION>


                                                     The Predecessor (1)                   The Company (1)
                                                                       Jan. 1,     May 26,
                                                                      ---------    1995 to
                                                   Years ended         1995 to     Dec. 31,        Years ended
                                                   December 31,        May 25,                     December 31,
---------------------------------------------
                                                 1993        1994        1995        1995      1996 (2)      1997
---------------------------------------------
STATEMENT OF OPERATIONS DATA:                                 (In thousands, except per share data)
---------------------------------------------
<S>                                              <C>         <C>         <C>         <C>         <C>         <C>
Revenues:
   Consulting revenues                           $22,226     $28,347     $13,712     $22,021     $45,123     $51,412
   Subcontractors and other revenues              10,276      13,437       8,897      11,119      22,821      33,645
     Total revenues                               32,502      41,784      22,609      33,140      67,944      85,057
Cost of services                                  26,645      33,998      18,814      27,010      54,091      64,097
Gross profit                                       5,857       7,786       3,795       6,130      13,853      20,960
Selling, general and administrative                4,006       5,384       2,710       3,591       9,139      12,319
expenses (4)
Stock and stock option compensation (3)                -           -           -           -       6,172          80
Income/(loss) from operations                      1,851       2,402       1,085       2,539     (1,458)       8,561
Other income(expense) net                           (47)        (18)        (59)       (693)     (1,012)         219
Income/(loss) before income tax expense            1,804       2,384       1,025       1,847     (2,470)       8,780
Income tax expense                                   729       1,002         422         810         961       3,352
Net Income (loss)                                  1,075       1,382         602       1,036     (3,431)       5,428
--------------------------------------------- =========== =========== =========== =========== =========== ===========
Net Income (loss) per share
   Basic                                               *           *           *           *      (0.67)        0.78
   Dilutive                                            *           *           *           *      (0.67)        0.70
Weighted average shares outstanding
   Basic                                               *           *           *           *   5,119,054   6,976,387
   Dilutive                                            *           *           *           *   5,119,054   7,809,967

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

                                                                     YEARS ENDED DECEMBER 31,
                                                  1993           1994          1995          1996           1997
---------------------------------------------
BALANCE SHEET DATA                                                        (In Thousands)
---------------------------------------------
Cash and cash equivalents                               963           620           706          1,686         3,035
Working capital                                       2,149         3,621         3,189          4,625        30,672
Total assets                                         14,027        17,311        27,722         30,704        57,437
Total debt                                                -             -        13,455         11,267             -
Total Stockholders' equity                            4,760         6,219         4,785          8,209        44,505
Common stock and cash dividends declared                  -             -             -              -             -
<FN>

(1)   Effective  May  25,  1995,  the  management  of  RCG/HB,   a  wholly-owned
      subsidiary of RCG International,  Inc. ("RCG"), acquired all of the voting
      stock of RCG/HB.  The statements of operations data include the operations
      of Apogee Research, Inc. for all periods presented.
(2)   The  statements  of operations  data for the year ended  December 31, 1996
      includes the following expenses: (a) approximately $0.5 million of cost of
      services,  representing that portion of officer compensation that exceeded
      the  compensation  that  would have been paid have the  compensation  plan
      adopted in January 1997 been in effect for all of 1996; (b)  approximately
      $6.2  million  stock  and  stock  option  compensation   representing  the
      non-recurring,  non-cash  compensation  expense  in  connection  with  the
      amendment to the Stock Plan and a reclassification of the Company's Common
      Stock  described in footnote 3 below.  The net impact of the  foregoing on
      the Company's Statement of Operations for the year ended December 31, 1996
      was to decrease  income  before income tax expense by  approximately  $7.7
      million  and net income by  approximately  $6.6  million,  with income tax
      expense  calculated  at a combined  federal  and state  income tax rate of
      40.0%.  Excluding the foregoing,  income before income tax expense for the
      year ended  December 31, 1996 would have been  approximately  $4.9 million
      and net income would have been approximately $2.9 million.
(3)   In connection  with an amendment to the Stock Plan and a  reclassification
      of its Common  Stock,  each  effective  December  31,  1996,  the  Company
      incurred  non-recurring,  non-cash charges to operations amounting to $4.6
      million for options and $1.6 million for stock, respectively,  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
      $65,000.
(4)   The selling,  general and  administrative  expenses  included $1.2 million
      acquisition related expenses for the year ended December 31, 1997.
</FN>
</TABLE>


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
completed the purchase of RCG/Hagler Bailly from RCG (the "Management Buy-Out"),
and the successor to RCG/Hagler  Bailly became a wholly-owned  subsidiary of the
Company.  In July 1997, the Company  completed an initial  public  offering (the
"IPO").

      Hagler Bailly is a worldwide  provider of  consulting,  research and other
professional   services  to  corporate   and   government   clients  on  energy,
telecommunication, transportation and the environment.

      Total revenues  represent the total of all revenues  related to contracts,
including  revenues  associated  with  professional  staff,  subcontractors  and
independent  consultants.  Consulting  revenues represent the amount of contract
revenue   associated  with  billings  by  the  Company's   professional   staff.
Subcontractor   and  other   revenues   represent   revenues   associated   with
subcontractors  and  independent  consultants,  as well as  travel  and per diem
reimbursements from clients.

      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 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.  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.  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,  predominantly  for public  sector  work.  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.

Management Buy-out

      From 1984 to May 1995,  when the  management of the Company  completed the
Management  Buy-Out,  the  Company was a  wholly-owned  subsidiary  of RCG.  The
results of  operations  since May 25, 1995 have been  affected by an increase in
overhead as a result of becoming an independent  corporation  and an increase in
interest  expense  relating  to  indebtedness  incurred in  connection  with the
Management Buy-Out. In addition, results of operations of the Company subsequent
thereto have been affected by the amortization of approximately  $9.0 million of
certain intangibles,  including goodwill, which were recorded in connection with
the Management  Buy-Out.  The data for 1995 in the period to period  discussions
below  reflects the results of  operations of the Company for the period May 26,
1995  through  December 31, 1995,  and the  restatement  for the 1997 pooling of
interests as described below.

Compensation Charges

      Prior to December 31, 1996,  the Company's  Stock Plan was formula  based,
pursuant to which the exercise price of options granted were based upon the book
value per share as of May 26,  1995,  adjusted for  accretion  of formula  value
during any interim period up to the grant date.

      Effective at December 31,  1996,  the Company  adopted an amendment to its
Stock Plan which  changed  the  exercise  price of future  options to be granted
thereunder to the market value of the underlying  Common Stock. In addition,  in
connection  with  the   reclassification   of  its  Common  Stock,  the  Company
substituted  0.9 shares of Class A Common Stock for each share of Class B Common
Stock  underlying  971,963 options vesting on January 1, 1997. At the same time,
options to purchase 971,963 shares of Class B Common Stock vesting on January 1,
1998, were canceled. As a result, the Company recorded a non-recurring, non-cash
charge to  operations of $6.2 million in December 1996 of which $4.6 million was
for options to purchase  Common Stock and $1.6 million was for 394,160 shares of
Common  Stock  sold to  employees  during  1996.  These  charges  represent  the
aggregate  difference between the exercise price of such outstanding  options or
the issuance  price of Common Stock sold to employees  during 1996,  as the case
may be,  and the  appraised  market  value  of the  underlying  Common  Stock at
December 31, 1996.

Recent Acquisitions

      On  December 1, 1997,  the Company  completed  the  acquisition  of Apogee
Research,  Inc. ("Apogee"),  whereby Apogee became a wholly-owned  subsidiary of
Hagler  Bailly.  Apogee is a consulting  firm  specializing  in the economic and
financial  analysis of  infrastructure,  including all aspects of transportation
and environment.  Total consideration for the acquisition was approximately $8.3
million,  in the form of an aggregate of 409,985  shares of Hagler Bailly Common
Stock.  The  acquisition  is  accounted  for as a  "pooling-of-interests"  under
generally accepted accounting principles.  Accordingly,  the Company's financial
statements have been restated to reflect the acquisition on a historical  basis.
On February 23, 1998, the Company  completed the acquisition of TB&A Group, Inc.
("TB&A") and its wholly-owned subsidiary,  Theodore Barry & Associates,  whereby
TB&A became a  wholly-owned  subsidiary  of the  Company.  TB&A is a  management
consulting  firm  to  electric,  gas  and  telecommunication   companies.  Total
consideration for the acquisition was approximately $10.9 million in the form of
an aggregate of 454,994  shares of Hagler Bailly Common Stock.  The  acquisition
will be accounted  for as a pooling of interests.  In connection  with these and
other  transactions,  the Company incurred merger related costs of approximately
$1.2 million in 1997.

Results of Operations

      The following table sets forth,  for the periods  indicated,  the relative
composition  of  revenues  and  selected  statements  of  operations  data  as a
percentage of revenues:
<TABLE>
<CAPTION>
                                              Years Ended December 31,
                                              1997     1996     1995
          <S>                                 <C>      <C>      <C>

          Revenues                            100%     100%      100%
          Cost of services                     75%      80%       82%
          -----------------------------------------------------------
          Gross profit                         25%      20%       18%
          Selling, general and
               administrative                  14%      13%       11%
          Stock & stock option compensation     -        9%        -
          -----------------------------------------------------------
          Operating income                     10%      (2)%       7%
          Other expense (income), net           -        1%        2%
          -----------------------------------------------------------
          Income (loss) before income tax
               expense (benefit)               10%     (4)%        5%
          Income tax expense                    4%       1%        2%
          -----------------------------------------------------------
          Net income                            6%     (5)%        3%
</TABLE>

1997 Compared to 1996

      Revenues. The Company's total revenues increased 25.2% to $85.1 million in
1997 from $67.9  million in 1996. A  significant  cause of this increase was the
increased  demand  for  management   consulting  services  associated  with  the
restructuring  and  deregulation  of the  electric  and gas sectors  outside the
United States. Consulting revenues increased 13.9% to $51.4 million in 1997 from
$45.1 million in 1996.  There was higher than  anticipated  growth in consulting
revenues for  institutional  clients while the overall growth was constrained by
the ending of two major private sector  engagements and the management  strategy
of  deploying   core   consulting   staff  to  create  and  initiate   sales  of
information-based products and services.

      Cost of Services.  Cost of services  increased  18.5% to $64.1  million in
1997 from $54.1 million in 1996. The Company  attributes the increase in cost of
services  to the  increases  in the number of  in-house  professional  staff and
related other direct costs.

      Gross Profit.  Gross profit  increased 51.3% to $21.0 million in 1997 from
$13.9  million in 1996.  Gross profit as a percentage  of revenues  increased to
24.6%  in 1997  from  20.4% in  1996.  The  improvement  in the  margins  is due
primarily to higher  growth in  institutional  clients  revenues and a continued
increase in higher margin private revenues.

      Selling,  General  and  Administrative  Expenses.   Selling,  general  and
administrative  expenses  increased  34.8% to $12.3  million  in 1997  from $9.1
million in 1996. This increase is primarily attributable to merger related costs
of $1.2 million with the remainder due to the relative increase in revenues. The
net effect is a reduction  of  selling,  general  and  administrative  expenses,
excluding  merger related costs, as a percentage of revenues to 13.0% from 13.4%
for 1997 and 1996, respectively.

      Income(loss) from Operations.  Income from operations was $8.6 million for
1997 compared to $(1.5)  million for 1996.  The loss from  operations in 1996 is
primarily attributable to the approximately $6.7 million non-recurring, non-cash
stock  and  stock  option  compensation  charge  and  that  portion  of  officer
compensation  that exceeded the  compensation  that would have been paid had the
compensation plan adopted on January 17, 1997 been in effect for all of 1996.

      Other (Income)/Expense. Other (income)/expense increased to $(0.2) million
income for 1997 due to the interest income earned from reduction of debt and the
investment of IPO funds compared to $1.0 million  expense for 1996  attributable
to the interest  expense  related to the debt  incurred in  connection  with the
Management Buy-Out.

      Income Tax Expense.  Income tax expense was $3.4 million in 1997 compared
to $1.0 million in 1996.

      Net  Income(Loss).  As a result of the preceding,  net income for 1997 was
$5.4  million,  ($6.2  million,  including the  tax-effected  add-back of merger
related  costs of $0.7  million)  compared  to  $(3.4)  million  loss for  1996,
(excluding the one-time,  non-cash,  compensatory item of $6.2 million for stock
and stock option compensation net income for 1996 was $2.7 million).

1996 Compared to 1995

      Revenues.  The Company's total revenues increased to $67.9 million in 1996
from $35.9 million in 1995.  Consulting  revenues  increased to $45.1 million in
1996 from $24.8  million in 1995.  These  revenue  increases  can be  attributed
principally to the difference in months reported, strong growth in consulting to
the U.S. utility sector and the  introduction of several new corporate  strategy
consulting services.

      Cost of  Services.  Cost of services  increased  by $24.8  million in 1996
compared  with 1995 but  decreased in relation to total  revenues  from 81.7% of
total  revenues  in 1995 to 79.6%  of total  revenues  in 1996.  Of this  amount
approximately $0.5 million represents that portion of officer  compensation that
exceeded the compensation  that would have been paid had the  compensation  plan
adopted in January 1997 been in place for all of 1996.

      Gross  Profit.  Gross profit  increased to $13.9 million in 1996 from $6.6
million in 1995.  Gross profit as a percentage  of total  revenues  increased to
20.4% in 1996 from  18.3% in 1995.  This can be  principally  attributed  to the
difference in months reported and an increase in consulting to the U.S.  utility
sector and increased  utilization  rates resulting,  in part, from  productivity
gains associated with technology improvements.

      Selling,  General  and  Administrative  Expenses.   Selling,  general  and
administrative  expenses  increased to $9.1 million in 1996 from $4.0 million in
1995. As a percentage of total  revenues,  selling,  general and  administrative
expenses  increased to 13.5% in 1996 from 11.1% in 1995.  This  increase was due
primarily to the difference in months reported and increases in certain overhead
costs  associated  with the Management  Buy-Out,  increases in loss reserves and
increases in proposal development expenses.

      Income(loss)  from Operations.  Loss from operations was $(1.5) million in
1996 compared to income from  operations of $2.6 million in 1995.  The loss from
operations in 1996 is primarily  attributable to the approximately  $6.7 million
non-recurring,  non-cash  stock and stock  option  compensation  charge and that
portion of officer  compensation  that exceeded the compensation that would have
been paid had the  compensation  plan adopted on January 17, 1997 been in effect
for all of 1996.  These expenses  negatively  impacted income from operations by
approximately  $6.2  million  in 1996.  Excluding  the  foregoing,  income  from
operations  for 1996  would  have  been  approximately  $4.7  million,  an 82.2%
increase  from 1995,  and would  have been 6.9% of total  revenues  in 1996,  as
compared to 7.2% in 1995.  Such  improvement  is primarily  attributable  to the
difference  in months  reported and  increased  revenues and the decrease in the
cost of services (as a percentage of total  revenues),  partially  offset by the
selling, general and administrative expenses.

      Other Income/(Expense).  Other income (expense) was $(1.0) million in 1996
compared to $(0.7) million for 1995. The increase is attributable to a full year
of interest  expense in 1996,  related to debt incurred in  connection  with the
Management Buy-Out versus seven months of interest expense in 1995. The debt was
repaid with the proceeds from the IPO.

      Income Tax Expense.  The  Management  Buy-Out in 1995 provided the Company
with the  opportunity  to make a tax  election  to be  treated  as a cash  basis
taxpayer.  For financial reporting  purposes,  the Company recognizes income tax
expense on an accrual basis. The difference between cash basis and accrual basis
created a deferred income tax liability which represents a temporary difference.
Income tax expense was $1.0 million for 1996  compared to $0.9 million for 1995.
The  Company  incurred  income tax expense in 1996 even with an  operating  loss
because a portion  of the stock and stock  option  compensation  charge  was not
deductible for tax purposes.

      Net  Income(Loss).  As a result  of the  preceding,  net  loss was  $(3.4)
million in 1996 as compared to net income of $1.0 million in 1995,  primarily as
a result  of the  non-recurring  stock  and  stock  option  compensation  charge
discussed  above. Net income (loss) as a percentage of total revenues was (5.0%)
in 1996 as  compared  to 2.7% in 1995.  Excluding  expenses  related  to (a) the
excess officer compensation  described above, (b) the interest expense described
above, and (c) the non-recurring,  non-cash compensation charge described above,
net income  would have been  approximately  $2.7 million with income tax expense
calculated at a combined federal and state income tax rate of 40.0%.

Liquidity and Capital Resources

      In July 1997,  the Company  completed  an initial  public  offering of its
common stock,  which raised net proceeds of approximately  $30.3 million.  $12.5
million of the net proceeds were used to repay borrowings from RCG and under the
Company's  credit  facility.  Prior to the IPO, the Company's  primary source of
liquidity  has been cash flows from  operations,  periodically  supplemented  by
borrowings  under a bank line of credit.  During the year,  ended  December  31,
1997,  the  Company,  through  two of its  subsidiaries,  established  a new $15
million  revolving  credit facility and began borrowing under the facility.  All
such borrowings were repaid at year-end.

      At December  31, 1997 and 1996,  the Company had working  capital of $30.7
million and $4.6  million,  respectively.  Working  capital at December 31, 1997
represents an increase of $26.0 million from December 31, 1996.  The increase in
1997 is primarily  due to net proceeds  received  from the IPO. The increase was
partially offset by purchases of property, equipment and merger related costs.

      Net cash  provided by or used in  operations  consisted  primarily  of net
income  (loss) plus elements of cash flows  related to accounts  receivable  and
related  billings,  accounts  payable  and  accrued  compensation  adjusted  for
non-cash items including  depreciation,  provision for possible losses, deferred
income  taxes,  and  stock and stock  option  compensation.  The use of funds by
operations  of  $7.0  million  for the  year  ended  December  31,  1997  can be
attributed to the growth in accounts  receivable due to increased  sales volume,
increased tax payments due to the change from cash basis to accrual  basis,  and
other changes in the Company's working capital.  Operating  activities  provided
$3.5 million of the Company's cash  resources for the year ended 1996,  compared
to $2.1 million in 1995. The Company  realized a cash flow benefit from deferred
federal and state  income  taxes for the two years ended  December  31, 1996 and
1995.  Since the IPO, the Company was required to change from the cash method of
income tax  reporting  to the accrual  method  which  resulted in a recapture of
deferred federal and state income taxes in 1996 and 1995.

      The  Company  used $11.2  million,  $1.1  million  and $12.4  million  for
investing  activities  for the years ended  December  31,  1997,  1996 and 1995,
respectively.  The Management  Buy-Out used $11.8 million of cash from investing
activities in 1995. Investment activities for the year ended 1997 have primarily
been  capital  expenditures  for  information  technology  and  other  resources
necessary for growth of the Company.

      Net cash  provided by financing  activities  of $19.5 million for the year
ended 1997 was principally the result of the proceeds received from the issuance
of  common  stock  in  connection  with  the IPO.  Net  cash  used by  financing
activities for the year ended December 31, 1996 of $1.4 million was  principally
the result of payment of long-term debt. During 1995, cash provided by financing
activities of $11.0 million was primarily  attributable to the issuance of stock
and the debt incurred in conjunction with the Management Buy-Out.

      The Company  believes the net proceeds  from its IPO,  together with funds
generated by  operations  and funds  provided  under the credit  facility,  will
provide  adequate  cash to fund its  anticipated  cash needs,  which may include
future  acquisitions of complementary  businesses,  for at least the next twelve
months. The Company,  depending on market conditions, may consider other sources
of financing,  including equity  financing.  Pending such uses, the net proceeds
are invested in short-term,  interest-bearing  investment grade securities.  The
Company  currently  anticipates  that it will  retain  all of its  earnings  for
development of the Company's  business and does not  anticipate  paying any cash
dividends in the foreseeable future.

New Accounting Pronouncements

      In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting  Comprehensive Income" ("SFAS
130"),  and Statement of Financial  Accounting  Standards  No. 131  "Disclosures
about Segments of an Enterprise and Related  Information" ("SFAS 131"). SFAS 130
establishes  standards for reporting  comprehensive income and its components in
the  consolidated  financial  statements.  SFAS 131  establishes  standards  for
reporting  information  on  operating  segments in interim and annual  financial
statements.  SFAS  130 and  SFAS  131  will  become  effective  for the  Company
beginning in 1998.  SFAS 130 and SFAS 131 require  disclosure only and will have
no impact on the  Company's  consolidated  financial  position  and  results  of
operations.

Year 2000

      The Company relies on software  technology to deliver its services and has
taken actions to evaluate the nature and extent of the work required to make its
systems and infrastructure "Year 2000" compliant. The Company believes this will
not have a material impact on its financial position or results of operations.

Recent Event

      On March 22, 1998 the Company signed a non-binding  Preliminary  Agreement
to combine with Putnam, Hayes & Bartlett,  Inc. ("PHB"). The Company anticipates
issuing 6.8 million shares of its Common Stock to PHB shareholders in connection
with the  transaction.  PHB had gross revenues of  approximately  $63 million in
1997.


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-23. An index to the Financial  Statements is set
forth on page 35.

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

      Not applicable.


                                PART III


ITEM 10 -- DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

      The Company's  Directors and Executive  Officers and their respective ages
and positions follows:

Name                                  Age     Positions
Henri-Claude Bailly (1)               51      President,  Chief  Executive
                                              Officer and  Chairman of the Board
                                              (Term Expiring 1999).

Jassi S. Cheema                       57      Chief  Executive  Officer  of
                                              Hagler  Bailly  Consulting, Inc.
                                              and President and Chief Executive
                                              Officer of TB&A Group,Inc.,  both
                                              wholly-owned subsidiaries of
                                              Hagler Bailly, Inc.

Vinod K. Dar                          47      Director  (Nominee for  Election,
                                              Term Expiring  2001);  Senior Vice
                                              President and Managing Director of
                                              Hagler Bailly  Consulting,  Inc.,
                                              a wholly-owned subsidiary of
                                              Hagler Bailly, Inc.

Daniel M. Rouse                       47      Vice President, Chief Financial
                                              Officer and Treasurer

Alex M. Steinbergh                    57      Chief Executive Officer, HB
                                              Capital,  Inc., a wholly-owned
                                              subsidiary of Hagler Bailly, Inc.

Alain M. Streicher                    49      Director  (Term Expiring  2000),
                                              Acting Chief Operating Officer and
                                              Senior Vice President;  Chief
                                              Executive Officer of Hagler Bailly
                                              Services, Inc., a wholly-owned
                                              subsidiary of Hagler Bailly, Inc.

Stephen V.R. Whitman                  51      Vice President and General Counsel

Michael D. Yokell                     51      Director  (Term  Expiring  1999);
                                              Senior Vice President and Managing
                                              Director of Hagler Bailly
                                              Consulting, Inc.,  a  wholly-owned
                                              subsidiary of Hagler Bailly, Inc.

Robert W. Fri (1)(2)(3)               61      Director (Term Expiring 1999).

Fred M. Schriever (1)(2)(3)           67      Director (Nominee for Election,
                                              Term Expiring 2001).

Richard H. O'Toole                    51      Director (Term Expiring 2000).

----------------------------------
(1) Member of the  Executive  Compensation  Committee of the Board of Directors.
(2) Member of the Audit  Committee of the Board of Directors.
(3) Member of the Stock Option Committee of the Board of Directors.

      Henri-Claude  Bailly has served as the Company's Chief  Executive  Officer
since the Company was founded in 1980, and as President of the Company from 1984
to 1987 and from May 1995 to date,  and as  Chairman  of the Board  from 1984 to
date.  From September 1984 to May 1995, Mr. Bailly was also employed by RCG in a
series  of  management  positions,  and ended his  tenure  there as Senior  Vice
President  and  director of RCG and  Chairman  of the Board and Chief  Executive
Officer of RCG/Hagler  Bailly,  Inc.. From 1972 to 1980, Mr. Bailly was employed
in successive positions from Associate to Managing Director of Resource Planning
Associates,  an international  energy,  utilities and  environmental  management
consulting  firm. Mr. Bailly holds a Masters of Business  Administration  degree
from Harvard University and Bachelor and Master of Architecture degrees from the
University  of  Washington.  Mr.  Bailly serves on the Board of Directors of the
United States Energy  Association  and was appointed as a member of the National
Coal Council.

      Jassi S. Cheema has been employed by TB&A Group,  Inc.  ("TB&A") in
various  positions since 1980. Mr. Cheema currently  serves as the  President
of TB&A and as of February  23, 1998,  the Chief  Executive  Officer of Hagler
Bailly  Consulting,  Inc.  Prior to joining TB&A, Mr. Cheema worked for Getty
Oil Co. as a Manager of its Corporate Technical  Applications  group.  Mr.
Cheema has his Master of Science  degree from the  University of Wisconsin and
his Masters of Business Administration from the University of Southern
California.

      Vinod K. Dar is one of the original  founders of the  Company.  He
rejoined the Company in 1995 and leads its corporate  strategy and  management
consulting  practice.  After leaving the Company in 1984, Mr. Dar was employed
in various  senior  executive  positions in the energy  industry.  From 1984 to
1989,  Mr. Dar was  Executive  Vice President and a director of Hadson
Corporation  and Chief  Executive  Officer of Hadson Gas Systems.  In 1990, Mr.
Dar was Senior  Vice  President  of American  Exploration  Company.  From mid
1990 to 1992,  Mr. Dar was a Managing Director of Dar & Company.  From 1992 to
1994,  Mr. Dar was the Chairman of Sunrise Energy  Services.  From 1994 to
1995,  Mr. Dar was Senior Advisor to the Company.  From 1978 to 1980, Mr. Dar
was a Senior  Associate with Resource Planning  Associates.  Mr. Dar holds a
Bachelor of Science degree in Engineering  and a Master of Science degree in
Management and Finance from the  Massachusetts  Institute of Technology.
Mr. Dar serves as a director and chairman of the  Compensation  Committee of
HarCor  Energy,  an  independent  oil and gas company traded on The Nasdaq Stock
MarketSM.

      Daniel M. Rouse has been employed as the Company's Chief Financial Officer
and Treasurer since he joined the Company in 1991. From 1987 to 1991,  Mr. Rouse
was employed by Strategic  Solutions,  Inc. as Chief  Financial Officer.  From
1984 to 1987,  Mr. Rouse was a principal at Loeb and Cohen,  P.C.  From 1979 to
1984,  Mr. Rouse was employed by Jarrell Oil Company,  Inc. as Vice  President,
Finance and Controller.  Mr. Rouse holds a Bachelor of Science degree in Finance
and Accounting from York University (Canada).  Mr.  Rouse is a  Certified Public
Accountant.

      Alex M. Steinbergh has been employed by the Company in various  management
positions since 1992 and currently  serves as the Chief Executive  Officer of HB
Capital,  Inc., a wholly-owned  subsidiary of Hagler Bailly, Inc. Mr. Steinbergh
leads the Company's  acquisitions  activities.  Mr. Steinbergh is the co-founder
and currently a general partner of Resource Capital Group, a holding company for
real estate investment  management and development  companies in Cambridge,  MA.
From 1972 to 1980,  Mr.  Steinbergh  was a colleague  of Mr.  Bailly at Resource
Planning  Associates  where  he held  successive  positions  from  Associate  to
Managing  Director.  From  1969 to 1972,  Mr.  Steinbergh  was an  Associate  of
McKinsey & Company.  Mr.  Steinbergh  holds a Master of Business  Administration
degree from Harvard University,  a Masters degree in Economics from Case Western
Reserve University and a Bachelor degree in Economics from Cornell University.

      Alain M. Streicher has been employed by the Company in various  management
positions  since it was founded in 1980.  Since October 1997, Mr.  Streicher has
served as Acting  Chief  Operating  Officer of Hagler  Bailly,  Inc.,  and since
January  1997,  has  served  as the Chief  Executive  Officer  of Hagler  Bailly
Services,  Inc. and leads the Company's energy and  infrastructure  planning and
development  practice.  Mr.  Streicher  has  served  as a member of the Board of
Directors of the Company since May 1995.  From 1976 to 1980,  Mr.  Streicher was
Chief Energy Analyst at the CEREN in Paris.  Mr.  Streicher  holds a Bachelor of
Science degree in Physics and Chemistry from the University of Orleans  (France)
and a Masters degree in Physics from the  University of Grenoble  (France) and a
Masters  degree  in  Industrial  Management  from the  Ecole  des Mines in Paris
(France).

      Stephen V.R.  Whitman has been Vice  President and General  Counsel of the
Company since July 1, 1997.  Mr.  Whitman was in private law practice in his own
firm from May 1993 until July 1997. From 1984 through May 1993 he was associated
with the law firm of Kelley Drye and Warren.  From 1979 to 1984, he was a lawyer
in  the  Office  of  the  General  Counsel  of  the  United  States  Agency  for
International  Development  ("USAID")  and  served as the USAID  Regional  Legal
Advisor in Lima,  Peru.  From 1975 through 1978 Mr. Whitman was associated  with
the law firm of White & Case.  He earned a Bachelor of Arts degree from  Harvard
College and a Juris Doctor degree from the University of Virginia School of Law.

      Michael D. Yokell has been employed by the Company in various  positions
since 1987, and currently leads the Company's economic analysis and litigation
support practice and is a Senior Vice  President of Hagler Bailly  Consulting,
Inc. Mr.  Yokell  served as President of the Company's  predecessor, RCG/Hagler
Bailly,  Inc.,  from 1988 to 1995. Mr. Yokell was the President of Energy and
Resource  Consultants, a corporation  acquired by the Company in 1987. Before
entering  management  consulting,  Mr. Yokell taught Economics at the University
of  California,  Berkeley and  Washington  State  University  and was a Senior
Economist at the United States  Department of Energy.  Mr. Yokell earned Ph.D.
and Masters degrees in Economics from the University of Colorado  and a Bachelor
of Science degree in Physics  from the  Massachusetts Institute  of  Technology.
Mr. Yokell serves on the Board of Directors of the Keystone Energy Center.

      Robert W. Fri has served as a member of the Board of  Directors  of the
Company  since May 1995.  Mr. Fri is currently  director of the National  Museum
of Natural History at the  Smithsonian  Institution,  and Senior Fellow Emeritus
at Resources  for the Future,  where he served as President  from 1986 to 1995.
Mr. Fri is a director of the American  Electric  Power  Company,  a member of
the  University  of Chicago Board of Governors for the Argonne National
Laboratory,  and a trustee of Science  Service,  Inc.,  publisher  of Science
News and  organizer of the Westinghouse  Science Talent Search.  In 1971, Mr.
Fri became the First Deputy  Administrator  of the United States Environmental
Protection  Agency.  In 1975,  President Ford appointed Mr. Fri as the Deputy
Administrator  of the United  States Energy  Research and  Development
Administration.  Mr. Fri served as acting  administrator  of both agencies for
extended  periods.  From  1978 to  1986,  Mr.  Fri  operated  his  own  company,
Energy  Transition Corporation.  Mr. Fri began his career with  McKinsey &
Company,  where he was elected a Principal.  Mr. Fri earned a Bachelor of Arts
degree in Physics from Rice  University  and a Masters  degree in Business
Administration from Harvard University.

      Richard H.  O'Toole is  currently  a Director of ABB Europe  Limited.  Mr.
O'Toole  has  extensive  international   experience  on  trade,  investment  and
regulatory  issues and has also acted as advisor and  consultant to a variety of
public and private  sector  organizations.  A former  diplomat,  Mr. O'Toole has
served in posts in Paris,  Geneva and Brussels.  From 1976 to 1979,  Mr. O'Toole
was  Special  Assistant  in the  Office  of  Executive  Director  of the  OECD's
International  Energy  Agency.  From  1979 to 1982,  Mr.  O'Toole  was  European
Correspondent in the Political  Division of the Irish Foreign  Ministry.  He was
Irish Deputy Permanent  Representative to the United Nations in Geneva from 1983
to 1984.  In 1985,  Mr.  O'Toole was  nominated  Chef de Cabinet in the European
Commission   with   responsibilities   in  the  areas  of  competition   policy,
institutional  issues  and  social  policy.  In 1989 he joined GPA Group plc and
became Managing Director of its GPA Technologies Division.  From 1993 to 1995 he
was appointed Assistant Director General of the General Agreement on Tariffs and
Trade (GATT) where he was a leading member of the Secretariat  team  supervising
the  conclusion of the Uruguay Round of trade  negotiations  and the creation of
the World Trade Organization (WTO) as a successor to the GATT arrangements.  Mr.
O'Toole earned Bachelor and Masters of Science Degrees from University  College,
Galway.

      Fred M.  Schriever  retired in April 1996 from RCG. Mr.  Schriever  was
employed by RCG in various  positions since 1971, most recently as its Chairman
and Chief Executive  Officer.  Prior to joining RCG, Mr. Schriever was a partner
of Booz Allen & Hamilton.  Since 1996,  Mr.  Schriever  has been a consultant to
various  industry  groups.  Mr.  Schriever is a Fellow of both the Institute of
Directors and the  Institute of Management  Consultants  in the United Kingdom,
and a member of the United States Institute of Management Consultants ant the
American Society of Mechanical Engineers and a Certified Management Consultant.
Mr. Schriever earned Bachelor's and Master's degrees from Polytechnic
University.

Section 16(a) Beneficial Ownership Reporting Compliance

      Section  16(a)  of the  Securities  Exchange  Act  of  1934  requires  the
Company's  executive  officers and directors,  and persons who own more than ten
percent  of a  registered  class of the  Company's  equity  securities,  to file
reports of ownership and changes in ownership  with the  Securities and Exchange
Commission  ("SEC").  SEC regulations  require the Company's executive officers,
directors and greater than ten percent  stockholders to furnish the Company with
copies of the reports they are required to file. Based solely on a review of the
copies of such  reports  furnished  to the Company,  the Company  believes  that
during 1997,  its executive  officers,  directors,  and greater than ten percent
beneficial   owners   complied   with  all   applicable   Section  16(a)  filing
requirements,  except  that one report with  respect to each of Messrs.  Bailly,
Fri, O'Toole and Yokell was filed late.

ITEM 11 -- EXECUTIVE COMPENSATION

Executive Compensation Summary Table

      The  following  table sets forth certain  information  with respect to the
annual and long-term  compensation  paid to the  President  and Chief  Executive
Officer and the four other most highly paid executive  officers  during the year
ended December 31, 1997 (the "Named Executive Officers").

                           Summary Compensation Table

<TABLE>
<CAPTION>
                                                                  Annual               Long-Term
                                                               Compensation           Compensation
<S>                                           <C>      <C>           <C>             <C>             <C>
                                                                                                        All Other
                                              -------  ------------  --------------  --------------  ---------------
Name and Principal Position                                                Bonus        Options/        Compensation
                                               Year     Salary ($)           ($)         SARs (#)            ($)
---------------------------------------------
Henri-Claude Bailly                            1997        $375,000        $125,000     172,876           $64,357(1)
President, Chief Executive Officer and         1996         325,000         606,954      51,863           107,126(2)
Chairman of the Board of Hagler Bailly, Inc.

--------------------------------------------- -------- ------------- --------------- --------------- ----------------
Daniel M. Rouse                                1997         175,945          62,500      20,745            26,025(3)
Vice President, Chief Financial Officer and    1996         134,335         110,683        --              13,931(4)
Treasurer of Hagler Bailly, Inc.
--------------------------------------------- -------- ------------- --------------- --------------- ----------------
Vinod K. Dar                                   1997         352,694         140,000        --              13,357(4)
Senior Vice President and Managing Director    1996         308,753              --        --             467,931(5)
of Hagler Bailly Consulting, Inc.
--------------------------------------------- -------- ------------- --------------- --------------- ----------------
Alain M. Streicher                             1997         225,880         115,000        --              14,357(4)
Acting Chief Operating Officer of Hagler       1996         176,357         270,245        --              13,931(4)
Bailly, Inc., Chief Executive Officer and
Managing Director of Hagler Bailly
Services, Inc.
--------------------------------------------- -------- ------------- --------------- --------------- ----------------
Alex M. Steinbergh                             1997         210,543          59,474        --                     --
Chief Executive Officer of HB Capital, Inc.    1996              --              --        --                     --
--------------------------------------------- -------- ------------- --------------- --------------- ----------------
<FN>
(1)      Represents  $50,000 paid pursuant to Mr. Bailly's  employment  agreement and $14,357 in matching  payments
         and profit sharing under the Company's 401(k) Profit Sharing Plan.  See "Employment Arrangements."
(2)      Represents  $93,195 paid pursuant to Mr. Bailly's  employment  agreement and $13,931 in matching  payments
         and profit sharing under the Company's 401(k) Profit Sharing Plan.
(3)      Represents  $11,668  paid for as  compensation  deducted  from  accrued  paid leave  hours and  $14,347 in
         matching payments and profit sharing under the Company's 401(k) Profit Sharing Plan.
(4)      Represents matching payments and profit sharing under the Company's 401(k) Profit Sharing Plan.
(5)      Represents  $454,000 paid to the Hagler Bailly,  Inc.  Deferred  Compensation  Plan Trust for Vinod K. Dar
         and $13,931 in matching payments and profit sharing under the Company's
         401(k) Profit Sharing Plan. In September  1996, the Company adopted the
         Hagler Bailly, Inc. Deferred  Compensation Plan Trust for Vinod K. Dar,
         an  individual  deferred  compensation  plan for Vinod K. Dar, a Senior
         Vice President of Hagler Bailly Consulting, Inc. Pursuant to this plan,
         the Company contributed  $454,000 of Mr. Dar's compensation payable for
         services  performed to a trust created for his benefit.  The trust used
         such deferred  compensation to purchase 345,754 shares of Hagler Bailly
         Common Stock from the Company at a price of $1.31 per share. Subject to
         the  terms of the  trust,  including  upon  Mr.  Dar's  termination  of
         employment or in the event of a change in control, Mr. Dar will receive
         a distribution of 345,745 shares of Hagler Bailly Common Stock from the
         trust.
</FN>
</TABLE>

Stock Option Grants During 1997

      The  following  table  presents  information  with respect to stock option
grants during the year ended December 31, 1997 to the Named Executive Officers.

                      Option/SAR Grants in Last Fiscal Year
<TABLE>
<CAPTION>
                                                                                              Potential Realizable
                                                                                              Value Assumed Annual
                                                                                               Rate of Stock Price
                                                                                                Appreciation for

                                                                                                 Option Term (1)
                                     Individual Grants
                             Number of          % of Total
                                               Options/SARs      -------------  -----------  -----------  ----------
                             Securities
                             Underlying         Granted to         Exercise
                            Option/SARs          Employees
          Name              Granted (#)       in Fiscal Year        or Base     Expiration     5% ($)      10% ($)
<S>                            <C>            <C>                <C>            <C>            <C>         <C>
                                                                 Price ($/Sh)      Date
-------------------------
                                97,509 (2)          14%                  $6.10   01/17/07       $374,070    $947,966
Henri-Claude A. Bailly          75,367 (3)          11%                   6.71   01/17/02        139,719     308,743

-------------------------
Daniel M. Rouse                 20,745               3%                   6.10   01/17/07         79,583     201,679
-------------------------
Vinod K. Dar                            --          --                      --      --                --          --
-------------------------
Alain M. Streicher                      --          --                      --      --                --          --
-------------------------
Alex M. Steinbergh                      --          --                      --      --                --          --
------------------------
<FN>

(1)      The potential  realizable  value is  calculated  based on the five-year
         term for Mr.  Bailly's  option to purchase  75,367  shares,  and on the
         ten-year  term for Mr.  Bailly's  and Mr.  Rouse's  options to purchase
         97,509 and 20,745  shares,  respectively.  It is calculated by assuming
         that the stock price on the date of grant appreciates from the exercise
         price at the indicated annual rate,  compounded annually for the entire
         term of the option.
(2)      Non-qualified  options  granted  pursuant to the Company's Stock Option
         Plan,  with an exercise  price based on Fair Market Value as determined
         by an independent third party appraisal.
(3)      Incentive stock options granted  pursuant to the Company's Stock Option
         Plan,  with an exercise price based on 110% of the Fair Market Value as
         determined by an independent third party appraisal.
</FN>
</TABLE>

Stock Option Exercises and Values in 1997

      The following table sets forth the number of shares covered by exercisable
and unexercisable  options held by the Named Executive  Officers on December 31,
1997 and the  aggregate  gains that would have been  realized had these  options
been exercised on December 31, 1997, even though the options were not exercised,
and the  unexercisable  options  could not have been  exercised  on December 31,
1997. A total of 72,213  stock  options  were  exercised by the Named  Executive
Officers during the fiscal year ended December 31, 1997.




                     Aggregate Option Exercises During 1997
                         and Values on December 31, 1997

<TABLE>
<CAPTION>
                                                          Number of Securities             Value of Unexercised
                                                    --------------------------------- -------------------------------
                                                         Underlying Unexercised        In-the-Money Options/SARs at
                                                         Options/SARs at FY-End                   FY-End
                                                                   (#)                             ($)(1)

----------------------- ------------ -------------- --------------- ----------------- -------------- ----------------
                           Shares
                        Acquired on
                        Exercise (#) --------------
         Name                          Value Realized      Exercisable Unexercisable    Exercisable    Unexercisable
------------------------
<S>                           <C>       <C>                 <C>        <C>             <C>            <C>
                             17,000      $  356,065(2)      234,542         --     $5,234,977         --
Henri-Claude A. Bailly       34,575         174,258(3)         --           --           --           --
                             17,288          85,403(4)         --           --           --           --
                                                              9,795       65,572      154,663   $1,035,382
                                                             24,780       72,729      406,392    1,192,756

Daniel M. Rouse ......         --              --            12,087       20,745      270,024      340,218

Vinod K. Dar

Alain M. Streicher ...        3,350          74,839(5)      117,580         --      2,626,737         --

Alex M. Steinbergh ...         --              --              --           --           --           --

<FN>
(1)     Options  are  in-the-money  if the market  value of the  shares  covered
        thereby is greater than the option exercise  price.  Value is calculated
        based on the fair market  value of the Common Stock at December 31, 1997
        of $22.50 (as reported on The Nasdaq Stock MarketSM),  less the exercise
        price.
(2)     Value is  calculated  based on the fair  market  value of the Common  Stock at  December  22, 1997 (date of
        exercise) of $21.125 (as reported on The Nasdaq Stock MarketSM), less the exercise price.
(3)     (4) Value is  calculated  based on fair market  value of Common Stock at
        January  23,  1997 (date of  exercise),  of $6.10 (as  determined  by an
        independent third party appraisal), less the exercise price.
(5)     Value is  calculated  based on the fair  market  value of the Common  Stock at  December  31, 1997 (date of
        exercise) of $22.50 (as reported on The Nasdaq Stock MarketSM), less the exercise price.
</FN>
</TABLE>

Employment Arrangements

      The Company  entered into an employment  agreement  with Mr. Bailly on May
25, 1995 in connection  with the  management  repurchase of the Company from RCG
and such  agreement  was amended and restated  effective  upon  consummation  of
Hagler Bailly's initial public offering (the "Agreement"). Mr. Bailly will serve
as Chairman of the Board and Chief  Executive  Officer of the Company and Hagler
Bailly Consulting, Inc. (or such other position mutually agreed upon) for a term
of three (3) years  (ending  July 9, 2000) and will  receive for his services an
initial base salary of $375,000 per year,  subject to increase each January 1 by
an amount  that is no less than  greater  of 5.0% over the  annual  rate of base
salary in effect the  preceding  year,  and the increase in the  Consumer  Price
Index for the year.  Mr.  Bailly is entitled to a bonus for each  calendar  year
equal to an amount  determined  by the Executive  Compensation  Committee of the
Board.  Mr.  Bailly is also entitled to receive,  from time to time,  options to
purchase  Hagler  Bailly  Common  Stock  pursuant  to the Stock  Option  Plan as
determined by the Stock Option Committee of the Board. Mr. Bailly is entitled to
participate  in all of the benefit  programs  which are  presently or may in the
future be provided by the Company. In addition, Mr. Bailly is also entitled to a
bonus  equal to the average  bonus  percentage  received  during the term of the
Agreement  multiplied  by his then  current  base  salary if his  employment  is
terminated  without  cause  or  upon  change  in  control  (as  defined  in  the
Agreement).

Director Compensation

      Directors who are not executive  officers of the Company are paid a fee of
$1,000  for  each  Board  meeting  attended  in  person  and all  directors  are
reimbursed for travel  expenses  incurred in connection with attending board and
committee meetings. Directors are not entitled to additional fees for serving on
committees of the Board of Directors.  Messrs.  Schriever, Fri and O'Toole, each
non-employee  directors of the Company,  were granted options to purchase 8,186,
8,186, and 3,000 shares of Common Stock, respectively,  in 1997. Pursuant to the
terms of the Stock Option  Plan,  subsequent  to the  Company's  initial  public
offering,  each director of Hagler  Bailly who is not otherwise  employed by the
Company is granted an option at the time of each annual election of directors to
purchase 3,000 shares of Common Stock.


ITEM 12 -- SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Security Ownership of Certain Beneficial Owners

      Set forth below is the name, address,  stock ownership and voting power of
each person or group of persons  known by the Company to own  beneficially  more
than 5% of the outstanding shares of the Company's Common Stock.
<TABLE>
<CAPTION>
                                  Name and Address                     Amount and Nature of
-----------------  -----------------------------------------------     Beneficial Ownership      -------------------
Title of Class                   of Beneficial Owner                                              Percent of Class
<S>                <C>                                                 <C>                       <C>
Common Stock       FMR Corp. (1)                                              787,500                   8.88
                   82 Devonshire Street, Boston, MA  02109
------------------ ------------------------------------------------ ---------------------------- --------------------
Common Stock       Henri-Claude Bailly (2)                                    824,336                   9.33
                   c/o Hagler Bailly, Inc.
                   1530 Wilson Blvd., Arlington, VA 22209
------------------ ------------------------------------------------ ---------------------------- --------------------
Common Stock       Vinod K. Dar (3)                                           468,631                    5.3
                   c/o Hagler Bailly, Inc.
                   1530 Wilson Blvd., Arlington, VA 22209
------------------ ------------------------------------------------ ---------------------------- --------------------
Common Stock       Alain M. Streicher (4)                                     490,677                   5.55
                   c/o Hagler Bailly, Inc.
                   1530 Wilson Blvd., Arlington, VA 22209
------------------ ------------------------------------------------ ---------------------------- --------------------
Common Stock       Michael D. Yokell (5)                                      615,389                   6.96
                   c/o Hagler Bailly, Inc.
                   1530 Wilson Blvd., Arlington, VA 22209
------------------ ------------------------------------------------ ---------------------------- --------------------
<FN>
(1)      On  February  10,  1998,  FMR  Corp.  filed a  Schedule  13G  with  the
         Securities and Exchange Commission  reporting  beneficial  ownership of
         787,500 shares of the Company's Common Stock.
(2)      Includes  72,500  shares of Common  Stock held  jointly in trust by Mr.
         Bailly and Mr. Streicher on the behalf of Mr. Streicher's children, and
         options to purchase  303,692 shares of the Company's Common Stock which
         are currently  exercisable  or  exercisable  within 60 days of March 2,
         1998.
(3)      Includes 345,754 shares of Common Stock held in the Hagler Bailly, Inc.
         Deferred Compensation Plan Trust for Mr. Dar's benefit.
(4)      Includes  72,500 shares of Common Stock held jointly in trust on behalf
         of Mr.  Streicher's  children.  Inc,  and options to  purchase  117,580
         shares of the Company's Common Stock which are currently or exercisable
         within 60 days of March 2, 1998.
(5)      Includes 29,389 shares of Common Stock held by Mr. Yokell in trust on behalf of his Children.
</FN>
</TABLE>

      The  following  table  sets  forth  certain   information   regarding  the
beneficial ownership of Hagler Bailly Common Stock at March 2, 1998, by (i) each
director and the Named  Executive  Officers and (ii) all executive  officers and
directors as a group.
<TABLE>
<CAPTION>                         Name and Address                     Amount and Nature of
-----------------  -----------------------------------------------     Beneficial Ownership      -------------------
Title of Class                   of Beneficial Owner                                              Percent of Class
<S>                <C>                                                 <C>                        <C>

Common Stock       Henri-Claude Bailly  (1)                                   824,336                   9.29
                   c/o Hagler Bailly, Inc.
                   1530 Wilson Blvd., Arlington, VA 22209
------------------ ------------------------------------------------ ---------------------------- --------------------
Common Stock       Vinod K. Dar  (2)                                          468,631                   5.28
                   c/o Hagler Bailly, Inc.
                   1530 Wilson Blvd., Arlington, VA 22209
------------------ ------------------------------------------------ ---------------------------- --------------------
Common Stock       Robert W. Fri (3)                                          11,642                    0.13
                   c/o Hagler Bailly, Inc.
                   1530 Wilson Blvd., Arlington, VA 22209
------------------ ------------------------------------------------ ---------------------------- --------------------
Common Stock       Richard H. O'Toole (4)                                      3,000                    0.03
                   c/o Hagler Bailly, Inc.
                   1530 Wilson Blvd., Arlington, VA 22209
------------------ ------------------------------------------------ ---------------------------- --------------------
Common Stock       Daniel M. Rouse (5)                                        12,087                    0.14
                   c/o Hagler Bailly, Inc.
                   1530 Wilson Blvd., Arlington, VA 22209
------------------ ------------------------------------------------ ---------------------------- --------------------
Common Stock       Fred M. Schriever (6)                                      24,398                    0.28
                   c/o Hagler Bailly, Inc.
                   1530 Wilson Blvd., Arlington, VA 22209
------------------ ------------------------------------------------ ---------------------------- --------------------
Common Stock       Alex M. Steinbergh                                          7,206                    0.08
                   c/o HB Capital, Inc.
                   77 Franklin Street, Boston, MA 02110
------------------ ------------------------------------------------ ---------------------------- --------------------
Common Stock       Alain M. Streicher (7)                                     490,677                   5.53
                   c/o Hagler Bailly, Inc.
                   1530 Wilson Blvd., Arlington, VA 22209
================== ================================================ ============================ ====================
Common Stock       Michael D. Yokell (8)                                      615,389                   6.96
                   c/o Hagler Bailly, Inc.
                   1530 Wilson Blvd., Arlington, VA 22209
================== ================================================ ============================ ====================
All Directors and Executive Officers as a Group                              2,552,293                  28.78

<FN>

(1)      Includes  72,500 shares of Common Stock held in trust by Mr. Bailly and
         Mr. Streicher on the behalf of Mr. Streicher's children, and options to
         purchase  303,692  shares  of the  Company's  Common  Stock  which  are
         currently exercisable or exercisable within 60 days of March 2, 1998.
(2)      Includes 345,754 shares of Common Stock held in the Hagler Bailly, Inc.
         Deferred Compensation Plan Trust for Mr. Dar's benefit.
(3)      Consists of options to purchase  11,642 shares of the Company's  Common
         Stock which are currently  exercisable or exercisable within 60 days of
         March 2, 1998.
(4)      Consists of options to purchase  3,000 shares of the  Company's  Common
         Stock which are currently  exercisable or exercisable within 60 days of
         March 2, 1998.
(5)      Consists of options to purchase  12,087 shares of the Company's  Common
         Stock which are currently  exercisable or exercisable within 60 days of
         March 2, 1998.
(6)      Excludes 50,000 shares of Common Stock held by Mr. Schriever's  spouse,
         as to which Mr.  Schriever  disclaims  beneficial  ownership.  Includes
         options to purchase  8,186 shares of the  Company's  Common Stock which
         are currently  exercisable  or  exercisable  within 60 days of March 2,
         1998.
(7)      Includes 72,500 shares of Common Stock held jointly in trust on behalf of Mr. Streicher's children.
(8)      Includes 29,389 shares of Common Stock held by Mr. Yokell in trust on behalf of his Children.
</FN>
</TABLE>


ITEM 13 -- CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

      Daniel M.  Rouse,  Vice  President  and  Chief  Financial  Officer  of the
Company,  was indebted to the Company in the amount of  $287,427.14  at December
31, 1997.  This amount  consisted of  $74,496.63  constituting  the  outstanding
balance on a personal loan incurred prior to 1997.  Interest was payable on this
loan at the rate of 8.5 percent. The remainder consisted of $5,315.14 in accrued
interest and  $206,930.51 of bonus advances and charges to Mr. Rouse's  personal
account  made in the course of 1997,  on which no interest was paid during 1997.
The largest  aggregate  amount of Mr.  Rouse's debt  outstanding  to the Company
during 1997 was $287,427.14.  All of Mr. Rouse's  indebtedness was combined into
one loan on  February 2, 1998 with an interest  rate of eight  percent  (8%) per
annum and a five (5) year term.  Mr. Rouse repaid this loan in full on March 25,
1998.

      Alain M.  Streicher,  a director and Senior Vice President of the Company,
was indebted to the Company in the amount of  $103,422.26  on December 31, 1997.
This  amount  consisted  of an  outstanding  balance  of  $21,295.26  on a  loan
established  in 1995 with an  interest  rate of 9 percent  per year and  accrued
interest of $7,109. The remainder of $75,000  constituted an advance on a bonus,
bore no interest and was for an indeterminate term. The largest aggregate amount
of Mr. Streicher's debt to the Company during 1997 was $181,809. The outstanding
amount of Mr. Streicher's indebtedness is currently $100,571.54.

      Michael D. Yokell,  a director and Senior Vice  President of the Company's
wholly-owned  subsidiary,  Hagler Bailly  Consulting,  Inc.,  obtained a loan of
$500,000  from the Company in April 1997.  The loan had an interest rate of 8.45
percent and was repaid in full in June 1997. The largest aggregate amount of Mr.
Yokell's debt to the Company during 1997 was $500,000.



                                     PART IV


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

(a)   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.




<PAGE>


                               HAGLER BAILLY, INC.
                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS


   Report of Independent Accountants.......................................FS-1

   Consolidated Balance Sheets at December 31, 1997
   and 1996................................................................FS-2

   Consolidated Statements of Operations for the years
   ended December 31, 1997, 1996 and 1995..................................FS-3

   Consolidated Statements of Stockholders' Equity
   for the years ended December 31, 1997, 1996 and 1995....................FS-4

   Consolidated Statements of Cash Flows for the years
   ended December 31, 1997, 1996 and 1995..................................FS-5

   Notes to Consolidated Financial Statements..............................FS-6



(b)   During the fourth quarter ended  December 31, 1997,  the Registrant  filed
      the  following  Current  Reports on Form 8-K:  Current  Report on Form 8-K
      dated  December 16, 1997  concerning the  acquisition of Apogee  Research,
      Inc.











<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.

                                         HAGLER BAILLY, INC.


Dated: March 30, 1998                    By: /s/ Henri-Claude Bailly
                                         Henri-Claude Bailly,
                                         Chief Executive Officer, President and
                                         Chairman of the Board

Dated: March 30, 1998                    By: /s/ Daniel M. Rouse
                                         Daniel M. Rouse,
                                         Vice President, Chief Financial Officer
                                         and Treasurer (Principal Financial and
                                         Accounting Officer)

Date:   March 30, 1998                   By: /s/ Vinod K. Dar
                                         Vinod K. Dar,
                                         Director

Dated: March 30, 1998                    By: /s/ Robert W. Fri
                                         Robert W. Fri,
                                         Director

Dated: March 30, 1998                    By: /s/ Richard H. O'Toole
                                         Richard H. O'Toole,
                                         Director

Dated: March 30, 1998                    By: /s/ Fred M. Schriever
                                         Fred M. Schriever,
                                         Director

Dated: March 30, 1998                    By: /s/ Alain M. Streicher
                                         Alain M. Streicher,
                                         Director

Dated: March 30, 1998                    By: /s/ Michael D. Yokell
                                         Michael D. Yokell,
                                         Director



<PAGE>
<TABLE>
<CAPTION>                                  EXHIBIT INDEX

     Exhibit
        No.                                                                             Description
        <S>          <C>

        2            Sale Agreement between RCG International, Inc., and Hagler Bailly Consulting Inc. (1)

        2.1          Agreement  and Plan of Merger by and among Hagler  Bailly,  Inc.,  Hagler  Bailly  Acquisition
                     Corp. 1997-1 and Apogee Research, Inc., dated as of November 18, 1997. (5)

        3.1          Amended and Restated Certificate of Incorporation of the Company (1)

        3.2          By-Laws of the Company (1)

        4            Specimen Stock Certificates (2)

        4.1          Escrow  Agreement  dated  December 1, 1997 by and among Hagler  Bailly,  Inc.,  Hagler  Bailly
                     Acquisition Corp.  1997-1,  Richard R. Mudge as Stockholders'  Representative and State Street
                     Bank and Trust Company, as Escrow Agent. (5)

        4.2          Registration  Rights Agreement dated November 18, 1997 by and between Hagler Bailly,  Inc. and
                     Richard R. Mudge, acting as Stockholders' Representation. (5)

        10.1         Hagler  Bailly,  Inc.  Amended and Restated 1996 Employee  Incentive and  Non-Qualified  Stock
                     Option and Restricted Stock Plan (including forms of option agreements) (1)

        10.2         Form of Non-Compete,  Confidentiality  and Registration  Rights Agreement  between the Company
                     and each stockholder (1)

        10.3         Form of Amended and Restated  Employment  Agreement  between the Company and  Henri-Claude  A.
                     Bailly (2)

        10.4         Lease by and between Wilson Boulevard  Venture and RCG/Hagler  Bailly,  Inc. dated October 25,
                     1991 (1)

        10.5         First  Amendment to Lease by and between  Wilson  Boulevard
                     Venture and  RCG/Hagler  Bailly,  Inc.,  dated February 26,
                     1993 (1)

        10.6         Second  Amendment to Lease by and between Wilson  Boulevard
                     Venture and  RCG/Hagler  Bailly,  Inc.,  dated December 12,
                     1994 (1)

        10.7         Lease by and between  Bresta Futura V.B.V.  and Hagler Bailly  Consulting,  Inc.  dated May 8,
                     1996 (1)

        10.8         Lease by and between L.C.  Fulenwider,  Inc., and RCG/Hagler  Bailly,  Inc. dated December 14,
                     1994 (1)

        10.9         Lease by and between  University of Research Park  Facilities  Corp.  and  RCG/Hagler  Bailly,
                     Inc., dated April 1, 1995 (2)

        10.10        Credit  Agreement  by and between  Hagler  Bailly  Consulting,  Inc. and State Street Bank and
                     Trust Company, dated May 17, 1995 (1)

        10.11        Amendment to Credit Agreement by and between Hagler Bailly  Consulting,  Inc. and State Street
                     Bank and Trust Company, dated as of June 20, 1996 (1)

        10.12        Extension  Agreement by and between Hagler Bailly  Consulting,  Inc. and State Street Bank and
                     Trust Company, dated as of August 1, 1996 (1)

        10.13        Amendment to Credit Agreement by and between Hagler Bailly  Consulting,  Inc. and State Street
                     Bank and Trust Company, dated as of November 12, 1996 (1)

        10.14        Term Note by and between  Hagler  Bailly  Consulting,  Inc.,  and State  Street Bank and Trust
                     Company, dated May 26, 1995 (1)

        10.15        Revolving  Credit Note by and between  Hagler  Bailly  Consulting,  Inc. and State Street Bank
                     and Trust Company, dated May 26, 1995 (3)

        10.16        Amendment to Credit  Agreement by and between Hagler Bailly
                     Consulting,  Inc., and State Street Bank and Trust Company,
                     dated as of June 12, 1997 (3)

        10.17        Credit Agreement by and among Hagler Bailly  Consulting,  Inc.,  Hagler Bailly Services,  Inc.
                     and State Street Bank and Trust Company, dated as of September 30, 1997. (4)

        10.18        Promissory Note by Hagler Bailly  Consulting,  Inc. and Hagler Bailly Services,  Inc. to State
                     Street Bank and Trust Company, dated September 30, 1997. (4)

        10.19        Security  Agreement by and between  Hagler Bailly  Consulting,  Inc. and State Street Bank and
                     Trust Company, dated as of September 30, 1997. (4)

        10.20        Security  Agreement  by and between  Hagler  Bailly  Services,  Inc. and State Street Bank and
                     Trust Company, dated as of September 30, 1997. (4)

        10.21        Guaranties by Hagler  Bailly,  Inc. to State Street Bank and Trust  Company,  dated  September
                     30, 1997. (4)

        10.22        Guaranties by HB Capital,  Inc. to State Street Bank and Trust  Company,  dated  September 30,
                     1997. (4)

        10.23        Subordination  Agreement  and Negative  Pledge/Sale  Agreement by and between  Hagler  Bailly,
                     Inc.  and State  Street  Bank and Trust  Company for Hagler  Bailly  Consulting,  Inc.,  dated
                     September 30, 1997. (4)

        10.24        Subordination  Agreement  and Negative  Pledge/Sale  Agreement by and between  Hagler  Bailly,
                     Inc.  and State  Street  Bank and Trust  Company  for  Hagler  Bailly  Services,  Inc.,  dated
                     September 30, 1997. (4)

        10.25        Guaranty of Monetary  Obligations to Bresta Futura V.B.V. by Hagler Bailly,  Inc.,  dated July
                     23, 1997. (4)

        21           Subsidiaries

        24           Powers of Attorney (included on Signature Pages) (1)

        27           Financial Data Schedule

<FN>
-------------------------------------------------------------------------------------------------------------------

         (1)         Included in Amendment  No.1 to the  Company's  Registration
                     Statement as Form S-1 (No. 333-22207) filed with Securities
                     and Exchange Commission on May 21, 1997.
         (2)         Included in Amendment  No.2 to the  Company's  Registration
                     Statement   Form  S-1  (No.   333-22207)   filed  with  the
                     Securities and Exchange Commission on June 12, 1997.
         (3)         Included in Amendment No. 3 to the  Company's  Registration
                     Statement  on Form  S-1  (No.  333-22207)  filed  with  the
                     Securities and Exchange Commission on July 1, 1997.
         (4)         Included  in the  Company's  Quarterly  Report on Form 10-Q
                     filed with the Securities  and Exchange  Commission for the
                     quarter ended September 30, 1997, on November 14, 1997.
         (5)         Included in the Company's  Current Report on Form 8-K filed
                     with the Securities and Exchange Commission on December 16,
                     1998.
</FN>
</TABLE>




<PAGE>



                         Report of Independent Auditors

Board of Directors and Shareholders
Hagler Bailly, Inc.

We have audited the accompanying  consolidated  balance sheets of Hagler Bailly,
Inc. ("the Company") and  subsidiaries as of December 31, 1996 and 1997, and the
related consolidated  statements of operations,  stockholders'  equity, and cash
flows for each of the three years in the period ended  December 31, 1997.  These
financial  statements are the  responsibility of the Company's  management.  Our
responsibility  is to express an opinion on these financial  statements based on
our audits.

We  conducted  our  audits  in  accordance  with  generally   accepted  auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated  financial statements referred to above present
fairly, in all material respects,  the consolidated financial position of Hagler
Bailly, Inc. and its subsidiaries December 31, 1996 and 1997, and the results of
their  operations and their cash flows for each of the three years in the period
ended  December  31,  1997 in  conformity  with  generally  accepted  accounting
principles.

We previously audited and reported on the December 31, 1996 consolidated balance
sheet and the  related  consolidated  statements  of  operations,  stockholders'
equity,  and cash flows of Hagler  Bailly,  Inc.  and its  subsidiaries  for the
period from May 26, 1995 to December  31, 1995 and the year ended  December  31,
1996, prior to their  restatement for the 1997 pooling of interests as described
in Note 16.  The  contribution  of the  Hagler  Bailly,  Inc.  to total  assets,
revenues,  and net (loss)income  represented 88%, 82%, 81%, and 90%, 91%, 93% of
the respective  restated  totals as of and for the years ended December 31, 1995
and  1996,  respectively.  Financial  statements  of the  other  pooled  Company
included in the 1995 and 1996 restated  consolidated  financial  statements were
audited and reported on separately by other auditors.  We also have audited,  as
to combination only, the accompanying  consolidated balance sheet as of December
31, 1996, and the related consolidated  statements of operations,  shareholders'
equity,  and cash flows for the years ended  December  31, 1995 and 1996,  after
restatement for the 1997 pooling of interests; in our opinion, such consolidated
financial  statements have been properly combined on the basis described in Note
16 to the consolidated financial statements.

March 5, 1998
Vienna, Virginia                                        /s/ Ernst & Young LLP
<PAGE>
                               Hagler Bailly, Inc.
<TABLE>
<CAPTION>
                           Consolidated Balance Sheets
                                                                                         December 31,


                                                                           --------------------------------------
                                                                                  1996               1997
<S>                                                                        <C>                     <C>
                                                                           --------------------------------------
Assets
Current assets:
   Cash and cash equivalents                                                   $  1,685,962        $  3,035,179
   Investments                                                                            -           6,551,446
   Accounts receivable, net                                                      17,479,485          30,429,516
   Note receivable                                                                        -           1,000,000
   Prepaid expenses                                                                 391,053             719,914
   Other current assets                                                             234,490           1,867,444
                                                                           --------------------------------------
Total current assets                                                             19,790,990          43,603,499
Property and equipment, net                                                       2,631,046           2,650,475

Software development costs, net                                                           -           2,463,174


Intangible assets, net                                                            7,661,092           6,925,960
Other assets                                                                        620,973           1,192,620
Deferred income taxes                                                                     -             601,002
                                                                           --------------------------------------
Total assets                                                                    $30,704,101         $57,436,730
                                                                           ======================================

Liabilities and stockholders' equity Current liabilities:
   Bank line of credit                                                         $  2,600,000    $
                                                                                                              -
   Accounts payable and accrued expenses                                          3,193,538           3,809,475
   Accrued compensation and benefits                                              4,262,524           4,638,433
   Billings in excess of cost                                                     2,173,427           1,757,208

   Current portion of long-term debt                                              1,337,466                   -
   Deferred income taxes                                                          1,554,600           1,318,792
   Income taxes payable                                                              44,305           1,407,794
                                                                           --------------------------------------
Total current liabilities                                                        15,165,860          12,931,702
Long-term debt, net of current portion                                            7,329,280                   -
                                                                           --------------------------------------
Total liabilities                                                                22,495,140          12,931,702

Stockholders' equity :
Common stock:

     Class A par value $.01, 20,000,000 shares authorized, 5,357,073 and
       8,412,851 issued and outstanding, at 1996 and 1997                            53,571              84,128

     Additional capital                                                          10,221,674          41,059,053
     Retained (deficit) earnings                                                 (2,066,284)          3,361,847
                                                                           --------------------------------------
Total stockholders' equity                                                        8,208,961          44,505,028
                                                                           --------------------------------------
Total liabilities and stockholders' equity                                      $30,704,101         $57,436,730
                                                                           ======================================

See accompanying notes.
</TABLE>



<PAGE>


                               Hagler Bailly, Inc.
                      Consolidated Statements of Operations

<TABLE>
<CAPTION>

                                                                            Year Ended December 31,
                                                          -----------------------------------------------------------
                                                          -----------------------------------------------------------
                                                                 1995                1996                1997
                                                          -----------------------------------------------------------

<S>                                                             <C>                <C>                   <C>

Revenues:
   Consulting revenues                                          $24,754,824         $45,123,323          $51,411,905
   Subcontractor and other revenues                              11,119,479          22,820,829           33,644,667
                                                          -----------------------------------------------------------
Total revenues                                                   35,874,303          67,944,152           85,056,572
Cost of revenues                                                 29,295,114          54,090,617           64,096,544
                                                          -----------------------------------------------------------
Gross profit                                                      6,579,189          13,853,535           20,960,028
Selling, general and administrative expenses                      3,991,070           9,138,606           12,318,954
Stock and stock option compensation                                       -           6,172,000               79,869
                                                          -----------------------------------------------------------
Income (loss) from operations                                     2,588,119          (1,457,071)           8,561,205
                                                          -----------------------------------------------------------
Other income (expense):
   Interest income                                                   25,374             122,597              903,923
   Interest expense                                                (759,384)         (1,135,192)            (684,572)
                                                          -----------------------------------------------------------
Income (loss) before income tax expense                           1,854,109          (2,469,666)           8,780,556
Income tax expense                                                  869,900             961,319            3,352,425
                                                          -----------------------------------------------------------
Net income (loss)                                               $   984,209        $ (3,430,985)         $ 5,428,131
                                                          ===========================================================
Net income (loss) per share:
   Basic                                                            $  0.33            $  (0.67)              $ 0.78
                                                          ===========================================================
   Diluted                                                           $ 0.28            $  (0.67)              $ 0.70
                                                          ===========================================================
Weighted average shares outstanding:
   Basic                                                          2,971,223            5,119,054           6,976,387
                                                          ===========================================================
   Diluted                                                        3,498,149            5,119,054           7,809,867
                                                          ===========================================================


See accompanying notes.
</TABLE>


<PAGE>


                               Hagler Bailly, Inc.
                 Consolidated Statements of Stockholders' Equity
<TABLE>
<CAPTION>

                                                          Common Stock                                   Retained          Total
                                            -------------------------------------------
                                                       Shares                          Additional        Earnings      Shareholders'

                                            ------------------------------
                                            Class A       Class B        Amount        -------           (Deficit)          Equity
                                                                                       Capital


<S> ......................................<C>             <C>             <C>             <C>             <C>             <C>

   Balance, December 31, 1994 ............   358,774            --      $      3,588    $    218,536    $    499,640   $    721,764
   Issuance of Common at MBO ............. 4,149,040            --            41,490       2,958,510            --        3,000,000
   Less: Notes receivable for Common Stock      --              --              --           (97,447)           --          (97,447)
   Issuance of Common Stock ..............   208,803         103,726           3,125         274,042            --          277,167
   Repurchase of Common Stock ............   (29,344)           --              (293)        (59,165)       (119,148       (178,606)
   Net income ............................      --              --              --              --           984,209        984,209
                                                                                                                            --------
   Balance, December 31, 1995 ............ 4,687,273         103,726          47,910       3,294,476       1,364,701      4,707,087
   Repayment of notes receivable for
      Common Stock .......................      --              --              --            97,447            --           97,447
   Issuance of Common Stock ..............   761,992            --             7,620         869,446            --          877,066
   Repurchase of Common Stock ............  (185,545)           --            (1,855)       (212,070)           --         (213,925)
      Substitution and issuance of
      compensatory stock and options .....    93,353        (103,726)           (104)      6,172,375            --        6,172,271
      (Note10)
   Net loss ..............................      --              --              --              --        (3,430,985)    (3,430,985)
                                                                                                                             -------
   Balance, December 31, 1996 ............ 5,357,073            --            53,571      10,221,674      (2,066,284)     8,208,961
   Issuance of Common Stock (IPO) ........ 2,500,000            --            25,000      30,240,031            --       30,265,031
   Compensatory stock and options ........      --              --              --            79,869            --           79,869
   Issuance of Common Stock (options) ....   484,701            --             4,847         132,879            --          137,726
   Net income ............................      --              --              --              --         5,428,131      5,428,131
   Issuance of Common Stock ..............    71,077            --               710         384,600            --          385,310
                                                                                                                            --------
                                          ============    ============    ============    ============    ============   ===========
   Balance, December 31, 1997 ............ 8,412,851            --      $     84,128    $ 41,059,053    $  3,361,847   $ 44,505,028
                                                                                                                         ===========
      See accompanying notes
</TABLE>


<PAGE>


                               Hagler Bailly, Inc.
                      Consolidated Statements of Cash Flows

<TABLE>
<CAPTION>
                                                                              Years Ended December 31,
                                                             -----------------------------------------------------------
                                                                   1995                1996                1997

                                                             -----------------------------------------------------------
<S>                                                                <C>                <C>                 <C>
Operating activities
Net income (loss)                                                  $  984,209         $(3,430,985)        $5,428,131
Adjustments to reconcile net income (loss) to net cash
   rovideerating activities:
   provided by (used in) operating activities
     Depreciation and amortization                                    816,378           1,354,545          1,892,132
     Provision for possible losses                                    129,484           1,092,713            503,460
     Provision for deferred income taxes                              723,300             816,100           (836,810)
     Stock and stock option compensation                                    -           6,172,000             79,869
     Changes in operating assets and liabilities:
       Accounts receivable                                         (2,280,925)         (3,049,437)       (13,453,491)
       Prepaid expenses                                                 4,828            (126,588)          (328,861)
       Other current assets                                          (138,634)            200,630         (1,632,954)
       Other assets                                                  (220,197)           (341,815)          (571,647)
       Accounts payable and accrued expenses                       (1,544,047)           (704,868)           615,937
       Accrued compensation and benefits                            2,499,276             765,724            375,909
       Income taxes payable                                          (102,641)             15,934          1,363,489
       Billing in excess of cost                                    1,228,756             775,451           (416,219)
                                                             -----------------------------------------------------------
                                                             -----------------------------------------------------------
Net cash provided by (used in) operating activities                 2,099,787           3,539,404         (6,981,055)
                                                             -----------------------------------------------------------
Investing activities
Note receivable                                                             -                   -         (1,000,000)
Purchase of investments                                                     -                   -       (161,850,846)
Sale of investments                                                         -                   -        155,299,400
Purchase of RCG/Hagler Bailly, Inc.

rereceived)
     (net of $1,126,873 cash received)                            (11,802,250)                  -                  -
Expenditures for software development                                       -                   -         (2,512,174)
Acquisition of property and equipment                                (637,042)         (1,131,251)        (1,127,429)
                                                             -----------------------------------------------------------
Net cash used by investing activities                             (12,439,292)         (1,131,251)       (11,191,049)
                                                             -----------------------------------------------------------
Financing activities
Issuance of Common Stock, net                                       3,190,171             877,066         30,788,067
Retirement of Common Stock                                           (178,606)                  -                  -
Repurchase of Common Stock                                                  -            (213,925)                 -
Repayment of notes receivable for Common Stock                              -              97,447                  -
Net borrowing (payments) on bank line of credit                     1,420,328             433,701         (2,600,000)
Proceeds from long-term debt financing                              7,100,000                   -                  -
Principal payments on long-term debt                                 (540,619)         (2,622,298)        (8,666,746)
                                                             -----------------------------------------------------------
Net cash provided by (used in) financing activities                10,991,274          (1,428,009)        19,521,321
                                                             -----------------------------------------------------------
Net increase in cash and cash equivalents                             651,769             980,144          1,349,217
Cash and cash equivalents, beginning of year                           54,049             705,818          1,685,962
                                                             ===========================================================
Cash and cash equivalents, end of year                             $  705,818          $1,685,962         $3,035,179
                                                             ===========================================================
See accompanying notes.
</TABLE>



<PAGE>







                               Hagler Bailly, Inc.
                   Notes to Consolidated Financial Statements
                           December 31, 1996 and 1997


1.   Organization

Hagler Bailly,  Inc.  ("Hagler  Bailly" or the  "Company") is a worldwide
provider of management  consulting  and other  advisory  services to the private
and public  sectors.  The Company  operates in principally one business segment.
The firm is  headquartered  in the Washington,  D.C.  metropolitan  area and has
offices in the United States, Asia, Europe, and Latin America.

Hagler Bailly was  organized  under the laws of the state of Delaware and formed
for the primary  purpose of facilitating  the acquisition of RCG/Hagler  Bailly,
Inc.  ("Predecessor")  by its  management.  The  Predecessor  was a wholly-owned
subsidiary  of RCG  International,  Inc.  ("RCG").  The date of inception of the
Company was May 5, 1995.  The Company had no operations  from May 5, 1995 to May
25,  1995.  Effective  on the close of business on May 25,  1995,  the  Company,
through a  wholly-owned  subsidiary,  acquired  all of the  voting  stock of the
Predecessor and the Company began operations on May 26, 1995.

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
$30.3  million  to  be  used  to  pay  off  all  debt  then  outstanding,   fund
acquisitions, and provide ongoing working capital needs.

On December 1, 1997, the Company acquired all of the outstanding common stock of
Apogee  Research,  Inc.  ("Apogee") (see Note 16). 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.

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.

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 cost 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.

Marketable Securities

Marketable securities are classified as  available-for-sale  and are recorded at
fair market value with unrealized gains and losses, net of taxes,  reported as a
separate component of shareholders' equity, if material.

Realized  gains and losses and  declines in market value judged to be other than
temporary are included in investment income. Interest and dividends are included
in investment income (see Note 3).

Property and Equipment

Property and  equipment  are  recorded at original  cost and  depreciated  using
primarily the straight line method over their estimated useful lives of three to
seven 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.   Subcontractor  and  other  revenue  represents  revenue   principally
generated through the use of subcontractors and independent consultants.

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 standard daily rate contracts is recognized at amounts  represented
by the agreed-upon billing amounts and costs are recognized as incurred.

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.

Earnings Per Share

In 1997,  the Financial  Accounting  Standards  Board issued  Statement No. 128,
"Earnings  per Share".  Statement  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  128
requirements.

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

<TABLE>
<CAPTION>
                                                           1995                1996                 1997
                                                      ---------------- -- ---------------- --- ----------------
<S>                                                         <C>              <C>                   <C>

Numerator:
  Net income (loss)                                          $984,209        $(3,430,985)           $5,428,131
                                                      ================ == ================ === ================

Denominator:
  Denominator for basic earnings per share -
      weighted average shares                               2,971,223           5,119,054            6,976,387
  Effect of dilutive securities:
       Stock options                                          526,926                   -              833,480
                                                      ================ == ================ === ================
  Denominator for diluted earnings per share -
      adjusted weighted average shares and assumed
      conversions                                           3,498,149           5,119,054            7,809,867
                                                      ================ == ================ === ================
</TABLE>

Recent Pronouncements

In June 1997,  the FASB  issued  Statement  No.  130,  "Reporting  Comprehensive
Income" which  established  standards for reporting and display of comprehensive
income and its components (revenues,  expenses,  gains and losses) in a full set
of  general-purpose  financial  statements.  This  statement  requires  that  an
enterprise  classify  items of other  comprehensive  income by their nature in a
financial  statement and display the accumulated  balance of other comprehensive
income separately from retained earnings and additional  paid-in-capital  in the
equity  section of the balance  sheet.  This  statement is effective  for fiscal
years beginning after December 15, 1997. The Company  believes that the adoption
of this statement will not have a material  impact on its financial  position or
results of operations.

In June 1997, the FASB issued Statement No. 131,  "Disclosure  about Segments of
an Enterprise and Related  Information"  which established  standards for public
business  enterprises to report  information about operating  segments in annual
financial   statements  and  requires  those   enterprises  to  report  selected
information  about  operating  segments in interim  financial  reports issued to
shareholders.  It also establishes the standards for related  disclosures  about
products and services,  geographic  areas and major  customers.  This  Statement
requires that a public  business  enterprise  report  financial and  descriptive
information about its reportable operating segments.  The financial  information
is  required  to be  reported  on the  basis  that  it is  used  internally  for
evaluating  segment  performance  and  deciding  how to  allocate  resources  to
segments.  Operating  segments  are  components  of an  enterprise  about  which
separate financial  information is available that is evaluated  regularly by the
chief  operating  decision  maker in deciding how to allocate  resources  and in
assessing performance.  This statement is effective for financial statements for
periods  beginning  after  December  15,  1997.  The Company  believes  that the
adoption  of this  statement  will not have a material  impact on its  financial
position or results of operations.

In October  1997,  the AICPA issued SOP 97-2,  "Software  Revenue  Recognition,"
which  changes  the   requirements   for  revenue   recognition   effective  for
transactions  that the Company will enter into  beginning  January 1, 1998.  The
Company believes that the impact of the adoption of the SOP will not be material
to the 1998 financial statements.

3.   Investments

The composition of investments are as follows:


                                                        December 31, 1997
 Municipal debt security                                     $1,000,569
 Mortgage backed debt security                                5,406,522
 Equity securities                                               51,116
 Cash equivalents                                                93,239
                                                  --------------------------
 Total                                                       $6,551,446
                                                  ==========================

All investment  securities  have  maturities of twelve months or less.  Interest
income for the year ended December 31, 1997 was approximately $347,000.




4.   Accounts Receivable

At December 31, 1996 and 1997, the components of accounts receivable are:

                                                1996                  1997
                                       -----------------------------------------
   Billed amounts                          $13,052,053            $19,724,886
   Unbilled amounts currently billable       5,055,916             11,520,799
   Retention not currently billable            256,306                287,377
   Allowance for possible losses              (884,790)            (1,103,546)
                                       -----------------------------------------
   Total                                   $17,479,485            $30,429,516
                                       =========================================

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

                                               1996                 1997
                                        ----------------------------------------
   Balance at beginning of year             $  358,784               $884,790
   Provision for losses charged to expense   1,092,713                503,460
   Charge-offs, net of recoveries             (566,707)              (284,704)
                                       -----------------------------------------
   Balance at end of year                   $  884,790             $1,103,546
                                       =========================================

All billed and unbilled  receivable  amounts are expected to be collected during
the next fiscal year.  Management has provided an allowance for amounts which it
believes are doubtful as to their ultimate  realization.  Substantially  all the
retention  relates to  contracts  for which a final  invoice is  submitted  upon
completion  of indirect  cost audits and  contract  close-outs;  therefore it is
anticipated that the retention amounts will not all be collected within the next
fiscal year.

5.   Property and Equipment

Components  of  property  and  equipment  at  December  31, 1996 and 1997 are as
follows:

                                                  1996                1997
                                          --------------------------------------
         Office equipment and furniture        $3,864,956          $5,069,237
         Leasehold improvements                   304,397             285,240
                                          --------------------------------------
                                                4,169,353           5,354,477
         Accumulated depreciated
              and amortization                 (1,538,307)         (2,704,002)
                                          ======================================
                                               $2,631,046          $2,650,475
                                          ======================================

Depreciation  expense for the years ended  December 31, 1995,  1996 and 1997 was
$457,000,   $838,000  and  $1,157,000,   respectively.   Costs  of  repairs  and
maintenance of property and equipment are charged to expense as incurred.


6.   Software Development Costs

At December  31,  1997,  the  Company had  recorded  $2,463,174  of  capitalized
software  development  costs net of $49,000  of  accumulated  amortization.  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  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. At December 31, 1997
the Company  believes  there has been no impairment of net  realizable  value of
these recorded amounts.

7.   Management Buy-Out

Effective at the close of business on May 25, 1995, the Company purchased all of
the  outstanding  shares of RCG/Hagler  Bailly,  Inc. from RCG in an acquisition
accounted for as a purchase.  The consolidated  financial statements include the
results  of  operations  from the date of  acquisition.  Under  the terms of the
Management  Buy-Out,  the Company agreed to pay  approximately  $15,587,000  and
assume  certain tax  obligations  of the seller.  Acquisition  related  costs of
approximately  $491,000  were  incurred.  The  purchase  was  funded by  capital
contributions, bank debt, and subordinated debt from RCG.

The  purchase  price was  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 was
recorded as intangible assets,  including goodwill, and are being amortized over
5 to 20 years on a straight-line  basis.  Intangible assets at December 31, 1996
and 1997 are net of  accumulated  amortization  of  $1,017,000  and  $1,753,000,
respectively.  Amortization  expense for the years ended December 31, 1995, 1996
and 1997 was $334,000, $683,000 and $736,000, respectively.

The  Company  periodically  reviews  the value of its net  intangible  assets to
determine if an impairment has occurred.  Based on its review,  the Company does
not believe that an impairment of net intangible assets has occurred at December
31, 1997.

Pro forma unaudited  consolidated  operating results of the Company for the year
ended December 31, 1995 assuming the  acquisition had been made as of January 1,
1995 are summarized below:

     Pro forma revenue                                              $55,749,661
     Pro forma net income                                            $1,089,981
        Pro forma earnings per share:
                      Basic                                               $0.37
                      Diluted                                             $0.31

These pro forma  results have been  prepared for  comparative  purposes only and
include  adjustments  such as  additional  amortization  expenses as a result of
goodwill and other intangible  assets and increased  interest expense related to
debt  used  to  finance  the  Management  Buy-Out.  They  do not  purport  to be
indicative of the results of operations  which  actually would have resulted had
the  combination  occurred  on  January 1,  1995,  or of the  future  results of
operations of the consolidated entities.

8.   Note Receivable

During 1997 the Company entered into a bridge loan agreement for $1,000,000 with
another  company.  The loan is due in six equal  installments  beginning June 1,
1998.  The loan pays  interest at 15% and is secured by all of the assets of the
borrower.  The loan  agreement  allows the  Company  to  purchase  an  ownership
interest of this company as defined in the loan agreement.

9.    Bank Line of Credit

At December 31, 1996 and 1997, the Company had a line of credit arrangement with
a bank which  provides  funds up to $5,750,000  and  $15,000,000,  respectively,
subject to sufficient collateral. The line is secured primarily by the Company's
accounts receivable and contract rights.  Under the terms of the line of credit,
interest is payable  monthly at the bank's  prime  rate.  There is an annual fee
equal to 1/4 of 1% of the unused  portion of the available  line of credit.  The
line of credit  agreement  contains  certain  covenants which among other things
restrict future borrowings and require the Company to maintain certain financial
ratios.  At  December  31, 1996 and 1997 the  Company  had  available  borrowing
capacity of $3,150,000 and $15,000,000, respectively, under the line of credit.


<PAGE>



10.      Long-term Debt
<TABLE>
<CAPTION>

Long-term debt consisted of the following at December 31, 1996:
<S>                                                                                        <C>

Senior term loan from a bank,  in the original  amount of  $7,000,000,  interest
     payable at the bank's prime rate plus 7/8%. Subject to certain limitations,
     the  Company  may fix the  interest  rate on portions or all of the note at
     LIBOR plus 2% for periods  ranging from 30-360 days.  The interest rate was
     7.6% at December  31,  1996.  Principal  is due in  quarterly  installments
     ranging from $250,000 to $384,500,  plus interest over the term of the note
     secured by the assets of the Company.

                                                                                               $3,913,000

Subordinated note payable to RCG in the amount of  $4,650,000;  interest at 9.5%
     payable semiannually; balloon payment
     due May 2001.                                                                              4,650,000

Other notes  and  equipment  loans;   interest  at  rates  approximating   prime;
     maturities through June 30, 1999.
                                                                                                  104,000
                                                                                           ----------------
Total long-term debt                                                                            8,667,000
Less:  current portion                                                                          1,337,000
                                                                                           ================
Long-term debt, net of current portion                                                         $7,330,000
                                                                                           ================
</TABLE>

Cash paid for interest for the years ended December 31, 1995,  1996 and 1997 was
approximately $569,000, $1,134,000 and $850,000, respectively.

The Company used a portion of the proceeds from the Initial  Public  Offering to
pay off all outstanding long term debt of the Company in July 1997.


<PAGE>



11.      Income Taxes

The Company has 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.  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.

Components of income tax expense consisted of the following:

                               For the Year Ended
                                  December 31,
                        ------------------------------------------------------
                                1995               1996               1997
                        ---------------- -- ------------- -- -----------------
Current
  Federal                      $118,000          $115,000          $3,363,000
  State                          29,000            30,000             826,000
                        ---------------- -- ------------- -- -----------------
                                147,000           145,000           4,189,000
Deferred:
  Federal                       578,000           654,000            (671,000)
  State                         145,000           162,000            (166,000)
                        ---------------- -- ------------- -- -----------------
                                723,000           816,000            (837,000)
                        ================ == ============= == =================
Income tax expense             $870,000          $961,000          $3,352,000
                        ================ == ============= == =================

The Company paid income taxes of $249,000,  $40,000, and $2,911,000 during 1995,
1996 and 1997, respectively.


Income tax expense for the years ended December 31, 1995, 1996 and 1997,  varies
from the amount computed using statutory rates as follows:

<TABLE>
<CAPTION>                                                                 For the Year Ended
                                                                              December 31,
                                                         --------------------------------------------------------
                                                               1995                1996                1997
                                                         ----------------- - ----------------- -- ----------------
<S>                                                            <C>                <C>                 <C>

Tax computed at the Federal statutory rate                     $699,000           $(862,000)          $2,749,000
State income taxes, net of Federal income tax benefit
                                                                104,000             142,000              695,000
Non-deductible charge for stock option compensation
                                                                      -           1,661,000               31,000
Other                                                            67,000              20,000             (123,000)
                                                         ================= = ================= == ================
Income tax expense                                             $870,000            $961,000           $3,352,000
                                                         ================= = ================= == ================
</TABLE>

The components of temporary differences are as follows:
<TABLE>
<CAPTION>                                                                December 31,

                                                               -----------------------------------
                                                                    1996               1997
                                                               --------------- -- ----------------
<S>                                                               <C>               <C>

Deferred tax liabilities:
   Accounts receivable                                            $6,015,000         $1,421,000
   Cash to accrual adjustment                                              -            756,000
   Other                                                             179,000            126,000
                                                               --------------- -- ----------------
Total deferred tax liabilities                                     6,194,000          2,303,000
Deferred tax assets:
   Accounts payable and accrued expenses                             967,000                  -
   Accrued compensation and benefits                               1,617,000          1,226,000
   Billings in excess of cost                                        811,000                  -
   Deferred compensation                                             762,000                  -
   Provisions for possible accounts receivable losses
                                                                           -            359,000
   Net operating loss carryforwards                                  482,000                  -
                                                               --------------- -- ----------------
Total deferred tax assets                                          4,639,000          1,585,000
                                                               =============== == ================
Net deferred tax liability                                        $1,555,000         $  718,000

                                                               =============== == ================

</TABLE>

<PAGE>



12.      Stockholders' Equity

The Company was  authorized at inception to issue  6,915,067  shares of $.01 par
value Class A common stock and 2,074,521 shares of $.01 par value Class B common
stock. Pursuant to a stockholders'  agreement, all of the Company's common stock
and  options  had  certain  restrictions  on  ownership  and  are  subject  to a
repurchase provision.  Class B shares were not eligible for dividends and had no
voting privileges.

The Company may grant qualified and non-qualified  stock options to employees to
purchase  common  stock under the Employee  Incentive  and  Non-Qualified  Stock
Option and Restricted Stock Plan (the "Stock Plan"). Prior to December 31, 1996,
the Company's  Stock Plan was a formula  based plan and was  authorized to grant
options to purchase Class A and B shares.  The exercise price of options granted
were based upon the book value per share at May 26, 1995, adjusted for accretion
of formula value during any interim period up to the grant date. Under the Stock
Plan,  options to purchase  Class B shares  granted did not accrue  value to the
option holder until date of exercise. Options to purchase Class A shares accrued
value to the option holder from the date of grant.

Effective  at December  31,  1996,  the Company (a) adopted an  amendment to its
Stock Plan which  changed  the  exercise  price of future  options to be granted
thereunder  to the  fair  value  of the  underlying  Common  Stock;  and  (b) in
connection with a  reclassification  of its Common Stock amended all outstanding
options  to  purchase  971,963  Class B shares  vesting  on  January  1, 1997 to
substitute  0.9 of a Class A  share  for  each  Class  B share  underlying  such
options.  In addition,  a remaining total of 971,963 options to purchase Class B
shares  vesting on  January  1, 1998 were  canceled.  As a result,  the  Company
recorded a  non-recurring,  non-cash charge to operations of $6,172,000 of which
$4,618,000  was for  options to purchase  Common  Stock and  $1,554,000  was for
394,160  shares of Common Stock sold to employees  during  1996.  These  charges
represent  the  aggregate   difference   between  the  exercise  price  of  such
outstanding  options or the  issuance  price of Common  Stock sold to  employees
during  1996,  as the  case  may  be,  and the  appraised  market  value  of the
underlying Common Stock at December 31, 1996.

Options granted after 1996 vest over periods  ranging from  immediately to three
years and are exercisable for five years. Options issued prior to 1996 generally
vest 50% after eighteen months and fully after an additional  year. Once vested,
the options are exercisable for ten years.

Pro forma  information  regarding  net  income  (loss)  and per share  data,  is
required  by SFAS  No.  123,  and 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 5 years.  For all
options issued subsequent to July 9, 1997, in accordance with SFAS 123, the fair
value of options was estimated at the date of grant using a Black-Scholes option
pricing  model  with  the  following  weighted-average   assumptions  for  1997:
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 5 years.

The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded  options which 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.

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:
<TABLE>
<CAPTION>                             Year ended December      Year ended December      Year ended December
                                          31, 1995                 31, 1996                 31, 1997
                                    --------------------- -- --------------------- -- ---------------------
<S>                                           <C>                <C>                      <C>

Net income (loss)                            $984,209            $(3,467,641)             $5,211,151
Earnings (loss) per share:
       Basic                                  $  0.33               $  (0.68)                $  0.75
       Diluted                                $  0.28               $  (0.68)                $  0.67


</TABLE>

<PAGE>


The following summarizes option activity:
<TABLE>
<CAPTION>

                                                                                               Weighted Average

                                                           Class A            Class B           Exercise Price
                                                           Options            Options
                                                       ---------------- -- ---------------    --------------------
<S>                                                         <C>               <C>              <C>

1995
Granted                                                           -           2,074,524                   $0.16
Exercised                                                         -            (103,726)                  $0.16
                                                       ---------------- -- ---------------
Outstanding at December 31, 1995                                  -           1,970,798                   $0.16

1996
Granted                                                      62,236                   -                    1.06
Canceled                                                          -            (971,963)                   0.16
Forfeited                                                         -             (26,872)                   0.16
Substituted                                                 874,707            (971,963)                   0.16
                                                       ---------------- -- ---------------
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
                                                       ================

Exercisable at December 31, 1997                            470,909                                       $1.05
                                                       ================

</TABLE>

The grant date weighted average fair value of options granted in 1995, 1996, and
1997 were $2.12, $0.74, and $1.98, respectively.

At December 31, 1997 the price range of options outstanding are as follows:

<TABLE>
<CAPTION>
                                                                                Weighted         Average Remaining
                                                                                Average           Contractual Life
                                                            Options           Exercise Per
                                                          Outstanding            Share
                                                       ------------------ -- --------------- -- ---------------------
<S>                                                    <C                    <C>                <C>

Less than $1.00                                                420,420              $0.18              7.4
$1.00-$10.00                                                   562,938               6.29              9.0
Over $10.00                                                    131,019              16.73              9.7
                                                       ==================
   Total                                                     1,114,377              $5.21              8.5
                                                       ==================
</TABLE>

 13.      Operating Leases

The Company  leases office space and  equipment  located  throughout  the United
States and worldwide,  all of which are under operating leases which expire over
the next seven years.  Substantially  all office  space  leases  provide for the
Company to pay a pro rate 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  by years of the future  minimum  rental  payments
required  under  the  operating   leases  that  have  an  initial  or  remaining
noncancellable lease term in excess of one year as of December 31, 1997:

     Year ended December 31
                1998                                             $2,929,000
                1999                                              3,294,000
                2000                                              3,156,000
                2001                                              3,092,000
                2002                                                504,000

         Total minimum rental payments                          $12,975,000

Total rental  expense for the years ended  December 31, 1995,  1996 and 1997 was
approximately $1,346,000, $2,214,000 and $2,337,000, respectively


<PAGE>


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").  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. The company's discretionary matching and other
contributions  for 1996 and 1997 were $1,384,000 and  $1,528,000,  respectively.
Rights to benefits provided by the Company's discretionary contributions vest as
follows: 40% after two years, 70% after three years and 100% after four years of
service. Participants are fully vested in their voluntary contributions.

15.      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,  which could result in adjustments of amounts
previously billed.  Management believes that the results of such 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.


<PAGE>


The Company had no open hedge positions at December 31, 1996 and 1997.

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

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, 1996 and 1997,  respectively,  cash of approximately  $1,004,000
and $1,425,000 was located in foreign bank accounts.

Major Customers

At December 31, 1996 and 1997,  included in accounts  receivable  was $6,824,000
and $9,143,000, 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.

The Company  generates  revenues from contracts with  governmental  agencies and
private companies within the United States and worldwide.  During 1995, 1996 and
1997,  the  Company  recognized  approximately,   $12,313,000,  $25,997,000  and
$31,792,000,  respectively,  of its revenue  from the United  States  Agency for
International  Development  ("USAID"),  a U.S.  government  agency,  and a major
public  utility.  Revenues  earned from foreign  customers,  both commercial and
governmental,  were  approximately  $713,000,  $1,314,000 and $6,831,000 for the
years ended December 31, 1995, 1996 and 1997, respectively.


<PAGE>



16.  Pooling of Interests

In November of 1997,  the  shareholders  of the Company and Apogee  approved the
merger of the companies.  Under the terms of the agreement,  Apogee shareholders
received 1.2689 shares of the Company's stock for each Apogee share. The Company
issued  409,985  shares  of its  stock of all of  outstanding  shares  and stock
options of Apogee.  Apogee was founded in 1986, and provides consulting services
to the transportation and the environmental  sectors.  The merger qualified as a
tax-free  reorganization  and  was  accounted  for as a  pooling  of  interests.
Accordingly,  the Company's  financial  statements have been restated to include
the  results  of  Apogee  for all  periods  presented.  As Hagler  Bailly  began
operations on May 26, 1995,  the financial  statements  for all periods prior to
May 26, 1995 will be those of Apogee.

Combined and  separate  results of Hagler  Bailly and Apogee  during the periods
preceding the merger were as follows (in millions):

                              Hagler Bailly         Apogee             Combined
                        -------------------- ---------------- -- ---------------

Year ended December 31, 1995
  Revenues                          29.3               6.6               35.9
  Net income                          .9                .1                1.0
Year ended December 31, 1996
  Revenues                          61.6               6.3               67.9
  Net income (loss)                 (3.6)               .2               (3.4)

The combined  financial  results  presented  above include  adjustments  made to
conform accounting policies of the two companies.

17.  Subsequent Events

On February 23, 1998 the Company  completed the acquisition of TB&A Group,  Inc.
and its  wholly-owned  subsidiary,  Theodore  Barry & Associates  ("TB&A").  The
Company issued  454,994  shares of common stock in connection  with the business
combination.  The business  combination  will be  accounted  for as a pooling of
interests.

Pro forma  combined  operating  results of the Company and TB&A as if the merger
was  consummated  at the date of the  financial  statements  is as  follows  (in
millions, except per share data):




                                1995               1996              1997
                            ------------- ----- ------------ --- -------------

  Revenues                        64.6              74.5               94.9
  Net income (1)                   2.0              (3.3)               8.7
  Net income per share (1):
     Basic                         $.57             $(.58)             $1.15
     Diluted                       $.49             $(.58)             $1.04

(1)   Includes  extraordinary  income,  resulting from the Company's  beneficial
      extinguishments of debt net of income taxes of 1.0 million, .1 million and
      2.0 million in 1995, 1996 and 1997, respectively.

The pro forma combined  financial  results  presented above include  adjustments
made to conform accounting policies of the two companies.