<PAGE>
                                                                    Exhibit 13.1
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
                              1998       1997       1996      1995      1994
================================================================================
                                (In thousands, except per share information)
<S>                         <C>        <C>        <C>       <C>       <C>
RESULTS OF OPERATIONS
Total contract revenues     $521,271   $446,432   $418,388  $354,728  $437,193
Operating income/(loss)       (1,667)     8,020      7,663     5,180    (9,097)
Net income/(loss)             (2,419)     4,953      4,180     2,900    (7,945)
Diluted net income/(loss)
 per share                  $  (0.30)  $   0.60   $   0.50  $   0.35  $  (0.95)
Return on average equity        (4.4)%      9.3%       8.5%      6.3%    (16.3)%

FINANCIAL CONDITION
Total assets                $151,861   $144,425   $126,082  $117,376  $134,794
Working capital             $ 31,855   $ 36,220   $ 27,417  $ 25,186  $ 22,391
Current ratio                   1.36       1.41       1.36      1.36      1.26
Long-term debt              $  3,138   $     --   $     --  $     --  $  3,960
Shareholders' investment      52,862     55,862     50,752    47,631    44,731
Book value per
 outstanding share              6.47       6.79       6.19      5.70      5.35
Year-end closing
 share price                $   9.75   $   9.75   $   6.38  $   5.00  $   3.75

CASH FLOW
Cash provided by/(used
 in) operating activities   $ (1,379)  $  7,803   $  1,167  $ 15,539  $  5,415
Cash used in investing
 activities                  (11,416)    (2,533)    (3,739)   (2,294)   (5,436)
Cash provided by/(used in)
 financing activities          1,935        124     (1,251)   (2,547)   (1,477)
--------------------------------------------------------------------------------
Increase/(decrease)
 in cash                    $(10,860)  $  5,394   $ (3,823) $ 10,698  $ (1,498)

BACKLOG
Funded                      $447,600   $393,200   $332,800  $299,900  $283,300
Total                       $735,300   $648,700   $543,700  $507,800  $468,300

SHARE INFORMATION
Year-end shares
 outstanding                   8,166      8,224      8,197     8,364     8,364
Average diluted shares
 outstanding during year       8,178      8,299      8,383     8,368     8,364
================================================================================
</TABLE>

<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

RESULTS OF OPERATIONS

As  discussed  more fully in Note 2 to the  consolidated  financial  statements,
during the fourth quarter of 1998, the Company  recorded  losses  totaling $10.9
million related to a construction project being performed by Baker Mellon Stuart
Construction, Inc. ("BMSCI") for Universal City Development Partners ("UCDP") at
the  Universal  Studios  theme park in  Orlando,  Florida.  Other  BMSCI-related
charges  totaling $2.8 million were also recorded  during the fourth  quarter of
1998.  Following these charges,  the Company determined during the first quarter
of 1999 that it will no longer  participate in low-bid,  high-risk  construction
projects  for  buildings  or  transportation  infrastructure.  Accordingly,  the
general  construction  activities  of the  Company's  Buildings  unit  have been
restructured,  and its Transportation  Construction (heavy and highway) business
will be sold.  In connection  with this  restructuring,  the Company  recorded a
charge of $0.8 million during the first quarter of 1999.

Total Contract Revenues

Total  contract  revenues  reached a record $521  million in 1998,  up from $446
million in 1997. All of the Company's business units posted revenue improvements
for 1998.  The  Buildings,  Transportation,  Energy and Civil units recorded the
largest  increases  of $25 million,  $22  million,  $14 million and $13 million,
respectively.  In the Buildings unit, the UCDP project accounted for $60 million
of  revenues  (or 11.5% of  revenues  for the  Company)  in 1998 versus only $17
million in 1997.  Nearly equal  revenue  growth in each of the  engineering  and
construction  divisions  contributed to the Transportation  unit's  improvement.
International growth, including that from a new consolidated joint venture which
provides  operations and maintenance  ("O&M") services to BP Amoco in Venezuela,
caused the increase in the Energy unit. The Civil unit's improvement principally
resulted  from  higher  revenues  on new  O&M  contracts  in its  Baker  Support
Services, Inc. ("BSSI") division.

For 1997,  total  contract  revenues  increased  from $418 million in 1996.  The
Transportation, Energy and Civil units recorded the largest revenue increases of
$14 million, $12 million and $9 million,  respectively.  Revenue growth from new
heavy and highway construction work, particularly in Chicago,  accounted for the
Transportation  unit's  improvement,  while the Energy unit's offshore  platform
operations  in the Gulf of  Mexico  fueled  its  growth.  The Civil  unit's  net
increase  again  resulted from higher  revenues on new O&M contracts in its BSSI
division,  despite lower  revenues in its  engineering  division due to the 1997
completion of its significant project in Mexico.
<TABLE>
<CAPTION>
    TOTAL CONTRACT REVENUES - 1998
    <S> <C>              <C>
    A.  Buildings        29%
    B.  Civil            25%
    C.  Energy           13%
    D.  Environmental     5%
    E.  Transportation   28%
</TABLE>

Gross Profit 

Gross profit  decreased to $47.2 million in 1998 from $51.9 million
in 1997. As a percentage of total contract revenues, gross profit declined to 9%
in  1998  compared  to  12%  in  1997.  Both  overall   decreases  are  directly
attributable to the construction project charges totaling $13.7 million recorded
in the  Buildings  unit  during the fourth  quarter  of 1998.  The gross  profit
<PAGE>

percentage  increased  for all of the  Company's  business  units except for the
Civil unit,  which remained  relatively flat, and the Buildings unit. The Energy
and Transportation units registered the most significant overall improvements in
1998. The Energy unit's international growth,  particularly in Venezuela, raised
its gross profit percentage. Both the engineering and construction operations in
the  Transportation  unit contributed to its  improvement,  with the engineering
side providing the greater increase due to higher profitability from several new
projects on which work commenced during 1998. After excluding the aforementioned
1998  construction  losses,  the Buildings unit's gross profit  percentage still
would have been lower for 1998 as the result of its  completion  of certain more
profitable construction projects in late 1997 and early 1998.

For 1997,  gross profit increased from $48.6 million in 1996. As a percentage of
total contact revenues, gross profit remained relatively constant at 12% in both
1997 and 1996.  The gross  profit  percentage  increased  in 1997 for all of the
Company's  business units except the Energy unit.  The Civil and  Transportation
units registered the most significant improvements in 1997. While the Civil unit
raised the gross profit percentages for both its engineering and O&M businesses,
the recovery in the  Transportation  unit was  attributable  to its  unfavorable
performance  on  certain  construction  projects  during  1996.  The  percentage
decrease in the Energy unit resulted  primarily  from lower  margins  associated
with its new work added in 1997.

Selling, General and Administrative Expenses

Selling, general and administrative ("SG&A") expenses increased to $48.9 million
in 1998 from $43.9 million in 1997. The 1998 increase  principally  reflected an
investment  in  technological  support  costs,  entry  into  new  transportation
markets,  additional  support costs  related to the Energy  unit's  consolidated
joint venture in Venezuela,  and higher international marketing costs. Expressed
as a percentage of total contract revenues,  SG&A expenses decreased slightly to
9.4% in 1998 from 9.8% in 1997.

SG&A expenses  increased in 1997 from $40.9  million in 1996.  The 1997 increase
principally  reflected  international  marketing  costs  and the  Energy  unit's
investment in the Venezuela market.  Expressed as a percentage of total contract
revenues, SG&A expenses remained constant at 9.8% in both 1997 and 1996.

Other Income and Expense

Interest income  decreased to $439,000 in 1998 from $552,000 in 1997, due to the
combination  of a lower  daily  average  investment  amount and  slightly  lower
interest rates in 1998.  Other income decreased to $42,000 in 1998 from $811,000
in 1997,  primarily due to 1998 expense related to the minority  interest in the
income of a  consolidated  Energy unit joint venture and 1997 gains  realized on
the sales of certain investments. Interest expense increased to $145,000 in 1998
from  $39,000 in 1997 as the result of financing  the purchase of certain  heavy
and highway construction equipment during the second half of 1998.

Interest income  increased in 1997 from $402,000 in 1996, due to the combination
of a higher daily average  investment  amount and slightly higher interest rates
in 1997. Other income  increased in 1997 from $50,000 in 1996,  primarily due to
gains  realized  on the sales of certain  investments  and equity  income from a
another Energy unit joint venture related to work in the Gulf of Mexico.

Income Taxes 

The  provision  for income taxes  resulted in an effective  tax rate of (82)% in
1998, 47% in 1997, and 48% in 1996. The difference between these percentages and
the 34% statutory U.S. federal rate is attributable primarily to state and
<PAGE>
foreign income taxes and foreign  withholding  taxes. The income tax expense for
1998 results from certain  foreign and state taxes that cannot be offset against
tax  benefits   derived  from  other   jurisdictions,   despite  the   Company's
consolidated  pre-tax loss. The 1996 provision rate was unfavorably  impacted by
higher foreign income taxes paid in that year.

CONTRACT BACKLOG

The Company's funded backlog, which consists of that portion of uncompleted work
represented  by  signed  contracts  and  for  which  the  procuring  agency  has
appropriated  and allocated  the funds to pay for the work,  was $448 million at
December 31, 1998, an increase from $393 million at the end of 1997. The overall
increase in funded backlog is  attributable to new work added and transfers from
unfunded backlog during the year.

Total backlog,  which incrementally  includes that portion of contract value for
which options are still to be exercised (unfunded backlog),  was $735 million at
the end of 1998 versus $649  million at the end of 1997.  With the  exception of
the Civil and Buildings units, each of the Company's business units entered 1999
with higher funded and total backlog than at the end of 1997.

With reference to the Company's  restructuring  announced in April 1999,  funded
backlog related to the businesses that will be continued by the Company was $300
million and $252  million,  and total backlog was $587 million and $508 million,
as of year-end 1998 and 1997, respectively.
<TABLE>
<CAPTION>
    FUNDED BACKLOG - YEAR END 1998
    <S> <C>              <C>
    A.  Buildings         8%
    B.  Civil            15%
    C.  Energy           17%
    D.  Environmental     5%
    E.  Transportation   55%
</TABLE>

LIQUIDITY AND CAPITAL RESOURCES

Net cash used in operating activities was $1.4 million in 1998, compared to cash
provided by  operating  activities  of $7.8  million in 1997 and $1.2 million in
1996.  The decrease for 1998 was  primarily  related to the  Company's  1998 net
loss.  The 1997  improvement  was  mainly  attributed  to a  combination  of the
Company's  higher net income and the  collection of retention  amounts  totaling
$3.0 million on a significant construction project in the Buildings unit.

Net cash used in investing  activities  was $11.4  million in 1998,  compared to
$2.5 million in 1997 and $3.7 million in 1996.  These  amounts  solely  comprise
capital  expenditures  in 1996 and 1997,  but the 1998 amount also includes $0.8
million paid during the fourth  quarter of 1998 relative to the  acquisition  of
GeoResearch, Inc.  The 1998 capital expenditures  totaling $10.6 million include
computer equipment and software purchases totaling $3.9 million as compared with
$1.4 million in 1997.  During 1997 and 1996,  the Company  acquired  most of its
computer  equipment  under  operating  leases,  but converted to the purchase of
computer  equipment for economic  reasons in 1998. An additional $3.5 million of
the 1998  expenditures  is  attributable  to the  purchase  of heavy and highway
construction  equipment needed for new projects added during 1998. These factors
account for the majority of the 1998 increase in capital expenditures.  The 1997
decrease is attributable to higher 1996  expenditures for building  improvements
and office equipment related to the Buildings unit's 1996 relocation from
<PAGE>
Pittsburgh to Coraopolis,  PA, and higher vehicle and equipment purchases during
1996 to meet the requirements of new BSSI O&M projects in the Civil unit.

Net cash  provided by  financing  activities  was $1.9  million in 1998 and $0.1
million in 1997,  compared to cash used in financing  activities of $1.3 million
in  1996.  The  1998  proceeds  from  long-term  debt  related  entirely  to the
aforementioned purchase of heavy and highway construction  equipment,  while the
repayments  of  long-term  debt  correlate  to both  the  financed  construction
equipment  and the 1998  subsidiary  acquisition.  In late 1996,  pursuant to an
announced  stock  repurchase  program,  the Company paid $1.3 million to acquire
207,560  treasury  shares.  In  1998,  the  Company  paid  $0.8  million  for an
additional 96,379 treasury shares under this program.

Working  capital  decreased  to $31.9  million at  December  31, 1998 from $36.2
million at December  31,  1997.  The  Company's  current  ratios were 1.36:1 and
1.41:1 at the end of 1998 and 1997,  respectively.  Both the working capital and
current ratio at year-end 1998 were negatively  impacted by the Buildings unit's
construction-related charges recorded during the fourth quarter of 1998.

In July 1998, the Company  extended the term of its unsecured  credit  agreement
with Mellon Bank,  N.A.  through May 31,  2001.  This  agreement  provides for a
commitment of $25 million,  which covers borrowings and letters of credit. As of
December 31, 1998, no borrowings were  outstanding;  however,  letters of credit
totaling $1.8 million were outstanding under the agreement.  Management believes
that the credit  agreement  will be adequate to meet its borrowing and letter of
credit requirements for at least the next year.

The  Company is  required  to  provide  bid and  performance  bonding on certain
construction  contracts,  and has a $500 million bonding line available  through
Travelers  Casualty & Surety Company of America.  Based on the Company's plan of
restructuring announced in April 1999, management believes that its bonding line
will be sufficient to meet its bid and  performance  needs for at least the next
year.

Short- and long-term  liquidity is dependent upon appropriations of public funds
for infrastructure and other government-funded projects, capital spending levels
in the private sector,  and the demand for the Company's services in the oil and
gas  markets.  Additional  external  factors such as price  fluctuations  in the
energy  industry  could  affect  the  Company.  The new  federal  transportation
legislation  (TEA-21)  will  provide  a  significant  increase  in  funding  for
transportation  infrastructure  projects  in 1999  and  beyond.  At  this  time,
management  believes that its funds  generated from  operations and its existing
credit facility will be sufficient to meet its operating and capital expenditure
requirements for at least the next year.

YEAR 2000 COMPLIANCE

The Company has completed an assessment of its information  systems  relative to
the arrival of the 21st century.  For internal  systems,  the Company  generally
utilizes  modern  technologies  supplied and  supported by leading  hardware and
software providers suited to Baker's areas of business.  Year 2000 compliance is
primarily  being  achieved  through the normal and  recurring  process of system
upgrades,  the software  costs of which are covered  under  related  maintenance
agreements.
<PAGE>

Vendors have asserted that the financial and project  management systems for the
Company's engineering and construction businesses,  its BSSI subsidiary, and one
of two such systems in the Energy unit are Year 2000 compliant. The other Energy
unit system is currently being assessed and scheduled to be compliant by the end
of the  third  quarter  of 1999.  Over 90% of the  Company  is served by a human
resources  system  which  the  vendor  has  stated  to be Year  2000  compliant.
Validation  testing of the Company's  financial,  project  management  and human
resources  systems  is  expected  to be  completed  during  the second and third
quarters of 1999.

The Company's  interrelated systems (e.g., e-mail, file sharing) are linked by a
network of servers.  Upgrades  to  compliant  versions  are already in place for
approximately  95% of the network.  The  remaining  servers are  scheduled to be
upgraded to compliant  versions or merged with existing compliant servers during
the second  quarter of 1999.  The Company is in the process of evaluating  other
less  critical  operational  support  systems  being used in all business  units
(e.g., mapping, CADD, cost estimating, databases,  spreadsheets, and specialized
and customized  software) to identify any remaining  issues for resolution.  Any
related issues are scheduled for resolution during the second and third quarters
of 1999. Normal end-user computing needs were addressed with BIOS testing of all
personal  computers and a review of the operating systems and software packages.
Patches and upgrade  needs have been  identified  and are being  applied  with a
scheduled completion date during the third quarter of 1999.

The Company is a service-based organization and, as such, has little reliance on
embedded technology (e.g., microcontrollers) for its key business processes. The
relevance of embedded  technology is limited to such items as  elevators,  HVAC,
security,  etc.,  which  are  components  of the  Company's  leased  facilities.
Embedded technology is also integral to some client facilities which the Company
operates and maintains  under customer  contracts.  Responsibility  for the Year
2000 compliance of such facilities rests with the customers.

To assess the Year 2000 compliance of significant third parties, the Company has
initiated a survey process to gather and evaluate  information  from significant
business  customers,  vendors  and  subcontractors.  Mailing  of the  survey was
completed  during the first  quarter of 1999.  The  majority  of  responses  are
expected to be received  by the end of the second  quarter of 1999.  The Company
will continue to evaluate the readiness of its key suppliers and customers  with
follow-up  requests  to  non-respondents   and  respondents  that  are  not  yet
compliant; such requests will continue through the end of 1999.

Management  currently  believes that its "most reasonably likely worst case Year
2000  scenario"  poses the  potential  for payment  delays from some  customers,
including  agencies  of the  U.S.  federal  government,  due to  their  lack  of
readiness for the new century.  A formal  assessment of the potential  impact of
this scenario has not yet been evaluated and is dependent upon the completion of
the aforementioned customer survey process.

Based on the customer survey results, the Company will also enhance its existing
disaster  recovery plans to include  assessments of potential Year 2000 impacts.
These  contingency  plans will address both internal  factors  related to staff,
computer  systems  and  facilities,  as  well as  external  factors  related  to
suppliers,  customers  and service  providers.  The Company  expects to have all
necessary contingency plans in place by the end of 1999.

Based upon information currently available, management does not believe that the
estimated  incremental  costs  associated  with  Year  2000  compliance  will be
material  to the  Company's  consolidated  results of  operations  or  financial
position.
<PAGE>

<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF INCOME

                                             For the years ended December 31,
                                               1998       1997         1996
================================================================================
                                        (In thousands, except per share amounts)
--------------------------------------------------------------------------------
<S>                                            <C>        <C>          <C>
Total contract revenues                        $521,271   $446,432     $418,388

Cost of work performed                          474,027    394,527      369,826
--------------------------------------------------------------------------------
        Gross profit                             47,244     51,905       48,562

Selling, general and administrative expenses     48,911     43,885       40,899
--------------------------------------------------------------------------------
        Income/(loss) from operation             (1,667)     8,020        7,663

Other income/(expense):
      Interest income                               439        552          402
      Interest expense                             (145)       (39)         (76)
      Other, net                                     42        811           50
--------------------------------------------------------------------------------

        Income/(loss) before income              (1,331)     9,344        8,039

Provision for income taxes                        1,088      4,391        3,859
--------------------------------------------------------------------------------
        Net income/(loss)                      $ (2,419)  $  4,953     $  4,180
================================================================================


        Basic and diluted net 
           income/(loss) per share             $  (0.30)  $   0.60     $   0.50
================================================================================
<FN>
The accompanying notes are an integral part of this statement.
</FN>
</TABLE>


<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEET
                                                 As of December 31,
                                                 1998         1997
================================================================================
                                                 (In thousands)
Assets
--------------------------------------------------------------------------------
<S>                                           <C>          <C>
Current Assets
   Cash                                       $   5,014    $  15,874
   Receivables                                   82,672       81,632
   Cost of contracts in progress and
    estimated earnings, less billings            22,407       21,478
   Prepaid expenses and other                    10,192        5,799
--------------------------------------------------------------------------------
     Total current assets                       120,285      124,783
--------------------------------------------------------------------------------
Property, plant and equipment, net               17,458       10,985
--------------------------------------------------------------------------------
Other Assets
   Goodwill and other intangible assets, net      7,507        6,521
   Other assets                                   6,611        2,136
--------------------------------------------------------------------------------
     Total other assets                          14,118        8,657
--------------------------------------------------------------------------------
     TOTAL ASSETS                             $ 151,861    $ 144,425
================================================================================

Liabilities and Shareholders' Investment
--------------------------------------------------------------------------------
Current Liabilities
   Accounts payable                           $  43,356    $  45,868
   Accrued employee compensation                  9,141        9,987
   Accrued insurance                              6,155        4,905
   Other accrued expenses                        20,210       14,800
   Excess of billings on contracts in
    progress over cost and estimated earnings     9,568       13,003
--------------------------------------------------------------------------------
     Total current liabilities                   88,430       88,563
--------------------------------------------------------------------------------
Other Liabilities
    Notes payable                                 3,138           --
    Other                                         7,431           --
--------------------------------------------------------------------------------
     Total liabilities                           98,999       88,563
================================================================================

Shareholders' Investment
   Common Stock, par value $1, authorized
    44,000,000 shares, issued 7,150,179 and
    7,086,623 shares, in 1998 and 1997,
    respectively                                  7,150        7,087
   Series B Common Stock, par value $1,
    authorized 6,000,000 shares, issued
    1,319,114 and 1,343,983 shares, in 1998
    and 1997, respectively                        1,319        1,343
   Additional paid-in capital                    37,002       36,822
   Retained earnings                              9,447       11,866
   Less 303,359 and 206,980 shares of
    Common Stock in treasury, at cost, in
    1998 and 1997, respectively                  (2,056)      (1,256)
--------------------------------------------------------------------------------
    Total shareholders' investment               52,862       55,862
--------------------------------------------------------------------------------
    TOTAL LIABILITIES AND SHAREHOLDERS'
     INVESTMENT                               $ 151,861    $ 144,425
================================================================================
<FN>
The accompanying notes are an integral part of this statement.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF CASH FLOWS
                                              For the years ended December 31,
                                                1998        1997        1996
================================================================================
                                                     (In thousands)
<S>                                          <C>         <C>         <C>
Cash Flows from Operating Activities
Net income/(loss)                            $ (2,419)   $  4,953    $  4,180
Adjustments to reconcile net income/(loss)
 to net cash provided by/(used in)
 operating activities:
  Depreciation and amortization                 5,049       4,483       4,851
  Deferred income taxes                          (695)      1,827       2,629
  Changes in assets and liabilities, 
   net of acquisition:
     Increase in receivables
      and contracts in progress                (8,276)    (13,514)    (14,275)
     Increase in accounts payable
      and accrued expenses                      9,216       9,534       6,787
     (Increase)/decrease in other
      net assets                               (4,254)        520      (3,005)
--------------------------------------------------------------------------------
      Total adjustments                         1,040       2,850      (3,013)
--------------------------------------------------------------------------------
       Net cash provided by/(used
        in) operating activities               (1,379)      7,803       1,167
--------------------------------------------------------------------------------
Cash Flows from Investing Activities
  Additions to property, plant and
   equipment                                  (10,573)     (2,533)     (3,739)
  Investment in GeoResearch, Inc.                (843)         --          --
--------------------------------------------------------------------------------
       Net cash used in investing
        activities                            (11,416)     (2,533)     (3,739)
--------------------------------------------------------------------------------
Cash Flows from Financing Activities
  Proceeds from long-term debt                  3,516          --          --
  Repayments of long-term debt                   (964)         --         (12)
  Proceeds from exercise of stock
   options                                        183         124          21
  Payments to acquire treasury stock             (800)         --      (1,260)
--------------------------------------------------------------------------------
       Net cash provided by/(used in)
        financing activities                    1,935         124      (1,251)
--------------------------------------------------------------------------------
Net increase/(decrease) in cash               (10,860)      5,394      (3,823)
Cash at beginning of year                      15,874      10,480      14,303
--------------------------------------------------------------------------------
Cash at end of year                          $  5,014    $ 15,874    $ 10,480
================================================================================
Supplemental Disclosure of Cash Flow Data
    Interest paid                            $    165    $     50    $     73
    Income taxes paid                        $  2,588    $  2,039    $    950
================================================================================
<FN>
The accompanying notes are an integral part of this statement.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF SHAREHOLDERS' INVESTMENT
--------------------------------------------------------------------------------
                                   Series B
                         Common    Common
                         Stock     Stock        Treasury     Additional
                         Par       Par       --------------   Paid-in   Retained
(In Thousands)           Value $1  Value $1  Shares  Amount   Capital   Earnings
================================================================================
<S>                      <C>       <C>        <C>   <C>       <C>       <C>
Balance, Dec. 31, 1995   $7,012    $1,352      --   $    --   $36,534   $ 2,733
    Net income               --        --      --        --        --     4,180
    Series B Common
     Stock conversions
     to Common Stock          3        (3)     --        --        --        --
    Stock issued for
     Maguire acquisition     33        --      --        --       129        --
    Restricted stock
     issued                   4        --      --        --        14        --
    Treasury stock
     purchases               --        --     208     1,260        --        --
    Stock options
     exercised                4        --      --        --        17        --
--------------------------------------------------------------------------------
Balance, Dec. 31, 1996    7,056     1,349     208     1,260    36,694     6,913
    Net income               --        --      --        --        --     4,953
    Series B Common
     Stock conversions
     to Common Stock          6        (6)     --        --        --        --
    Restricted stock
     issued                   3        --      --        --        21        --
    Issuance of
     Treasury stock          --        --      (1)       (4)        2        --
    Stock options
     exercised               22        --      --        --       102        --
    Other                    --        --      --        --         3        --
--------------------------------------------------------------------------------
Balance, Dec. 31, 1997    7,087     1,343     207     1,256    36,822    11,866
Net income                   --        --      --        --        --    (2,419)
    Series B Common
     Stock conversions
     to Common Stock         24       (24)     --        --        --        --
    Restricted stock
     issued                   4        --      --        --        32        --
    Treasury stock
     purchases               --        --      96       800        --        --
    Stock options
     exercised               35        --      --        --       148        --
--------------------------------------------------------------------------------
Balance, Dec. 31, 1998   $7,150    $1,319     303    $2,056   $37,002   $ 9,447
================================================================================
<FN>
The accompanying notes are an integral part of this statement.
</FN>
</TABLE>
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation
The consolidated  financial  statements  include the accounts of the Company and
its  subsidiaries,  and joint  ventures  over which it  maintains  control.  All
intercompany accounts and transactions have been eliminated in consolidation.

Accounting  for  Contracts  
Total  contract  revenues  have been  recorded  on the  percentage-of-completion
method of accounting for the majority of engineering and construction  contracts
in the  Buildings,  Civil,  Environmental  and  Transportation  units.  Contract
revenues attributable to claims and unapproved change orders are recognized when
realization is probable and the amounts can be reliably  estimated.  Earnings on
fixed-price  contracts are determined by multiplying  the total  estimated gross
profit for the contracts by the percentage of physical completion to date (which
approximates costs incurred to date in relation to total estimated costs),  less
earnings  recognized  in  prior  periods.   Earnings  under  cost  reimbursement
contracts  are  principally  recorded as costs are  incurred.  In the event that
legal  costs are  expected  to be  incurred in  connection  with  defending  the
Company's  position related to claims or litigation on projects,  such costs are
accrued  at the  time  they  are  probable  of  being  incurred  and  reasonably
estimable.  As work is performed  under  long-term  contracts,  estimates of the
costs are reviewed and, when  necessary,  revised on a current  basis.  Contract
costs  include  costs of  subcontracts,  direct  labor,  supplies and  overhead.
Estimated losses on contracts in progress, if significant,  are recorded as they
are identified.

Total contract revenues for the operations and maintenance  contracts within the
Civil  and  Energy  units are  primarily  recognized  as  related  services  are
provided.  The Civil unit's  government  contracts are typically  binding on the
Company  for a  multi-year  period  and  are  renewable  at  the  option  of the
respective  government  agency.  Modifications  to contract terms that result in
retroactive  adjustments to contract revenues are recognized when realization is
probable.

Accounting for Joint Ventures
In the accompanying Consolidated Balance Sheet, the Company records its interest
in all  majority-owned,  project-specific  joint  ventures  based on the  equity
method of  accounting  for  investments.  The Company's  proportionate  share of
majority-owned,  project-specific joint venture revenue and cost of contracts is
included in the  accompanying  Consolidated  Statement of Income.  The Company's
investment in these joint ventures,  for which the related projects are expected
to be completed  within one year, is included within other current assets in the
accompanying Consolidated Balance Sheet.

Use of Estimates
The preparation of financial  statements in conformity  with generally  accepted
accounting principles requires management to make estimates and assumptions that
affect the reported  amounts of assets and  liabilities  and the  disclosure  of
contingent  assets and  liabilities as of the date of the financial  statements,
and the reported  amounts of revenues and  expenses  for the  reporting  period.
Actual  results  could differ from those which result from using the  estimates.
The use of  estimates is an integral  part of applying  percentage-of-completion
accounting for contracts.

Cash and Cash  Equivalents 
Cash and cash  equivalents  include  cash on hand or  deposit  and other  highly
liquid  instruments  with original  maturities of three months or less.  Any net
outstanding  checks within banking  institutions  are  reclassified  as accounts
payable; such amount totaled $9,141,000 at December 31, 1998.
<PAGE>
Depreciation and Amortization  
Depreciation  on property,  plant and equipment is recorded using  straight-line
and  accelerated  methods over the estimated  useful lives of the assets,  which
range  from  3 to 31  years.  Amortization  of  intangible  assets  is  provided
primarily  on a  straight-line  basis  over the  estimated  useful  lives of the
assets,  which range from 5 to 10 years.  Upon disposal of property  items,  the
asset and related accumulated  depreciation accounts are relieved of the amounts
recorded  therein for such items and any resulting  gain or loss is reflected in
income.

Goodwill
Goodwill,  which  represents  the  excess  of cost over net  assets of  acquired
companies, is being amortized on a straight-line basis over periods ranging from
10 to 30 years.

Earnings Per Common Share
Basic and diluted  net income per share  computations  are based upon  8,178,067
weighted  average  shares  outstanding  for  1998.  Basic net  income  per share
computations are based upon weighted  averages of 8,207,786 and 8,372,034 shares
outstanding  for the years 1997 and 1996,  respectively.  Diluted net income per
share  computations are based upon weighted  averages of 8,299,083 and 8,382,592
shares outstanding for the years 1997 and 1996, respectively.

Reclassifications
Certain 1997 and 1996  financial  statement  amounts have been  reclassified  to
conform with 1998 classifications.

2. CONSTRUCTION CHARGES AND RESTRUCTURING

During the fourth  quarter of 1998, the Company  recorded  losses related to the
CityWalk   construction   project   being   performed  by  Baker  Mellon  Stuart
Construction,  Inc.  ("BMSCI"),  a wholly-owned  subsidiary of the Company,  for
Universal City Development Partners ("UCDP") at the Universal Studios theme park
in Orlando, Florida. This project involved the construction of a new entrance to
the park, which comprises a shopping area, restaurants and a large cineplex, and
represented BMSCI's largest active construction contract during 1998. Under this
contract,  BMSCI acted as the construction  manager and self-performed a portion
of the work.

Following its inception in May 1997,  the project  suffered  delays  because its
design and related  drawings  were  changed  substantially  during the course of
construction.  On March 5, 1999, BMSCI was terminated by UCDP from this project,
which was over 90%  completed.  UCDP alleges  contract  breaches  related to the
quality of work,  contract  administration  and delays in project completion and
seeks damages,  including  consequential damages related to project delays. Both
parties filed  lawsuits in this matter  during the first quarter of 1999.  BMSCI
alleges  unfair and deceptive  trade  practices,  breach of implied  warranty of
plans and specifications,  breach of contract,  wrongful  termination,  tortious
interference with business relationships, and breach of implied contract of good
faith and fair dealing,  and seeks damages,  interest,  court costs, and further
relief.  Certain  subcontractors  have also sued BMSCI and its  surety,  seeking
reimbursement  for costs  incurred and related  damages.  Additional  claims and
litigation may be filed in connection with this matter.

The losses recorded by the Company related to this project in the fourth quarter
of 1998 totaled $10.9  million,  and reflect costs incurred in excess of amounts
provided  for in the  contract,  estimated  legal costs to defend the  Company's
position,  the reversal of the  cumulative  gross profit  totaling  $1.1 million
recorded  through the third quarter of 1998,  and certain other costs related to
the termination.  Through  December 31, 1998, the Company has recorded  adjusted
revenues  totaling $76.9 million ($60.2 million during 1998),  and had been paid
$67.0 million, in connection with this contract.
<PAGE>
As of March 5, 1999, the Company is aware of  subcontractors'  allegations,  for
amounts in excess of $12 million,  representing  work  performed  for which they
have not been paid. Management and its counsel believe that under the provisions
of BMSCI's agreements with it subcontractors, it is not probable that BMSCI will
be  required to make  payments  for such work to the  subcontractors  unless and
until BMSCI is paid by UCDP. The Company is also aware of material  asserted and
unasserted claims by the  subcontractors.  In addition to the defenses described
below, the Company's  experience  indicates that  subcontractor  claims of these
types  are often  proven to be  significantly  in excess of  amounts  ultimately
recoverable.

BMSCI and its counsel  believe it has valid  claims  against  UCDP and  defenses
against claims by both UCDP and the subcontractors,  and BMSCI intends to defend
its  position  vigorously.  No amounts  have been  accrued at December 31, 1998,
associated  with the ultimate  resolution  of this matter in excess of the items
discussed  above,  since  management and its counsel believe any such additional
costs are neither probable of payment nor reasonably estimable at this time.

The Company expects this matter to be resolved  through a trial over a number of
years. It is reasonably  possible that BMSCI may recover all or a portion of the
amounts  expensed  to date  on  this  project.  However,  it is also  reasonably
possible that there may be an  unfavorable  resolution  with respect to the UCDP
litigation  or  the   subcontractor   allegations  and  claims;  an  unfavorable
resolution with respect to either matter, or both, could have a material adverse
effect on the Company's consolidated  financial position,  results of operations
and cash flows in a future period.

Other charges totaling $2.8 million were also recorded during the fourth quarter
of 1998 related to the settlement of construction-related litigation and charges
on other completed construction projects.

In connection  with the foregoing,  the Company has  determined  that it will no
longer participate in low-bid,  high-risk construction projects for buildings or
transportation infrastructure.  Accordingly, the general construction activities
of the  Company's  Buildings  unit have  been  restructured,  and the  Company's
Transportation  Construction (heavy and highway) business will be sold. Existing
low-bid, high-risk construction projects in the Buildings unit will be completed
or sold.  Management  initiated  activities related to the sale of the heavy and
highway  business  during the second  quarter of 1999. In  connection  with this
restructuring,  the Company  recorded a charge of $0.8 million  during the first
quarter of 1999.

3. CONTRACTS

The  total  cost of  contracts  in  progress  (used  to  determine  cost of work
performed)  plus  accumulated  gross  profit  recorded  was  $1,007,668,000  and
$858,705,000  at December 31, 1998 and 1997,  respectively.  Billings to date on
contracts  in  progress  at December  31,  1998 and 1997 were  $994,829,000  and
$850,231,000, respectively.

Trade accounts  receivable  totaling  $9,097,000 and $12,088,000 at December 31,
1998 and 1997,  respectively,  relate to retainage  provisions  under  long-term
contracts  which  will  be due  upon  completion  of  the  contracts.  Based  on
management's  estimates,  substantially all of the retention balance at December
31, 1998 is expected to be collected in 1999.

As of  December  31, 1998 and 1997,  accounts  payable  included  amounts due to
subcontractors  of  $4,623,000  and  $8,888,000,  respectively,  which have been
retained  under  contractual  terms pending the completion and acceptance of the
work performed by the subcontractors.

Certain  subsidiaries  of the Company  participate  in joint  ventures  that are
typically  formed to  accomplish  a specific  project  and then  dissolved  upon
completion  of the  project.  The number of joint  ventures in which the Company
<PAGE>
participates  and the size,  scope and  duration of the  projects  vary  between
periods.  The Company's equity investment in these joint ventures was $2,028,000
and $1,737,000 at December 31, 1998 and 1997, respectively.

Consistent with industry practice, within each of the Company's operating units,
credit is granted to customers  for the payment of services  rendered.  Although
the  Company  has a  diversified  client  base,  a  substantial  portion  of its
receivables and net  underbillings  reflected in the  accompanying  Consolidated
Balance   Sheet  is   dependent   upon  U.S.   federal   and  state   government
appropriations.

Internationally,  the  Company  conducts  business  in certain  countries  where
unstable  governments subject the Company's related trade receivables,  due from
subsidiaries of major oil companies,  to unique  collection  delays.  Based upon
past experience with these clients,  management  believes that these receivables
will be fully collectible.

4. BUSINESS SEGMENT INFORMATION

In 1998, the Company  adopted  Statement of Financial  Accounting  Standards No.
("SFAS")  131,   "Disclosures  about  Segments  of  an  Enterprise  and  Related
Information." SFAS 131 supersedes SFAS 14, "Financial  Reporting for Segments of
a Business  Enterprise,"  replacing  the  "industry  segment"  approach with the
"management"   approach.   The  management   approach  designates  the  internal
organization  that is used by  management  for making  operating  decisions  and
assessing  performance as the source of the Company's reportable segments.  SFAS
131 also requires disclosures about products and services, geographic areas, and
major  customers.  The adoption of SFAS 131 did not affect results of operations
or financial  position but did affect the disclosure of the segment  information
which follows.

The  Company  has five  operating  business  units.  The  Buildings,  Energy and
Environmental  units each  represent  reportable  segments  under SFAS 131.  The
Transportation   and  Civil  units  each  comprise  two   reportable   segments.
Accordingly, the Company has the following seven reportable segments:

o    The  Buildings  unit  has  historically  provided  a  variety  of  services
     including  design-build,   construction   management,   planning,   program
     management,   general  contracting,   architectural  and  interior  design,
     construction inspection and constructability reviews.

o    The Civil unit  includes two  reportable  segments.  The  Civil-Engineering
     segment  provides  surveying,   mapping,  geographic  information  systems,
     planning, design, construction management and total program management. The
     Civil-Baker Support Services,  Inc. ("BSSI") segment  principally  provides
     operations and maintenance services on U.S. military bases.

o    The Energy unit provides training,  personnel  recruitment,  pre-operations
     engineering,   field  operations  and  maintenance,   mechanical  equipment
     maintenance  and  logistics   management   services  for  operating  energy
     production facilities.

o    The Environmental  unit provides  environmental,  health and safety related
     engineering and consulting services in both the public and private markets.

o    The   Transportation   unit   includes   two   reportable   segments.   The
     Transportation-Engineering  segment provides planning, design, construction
     management and inspection  and management  consulting  services to highway,
     toll road and transit  agencies.  The  Transportation-Construction  segment
     acts as a general  contractor for highways,  bridges,  track  installation,
     sewer, water and other civil construction projects.
<PAGE>

The accounting  policies of the segments are the same as those  described in the
summary  of  significant   accounting   policies.   The  Company  evaluates  the
performance of its segments based on income before income taxes.

The following tables reflect disclosures  required by SFAS 131 for the Company's
seven segments (in millions):
<TABLE>
<CAPTION>
                                          1998       1997       1996
================================================================================
Total contract revenues:
<S>                                       <C>        <C>        <C>
 Buildings unit                           $151.6     $126.4     $127.4
 Civil unit:
    Engineering                             69.1       67.7       75.1
    BSSI                                    61.8       50.5       34.3
 Energy unit                                68.6       54.8       43.2
 Environmental unit                         22.7       21.5       27.3
 Transportation unit:
    Engineering                             72.3       62.0       50.8
    Construction                            75.2       63.5       60.3
--------------------------------------------------------------------------------
       Total                              $521.3     $446.4     $418.4
================================================================================

                                          1998       1997       1996
================================================================================
Income/(loss) before taxes:
 Buildings unit                           $(13.9)    $  0.9     $  0.9
 Civil unit:
    Engineering                              3.5        3.7        4.2
    BSSI                                     0.1         --       (0.8)
 Energy unit                                 4.0        2.3        2.3
 Environmental unit                          1.0        0.4        0.5
 Transportation unit:
    Engineering                              2.9        1.0        2.3
    Construction                             0.7        0.6       (1.4)
--------------------------------------------------------------------------------
       Subtotal - segments                  (1.7)       8.9        8.0
  Corporate/Insurance                        0.4        0.4         --
--------------------------------------------------------------------------------
       Total                              $ (1.3)    $  9.3     $  8.0
================================================================================
<PAGE>
                                          1998       1997
================================================================================
Segment assets:
 Buildings unit                           $ 30.5     $ 27.1
 Civil unit:
    Engineering                             18.7       16.2
    BSSI                                    15.6       15.5
 Energy unit                                27.9       23.5
 Environmental unit                          5.1        3.7
 Transportation unit:
    Engineering                             21.7       17.7
    Construction                            20.6       20.2
--------------------------------------------------------------------------------
       Subtotal - segments                 140.1      123.9
  Corporate/Insurance                       11.8       20.5
--------------------------------------------------------------------------------
       Total                              $151.9     $144.4
================================================================================

                                          1998       1997       1996
================================================================================
Capital expenditures:
 Buildings unit                           $  0.3     $  0.1     $ 0.5
 Civil unit:
    Engineering                              1.4        0.6       0.5
    BSSI                                     0.8        0.3       1.0
 Energy unit                                 1.2        0.4       0.5
 Environmental nit                           0.2         --        --
 Transportation unit:
    Engineering                              1.3        0.3       0.2
    Construction                             4.2        0.3       0.1
--------------------------------------------------------------------------------
       Subtotal - segments                   9.4        2.0       2.8
  Corporate                                  1.2        0.5       0.9
--------------------------------------------------------------------------------
       Total                              $ 10.6     $  2.5     $ 3.7
================================================================================

                                          1998       1997       1996
================================================================================
Depreciation and amortization:
 Buildings unit                           $  0.2     $  0.2     $ 0.1
 Civil unit:
    Engineering                              0.7        0.4       0.5
    BSSI                                     0.6        0.5       0.4
 Energy unit                                 1.1        1.2       1.1
 Environmental unit                          0.1        0.1       0.2
 Transportation unit:
    Engineering                              0.6        0.5       0.5
    Construction                             0.7        0.5       1.0
--------------------------------------------------------------------------------
       Subtotal - segments                   4.0        3.4       3.8
  Corporate                                  1.0        1.1       1.1
--------------------------------------------------------------------------------
       Total                              $  5.0     $  4.5     $ 4.9
================================================================================
</TABLE>

<PAGE>

The Company has determined that the intersegment  revenues,  interest income and
expense,  equity in the net  income of  investees  accounted  for by the  equity
method and the amount of investment in equity method investees,  by segment, are
immaterial for further disclosure in these financial statements.

The enterprise-wide disclosures required by SFAS 131 are as follows:
<TABLE>
<CAPTION>
                                          1998       1997      1996
================================================================================
<S>                                       <C>        <C>       <C>
Total contract revenues by type of service:
 Engineering                              $178.4     $164.2    $175.1
 Construction                              212.4      176.9     165.9
 Operations & Maintenance                  130.5      105.3      77.4
--------------------------------------------------------------------------------
       Total                              $521.3     $446.4    $418.4
================================================================================

                                          1998       1997      1996
================================================================================
Total contract revenues by geographic origin:
  Domestic                                $475.2     $403.6    $367.2
  Foreign                                   46.1       42.8      51.2
--------------------------------------------------------------------------------
       Total                              $521.3     $446.4    $418.4
================================================================================

                                          1998       1997      1996
================================================================================
Total contract revenues by principal markets:
United States government                    27.1%      23.8%     22.5%
Various state governmental
  and quasi-governmental
  agencies                                  34.4%      40.9%     46.6%
Commercial, industrial
  and private clients                       38.5%      35.3%     30.9%
================================================================================
</TABLE>


The Company's business is substantially conducted in the U.S. The aforementioned
contract with UCDP accounted for 11.5% of the Company's total contract  revenues
in 1998.  No  individual  contract  accounted for more than 10% of the Company's
total contract revenues in 1997 or 1996.

<PAGE>

5. PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment consists of the following (in thousands):
<TABLE>
<CAPTION>
                                           1998           1997
================================================================================
<S>                                       <C>            <C>
Land                                      $   552        $   552
Buildings and improvements                  6,832          6,388
Equipment and vehicles                     41,137         32,319
--------------------------------------------------------------------------------
       Total, at cost                      48,521         39,259
Less - Accumulated depreciation            31,063         28,274
--------------------------------------------------------------------------------
       Net property, plant
        and equipment                     $17,458        $10,985
================================================================================
</TABLE>

6. GOODWILL AND OTHER INTANGIBLE ASSETS

Goodwill and other intangible assets consist of the following (in thousands):
<TABLE>
<CAPTION>
                                           1998           1997
================================================================================
<S>                                      <C>             <C>
Goodwill, net of accumulated
  amortization of $2,867,000 and
  $2,437,000, respectively                $ 6,091        $ 5,078
Other intangible assets, net of
  accumulated amortization of
  $2,344,000 and $1,817,000,
  respectively                              1,416          1,443
--------------------------------------------------------------------------------
       Net intangible assets              $ 7,507        $ 6,521
================================================================================
</TABLE>
Effective October 1, 1998, the Company acquired all of the outstanding shares of
capital  stock of  GeoResearch,  Inc.  from  its  shareholder  in a  transaction
accounted for as a purchase.  While this transaction is not considered  material
for purposes of detailed  disclosure,  the Company recorded  related  intangible
assets totaling $1,943,000 during the fourth quarter of 1998.

7. LONG-TERM DEBT AND BORROWING AGREEMENTS

The Company has an unsecured  credit  agreement  (the  "Agreement")  with Mellon
Bank, N.A. (the "Bank").  The Agreement provides for a commitment of $25 million
through May 31, 2001. The commitment includes the sum of the principal amount of
revolving  credit loans  outstanding and the aggregate face value of outstanding
letters of credit.  As of December 31, 1998,  no  borrowings  were  outstanding;
however,  letters  of credit  totaling  $1,792,000  were  outstanding  under the
Agreement.


<PAGE>

The  Agreement  provides for the Company to borrow at the Bank's prime  interest
rate or at other  indexed  rates that may be lower,  and for the Company to meet
certain  cash  flow,   leverage,   interest  coverage  and  tangible  net  worth
requirements.  Under the Agreement, the Company pays the Bank commitment fees of
3/8% per year based on the unused portion of the commitment.

The maximum amount of borrowings outstanding under the Agreement during 1998 was
$6,974,000. For 1998, the average daily balance outstanding when the Company was
in a net borrowing  position was $2,584,000 at a weighted  average interest rate
of 8.0%. The proceeds of all loans under the Agreement were used to meet various
working  capital  requirements.  The Company did not borrow under the  Agreement
during 1997.

Other  amounts  totaling  $3,961,000  included  in other  accrued  expenses  and
long-term debt in the accompanying  Consolidated Balance Sheet represent amounts
due for  construction  equipment  financed in 1998 as well as amounts due to the
former owner of GeoResearch, Inc. These notes and obligations mature as follows:
$823,000 in 1999, $627,000 in 2000, $954,000 in 2001, $915,000 in 2002, $370,000
in 2003, and $272,000 thereafter. The interest rates with respect to these notes
ranged from 4.44% to 7.75% as of December 31, 1998.

8. CAPITAL STOCK

In 1996,  the Board of  Directors  authorized  the  repurchase  of up to 500,000
shares of the  Company's  common  stock in the open  market.  During  1998,  the
Company  repurchased  96,379  treasury  shares of Common Stock at market  prices
ranging  from $7.53 to $8.87 per share,  for a total price of  $800,000.  During
1996, the Company  repurchased 207,560 treasury shares of Common Stock at market
prices  ranging from $5.63 to $6.25 per share,  for a total price of $1,260,000.
The Company made no treasury share repurchases during 1997.

The Company's Common Stock is divided into two series, Common Stock and Series B
Common Stock. Each share of Common Stock entitles the holder thereof to one vote
on all matters submitted to the shareholders,  and each share of Series B Common
Stock entitles the holder thereof to ten votes on all such matters.

The Company's Articles of Incorporation authorize the issuance of 300,000 shares
of Cumulative  Preferred Stock, par value $1 per share. At December 31, 1998 and
1997, there were no shares of such Preferred Stock outstanding.

9. LEASE COMMITMENTS

Rent expense under  noncancellable  operating  leases was  $11,687,000  in 1998,
$10,364,000 in 1997 and $9,972,000 in 1996.

Minimum annual rentals payable under noncancellable  operating leases in each of
the five years after December 31, 1998 are $11,220,000,  $9,250,000, $6,529,000,
$3,241,000 and $894,000,  respectively.  These  noncancellable  leases relate to
office space, computer equipment, office equipment,  construction equipment, and
vehicles, with lease terms ranging from one to 10 years.


<PAGE>
10. INCOME TAXES

The provision for income taxes consisted of the following (in thousands):
<TABLE>
<CAPTION>
                                     1998          1997         1996
================================================================================
<S>                                  <C>           <C>          <C>
Current income taxes:
  Federal                            $    18       $ 1,401       $  (176)
  State                                  246           139            --
  Foreign                              1,519         1,024         1,406
--------------------------------------------------------------------------------
        Total current
          income taxes                 1,783         2,564         1,230
--------------------------------------------------------------------------------
Deferred income taxes:
  Federal                               (799)        1,705         2,538
  State                                  104           122            91
--------------------------------------------------------------------------------
       Total deferred
         income taxes                   (695)        1,827         2,629
--------------------------------------------------------------------------------
       Total provision for
         income taxes                $ 1,088       $ 4,391       $ 3,859
================================================================================
</TABLE>
The following is a reconciliation  of income taxes at the federal statutory rate
to income taxes recorded by the Company (in thousands):
<TABLE>
<CAPTION>
                                     1998          1997          1996
================================================================================
<S>                                  <C>           <C>           <C>
Computed income
  taxes at U.S. federal
  statutory rate                     $  (453)      $ 3,177       $ 2,733
Foreign taxes, net of
  federal income tax
  benefit                              1,003           676           928
State income taxes,
  net of federal income
  tax benefit                            225           172            61
Nondeductible charges                    313           300           249
Other, net                                --            66          (112)
--------------------------------------------------------------------------------
       Total provision for
         income taxes                $ 1,088       $ 4,391       $ 3,859
================================================================================
</TABLE>
The domestic and foreign components of income before income taxes are as follows
(in thousands):
<TABLE>
<CAPTION>
                                     1998          1997         1996
================================================================================
<S>                                  <C>           <C>          <C>
Domestic                             $(4,203)      $ 7,148       $ 3,530
Foreign                                2,872         2,196         4,509
--------------------------------------------------------------------------------
       Total                         $(1,331)      $ 9,344       $ 8,039
================================================================================
</TABLE>
<PAGE>
The components of the Company's  deferred  income tax assets and  liabilities at
December 31, 1998 and 1997 are as follows (in thousands):
<TABLE>
<CAPTION>

                                             1998         1997
================================================================================
<S>                                        <C>          <C>
Deferred income tax assets:
  Deductible temporary differences:
   Provision for expenses and losses       $ 6,341      $ 2,763
   Contract overbillings                       666          705
   Federal tax operating loss
     carryforward                               --           98
   Accrued vacation pay                      1,301        1,404
   Fixed and intangible assets                 852          795
   Minimum tax credits                         379          570
   Charitable contribution carryforward        307          230
   Other                                       135          197
--------------------------------------------------------------------------------
  Total deferred income tax assets           9,981        6,762
--------------------------------------------------------------------------------
Deferred income tax liabilities:
   Contract underbillings                   (7,507)      (6,159)
   Undistributed foreign earnings           (1,494)      (1,017)
--------------------------------------------------------------------------------
  Total deferred income liabilities         (9,001)      (7,176)
--------------------------------------------------------------------------------
        Net deferred tax asset/(liability) $   980     $   (414)
================================================================================
</TABLE>

The  Company's  U.S.  income tax returns have been  examined and accepted by the
Internal  Revenue Service for the years 1990 through 1994.  Management  believes
that adequate provisions have been made for income taxes at December 31, 1998.

11. CONTINGENCIES

The Company is  self-insured  for its primary  layer of  professional  liability
insurance  through a wholly-owned  captive insurance  subsidiary.  The secondary
layer  of  the  professional  liability  insurance  continues  to  be  provided,
consistent with industry practice, under a "claims-made" insurance policy placed
with an independent insurance company. Under claims-made policies, coverage must
be in  effect  when a claim is made.  This  insurance  is  subject  to  standard
exclusions.

The Company is self-insured up to a certain deductible limit with respect to its
workers'  compensation and general  liability  exposures.  Provisions for losses
expected for these exposures are recorded based upon the Company's  estimates of
the aggregate  liability for claims  incurred.  Such estimates  utilize  certain
actuarial assumptions followed in the insurance industry.  Insurance coverage is
obtained  for  catastrophic  exposures  as well as those  risks  required  to be
insured by law or by contract.

The Company has been named as a defendant or co-defendant  in legal  proceedings
wherein  substantial  damages are claimed.  Such proceedings are not uncommon to
the Company's business. After consultations with counsel, except as discussed in
Note 2, management  believes that the Company has recognized adequate provisions
for these  proceedings and their ultimate  resolutions  will not have a material
adverse  effect on the  consolidated  financial  position  or annual  results of
operations of the Company.
<PAGE>

The Company  currently has two significant legal  proceedings  outstanding.  The
more significant of the two relates to BMSCI's  construction  contract with UCDP
(see related discussion in Note 2).

The other  significant  proceeding  relates to a lawsuit  brought in 1987 in the
Supreme Court of the State of New York, Bronx County, by the Dormitory Authority
of the State of New York against a number of parties,  including the Company and
one of its  wholly-owned  subsidiaries,  that  asserts  breach of  contract  and
alleges  damages  of  $13,000,000.  The  Company,  which  was not a party to the
contract  underlying the lawsuit,  contends that there is no  jurisdiction  with
respect to the  Company and that it cannot be held liable for any conduct of the
subsidiary.  Both the Company and the subsidiary are contesting liability issues
and have filed  cross-claims  and  third-party  claims  against  other  entities
involved in the project.

In accordance  with the purchase  agreement  related to its 1998  acquisition of
GeoResearch, Inc., the Company agreed to pay the former owner, who has continued
as an employee of the Company,  contingent consideration based on a formula tied
to the operating profit of the combined  geospatial  businesses,  in excess of a
specified  threshold,  for the year ending  December  31,  2001.  The  threshold
contemplates  substantial growth in the combined  businesses over the years 1999
through 2001. This contingent  consideration payment cannot exceed $5.3 million.
Any such  payment  would serve to increase  the  goodwill  associated  with this
acquisition.  It is currently  uncertain  whether any  contingent  consideration
payment will be required under the purchase agreement with GeoResearch, Inc.

At December 31, 1998,  certain  subcontractors  performing  work on  uncompleted
Company and  joint-venture  construction  contracts and certain  contractors  on
construction  management  projects had not been required to furnish  performance
bonds. In the opinion of management,  provision has been made for all costs that
will be incurred as a result of such  contractors  not  performing in accordance
with their agreements.

12. EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST

The  Company  maintains a defined  contribution  retirement  program  through an
Employee Stock Ownership Plan ("ESOP"), in which substantially all employees are
eligible to  participate.  In addition to providing a vehicle for  investment in
Company stock, the ESOP offers  participants  several other investment  options.
Contributions to the ESOP are derived from a 401(k) Salary  Redirection  Program
with a  Company  matching  contribution,  and a  discretionary  contribution  as
determined  by the  Company's  Board  of  Directors.  Under  the  401(k)  Salary
Redirection  Program  effective January 1, 1999, the Company began matching 100%
of the  first  5-1/2%  of  eligible  salary  contributed  by  participants.  The
Company's matching contributions are invested not less than 25% in Michael Baker
Corporation  Common Stock,  with the remaining 75% being  available to invest in
Baker Common Stock or mutual funds, as directed by the  participants.  From July
1, 1997 through December 31, 1998, the Company's matching contributions were not
permitted to be less than 50% invested in Baker Common Stock with the  remaining
50% being available to invest in Baker Common Stock or mutual funds, as directed
by the participants.  Prior to July 1997, the Company's  matching  contributions
were required to be invested 100% in Baker Common Stock.  Company  contributions
under this program  amounted to  $4,312,000,  $3,321,000 and $3,306,000 in 1998,
1997 and 1996, respectively.
<PAGE>

As of  December  31,  1998,  the  market  value  of  all  ESOP  investments  was
$91,037,000,  of which 40% represented the market value of the ESOP's investment
in Michael Baker  Corporation  Common Stock.  The Company's ESOP held 44% of the
shares and 73% of the voting power for the outstanding Common Stock and Series B
Common Stock of the Company at the end of 1998.

13. STOCK OPTION PLANS

As of December 31, 1998, the Company has two fixed stock option plans. Under the
amended 1995 Stock  Incentive  Plan (the "Plan"),  the Company may grant options
for an aggregate of 1,500,000 shares of Common Stock to key employees. Under the
1996  Nonemployee  Directors' Stock Incentive Plan (the "Directors  Plan"),  the
Company may grant options for an aggregate of 150,000  shares of Common Stock to
nonemployee  board members.  Under both plans, the exercise price of each option
equals the market price of the Company's stock on the date of grant. Options are
typically  granted  pursuant  to an  agreement  with the  employee,  under which
one-fourth of the options granted become  immediately  vested, and the remaining
three-fourths  vest in annual one-fourth  increments under the Plan. The options
under the Directors' Plan are fully vested at the date of grant.  Vested options
remain  exercisable  for a period of ten years  from the grant  date  under both
plans.  Under the Plan, the Company granted  special options during 1998,  which
vest in the year 2006, but whose vesting may be accelerated to the first quarter
of the year 2001 if the Company  meets its  pre-established  earnings  per share
goal for the year 2000.

Under the Directors  Plan, each  nonemployee  director was issued 500 restricted
shares of Common Stock for a total of 3,500 and 4,500 shares of restricted stock
issued in 1998 and 1997,  respectively.  Restrictions  on the shares  expire two
years after the issue date.

The following table summarizes all stock option activity for both plans in 1998,
1997 and 1996:
<TABLE>
<CAPTION>

                                                  Average
                                      Shares      exercise
                                     subject       price
                                    to option     per share
--------------------------------------------------------------------------------
<S>                                 <C>           <C>
Balance at December 31, 1995        151,788       $  5.00
 Options granted                     67,947       $  4.83
 Options exercised                   (4,125)      $  5.00
 Options forfeited                  (20,918)      $  4.97
--------------------------------------------------------------------------------
Balance at December 31, 1996        194,692       $  4.94
 Options granted                    179,593       $  6.90
 Options exercised                  (22,690)      $  5.48
 Options forfeited                  (10,581)      $  5.76
--------------------------------------------------------------------------------
Balance at December 31, 1997        341,014       $  5.92
 Options granted                    402,397       $  9.96
 Options exercised                  (35,191)      $  5.20
 Options forfeited                   (2,639)      $  6.46
--------------------------------------------------------------------------------
Balance at December 31, 1998        705,581       $  8.25
================================================================================
</TABLE>

The weighted  average fair value of options  granted during 1998,  1997 and 1996
was $5.37, $3.94 and $2.72, respectively.
<PAGE>

The following table summarizes information about stock options outstanding under
both plans as of December 31, 1998:
<TABLE>
<CAPTION>

Options       Exercise    Outstanding    Average     Exercisable
granted in    price       options         life*        options
--------------------------------------------------------------------------------
<S>           <C>          <C>             <C>         <C>
Jan.  1995    $  5.00       91,994         6.0         91,994
Feb. 1996     $  4.81       43,518         7.2         31,227
May 1996      $  5.03        5,000         7.4          5,000
Feb. 1997     $  6.91      154,672         8.2         73,810
May 1997      $  6.84        8,000         8.4          8,000
Feb. 1998     $  9.53      113,366         9.2         28,336
Apr. 1998     $ 10.13      289,031         9.4          7,000
--------------------------------------------------------------------------------

    Total                  705,581         8.2        245,367
================================================================================
<FN>
*Average life remaining in years
</FN>
</TABLE>

During  1996,  the  Company  adopted  SFAS  123,   "Accounting  for  Stock-Based
Compensation,"  for  disclosure  purposes  only.  As allowed under SFAS 123, the
Company  continues to apply APB Opinion No. 25,  "Accounting for Stock Issued to
Employees,"  and  related  Interpretations  in its  accounting  for  stock-based
compensation  plans.  Accordingly,  no compensation cost was recognized in 1998,
1997 or 1996. If compensation  costs for the Company's stock incentive plans had
been  determined  based on the fair value at the grant  dates for  awards  under
those plans,  consistent  with the method  prescribed by SFAS 123, the Company's
net income and diluted net income per share amounts would have been reduced.

The Company's pro forma net income/(loss)  amounts would have been $(2,669,000),
$4,725,000 and $4,077,000 for the years ended December 31, 1998,  1997 and 1996,
respectively.  The Company's pro forma diluted net income/(loss) per share would
have been $(0.33),  $0.57 and $0.49 for the years ended December 31, 1998, 1997,
and 1996, respectively.

The fair value of options on the  respective  grant dates was estimated  using a
Black-Scholes option pricing model with certain assumptions. The key assumptions
used  include a  weighted  average  risk-free  interest  rate of 5.9%,  weighted
average expected  volatility of 49.4%, an expected option life of 6 years, and a
0% expected dividend yield.

<PAGE>

14. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

The following is a summary of the unaudited  quarterly results of operations for
the two years ended December 31, 1998:
<TABLE>
<CAPTION>

                                     1998 - Three Months Ended
 (In thousands)            March 31     June 30      Sept. 30     Dec. 31*
--------------------------------------------------------------------------------
<S>                        <C>          <C>          <C>          <C>
Total contract revenues    $111,097     $127,118     $135,803     $147,253
Gross profit                 12,244       15,742       15,764        3,494
Income before income tax      1,378        3,123        3,947       (9,779)
Net income/(loss)               730        1,655        2,093       (6,897)
Diluted net income/(loss)
 per common share          $   0.09     $   0.20     $   0.25     $  (0.84)
================================================================================
<FN>
*Includes Buildings unit operating charges totaling $13.7 million (see Note 2).
</FN>
</TABLE>

<TABLE>
<CAPTION>
                                      1997 - Three Months Ended
 (In thousands)            March 31     June 30     Sept. 30     Dec. 31
--------------------------------------------------------------------------------
<S>                        <C>          <C>          <C>          <C>
Total contract revenues    $ 94,092     $105,477     $116,627     $130,236
Gross profit                 10,876       12,914       13,413       14,702
Income before income tax      1,109        2,634        2,942        2,659
Net income                      577        1,369        1,530        1,477
Diluted net income
 per common share          $   0.07     $   0.17     $   0.18     $   0.18
================================================================================
</TABLE>

<PAGE>


REPORT OF INDEPENDENT ACCOUNTANTS

To the Shareholders and Board of Directors of Michael Baker Corporation

In our opinion,  the  accompanying  consolidated  balance  sheet and the related
consolidated statements of income, of shareholders' investment and of cash flows
present  fairly,  in all material  respects,  the financial  position of Michael
Baker  Corporation and its  subsidiaries  (the Company) at December 31, 1998 and
1997,  and the results of their  operations and their cash flows for each of the
three years in the period ended December 31, 1998, in conformity  with generally
accepted   accounting   principles.   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 of these  statements  in  accordance  with  generally  accepted  auditing
standards which 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,   assessing  the
accounting  principles  used and significant  estimates made by management,  and
evaluating the overall  financial  statement  presentation.  We believe that our
audits provide a reasonable basis for the opinion expressed above.

As discussed in Note 2 and Note 11 to the consolidated financial statements, the
Company  is  involved  in certain  contingencies,  the  outcome of which  cannot
presently be  determined.  Accordingly,  no provision for any liability that may
result from these  contingencies has been made in the accompanying  consolidated
financial statements.


/s/ PricewaterhouseCoopers LLP
------------------------------
PricewaterhouseCoopers LLP
Pittsburgh, Pennsylvania
April 20, 1999





SUPPLEMENTAL FINANCIAL INFORMATION

Market Information - Common Shares
The  principal  market on which the Michael  Baker  Corporation  Common Stock is
traded is the American Stock Exchange. High and low closing prices of the Common
Stock for each quarter during 1998 and 1997 were as follows:
<TABLE>
<CAPTION>
                     1998                                   1997
--------------------------------------------------------------------------------
      First   Second    Third    Fourth     First     Second   Third     Fourth
--------------------------------------------------------------------------------
<S>   <C>     <C>       <C>       <C>       <C>       <C>      <C>       <C>
High  10 1/2  10 1/2    9 1/2     10 3/8    7 11/16   7 3/8    10 5/8    11 5/8
Low    8 1/2   9 1/16   6 11/16    7 1/4    6 3/8     6 1/2     6 3/4     9
================================================================================
</TABLE>