<PAGE>   1

                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    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 December 31, 1998

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

                          Commission File Number 0-7898

                              GREY ADVERTISING INC.
             ------------------------------------------------------
             (Exact name of registrant as specified in its charter)

           Delaware                                    13-0802840
-------------------------------          ---------------------------------------
(State or other jurisdiction of          (I.R.S. Employer Identification Number)
incorporation or organization)

777 Third Avenue, New York, New York                     10017
----------------------------------------               ----------
(Address of principal executive offices)               (Zip Code)

Registrant's telephone number,
  including area code:                                              212-546-2000

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

Title of each Class                    Name of each exchange on which registered
-------------------                    -----------------------------------------
       None                                             None

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

                      Common Stock, par value $1 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 and (2) has been subject to the 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 the 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.

Yes |X| No |_|


<PAGE>   2

The aggregate market value of the voting stock held by non-affiliates of the
registrant was $284,696,802 as at March 1, 1999.

The registrant had 988,734 shares of its Common Stock, par value $1 per share,
and 253,544 shares of its Limited Duration Class B Common Stock, par value $1
per share, outstanding as at March 1, 1999.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the annual proxy statement to be furnished in connection with the
registrant's 1999 annual meeting of stockholders are incorporated by reference
into Part III.


<PAGE>   3

PART I.

ITEM 1. Business.

            The Registrant ("Grey") and its subsidiaries (collectively with
Grey, the "Company") have been engaged in the planning, creation, supervision
and placing of advertising since the Company's formation in 1917. Grey was
incorporated in New York in 1925 and changed its state of incorporation to
Delaware in 1974.

            The Company's principal business activity consists of providing a
full range of advertising and communications services to its clients. Most 
typically, this involves developing an advertising and/or marketing plan after
study of a client's business, the distribution or utilization of the client's
products or services and the use of various media (e.g., television, radio,
newspapers, magazines, direct mail, outdoor billboards and the Internet) by
which desired market performance can best be achieved. The Company then creates
advertising, prepares media recommendations and places advertising in the
media. The Company's business also involves it in allied areas such as
marketing consultation, audio-visual production, co-marketing programs, direct
marketing, interactive consulting and production, media research and buying,
research, product publicity, public affairs, public relations and sales
promotion.

         


                                       3
<PAGE>   4

            The Company serves a diversified client roster in the apparel,
automobile, beverage, chemical, communications, community service, computer,
corporate, electrical appliance, entertainment, food product, home furnishing,
houseware, healthcare, office product, packaged goods, publishing, restaurant,
retailing, toy and other sectors.

            Advertising is a highly competitive business in which agencies of
all sizes and other providers of creative or media services strive to attract
new clients or additional assignments from existing clients. Competition for new
business, however, is restricted from time to time because large agencies (such
as the Company) may be precluded from providing advertising services to products
or services that may be viewed as being competitive with those of an existing
client. Generally, since advertising agencies charge clients substantially
equivalent rates for their services, competitive efforts principally focus on
the skills of the competing agencies.

            Published reports indicate that there are over 500 advertising
agencies of all sizes in the United States. According to a report published in
1998 (Advertising Age, a trade publication), the Company was the 6th largest
United States advertising agency in terms of worldwide gross income.

            A majority of Grey's domestic gross income is from clients that have
been with the Company since 1994. The agreements between the Company and most of
its clients are generally terminable by either the Company or the client upon
mutually agreed notice, as is the custom in the industry. Clients may also
modify advertising budgets at any time and for any reason, and because the
agency's compensation in many cases is determined by reference to client
expenditures, shifts in advertising budgets may result in increased or reduced
levels of revenue for the Company.


                                       4
<PAGE>   5

            During 1998, one client (The Procter & Gamble Company), which has
been a client of the Company for more than forty years, represented more than
10% of the Company's consolidated income from commissions and fees. The loss of
this client would be expected to have an adverse effect on the results of the
Company. No other client represented more than 5% of the Company's total
consolidated income from commissions and fees. The loss of any single client in
past years has not had a long-term negative impact on the Company's financial
condition or its competitive position.

            On December 31, 1998, the Company and its nonconsolidated affiliated
companies employed approximately 10,700 persons, of whom seven are executive
officers of Grey.

            As is generally the case in the advertising industry, the Company's
business traditionally has been seasonal, with greater revenues generated in the
second and fourth quarters of each year. This reflects, in large degree, the
media placement patterns of the Company's clients.

            Advertising programs created by the Company and its nonconsolidated
affiliated companies are placed principally in media distributed within the
United States and internationally through its offices in the United States and
more than 70 other countries. While the Company operates on a worldwide basis,
for the purpose of presenting certain financial information in accordance with
Generally Accepted Accounting Principles, its operations are deemed to be
conducted in three geographic areas. Commissions and fees, operating profit and
other relevant information by each such geographic area for the years ended
December 31, 1998, 1997 and 1996, and related identifiable and total assets at
December 31 of each of the years, are summarized in Note N of the Notes to
Consolidated Financial Statements, which is incorporated herein by reference.


                                       5
<PAGE>   6

            While the Company has no reason to believe that its foreign
operations as a whole are presently jeopardized in any material respect, there
are certain risks of operating which do not affect domestic operations but which
may affect the Company's foreign operations from time to time. Such risks
include the possibility of limitations on repatriation of capital or dividends,
political instability, currency devaluation and restrictions on the percentage
of permitted foreign ownership.

FORWARD LOOKING STATEMENTS

            In connection with the provisions of the Private Securities
Litigation Reform Act of 1995 (the "Reform Act"), the Company may include
Forward Looking Statements (as defined in the Reform Act) in oral or written
public statements issued by or on behalf of the Company. These Forward Looking
Statements may include, among other things, plans, objectives, projections,
anticipated future economic performance or assumptions and the like that are
subject to risks and uncertainties. Actual results or outcomes may differ
materially from those discussed in the Forward Looking Statements. Important
factors which may cause actual results to differ, include but are not limited
to, the following: the unanticipated loss of a material client or key
personnel, delays or reductions in client budgets, shifts in industry rates of
compensation, government compliance costs or litigation, unanticipated natural
disasters, changes in the general economic conditions that affect interest
rates and/or consumer spending both in the U.S. and the international markets
in which the Company operates, unanticipated expenses, client preferences which
can be affected by competition, the inability to implement upgrades for certain
computer programs which are not year 2000 compliant and the ability to project
risk factors which may vary. Certain of these factors are discussed in greater
detail elsewhere herein.   


                                       6
<PAGE>   7

                      Executive Officers of the Registrant
                               as of March 1, 1999

<TABLE>
<CAPTION>
                                                                    Year First Became
Executive Officers (a)             Position                  Age    Executive Officer
----------------------             --------                  ---    -----------------
<S>                      <C>                                  <C>          <C>
Robert L. Berenson       President - Grey - US                59           1978
Lester M. Feintuck       Senior Vice President
                         Chief Financial Officer - US
                         Controller                           45           1998
Steven G. Felsher        Exec. Vice President Finance -
                         Worldwide, Secretary & Treasurer     49           1989
John A. Gerster          Exec. Vice President                 51           1983
Edward H. Meyer          Chairman of the Board,
                         President & Chief Executive
                         Officer                              72           1959
Stephen A. Novick        Exec. Vice President                 58           1984
O. John C. Shannon       President - Grey Int'l.              62           1993
</TABLE>

(a)   All executive officers are elected annually by the Board of Directors of
      Grey. Each executive officer has been with Grey for a period greater than
      five years. There exists no family relationship between any of Grey's
      directors or executive officers and any other director or executive
      officer or person nominated or chosen to become a director or executive
      officer.


                                       7
<PAGE>   8

ITEM 2. Properties.

            Substantially all offices of the Company are located in leased
premises. The Company's principal office is at 777 Third Avenue, New York, New
York, where it occupies approximately 400,000 square feet of space. The
Company's lease covering this space expires at the end of 2009. The Company also
has leases covering other offices, including New York, Los Angeles, Amsterdam,
Brussels, Buenos Aires, Copenhagen, Dusseldorf, Hong Kong, London, Madrid,
Melbourne, Mexico City, Milan, Oslo, Paris, Sao Paolo, Stockholm, Sydney and
Toronto.

            The Company considers all space leased by it to be adequate for the
operation of its business and does not foresee any significant difficulty in
meeting its space requirements.

ITEM 3. Legal Proceedings.

            In the Company's judgment, it is not involved in any material
pending legal proceedings other than ordinary routine litigation incidental to
the business of the Company.

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

            None


                                       8
<PAGE>   9

PART II

ITEM 5. Market for the Registrant's Common Equity and Related Stockholder
        Matters.

            The Common Stock is traded on The NASDAQ Stock Market's National
Market and listed on the NASDAQ Stock Market under the symbol GREY.

            As of March 1, 1999, there were 495 holders of record of the Common
Stock and 264 holders of record of the Limited Duration Class B Common Stock.

            The following table sets forth certain information about dividends
paid, and the bid prices on the NASDAQ Stock Market during the periods indicated
with respect to the Common Stock:

<TABLE>
<CAPTION>
                                                 Bid Prices*
                                              Dollars per Share              Dividends
                                           High               Low            Per Share
                                           ----               ---            ---------
<S>            <C>                         <C>                <C>              <C>
1997           First Quarter               278                253              $1.00
               Second Quarter              322                250               1.00
               Third Quarter               341                292               1.00
               Fourth Quarter              360                328               1.00

1998           First Quarter               370                325               1.00
               Second Quarter              455                360               1.00
               Third Quarter               417                312               1.00
               Fourth Quarter              369                262               1.00
</TABLE>

*       Such over-the-counter market quotations reflect inter-dealer prices,
        without retail mark-up, mark-down or commission and may not necessarily
        represent actual transactions.


                                       9
<PAGE>   10

ITEM 6. Selected Financial Data.

<TABLE>
<CAPTION>
                                               1998               1997               1996               1995               1994
                                               ----               ----               ----               ----               ----
<S>                                      <C>                <C>                <C>                <C>                   <C>        
Commissions and fees .................   $  935,181,000     $  858,752,000     $  765,498,000     $  688,219,000        593,317,000
Expenses .............................      882,524,000        793,832,000        706,965,000        637,979,000        552,022,000
Goodwill write-off (a) ...............                                                                                   39,944,000
Income of consolidated
  companies before taxes on income ...       59,152,000         69,291,000         65,693,000         54,327,000          1,610,000
Provision for taxes on income ........       29,856,000         33,719,000         31,612,000         26,966,000         21,621,000
Net income (loss) ....................       25,877,000         30,451,000         28,602,000         23,438,000        (21,378,000)
Earnings (loss) per 
  Common share (b)
    Basic ............................            20.81              25.03              22.98              18.19             (18.45)
    Diluted ..........................            18.98              21.89              20.45              16.32             (18.45)
Weighted average number
  of common shares outstanding
    Basic ............................        1,220,767          1,180,146          1,185,841          1,195,314          1,220,529
    Diluted ..........................        1,345,928          1,355,452          1,339,111          1,340,261          1,220,529
Working capital ......................        3,464,000         50,526,000          3,843,000          9,582,000         33,735,000
Total assets .........................    1,489,653,000      1,199,987,000      1,089,394,000        963,433,000        830,076,000
Long-term debt .......................       78,025,000         78,025,000         33,025,000         33,025,000         33,025,000
Redeemable preferred stock at
  redemption value ...................       10,333,000         10,760,000         10,098,000          8,986,000          7,516,000
Common stockholders' equity ..........      173,389,000        162,306,000        147,922,000        127,663,000        108,705,000
Cash dividend per share of Common
  Stock and Limited Duration Class B
  Common Stock .......................             4.00               4.00             3.8125             3.5625             3.3125
</TABLE>

      (a)   In 1994, the Company recorded a charge of $39,944,000, on both a
            pre-tax and after-tax basis, for a non-cash write-off which related
            almost exclusively to write-offs of goodwill.

      (b)   After giving effect to amounts attributable to redeemable preferred
            stock and for diluted earnings per common share (i) to the assumed
            exercise of dilutive stock options, (ii) to the assumed issuance of
            shares pursuant to the Company's Senior Management Incentive Plan
            and (iii) to the assumed conversion of 8 1/2% Convertible
            Subordinated Debentures.


                                       10
<PAGE>   11

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

RESULTS OF OPERATIONS

      Income from commissions and fees ("gross income") increased 8.9% in 1998
and 12.2% in 1997 as compared to the respective prior years. Absent exchange
rate fluctuations, gross income increased 11.7% in 1998 and 16.9% in 1997. In
1998, 1997 and 1996, respectively, 44.9%, 44.5% and 44.2% of consolidated gross
income was attributable to domestic operations and 55.1%, 55.5% and 55.8%,
respectively, to international operations. In 1998, gross income from domestic
operations increased 9.7% versus 1997 and was up 12.9% in 1997 versus 1996.
Gross income from international operations increased 8.2% (13.3% absent
exchange rate fluctuations) in 1998 when compared to 1997 and 11.6% (20.0%
absent exchange rate fluctuations) in 1997 when compared to 1996. The increases
in gross income in both years primarily resulted from expanded activities from
existing clients, and the continued growth, in some measure through
acquisitions, of the Company's general agency and specialized communications
operations.
      
      Salaries and employee-related expenses increased 13.2% in 1998 and 11.6%
in 1997 as compared to the respective prior years. Office and general expenses
increased 7.2% in 1998 and 13.6% in 1997 versus respective prior years. The 1998
increases reflect the general growth of the business and an increased investment
in staffing to better serve our multinational clients and their businesses in
developing markets. The 1997 increases in expenses are generally in line with
the increases in gross income in that year.

      Inflation did not have a material effect on revenue or expenses in 1998,
1997 or 1996.


                                       11
<PAGE>   12

      Other income increased in 1998 by $2,124,000 and decreased in 1997 by
$2,789,000 as compared to the comparable prior periods. The 1998 increase was
due primarily to increased interest income generated from higher average
invested balances, inpart due to the proceeds from the long-term borrowing in
December 1997. The 1997 decrease resulted primarily from the absence of a 1996
non-recurring, non-operating pre-tax income amount of approximately $4,000,000
related to gains on the sale of the Company's equity position in a
nonconsolidated subsidiary and the liquidation of a non-marketable investment
security.

      The effective tax rate increased to 50.5% in 1998 as compared to 48.7% in
1997. The tax rate in 1996 was 48.1%. The change in the effective tax rates in
1998 and 1997, as compared to their respective prior periods, was due to higher
effective state and local tax rates and higher effective foreign tax rates,
largely dependent upon where the Company generates profits.

      Minority interest decreased $2,602,000 in 1998 and increased $80,000 in
1997 as compared to the respective prior years. The changes in 1998 and in 1997
were primarily due to changes in the level of profits of majority-owned
companies.

      Equity in earnings of nonconsolidated affiliated companies decreased
$900,000 in 1998 and increased $438,000 in 1997 as compared to the respective
prior years. These changes were due primarily to changes in the level of profits
attributable to the nonconsolidated companies.

      The Company reported net income of $25,877,000 for 1998 as compared to
$30,451,000 in 1997 and $28,602,000 in 1996. Diluted earnings per common share
was $18.98 in 1998 as compared to $21.89 in 1997 and $20.45 in 1996. Net income
for 1998 was off from 1997 by 15.0%, and absent non-recurring, non-operating
pre-tax income recognized in 1996,


                                       12
<PAGE>   13

net income for 1997 was up 15.0% from 1996. Diluted earnings per common share
was down 13.3% for 1998 while 1997 diluted earnings per common share was up
15.5% absent the 1996 non-recurring, non-operating pre-tax income.

      For purpose of computing basic earnings per common share, the Company's
net income was adjusted by (i) dividends paid on the Company's preferred stock
and (ii) by the change in redemption value of the Company's preferred stock. For
the purpose of computing diluted earnings per common share, net income was also
adjusted by the interest savings, net of tax, on the assumed conversion of the
Company's 8 1/2% convertible subordinated debentures.

      The Company's 1998 results were adversely affected by software
development-related losses in the Internet division of one of its international
subsidiaries. In addition, the results were impacted by significant decreases in
client expenditures in emerging markets. According to Advertising Age, the 
Company serves more multinational clients than any other global network. The
Company has invested in these markets in support of its multinational clients
and their businesses, and remains committed to the long-term growth potential
of these developing markets. It is expected that the losses incurred in such
Internet unit will be reduced significantly or eliminated altogether in 1999.
Equally, the Company believes that the losses in the economically-troubled
emerging markets will be less in 1999 than in 1998 but it does foresee its
operations in those countries negatively impacting 1999 results.             

      During 1998, the Company's principal advertising agency business lost a
number of pieces of business, the impact of which will be felt mostly in 1999.
The Company has not yet replaced the lost business and its absence will put
pressure on the gross income, and resulting profitability, of the Company in
1999. The Company is committed to growing this revenue base and has done so in
the past in the face of client losses. It has also reduced expenses at the
operations which have suffered the gross income declines. At the same time, a
number of


                                       13
<PAGE>   14

the Company's units, most notably in the healthcare, Internet services, public
relations and media sectors, are growing rapidly. The Company will continue to
seek to propel the global growth of these operations by continuing its
investment program in their support. On balance, however, until the lost
business is fully replaced, the Company will likely operate at lower
profitability levels than in the recent past.

      The Company's results may be affected by currency exchange rate
fluctuations given the Company's extensive non-United States operations.
Generally, the foreign currency exchange risk is limited to net income because
the Company's revenues and expenses, by country, are almost exclusively
denominated in the local currency of each respective country with both revenue
and expense items matched.

      The Year 2000 issue is the result of computer programs being written
using two digits rather than four digits to define the applicable year.
Accordingly, computer equipment, software and other devices with embedded
technology that are time-sensitive may not be able to distinguish between the
year 1900 and the year 2000 and may encounter other difficulties as a result.
This could result in system failures
      

                                       14
<PAGE>   15

or miscalculations causing a temporary disruption of the ordinary course of
business.

      Grey and its operating subsidiaries have completed an assessment of
their computer programs, those of its third party software vendors and those of
mission critical business partners. The Company's assessment process included
formal communications, via questionnaire, with third parties regarding their own
Year 2000 status and testing of relevant equipment, systems and interfaces.
Based on this assessment along with normal recurring upgrades and replacement of
outdated systems, the Company has undertaken, or is in the process of
undertaking, what it believes to be the appropriate steps to modify or replace
hardware and software as necessary.

      These steps included an inventory of systems, both domestically and
internationally, for Year 2000 compliance and a remediation strategy to ensure
substantial completion of upgrades and replacement where necessary. Given the
decentralized nature of the Company's information technology environment,
software for financial and non-financial applications can vary from operation
to operation and range from complete reliance on third party software to use of
all in-house applications. Moreover, as a result of its decentralized
environment, the Company's systems tend to be more limited in their effect and
easier to correct. The remediation strategy, therefore, can be unique from
operation to operation and includes a combination of conversions of all
in-house systems and upgrades to Year 2000 compliant third party systems. The
majority of operations, including all entities in the larger markets, are in
various stages of implementation which should be completed by mid-year. The
Company envisages final testing to be completed well in advance of year end and
does not expect the Year 2000 issue to pose significant operational problems
for its computer network.                                        


                                       15
<PAGE>   16

      The Company is also dependent in various ways, both domestically and
internationally, on the Year 2000 readiness of broadcasters, governments,
financial institutions, utilities, communications suppliers and building
services, other infrastructure suppliers and other parties with whom it does
business. The effects of failures in the systems utilized by these third party
suppliers can not be estimated or anticipated. Given the reliance on third
party information as it relates to compliance programs and the difficulty of
determining potential errors on the part of external service suppliers, no
assurance can be given that the Company's information systems or operations
will not be affected by mistakes, if any, of third parties or third party
failures to complete the Year 2000 projects on a timely basis. There can be no
assurance that the systems of other companies on which the Company relies will
be converted on a timely basis or that any such failure to convert by another
company would not have an adverse effect on the Company's systems. However,
with respect to operations under the Company's control, the Company does not
expect, in light of its Year 2000 readiness efforts and the diversity of its
suppliers and customers, that occurrences of Year 2000 failures will have a
material adverse effect on the financial position or results of operations of
the Company.

      Grey and its subsidiaries are utilizing both internal and external
resources to reprogram, replace, implement and test the software modifications
necessary for Year 2000 compliance. The cost of the project has been estimated
to be approximately $4,000,000 and will not have a material effect on the
Company. Costs include the purchase of third party software, hardware and
related internal payroll costs associated with the information technology
group. A substantial portion of these estimated costs relate to systems and
applications that were previously planned and budgeted. The project is being
funded through operating cash; costs specifically identified with the Year 2000
remediation are being expensed as incurred. Other hardware and purchased
software costs have been capitalized. The cost and time of completion are based
on management's best estimates which were derived utilizing numerous
assumptions of future events, including the continued availability


                                       16
<PAGE>   17

of certain resources and other factors. Since there is no guarantee
that these estimates will be achieved, actual results could differ materially
from those anticipated. Specific factors that might cause such material
differences include, but are not limited to, the availability and cost of
personnel trained in this area, the ability to locate and correct all relevant
computer codes, the timely receipt and installation of upgrades from third party
software vendors, compliance of third parties with whom the Company interacts
and similar circumstances.

      The Company believes it has an effective program in place to resolve the
Year 2000 issue. However, due to the magnitude and complexity of the problem it
is difficult to identify all possible contingencies. The Company believes that
a worst case scenario would involve its temporary inability to process media,
collect payments or invoice customers at a significant number of its
subsidiaries. In addition, disruptions in the economy generally resulting from
Year 2000 issues could also affect the Company. The Company could, for example,
be subject to litigation for computer system product failure, equipment
shutdown or failure to properly date business records. The amount of potential
liability and lost revenue cannot be reasonably estimated at this time. Current
contingency plans call for manual workarounds and staffing strategies that
provide a prompt response time in the event of problems. The development of the
Company's contingency plans is ongoing and will be amended as appropriate.
      
LIQUIDITY AND CAPITAL RESOURCES

      The Company continues to be highly liquid by maintaining significant
levels of cash, cash equivalents and investments in highly liquid marketable
securities, most of which are money market funds and corporate bonds. Cash and
cash equivalents were $153,816,000 and $150,553,000 at December 31, 1998 and
1997, respectively, and the Company's investment in


                                       17
<PAGE>   18

marketable securities was $85,957,000 and $72,741,000 at December 31, 1998 and
1997, respectively. The continued high level of liquidity reflects the Company's
ongoing focus on its cash management process. Working capital decreased by
$47,062,000 from $50,526,000 at December 31, 1997 to $3,464,000 at December 31,
1998. The decrease in working capital is largely attributable to an increased
investment in majority-owned subsidiaries and an increase in short-term
financing of the Company's international subsidiaries.

      Domestically, the Company maintains committed bank lines of credit
totaling $51,000,000. These lines of credit were partially utilized during both
1998 and 1997 to secure obligations of selected foreign subsidiaries in the
amounts of $18,700,000 and $3,000,000 at December 31, 1998 and 1997,
respectively.

      Other lines of credit are available to the Company in foreign countries in
connection with short-term borrowings and bank overdrafts used in the normal
course of business. Amounts outstanding under such facilities at December 31,
1998 and 1997 were $52,211,000 and $19,455,000, respectively. The increase in
borrowings is largely attributable to the short-term borrowings in Europe.

      Historically, funds from operations and short-term bank borrowings have
been sufficient to meet the Company's dividend, capital expenditure and working
capital needs. The Company expects that such sources will be sufficient to meet
its short-term cash requirements in the future. While the Company has not
utilized long-term borrowings to fund its operating needs, in 1997 it refinanced
its borrowings with the Prudential Insurance Company of America. Pursuant to the
refinancing, the Company repaid the 7.68% $30,000,000 loan it had taken down in
early 1993 and, in turn, borrowed $75,000,000 in December 1997. The loan bears
an interest at the rate of 6.94% and is repayable in three equal annual
installments, commencing in December 2003. The Company does not


                                       18
<PAGE>   19

anticipate any material increased requirement for capital or other expenditures
which will adversely affect its liquidity.

      The Company's business generally has been seasonal with greater gross
income earned in the second and fourth quarters, particularly the fourth
quarter. As a result, cash, accounts receivable, accounts payable and accrued
expenses are typically higher on the Company's year-end balance sheet than at
the end of any of the preceding three quarters.

FASB STATEMENT 130

      As of January 1, 1998, the Company adopted the Financial Accounting
Standards Board Statement No. 130, Reporting Comprehensive Income ("FAS 130").
FAS 130 establishes standards for reporting and display of comprehensive income
and its components in the financial statements. FAS 130 requires unrealized
gains or losses on the Company's available for sale securities and foreign
currency translation adjustments, which prior to adoption were reported
separately in stockholders' equity, to be included in other comprehensive income
(loss). Prior period financial statements have been reclassified to conform to
the requirements of FAS 130. The adoption of this standard has no impact on the
Company's net income or stockholders' equity.

ITEM 7a. Quantitative and Qualitative Disclosures About Market Risk

      Occasionally, the Company enters into foreign currency contracts for
known cash flows related to repatriation of earnings from its international
subsidiaries. The term of each such foreign currency contract entered into in
1998 was for less than three months. At December 31, 1998, there were no
foreign currency contracts open. The Company did take advantage of an inverted
yield curve in the United Kingdom and entered into an interest rate swap
agreement as a hedge against rising interest rates by exchanging the cash flow
on borrowings of 5,000,000 pounds sterling at a variable interest rate for the
cash flow from a similar borrowing at a fixed interest rate of 5.67%. The
Company had no other derivative contracts outstanding at December 31, 1998 and
did not enter into any other derivative contracts during 1998.


                                       19
<PAGE>   20

ITEM 8. Financial Statements and Supplementary Data.

      The information required by this Item is presented in this report
beginning on Page F-1.

ITEM 9. Changes in and Disagreements with Accountants on Accounting and
        Financial Disclosure.

      None.

PART III.

ITEM 10. Directors and Executive Officers of the Registrant.

      Information with respect to the directors of the Company is incorporated
herein by reference to the Company's proxy statement ("Proxy Statement") to be
sent to its stockholders in connection with its 1999 Annual Meeting, under the
caption "Election of Directors". Information with respect to the Company's
executive officers is set forth in Part I of this report.

ITEM 11. Executive Compensation.

      The information required by this Item is incorporated herein by reference
to the Proxy Statement and will be included under the caption "Management
Remuneration and Other Transactions".


                                       20
<PAGE>   21

ITEM 12. Security Ownership of Certain Beneficial Owners and Management.

      The information required by this Item is incorporated herein by reference
to the Proxy Statement and will be included under the captions "Election of
Directors" and "Voting Securities".

ITEM 13. Certain Relationships and Related Transactions.

      The information required by this Item is incorporated herein by reference
to the Proxy Statement and will be included under the captions "Election of
Directors" and "Voting Securities".

PART IV.

ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.

            (a)   (1) (2) The information required by this subsection of this
                  Item is presented in the index to Financial Statements on Page
                  F-1.

                  (3) The information required by this subsection of this Item
                  is provided in the Index of Exhibits at Page E-1 of this
                  report. Such index provides a listing of exhibits filed with
                  this report and those incorporated herein by reference.


                                       21
<PAGE>   22

                                   SIGNATURES

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

                                        GREY ADVERTISING INC.

                                        By: /s/ Edward H. Meyer
                                           -------------------------------------
                                            Edward H. Meyer,
                                            Chairman, Chief Executive
                                            Officer & President

                                        Dated: March 31, 1999

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of Registrant and in
the capacities and on the date indicated.

/s/ Mark N. Kaplan                      Dated: March 31, 1999
------------------------------
Mark N. Kaplan, Director

/s/ Edward H. Meyer                     Dated: March 31, 1999
------------------------------
Edward H. Meyer, Director;
Principal Executive Officer

/s/ O. John C. Shannon                  Dated: March 31, 1999
------------------------------
O. John C. Shannon, Director;
President - Grey International

/s/ Steven G. Felsher                   Dated: March 31, 1999
------------------------------
Steven G. Felsher,
Principal Financial Officer

/s/ Lester M. Feintuck                  Dated: March 31, 1999
------------------------------
Lester M. Feintuck,
Principal Accounting Officer
<PAGE>   23

                           Annual Report on Form 10-K

                  Item 8, Item 14(a)(1) and (2) and Item 14(d)

                   Financial Statements and Supplementary Data

                          List of Financial Statements

                          Year ended December 31, 1998

                              Grey Advertising Inc.

                               New York, New York
<PAGE>   24

Form 10-K-Item 8, Item 14(a)(1) and (2)

Grey Advertising Inc. and Consolidated Subsidiary Companies

Index to Financial Statements

The following consolidated financial statements of Grey Advertising Inc. and
consolidated subsidiary companies are included in Item 8:

  Report of Independent Auditors.......................................... F- 2

  Consolidated Balance Sheets--December 31, 1998 and 1997................. F- 3

  Consolidated Statements of Income--Years Ended
    December 31, 1998, 1997 and 1996...................................... F- 5

  Consolidated Statements of Common Stockholders' Equity--
    Years Ended December 31, 1998, 1997 and 1996.......................... F- 6

  Consolidated Statements of Cash Flows--
    Years Ended December 31, 1998, 1997 and 1996.......................... F- 9

  Notes to Consolidated Financial Statements--
    December 31, 1998..................................................... F- 11

All schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable and, therefore, have been omitted.

Summarized financial information and financial statements for nonconsolidated
foreign investee companies accounted for by the equity method have been omitted
because such companies, considered individually or in the aggregate, do not
constitute a significant subsidiary.


                                                                             F-1
<PAGE>   25

                         Report of Independent Auditors

Board of Directors
Grey Advertising Inc.

We have audited the accompanying consolidated balance sheets of Grey Advertising
Inc. and consolidated subsidiary companies as of December 31, 1998 and 1997, and
the related consolidated statements of income, common stockholders' equity, and
cash flows for each of the three years in the period ended December 31, 1998.
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 Grey
Advertising Inc. and consolidated subsidiary companies at December 31, 1998 and
1997, and the consolidated 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.

                                                               ERNST & YOUNG LLP

New York, New York
February 18, 1999


                                                                             F-2
<PAGE>   26

Grey Advertising Inc. and Consolidated Subsidiary Companies

                           Consolidated Balance Sheets

<TABLE>
<CAPTION>
                                                                           December 31
                                                                     1998                1997
                                                                ----------------------------------
<S>                                                             <C>                 <C>           
Assets
Current assets:
  Cash and cash equivalents                                     $  153,816,000      $  150,553,000
  Marketable securities                                             55,130,000          15,401,000
  Accounts receivable                                              797,474,000         647,524,000
  Expenditures billable to clients                                  66,681,000          54,687,000
  Other current assets                                              75,481,000          56,225,000
                                                                ----------------------------------
Total current assets                                             1,148,582,000         924,390,000

Investments in and advances to nonconsolidated
  affiliated companies                                              16,705,000          18,386,000
Fixed assets-net                                                   113,084,000          88,006,000
Marketable securities                                               30,827,000          57,340,000
Goodwill-net of accumulated amortization of $31,466,000 in
  1998 and $23,509,000 in 1997                                     116,499,000          59,851,000
Other assets-including loans to executive officers of
  $5,572,000 in 1998 and 1997                                       63,956,000          52,014,000
                                                                ----------------------------------
Total assets                                                    $1,489,653,000      $1,199,987,000
                                                                ==================================
</TABLE>

See notes to consolidated financial statements.


                                                                             F-3
<PAGE>   27

           Grey Advertising Inc. and Consolidated Subsidiary Companies

                     Consolidated Balance Sheets (continued)

<TABLE>
<CAPTION>
                                                                                              December 31
                                                                                       1998                  1997
                                                                                 -------------------------------------
<S>                                                                              <C>                   <C>            
Liabilities and stockholders' equity 
  Current liabilities:
  Accounts payable                                                               $   865,427,000       $   709,959,000
  Notes payable to banks                                                              70,911,000            22,455,000
  Accrued expenses and other                                                         184,497,000           122,269,000
  Income taxes payable                                                                24,283,000            19,181,000
                                                                                 -------------------------------------
Total current liabilities                                                          1,145,118,000           873,864,000

Other liabilities-including deferred compensation of $41,871,000 in
  1998 and $36,481,000 in 1997                                                        68,676,000            61,723,000
Long-term debt                                                                        78,025,000            78,025,000
Minority interest                                                                     14,112,000            13,309,000
Redeemable preferred stock-at redemption value; par
  value $1 per share; authorized 500,000 shares; issued and outstanding
  30,000 shares in 1998 and 32,000 shares in 1997                                     10,333,000            10,760,000

Common stockholders' equity:
  Common Stock-par value $1 per share; authorized 10,000,000 shares; issued
    1,205,041 shares in 1998 and 1,124,324 shares in 1997                              1,205,000             1,124,000
  Limited Duration Class B Common Stock-par value $1 per share; authorized
    2,000,000 shares; issued 282,765 shares
    in 1998 and 307,460 shares in 1997                                                   283,000               308,000
  Paid-in additional capital                                                          38,832,000            44,349,000
  Retained earnings                                                                  189,714,000           169,214,000
  Accumulated other comprehensive loss:
    Cumulative translation adjustment                                                (11,716,000)           (9,422,000)
    Unrealized (loss) gain on marketable securities                                   (1,307,000)              189,000
                                                                                 -------------------------------------
  Total accumulated other comprehensive loss                                         (13,023,000)           (9,233,000)
                                                                                 -------------------------------------
  Loans to officer used to purchase Common Stock and Limited Duration
    Class B Common Stock                                                              (4,726,000)           (4,726,000)
                                                                                 -------------------------------------
                                                                                     212,285,000           201,036,000
  Less-cost of 222,950 and 222,098 shares of Common Stock and 26,762 and
    26,762 shares of Limited Duration Class B Common Stock held in treasury
    at December 31, 1998 and 1997, respectively                                       38,896,000            38,730,000
                                                                                 -------------------------------------
Total common stockholders' equity                                                    173,389,000           162,306,000
Retirement plans, leases and contingencies
                                                                                 -------------------------------------
Total liabilities and stockholders' equity                                       $ 1,489,653,000       $ 1,199,987,000
                                                                                 =====================================
</TABLE>

See notes to consolidated financial statements.


                                                                             F-4
<PAGE>   28

           Grey Advertising Inc. and Consolidated Subsidiary Companies

                        Consolidated Statements of Income

<TABLE>
<CAPTION>
                                                                      Year ended December 31
                                                           1998                1997               1996
                                                      -----------------------------------------------------
<S>                                                   <C>                 <C>                 <C>          
Commissions and fees                                  $ 935,181,000       $ 858,752,000       $ 765,498,000
Expenses:
  Salaries and employee related expenses                599,681,000         529,863,000         474,686,000
  Office and general expenses                           282,843,000         263,969,000         232,279,000
                                                      -----------------------------------------------------
                                                        882,524,000         793,832,000         706,965,000
                                                      -----------------------------------------------------
                                                         52,657,000          64,920,000          58,533,000
Other income-net                                          6,495,000           4,371,000           7,160,000
                                                      -----------------------------------------------------
Income of consolidated companies
  before taxes on income                                 59,152,000          69,291,000          65,693,000
Provision for taxes on income                            29,856,000          33,719,000          31,612,000
                                                      -----------------------------------------------------
Income of consolidated companies                         29,296,000          35,572,000          34,081,000
Minority interest applicable to consolidated
  companies                                              (4,141,000)         (6,743,000)         (6,663,000)
Equity in earnings of nonconsolidated affiliated
  companies                                                 722,000           1,622,000           1,184,000
                                                      -----------------------------------------------------
Net income                                            $  25,877,000       $  30,451,000       $  28,602,000
                                                      =====================================================
Earnings per Common Share:
  Basic                                                      $20.81              $25.03              $22.98
  Diluted                                                    $18.98              $21.89              $20.45
</TABLE>

See notes to consolidated financial statements.


                                                                             F-5
<PAGE>   29

           Grey Advertising Inc. and Consolidated Subsidiary Companies
             Consolidated Statements of Common Stockholders' Equity
                  Years ended December 31, 1998, 1997 and 1996

<TABLE>
<CAPTION>
                                                             Paid-In
                                                Common     Additional     Comprehensive    Retained
                                                Stock        Capital         Income        Earnings
                                             -----------------------------------------------------------
<S>                                           <C>          <C>            <C>           <C>         
  Balance at December 31, 1995                $1,432,000   $ 37,898,000                   $122,345,000
  Comprehensive income:
    Net income                                                            $ 28,602,000      28,602,000
    Other comprehensive loss:  
      Translation adjustment                                                (2,085,000)
      Unrealized loss on marketable
      securities, net of reclassification
      adjustment for gains included in net
      income of $378,000                                                    (1,420,000)
                                                                         ---------------
    Other comprehensive loss                                                (3,505,000)
                                                                         ---------------
  Total comprehensive income                                              $ 25,097,000
                                                                         ===============
  Cash dividends-Common Shares $3.8125 per
  share                                                                                     (4,527,000)
  Cash dividends-Redeemable Preferred
  Stock-$7.625 per
    share                                                                                     (244,000)
  Common Shares acquired-at cost
  Dividends payable in common shares
    pursuant to the Senior Management
  Incentive Plan                                                275,000                       (275,000)
  Increase in redemption value of
  Redeemable Preferred
    Stock                                                                                   (1,112,000)
  Restricted stock activity                                      43,000
  Tax benefit from restricted stock                               3,000
  Common Shares issued upon exercise of
    stock options                                               250,000
  Tax benefit from exercise of stock options                    483,000
  Senior Management Incentive Plan activity                   3,862,000
                                             -----------------------------------------------------------

  Balance at December 31, 1996                 1,432,000     42,814,000                    144,789,000
                                             -----------------------------------------------------------
<CAPTION>

                                                Common Stock                        Accumulated
                                               Held in Treasury                         Other  
                                               ----------------         Loans to    Comprehensive
                                              Shares      Amount        Officers        Income          Total
                                             --------------------------------------------------------------------
<S>                                          <C>      <C>              <C>            <C>           <C>
  Balance at December 31, 1995               239,599  $ (34,500,000)   $(4,726,000)   $ 5,214,000   $ 127,663,000
  Comprehensive income:
    Net income                                                                                         28,602,000
    Other comprehensive loss:
      Translation adjustment                 
      Unrealized loss on marketable
        securities, net of reclassification
        adjustment for gains included in net
        income of $378,000                   
                                             
    Other comprehensive loss                                                           (3,505,000)     (3,505,000)
                                             
  Total comprehensive income                 
                                             
  Cash dividends-Common Shares
    $3.8125 per share                                                                                  (4,527,000)
  Cash dividends-Redeemable Preferred
  Stock-$7.625 per share                                                                                 (244,000)
  Common Shares acquired-at cost              20,818     (4,733,000)                                   (4,733,000)
  Dividends payable in common shares
    pursuant to the Senior Management
  Incentive Plan                             
  Increase in redemption value of
    Redeemable Preferred Stock                                                                         (1,112,000)
  Restricted stock activity                     (250)        14,000                                        57,000
  Tax benefit from restricted stock                                                                         3,000
  Common Shares issued upon exercise
    of stock options                         (10,598)     1,123,000                                     1,373,000
  Tax benefit from exercise of stock
    options                                                                                               483,000
  Senior Management Incentive
    Plan activity                                                                                       3,862,000
-----------------------------------------------------------------------------------------------------------------

  Balance at December 31, 1996               249,569    (38,096,000)   $(4,726,000)     1,709,000     147,922,000
-----------------------------------------------------------------------------------------------------------------
</TABLE>


                                                                             F-6
<PAGE>   30

           Grey Advertising Inc. and Consolidated Subsidiary Companies
             Consolidated Statements of Common Stockholders' Equity
            Years ended December 31, 1998, 1997 and 1996 (continued)

<TABLE>
<CAPTION>
                                                                                                                
                                                                   Paid-In                                      
                                                   Common         Additional      Comprehensive     Retained    
                                                    Stock           Capital           Income         Earnings   
----------------------------------------------------------------------------------------------------------------
<S>                                             <C>              <C>              <C>             <C>
  Balance at December 31, 1996                     $1,432,000      $42,814,000                    $ 144,789,000 
  Comprehensive income:
    Net income                                                                     $ 30,451,000      30,451,000 
    Other comprehensive loss:
      Translation adjustment                                                        (12,001,000)
      Unrealized gain on marketable
        securities, net of reclassification
        adjustment for gains included in net
        income of $215,000                                                            1,059,000
                                                                                  -------------
    Other comprehensive loss                                                        (10,942,000)
                                                                                  -------------
  Total comprehensive Income                                                       $ 19,509,000
                                                                                  =============
  Cash dividends-Common Shares-$4.00 per                                                             (4,738,000)
  Cash dividends-Redeemable Preferred
    Stock-$8.00 per share                                                                              (256,000)
  Common Shares acquired-at cost                                                                                
  Dividends Payable in common shares
    pursuant to the Senior Management
    Incentive Plan                                                                                     (370,000)
  Increase in redemption value of
    Redeemable Preferred Stock                                                                         (662,000)
  Restricted stock activity                                           (143,000)                                 
  Tax benefit from restricted stock                                      8,000                                  
  Common Shares issued upon exercise of
    stock options                                                       52,000                                  
  Senior Management Incentive Plan activity                          1,618,000                                  
----------------------------------------------------------------------------------------------------------------

  Balance at December 31, 1997                      1,432,000       44,349,000                      169,214,000 
----------------------------------------------------------------------------------------------------------------
</TABLE>

<TABLE>
<CAPTION>
                                                    Common Stock                                Accumulated  
                                                  Held in Treasury                                 Other     
                                                  ----------------               Loans to       Comprehensive
                                                Shares        Amount             Officers       Income (Loss)         Total
-------------------------------------------------------------------------------------------------------------------------------
<S>                                             <C>       <C>                 <C>                <C>              <C>
  Balance at December 31, 1996                  249,569   $ (38,096,000)      $ (4,726,000)      $ 1,709,000      $ 147,922,000
  Comprehensive income:
    Net income                                                                                                       30,451,000
    Other comprehensive loss:
      Translation adjustment                    
      Unrealized gain on marketable
        securities, net of reclassification
        adjustment for gains included in net    
        income of $215,000                      
    Other comprehensive loss                                                                     (10,942,000)       (10,942,000)
                                                
  Total comprehensive Income                    
                                                
  Cash dividends-Common Shares-$4.00 per                                                                             (4,738,000)
  Cash dividends-Redeemable Preferred
    Stock-$8.00 per share                                                                                              (256,000)
  Common Shares acquired-at cost                  3,007        (962,000)                                               (962,000)
  Dividends Payable in common shares
    pursuant to the Senior Management
    Incentive Plan                                                                                                     (370,000)
  Increase in redemption value of
  Redeemable Preferred Stock                                                                                           (662,000)
  Restricted stock activity                      (3,000)        309,000                                                 166,000
  Tax benefit from restricted stock                                                                                       8,000
  Common Shares issued upon exercise of
    stock options                                  (716)         19,000                                                  71,000
  Senior Management Incentive Plan activity                                                                           1,618,000
-------------------------------------------------------------------------------------------------------------------------------

  Balance at December 31, 1997                  248,860     (38,730,000)        (4,726,000)       (9,233,000)       162,306,000
-------------------------------------------------------------------------------------------------------------------------------
</TABLE>


                                                                             F-7
<PAGE>   31

           Grey Advertising Inc. and Consolidated Subsidiary Companies
             Consolidated Statements of Common Stockholders' Equity
            Years ended December 31, 1998, 1997 and 1996 (continued)

<TABLE>
<CAPTION>
                                                                                                                    
                                                                   Paid-In                                          
                                                   Common         Additional      Comprehensive        Retained     
                                                    Stock           Capital          Income            Earnings     
                                                --------------------------------------------------------------------
<S>                                             <C>              <C>              <C>               <C>             
Balance at December 31, 1997                       $1,432,000      $44,349,000                       $169,214,000   

Comprehensive income:
  Net income                                                                       $ 25,877,000        25,877,000   
  Other comprehensive loss:
    Translation adjustment                                                           (2,294,000)
    Unrealized loss on marketable
      securities, net of reclassification
      adjustment for gains included in net
      income of $256,000                                                             (1,496,000)
                                                                                  -------------
  Other comprehensive loss                                                           (3,790,000)                    
                                                                                  -------------
Total comprehensive income                                                         $ 22,087,000
                                                                                  =============
Cash dividends-Common Shares-$4.00 per share                                                           (4,895,000)  
Cash dividends - Redeemable Preferred
    Stock $8.00  per share                                                                               (244,000)  
Common Shares acquired-at cost                                                                                    
Dividends payable in cash pursuant to the
    Senior Management Incentive Plan                                                                      (14,000)  
Increase in redemption value of
    Redeemable Preferred Stock                                                                           (224,000)  
Restricted stock activity                                               81,000                                      
Tax benefit from restricted stock                                        8,000                                      
Common Shares issued upon exercise of
    stock options                                                        5,000                                      
Senior Management Incentive Plan activity              56,000       (5,611,000)                                     
--------------------------------------------------------------------------------------------------------------------

Balance at December 31, 1998                       $1,488,000      $38,832,000                       $189,714,000   
--------------------------------------------------------------------------------------------------------------------
</TABLE>

<TABLE>
<CAPTION>
                                                                                          Accumulated
                                                     Common Stock                            Other
                                                  Held in Treasury           Loans to    Comprehensive
                                                Shares        Amount         Officers         Loss             Total
                                                -----------------------------------------------------------------------
<S>                                             <C>       <C>              <C>            <C>             <C>
Balance at December 31, 1997                    248,860    $(38,730,000)    $(4,726,000)   $(9,233,000)    $162,306,000

Comprehensive income:
  Net income                                                                                                 25,877,000
  Other comprehensive loss:
    Translation adjustment                      
    Unrealized loss on marketable
      securities, net of reclassification
      adjustment for gains included in net
      income of $256,000                        
                                                
  Other comprehensive loss                                                                  (3,790,000)      (3,790,000)
                                                
Total comprehensive income                      
                                                
Cash dividends-Common Shares-$4.00 per share                                                                 (4,895,000)
Cash dividends - Redeemable Preferred
    Stock $8.00  per share                                                                                     (244,000)
Common Shares acquired-at cost                      427        (168,000)                                       (168,000)
Dividends payable in cash pursuant to the
    Senior Management Incentive Plan                                                                            (14,000)
Increase in redemption value of
    Redeemable Preferred Stock                                                                                 (224,000)
Restricted stock activity                           625         (21,000)                                         60,000
Tax benefit from restricted stock                                                                                 8,000
Common Shares issued upon exercise of
    stock options                                  (200)         23,000                                          28,000
Senior Management Incentive Plan activity                                                                    (5,555,000)
-----------------------------------------------------------------------------------------------------------------------

Balance at December 31, 1998                    249,712    $(38,896,000)    $(4,726,000)  $(13,023,000)    $173,389,000
-----------------------------------------------------------------------------------------------------------------------
</TABLE>

See notes to consolidated financial statements.


                                                                             F-8
<PAGE>   32

           Grey Advertising Inc. and Consolidated Subsidiary Companies

                      Consolidated Statements of Cash Flows

<TABLE>
<CAPTION>
                                                                                Year ended December 31
                                                                     1998                 1997                1996
                                                                 -----------------------------------------------------
<S>                                                              <C>                 <C>                 <C>          
Operating activities
Net income                                                       $  25,877,000       $  30,451,000       $  28,602,000
Adjustments to reconcile net income to net cash provided by
  operating activities, net of acquisitions:
    Depreciation and amortization of fixed assets                   27,992,000          25,866,000          22,880,000
    Amortization of intangibles                                      7,957,000           6,160,000           4,976,000
    Deferred compensation                                           12,366,000          14,002,000          16,217,000
    Equity in earnings of nonconsolidated affiliated
      companies, net of dividends received of  $856,000 in
      1998, $658,000 in 1997, and $441,000 in 1996                     134,000            (964,000)           (743,000)
    Gains from the sale of marketable securities                      (256,000)           (215,000)           (378,000)
    Gains from the sale of a nonconsolidated affiliated
      company and a non-marketable investment security                (336,000)           (384,000)         (4,533,000)
    Minority interest applicable to consolidated companies           4,141,000           6,743,000           6,663,000
    Amortization of restricted stock expense                            84,000             140,000              33,000
    Deferred income taxes                                           (4,793,000)         (7,366,000)         (7,085,000)
    Changes in operating assets and liabilities:
      Increase in accounts receivable                             (106,600,000)        (89,556,000)       (103,252,000)
      Increase in expenditures billable to clients                  (9,644,000)         (6,103,000)         (7,229,000)
      Increase in other current assets                              (9,590,000)         (5,314,000)         (4,782,000)
      Increase in other assets                                      (7,264,000)           (652,000)         (2,741,000)
      Increase in accounts payable                                 110,878,000         121,303,000          78,157,000
      (Decrease) increase in accrued expenses and other             (1,721,000)         14,473,000           8,611,000
      Increase  in income taxes payable                              7,656,000             480,000           2,419,000
      Increase (decrease) in other liabilities                          35,000           1,380,000          (2,592,000)
                                                                 -----------------------------------------------------
Net cash provided by operating activities                           56,916,000         110,444,000          35,223,000
Investing activities
Purchases of fixed assets                                          (47,068,000)        (39,718,000)        (27,896,000)
Trust fund deposits                                                 (5,306,000)         (2,974,000)         (2,833,000)
Increase in investments in and advances to non-
  consolidated affiliated companies                                   (840,000)         (1,142,000)           (320,000)
Purchases of marketable securities                                 (41,088,000)        (25,038,000)       (129,491,000)
Proceeds from the sales of marketable securities                    26,684,000          49,613,000         101,012,000
Proceeds from the sale of a nonconsolidated affiliated
  company and a non-marketable investment security                          --                  --           8,568,000
Increase in intangibles, primarily goodwill                        (24,839,000)        (19,912,000)        (13,103,000)
                                                                 -----------------------------------------------------
Net cash used in investing activities                              (92,457,000)        (39,171,000)        (64,063,000)
</TABLE>


                                                                             F-9
<PAGE>   33

           Grey Advertising Inc. and Consolidated Subsidiary Companies

                Consolidated Statements of Cash Flows (continued)

<TABLE>
<CAPTION>
                                                                               Year ended December 31
                                                                    1998                1997                1996
                                                                -----------------------------------------------------
<S>                                                                <C>                <C>                  <C>       
Financing activities
Net proceeds from (repayments of) short-term borrowings            45,694,000         (60,895,000)         18,180,000
Proceeds from term loan                                                    --          75,000,000                  --
Repayment of term loan                                                     --         (30,000,000)                 --
Common Shares acquired for treasury                                  (168,000)           (962,000)         (4,733,000)
Preferred Shares redeemed to treasury                                (651,000)                 --                  --
Cash dividends paid on Common Shares                               (4,895,000)         (4,738,000)         (4,527,000)
Cash dividends paid on Redeemable Preferred Stock                    (244,000)           (256,000)           (244,000)
Net (payments for repurchase of) proceeds from issuance of
   Restricted Stock                                                   (18,000)             27,000              24,000
Proceeds from exercise of stock options                                28,000              71,000           1,373,000
Borrowings under life insurance policies                              510,000             450,000             464,000
                                                                -----------------------------------------------------
Net cash provided by (used in) financing activities                40,256,000         (21,303,000)         10,537,000
Effect of exchange rate changes on cash                            (1,452,000)        (11,902,000)         (3,525,000)
                                                                -----------------------------------------------------
Increase (decrease) in cash and cash equivalents                    3,263,000          38,068,000         (21,828,000)
Cash and cash equivalents at beginning of year                    150,553,000         112,485,000         134,313,000
                                                                -----------------------------------------------------
Cash and cash equivalents at end of year                        $ 153,816,000       $ 150,553,000       $ 112,485,000
                                                                =====================================================
</TABLE>

See notes to consolidated financial statements.


                                                                            F-10
<PAGE>   34

           Grey Advertising Inc. and Consolidated Subsidiary Companies

                   Notes to Consolidated Financial Statements

A. Summary of Significant Accounting Policies

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and
its majority owned subsidiaries. Material intercompany balances and transactions
have been eliminated in consolidation.

Use of Estimates

The preparation of financial statements in conformity with generally accepted
accounting principles requires the Company to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements.
Estimates also affect the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates.

Commissions and Fees and Accounts Receivable

Income derived from advertising placed with media is generally recognized based
upon the publication or broadcast dates. Income resulting from expenditures
billable to clients is generally recognized when billed. Payroll costs are
expensed as incurred. Accounts receivable include both the income recognized as
well as the actual media and production costs which are paid for by the Company
and rebilled to clients at the Company's cost.

Cash Equivalents

The Company considers all highly liquid investments with a maturity of three
months or less from the purchase date to be cash equivalents. The carrying
amount of cash equivalents approximates fair value because of the short
maturities of those instruments.

Investments in and Advances to Nonconsolidated Affiliated Companies

The Company generally carries its investments in nonconsolidated affiliated
companies on the equity method. Certain investments which are not material in
the aggregate are carried on the cost method.

Fixed Assets

Depreciation of furniture, fixtures and equipment is provided for over their
estimated useful lives ranging from three to ten years and has been computed
principally by the straight-line method. Amortization of leaseholds and
leasehold improvements is provided for principally over the terms of the related
leases, which are not in excess of the lives of the assets.


                                                                            F-11
<PAGE>   35

           Grey Advertising Inc. and Consolidated Subsidiary Companies

             Notes to Consolidated Financial Statements (continued)

A. Summary of Significant Accounting Policies (continued)

Foreign Currency Translation

Primarily all balance sheet accounts of the Company's foreign operations are
translated at the exchange rate in effect at each year end and statement of
income accounts are translated at the average exchange rates prevailing during
the year. Resulting translation adjustments are made directly to other
comprehensive income (loss). Foreign currency transaction gains and losses are
reported in income. During 1998, 1997 and 1996, foreign currency transaction
gains and losses were not material.     

Intangibles

The excess of purchase price over underlying net equity of certain consolidated
subsidiaries and nonconsolidated affiliated companies at the date of acquisition
("goodwill") is amortized by the straight-line method over periods of up to
twenty years. The amounts of goodwill, net of accumulated amortization,
associated with consolidated subsidiaries and nonconsolidated investments
(included in Investments in and Advances to Nonconsolidated Affiliated
Companies) were $116,499,000 and $3,394,000 in 1998, and $59,851,000 and
$3,685,000 in 1997, respectively.

Annually, the Company assesses the carrying value of its goodwill and the
respective periods of amortization. As part of the evaluation, the Company
considers a number of factors including actual operating results, the impact of
gains and losses of major local clients, the impact of any loss of key local
management staff and any changes in general economic conditions. The Company
quantifies the recoverability of goodwill based on each agency's estimated
future non-discounted cash flows over the applicable remaining amortization
periods. This requires management to make certain specific assumptions with
respect to future revenue and expense levels. When multiple investments are
made in a single company, a weighted average amortization period is used.
Charges to reflect permanent impairment are recorded to the extent that the
unamortized book value of the goodwill exceeds the future cumulative discounted
cash flows.

Income Taxes

The Company uses the liability method of accounting for income taxes. Under this
method, deferred tax assets and liabilities are determined based on differences
between financial reporting and tax bases of assets and liabilities and are
measured using enacted tax rates and laws that will be in effect when the
differences are expected to reverse. The Company provides appropriate foreign
withholding taxes on unremitted earnings of consolidated and nonconsolidated
foreign companies.


                                                                            F-12
<PAGE>   36

           Grey Advertising Inc. and Consolidated Subsidiary Companies

             Notes to Consolidated Financial Statements (continued)

A. Summary of Significant Accounting Policies (continued)

Marketable Securities

The Company considers all its investments in marketable securities as
available-for-sale. Available-for-sale securities are carried at fair value,
based on publicly quoted market prices, with unrealized gains and losses
reported as other comprehensive income (loss).

Stock-Based Compensation

As permitted by Financial Accounting Standards Statement No. 123, Accounting for
Stock-Based Compensation, the Company accounts for stock-based awards in
accordance with APB Opinion No. 25, Accounting For Stock Issued to Employees. No
compensation expense is recorded for options granted at fair market value at the
date of grant. The excess of the fair market value of Restricted Stock over the
cash consideration received is amortized, as compensation, over the period of
restriction. The future obligation to issue stock, pursuant to the Company's
Senior Management Incentive Plan, is included in Paid-In Additional Capital and
results in periodic charges to compensation.

Earnings Per Share

The computation of basic earnings per common share is based on the weighted
average number of common shares outstanding and for diluted earnings per common
share includes adjustments for the effect of the assumed exercise of dilutive
stock options, shares issuable pursuant to the Company's Senior Management
Incentive Plan (see Note M(1)) and the assumed conversion of the 8 1/2%
Convertible Subordinated Debentures. For the purpose of computing basic earnings
per common share, the Company's net income is adjusted by dividends on the
Preferred Stock and by the increase or decrease in redemption value of the
Preferred Stock during the relevant period. For the purpose of computing diluted
earnings per common share, net income is also adjusted by the interest savings,
net of tax, on the assumed conversion of the Company's 8 1/2% convertible
subordinated debentures.


                                                                            F-13
<PAGE>   37

           Grey Advertising Inc. and Consolidated Subsidiary Companies

             Notes to Consolidated Financial Statements (continued)

B. Foreign Operations

The following financial data is applicable to consolidated foreign subsidiaries:

<TABLE>
<CAPTION>
                                                     1998              1997              1996
                                             ------------------------------------------------
<S>                                          <C>               <C>               <C>         
Current assets                               $610,767,000      $489,242,000      $429,863,000
Current liabilities                           621,164,000       480,514,000       452,220,000
Other assets - net of other liabilities       161,619,000        79,391,000        62,363,000
Net income                                        745,000         8,921,000         9,276,000
</TABLE>

Consolidated retained earnings at December 31, 1998 includes equity in
unremitted earnings of nonconsolidated foreign companies of approximately
$9,712,000.

C. Other Income - Net

Details of other income - net are:

<TABLE>
<CAPTION>
                                                    1998               1997               1996
                                                --------------------------------------------------
<S>                                             <C>                <C>                <C>         
Interest income                                 $ 16,113,000       $ 13,826,000       $ 12,211,000
Interest expense                                 (11,506,000)       (11,095,000)       (10,065,000)
Gains from the sale of marketable
  securities and in 1996 a nonconsolidated
  affiliated company and a nonmarketable
  investment security                                592,000            599,000          4,911,000
Dividends from affiliates                             93,000             83,000            151,000
Other income (expense)-net                         1,203,000            958,000            (48,000)
                                                --------------------------------------------------
                                                $  6,495,000       $  4,371,000       $  7,160,000
                                                ==================================================
</TABLE>

D. Fixed Assets

Components of fixed assets-at cost are:

<TABLE>
<CAPTION>
                                                   1998                1997
                                               ---------------------------------
<S>                                            <C>                 <C>          
Furniture, fixtures and equipment              $ 180,657,000       $ 145,116,000
Leaseholds and leasehold improvements             69,961,000          59,333,000
                                               ---------------------------------
                                                 250,618,000         204,449,000
Accumulated depreciation and amortization       (137,534,000)       (116,443,000)
                                               ---------------------------------
                                               $ 113,084,000       $  88,006,000
                                               =================================
</TABLE>


                                                                            F-14
<PAGE>   38

           Grey Advertising Inc. and Consolidated Subsidiary Companies

             Notes to Consolidated Financial Statements (continued)

E. Acquisitions and Related Costs

In December 1998, pursuant to a cash tender offer, the common and preferred
shareholders of TMBG Media Co. ("TMBG"), a United Kingdom company, agreed to be
acquired by the Company. In January 1999, the Company distributed cash in the
amount of $47,006,000 in exchange for 100% of TMBG's voting common stock and 90%
of its preferred stock. The acquisition was funded out of operating cash and has
been accounted for using the purchase method. Results of operations of TMBG for
the period December 23, 1998 to December 31, 1998 were not material and thus
were not included in the Consolidated Statement of Income for the year ended
December 31, 1998. TMBG's net assets of $8,007,000, including $14,158,000 of
cash, have been included in the Consolidated Balance Sheet at December 31, 1998.
Additionally, the liability related to the tendered shares of TMBG has been
included in Accrued Expenses and Other at December 31, 1998. The excess of
purchase price over the underlying net equity of TMBG was recorded as goodwill
and will be amortized in accordance with the Company's accounting policy.

F. Marketable Securities

The marketable securities, by type of investment, held by the Company at
December 31, 1998 and 1997 are as follows:

<TABLE>
<CAPTION>
                                                     1998               1997
                                                  -----------        -----------
<S>                                               <C>                <C>        
Maturities of one year or less:
  Money market funds                              $55,130,000        $14,406,000
  U.S. Treasury Securities                                 --            995,000
                                                  -----------        -----------
                                                   55,130,000         15,401,000
                                                  -----------        -----------
Maturities greater than one year:
  Corporate bonds                                  30,827,000         23,408,000
  U.S. Treasury Securities                                 --         32,310,000
  Government National Mortgage
   Association Securities                                  --          1,622,000
                                                  -----------        -----------
                                                   30,827,000         57,340,000
                                                  -----------        -----------
                                                  $85,957,000        $72,741,000
                                                  ===========        ===========
</TABLE>

At December 31, 1998, the Company had unrealized gains of $5,412,000 and
unrealized losses of $6,719,000 related primarily to investments in both U.S.
and non-U.S. dollar-denominated corporate bonds. At December 31, 1997, the
Company had unrealized gains of $748,000 related primarily to investments in
corporate bonds and unrealized losses of $559,000, principally related to the
investments in U.S. treasury securities and money market funds. At December 31,
1998 and 1997, the Company's investments in marketable securities, classified
as non-current, had an average maturity of approximately six and seven years,
respectively. 


                                                                            F-15
<PAGE>   39

           Grey Advertising Inc. and Consolidated Subsidiary Companies

             Notes to Consolidated Financial Statements (continued)

G. Credit Arrangements and Long-Term Debt

The Company maintains committed lines of credit of $51,000,000 with various
domestic banks and may draw against the lines on unsecured demand notes at rates
below the applicable bank's prime interest rate. These lines of credit, which
are renewable annually, were partially utilized during both 1998 and 1997 by
selected foreign subsidiaries in the amount of $18,700,000 and $3,000,000 at the
end of each respective year. The weighted average interest rate related to the
debt associated with the committed lines of credit was 7.43% and 6.92% at
December 31, 1998 and 1997, respectively. The Company had $52,211,000 and
$19,455,000 outstanding under other uncommitted lines of credit at December 31,
1998 and 1997, respectively. The weighted average interest rate for the
borrowings under the uncommitted lines of credit was 6.24% and 6.64% at December
31, 1998 and 1997, respectively. The carrying amount of the debt outstanding
under both the committed and uncommitted lines of credit approximates fair value
because of the short maturities of the underlying notes. Occasionally, the
Company enters into foreign currency contracts for known cash flows related to
the repatriation of earnings from its international subsidiaries. The terms of
each foreign currency contract entered into in 1998 and 1997 were for less than
three months. At December 31, 1998, there were no foreign currency contract
transactions open. In December 1998, the Company did take advantage of an
inverted yield curve in the United Kingdom and entered into a two year interest
rate swap agreement as a hedge against rising interest rates by exchanging the
cash flow on borrowings of 5,000,000 pounds sterling at a variable interest rate
under the uncommitted lines of credit, for the cash flow from a similar
borrowing at a fixed interest rate of 5.67%. The fair value of the swap
agreement is not material. This estimate was determined using a discounted cash
flow analysis using current interest rates for debt having similar terms and
remaining maturities. 

Long-term debt at December 31, 1998 and 1997 is as follows:

<TABLE>
<CAPTION>
                                               1998                    1997
                                            -----------------------------------
<S>                                         <C>                     <C>        
      Term loans                            $75,000,000             $75,000,000
      Convertible debentures                  3,025,000               3,025,000
                                            -----------------------------------
      Long-term debt                        $78,025,000             $78,025,000
                                            ===================================
</TABLE>

During 1997, the Company repaid the 7.68%, $30,000,000 loan it had taken down in
1993 from the Prudential Insurance Company ("Prudential") and, in turn, borrowed
$75,000,000 in December 1997 at a fixed interest rate of 6.94% with principal
repayable in equal installments of $25,000,000 in December 2003, 2004 and 2005.
The terms of the loan agreement require, inter alia, that the Company meet
certain cash flow requirements and limit its incurrence of additional
indebtedness to certain specified amounts. At December 31, 1998 and 1997, the
Company was in compliance with all of these covenants. The fair value of the
Prudential debt is estimated to be $79,105,000 and $75,000,000 at December 31,
1998 and 1997, respectively. This estimate was determined using a discounted
cash flow analysis using current interest rates for debt having similar terms
and remaining maturities.


                                                                            F-16
<PAGE>   40

           Grey Advertising Inc. and Consolidated Subsidiary Companies

             Notes to Consolidated Financial Statements (continued)

G. Credit Arrangements and Long-Term Debt (continued)

The remaining portion of long-term debt consists of 8 1/2% Convertible
Subordinated Debentures, due December 31, 2003, which are currently convertible
into 8.44 shares of Common Stock and an equal number of shares of Limited
Duration Class B Common Stock ("Class B Common Stock"), subject to certain
adjustments, for each $1,000 principal amount of such debentures. The debentures
were issued in exchange for cash and a $3,000,000, 9% promissory note from the
Chairman and Chief Executive Officer of the Company, payable on December 31,
2004 (included in Other Assets at December 31, 1998 and 1997). During each of
the years 1998, 1997 and 1996, the Company paid to the officer interest of
$257,000 pursuant to the terms of the debentures and the officer paid to the
Company interest of $270,000 pursuant to the terms of the 9% promissory note.

The scheduled repayment of long-term debt is as follows:

<TABLE>
<CAPTION>
                Years ending
                 December 31                                Amount
            --------------------------------------------------------
<S>                                                      <C>        
                    2003                                 $28,025,000
                    2004                                  25,000,000
                    2005                                  25,000,000
                                                         -----------
                                                         $78,025,000
                                                         ===========
</TABLE>

During 1998 and 1997, the Company borrowed against the cash surrender value of
the life insurance policies that it owns on the life of its Chairman and Chief
Executive Officer. The amounts borrowed at December 31, 1998 and 1997 are
$18,184,000 and $16,428,000, respectively, with an interest rate of 7.30% in
each year, and are carried as a reduction of the related cash surrender value
that is included in Other Assets. Of the amounts borrowed in 1998 and 1997, the
Company received $510,000 and $450,000 in cash, respectively, and $1,245,000
was used in each year to pay premiums on the underlying life insurance
policies.

For the years 1998, 1997 and 1996, the Company made interest payments of
$11,673,000, $11,969,000 and $10,065,000, respectively.

H. Redeemable Preferred Stock

As of December 31, 1998, the Company had outstanding 20,000 shares of Series I
Preferred Stock, 5,000 shares each of Series II and Series III Preferred Stock.
In 1997, 2,000 shares of Series 1 Preferred Stock were outstanding which were
redeemed in 1998. The holder of the Series I, Series II and Series III Preferred
Stock is the Chairman and Chief Executive Office of the Company, and the Series
1 Preferred Stock was held by a former employee. The terms of each class of
Preferred Stock, including the basic economic terms relating thereto, are
essentially the same, except with respect to the redemption date of each series.
The redemption date for the


                                                                            F-17
<PAGE>   41

           Grey Advertising Inc. and Consolidated Subsidiary Companies

             Notes to Consolidated Financial Statements (continued)

H. Redeemable Preferred Stock (continued)

Series I, Series II and Series III Preferred Stock is fixed at April 7, 2004,
unless redeemed earlier under circumstances described below. The terms of the
Series I, Series II and Series III Preferred Stock also give the holder, his
estate or legal representative, as the case may be, the option to require the
Company to redeem his Preferred Stock for a period of 12 months following his
(i) death, (ii) permanent disability or permanent mental disability, (iii)
termination of full-time employment for good reason or (iv) termination of
full-time employment by the Company without cause.

Each share of Preferred Stock is to be redeemed by the Company at a price equal
to the book value per share attributable to one share of Common Stock and one
share of Class B Common Stock (subject to certain adjustments) upon redemption,
less a fixed discount established upon the issuance of the Preferred Stock. The
holder of each class of Preferred Stock is entitled to receive cumulative
preferential dividends at the annual rate of $.25 per share, and to participate
in dividends on one share of the Common Stock and one share of the Class B
Common Stock to the extent such dividends exceed the per share preferential
dividend. In connection with his ownership of the Series I, Series II and Series
III Preferred Stock, the holder issued to the Company full recourse promissory
notes totaling $763,000 (included in Other Assets at December 31, 1998 and 1997)
with a maturity date of April 2004. The interest paid by the senior executive to
the Company in 1998, 1997 and 1996 pursuant to the terms of these notes was
approximately $69,000 in each year.

In accordance with the terms of the respective Certificates of Designation and
Terms of each Series of Preferred Stock ("Certificates"), the Board of Directors
determined the change in redemption value would not reflect a 1994 write-off of
goodwill but rather reflect amortization as if the Company had continued to
write-off goodwill in accordance with historical amortization schedules.

Following the distribution of Class B Common Stock, the holder of the Preferred
Stock became entitled to eleven votes per share on all matters submitted to the
vote of stockholders. The holder of the Series I Preferred Stock is entitled, as
well, to vote as a single class to elect or remove one-quarter of the Board of
Directors, to approve the merger or consolidation of the Company or the sale by
it of all or substantially all of its assets, and to approve the authorization
or issuance of any other class of Preferred Stock having equivalent voting
rights.

In the event of the liquidation of the Company, the holder of the Preferred
Stock is entitled to a preferential liquidation distribution of $1.00 per share
in addition to all accrued and unpaid preferential dividends.

The total carrying value of the Preferred Stock (applicable to those shares
outstanding at each respective year end) increased by $224,000, $662,000 and
$1,112,000 in 1998, 1997 and 1996, respectively. The change in carrying value
represents the change in aggregate redemption value


                                                                            F-18
<PAGE>   42

           Grey Advertising Inc. and Consolidated Subsidiary Companies

             Notes to Consolidated Financial Statements (continued)

H. Redeemable Preferred Stock (continued)

during those periods. This change is referred to as "Additional Capital
Applicable to Redeemable Preferred Stock" in the respective Certificates.

I. Common Stock

The Company has authorized and outstanding two classes of common stock, Common
Stock and Class B Common Stock, each having a $1 par value per share. The Class
B Common Stock has the same dividend and liquidation rights as the Common Stock,
and a holder of each share of Class B Common Stock is entitled to ten votes on
all matters submitted to stockholders. The shares of Class B Common Stock are
restricted as to transferability and upon transfer, except to specified limited
classes of transferees, will convert into shares of Common Stock which have one
vote per share. The Class B Common Stock will automatically convert to Common
Stock on April 3, 2006.

J. Restricted Stock and Stock Option Plans

The Company's 1994 Stock Incentive Plan ("Stock Incentive Plan") is the
Company's active restricted stock and stock option plan. The Stock Incentive
Plan replaced the Restricted Stock Plan, the Executive Growth Plan, the
Incentive Stock Option Plan and the Nonqualified Stock Option Plan
(collectively, the "Prior Plans"), and any shares available for granting of
awards under the Prior Plans are no longer available for such awards. Options
granted pursuant to the Prior Plans remain outstanding and in full force, and
shares reserved thereunder remain so for such purposes.

Stock Incentive Plan

Under the Stock Incentive Plan, awards in the form of incentive or nonqualified
stock options or restricted stock are available to be granted through June 2003
to officers and other key employees. A maximum of 250,000 shares of Common Stock
are available for grant under the Stock Incentive Plan. Stock options cannot be
granted at a price less than 100% of the fair market value of the shares on the
date of grant. A committee of the Board of Directors ("Committee") determines
the terms and conditions under which the awards may be granted, vest or are
exercisable. Options must be exercised within ten years of the date of grant.
Shares of restricted stock may be sold to participants at a purchase price
determined by the Committee (which may be less than fair market value per
share).

Under the Prior Plans, nonqualified and incentive stock options were granted to
employees eligible to receive options at prices not less than 100% of the fair
market value of the shares on the date of grant. Options must be exercised
within ten years of grant and for only specified limited periods beyond
termination of employment. There were 1,000 shares reserved for issuance under
the Prior Plans at December 31, 1998.


                                                                            F-19
<PAGE>   43

           Grey Advertising Inc. and Consolidated Subsidiary Companies

             Notes to Consolidated Financial Statements (continued)

J. Restricted Stock and Stock Option Plans (continued)

Nonqualified Options

Transactions involving nonqualified options under the Stock Incentive and Prior
Plans were:

<TABLE>
<CAPTION>
                                                   Number      Weighted Average
                                                 Of Shares      Exercise Price
                                                 ------------------------------
<S>                                                <C>            <C>     
      Outstanding, December 31, 1995               98,324         $    149
      Granted                                      47,100              229
      Exercised                                    (9,884)             130
      Forfeited                                       (66)             118
                                                 ------------------------------
      Outstanding, December 31, 1996              135,474              178
      Granted                                       8,450              260
      Exercised                                       -0-              -0-
      Forfeited                                    (1,500)             189
                                                 ------------------------------
      Outstanding, December 31, 1997              142,424              183
      Granted                                      45,400              333
      Exercised                                      (200)             141
      Forfeited                                    (8,675)             209
                                                 ------------------------------
      Outstanding, December 31, 1998              178,949              220
                                                 ==============================
</TABLE>

There were 76,750, 50,133, and 33,400 options exercisable at December 31, 1998,
1997 and 1996, respectively. The weighted average fair value of the options
granted during 1998, 1997 and 1996 was $108, $101 and $77, respectively.

The remaining weighted average contractual life of options outstanding as of
December 31, 1998 and the weighted average exercise price for options
exercisable at December 31, 1998 are as follows:

<TABLE>
<CAPTION>
                              Options Outstanding                      Options Exercisable
              --------------------------------------------------  ------------------------------
Range of          Number of    Weighted Average     Weighted       Number of         Weighted 
Exercise           Shares          Remaining         Average         Shares          Average
 Prices          Outstanding   Contractual Life   Exercise Price  Exercisable     Exercise Price
----------------------------------------------------------------  ------------------------------
<S>               <C>              <C>                <C>           <C>             <C>
  $131              1,000          1.2 years          $131             666          $   131
 149-171           83,299          5.3 years           151          46,000              151
 187-196            6,900          7.0 years           195              84              187
   235             34,100          7.3 years           235          20,000              235
 259-282            8,450          8.3 years           260              -0-              -0-
 268-393           45,200          7.1 years           333          10,000              333
              --------------------------------------------------  ------------------------------
  Total           178,949                                           76,750
              ==================================================  ==============================
</TABLE>


                                                                            F-20
<PAGE>   44

           Grey Advertising Inc. and Consolidated Subsidiary Companies

             Notes to Consolidated Financial Statements (continued)

J. Restricted Stock and Stock Options Plans (continued)

Incentive Stock Options

Transactions involving outstanding incentive stock options under the plans were:

<TABLE>
<CAPTION>
                                                   Number of Shares of     Weighted Average
                                                       Common Stock         Exercise Price
                                                   -----------------------------------------
<S>                                                      <C>                    <C>   
Outstanding and exercisable, December 31, 1995           1,430                  $   99
Exercised                                                 (714)                     99
                                                   -----------------------------------------
Outstanding and exercisable, December 31, 1996             716                      99
Exercised                                                 (716)                     99
                                                   -----------------------------------------
Outstanding, December 31, 1997                             -0-
                                                   =========================================
</TABLE>

Restricted Stock

In 1998, 1,375 shares of Restricted Stock were issued at a price of $1.00 per
share. In 1997, 3,000 shares of Restricted Stock were issued at prices between
$1.00 and $93.50 per share. All stock is issued with restrictions as to
transferability expiring after five years. No restrictions lapsed in 1998, 1997
or 1996. In 1998, 2,000 shares were forfeited and held in treasury.

Compensation to employees under the Stock Incentive and Prior Plans of $671,000
in 1998, $756,000 in 1997 and $98,000 in 1996, representing the excess of the
market value of restricted stock over any cash consideration received, is
carried as a reduction of Paid-In Additional Capital and is charged to income
($166,000 in 1998, $140,000 in 1997 and $33,000 in 1996) over the related
required period of service of the respective employees. In 1998, accumulated
amortization of $82,000 was added back into income resulting from the forfeiture
of Restricted Stock.

Pro Forma Information

Pro forma information regarding net income and earnings per share has been
determined as if the Company had accounted for its employee stock options under
the fair value method. The approximate fair value for these options was
estimated at the date of grant using a Black-Scholes option valuation model with
the following weighted average assumptions for the years 1998, 1997 and 1996,
respectively; risk-free interest rates of 6.78%, 6.70% and 6.16%; dividend
yields of 1.86%, 1.40% and 1.73%; volatility factors of the expected market
price of the Company's Common Stock of .18, .19 and .17; and a weighted-average
expected life for the options of 9.6, 10.0, and 10.0 years.


                                                                            F-21
<PAGE>   45

           Grey Advertising Inc. and Consolidated Subsidiary Companies

             Notes to Consolidated Financial Statements (continued)

J. Restricted Stock and Stock Options Plans (continued)

Pro Forma Information (continued)

The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restriction 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 pro
forma disclosures, 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>
                                        1998                1997                1996
                                   ------------------------------------------------------
<S>                                <C>                 <C>                 <C>           
Pro forma net income               $   24,450,000      $   29,689,000      $   27,861,000
Pro forma earnings per share:
  Basic                                  $19.67              $24.41              $22.38
  Diluted                                $17.95              $21.39              $19.87
</TABLE>

The pro forma information for 1998, 1997 and 1996 is not necessarily indicative
of future year calculations because options issued prior to 1995 have not been
valued for purposes of the pro forma calculation.


                                                                            F-22
<PAGE>   46

           Grey Advertising Inc. and Consolidated Subsidiary Companies

             Notes to Consolidated Financial Statements (continued)

K. Computation of Earnings per Common Share

The following table shows the amounts used in computing earnings per share and
the effect on income and the weighted average number of shares of dilutive
potential common stock.

<TABLE>
<CAPTION>
                                                             For the Year Ended December 31
                                                    --------------------------------------------------
                                                        1998              1997               1996
                                                    --------------------------------------------------
<S>                                                 <C>                <C>                <C>         
      BASIC EARNINGS PER SHARE
      ------------------------
Weighted-average shares                                1,220,767          1,180,146          1,185,841
                                                    --------------------------------------------------

Net Income                                          $ 25,877,000       $ 30,451,000       $ 28,602,000
Effect of dividend requirements
  and the change in redemption value
  of redeemable preferred stock                         (468,000)          (917,000)        (1,356,000)
                                                    --------------------------------------------------
Net earnings used in computation                    $ 25,409,000       $ 29,534,000       $ 27,246,000
                                                    --------------------------------------------------

Per share amount                                          $20.81             $25.03             $22.98
                                                    ==================================================

      DILUTED EARNINGS PER SHARE
      --------------------------
Weighted-average shares used in Basic                  1,220,767          1,180,146          1,185,841
Net effect of dilutive stock options and
  stock incentive plans (1)                               74,121            124,289            102,378
Assumed conversion of 8.5%
  convertible subordinated
  debentures issued December 1983                         51,040             51,017             50,892
                                                    --------------------------------------------------
Adjusted weighted-average shares                       1,345,928          1,355,452          1,339,111
                                                    --------------------------------------------------

Net Income used in Basic                            $ 25,409,000       $ 29,534,000       $ 27,246,000
8.5% convertible subordinated
  debentures interest net of income tax effect           137,000            139,000            139,000
                                                    --------------------------------------------------
Net earnings used in computation                    $ 25,546,000       $ 29,673,000       $ 27,385,000
                                                    --------------------------------------------------

Per share amount                                          $18.98             $21.89             $20.45
                                                    ==================================================
</TABLE>

(1) Includes 31,481, 92,391, and 85,350 shares for 1998, 1997 and 1996,
respectively, expected to be issued pursuant to the terms of the Senior
Management Incentive Plan.


                                                                            F-23
<PAGE>   47

           Grey Advertising Inc. and Consolidated Subsidiary Companies

             Notes to Consolidated Financial Statements (continued)

L. Income Taxes

Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and amounts used for income tax purposes. At December 31, 1998 and
1997, the Company had deferred tax assets and deferred tax liabilities as
follows:

<TABLE>
<CAPTION>
                                               Deferred Tax Assets (Liabilities)
                                                    1998               1997
                                                -------------------------------
<S>                                             <C>                <C>         
Deferred compensation                           $ 24,485,000       $ 27,966,000
Accrued expenses                                   3,649,000          3,315,000
Safe harbor lease and depreciation                   749,000         (1,225,000)
Foreign net operating losses                      14,517,000          8,140,000
Tax on unremitted foreign earnings and other      (1,477,000)        (3,414,000)
                                                -------------------------------
                                                  41,923,000         34,782,000
Valuation allowance                              (10,488,000)        (8,140,000)
                                                -------------------------------
Net deferred tax assets                         $ 31,435,000       $ 26,642,000
                                                ===============================

Included in:
  Other current assets                          $ 10,914,000       $  6,779,000
  Other assets                                    20,521,000         19,863,000
                                                -------------------------------
                                                $ 31,435,000       $ 26,642,000
                                                ===============================
</TABLE>

The components of income of consolidated companies before taxes on income are as
follows:

<TABLE>
<CAPTION>
                                     1998             1997            1996
                                 ---------------------------------------------
<S>                              <C>              <C>              <C>        
Domestic                         $44,600,000      $40,476,000      $36,553,000
Foreign                           14,552,000       28,815,000       29,140,000
                                 ---------------------------------------------
                                 $59,152,000      $69,291,000      $65,693,000
                                 =============================================
</TABLE>

Provisions (benefits) for Federal, foreign, state and local income taxes
consisted of the following:

<TABLE>
<CAPTION>
                                  1998                                  1997                                  1996
                     --------------------------------     ---------------------------------      -------------------------------
                        Current           Deferred            Current           Deferred            Current           Deferred
                     -----------------------------------------------------------------------------------------------------------
<S>                  <C>                <C>                <C>                <C>                <C>                <C>          
Federal              $ 11,382,000       $  1,526,000       $ 16,763,000       $ (3,989,000)      $ 16,285,000       $ (3,890,000)
Foreign                16,010,000         (6,886,000)        15,171,000         (1,204,000)        13,677,000           (280,000)
State and local         7,257,000            567,000          9,151,000         (2,173,000)         8,735,000         (2,915,000)
                     -----------------------------------------------------------------------------------------------------------
                     $ 34,649,000       $ (4,793,000)      $ 41,085,000       $ (7,366,000)      $ 38,697,000       $ (7,085,000)
                     ===========================================================================================================
</TABLE>


                                                                            F-24
<PAGE>   48

           Grey Advertising Inc. and Consolidated Subsidiary Companies

             Notes to Consolidated Financial Statements (continued)

L. Income Taxes (continued)

The effective tax rate varied from the statutory Federal income tax rate as
follows:

<TABLE>
<CAPTION>
                                                                     1998         1997         1996
                                                                     ------------------------------
<S>                                                                  <C>          <C>          <C>  
      Statutory Federal tax rate                                     35.0%        35.0%        35.0%
      State and local income taxes, net of Federal income tax
        benefits                                                      8.6          6.6          5.8
      Difference in foreign tax rates                                 6.8          4.7          4.3
      Withholding tax on unremitted foreign earnings                  0.1          0.9          0.6
      Other--net                                                      0.0          1.5          2.4
                                                                     ------------------------------
                                                                     50.5%        48.7%        48.1%
                                                                     ==============================
</TABLE>

During the years 1998, 1997 and 1996, the Company made income tax payments of
$31,104,000, $39,689,000, and $36,513,000 respectively.

The tax benefit resulting from the difference between compensation expense
deducted for tax purposes and compensation expense charged to income for
restricted stock and nonqualified stock options is recorded as an increase to
Paid-In Additional Capital.

At December 31, 1998, the Company had cumulative net operating losses
attributable to foreign subsidiaries of approximately $44,000,000. The duration
over which the tax benefits attributable to these losses may be realized varies
on a country by country basis, but in no instance will any of the benefits
expire before 2003. Since a portion of the benefits may fail to be realized, a
valuation allowance has been reflected.

M.    Retirement Plans, Deferred Compensation, Executive Officer Loans, Leases
      and Contingencies

1.    The Company's Profit Sharing Plan is available to employees of Grey and
      qualifying subsidiaries meeting certain eligibility requirements. This
      plan provides for contributions by the Company at the discretion of the
      Board of Directors, subject to maximum limitations, as well as employee
      pre-tax contributions. The Company also maintains a noncontributory
      Employee Stock Ownership Plan covering eligible employees of the Company
      and qualifying subsidiaries, under which the Company may make
      contributions (in stock or cash) to an Employee Stock Ownership Trust
      (ESOT) in amounts each year as determined at the discretion of the Board
      of Directors. The Company made only cash contributions to the ESOT in
      1998, 1997 and 1996. The Company and the ESOT have certain rights to
      purchase shares from participants whose employment has terminated. In
      addition to the two plans noted above, a number of subsidiaries maintain
      separate profit sharing and retirement arrangements. Furthermore, the
      Company also provides additional retirement and deferred compensation
      benefits to certain executive officers and employees. The Company
      maintains a Senior Management Incentive Plan ("Plan") in which deferred
      compensation is granted to senior executive or management employees
      deemed important to the continued success of the Company. The Plan
      operates as an ongoing series of individual five year plans.
        

                                                                            F-25
<PAGE>   49

           Grey Advertising Inc. and Consolidated Subsidiary Companies

             Notes to Consolidated Financial Statements (continued)

M.    Retirement Plans, Deferred Compensation, Executive Officer Loans, Leases
      and Contingencies (continued)

      The latest plan in the series commenced in 1998. Awards will vest to
      individuals achieving five years of participation in the current plan.
      Those participants who commence participation after 1998 will vest in
      their awards five years from the year of their initial participation. The
      amount recorded as an expense related to the Plan amounted to $7,600,000,
      $8,377,000 and $8,211,000 in 1998, 1997 and 1996, respectively.
      Approximately $2,295,000, $1,113,000 and $5,634,000 of plan expense
      incurred in 1998, 1997 and 1996, respectively, will be payable in Common
      Stock in accordance with the terms of the Plan. The awards payable in
      Common Stock were converted into an equivalent number of shares of Common
      Stock, based on the average of the market values on the last 15 business
      days of the calendar year. The 1998 Plan activity includes increases in
      Paid-in Additional Capital of $1,899,000 related to the future obligation
      to issue Common Stock and $3,648,000 related to the tax benefit resulting
      from the issuance of shares in settlement of the previous plan's awards
      offset by a decrease of $11,158,000 related to the repurchase of shares
      to satisfy statutory minimun tax withholding requirements. At December
      31, 1998, approximately 14,000 shares are payable in Common Stock
      pursuant to the Plan of which approximately 3,000 shares were vested.

      In 1995, the Company and its Chairman and Chief Executive Officer entered
      into an agreement extending the term of his employment agreement with the
      Company through December 31, 2002. This agreement further provides for the
      deferral of certain compensation otherwise payable to the Chairman and
      Chief Executive pursuant to his employment agreement and the payment of
      such deferred compensation into a trust, commonly referred to as a rabbi
      trust, established with United States Trust Company of New York. The
      purpose of the trust arrangement is to ensure the Company's ability to
      deduct compensation paid to the Chairman and Chief Executive Officer
      without the application of Section 162(m) of the Internal Revenue Code
      ("Section"). The Section, under certain circumstances, denies a tax
      deduction to an employer for certain compensation expenses in excess of
      $1,000,000 per year paid by a publicly held corporation to certain of its
      executives. Amounts deferred and paid into the trust, as adjusted for the
      earnings and gains or losses on the trust assets, will be paid to the
      Chairman and Chief Executive Officer or to his estate, as the case may be,
      following the expiration of his employment agreement, or the termination
      of his employment by reason of death or disability. In 1998, the Company
      made payments to the rabbi trust which are to be used to fund a pension
      obligation to be payable to the Chairman and Chief Executive Officer over
      the eleven year period following the normal expiration of his current
      employment agreement ("pension period"). The initial pension deposit was
      for $1,040,000 with annual pension deposits of $360,000 ratably payable
      from 1998 through 2002, inclusive. The amount of the pension to be paid to
      the Chairman and Chief Executive Officer will depend on, and be limited
      to, the funds in the rabbi trust during the pension period. In addition,
      upon termination of his employment prior to the commencement of the
      pension period or upon his death, any undistributed funds in the rabbi
      trust would be paid to his estate, as the case may be, in satisfaction of
      any future obligations with respect to this pension.


                                                                            F-26
<PAGE>   50

           Grey Advertising Inc. and Consolidated Subsidiary Companies

             Notes to Consolidated Financial Statements (continued)

M.    Retirement Plans, Deferred Compensation, Executive Officer Loans, Leases
      and Contingencies (continued)

      At December 31, 1998 and 1997, the value of the trust was $15,706,000 and
      $10,400,000, respectively, and is included in Other Assets and the
      Company's related deferred compensation obligation for the same amount is
      included in Other Liabilities.

      Expenses related to the foregoing plans and benefits aggregated
      $32,266,000 in 1998, $33,230,000 in 1997 and $36,140,000 in 1996.

2.    Pursuant to an employment agreement, dated January 1, 1994, an executive
      officer of the Company borrowed $600,000 from the Company. One-third of
      the principal amount of the loan was forgiven by the Company on December
      31, 1996 and 1997, as the officer continued to be employed by the Company
      on those dates. In 1997 and 1996, the Company has included in each year
      $200,000 of compensation expense, representing the amount of loan forgiven
      each year. The forgiveness date for the remaining $200,000 loan balance is
      in 1999 and is to be forgiven contingent upon the officer's continued
      employment by the Company. As of December 31, 1998 and 1997, the remaining
      loan balance was $200,000 and is included in Other Assets.

      In addition, a second executive officer has outstanding loans with the
      Company totaling $825,000 as of December 31, 1998 and 1997 which are
      reflected in Other Assets. The first loan for $125,000 was made in 1995
      and is forgivable on December 31, 1999 provided that the executive officer
      is employed by the Company on that date. During 1996, the Company made an
      additional loan to this executive officer for $700,000, $200,000 of which
      is forgivable by the Company assuming his continued employment through
      2003 and $500,000 of which is forgivable by the Company assuming his
      continued employment through 2004.

      In connection with a 1992 exercise of the stock options, the Company
      received a cash payment of $67,000 and a note from the Chairman and Chief
      Executive Officer of the Company in the amount of $3,170,000, due in
      December 2001, bearing interest at the rate of 6.06%. In addition, and in
      accordance with the terms of the option agreement, the holder of the
      options issued to the Company a promissory note in the principal amount of
      $2,340,000 bearing interest at the rate of 6.06%, payable in December
      2001, to settle his obligation to provide the Company with funds necessary
      to pay the required withholding taxes due upon the exercise of the
      options. A portion of the second note ($1,556,000) equal to the tax
      benefit received by the Company upon exercise and the full amount of the
      note for $3,170,000 are reflected in a separate component of stockholders'
      equity. The interest paid to the Company by the holder pursuant to the
      terms of the two notes issued in connection with the option exercise was
      $334,000 in 1998, 1997 and 1996.


                                                                            F-27
<PAGE>   51

           Grey Advertising Inc. and Consolidated Subsidiary Companies

             Notes to Consolidated Financial Statements (continued)

M.    Retirement Plans, Deferred Compensation, Executive Officer Loans, Leases
      and Contingencies (continued)

3.    Rental expense amounted to approximately $44,364,000 in 1998, $41,239,000
      in 1997 and $41,104,000 in 1996. Approximate minimum rental commitments,
      excluding escalations, under noncancellable operating leases are as
      follows:

<TABLE>
                  <S>                                         <C>         
                  1999                                        $ 43,809,000
                  2000                                          41,940,000
                  2001                                          39,822,000
                  2002                                          36,933,000
                  2003                                          32,503,000
                  Beyond 2003                                  124,030,000
                                                              ------------
                                                              $319,037,000
                                                              ============
</TABLE>

4.    The Company is not involved in any pending legal proceedings not covered
      by insurance or by adequate indemnification or which, if decided
      adversely, would have a material effect on the results of operations,
      liquidity or financial position of the Company.


                                                                            F-28
<PAGE>   52

           Grey Advertising Inc. and Consolidated Subsidiary Companies

             Notes to Consolidated Financial Statements (continued)

N. Industry Segment and Related Information

The Company is not engaged in more than one industry segment. The Company
evaluates performance by geographic region based on profit or loss before income
taxes. Commissions and fees are attributed to the geographic region that
generates billings. Commissions and fees, operating profit, interest
income/expense, and related identifiable assets at December 31, 1998, 1997 and
1996, are summarized below according to geographic region (000s omitted):

<TABLE>
<CAPTION>
                                                            United States                                  Europe                   
                                               ----------------------------------------     ----------------------------------------
                                                   1998          1997           1996           1998         1997            1996    
                                               -------------------------------------------------------------------------------------
<S>                                            <C>            <C>            <C>            <C>          <C>            <C>       
Commissions and fees                           $  419,469     $  382,288     $  338,496     $  415,685   $  380,675     $  370,888
                                               -------------------------------------------------------------------------------------

Operating profit (loss)                            38,501         32,570         26,174         27,509       30,534         30,279

Interest income (expense) - net                     4,677          6,366          4,910            853       (2,501)        (2,634)

Other income (expense)                              1,422          1,540          5,470            785          194           (765)
                                               -------------------------------------------------------------------------------------

Income of consolidated companies
before taxes on income                             44,600         40,476         36,554         29,147       28,227         26,880
                                               =====================================================================================

Equity in earnings of
nonconsolidated  affiliated
companies

Identifiable assets                               608,880        581,557        549,160        699,637      457,099        445,038

Investments in and advances to
nonconsolidated affiliated

Total assets

<CAPTION>
                                                                 Other                                    Consolidated
                                               ----------------------------------------     ----------------------------------------
                                                   1998           1997           1996          1998           1997           1996
                                                ------------------------------------------------------------------------------------
<S>                                             <C>            <C>            <C>           <C>            <C>               <C>    
Commissions and fees                            $  100,027     $   95,789     $   56,114    $  935,181     $  858,752     $  765,498
                                                ------------------------------------------------------------------------------------

Operating profit (loss)                            (13,353)         1,816          2,080    $   52,657     $   64,920     $   58,533

Interest income (expense) - net                       (923)        (1,135)          (130)        4,607          2,730          2,146

Other income (expense)                                (319)           (93)           309         1,888          1,641          5,014
                                                ------------------------------------------------------------------------------------

Income of consolidated companies
before taxes on income                             (14,595)           588          2,259        59,152         69,291         65,693
                                                ====================================================================================

Equity in earnings of
nonconsolidated  affiliated
companies                                                                                          722          1,622          1,184
                                                                                            ========================================

Identifiable assets                                164,431        142,945         77,473     1,472,948      1,181,601      1,071,671

Investments in and advances to
nonconsolidated affiliated                                                                      16,705         18,386         17,723
                                                                                            ----------------------------------------

Total assets                                                                                $1,489,653     $1,199,987     $1,089,394
                                                                                            ========================================
</TABLE>

Commissions and fees from one client amounted to 13.4%, 12.8% and 13.2% of the
consolidated total in 1998, 1997 and 1996, respectively.


                                                                            F-29
<PAGE>   53

                                INDEX TO EXHIBITS

<TABLE>
<CAPTION>
                                                                                    
  Number Assigned to Exhibit                                                        
 (i.e. 601 of Regulation S-K)                 Description of Exhibits               
 ----------------------------                 -----------------------               
<S>                             <C>                                                 
             3.01               Restated Certificate of Incorporation of Grey       
                                Advertising Inc. ("Grey"). (Incorporated herein     
                                by reference to Exhibit 3.01 to Grey's Current      
                                Report on Form 8-K, dated October 31, 1995,         
                                filed with the SEC pursuant to Section 13 of the    
                                1934 Act.)                                          
                                                                                    
             3.02               By-Laws of Grey as  amended.  (Incorporated  herein 
                                by  reference  to  Exhibit  3.02 to  Grey's  Annual 
                                Report  on Form  10-K  for the  fiscal  year  ended 
                                December 31, 1988.)                                 
                                                                                    
             4.01               Stockholder Exchange Agreement, dated as of         
                                April 7, 1994, by and between Grey and Edward H.    
                                Meyer. (Incorporated herein by reference to         
                                Exhibit 10(a) of Grey's Current Report on Form      
                                8-K, dated April 7, 1994, filed with the SEC        
                                pursuant to Section 13 of the 1934 Act.             
                                                                                    
             4.02               Purchase Agreement, dated as of December 10,        
                                1983, between Grey and Edward H. Meyer relating     
                                to the sale to Mr. Meyer of Grey's 8 1/2%           
                                Convertib Debentures, of even date therewith        
                                ("Convertible Debenture"). (Incorporated herein     
                                by reference to Exhibit 3.08 to Grey's Annual       
                                Report on Form 10-K for the fiscal year ended       
                                December 31, 1983.)                                 
                                                                                    
             4.03               Extension Agreement, dated as of November 19,       
                                1991 between Grey and Edward H. Meyer relating      
                                to the extension of the maturity dates of the       
                                Convertible Debenture and related Promissory        
                                Note. (Incorporated herein by reference to          
                                Exhibit 3.07 to Grey's Annual Report on Form        
                                10-K for the fiscal year ended December 31,         
                                1991.)                                              
                                                                                    
             4.04               Form of Convertible Debenture. (Incorporated        
                                herein by reference to Exhibit 3.09 to Grey's       
                                Annual Report on Form 10-K for the fiscal year      
                                ended December 31, 1983.)                           
                                                                                    
             4.05               Extension Agreements dated as of July 29, 1996      
                                between Grey and Edward H. Meyer relating to the    
                                extension of the maturity dates of the              
                                Convertible Debenture and related Promissory        
                                Note. (Incorporated herein by reference to          
                                Exhibit 4.01 and 4.02 to Grey's Quarterly Report    
                                on Form 10-Q for the quarter ended June 30,         
                                1996).                                              
</TABLE>


                                                                             E-1
<PAGE>   54

                                INDEX TO EXHIBITS

<TABLE>
<CAPTION>
                                                                                    
  Number Assigned to Exhibit                                                        
 (i.e. 601 of Regulation S-K)                 Description of Exhibits               
 ----------------------------                 -----------------------               
<S>                             <C>                                                 
             9.01               Voting Trust Agreement, dated as of December 1,     
                                1989, among the several Beneficiaries, Grey and     
                                Edward H. Meyer as Voting Trustee. (Incorporated    
                                herein by reference to Exhibit 9.03 to Grey's       
                                Annual report on Form 10-K for the fiscal year      
                                ended December 31, 1989.)                           
                                                                                    
             9.02               Amended and Restated Voting Trust Agreement,        
                                dated as of February 24, 1986, as amended and       
                                restated as of August 31, 1987 and again amended    
                                and restated as of March 21, 1994, among the        
                                several Beneficiaries where-under, Grey and         
                                Edward H. Meyer as Voting Trustee. (Incorporated    
                                herein by reference to Exhibit 9.04 to Grey's       
                                Annual Report on Form 10-K for the fiscal year      
                                ended December 31, 1993.)                           
                                                                                    
            10.01 *             Employment Agreement, dated as of February 9,       
                                1984, between Grey and Edward H. Meyer ("Meyer      
                                Employment Agreement"). (Incorporated herein by     
                                reference to Exhibit 10.01 to Grey's Annual         
                                Report on Form 10-K for the fiscal year ended       
                                December 31, 1983.)                                 
                                                                                    
            10.02 *             Amendments Two through Ten to Meyer Employment      
                                Agreement. (Incorporated herein by reference to     
                                Exhibit 10.02 to Grey's Annual Report on Form       
                                10-K for the fiscal year ended December 31,         
                                1985, Exhibit 10.03 to Grey's Annual Report on      
                                Form 10-K for the fiscal year ended December 31,    
                                1987, Exhibit 1 to Grey's Current Report on Form    
                                8-K, dated May 9, 1988, filed with the SEC          
                                pursuant to Section 13 of the 1934 Act, Exhibit     
                                2 to Grey's Current Report on Form 8-K, dated       
                                May 9, 1988, filed with the SEC pursuant to         
                                Section 13 of the 1934 Act. Exhibit I to Grey's     
                                Current Report on Form 8-K, dated June 9, 1989,     
                                filed with the SEC pursuant to Section 13 of the    
                                1934 Act, Exhibit 10.07 to Grey's Annual Report     
                                on Form 10-K for the fiscal year ended December     
                                31, 1990, Exhibit 10.03 to Grey's Annual Report     
                                on Form 10-K for the fiscal year ended December     
                                31, 1994, Exhibit 10.03 to Grey's Annual Report     
                                on Form 10-K for the fiscal year ended December     
                                31, 1997, and Exhibit 10.01 to Grey's Quarterly     
                                Report on Form 10-Q for the quarter ended March     
                                31, 1998, respectively.)                            
</TABLE>


                                                                             E-2
<PAGE>   55

                                INDEX TO EXHIBITS

<TABLE>
<CAPTION>
                                                                                    
  Number Assigned to Exhibit                                                        
 (i.e. 601 of Regulation S-K)                 Description of Exhibits               
 ----------------------------                 -----------------------               
<S>                             <C>                                                 
           10.03 *              Deferred Compensation Trust Agreement dated         
                                March 22, 1995 ("Trust Agreement"), by and          
                                between Grey and United States Trust Company of     
                                New York. (Incorporated herein by reference to      
                                Exhibit 10.04 to Grey's Annual Report on Form       
                                10-K for the fiscal year ended December 31,         
                                1994.)                                              
                                                                                    
           10.04 *              First and Second Amendments to Trust Agreement      
                                (Incorporated herein by reference to Exhibit        
                                10.05 to Grey's Annual Report on Form 10-K for      
                                the fiscal year ended December 31, 1995, and        
                                Exhibit 10.02 to Grey's Quarterly Report on Form    
                                10-Q for the quarter ended March 31, 1998,          
                                respectively.)                                      
                                                                                    
           10.05 *              Employment Agreement, dated as of December 21,      
                                1990, by and between Grey and Stephen A. Novick.    
                                (Incorporated herein by reference to exhibit        
                                10.11 to Grey's Annual Report on Form 10-K for      
                                the fiscal year ended December 31, 1990.)           
                                                                                    
           10.06 *              Amendment to Employment Agreement, dated as of      
                                April 26, 1994, by and between Grey and Stephen     
                                A. Novick. (Incorporated herein by reference to     
                                Exhibit 10.07 to Grey's Annual Report on Form       
                                10-K for the fiscal year ended December 31,         
                                1994.)                                              
                                                                                    
           10.07 *              Employment Agreement, dated as of December 1,       
                                1992, by and between Grey and Robert L.             
                                Berenson. (Incorporated herein by reference to      
                                Exhibit 10.05 to Grey's Annual Report on Form       
                                10-K for the fiscal year ended December 31,         
                                1992.)                                              
                                                                                    
           10.08 *              Grey Advertising Inc. Book Value Preferred Stock    
                                Plan, as amended. (Incorporated herein by           
                                reference to Exhibit 4.1 to Grey's Current          
                                Report on Form 8-K, dated June 14, 1983, filed      
                                with the SEC pursuant to Section 13 of the 1934     
                                Act.)                                               
                                                                                    
           10.09 *              Grey Advertising Inc. Amended and Restated          
                                Senior Executive Officer Pension Plan.              
                                (Incorporated herein by reference to Exhibit        
                                10.08 to Grey's Annual Report on Form 10-K for      
                                the fiscal year ended December 31, 1984.)           
</TABLE>


                                                                             E-3
  
<PAGE>   56

                                INDEX TO EXHIBITS

<TABLE>
<CAPTION>
                                                                                    
  Number Assigned to Exhibit                                                        
 (i.e. 601 of Regulation S-K)                 Description of Exhibits               
 ----------------------------                 -----------------------               
<S>                             <C>                                                 
           10.10 *              Grey Advertising Inc. Amended and Restated 1993     
                                Senior Management Incentive Plan. (Incorporated     
                                herein by reference to Exhibit 10.01 to Grey's      
                                Quarterly Report on Form 10-Q for the quarter       
                                ended September 30, 1996.)                          
                                                                                    
           10.11 *              Grey Advertising Inc. 1998 Senior Management        
                                Incentive Plan (Incorporated herein by reference    
                                to Exhibit A to Grey's 1998 Annual Meeting Proxy    
                                Statement)                                          
                                                                                    
           10.12 *              Promissory Notes I and II, dated as of December 29, 
                                1992, from Edward H. Meyer to Grey, delivered       
                                pursuant to the Stock Option Agreement dated as     
                                of October 13, 1984 by and between Grey and         
                                Edward H. Meyer. (Incorporated herein by reference  
                                to Exhibit 10.16 to Grey's Annual Report on Form    
                                10-K for the fiscal year ended December 31, 1992.)  
                                                                                    
           10.13 *              Stock Option Agreement, effective as of January     
                                5, 1995, by and between Grey and Edward H.          
                                Meyer. (Incorporated herein by reference to         
                                Exhibit 13 to Amendment No. 8 to the Statement      
                                on Schedule 13D, dated as of March 10, 1995,        
                                filed by Edward H. Meyer.)                          
                                                                                    
           10.14 *              Stock Option Agreement effective as of November     
                                26, 1996, by and between Grey and Edward H.         
                                Meyer. (Incorporated herein by reference to         
                                Exhibit 15 to Amendment No. 10 to the Statement     
                                on Schedule 13D, dated as of February 11, 1997,     
                                filed by Edward H. Meyer.)                          
                                                                                    
           10.15 *              Stock Option Agreement, effective as of January     
                                23, 1998, by and between Grey and Edward H.         
                                Meyer. (Incorporated herein by reference to         
                                Exhibit 16 to Amendment No. 11 to the Statement     
                                on Schedule 13D, dated as of March 13, 1998,        
                                filed by Edward H. Meyer.)                          
                                                                                    
           10.16                Registration Rights Agreement, dated as of June     
                                5, 1986, between Grey and Edward H. Meyer.          
                                (Incorporated herein by reference to Exhibit 12     
                                to Amendment No. 8 to the Statement on Schedule     
                                13D, dated as of March 10, 1995, filed by Edward    
                                H. Meyer.)                                          
</TABLE>


                                                                             E-4
<PAGE>   57
                                INDEX TO EXHIBITS

<TABLE>
<CAPTION>
                                                                                    
  Number Assigned to Exhibit                                                        
 (i.e. 601 of Regulation S-K)                 Description of Exhibits               
 ----------------------------                 -----------------------               
<S>                             <C>                                                 
            10.17 *             Grey Advertising Inc. Incentive Stock Option        
                                Plan, as amended and restated as of April 3,        
                                1986. (Incorporated herein by reference to          
                                Exhibit 4.04 to Grey's Registration Statement on    
                                Form S-8 filed with the SEC pursuant to Section     
                                6(a) of the '33 Act.)                               
                                                                                    
            10.18 *             Grey Advertising Inc. 1987 Stock Option Plan.       
                                (Incorporated herein by reference to Exhibit        
                                10.24 to Grey's Annual Report on Form 10-K for      
                                the fiscal year ended December 31, 1988.)           
                                                                                    
            10.19 *             Grey Advertising Inc. amended and restated 1994     
                                Stock Incentive Plan. (Incorporated herein by       
                                reference to Exhibit 10.02 to Grey's Quarterly      
                                Report on Form 10-Q for the quarter ended           
                                September 30, 1996.)                                
                                                                                    
            10.20               Note Agreement, dated as of December 23, 1997,      
                                by and between Grey and the Prudential Insurance    
                                Company of America.                                 
                                                                                    
            10.21 *             Bonuses - Grey has paid bonuses to certain of       
                                its executive officers (including those who are     
                                directors) and employees in prior years             
                                including 1993, and may do so in future years.      
                                Bonuses have been and may be in the form of         
                                cash, shares of stock or both although Grey         
                                presently does not have any plans to pay stock      
                                bonuses. Bonuses are not granted pursuant to any    
                                formal plan.                                        
                                                                                    
            10.22 *             Director's Fees - It is the policy of Grey to       
                                pay each of its non-employee directors a fee of     
                                $4,500 per fiscal quarter and a fee of $3,000       
                                for each meeting of the Board of Directors          
                                attended. This policy is not embodied in any        
                                written document.                                   
                                                                                    
            10.23 *             Deferred Compensation Agreement, dated December     
                                23, 1981, between Grey and Mark N. Kaplan,          
                                regarding deferral of payment of director's fees    
                                to which Mr. Kaplan may become entitled.            
                                (Incorporated herein by reference to Exhibit        
                                10.18 to Grey's Annual Report on Form 10-K for      
                                the fiscal year ended December 31, 1982.)           
</TABLE>


                                                                             E-5
<PAGE>   58

                                INDEX TO EXHIBITS

<TABLE>
<CAPTION>
                                                                                     
  Number Assigned to Exhibit                                                         
 (i.e. 601 of Regulation S-K)                 Description of Exhibits                
 ----------------------------                 -----------------------                
<S>                             <C>                                                  
            10.24 *             On March 23, 1978, Grey's Board of Directors, at     
                                a meeting thereof held on such date, approved an     
                                arrangement whereby Grey is required to accrue       
                                for Edward H. Meyer, the difference between the      
                                amount contributed by Grey on behalf of Mr.          
                                Meyer under the Profit Sharing Plan and Grey's       
                                Employee Stock Ownership Plan, and the amount        
                                which would have been contributed to such plans      
                                on his behalf had such plans not contained           
                                maximum annual limitations on contributions and      
                                credits, as required by the Employee Retirement      
                                Income Security Act of 1974. Such accrual is to      
                                be paid to Mr. Meyer as if it had been               
                                contributed to his account under the Profit          
                                Sharing Plan. Such arrangement is not embodied       
                                in any written document.                             
                                                                                     
            10.25               Lease, dated as of July 1, 1978, by and between      
                                Grey and William Kaufman and J. D. Weiler,           
                                regarding space at 777 Third Avenue, New York,       
                                New York ("Main Lease"). (Incorporated herein by     
                                reference to Exhibit 10.21 to Grey's Annual          
                                Report on Form 10-K for the fiscal year ended        
                                December 31, 1982.)                                  
                                                                                     
            10.26               First through Seventeenth Amendments to Main         
                                Lease (Incorporated herein by reference to           
                                Exhibits 10.22, 10.23, 10.24, 10.25, 10.26,          
                                10.27, 10.28 and 10.29 to Grey's Annual Report       
                                on Form 10-K for the fiscal year ended December      
                                31, 1982, Exhibit 10.30 to Grey's Annual Report      
                                on Form 10-K for the fiscal year ended December      
                                31, 1983, Exhibits 10.33 and 10.34 to Grey's         
                                Annual Report on Form 10-K for the fiscal year       
                                ended December 31, 1984, Exhibits 10.35 and          
                                10.36 to Grey's Annual Report on Form 10-K for       
                                the fiscal year ended December 31, 1985, Exhibit     
                                10.36 to Grey's Annual Report on Form 10-K for       
                                the fiscal year ended December 31, 1986, and         
                                Exhibit 10.27 to Grey's Annual Report on Form        
                                10-K for the fiscal year ended December 31,          
                                1997, respectively.)                                 
                                                                                     
            10.27               Eighteenth Amendment to Main Lease dated as of       
                                October 1, 1998                                      
                                                                                     
            21.01               Subsidiaries of Grey                                 
                                                                                     
            23.01               Consent of Independent Auditors                      
</TABLE>


                                                                             E-6
<PAGE>   59

                                INDEX TO EXHIBITS

<TABLE>
<CAPTION>
                                                                                    
  Number Assigned to Exhibit                                                        
 (i.e. 601 of Regulation S-K)                 Description of Exhibits               
 ----------------------------                 -----------------------               
<S>                             <C>                                                 
            27.01               Financial Data Schedule                             
                                                                                    
                                *Management contract or compensatory plan or        
                                arrangement identified in compliance with Item      
                                14(c) of the rules governing the preparation of     
                                this report.                                        
                                                                                    
        10K-Exhibits                                                                
</TABLE>


                                                                             E-7