SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
 
                                    FORM 10-K
(Mark One)
[X]  ANNUAL REPORT  PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES  EXCHANGE
     ACT OF 1934 (FEE REQUIRED)

     FOR  THE FISCAL YEAR ENDED JUNE 30, 1997
                                       OR
[ ]  TRANSITION  REPORT  PURSUANT  TO SECTION 13 OR 15 (d) OF THE  SECURITIES
     EXCHANGE  ACT OF 1934 (NO FEE  REQUIRED)   
     For the  transition  period  from  _______ to _______



                        Commission File Number: 0-20724
                             WATSON WYATT & COMPANY
             (Exact name of registrant as specified in its charter)

            Delaware                                       53-0181291
 (State or other jurisdiction of                (I.R.S. Employer Identification
          organization)                                       No.)
                                             
                            6707 DEMOCRACY BOULEVARD
                                    SUITE 800
                               BETHESDA, MD 20817
           (Address of Principal executive offices including zip code)
                                 (301) 581-4600
              (Registrant's telephone number, including area code)

--------------------------------------------------------------------------------
        SECURITIES TO BE REGISTERED PURSUANT TO SECTION 12(B)OF THE ACT:

       TITLE OF EACH CLASS                    NAME OF EACH EXCHANGE ON WHICH
       TO BE SO REGISTERED                    EACH CLASS IS TO BE REGISTERED

              NONE                                        NONE

        SECURITIES TO BE REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:

  COMMON STOCK, $1.00 PAR VALUE               OUTSTANDING AT SEPTEMBER 29, 1997
        (TITLE OF CLASS)                                17,736,687 SHARES

Indicate  by check  mark  whether  the  registrant:  (1) has filed  all  reports
required to be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of
1934  during  the  preceding  12 months  (or for such  shorter  period  that the
Registrant was required to file such reports),  and (2) has been subject to such
filing requirements for the past 90 days.
                                    Yes [X] No [ ]

Indicate by check mark if disclosure of delinquent  filers  pursuant to Item 405
of Regulation  S-K is not contained  herein,  and will not be contained,  to the
best of registrant's  knowledge,  in definitive proxy or information  statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]

The  aggregate  market value of the Common Stock held by  non-affiliates  of the
Registrant is $82,753,943.  The aggregate market value was computed by using the
formula book value of the stock (calculated in accordance with the bylaws) as of
September 29, 1997.
                       Documents Incorporated by Reference

The  registrant's  definitive  proxy  statement  for its 1997 annual  meeting of
shareholders  (which is to be filed  pursuant to General  Instruction  G of Form
10-K not later than October 28, 1997),  is  incorporated  by reference into Part
III of this Form 10-K.

<PAGE>

PART I

ITEM 1.  BUSINESS.

GENERAL

Watson  Wyatt  &  Company,   together  with  its  affiliates  and   consolidated
subsidiaries,  (collectively,  "Watson Wyatt" or "the Company"),  provides human
resource  and  employee  benefits  consulting  and  administrative/recordkeeping
services. The Company also provides a broad range of services in risk management
and general insurance and investment consulting,  and derives fees from sales of
surveys and licensing of software.  The Company works with  organizations of all
sizes,  from the  largest  multinationals  to  public  employers  and  nonprofit
institutions.

Founded in 1946,  Watson Wyatt is owned almost entirely by its active employees.
The Company is incorporated in Delaware, and its principal executive offices are
located at 6707  Democracy  Boulevard,  Bethesda,  MD 20817.  Together  with its
affiliates, it operates globally as Watson Wyatt Worldwide.

GLOBAL OPERATIONS

Watson Wyatt provides services in the United States,  Canada, Asia and the South
Pacific, Europe, Africa, Latin America and the Caribbean.

Watson  Wyatt  Worldwide  continues  to expand  geographically  with new offices
recently opened in Bangkok, Beijing, Delhi, Johannesburg, Mumbai, Sao Paulo, Sri
Lanka, and Zurich.

Together Watson Wyatt Worldwide employs approximately 4,500 associates.  Of this
total,  the Company  employs  approximately  3,240  full-time  associates in the
following geographic areas:

North America                              2,640
Asia Pacific                                 520
Latin America                                 80
                                          ------
                                           3,240
                                          ======  

None  of  the  Company's   associates  are  subject  to  collective   bargaining
agreements. The Company believes relations with associates are good.

For geographic  segment  information,  see Note 12 of Notes to the  Consolidated
Financial Statements.

PRINCIPAL SERVICES

Watson Wyatt provides a vast array of employee  benefit and related  services to
clients.   While  the  Company  groups  services  into  functional   categories,
management  believes its primary strength is the ability to deliver its services
without boundaries to meet the requirements of its clients. Services provided by
the Company include:

RETIREMENT  CONSULTING:  Analysis,  design and  implementation of client defined
benefit retirement programs, including actuarial services and required reporting
of plan contributions and funding levels,  and defined  contribution plan design
and related  services  comprised  44%, 46% and 48% of fees in fiscal years 1997,
1996, and 1995, respectively.

                                      -2-
<PAGE>

COMPENSATION AND COMMUNICATIONS  CONSULTING:  Compensation plan design, benefits
communication, and organization effectiveness comprised 13%, 12% and 11% of fees
in fiscal years 1997, 1996 and 1995, respectively.

GROUP, HEALTH CARE AND FLEXIBLE BENEFITS CONSULTING:  Analysis,  plan design and
implementation  of client  organizations'  group health care,  flexible benefits
programs,  and  consulting  with  providers of health care services to help them
deliver services on a more efficient and  cost-effective  basis comprised 8%, 8%
and 9% of fees in fiscal years 1997, 1996 and 1995, respectively.

OTHER  STRATEGIC  CONSULTING  SERVICES:  Watson  Wyatt  provides  other types of
strategic  consulting  services,  which individually  represent less than 10% of
total fees, and which accounted in the aggregate for 35%, 34% and 32% of fees in
fiscal  years  1997,  1996  and  1995,  respectively.   These  services  include
consulting in the areas of risk management,  investment  consulting,  outsourced
benefits  administration,  international  benefits consulting,  and research and
surveys.

Prior  year   percentages   have  been   recalculated   to  conform  to  current
classification.

COMPETITION

The human resource consulting business, including all of the Company's principal
services,  is highly competitive and has relatively low barriers to entry. There
is no substantial  difference between the competitive  position of the Company's
overall business as compared to its individual lines of business.  The Company's
competitors  include other human resource  consulting firms,  insurance brokers,
general  management  consultants,  public  accounting firms and, to some extent,
mutual  funds and other  financial  institutions,  particularly  in the  defined
contribution recordkeeping area. The human resource consulting field includes as
many as ten principal  competitors  who offer services in the United States and,
in several cases, internationally.  BUSINESS INSURANCE ranks Watson Wyatt as the
third largest employee benefit consulting firm in the world.

Although competition is based primarily upon quality of service and availability
of key  consulting  resources,  in recent years in some aspects of the business,
price  has  become a more  significant  competitive  factor.  Other  competitive
factors of increasing  importance are the quality and effectiveness of available
technology and software and the ability to serve multinational clients.

AFFILIATES

On April 1, 1995,  the Company (then The Wyatt  Company or "Wyatt")  transferred
its United  Kingdom  operations  to R. Watson & Sons  ("Watsons"),  an actuarial
consulting  partnership  based in the United Kingdom,  and received a beneficial
interest  in Watsons  and a 10%  interest  in a defined  profit pool of Watsons.
Wyatt also  transferred  its Continental  European  operations to a newly formed
holding  company owned by Wyatt and Watsons in exchange for 50.1% of its shares.
On July 1, 1996, Wyatt and Watsons changed their names to Watson Wyatt & Company
and Watson  Wyatt  Partners,  respectively.  While both  remain  separate  legal
entities, the companies are operating together as Watson Wyatt Worldwide.

On March 31, 1996,  the Company  transferred  the outsourced  employee  benefits
administration  operations  of Wyatt  PREFERRED  CHOICE (R) ("WPC"),  to a newly
formed limited liability  company,  Wellspring  Resources,  LLC  ("Wellspring").
Wellspring,  which is owned 50% by Watson Wyatt and 50% by State Street Bank and
Trust Company ("State Street"), provides outsourced benefits and human

                                      -3-
<PAGE>

resources  administration.  In connection with the formation of Wellspring,  the
Company retained three  pre-existing long term  administrative and recordkeeping
contracts and  contracted  with  Wellspring to service those clients  ("Retained
Clients")  (see  Note  13  of  Notes  to  Consolidated   Financial  Statements).
Wellspring's financial statements are included as Exhibit 25 to this Form 10-K.

ITEM 2.  PROPERTIES.

Watson Wyatt Worldwide operates in approximately 97 offices in cities throughout
the world. With minor  exceptions,  operations are carried out in leased offices
under  operating  leases  which  normally do not exceed 10 years in length.  The
Company  does not  anticipate  difficulty  in meeting  its space  needs at lease
expiration  or if  additional  space  is  required  earlier.  The  Company  also
evaluates  office  relocation on an ongoing basis to meet changing  needs in its
markets while minimizing its occupancy expense.

The fixed assets owned by Watson Wyatt  represented  approximately  11% of total
assets at June 30, 1997 and consisted  primarily of computer  equipment,  office
furniture and leasehold improvements.


ITEM 3.  LEGAL PROCEEDINGS.

Watson Wyatt is from time to time a defendant in various lawsuits which arise in
the  ordinary  course of  business.  These  disputes  typically  involve  claims
relating to employment  matters or the rendering of professional  services.  The
management  of the Company does not believe that any such  currently  pending or
threatened  litigation  is  likely  to have a  material  adverse  effect  on the
business or financial condition of Watson Wyatt.


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

There were no matters  submitted to a vote of security holders during the fourth
fiscal quarter.


PART II

ITEM 5. MARKET PRICE OF AND  DIVIDENDS  ON THE  REGISTRANT'S  COMMON  EQUITY AND
RELATED STOCKHOLDER MATTERS. 

MARKET INFORMATION; HOLDERS

There is no established  public trading market for the Common Stock,  nor is any
likely to  develop,  since the  transferability  of all shares of the  Company's
Common Stock is restricted. Ownership of the Company's Common Stock is generally
limited to directors, full-time and certain part-time associates of the Company,
its subsidiaries and affiliates, and corporations, partnerships, associations or
other entities designated by the Board of Directors with which the Company has a
business affiliation and the employees thereof. In addition, all shareholders of
the  Company,  prior to selling any shares of the  Company's  Common  Stock to a
third party,  must first offer such shares to the Company.  As of September  24,
1997,  there  were  2,121  registered  holders of the  Company's  Common  Stock.
Transfers of the  Company's  Common  Stock are made at a Formula Book Value,  as
defined,  and the current Formula Book Value per share is calculated pursuant to
the  Company's  bylaws  to be  $5.30  per  share at June 30,

                                      -4-
<PAGE>

1997,  as further  described  in the  Consolidated  Financial  Statements.  This
Formula Book Value reflects an increase of  approximately  7.3% from the Formula
Book Value of $4.94 per share at June 30, 1996.

DIVIDENDS

The  Company's  credit  facility   requires  it  to  observe  certain  covenants
(including  requirements  as to minimum  net  worth)  that  affect  the  amounts
available  for  the  declaration  or  payment  of  dividends.   Under  the  most
restrictive of these  covenants,  approximately  $11.7 million was available for
the  declaration  or payment of dividends as of June 30, 1997. No dividends have
been declared by the Company since fiscal year 1991. The declaration and payment
of  dividends  by the Company is at the  discretion  of the  Company's  Board of
Directors and depends on numerous factors,  including,  without limitation,  the
Company's net  earnings,  financial  condition,  availability  of capital,  debt
covenant  limitations,   and  other  business  needs  of  the  Company  and  its
subsidiaries and affiliates.

ITEM 6.  SELECTED CONSOLIDATED FINANCIAL DATA.

The  following  table sets forth  selected  consolidated  financial  data of the
Company as of and for each of the years in the five year  period  ended June 30,
1997. The selected consolidated  financial data as of June 30, 1997 and 1996 and
for each of the years in the three year  period  ended June 30, 1997 are derived
from the audited  consolidated  financial statements of Watson Wyatt included in
this Form 10-K.  The selected  consolidated  financial data as of June 30, 1995,
1994,  1993,  and for each of the years  ended June 30,  1994 and 1993 have been
derived  from  audited  consolidated  financial  statements  of Watson Wyatt not
included in this Form 10-K.

The  transfer  of the  Company's  UK and  European  operations,  as  more  fully
described  in Item 1,  occurred  in the  fourth  quarter  of  fiscal  1995.  The
formation of  Wellspring  at the end of the third quarter of fiscal 1996 is also
described in Item 1. Since the dates of inception,  these transactions have been
accounted for in accordance with the equity method.

The selected  consolidated  financial  data should be read in  conjunction  with
Watson  Wyatt's   consolidated   financial  statements  and  notes  thereto  and
"Management's  Discussion  and  Analysis of Financial  Condition  and Results of
Operations"  included  in Item 7 in this Form 10-K.  Amounts  are in  thousands,
except per share data.


                                      -5-
<PAGE>
<TABLE>
<CAPTION>

                                                                              Year ended June 30,
                                                      -------------------------------------------------------------------- 
Statement of Operations Data:                            1997          1996           1995          1994           1993
                                                         ----          ----           ----          ----           ----
<S>                                                          <C>           <C>            <C>           <C>            <C>

Fees                                                  $  510,998    $  492,513     $  474,521    $  433,441     $  410,121
Loss from affiliates                                      (6,174)       (2,275)          (576)         (547)          (144)
Income before income taxes, minority interest and          
    cumulative effect of a change in accounting            1,954        18,688          5,625        12,717          5,644
Cumulative effect of a change in accounting                    -             -           (800)            -              -
                                                                                         
Net income                                                   898         9,355            849         5,636            963
Earnings per share                                    $     0.05    $     0.51     $     0.05    $     0.29    $      0.05
                                                                                                   
Dividends per share                                            -             -              -             -              -
Weighted average shares
    outstanding (in thousands)                            17,438        18,516         19,248        19,160         18,302

                                                                                     June 30,
                                                      --------------------------------------------------------------------
Balance Sheet Data:                                      1997          1996           1995          1994           1993
                                                         ----          ----           ----          ----           ----

Investment in affiliates                              $   52,516    $   41,195     $   18,783    $      383    $       930
                                                                                                        
Deferred software and development costs                   32,869        35,746         28,979        12,479          9,401
                                                                                               
Total assets                                             331,778       320,819        286,622       266,786        242,994
Redeemable Common Stock                                   96,091        90,214         86,275        87,612         82,557
                                                                                                   
Formula Book Value
    per share (1)                                     $     5.30    $     4.94     $     4.51    $     4.44    $      4.11
                                                                                                    
Shares outstanding (in thousands)                         18,130        18,262         19,130        19,732         20,087
                                                                                                

</TABLE>
-----------
(1)As  described  more fully in Note 10 of Notes to the  Consolidated  Financial
Statements,  effective  with the fiscal  year ended June 30,  1997,  the Company
modified its bylaws for calculating Formula Book Value per share.


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

YEAR ENDED JUNE 30, 1997 COMPARED TO YEAR ENDED JUNE 30, 1996

The Company generated net income in fiscal year 1997 of $0.9 million compared to
net  income  in fiscal  year 1996 of $9.4  million.  The  primary  factor in the
reduction of net income,  as further  explained  below,  is the sublease loss of
$12.1 million resulting from the relocation of offices,  which will be more than
offset  by  future  rent  savings.  Revenue  growth  of $18.5  million  outpaced
inflation,  but the  improvement was offset by expense growth during the period.
Increases in expenses are attributable to increased  compensation costs of $10.7
million for associates, higher costs for professional and subcontracted services
of $6.5  million  and  increased  occupancy  and  communications  costs  of $8.2
million.

Fee revenue  reached  $511.0  million in fiscal year 1997,  an increase of $18.5
million,  or 4%, from $492.5  million in fiscal  year 1996.  Revenue  growth has
occurred across all major lines of business and all geographic regions. 

                                      -6-
<PAGE>

For the year,  salaries and employee  benefit  expenses were $252.3 million,  an
increase of $10.7  million  from fiscal year 1996 due  primarily to increases in
base salaries and associate bonuses.

Occupancy and communications expense increased $8.2 million in 1997. The Company
relocated  its  corporate  and some  operating  offices to lower  cost  suburban
facilities in 1997 recognizing sublease losses of $12.1 million.  This charge is
offset primarily by savings in other occupancy and office expenses.

Professional and subcontracted services were $82.8 million for fiscal year 1997,
an increase of $6.5 million,  or 9%, from fiscal year 1996. This net increase is
due to the increased payments to Wellspring for outsourcing services provided to
the Retained Clients. In fiscal year 1996, payments to Wellspring,  representing
one fiscal  quarter of activity,  were $10.8 million  whereas the full year cost
incurred  in fiscal  year 1997 was $40.3  million,  representing  an increase of
$29.5  million.  This increase was offset by decreased  payments to  independent
software contractors of $13.0 million which are now incurred by Wellspring and a
further  reduction  of $5.0  million  for costs  incurred in fiscal year 1996 by
WPC-Minneapolis  which was sold in fiscal year 1996 and other  decreases of $5.0
million.

Other costs of providing  services decreased $1.3 million in 1997 as the Company
controlled general office expenditures.

General and administrative  expenses for fiscal year 1997 were $45.7 million, an
increase of $7.0 million or 18% from fiscal year 1996 due to increased  spending
on marketing and strategic planning initiatives.

Depreciation  and  amortization  decreased  $0.4  million in fiscal year 1997 to
$26.0  million.  This decrease is primarily due to the disposal of assets in the
prior year and lower levels of capital expenditures in the current fiscal year.

Loss from  affiliates  for the year is primarily  affected by the results of the
Company's  affiliate,  Wellspring  (See  Note 3 of  Notes  to  the  Consolidated
Financial  Statements).  As previously reported,  Wellspring was formed in March
1996  as a  successor  to  the  Company's  prior  outsourced  employee  benefits
administration business, Wyatt PREFERRED CHOICE(R). Wellspring provides benefits
administration outsourcing services and renders services to the Retained Clients
on behalf of the Company.  (See Part 1, Item 1 and Notes 1  ("Deferred  Software
and  Development  Costs")  and  13  of  Notes  to  the  Consolidated   Financial
Statements).

During fiscal year 1997, Wellspring experienced software development and systems
implementation  delays.  The combination of delayed  revenues  arising from late
systems   implementations  for  clients,  as  well  as  unanticipated  operating
expenses,  resulted in a  significantly  higher  investment  in the  outsourcing
business  than had been  anticipated.  During  fiscal  year  1997,  the  Company
invested  $17.0 million in Wellspring  and made certain  guarantees on behalf of
Wellspring  as more  fully  described  in Note 14 of Notes  to the  Consolidated
Financial Statements. The $17.0 million invested in fiscal year 1997 brought the
Company's   total  capital   contribution  to  $36.75  million  (State  Street's
cumulative investment being at an equal level) or $6.75 million in excess of the
cumulative  partner  capital  to which  each of  State  Street  and the  Company
committed when the Wellspring joint venture was formed.

The Company  anticipates  that in fiscal year 1998  Wellspring will require cash
resources of $15.1 million, and that its share of Wellspring's  operating losses
will be $5.7 million.  As described above, the level of investment  required has
exceeded  expectations  due to systems and software delays and higher  operating
costs,  both  of  which  conditions,   the  Company  believes,  have  also  been
experienced by Wellspring's


                                      -7-
<PAGE>

competitors  in  this  emerging  business.   Wellspring  has  recently  achieved
operating   milestones,   including  completion  of  both  Retained  Client  and
Wellspring  client  implementations  and a  successful  acceptance  test  on its
"NextGen" operating system.

The Company and State Street have indicated their intention to fund Wellspring's
cash  requirements as needed.  Additionally  the Company has received  inquiries
from interested third parties as to potential  investments in Wellspring.  These
discussions are in preliminary stages and the Company cannot, therefore,  assess
the probable outcome.

The Company  anticipates  that in fiscal  year 1998 the  Retained  Clients  will
require $3.5 million of cash resources, substantially improved from the negative
cash flow to the Company from these  contracts of $21.0  million in fiscal 1997,
primarily due to the completion of two major client implementations in the first
quarter of fiscal  year 1998.  The Company  anticipates  losses  totalling  $8.3
million for the Retained Client operations in fiscal year 1998 compared with the
$17.3  million  loss  incurred  in fiscal  year 1997.  The  Company's  remaining
investment  in the Retained  Clients is described in Note 1 ("Deferred  Software
and Development Costs") of Notes to the Consolidated Financial Statements.

The information  concerning Wellspring and the Retained Clients in the preceding
three paragraphs includes "forward-looking statements" within the meaning of the
Private  Securities  Legislation  Reform Act of 1995. Any such  "forward-looking
statements" are not guarantees of future  performance.  The Company's ability to
realize such "forward-looking  statements" is subject to risks and uncertainties
which could cause actual results to differ  materially  from those  described in
such   "forward-looking   statements."  Such  risks  and  uncertainties  include
Wellspring's  ability to put NextGen into  operation,  to meet scheduled  client
implementations,  to control  development  costs, and to control operating costs
for both the Wellspring clients and the Retained Clients.

Income before income taxes,  minority  interest and the  cumulative  effect of a
change in  accounting  was $2.0 million in fiscal year 1997.  The  provision for
income taxes of $.9 million  reflects a 45%  effective  tax rate  compared to an
effective tax rate of 49% in fiscal year 1996. The decrease in the effective tax
rate is due to increased tax credits in 1997.

YEAR ENDED JUNE 30, 1996 COMPARED TO YEAR ENDED JUNE 30, 1995

The Company generated net income in fiscal year 1996 of $9.4 million compared to
net income in fiscal year 1995 of $0.8 million.  The  improvement is due largely
to  increases  in  associate  utilization  and new  client  growth.  The rate of
increased  revenues has outpaced both  inflation  and expense  growth during the
period. Fiscal year 1996 results also include a postretirement  curtailment gain
of $1.7 million,  net of tax, arising primarily from participants who joined new
plans of the Company's affiliate.  Fiscal year 1995 results include an after tax
charge  of  $0.8  million  related  to the  cumulative  effect  of a  change  in
accounting for postemployment benefits.

Fee revenue  reached  $492.5  million in fiscal year 1996,  an increase of $18.0
million,  or 4%, from $474.5  million in fiscal  year 1995.  Revenue  growth has
occurred  across  most lines of  business,  including  the  outsourced  benefits
administration  business  and the  Company's  Asia/Pacific  operations.  Average
billable  hours per associate  increased as compared with the last year.  Fiscal
year 1995 results  include fee revenues of $30.0 million related to the European
operations prior to their transfer to the Watsons affiliate and the newly formed
holding company, Watson Wyatt Holdings (Europe) Limited (WWHE) on April 1, 1995.
Excluding the effect of this transfer,  fee revenue  increased  $48.0 million or
11% from 1995 to 1996.

                                      -8-
<PAGE>

For fiscal  year 1996,  salaries  and  employee  benefit  expenses  were  $241.6
million,  a decrease of $7.1 million from fiscal year 1995.  The decrease is due
to the transfer of the European  operations in the fourth quarter of fiscal year
1995, $17.0 million, and the sale of the Minneapolis  outsourcing center and the
formation of Wellspring in the third quarter of fiscal year 1996, $10.0 million,
offset by normal salary increases and higher associate bonuses.

Occupancy and communication  expenses for fiscal year 1996 were $64.0 million, a
decrease  of $9.5  million,  or 13% from the prior  year.  The  decrease  is due
primarily to the transfer of the Company's European operations to WWHE.

Professional and subcontracted services were $76.2 million for fiscal year 1996,
an increase of $19.6  million,  or 35%,  from fiscal year 1995.  The increase is
primarily due to software  subcontractor  costs related to outsourcing  benefits
administration at WPC.

For fiscal  year 1996,  other  costs of  providing  services,  including  travel
expense,  decreased $1.4 million,  or 5%, from fiscal year 1995 to $25.2 million
due in part to nonrecurring  expenses in 1995 relating to the  affiliation  with
Watsons.

General and  administrative  expenses  for fiscal year 1996 were $38.7  million,
down $2.7 million or 6% from fiscal year 1995. The expenses for fiscal year 1995
were higher due to certain  nonrecurring  expenses  incurred in  completing  the
affiliation with Watsons. Also, earlier in fiscal year 1996, the Company reduced
general and  administrative  staff and related costs,  which is reflected in the
decrease between years.

Depreciation  and  amortization  increased  $4.9  million in fiscal year 1996 to
$26.3  million.  This  increase is  primarily  due to new client  administrative
systems placed in service during fiscal year 1996.

Income before income taxes,  minority  interest and the  cumulative  effect of a
change in accounting  was $18.7 million in fiscal year 1996,  which  generated a
provision  for income  taxes of $9.2  million.  This  compares to income  before
income taxes and minority interest of $5.6 million,  and an income tax provision
of $3.8 million in fiscal year 1995.

LIQUIDITY AND CAPITAL RESOURCES

The Company relies primarily on funds from operations and short-term  borrowings
as its sources of liquidity.  The Company  believes  that it has access to ample
financial resources to finance its growth, meet its commitments to affiliates as
well as support ongoing  operations.  The Company's cash and cash equivalents at
June 30, 1997 totaled $26.3 million, compared to $21.7 million at June 30, 1996.
The Company did not have any outstanding borrowings at June 30, 1997 or 1996.

CASH FROM  OPERATIONS.  The Company's  annual  pattern of cash flow is generally
stable  and  typically  does not  fluctuate  widely  between  operating  cycles.
Operating  cash flow for the Company,  however,  totaled  $49.0 million in 1997,
compared to $73.0 million in the preceding  year with the decrease due primarily
to lower net income of $8.5  million  and tax  payments  of $11.9  million.  The
Company  continued its focus on billing and collection  practices in fiscal year
1997 to strengthen the role of working capital management in its profit goals.

                                      -9-
<PAGE>

The  Company's  foreign  operations  do not  materially  impact its liquidity or
capital  resources.  At June 30, 1997, $6.1 million of the total cash balance of
$26.3  million was held outside of North  America,  all of which the Company has
the  ability  to  readily  access,  if  necessary.   There  are  no  significant
repatriation  restrictions  or adverse  economic  consequences  associated  with
repatriation. The foreign operations are substantially self-sufficient,  and the
Company does not anticipate any material future funding  requirements  for these
operations.  Likewise,  the Company does not  anticipate the need to access such
cash under its line of credit.

There was no reduction in available  foreign operating losses as a result of the
transfer of the European operating subsidiaries to WWHE in 1995, and such losses
remain available to the Company.  For financial statement purposes,  the Company
has not  recognized  any  income  tax  benefits  for  these net  operating  loss
carryforwards due to the uncertainty associated with their eventual realization.

Due to the  nature of the  Company's  operations  (billing  and  collecting  for
services within each country in that country's local currency),  the Company has
little  foreign  currency  transaction  risk.  Therefore,  the  Company  has not
implemented a formal hedging policy or program.  Any foreign currency risk would
be primarily  associated  with  the  Company's   investments  in  its  non-U.S.
subsidiaries.  The Company has  evaluated the cost of hedging this balance sheet
exposure,  and  concluded  that the  cost  exceeds  the benefit  relative to the
associated level of exposure.

The Company's ratio of current assets to current liabilities  increased slightly
between fiscal years 1997 and 1996 at 1.2 and 1.1, respectively.

CASH FROM  INVESTING  ACTIVITIES.  Investing  activity  cash  outflow  was $42.3
million in 1997,  versus $58.2 million in 1996. The decrease is primarily due to
decreased fixed asset purchases net of lower proceeds from sales of fixed assets
and lower investments in software development and affiliates.

Anticipated  commitments  of funds for fiscal year 1998 are  estimated  at $39.0
million,  which includes expected  purchases of fixed assets, 50% of the capital
requirements of Wellspring,  and 50.1% of the capital  requirements of WWHE. The
company expects operating cashflows to provide for the Company's cash needs.

The Company has an $80.0  million  revolving  credit line with a group of banks.
The line is currently  scheduled to mature in January 2001.  Fifty-five  million
dollars of the credit line is available  to the Company as revolving  credit for
operating needs, subject to certain borrowing  limitations.  The remaining $25.0
million is available to secure loans to associates  from financial  institutions
for the purchase of Redeemable  Common Stock made available  under the Company's
stock purchase  program.  At June 30, 1997,  $40.6 million of the credit line is
available to the Company as revolving credit for operations.

CASH FROM FINANCING ACTIVITIES. Financing activity cash outflow was $1.2 million
in 1997, versus $4.0 million in 1996, due to the net of sales and repurchases of
the Company's Redeemable Common Stock.

ITEM 8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

The financial  statements and supplementary data are included as Item 14 of this
report.

                                      -10-
<PAGE>

ITEM  9.  CHANGES  IN AND  DISAGREEMENTS  WITH  ACCOUNTANTS  ON  ACCOUNTING  AND
FINANCIAL DISCLOSURE.

There are no  changes  in  accountants  or  disagreements  with  accountants  on
accounting principles and financial disclosures required to be disclosed in this
Item 9.


PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

The response to this item will be included in a definitive proxy statement filed
within 120 days  after the end of the  Registrant's  fiscal  year,  which  proxy
statement is incorporated herein by this reference.


ITEM 11.  EXECUTIVE COMPENSATION.

The response to this item will be included in a definitive proxy statement filed
within 120 days  after the end of the  Registrant's  fiscal  year,  which  proxy
statement is incorporated herein by this reference.


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

The response to this item will be included in a definitive proxy statement filed
within 120 days  after the end of the  Registrant's  fiscal  year,  which  proxy
statement is incorporated herein by this reference.


ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

The response to this item will be included in a definitive proxy statement filed
within 120 days  after the end of the  Registrant's  fiscal  year,  which  proxy
statement is incorporated herein by this reference.


PART IV

ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
                                                                           Page
a)  Financial Information                                                  ----

(1) Consolidated Financial Statements of Watson Wyatt & Company

    Report of Independent Accountants                                      F-1

    Financial Statements:

      Consolidated Statements of Operations for
      the three years ended June 30, 1997                                  F-2

      Consolidated Balance Sheets at June 30, 1997 and 1996                F-3

                                       -11-
<PAGE>

      Consolidated Statements of Cash Flows for the three
      years ended June 30, 1997                                            F-4

      Consolidated Statements of Changes in Permanent
      Shareholders' Equity for the three years ended June 30, 1997         F-5

      Notes to Consolidated Financial Statements                   F-6 to F-25

(2) Consolidated Financial Statement Schedule for the three years
    ended June 30, 1997

    Report of Independent Accountants on Financial Statement Schedule     F-26

    Valuation and Qualifying Accounts and Reserves (Schedule II)          F-27

    All other schedules are omitted because they are not applicable or the
    required information is shown in the financial statements or notes thereto.

    Financial  statements  of 50% or less  owned  entities  and  unconsolidated
    subsidiaries have been omitted, with the exception of Wellspring Resources,
    LLC  which  is  filed  with  this  Form  10-K,   because  the  registrant's
    proportionate share of the income from continuing  operations before income
    taxes  from such companies is less than 20% of the  respective  consolidated
    amount.  Total  assets  of  each  such  company  is  less  than  20% of the
    respective consolidated amounts, and the investment in and advances to each
    company is less than 20% of consolidated total assets.

(3) Unaudited Supplementary Data
      Not required.

b)  Reports on Form 8-K
      None.

c)  Exhibits

3.1     Restated Certificate of Incorporation of Watson Wyatt & Company(4)
3.2     Restated Bylaws (as amended through August 1997)(5)
4       Form of Certificate Representing Common Stock(1)
10.1    Third Amended and Restated Credit and Security Agreement, dated
        January 5, 1996(3)
10.2    First Amendment to The Third Amended and Restated Credit and Security
        Agreement, dated June 14, 1996(4)
----------
(1)     Incorporated by reference from Registrant's Initial Statement on Form 10
        (File No. 0-20724), filed on October 13, 1992

(2)     Incorporated by reference from Registrant's Amended Registration
        Statement on Form 10A (File No. 0-20724), filed on December 30, 1994.

(3)     Incorporated by reference from Registrant's Quarterly Report on Form
        10-Q for the quarterly period ended March 31, 1996(File No. 0-20724),
        filed on May 13, 1996.

(4)     Incorporated by reference from Registrant's Annual Report on Form 10-K
        for the fiscal year ended June 30, 1996 (file no. 0-20724), filed on
        September 16, 1996

(5)     Filed herewith
                                  -12-
<PAGE>


10.3    Second Amendment to The Third Amended and Restated Credit and Security
        Agreement, dated as of April 30, 1997(5)
21      Subsidiaries of Watson Wyatt & Company(5)
23      Consent of the Company's Independent Accountants(5)
24      Consent of Wellspring's Independent Accountants(5)
99      Wellspring Resources, LLC Financial Statements(5)
----------
(5)     Filed herewith

                                      -13-
<PAGE>

SIGNATURES


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


                                   WATSON WYATT & COMPANY
                                   (Registrant)


Date:September 29,  1997       By: /S/ A.W. Smith, Jr.
                                   ----------------------------
                                   A.W. Smith, Jr.
                                   President and Chief Executive Officer



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

SIGNATURE                          TITLE                              DATE
---------                          -----                              ----
/S/ A.W. Smith, Jr.
------------------------------     President, Chief Executive         9/29/97
A.W. Smith, Jr.                    Officer and Director

/S/ Paul R. Daoust           
------------------------------     Executive Vice President, Chief    9/29/97
Paul R. Daoust                     Operating Officer and Director

/S/ Barbara L. Landes          
------------------------------     Vice President and Chief           9/29/97
Barbara L. Landes                  Financial Officer

/S/ Carl D. Mautz           
------------------------------     Controller                         9/29/97
Carl D. Mautz

/S/ Walter W. Bardenwerper           
------------------------------     Director                           9/29/97
Walter W. Bardenwerper

/S/ Charles A. Clemens           
------------------------------     Director                           9/29/97
Charles A. Clemens

                                      -14-
<PAGE>

SIGNATURE                          TITLE                              DATE
---------                          -----                              ----
           
------------------------------     Director                           9/29/97
John J.  Gabarro

/S/ John J. Haley                          
------------------------------     Director                           9/29/97
John J. Haley

                           
------------------------------     Director                           9/29/97
Gary T. Hallenbeck

/S/ Ira T. Kay                          
------------------------------     Director                           9/29/97
Ira T. Kay

/S/ Brian E. Kennedy                          
------------------------------     Director                           9/29/97
Brian E. Kennedy

/S/ Robert D. Masding                          
------------------------------     Director                           9/29/97
Robert D. Masding

                           
------------------------------     Director                           9/29/97
R. Michael McCullough

/S/ John A. Steinbrunner                          
------------------------------     Director                           9/29/97
John A. Steinbrunner

                           
------------------------------     Director                           9/29/97
A. Grahame Stott

                                      -15-
<PAGE>



    


                        REPORT OF INDEPENDENT ACCOUNTANTS





To the Board of Directors and
Shareholders of Watson Wyatt & Company

In our opinion,  the  accompanying  consolidated  balance sheets and the related
consolidated statements of operations, of cash flows and of changes in permanent
shareholders'  equity present fairly,  in all material  respects,  the financial
position  of Watson  Wyatt & Company and its  subsidiaries  at June 30, 1997 and
1996,  and the results of their  operations and their cash flows for each of the
three years in the period  ended June 30, 1997,  in  conformity  with  generally
accepted   accounting   principles.   These   financial   statements   are   the
responsibility of the Company's management;  our responsibility is to express an
opinion on these  financial  statements  based on our audits.  We conducted  our
audits of these  statements  in  accordance  with  generally  accepted  auditing
standards which require that we plan and perform the audit to obtain  reasonable
assurance   about  whether  the  financial   statements  are  free  of  material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the  amounts  and  disclosures  in  the  financial  statements,   assessing  the
accounting  principles  used and significant  estimates made by management,  and
evaluating the overall  financial  statement  presentation.  We believe that our
audits provide a reasonable basis for the opinion expressed above.





/S/ PRICE WATERHOUSE LLP
------------------------
PRICE WATERHOUSE LLP

Washington, D.C.
July 23, 1997


                                      F-1
<PAGE>
<TABLE>
<CAPTION>
 
                                                   WATSON WYATT & COMPANY
                                           CONSOLIDATED STATEMENTS OF OPERATIONS
                                   (THOUSANDS OF U.S. DOLLARS, EXCEPT PER SHARE AMOUNTS)

                                                                                 Year Ended June 30,
                                                                  --------------------------------------------------
                                                                      1997               1996                1995
                                                                  ------------       ------------        -----------
<S>                                                              <C>                <C>                 <C>

Fees                                                             $     510,998      $     492,513       $    474,521

Costs of providing services:
     Salaries and employee benefits                                    252,302            241,648            248,708
     Occupancy and communications                                       72,155             63,955             73,449
     Professional and subcontracted services                            82,782             76,243             56,594
     Other                                                              23,898             25,211             26,650
                                                                  ------------       ------------        -----------
                                                                       431,137            407,057            405,401

General and administrative expenses                                     45,696             38,656             41,313
Depreciation and amortization                                           25,993             26,348             21,442
                                                                  ------------       ------------        -----------
                                                                       502,826            472,061            468,156

Income from operations                                                   8,172             20,452              6,365

Other:
     Interest income                                                     1,462              1,441              1,343
     Interest expense                                                   (1,506)              (930)            (1,507)
Loss from affiliates                                                    (6,174)            (2,275)              (576)
                                                                  ------------       ------------        -----------

Income before income taxes, minority interest and
     cumulative effect of a change in accounting                         1,954             18,688              5,625

Provision for (benefit from) income taxes:
     Current                                                             4,149             15,781              2,492
     Deferred                                                           (3,260)            (6,578)             1,357
                                                                  ------------       ------------        -----------
                                                                           889              9,203              3,849
                                                                  ------------       ------------        -----------

Income before minority interest and cumulative
     effect of a change in accounting                                    1,065              9,485              1,776

Minority interest in net income of consolidated subsidiaries              (167)              (130)              (127)
                                                                  ------------       ------------        -----------
                                                                           898              9,355              1,649
Cumulative effect of a change in accounting for
     postemployment benefits, net of tax benefit of $1,000                   -                  -               (800)
                                                                  ------------       ------------        -----------

Net income                                                       $         898      $       9,355       $        849
                                                                  ============       ============        ===========


Earnings per share                                               $        0.05      $        0.51       $       0.09
Cumulative effect of a change in accounting                               0.00               0.00              (0.04)
                                                                  ------------       ------------        -----------
Net income per share                                             $        0.05      $        0.51       $       0.05
                                                                  ============       ============        ===========
</TABLE>


               See notes to the consolidated financial statements.
                                       F-2

<PAGE>
<TABLE>
<CAPTION>

                                                WATSON WYATT & COMPANY
                                             CONSOLIDATED BALANCE SHEETS
                                             (THOUSANDS OF U.S. DOLLARS)

                                                                                       June 30,             June 30,
                                                                                         1997                 1996
                                                                                    ------------         -------------
                                                        Assets
<S>                                                                                <C>                   <C>    

Cash and cash equivalents                                                          $      26,257        $       21,694
Receivables from clients: 
     Billed, net of allowances of $2,525 and $5,161                                       67,393                71,431
     Unbilled                                                                             56,368                53,122
                                                                                    ------------         -------------
                                                                                         123,761               124,553

Other current assets                                                                       7,287                 6,936
                                                                                    ------------         -------------
     Total current assets                                                                157,305               153,183

Investment in affiliates                                                                  52,516                41,195
Fixed assets                                                                              37,045                36,466
Deferred income taxes                                                                     39,025                41,983
Deferred software and development costs                                                   32,869                35,746
Other intangible assets                                                                    2,661                 3,820
Other assets                                                                              10,357                 8,426
                                                                                    ------------         -------------

                                                                                  $      331,778        $      320,819
                                                                                    ============         =============

                                 Liabilities, Redeemable Common Stock, and Permanent Shareholders' Equity

Accounts payable and accrued liabilities                                          $      103,823        $       88,203
Income taxes payable                                                                       3,563                11,362
Deferred income taxes                                                                     28,612                34,830
                                                                                    ------------         -------------
     Total current liabilities                                                           135,998               134,395

Accrued retirement benefits                                                               86,697                81,141
Deferred rent and accrued lease losses                                                    14,938                 9,904
Other noncurrent liabilities                                                               9,908                10,635

Minority interest in subsidiaries                                                            351                   362

Redeemable Common Stock - $1 par value:
     25,000,000 shares authorized;
     18,130,429 and 18,261,963 issued
     and outstanding; at redemption value                                                 96,091                90,214

Permanent shareholders' equity:
Adjustment for redemption value greater than amounts paid in by shareholders             (37,674)              (37,549)
Retained earnings                                                                         24,633                30,677
Cumulative translation gain                                                                  836                 1,040

Commitments and contingencies (Note 14)
                                                                                    ------------         -------------

                                                                                  $      331,778        $      320,819
                                                                                    ============         =============

</TABLE>




               See notes to the consolidated financial statements.
                                       F-3

<PAGE>
<TABLE>
<CAPTION>
                                                   WATSON WYATT & COMPANY
                                           CONSOLIDATED STATEMENTS OF CASH FLOWS
                                                (THOUSANDS OF U.S. DOLLARS)


                                                                                          Year ended June 30,
                                                                           ---------------------------------------------------
                                                                                1997               1996                1995
                                                                           ------------       -------------       ------------
<S>                                                                         <C>               <C>                 <C>

Cash flows from operating activities:
     Net income                                                            $        898       $       9,355       $        849
     Adjustments to reconcile net income to net cash
     provided by operating activities:
         Provision for doubtful receivables from clients                          6,853              11,667              5,982
         Depreciation                                                            13,816              14,805             15,479
         Amortization of deferred software and development costs
             and other intangible assets                                         12,176              11,543              5,963
         Change in deferred income taxes                                         (3,260)             (6,578)               303
         Loss from affiliates                                                     6,174               2,275                576
         Minority interest in net income of consolidated subsidiaries               167                 130                127
         (Increase) decrease in assets:
             Receivables from clients                                            (6,061)              1,143            (17,619)
             Income taxes receivable                                               -                  2,055             (2,055)
             Other current assets                                                  (351)                 30               (778)
             Other assets                                                        (1,930)             (1,904)            (2,015)
         Increase (decrease) in liabilities:
             Accounts payable and accrued liabilities                            17,846              12,785             12,539
             Income taxes payable                                                (7,799)             10,926             (2,190)
             Accrued retirement benefits                                          5,556               7,104              8,975
             Deferred rent and deferred lease losses                              5,034              (3,004)               399
             Other noncurrent liabilities                                          (727)                605              7,364
         Other                                                                      656                  99               (433)
                                                                             ----------        ------------        -----------
         Net cash provided by operating activities                               49,048              73,036             33,466
                                                                             ----------        ------------        -----------

Cash flows from investing activities:
     Sale of short-term investments                                                 -                   -                2,530
     Purchases of fixed assets                                                  (15,548)            (21,672)           (18,780)
     Proceeds from sales of fixed assets and investments                            446               8,160                533
     Acquisitions                                                                (1,169)             (2,445)              (604)
     Investment in software and development costs                                (7,597)            (17,568)           (21,645)
     Investment in affiliates                                                   (18,404)            (24,687)            (7,879)
                                                                             ----------        ------------        -----------
         Net cash used in investing activities                                  (42,272)            (58,212)           (45,845)
                                                                             ----------        ------------        -----------

Cash flows from financing activities:
     Issuances of Redeemable Common Stock                                        15,414              10,274              7,188
     Repurchases of Redeemable Common Stock                                     (16,604)            (14,270)           (10,144)
                                                                             ----------        ------------        -----------
         Net cash used in financing activities                                   (1,190)             (3,996)            (2,956)
                                                                             ----------        ------------        -----------

Effect of exchange rate changes on cash                                          (1,023)               (994)               936
                                                                             ----------        ------------        -----------

Increase (decrease) in cash and cash equivalents                                  4,563               9,834            (14,399)

Cash and cash equivalents at beginning of period                                 21,694              11,860             26,259
                                                                             ----------        ------------        -----------

Cash and cash equivalents at end of period                                  $    26,257       $      21,694       $     11,860
                                                                             ==========        ============        ===========
</TABLE>



               See notes to the consolidated financial statements.
                                       F-4

<PAGE>
<TABLE>
<CAPTION>

                             WATSON WYATT & COMPANY
      CONSOLIDATED STATEMENTS OF CHANGES IN PERMANENT SHAREHOLDERS' EQUITY
                           (THOUSANDS OF U.S. DOLLARS)

                                                                                                         Excess of Redemption
                                                                                      Cumulative          Value Over Amounts
                                                                Retained              Translation             Paid in by
                                                                Earnings                 Gain                Shareholders
                                                              -------------        ----------------        ---------------
<S>                                                          <C>                  <C>                     <C>

Balance at June 30, 1994                                     $       30,344       $             694       $        (37,866)

Net income                                                              849                      -                      -
Effect of repurchases of 2,221,419 shares of
     common stock (various prices per share)                         (4,306)                     -                   4,306
Foreign currency translation adjustment                                  -                    1,036                     -
Adjustment of redemption value for change
     in formula book value per share                                     -                       -                  (1,619)
                                                              -------------        ----------------        ---------------

Balance at June 30, 1995                                     $       26,887       $           1,730       $        (35,179)

Net income                                                            9,355                      -                      -
Effect of repurchases of 3,146,899 shares of
     common stock (various prices per share)                         (5,565)                     -                   5,565
Foreign currency translation adjustment                                  -                     (690)                    -
Adjustment of redemption value for change
     in formula book value per share                                     -                       -                  (7,935)
                                                              -------------        ----------------        ---------------

Balance at June 30, 1996                                     $       30,677       $           1,040       $        (37,549)

Net income                                                              898                      -                      -
Effect of repurchases of 3,258,203 shares of
     common stock (various prices per share)                         (6,942)                     -                   6,942
Foreign currency translation adjustment                                  -                     (204)                    -
Adjustment of redemption value for change
     in formula book value per share                                     -                       -                  (7,067)
                                                              -------------        ----------------        ---------------

Balance at June 30, 1997                                     $       24,633       $             836       $        (37,674)
                                                              =============        ================        ===============

</TABLE>













               See notes to the consolidated financial statements.
                                       F-5


<PAGE>
                                    
                                                        
                             WATSON WYATT & COMPANY

                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
   (Tabular Amounts in Thousands of Dollars Except Share and Percentage Data)


NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

NATURE  OF THE  BUSINESS  -  Watson  Wyatt  &  Company  ("Watson  Wyatt"  or the
"Company"),  together  with its  subsidiaries,  is a  diversified  international
company  engaged in the  business of  providing  professional  services on a fee
basis,  primarily in the employee  benefit and  compensation  field, but also in
other  areas  of  specialization  such as  risk  management,  insurance  company
consulting and asset services.  Substantially all of the Company's stock is held
by or for the benefit of employees.  On July 1, 1996, The Wyatt Company  changed
its name to Watson Wyatt & Company.

On March 31, 1996,  the Company  transferred  its employee  outsourced  benefits
administration  operations including certain deferred systems development costs,
to  a  newly  formed  limited  liability  company,   Wellspring  Resources,  LLC
("Wellspring").  Wellspring,  which is owned 50% by the Company and 50% by State
Street Bank and Trust  Company  ("State  Street"),  provides  benefits and human
resources administration outsourcing services. The transfer included $15,407,000
of deferred software development costs substantially incurred in anticipation of
this transaction,  transaction costs of $2,834,000 and the sale of $3,800,000 of
fixed assets. In conjunction with the Wellspring transfer, the Company also sold
its rights to contracts and fixed assets for its Minneapolis benefit outsourcing
center directly to State Street for $3,500,000.  No gain or loss was recorded on
either transaction, (See also Notes 3, 13 and 14).

USE OF  ESTIMATES -  Preparation  of financial  statements  in  conformity  with
generally accepted  accounting  principles requires management to make estimates
and  assumptions  that affect the  reported  amounts of assets and  liabilities,
disclosures  of contingent  assets and  liabilities at the date of the financial
statements  and the  reported  amounts  of  revenues  and  expenses  during  the
reporting  period.  Actual results could differ from those estimates.  Estimates
are used when accounting for revenue,  allowance for uncollectible  receivables,
deferred software and development costs, investments in affiliates, depreciation
and amortization, asset write-downs, employee benefit plans and taxes.

PRINCIPLES  OF  CONSOLIDATION  - The  consolidated  financial  statements of the
Company  include  the  accounts  of  the  Company  and  its  majority-owned  and
controlled   subsidiaries   after  elimination  of  intercompany   accounts  and
transactions. Investments in affiliated companies over which the Company has the
ability to exercise  significant  influence  are  accounted for using the equity
method.

RECLASSIFICATIONS - Certain amounts previously  presented have been reclassified
to conform to the current presentation.

CASH AND CASH  EQUIVALENTS  - The Company  considers  short-term,  highly liquid
investments with original  maturities of 90 days or less to be cash equivalents.
The Company had an overnight repurchase  agreement with a financial  institution
of $17,200,000 at June 30, 1997 and $15,500,000 at June 30, 1996.

RECEIVABLES  FROM CLIENTS - Billed  receivables  from  clients are  presented at
their  billed  amount  less  an  allowance  for  doubtful   accounts.   Unbilled
receivables are stated at their estimated net realizable value.

                                      F-6
<PAGE>

REVENUE RECOGNITION - For consulting services, fees from clients are recorded as
services are performed and are  presented  net of write-offs  and  uncollectible
amounts.  Under certain long-term contracts for administrative and recordkeeping
services, implementation fees are deferred until services become operational and
are then  recognized  ratably over the remaining  life of the initial  contract.
Total current and non-current  deferred  implementation fees were $9,043,000 and
$7,259,000 at June 30, 1997 and 1996, respectively.  Fees for administrative and
recordkeeping operations are recognized as earned by the Company.

DEFERRED  SOFTWARE AND DEVELOPMENT COSTS - Labor and other direct costs incurred
to develop  software and systems are deferred on the Company's  balance  sheets.
Deferred software costs include costs primarily associated with products used in
providing services to clients. Deferred system development costs include certain
pre-operational  costs,  primarily  systems  development and enhancement  costs,
which are specifically  identifiable and associated with long-term contracts for
outsourcing and  recordkeeping  services.  Deferred software costs are amortized
over the useful lives of the products  ranging usually from three to five years.
Deferred  systems  development  costs are  amortized  ratably over the estimated
remaining  life  of  the  respective  contract  (excluding  renewals)  upon  the
commencement  of  services  under the  contract.  Accumulated  amortization  was
$21,325,000 and $18,871,000 at June 30, 1997 and June 30, 1996, respectively.

The Company assesses impairment  quarterly on individual  contracts by comparing
probable  undiscounted future cash flows with the net book value of the deferred
costs. Losses so identified are then measured as the difference between net book
value of the deferred costs and the  discounted  present value of the cash flows
and are recorded when identified. Permanent impairment of $3.7 million on two of
three contracts for  administrative  and  recordkeeping  services was recognized
during  fiscal  year 1997 and is  included  in  Professional  and  subcontracted
services, (See also Note 13). This impairment resulted from changes in estimated
future cash flows primarily related to third party vendor costs.

OTHER INTANGIBLE  ASSETS - Other intangible assets consist primarily of goodwill
related to the excess cost over net assets of purchased  companies.  Goodwill is
generally  amortized on a  straight-line  basis over ten to fifteen  years.  The
Company regularly assesses the recoverability of unamortized  goodwill and other
long-lived assets by comparing the probable  undiscounted future cash flows with
the net book value of the underlying assets.  Accumulated  amortization of other
intangible  assets was $12,201,000 and $11,931,000 at June 30, 1997 and June 30,
1996, respectively.

EMPLOYEE RECEIVABLES - The Company had outstanding employee receivables included
in other current and noncurrent  assets of $3,505,000 and $4,474,000 at June 30,
1997 and June 30, 1996, respectively, related primarily to employee relocations.

FOREIGN CURRENCY TRANSLATION - Gains and losses on foreign currency transactions
are recognized  currently in the consolidated  statements of operations.  Assets
and  liabilities  of the  Company's  subsidiaries  outside the United States are
translated into the reporting currency, the U.S. dollar, based on exchange rates
at the balance sheet date.  Revenue and expenses of the  Company's  subsidiaries
outside  the  United  States are  translated  into U.S.  dollars at the  average
exchange rates during the year. Gains and losses on translation of the Company's
equity interests in its subsidiaries  outside the United States are not included
in the  consolidated  statements of operations  but are reported  separately and
accumulated  as  the  cumulative  translation  gain  or  loss  within  permanent
shareholders' equity in the consolidated balance sheets.

                                      F-7
<PAGE>

FAIR VALUE OF FINANCIAL  INSTRUMENTS - The carrying amount of the Company's cash
and cash  equivalents,  short-term  investments,  receivables  from  clients and
accounts payable and accrued liabilities  approximates fair value because of the
short maturity and ready liquidity of those instruments. The Company's policy is
to estimate the fair value of its notes payable, if any, by discounting required
future cash flows under such notes using  interest  rates at which similar types
of borrowing  arrangements could be currently  obtained by the Company.  At June
30, 1997 and June 30,  1996,  the Company had no amounts  outstanding  under its
note payable. The Company knows of no event of default which would require it to
satisfy the  guarantees  described  in Notes 9 and 14, and  therefore,  the fair
value of these contingent liabilities is considered immaterial.

CONCENTRATION OF CREDIT RISK - Financial  instruments which potentially  subject
the Company to concentrations of credit risk consist principally of certain cash
and cash equivalents,  short-term  investments and receivables from clients. The
Company invests its excess cash with high credit quality financial institutions.
Concentrations  of credit  risk with  respect to  receivables  from  clients are
limited due to the  Company's  large  number of customers  and their  dispersion
across many industries and geographic regions.

EARNINGS PER SHARE - The  computation  of  earnings  per share is based upon the
weighted average number of shares of Redeemable Common Stock  outstanding.  The
number of shares (in thousands) used in the computation is 17,438 in fiscal year
1997, 18,516 in fiscal year 1996, and 19,248 in fiscal year 1995.


NOTE 2 - CASH FLOW INFORMATION

Net cash provided by operating activities in the consolidated statements of cash
flows includes cash payments for:

                                                 Year Ended June 30,
                                   ------------------------------------------
                                       1997           1996              1995
                                       ----           ----              ---- 
Interest expense and bank fees     $     1,506    $       930       $     1,507
Income taxes paid                  $    11,947    $     2,800       $     6,955


                                      F-8
<PAGE>

NOTE 3 - INVESTMENTS IN AFFILIATES

Entities accounted for under the equity method are:

                                                              June 30,
                                         Ownership  ---------------------------
                                         Interest      1997             1996
                                         --------      ----             ----

Watson Wyatt Holdings (Europe) Limited     50.1%    $      7,614    $     7,585
Watson Wyatt Partners                      10.0%          12,582         10,366
Wellspring Resources, LLC                  50.0%          31,894         22,833
Professional Consultants Insurance 
     Company, Inc.                         22.5%             426            411
                                                    ------------    -----------
     Total investment in affiliates                 $     52,516    $    41,195
                                                    ============    ===========




On April 1, 1995, the Company  transferred its United Kingdom (U.K.)  operations
to Watson Wyatt  Partners,  formerly R. Watson & Sons ("Watsons"),  an actuarial
partnership based in the U.K., and received a beneficial interest in Watsons and
a 10% interest in a defined profit pool of Watsons. The Company also transferred
its Continental  European  operations to a newly formed holding company,  Watson
Wyatt  Holdings  (Europe)  Limited  (WWHE),  jointly owned and controlled by the
Company  and  Watsons,  in  exchange  for  50.1% of its  shares.  The  Company's
historical basis in the assets and liabilities carried over.

The Company  accounts  for its  interest in Watsons  using the equity  method of
accounting  because it is an  investment in a general  partnership.  The Company
accounts  for its  interest in WWHE and  Wellspring  using the equity  method of
accounting because it exercises significant influence, but does not control, the
operations of the entities.

At June 30, 1997,  the  Company's  investment  in WWHE,  Watsons and  Wellspring
exceeded the Company's  share of the  underlying  net  assets  by $6,772,000 due
primarily to the  capitalization  of external  transaction costs incurred by the
Company.  This basis  differential  is being  amortized over periods of 10 to 15
years (See also Notes 13 and 14).

The Company's pre-tax loss from affiliates includes the following:

                                               Year ended June 30,
                                     -----------------------------------------
                                        1997          1996           1995
                                        ----          ----           ---- 

Wellspring                           $    (6,087)  $    (1,408)  $          -
All others                                   827          (231)          (510)
                                     ------------  ------------  -------------
Equity investment losses                  (5,260)       (1,639)          (510)
                                                        
Amortization of basis differential          (914)         (636)           (66) 
                                     ------------  ------------  -------------
Loss from affiliates                 $    (6,174)  $    (2,275)  $       (576)
                                     ============  ============  =============

                                      F-9
<PAGE>

Combined  summarized  balance  sheet  information  at June 30 for the  Company's
affiliates follows:

                                       1997                      1996
                                       ----                      ----
                                           50% or                      50% or
                           Unconsolidated Less Owned Unconsolidated  Less Owned
                            Subsidiaries   Entities   Subsidiaries    Entities  
                            ------------   --------   ------------    --------
Current assets                 $  12,487  $ 130,948    $  15,713     $ 101,434
Noncurrent assets                  1,972     61,157        2,058        33,560
                               ---------  ---------    ---------     ---------
     Total assets              $  14,459  $ 192,105    $  17,771     $ 134,994
                               =========  =========    =========     =========

Current liabilities            $   7,820  $  47,983    $  15,340     $  33,688
Noncurrent liabilities            13,561     21,990       11,715        13,476
Shareholders' equity              (6,922)   122,132       (9,284)       87,830
                               ---------  ---------    ---------     ---------
     Total liabilities &       
     shareholders' equity      $  14,459  $ 192,105    $  17,771     $ 134,994 
                               =========  =========    =========     ========= 
                               


The Company's  operating results include its proportionate  share of income from
equity investments from the dates of investment.  Combined summarized  operating
results for the years ended June 30, reported by the affiliates follow:

<TABLE>
<CAPTION>


                                              1997                             1996                             1995
                                              ----                             ----                             ----
                                 Unconsolidated    50% or less    Unconsolidated    50% or less    Unconsolidated    50% or less
                                  Subsidiaries   Owned Entities    Subsidiaries   Owned Entities    Subsidiaries    Owned Entities
                                  ------------   --------------    ------------   --------------    ------------    --------------
<S>                                          <C>           <C>            <C>            <C>             <C>             <C>

Revenue                               $   29,410    $  182,529     $   20,082      $  127,531       $   19,208       $   90,129
Operating expenses                        31,443       152,203         23,493         100,073           20,730           66,820
                                      ----------    ----------     ----------      ----------       ----------       ----------
Income(loss) before tax               $   (2,033)   $   30,326     $   (3,411)     $   27,458       $   (1,522)      $   23,309
                                      ==========    ==========     ==========      ==========       ==========       ==========

Net income (loss)                     $   (2,220)   $   29,996     $   (3,249)     $   27,761       $   (1,562)      $   23,503
                                      ==========    ==========     ==========      ==========       ==========       ==========
</TABLE>


NOTE 4 - FIXED ASSETS

Furniture, fixtures, equipment, and leasehold improvements are recorded at cost,
and  presented  net of  accumulated  depreciation  or  amortization.  Furniture,
fixtures and equipment  are  depreciated  using  straight-line  and  accelerated
methods over lives ranging from three to seven years. Leasehold improvements are
amortized  on a  straight-line  basis over the shorter of the  assets'  lives or
lease terms.

                                      F-10
<PAGE>

The components of fixed assets are:

                                                   June 30,
                                          --------------------------
                                              1997            1996
                                              ----            ----   
Furniture, fixtures and equipment         $  105,704      $  110,117
Leasehold improvements                        23,688          22,098
                                          ----------      ----------
                                             129,392         132,215
Less: accumulated depreciation
      and amortization                       (92,347)        (95,749)
                                          ----------      ----------

      Net fixed assets                    $   37,045      $   36,466
                                          ==========      ==========


NOTE 5 - PENSION AND PROFIT SHARING PLANS

The  noncurrent  portions of accrued costs  related to the  Company's  principal
retirement plans are:

                                                             June 30,
                                                   --------------------------
                                                       1997              1996
                                                       ----              ----  
Reserves for defined benefit retirement plans      $   42,212      $   38,916
Reserves for Canadian Separation Allowance Plan         6,229           5,966
Reserves for postretirement benefits other             
     than pensions                                     38,256          36,259
                                                   ----------      ----------
     Accrued retirement benefits                   $   86,697      $   81,141
                                                   ==========      ==========


DEFINED BENEFIT PLANS

The Company sponsors both qualified and non-qualified  non-contributory  defined
benefit pension plans covering  substantially  all of its associates.  Under the
Company's principal plans (U.S.,  Canada, and Hong Kong),  benefits are based on
the number of years of service and the associates' compensation during the three
highest paid consecutive years of service. Consolidated pension plan expense for
the Company's  principal  defined  benefit plans for fiscal years 1997, 1996 and
1995 amounted to $6,595,000, $10,952,000 and $10,027,000 respectively.

Contributions  are  limited to amounts  that are  currently  deductible  for tax
purposes,  and the excess of expense over such contributions and direct payments
under  non-qualified plan provisions is accrued.  At June 30, 1997 and 1996, the
Company's non-qualified plans had accumulated benefits in excess of related plan
assets.

As of  January 1,  1997,  changes  were made to the U.S.  pension  program.  The
pension plan  definition  of  compensation  was revised to include  overtime and
annual bonuses. The pension benefit formula was changed to integrate with Social
Security  benefits on a step-rate  basis. The total years of service included in
the benefit calculation were reduced from 28-1/3 years to 25 years.

                                      F-11
<PAGE>

The following  table sets forth the principal  plans' funded status as reflected
in the consolidated balance sheets:

<TABLE>
<CAPTION>
                                    
                                                      June 30, 1997                        June 30, 1996
                                            -------------------------------        -------------------------------
                                            Assets Exceed      Accumulated         Assets Exceed     Accumulated
                                             Accumulated        Benefits            Accumulated       Benefits
                                               Benefits       Exceed Assets           Benefits      Exceed Assets
                                               --------       -------------           --------      -------------
<S>                                                  <C>                <C>                <C>           <C>

Actuarial present value of benefit
  obligations:
Vested benefit obligation                    $  162,769        $   32,689          $  150,510        $   15,499
                                             ==========        ==========          ==========        ==========
Accumulated benefit obligation               $  184,582        $   36,239          $  170,959        $   17,786
                                             ==========        ==========          ==========        ==========

Projected benefit obligation for
  service rendered to date                      225,987            69,258             220,052            43,670
Plan assets at fair value, primarily
 marketable equity securities                   322,485                 -             271,000                 -
                                             ----------        ----------          ----------        ----------
Projected benefit obligation (less than)
  in excess of plan assets                      (96,498)           69,258             (50,948)           43,670
Remaining unrecognized transition
  obligation                                       (576)             (598)               (708)             (661)
Unrecognized prior service cost (benefit)        15,385           (27,676)              4,086           (11,274)
Unrecognized net gain subsequent
  to transition                                  78,635               885              49,346             5,117
                                             ----------        ----------           ---------        ----------
Accrued pension obligation (benefit)         $   (3,054)       $   41,869           $   1,776        $   36,852
                                             ==========        ==========           =========        ==========
</TABLE>



Net  periodic  pension  cost for the  principal  plans  included  the  following
components:

                                                   Year ended June 30,
                                           -----------------------------------  
                                              1997         1996        1995
                                              ----         ----        ----
Service cost - benefits earned during
    the period                             $   16,962   $   16,601  $   14,134
Interest cost on projected benefit            
    obligation                                 19,651       18,425      15,951  
Amortization of unrecognized net obligation
    and other deferred amounts                 26,860       24,798      17,738
Actual return on plan assets                  (56,877)     (48,872)    (37,796)
                                           ----------   ----------   ---------
Net periodic pension cost                  $    6,596   $   10,952   $  10,027
                                           ==========   ==========   =========
                                                   


During fiscal year 1996, the Company sold its  Minneapolis  benefit  outsourcing
center  and  transferred  the  employee  benefits   administrative   outsourcing
operations of WPC to a newly formed  limited  liability  company.  In connection
with  this   transaction,   the  Company   recognized  a  curtailment   gain  of
approximately  $2,919,000,  which is included in the  accompanying  statement of
operations  for fiscal  year  1996,  but is  excluded  from the  previous  table
detailing net periodic pension cost.

                                      F-12
<PAGE>


During fiscal year 1995, the Company suspended its U.K. pension plan as a result
of the  transaction  with  Watsons.  The  suspension  of the U.K.  pension  plan
resulted in a curtailment loss of approximately $2,600,000, which is included in
the  accompanying  statement of operations for fiscal year 1995, but is excluded
from the previous table detailing net periodic pension cost.

During  fiscal year 1995,  the Company  had certain key  executive  retirements.
These  retirements  resulted in a net loss of  approximately  $346,000 in fiscal
year 1995 associated with settlements of the U.S. pension plan.

Assumptions  used in the  valuation  for the  U.S.  plan,  which  comprises  the
majority of the principal defined benefit pension plans, include:

                                                          June 30,
                                              ----------------------------------
                                              1997          1996           1995
                                              ----          ----           ----
Discount rate, projected benefit obligation    7.5%          7.5%           7.5%
Discount rate, net periodic pension cost       7.5%          7.5%           8.0%
Rate of increase in compensation levels        5.8%          5.8%           5.8%
Expected long-term rate of return on assets   10.0%          9.5%           9.5%



Based upon an analysis of recent experience,  anticipated future experience, and
market and economic factors,  the Company changed certain actuarial  assumptions
used in its pension valuations for fiscal years 1997, 1996, and 1995. Changes in
actuarial  assumptions  from  fiscal  year  1996 to fiscal  year 1997  decreased
pension expense by approximately  $1,182,000.  Changes in actuarial  assumptions
from  fiscal  year  1995 to  fiscal  year  1996  increased  pension  expense  by
approximately $1,039,000. Changes in actuarial assumptions from fiscal year 1994
to fiscal year 1995 decreased pension expense by approximately $4,358,000.

DEFINED CONTRIBUTION PLANS

The  Company  sponsors  a  profit  sharing  plan  which  provides   benefits  to
substantially   all  U.S.   associates   and  to  which  the  Company  can  make
discretionary    irrevocable   annual   contributions   and   matches   employee
contributions.  The Profit  Sharing Plan was changed in 1997 to The Savings Plan
with a company  match of 50% of the first 6% of total pay (which  includes  base
salary,  overtime and annual  performance  based  bonuses) on  associate  401(k)
contributions.  Vesting  of the  Company  match  occurs  after 3  years  for new
employees  and is 100% for all  employees  hired  before  January 1,  1997.  The
expense in fiscal year 1997 for the match was $2.0 million.  The Company made no
profit sharing contributions during fiscal years 1997, 1996 or 1995. The Company
also  sponsors  a Canadian  Separation  Allowance  Plan  (CSAP)  which  provides
benefits to substantially all Canadian associates.  The CSAP is an unfunded book
reserve  arrangement;  as such,  the amounts due to associates are recorded as a
liability in the  consolidated  balance sheets of the Company.  CSAP expense for
fiscal years 1997, 1996 and 1995 amounted to $414,000,  $509,000,  and $679,000,
respectively.

                                      F-13
<PAGE>

NOTE 6 -  BENEFITS OTHER THAN PENSIONS

HEALTH CARE BENEFITS

The  Company   sponsors  a   contributory   health  care  plan  which   provides
hospitalization,   medical  and  dental  benefits  to  substantially   all  U.S.
associates.   The  Company  accrues  a  liability  for  estimated  incurred  but
unreported  claims based on projected  use of the plan as well as paid claims of
prior periods.  The liability totaled $2,195,000 and $1,867,000 at June 30, 1997
and  1996,  respectively,  and is  included  in  accounts  payable  and  accrued
liabilities in the consolidated balance sheets.

POSTEMPLOYMENT BENEFITS

The Company  provides  certain  postemployment  health  care and life  insurance
benefits for terminated or inactive  associates  other than  retirees.  Prior to
fiscal year 1995, the Company  recognized  these expenses as they were reported.
Effective July 1, 1994, the Company  adopted  Statement of Financial  Accounting
Standards (SFAS) No. 112, "Employers'  Accounting for Postemployment  Benefits,"
which  requires  that the  Company  estimate  and accrue  future  benefits.  The
cumulative effect upon adoption of SFAS No. 112, which relates to years prior to
fiscal year 1995, was an expense of $1,800,000  ($800,000 after-tax or $0.04 per
share).

POSTRETIREMENT BENEFITS

The Company provides certain health care and life insurance benefits for retired
associates. The principal plans cover associates in the U.S. and Canada who have
met  certain  eligibility  requirements.   The  Company's  principal  plans  are
unfunded.

Effective January 1, 1997, premiums paid on the retiree medical plan are tied to
the retiree's  years of service.  The Company  contribution is capped at 200% of
1997 per capita claims cost.  Benefits  have been  redefined to ensure a retiree
benefit comparable to the Watson Wyatt Plan for active employees.

                                      F-14
<PAGE>

The following  table sets forth the principal  plans' status as reflected in the
consolidated balance sheets:

                                                              June 30,
                                                    --------------------------
                                                       1997              1996
                                                       ----              ----  
Accumulated postretirement benefit obligation:
   Retirees                                         $   12,453      $   13,142
   Fully eligible active plan participants               1,918           5,987
   Other active plan participants                       15,661          17,608
                                                    ----------      ----------
   Accumulated postretirement benefit obligation        30,032          36,737
Unrecognized prior service cost (benefit)                1,563          (3,831)
Unrecognized net gain subsequent to transition           8,367           4,842
Unrecognized transition obligation                        (792)           (930)
                                                    ----------      ----------
   Accrued postretirement benefit obligation        $   39,170      $   36,818
                                                    ==========      ==========


Net periodic  postretirement  benefit cost for the principal  plans included the
following components:

                                                        Year ended June 30,
                                                   ----------------------------
                                                     1997      1996      1995
                                                     ----      ----      ----
Service cost - benefits earned during the period   $  1,891  $  3,881  $  2,145
Interest cost on accumulated postretirement
   benefit obligation                                 1,987     2,685     2,038
Net amortization of prior service cost and net gain
   subsequent to transition                            (685)      138      (935)
Amortization of transition obligation over 20 years      50       347       349
                                                   --------  --------   -------
   Net periodic postretirement benefit cost        $  3,243  $  7,051   $ 3,597
                                                   ========  ========   =======

                                      F-15
<PAGE>

Assumptions  used in the  valuation  for the  U.S.  plan,  which  comprises  the
majority of the principal plans, include:
<TABLE>
<CAPTION>


                                                                                       June 30,
                                                                             -----------------------------
                                                                             1997        1996         1995
                                                                             ----        ----         ---- 
<S>                                                                            <C>         <C>         <C>

Health care cost trend rate, accumulated benefit obligation:
   Pre-65 benefits  (decreasing to 5.0% for 2004 and thereafter)              9.1%        9.8%       10.6%
   Post-65 benefits (decreasing to 5.0% for 2007 and thereafter)              8.3%        8.8%        9.9%
Health care cost trend rate, net periodic postretirement benefit cost:
   Pre-65 benefits  (decreasing to 5.0% for 2004 and thereafter)              9.8%       10.6%       11.3%
   Post-65 benefits (decreasing to 5.0% for 2007 and thereafter)              8.8%        9.4%        9.9%
Discount rate, accumulated benefit obligation                                 7.5%        7.5%        7.5%
Discount rate, net periodic postretirement benefit cost                       7.5%        7.5%        8.0%
</TABLE>


Based on an analysis of market and economic trends,  the Company changed certain
actuarial  assumptions used in determining net periodic  postretirement  benefit
cost in fiscal years 1997, 1996 and 1995. Changes in actuarial  assumptions from
fiscal  year  1996 to  fiscal  year  1997  decreased  expense  by  approximately
$3,182,000 in fiscal year 1997. The effect was to increase net income for fiscal
year 1997 by  approximately  $1,877,000 or $.11 per share.  Changes in actuarial
assumptions  from  fiscal  year 1995 to fiscal  year 1996  increased  expense by
approximately  $259,000 in fiscal year 1996. The effect was to reduce net income
for fiscal year 1996 by  approximately  $121,000  or $.01 per share.  Changes in
actuarial  assumptions  from  fiscal  year  1994 to fiscal  year 1995  decreased
expense  by  approximately  $869,000  in fiscal  year  1995.  The  effect was to
increase net income for fiscal year 1995 by  approximately  $420,000 or $.02 per
share.

An  increase  in the  assumed  health care cost trend rate by 1% each year would
have the following effect on the principal plans:
<TABLE>
<CAPTION>

                                                                           Year ended June 30,
                                                                     ------------------------------ 
                                                                        1997      1996      1995
                                                                        ----      ----      ----  
<S>                                                                  <C>        <C>        <C>    
Increase in accumulated postretirement benefit obligation            $  1,441   $  5,242   $  5,503
Increase in service and interest cost components of net
    periodic postretirement benefit cost                             $    260   $  1,301   $    677

</TABLE>


                                      F-16
<PAGE>


NOTE 7 - ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

Accounts payable and accrued liabilities consist of:

                                                             June 30,
                                                   ---------------------------
                                                      1997             1996
                                                      ----             ---- 
Accounts payable and accrued liabilities           $   47,902       $   33,697
Accrued salaries and bonuses                           33,221           32,141
Current portion of reserves for principal defined
    benefit retirement plans                            1,351            3,220
Current portion of reserves for postretirement
    benefits other than pensions                          891              559
Accrued vacation                                       12,260           12,183
Deferred fee income - current portion                   8,198            6,403
                                                   ----------       ----------
Total accounts payable and accrued liabilities     $  103,823       $   88,203
                                                   ==========       ==========



NOTE 8 - LEASES

The Company leases office space and various  computer  equipment under operating
lease agreements with terms generally  ranging from one to 10 years. The Company
has entered into sublease  agreements  for some of its leased space.  The rental
expense was  $42,079,000,  $45,749,000,  and  $51,604,000 for fiscal years 1997,
1996 and 1995,  respectively.  Sublease income was $1,702,000,  $1,810,000,  and
$2,868,000  for fiscal  years  1997,  1996 and 1995,  respectively.  Future cash
outlays for operating  lease  commitments  and cash inflows for sublease  income
are:

                                               Lease           Sublease
                                            Commitments         Income
                                            -----------         ------
                    1998                    $   42,863       $    2,024
                    1999                        36,217            1,353
                    2000                        34,489            1,358
                    2001                        30,675            1,216
                    2002                        24,857              966
              thereafter                        35,782                -
                                            ----------       ----------
                                            $  204,883       $    6,917
                                            ==========       ==========



As a result of  relocations  and the  subleasing  of excess  office  space,  the
Company  recognized  lease  termination  losses  of  approximately  $12,100,000,
$500,000, and $1,200,000 in fiscal years 1997, 1996, and 1995, respectively.

                                      F-17
<PAGE>

NOTE 9 - NOTE PAYABLE

The Company has an $80 million revolving credit line with a group of banks at an
interest rate which varies with the prime rate. The credit facility requires the
Company to observe certain covenants  (including  requirements as to minimum net
worth and other  financial  and  restrictive  covenants)  and is  secured by the
Company's  receivables.  The current  line is  currently  scheduled to mature on
January 5, 2001. Of the credit line,  $55 million is available to the Company as
revolving credit for operating needs, subject to certain borrowing  limitations.
The  remaining  $25 million is  available  to secure  loans to  associates  from
financial  institutions  for  the  purchase  of  Redeemable  Common  Stock  made
available under the Company's  stock purchase  program.  The Company  guarantees
these loans to its  shareholders,  the aggregate  outstanding  balances of which
totaled  $20,920,000  and  $17,534,000 at June 30, 1997 and 1996,  respectively.
Shares totaling 5,718,000 and 4,800,000 of the Company's Redeemable Common Stock
were  pledged by  shareholders  to secure these loans at June 30, 1997 and 1996,
respectively.



NOTE 10 - REDEEMABLE COMMON STOCK

Substantially all of the Company's Redeemable Common Stock is held by or for the
benefit of its employees and,  pursuant to the Company's  bylaws,  is subject to
certain restrictions. In connection with these restrictions, the Company has the
following  rights and  obligations  regarding  purchases and sales of its common
stock:

a)   The Company has the first  option to purchase,  or to designate  associates
     who are eligible to purchase, any shares offered for sale by a shareholder.
     Shares  not  purchased  by the  Company  or its  designees  may be  sold to
     identified  transferees,  subject  to  the  restrictions  contained  in the
     bylaws.

b)   Upon the  termination  of employment,  bankruptcy of a shareholder,  or the
     imposition  of a lien or  attachment  on any stock,  the shares held by the
     shareholder or subject to attachment are considered to be offered for sale.
     In these  circumstances,  the Company is  obligated  to  purchase  any such
     shares.


Pursuant  to the  Company's  bylaws,  the price for all  purchases  and sales of
Redeemable  Common  Stock is the  formula  book value per share  (defined in the
bylaws  as  "Formula  Book  Value")  of such  stock  as of the  last  day of the
preceding  year.  Additional  amounts may be paid for  purchases  of  Redeemable
Common Stock reflecting the pro rata  appreciation in the formula book value per
share from the last day of the preceding year to the end of the current year and
pro rata dividends paid during the year. Formula Book Value as used herein means
the Net  Book  Value of the  Corporation's  Common  Stock  as of June 30,  1996,
increased  or  decreased  by net  income or  losses,  and all other  GAAP  basis
increases or decreases to Net Book Value occurring after June 30, 1996, adjusted
to (i) spread the economic  impact of certain real estate  sublease  losses over
the remaining  life of the sublease;  and (ii)  eliminate  annual changes in the
Currency  Translation  Adjustment  ("CTA")  occurring  after June 30, 1996.  The
Formula Book Value per share was $5.30 at June 30, 1997. In prior years, the Net
Book  Value was  defined in the bylaws as the sum of  Redeemable  Common  Stock,
adjustments for redemption  value greater than amounts paid in by  shareholders,
retained  earnings,   and  cumulative   translation   adjustment,   adjusted  by
compensation  survey items.  The Formula Book Value per share, as defined above,
was $4.94 and $4.51 at June 30, 1996 and 1995,  respectively.  Redeemable Common
Stock is equal to the number of shares  outstanding  multiplied  by the  Formula
Book Value per share.

                                      F-18
<PAGE>

The following schedule computes the Formula Book Value per share at June 30:
<TABLE>
<CAPTION>

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

Consolidated net worth (as defined in the Company's
      bylaws)                                           $   84,091      $   84,382    $   79,713
Adjustment for the compensation survey items:
      50% of consolidated income received
      from compensation survey business                      5,915           5,915         6,524
Add:  Adjustment for after tax affect of lease losses        6,003             N/A           N/A
                                                        ----------      ----------    ----------
Formula Book Value of Redeemable Common Stock           $   96,009      $   90,297    $   86,237
                                                        ==========      ==========    ==========

Number of shares of Redeemable Common Stock outstanding     18,130          18,262        19,130
                                                        ==========      ==========    ==========

Formula Book Value per share of Redeemable Common Stock $     5.30      $     4.94    $     4.51
                                                        ==========      ==========    ==========
</TABLE>
                                      F-19
<PAGE>


In view of the Company's  obligation to repurchase its Redeemable  Common Stock,
the Securities  and Exchange  Commission  requires that the redemption  value of
outstanding shares be classified as Redeemable Common Stock and not be portrayed
as permanent capital. The changes in this balance for the three years ended June
30, 1997 were as follows:


                                            Number of                Redeemable
                                              Shares                Common Stock
                                              ------                ------------
Balance at June 30, 1994                    19,732,423             $     87,612

Redemption of shares                        (2,221,419)                 (10,143)

Issuance of shares                           1,618,702                    7,187

Adjustment of redemption values for
   change in formula book vaue per share         -                        1,619
                                           -----------             ------------
Balance at June 30, 1995                    19,129,706             $     86,275
                                           ===========             ============
Redemption of shares                        (3,146,899)                 (14,270)

Issuance of shares                           2,279,156                   10,274

Adjustment of redemption value for
  change in formula book value per share             -                    7,935

Balance at June 30, 1996                    18,261,963             $     90,214
                                          ============             ============

Redemption of shares                        (3,258,203)                 (16,604)

Issuance of shares                           3,126,670                   15,414

Adjustment of redemption value for
  change in formula book value per share             -                    7,067
                                          ------------             ------------
Balance at June 30, 1997                    18,130,430             $     96,091
                                          ============             ============




The Company  sponsors a Stock  Purchase  Plan (SPP) which allows  virtually  all
associates to become shareholders.  For the fiscal year ended June 30, 1997, the
Company paid each associate  purchasing stock $.50 per share purchased under the
SPP.  For fiscal  years  ended 1996 and 1995,  the Company  paid each  associate
purchasing  stock  $1.00 per share  purchased  under the SPP.  This  resulted in
expense for fiscal years 1997,  1996,  and 1995 of $1,300,000,  $1,700,000,  and
$1,600,000, respectively.

                                      F-20
<PAGE>


NOTE 11 - INCOME TAXES

The provision for income taxes is based upon reported income before income taxes
and includes deferred income taxes resulting from differences between assets and
liabilities  recognized  for  financial  reporting  purposes  and  such  amounts
recognized  for income tax  purposes.  The Company  measures  deferred  taxes by
applying  currently  enacted tax laws,  recognizes  deferred tax assets if it is
more likely than not that a benefit will be  realized,  and provides a valuation
allowance  on deferred  tax assets to the extent that it is more likely than not
that a benefit will not be realized.

The components of the income tax provision  before the cumulative  effect of any
accounting change include:

                                               Year ended June 30,
                                       ------------------------------------
                                          1997         1996          1995
                                          ----         ----          ----
Current tax expense (benefit):
        U.S.                          $    1,699   $   11,415   $   (1,269)
        State and local
                                             966        2,735          659
        Foreign
                                           1,484        1,631        3,102
                                      ----------   ----------   ----------
                                      $    4,149   $   15,781   $    2,492
                                      ----------   ----------   ----------

Deferred tax expense (benefit):
        U.S.                          $   (4,002)  $   (4,579)  $    1,101
        State and local
                                          (1,396)      (1,298)          92
        Foreign
                                           2,138         (701)         164
                                      ----------   ----------   ----------
                                      $   (3,260)  $   (6,578)  $    1,357
                                      ----------   ----------   ----------

Total provision for income taxes      $      889   $    9,203   $    3,849
                                      ==========   ==========   ==========
                                             


                                      F-21
<PAGE>

Deferred income tax assets  (liabilities)  included in the consolidated  balance
sheets at June 30, 1997 and June 30, 1996 are comprised of the following:


                                                         June 30,
                                               -----------------------------   
                                                   1997             1996
                                                   ----             ----
Cash method of accounting for U.S. income
     tax purposes                              $   (23,468)     $   (34,061)
Amortization of deferred software and
     development costs                              (3,470)          (4,351)
Foreign temporary difference                        (1,036)            (975)
Partnership income                                  (4,289)            (744)
Other                                                   (9)            (144)
                                               -----------      -----------
  Gross deferred tax liabilities                   (32,272)         (40,275)
                                               -----------      -----------
Accrued retirement benefits                         36,619           36,177
Non-deductible foreign expenses                      1,172            1,172
Difference between book and tax depreciation        (2,576)           1,704
Amortization of deferred rent                        3,419            4,313
Foreign temporary difference                         1,281            1,306
Foreign net operating loss carryforwards             2,530            2,159
Other                                                3,942            3,928
                                               -----------      -----------
     Gross deferred tax assets                      46,387           50,759
                                               -----------      -----------

     Deferred tax assets valuation allowance        (3,702)          (3,331)
                                               -----------      -----------
     Net deferred tax asset                    $    10,413      $     7,153
                                               ===========      ===========

The  Company  has  foreign tax credit  carryforwards  for U.S.  tax  purposes of
$441,000.  At June 30, 1997, the Company has unused loss  carryforwards  for tax
purposes in various jurisdictions  outside the U.S. amounting to $6,171,000,  of
which $3,804,000 can be indefinitely  carried forward under local statutes.  The
majority of the remaining loss carryforwards  will expire, if unused,  after the
end of fiscal year 2002.  The valuation  allowance  applies to the tax effect of
the foreign net operating loss carryforwards ($2,530,000), and the tax effect of
nondeductible   foreign  expenses   ($1,172,000)  for  which   realizability  is
considered uncertain.

The net change in the  valuation  allowance  of $371,000 in fiscal year 1997 and
$1,080,000 in fiscal year 1996 are due primarily to the tax effect of the change
in foreign net operating losses and non-deductible foreign expenses.

                                      F-22
<PAGE>

Domestic and foreign  components of income before taxes,  minority  interest and
cumulative  effect of a change in  accounting  for each of the three years ended
June 30, are follows:

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

          Domestic           $   (4,803)    $   11,477     $    6,817
          Foreign                 6,757          7,211         (1,192)
                             ----------     ----------     ----------

                             $    1,954     $   18,688     $    5,625
                             ==========     ==========     ==========

The  reported  income tax  provision  differs  from the amounts  that would have
resulted  had the  reported  income  before  income taxes been taxed at the U.S.
federal  statutory rate. The principal  reasons for the differences  between the
actual amounts provided and those which would have resulted from the application
of the U.S. federal statutory tax rate are as follows:


                                                      Year ended June 30,
                                               ------------------------------
                                                  1997       1996       1995
                                                  ----       ----       ----
Calculated income tax provision at U.S.
     federal statutory tax rate of 35%         $   684     $ 6,541    $ 1,969
(Reduction) increase resulting from:
     Results of non-U.S. affiliates taxed
          at other than statutory rates           (463)        120       (759)
     Losses of non-U.S. affiliates for which
          no current benefit is available          599         792      1,043
     State income taxes, net of federal tax
          benefit                                 (430)        620        336
     Non-deductible amortization and other
          expenses                                 700       1,668      1,183
     Tax credits                                  (258)       (311)      (207)
     Other                                          57        (227)       284
                                               -------     -------    -------
Income tax provision before cumulative
     effect of a change in accounting          $   889     $ 9,203    $ 3,849
                                               =======     =======    =======


                                      F-23
<PAGE>

NOTE 12 - GEOGRAPHIC SEGMENT INFORMATION

The following  table  presents  segment  information  for U.S. and  consolidated
foreign   operations   including  Canada,   Latin  America,   and  Asia  Pacific
subsidiaries. Summary financial information follow:
<TABLE>
<CAPTION>

                                                            Year ended June 30,
                                               ------------------------------------------
<S>                                            <C>              <C>             <C>  
                                                  1997            1996             1995
                                                  ----            ----             ----
U.S. Operations
   Fees                                        $  421,595      $  413,757      $  405,821
   Cost of Providing Services                     268,124         245,368         241,777
   Depreciation and amortization                   18,016          23,084          23,860
   Income from operations before               ----------      ----------      ----------  
     General and Administrative Expenses       $  130,387      $  144,529      $  146,028
                                               ----------      ----------      ----------

Foreign Operations
   Fees                                        $   89,403      $   78,756      $   68,700
   Cost of Providing Services                     163,013         161,689         163,624
   Depreciation and amortization                    2,909           2,488           3,426
                                               ----------      ----------      ----------
   Income from operations before
     General and Administrative Expenses       $  (76,519)     $  (85,421)     $  (98,350)
                                               ----------      ----------      ----------

All Operations
   Fees                                        $  510,998      $  492,513      $  474,521
   Cost of Providing Services                     431,137         407,057         405,401
   Depreciation and amortization                   21,442          25,993          26,348
                                               ----------      ----------      ----------            
   Income from operations before
     General and Administrative Expenses       $   53,868      $   59,108      $   47,678
                                               ----------      ----------      ----------

   General and Administrative Expenses         $   45,696      $   38,656      $   41,313
                                               ----------      ----------      ----------
Income from operations                         $    8,172      $   20,452      $    6,365
                                               ==========      ==========      ==========
                                                                 
 
                                                              As of June 30,
                                               ------------------------------------------
                                                  1997            1996             1995
                                                  ----            ----             ----   

Total Assets:
   U.S. Operations                             $  306,779      $  300,472      $  267,677
   Foreign Operations                              24,999          20,347          18,945
                                               ----------      ----------      ----------
                                                                
   All Operations                              $  331,778      $  320,819      $  286,622
                                               ==========      ==========      ==========
</TABLE>


General and Administrative expenses include corporate functions primarily in the
U.S.

                                      F-24
<PAGE>

NOTE 13 - RELATED PARTY TRANSACTIONS

In connection  with the formation of  Wellspring,  Watson Wyatt  retained  three
contracts  for  administrative  and  recordkeeping  services  and  entered  into
agreements whereby  Wellspring  provides the services to those clients on behalf
of the Company for a fee equal to the cost of servicing those clients.  Expenses
charged to the Company by Wellspring  for such services for fiscal 1997 and 1996
were  $40,313,000 and $10,829,000,  respectively.  At June 30, 1997, the Company
owed Wellspring  $11,009,000 for such services. At June 30, 1996 Wellspring owed
the Company $736,000 (See also Notes 1 and 14).


NOTE 14 - COMMITMENTS AND CONTINGENT LIABILITIES

The Company is a defendant in certain  lawsuits  arising in the normal course of
business,  some of which  are in their  earliest  stages.  Management  currently
foresees no material  liability  resulting from such litigation,  and management
believes  that  the  Company  carries  adequate   insurance,   above  reasonable
deductibles, against any foreseeable outcome of such litigation.

As of  June  30,  1997,  the  Company  had  outstanding  letters  of  credit  of
$2,225,000.

The Company  guarantees certain leases for office premises and equipment for one
of its affiliates.  Minimum remaining payments  guaranteed under these leases at
June 30, 1997 total  $73,200,000,  which expire at various  dates  through 2007.
These leases are also jointly and severally guaranteed by the Company's partner.
In addition,  the Company guarantees its affiliate's obligation to a customer in
the event of termination  without cause. The amount of the guarantee at June 30,
1997 is $5,310,000. This amount declines monthly beginning in September 1997 and
expires in 2002.

It is not practical to estimate  fair value of these  guarantees;  however,  the
Company  believes the  likelihood of significant  loss from these  guarantees is
remote.

Anticipated  commitments  of  funds  for  fiscal  year  1998  are  estimated  at
$39,000,000,  and include expected purchases of fixed assets, 50% of the capital
requirements of Wellspring, and 50.1% of the capital requirements of WWHE. It is
the intention of the Company to fund  Wellspring's and WWHE's cash  requirements
as needed (See also Notes 3 and 13).



                                      F-25
<PAGE>


                      REPORT OF INDEPENDENT ACCOUNTANTS ON
                          FINANCIAL STATEMENT SCHEDULE



To the Board of Directors and
Shareholders of  Watson Wyatt & Company

Our audits of the consolidated  financial  statements  referred to in our report
dated July 23,  1997  appearing  on page F-1 of the Form 10-K also  included  an
audit of the  Financial  Statement  Schedule  listed in item  14(a) of this Form
10-K. In our opinion,  the Financial  Statement Schedule presents fairly, in all
material  respects,  the  information set forth therein when read in conjunction
with the related consolidated financial statements.




/S/ PRICE WATERHOUSE LLP
------------------------
PRICE WATERHOUSE LLP

Washington, D.C.
July 23, 1997


                                      F-26
<PAGE>


                             WATSON WYATT & COMPANY

                                   SCHEDULE II
                 VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
                             (THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>



                        Balance  at   Additions     Additions                    Balance at
                         Beginning     Charged      charged to                    End of
       Description        of Year    against fees  other accounts  Deductions      Year
       -----------      -----------  ------------  --------------  ----------    ----------

                                     Year Ended June 30, 1997
                                     ------------------------
<S>                       <C>          <C>          <C>             <C>           <C>

Allowance for doubtful
   accounts               $5,161       $6,853       $    -          $(9,489)       $2,525
Valuation allowance for
   deferred tax assets     3,331            -          371(1)             -         3,702


                                     Year ended June 30, 1996
                                     ------------------------

Allowance for doubtful
   accounts                1,508       11,667            -           (8,014)        5,161

Valuation allowance for
   deferred tax assets     2,251            -        1,080(1)             -         3,331


                                     Year ended June 30, 1995
                                     ------------------------

Allowance for doubtful
   accounts                1,026        5,982            -           (5,500)        1,508

Valuation allowance for
   deferred tax assets    $5,209          $ -         $235(1)       $(3,193)(2)    $2,251
</TABLE>


----------

(1)  Represents   current  year  net  operating  loss   carryforwards   and  the
     nondeductible  foreign  expenses  for  which  realizability  is  considered
     uncertain.

(2)  Represents  expiring net operating loss  carryforwards and reduction of net
     operating  loss  carryforwards  resulting  from  the  transfer  of  certain
     subsidiaries to a newly formed entity.

                                      F-27