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
    For the fiscal year ended June 30, 1999
                                      OR
       TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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                                           (I.R.S. Employer
    jurisdiction of                                          Identification No.)
   incorporation or
     organization)
                           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 REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:

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

         NONE                                                        NONE
         SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:

  COMMON STOCK, $1.00                                           OUTSTANDING AT
       PAR VALUE                                              SEPTEMBER 28, 1999
   (TITLE OF CLASS)                                            15,012,350 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.

The aggregate market value of the voting and non-voting  common equity held by
non-affiliates  of the Registrant is $97,871,018.  The aggregate  market value
was  computed  by using the  Formula  Book Value of the stock  (calculated  in
accordance with the bylaws) as of September 28, 1999.

                     Documents Incorporated by Reference

The  registrant's  definitive  proxy  statement for its 1999 annual meeting of
shareholders  (which is to be filed pursuant to General  Instruction G of Form
10-K not later than October 28, 1999),  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
employee  benefits,  human  resources and human resources  systems  technology
consulting  to major  employers  throughout  the world.  The  Company  and its
alliance  partner,  Watson Wyatt  Partners,  the leading United  Kingdom-based
employee benefits partnership, operate seamlessly as Watson Wyatt Worldwide.

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,  Suite 800,  Bethesda,  MD 20817.  The Company was
founded in 1946; Watson Wyatt Partners was founded in 1878.

GLOBAL OPERATIONS

Watson Wyatt Worldwide  employs  approximately  5,300 associates in offices in
the United States,  Canada, Asia and the South Pacific,  Europe, Africa, Latin
America and the U.S. Caribbean.

Watson  Wyatt  &  Company  is  primarily  organized  based  on  the  following
geographic regions: U.S. East, U.S. Central, U.S. West,  Asia/Pacific,  Canada
and Latin  America.  The Company  employs  approximately  3,850  associates as
follows:

      U.S. East                 950
      U.S. Central              975
      U.S. West                 450
      Asia/Pacific              625
      Canada                    425
      Latin America              80
      Data Services              60
      Corporate/Other           285
                            -------
                              3,850
                            =======

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

On a worldwide basis, the Company is primarily  managed through the geographic
regions listed above. Like many professional  services firms, the Company also
uses a  practice-based  matrix form of organization  within some regions.  The
Company is developing and  implementing  systems and  management  reporting to
enhance practice-specific information on a Company-wide basis.

                                      -1-
<PAGE>

The  percentage  of fees  generated  in the various  geographic  regions is as
follows:

                          1999         1998         1997
                          ----         ----         ----
   U.S. East               36%          32%          32%
   U.S. Central            29           29           30
   U.S. West               14           17           16
   Asia/Pacific             9            9           10
   Canada                   8            8            8
   Latin America            1            2            1
   Data Services            3            3            3
                         -----        -----        -----
   Total                  100%         100%         100%

Prior  year  percentages   have  been   recalculated  to  conform  to  current
classification.  For more information  about industry  segments see Note 13 of
Notes to the Consolidated  Financial  Statements,  included in Item 14 of this
report.

PRINCIPAL SERVICES

Watson Wyatt focuses its services in four principal areas:

BENEFITS  CONSULTING:  The Benefits  Consulting  practice  provides  analysis,
design and implementation of retirement programs, including actuarial services
and required reporting of plan contributions and funding levels,  group health
benefit  plan design and provider  selection,  and defined  contribution  plan
design and related services.

HR TECHNOLOGIES  CONSULTING:  The HR Technologies Consulting practice develops
technology-based  solutions  to reduce  employer  costs and  improve  employee
service in human resources administration, including web-based applications.

HUMAN CAPITAL  CONSULTING:  The Human  Capital  Consulting  practice  provides
comprehensive  consulting in compensation plan design, executive compensation,
salary management,  benefits  communication and  organizational  effectiveness
consulting.

DATA  SERVICES:  Watson  Wyatt Data  Services  produces  custom  and  standard
compensation,  benefits  and best  practices  surveys and  reference  works to
clients  throughout  the  world.  Over  5,000  companies  participate  in  the
Company's surveys; its services include over seventy reference publications in
remuneration,  benefits and employment  practices which are utilized by global
and local companies in fifty countries.

Within  the past  two  years,  Watson  Wyatt  has  divested  several  non-core
businesses   -  including   benefits   administration   outsourcing,   defined
contribution recordkeeping,  and its North American risk management consulting
services - in order to focus on these core consulting areas.

While the Company  groups  services  into  functional  categories,  management
believes a primary  strength is its ability to deliver  its  services  without
boundaries to meet the requirements of its clients.

                                      -2-
<PAGE>

COMPETITION

The  human  resource  consulting  business,  including  all of  the  Company's
principal services, is highly competitive.  Barriers to entry relate primarily
to the need to  assemble  the  specialized  intellectual  capital  to  provide
expertise demanded by clients. The Company's competitive position is strongest
in  retirement,  benefits  and HR  technology  consulting,  but there is not a
substantial  difference  between  the  competitive  position  of  its  overall
business as compared to its individual  lines of business.  Watson Wyatt ranks
number one in the  consulting  industry when it comes to  delivering  value to
clients  and  overall  reputation  according  to a  recent  independent  study
conducted by The Wall Street  Journal  among its  subscribers.  The  Company's
competitors  include other human resource  consulting firms and certain public
accounting/consulting  firms;  its most direct  competitors  are five to seven
firms which offer similar services in the United States and, in several cases,
internationally.   Buyers  of  consulting   services  in  the  Company's  core
businesses consistently mention that their key selection criteria are quality,
the ability to tailor  services to a client's  unique  needs,  creativity  and
overall value. In recent years,  price has become a somewhat more  significant
competitive factor in some aspects of the business.  Other competitive factors
of  increasing  importance  are the quality  and  effectiveness  of  available
technology and software and the ability to serve multinational clients.

AFFILIATES

Beginning  in the 1970's,  the Company  (then "The Wyatt  Company" or "Wyatt")
began to establish  operations  outside North  America.  In 1995,  the Company
formed a  strategic  alliance  with R. Watson & Sons  ("Watsons"),  one of the
leading  actuarial/benefits  consulting firms based in the United Kingdom. The
Company received a beneficial  interest 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"),  which is now jointly  owned and  controlled by the Company
(25%) and Watsons (75%). While Watson Wyatt & Company,  Watson Wyatt Partners,
and WWHE remain separate legal entities,  the companies are operating together
as Watson Wyatt Worldwide.

In 1996, the Company and State Street Bank and Trust Company ("State  Street")
formed a limited liability company,  Wellspring  Resources LLC ("Wellspring"),
to  provide  outsourced  benefits  administration  services.  During the third
quarter  of  fiscal  year  1998,   the  Company   discontinued   its  benefits
administration  outsourcing business,  including its investment in Wellspring,
pursuant  to a  Restructuring  Agreement  by  which  Wellspring  redeemed  the
Company's 50% interest in Wellspring  effective  April 1, 1998.  Pursuant to a
discontinuation  plan approved by the Company's Board of Directors on February
18, 1998, in fiscal year 1998, the Company  recorded a charge of $69.9 million
net  of  taxes  for  the   discontinuation  of  its  benefits   administration
outsourcing  business.  In fiscal year 1999, the Company further clarified its
future  obligations under the  restructuring  and reduced its  discontinuation
liability  by  $8.7  million  net of  taxes.  (See  Note  16 of  Notes  to the
Consolidated Financial Statements, included in Item 14 of this report.)


ITEM 2. PROPERTIES.

Watson  Wyatt  Worldwide  operates in  approximately  90 offices in  principal
markets  throughout  the world.  Operations  are carried out in leased offices
under  operating  leases that normally do not exceed ten years in length.  The
Company does not anticipate difficulty in meeting its space needs at lease

                                      -3-
<PAGE>

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 14% of total
assets at June 30, 1999 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  that arise
in the ordinary course of business.  These disputes  typically  involve claims
relating to employment matters or the rendering of professional  services. The
Company carries appropriate  professional liability insurance,  and management
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 28, 1999,  there were 1,954  registered  holders of the Company's
Common Stock. Transfers of the Company's Common Stock are made at Formula Book
Value, as defined in the Company's bylaws,  and the current Formula Book Value
per share is calculated pursuant to the Company's bylaws to be $6.68 per share
at June 30, 1999, as further described in Note 10 of Notes to the Consolidated
Financial  Statements,  included in Item 14 of this report.  This Formula Book
Value reflects an increase of approximately 10% from the Formula Book Value of
$6.05 per share at June 30, 1998.

DIVIDENDS

Under the Company's  credit facility (see Note 9 of Notes to the  Consolidated
Financial  Statements,  included  in Item 14 of this  report),  the Company is
required 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 $20.3
million was available

                                      -4-
<PAGE>

for the  declaration  or  payment  of  dividends  as of  June  30,  1999.  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.  Historically,  while the
Company's  performance  would have  permitted  the payment of  dividends,  the
Company has chosen not to declare dividends every year since fiscal year 1991.

                                      -5-
<PAGE>

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,
1999.  The selected  consolidated  financial data as of June 30, 1999 and 1998
and for each of the years in the three year  period  ended  June 30,  1999 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, 1997,  1996,  1995, and for each of the years ended June 30, 1996 and
1995 have been derived  from  audited  consolidated  financial  statements  of
Watson Wyatt not included in this Form 10-K and have been  restated to reflect
the Company's discontinued operations.

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 of this Form 10-K.  Amounts are in  thousands,
except per share data.

<TABLE>
<CAPTION>

                                                                                   Year Ended June 30
                                                          ------------------------------------------------------------------
Statements of Operations Data:                               1999           1998          1997          1996           1995
                                                             ----           ----          ----          ----           ----
<S>                                                       <C>            <C>           <C>           <C>           <C>
Continuing operations
   Fees                                                   $ 556,860      $ 512,660     $ 486,502     $ 475,298     $ 465,788
   Income (loss) before income taxes and
     minority interest (See Note 12 of Notes
     to the Consolidated Financial Statements)               23,800        (42,966)       21,618        34,036        12,204
   Income (loss) from continuing operations
     (See Note 12 of Notes to the Consolidated
     Financial Statements)                                   12,135        (56,212)       12,381        19,835         4,908
   Earnings (loss) per share, continuing
     operations                                           $    0.80      $   (3.27)    $    0.71     $    1.07     $    0.25
Discontinued operations - income(loss)
     (See Note 16 of Notes to the Consolidated
     Financial Statements)                                    8,678        (69,906)      (11,483)      (10,480)       (4,059)
Net income (loss)(See Note 12 of Notes
     to the Consolidated Financial Statements)               20,813       (126,118)          898         9,355           849
Earnings (loss) per share, net income (loss)              $    1.37      $   (7.34)    $    0.05     $    0.51     $    0.05
Weighted average shares outstanding                          15,215         17,170        17,438        18,516        19,248

                                                                                   Year Ended June 30
                                                          ------------------------------------------------------------------
Balance Sheet Data:                                          1999           1998          1997          1996          1995
                                                             ----           ----          ----          ----          ----
Working capital (1)                                       $  11,692      $   23,748    $  21,307     $  18,788      $ 49,826
Total assets                                                313,960         268,310      331,778       320,819       286,622
Redeemable Common Stock                                     107,631          96,296       96,091        90,214        86,275
Formula Book Value
    per share                                             $    6.68      $     6.05    $    5.30     $    4.94      $   4.51
Shares outstanding                                           16,112          15,917       18,130        18,262        19,130

<FN>
  (1) See Management's discussion of Liquidity and Capital Resources.
</FN>
</TABLE>
                                     -6-
<PAGE>

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

YEAR ENDED JUNE 30, 1999 COMPARED TO YEAR ENDED JUNE 30, 1998.

The Company generated net income in fiscal year 1999 of $20.8 million compared
to a net loss in fiscal  year 1998 of $126.1  million.  The  fiscal  year 1998
results included a non-recurring  compensation charge and the after-tax effect
of the  discontinuation of the Benefits  Administration  Outsourcing  Business
(see  discussion of 1998 financial  results found in "Year Ended June 30, 1998
Compared to Year Ended June 30, 1997" on pages 6 and 7).  Income (loss) before
income taxes and minority interest in 1999 was $23.8 million compared to $26.9
million in 1998 without the effect of the non-recurring  compensation  charge.
These results  reflect  growth of share value of 10.4% and a larger bonus pool
allocated at the discretion of the Company's Board of Directors.

Fee revenue from continuing  operations  reached $556.9 million in fiscal year
1999,  an increase of $44.2  million from $512.7  million in fiscal year 1998.
This represents a 9% growth in revenue.  This increase  occurred  primarily in
the Company's U.S. East, U.S. Central and Asia/Pacific  consulting regions. In
North America, the Retirement and HR Technologies practices experienced strong
revenue growth;  the Human Capital practice  revenues declined modestly amid a
reorganization of the practice. Revenues for fiscal year 1999 also reflect the
sale  late in  fiscal  year  1998 of the  Company's  North  American  risk and
insurance  consulting  practice  and its exit  from the  defined  contribution
recordkeeping business.

For the fiscal year 1999,  salaries and employee  benefit expenses were $321.5
million,  an increase of $52.9  million,  or 20%, from fiscal year 1998.  This
increase is due  primarily to increased  bonuses,  a 6% increase in headcount,
and increases in annual compensation and benefits.

Occupancy and  communications  expense  increased $0.9 million or 1% in fiscal
year 1999. This low percentage  increase reflects the Company's adoption of an
office space standard as well as its ability to negotiate  advantageous leases
of office space.

Professional  and  subcontracted  services  were $47.9 million for fiscal year
1999, a decrease of $2.0 million,  or 4%, from fiscal year 1998 due to reduced
corporate expenses.

Other costs of providing  services  increased  $3.0 million in 1999,  which is
mainly attributable to increased travel.

General and  administrative  expenses for fiscal year 1999 were $56.6 million,
an increase of $4.8 million, or 9%, from fiscal year 1998 due to the increased
cost of providing technology support to core consulting areas.

Depreciation  and  amortization  decreased $9.7 million in fiscal year 1999 to
$15.2 million. This decrease is due to higher amortization of software in 1998
of $11.6 million,  primarily due to a reevaluation and subsequent reduction of
the useful lives of the related products.  Without this item, depreciation and
amortization  expense  increased  $1.9  million  in 1999 due to the  increased
purchases of capital assets.

Income from  affiliates  was $2.5 million in 1999  compared to $0.3 million in
1998. The increase reflects heightened synergies and focus within the European
operations as well as improved business operations in the United Kingdom.

                                      -7-
<PAGE>

Income before income taxes, minority interest and discontinued  operations was
$23.8 million in fiscal year 1999, which,  considering taxes of $11.4 million,
reflects an  effective  tax rate of 48%  compared  to 49% in 1998  without the
effect of the non-recurring compensation charge.

In fiscal 1999, the Company further resolved its future obligations related to
the discontinuation of its Benefits  Administration  Outsourcing  Business and
reduced  the  expected  loss on disposal  by $8.7  million  net of taxes.  The
Company believes it has adequate provisions for any remaining costs related to
the discontinuation.

YEAR ENDED  JUNE 30,  1998  COMPARED TO YEAR ENDED  JUNE 30,  1997.  (1997 has
been  reclassified to reflect  discontinued  operations.  See Note 16 of Notes
to the Consolidated Financial Statements.)

The Company had strong operating  results in 1998 from continuing  operations.
Two major  events also  affected  financial  results in fiscal year 1998.  The
first event,  the  discontinuation  of the Company's  Benefits  Administration
Outsourcing  Business,  resulted in a $69.9 million loss due to the withdrawal
from this line of business and is reported as a  discontinued  operation.  The
loss on discontinuation, net of taxes of $69.9 million, included the write-off
of  its  investment  in  Wellspring   Resources,   net  capitalized   software
development  costs for the Retained Clients (as defined in Note 16 of Notes to
the Consolidated  Financial  Statements) and a provision for the completion of
any obligations to clients, vendors or its former joint venture partner.

The second event, a $69.9 million  non-recurring  compensation charge, was due
to a required  method of accounting for the change in the Company's  bylaws to
modify  the  Formula  Book  Value  of  the  Company's  stock  to  exclude  the
discontinued  operations from the Formula Book Value calculation.  This charge
was reported as a component of continuing operations.  The charge was measured
by the  difference  between  what the value per share was at June 30, 1998 and
what it would have been at that date without the modification.  The charge did
not reduce company  resources but did reduce  operating income from continuing
operations.

                                      -8-
<PAGE>

Management believes the Company's results from continuing  operations are more
comparable to prior years and are a better  indication of current year results
if they are analyzed  without giving effect to such charge.  In such case, the
Costs of providing  services in 1998 would have been $407.4 million instead of
$477.3  million and continuing  operations  would have shown a profit of $13.7
million instead of a loss of $56.2 million. The net loss for the Company would
have been  $56.2  million  including  the loss from  discontinued  operations,
rather than $126.1 million.

The following table presents the Company's  results of operations  without the
non-recurring  compensation  charge and the same  captions  as reported in the
Company's audited financial statements.
<TABLE>
<CAPTION>
                                                                   1998 Results of Operations
                                                          -------------------------------------------
                                                             Pro Forma Without Non-
                                                          Recurring Compensation Charge   As Reported
                                                          -----------------------------   -----------
<S>                                                               <C>                     <C>
Fees                                                              $  512,660              $  512,660
Costs of providing services                                          407,358                 477,264
General & administrative costs, depreciation and amortization         76,753                  76,753
                                                                  ----------              ----------
                                                                     484,111                 554,017
                                                                  ----------              ----------
Income (loss) from operations                                         28,549                 (41,357)
Interest income/expense and income from affiliates                    (1,609)                 (1,609)
                                                                  ----------              ----------
Income (loss) before income taxes and minority interest               26,940                 (42,966)
Income taxes and minority interest                                   (13,246)                (13,246)
                                                                  ----------              ----------
Income(loss)from continuing operations                                13,694                 (56,212)
                                                                  ----------              ----------
Discontinued operations - net loss                                   (69,906)                (69,906)
                                                                  ----------              ----------
Net loss                                                          $  (56,212)             $ (126,118)
                                                                  ==========              ==========
Earnings per share:

Earnings (loss) per share, continuing operations                  $     0.80              $    (3.27)
                                                                  ==========              ==========
Loss per share, discontinued operations                           $    (4.07)             $    (4.07)
                                                                  ==========              ==========
Loss per share, net loss                                          $    (3.27)             $    (7.34)
                                                                  ==========              ==========
</TABLE>

Although  the  Company  generated  a net loss in  fiscal  year  1998 of $126.1
million  compared  to net income in fiscal  year 1997 of $0.9  million,  these
results include the non-recurring  compensation charge explained above and the
after  tax  effect  of  the  discontinuation  of the  Benefits  Administration
Outsourcing   Business  for  both  fiscal  years.  Without  the  non-recurring
compensation  charge,  results of continuing  operations in 1998 before income
taxes and minority  interest  would have been $26.9 million  compared to $21.6
million in 1997, or a 24%  increase.  The  Company's  revenue  growth of $26.2
million,  or 5%, outpaced  inflation and leveraged the expense base to improve
return on revenue before taxes to 5% in 1998 from 4% in 1997.

Fee revenue from continuing  operations  reached $512.7 million in fiscal year
1998, an increase of $26.2 million,  or 5%, from $486.5 million in fiscal year
1997.  This increase  occurred  primarily in the  Company's  U.S.  East,  U.S.
Central  and U.S.  West  regions,  offsetting  a decline  in the  Asia/Pacific
region,  and is due to the  realization  of billing rate  increases.  In North
America,  the  Retirement,   Human  Capital,  and  HR  Technologies  practices
experienced strong revenue growth.

                                      -9-
<PAGE>

For the fiscal year 1998,  salaries and employee  benefit expenses were $268.6
million  excluding  the  non-recurring  compensation  charges,  an increase of
$16.3  million or 6% from fiscal year 1997 due  primarily  to a 2% increase in
headcount and annual salary increases.

Occupancy and  communications  expense  decreased  $10.1 million in 1998.  The
Company  relocated its corporate  office to lower cost suburban  facilities in
1997,  recognizing  sublease  losses of $12.1 million.  Excluding  these lease
losses,  occupancy and  communications  increased $2.0 million or 3%, with the
largest growth occurring in telecommunications expense.

Professional  and  subcontracted  services  were $49.9 million for fiscal year
1998, an increase of $1.1 million, or 2%, from fiscal year 1997.

Other  costs of  providing  services  increased  $2.9  million  in 1998 due to
travel and local office promotion expenses.

General and  administrative  expenses for fiscal year 1998 were $51.8 million,
an  increase of $6.1  million or 13% from  fiscal  year 1997 due to  increased
spending on business  strategy  initiatives and higher  corporate  advertising
and promotional expense.

Depreciation  and  amortization  increased $2.9 million in fiscal year 1998 to
$25.0  million.  This  increase is primarily due to  management's  decision to
accelerate the  amortization  of software in 1998 by $6.8 million based upon a
reevaluation  and  subsequent  reduction  of the useful  lives of the  related
products.  Without this item,  depreciation and amortization  expense declined
18% due to the decreased base of capital assets.

Loss before income taxes,  minority  interest and discontinued  operations was
$43.0  million  in fiscal  year 1998.  This loss  reflects  the $69.9  million
non-recurring charge that is not a taxable transaction. Pre-tax income without
this amount was $26.9 million with taxes of $13.1 million, or an effective tax
rate of 49% compared to 42% in 1997. The increase in the effective tax rate is
due to changes in income in  various  tax  jurisdictions  with  differing  tax
rates, particularly foreign jurisdictions.

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, 1999 totaled $36.0 million,  compared to
$13.4  million at June 30,  1998.  The company had no  borrowings  at June 30,
1999, compared to $9.0 million of borrowings at June 30, 1998. The decrease in
borrowings and increased cash balances were the result of the Company's  stock
sale in fiscal year 1999,  and from  reduced  operating  and  closedown  costs
associated with the discontinuation of the Benefits Administration Outsourcing
Business.

The Company has a $120.0  million  credit line that is currently  scheduled to
mature  in June  2003.  Ninety-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  for the purchase of  Redeemable  Common Stock made
available under the Company's Stock Purchase Program.

                                      -10-
<PAGE>

CASH FROM OPERATIONS.  Net cash provided by operating  activities increased in
1999 compared to 1998 by $33.3 million.  The increase was primarily due to the
$43.2 million increase in accounts payable and accrued liabilities from fiscal
year 1999  operating  expenses  that will be paid in fiscal  year  2000.  This
increase was augmented by the $13.0 million decrease in the cash needed in the
closedown of discontinued  operations.  The change in receivables from clients
increased $14.4 million, thereby decreasing cash that would have been provided
by  operations.  Deferred  income taxes  increased $7.3 million in conjunction
with the increase in accounts payable and accrued liabilities.

CASH  FROM  INVESTING  ACTIVITIES.  Uses  of  cash  for  investing  activities
decreased  $8.7  million from 1998,  principally  due to reduced cash needs of
the discontinued operations.

CASH FROM FINANCING ACTIVITIES. The Company used more cash in fiscal year 1999
as it paid down its  outstanding  debt.  The Company's net stock  activity had
virtually no impact on cash used by financing activities in 1999.

The Company's  foreign  operations do not  materially  impact its liquidity or
capital  resources.  At June 30, 1999, $14.4 million of the total cash balance
of $36.0 million was held outside of North America,  which the Company has the
ability to readily access, if necessary. There are no significant repatriation
restrictions other than local or U.S. taxes associated with repatriation.  The
foreign operations in total are substantially self-sufficient.

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 historically had moderate foreign currency  transaction  risk. 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.  This risk is mitigated by the Company's  intention to
leave the investments in place rather than repatriating them.

The Company's ratio of current assets to current  liabilities  declined to 1.1
in fiscal  year  1999 from 1.2 in fiscal  year  1998.  The  Company's  working
capital  decreased $12.1 million from 1999 to 1998, mainly due to the increase
in 1999 fiscal year-end accruals related to discretionary payments.

Anticipated  commitments  of funds for fiscal year 2000 are estimated at $30.1
million,  which  includes  expected  purchases  of fixed  assets and  payments
related to the purchase of certain consulting operations.  The Company expects
operating  cash flows and  seasonal  use of its credit line to provide for the
Company's cash needs.

YEAR 2000 ISSUE

The Company has  continued  to address the Year 2000 problem as it affects the
Company's  business.   While  the  Company  has  successfully  passed  several
important  Year 2000  milestones,  management  believes  that  effort  will be
required  through the end of 1999 and beyond to enable the Company to meet its
Year  2000  goals.   Based  on  the  work  completed  during  the  past  year,
management  continues to be confident that the Year 2000 problem is not likely
to have a material  effect on the Company's  business,  results of operations,
or  financial  condition.  Nevertheless,  since the  effects  of the Year 2000
problem are likely to be  unpredictable,  management  does not expect that the
Company's Year 2000 compliance  program will eliminate all risk to the Company
associated with the Year 2000 problem.

Based on its ongoing  review,  management  continues  to believe that the most
significant  risk  facing the  Company  in  connection  with Year 2000  issues
relates to software provided by the Company for use by,

                                     -11-
<PAGE>

or on behalf of, its clients.  This software has been provided  principally by
the HR Technologies  practice (including benefit  administration  software and
call   center   services)   and   the   Retirement    practice    (principally
spreadsheet-based  benefit  calculators).  The  risks  presented  include  the
possibility  of  errors  or  contractual  liability  caused  by  non-compliant
software  that is not  identified  or  corrected  and  costs of  replacing  or
repairing client systems.  Other risks identified by the Company include: risk
of a general  economic  downturn  as a result of the Year 2000  problem;  risk
arising  from  the  failure  of   infrastructure,   including  power,   water,
telecommunications,  and building services;  and risks from operations outside
North America.  The Company s Year 2000 compliance program will not address or
prevent  adverse  effects to the  Company  because of economic  disruption  or
failure of public infrastructure.

The Company's  Year 2000  compliance  plan relies on  geographic  and practice
leaders to assess and oversee  repair or  replacement of software and hardware
used  in  their  domain.  Except  in  the  case  of  software  provided  to or
maintained  for clients by the HR  Technologies  practice,  substantially  all
assessment and remediation  work has been completed,  but formal  verification
and  documentation of this effort is still in process.  The Company expects to
complete verification and documentation by September 30, 1999.

The Company has completed assessment,  repair, and testing of all its internal
information  technology  systems,  including  WyVal,  the Company's  actuarial
valuation  software.  The Company has  completed  an  inventory of its vendors
and is monitoring Year 2000 compliance  efforts by its major vendors.  Because
of the nature of the Company's business and the widely  distributed  locations
of the  Company's  operations,  management  believes that the Company does not
face  significant  risks from Year 2000 failures in systems relied upon by its
vendors.  The Company has not reviewed the Year 2000 compliance  status of its
clients,  some of which  may be  affected  by Year 2000  problems.  Management
believes that the effect of client  problems on the  Company's own  operations
is not likely to be material because of the broad,  diversified  nature of the
Company's  client  base.  The  Company  will  continue  to develop  and revise
contingency  procedures  to address  the Year 2000  situation.  In many cases,
the Company will rely on existing  contingency  plans  relating to failures in
information   technology   systems.   A  principal   focus  of  the  Company s
contingency  planning is maintaining  communications  among employees and with
clients in the event of short-term  telecommunications  failures or short-term
disruptions limiting access to the Company's offices.

While the Company has made progress  toward meeting its  compliance  goals for
software  provided to or used on behalf of clients,  the Company  continues to
be behind in its  schedule  for  compliance  activity  for such  systems.  The
Company's  deadline for bringing  systems into  compliance  was June 30, 1999.
The  following  summarizes  the status of the Company's  Year 2000  compliance
efforts related to client software:

   As  of  August  31,  1999,   remediation   and  testing  were  complete  on
   substantially all of the systems  inventoried by the Retirement practice in
   North America. This assessment,  however, does not include certain internal
   systems  with limited  application  (such as  calculators  used to estimate
   benefits for a single  client  plan).  The Company will  remediate and test
   such  systems  as a part of its normal  quality  review  process  when such
   systems are next used.

   As  of  August  31,  1999,  the  HR  Technologies  practice  has  completed
   assessment on more than 70% of the systems  inventoried  in North  America.
   Testing and remediation  have been completed on  approximately  45% of such
   systems.  Testing and remediation of the remaining systems are scheduled to
   be completed before the end of 1999. A substantial  number of the remaining
   systems are used to support open enrollment in benefit plans; these systems
   are normally modified late in the

                                     -12-
<PAGE>

   calendar year and any required Year 2000 remediation will be performed as a
   part of such modifications.

   The Company has established a program of contacting clients to discuss Year
   2000 issues. As of August 31, 1999, the Company had completed approximately
   90% of the  projected  effort  for this  program.  The  Company  expects to
   complete its client contact program by October 31, 1999.

The Company's Year 2000  compliance  program  includes its operations  outside
North America.  Because of the size of these  operations,  management does not
expect that Year 2000  problems  outside  North  America  will have a material
effect on the Company.

The  Company's  cost to address  Year 2000  compliance  issues  exceeded  $4.0
million for fiscal year 1999. The Company's  principal  expenditures  were for
repair and testing of internal and client software,  costs associated with the
Company's Year 2000 compliance program and costs of outside  consultants.  The
Company  expects  that its  costs for Year  2000  compliance  will be lower in
fiscal year 2000.  Funds for costs  associated  with the  Company's  Year 2000
compliance  efforts will come from  operating  cash flows for all areas of the
Company's operations and will be expensed as incurred.

The information  concerning the Company's Year 2000 compliance effort includes
"forward-looking"  statements  within the  meaning of the  Private  Securities
Litigation Reform Act of 1995. Such  forward-looking  statements involve known
and unknown  risks,  uncertainties,  and other  factors  that may cause actual
events  or  costs  to  be  materially   different   than   indicated  by  such
forward-looking statements. These factors include, among others, unanticipated
costs of  remediation  and  replacement,  the Company's  inability to meet its
targeted  dates as  scheduled  and  extensive  failures  of  governmental  and
municipal  infrastructures.  Any estimates and projections described have been
developed by the management of the Company and are based on the Company's best
judgments  together with the information that is available to date. Due to the
many uncertainties  surrounding the Year 2000 problem, the shareholders of the
Company  are  cautioned  not to place undue  reliance on such  forward-looking
statements.


ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

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


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.

                                      -13-
<PAGE>

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 each of the
         three years ended June 30, 1999                              F-2

         Consolidated Balance Sheets at June 30, 1999 and 1998        F-3

         Consolidated Statements of Cash Flows for each of the
         three years ended June 30, 1999                              F-4

         Consolidated Statements of Changes in Permanent
         Shareholders' Equity for each of the three years
         ended June 30, 1999                                          F-5

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

(2)  Consolidated Financial Statement Schedule for each of the three
     years ended June 30, 1999

      Valuation and Qualifying Accounts and Reserves (Schedule II)    F-26

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

                                     -14-
<PAGE>

     Financial  statements  of 50% or less owned  entities and  unconsolidated
     subsidiaries  have  been  omitted,   with  the  exception  of  Wellspring
     Resources LLC for  the fiscal  year  ended June 30,  1997 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 & Company2
3.2  Restated Bylaws (as amended through June 30, 1999)3
4    Form of Certificate Representing Common Stock1
10   Credit Agreement Among NationsBank, N.A. and Others dated June 30, 19984
21   Subsidiaries of Watson Wyatt & Company5
23   Consent of the Company's Independent Accountants5
24   Consent of Wellspring's Independent Accountants5
99   Wellspring Resources LLC Financial Statements5







-----------------------------------------
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 Annual Report on Form 10-K for
    the fiscal year ended June 30, 1996 (File No. 0-20724), filed on
    September 16, 1996
3   Incorporated by reference from Registrant's Report on Form S-8
    (File No. 33-369545), filed on December 23, 1998
4   Incorporated by reference from Registrant's Annual Report on Form 10-K for
    the fiscal year ended June 30, 1998 (File No. 0-20724), filed on
    September 24, 1998
5   Filed herewithin

                                     -15-
<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 28, 1999              By: /S/ John J. Haley
                                          -----------------
                                          John J. Haley
                                          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/ John J. Haley          President, Chief Executive Officer     9/28/99
-----------------          and Director
John J. Haley


/S/ Carl D. Mautz          Vice President and Chief               9/28/99
-----------------          Financial Officer
Carl D. Mautz


/S/ Peter L. Childs        Controller                             9/28/99
-------------------
Peter L. Childs


/S/ Thomas W. Barratt      Vice President and Director            9/28/99
---------------------
Thomas W. Barratt


/S/ Paula A. DeLisle       Vice President and Director            9/28/99
--------------------
Paula A. DeLisle


/S/ David B. Friend        Vice President and Director            9/28/99
-------------------
David B. Friend


/S/ Ira T. Kay             Vice President and Director            9/28/99
--------------
Ira T. Kay

                                      -16-
<PAGE>

Signature                  Title                                   Date
---------                  -----                                   ----


/S/ Brian E. Kennedy       Vice President and Director            9/28/99
--------------------
Brian E. Kennedy

/S/ Eric P. Lofgren        Vice President and Director            9/28/99
-------------------
Eric P. Lofgren

/S/ Robert D. Masding      Director                               9/28/99
---------------------
Robert D. Masding

/S/ R. Michael McCullough  Director                               9/28/99
-------------------------
R. Michael McCullough

/S/ Gail E. McKee          Vice President and Director            9/28/99
-----------------
Gail E. McKee

/S/ John A. Steinbrunner   Vice President and Director            9/28/99
------------------------
John A. Steinbrunner

/S/ A. Grahame Stott       Vice President and Director            9/28/99
-------------------
A. Grahame Stott





                                      -17-

<PAGE>

                      REPORT OF INDEPENDENT ACCOUNTANTS





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

In our opinion,  the  consolidated  financial  statements  listed in the index
appearing under Item 14(a)(1) on page 14 of this Form 10-K present fairly,  in
all material  respects,  the financial  position of Watson Wyatt & Company and
its  subsidiaries  at June  30,  1999  and  1998,  and the  results  of  their
operations  and their  cash  flows for each of the three  years in the  period
ended  June  30,  1999,  in  conformity  with  generally  accepted  accounting
principles.  In addition,  in our opinion,  the financial  statement  schedule
listed in the index appearing under Item 14(a)(2) on page 14 presents  fairly,
in all  material  respects,  the  information  set forth  therein when read in
connection with the related consolidated financial statements. These financial
statements  and financial  statement  schedule 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.





PRICEWATERHOUSECOOPERS LLP

Washington, D.C.
September 8, 1999

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

<S>                                                                                <C>            <C>           <C>
Fees                                                                               $    556,860   $    512,660   $    486,502

Costs of providing services:
   Salaries and employee benefits                                                       321,525        268,611        252,302
   Non-recurring compensation charge (see Note 12)                                            -         69,906              -
   Occupancy and communications                                                          62,915         62,061         72,155
   Professional and subcontracted services                                               47,863         49,907         48,827
   Other                                                                                 29,753         26,779         23,871
                                                                                   ------------   ------------   ------------
                                                                                        462,056        477,264        397,155

General and administrative expenses                                                      56,578         51,759         45,696
Depreciation and amortization                                                            15,248         24,994         22,094
                                                                                   ------------   ------------   ------------
                                                                                        533,882        554,017        464,945

Income (loss) from operations (see Note 12)                                              22,978        (41,357)        21,557

Other:
   Interest income                                                                          944            901          1,462
   Interest expense                                                                      (2,646)        (2,768)        (1,506)

Income from affiliates                                                                    2,524            258            105
                                                                                   ------------   ------------   ------------


Income (loss) before income taxes and minority interest (see Note 12)                    23,800        (42,966)        21,618

Provision for (benefit from) income taxes:
   Current                                                                               18,744         15,116         12,627
   Deferred                                                                              (7,296)        (1,982)        (3,557)
                                                                                   ------------   ------------   ------------
                                                                                         11,448         13,134          9,070
                                                                                   ------------   ------------   ------------


Income (loss) before minority interest (see Note 12)                                     12,352        (56,100)        12,548


Minority interest in net loss of consolidated subsidiaries                                 (217)          (112)          (167)
                                                                                   ------------   ------------   ------------

Income(loss)from continuing operations (see Note 12)                                     12,135        (56,212)        12,381

Discontinued operations:

Loss from operations of discontinued Outsourcing Business (less
   applicable income tax benefit of $0, $5,053 and $8,181 respectively)                       -         (6,821)       (11,483)

Adjustment (loss) on disposal of  discontinued Outsourcing Business
   (1999 adjustment is net of applicable income tax expense of $6,322;
   1998 loss is net of applicable income tax benefit of $46,715)                          8,678        (63,085)             -
                                                                                   ------------   ------------   ------------
Net Income (loss) (see Note 12)                                                    $     20,813   $   (126,118)  $        898
                                                                                   ============   ============   ============



Earnings (loss) per share, continuing operations                                   $       0.80   $      (3.27)  $       0.71
                                                                                   ============   ============   ============

Earnings (loss)  per share, discontinued operations                                $       0.57   $      (4.07)  $      (0.66)
                                                                                   ============   ============   ============

Earnings (loss) per share, net income (loss)                                       $       1.37   $      (7.34)  $       0.05
                                                                                   ============   ============   ============
</TABLE>

                                                        SEE ACCOMPANYING NOTES
                                                                  F-2

<PAGE>
<TABLE>
<CAPTION>

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

                                                                              June 30,                 June 30,
                                                                                1999                     1998
                                                                             ----------               ----------

                                                      ASSETS
<S>                                                                          <C>                      <C>
Cash and cash equivalents                                                    $   35,985               $   13,405
Receivables from clients:

    Billed, net of allowances of $3,701 and $2,142                               72,798                   69,671
    Unbilled                                                                     63,068                   59,725
                                                                             ----------               ----------
                                                                                135,866                  129,396

Income taxes receivable                                                               -                    2,216
Other current assets                                                             10,834                    6,945
                                                                             ----------               ----------
    Total current assets                                                        182,685                  151,962

Investment in affiliates                                                         15,306                   17,666
Fixed assets                                                                     42,797                   37,368
Deferred income taxes                                                            56,206                   48,911
Intangible assets                                                                 7,455                    2,412
Other assets                                                                      9,511                    9,991
                                                                             ----------               ----------
                                                                             $  313,960               $  268,310
                                                                             ==========               ==========

                     LIABILITIES, REDEEMABLE COMMON STOCK, AND PERMANENT SHAREHOLDERS' EQUITY


Accounts payable and accrued liabilities                                     $  152,371               $  116,548
Note payable and book overdrafts                                                    248                   11,666
Income taxes payable                                                             18,374                        -
                                                                             ----------               ----------
    Total current liabilities                                                   170,993                  128,214

Accrued retirement benefits                                                      77,140                   82,528
Deferred rent and accrued lease losses                                            9,270                   12,676
Other noncurrent liabilities                                                     22,608                   32,784

Minority interest in subsidiaries                                                   669                      322

Redeemable Common Stock - $1 par value:
    25,000,000 shares authorized;
    16,112,416 and 15,916,757 issued
    and outstanding; at redemption value                                        107,631                   96,296

Permanent shareholders'equity:
Adjustment for redemption value less than
    amounts paid in by shareholders                                              11,420                   25,240
Retained deficit                                                                (83,209)                (106,834)
Cumulative translation loss                                                      (2,562)                  (2,916)
Commitments and contingencies
                                                                             ----------               ----------
                                                                             $  313,960               $  268,310
                                                                             ==========               ==========

</TABLE>



                                                        SEE ACCOMPANYING NOTES
                                                                  F-3

<PAGE>

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


                                                                                                   Year Ended June 30
                                                                                       -----------------------------------------
                                                                                          1999            1998           1997
                                                                                       -----------     ----------     ----------
<S>                                                                                    <C>             <C>            <C>
Cash flows from (used for) operating activities:
   Net income(loss)                                                                    $    20,813     $ (126,118)     $     898
   Adjustments to reconcile net income(loss) to net cash
     provided by operating activities:
       Non-cash non-recurring compensation charge                                                -         69,906              -
       Net (adjustment) loss from Discontinued Operations                                   (8,678)        69,906         11,483
       Provision for doubtful receivables from clients                                       9,503          5,613          6,853
       Depreciation                                                                         13,680         12,849         13,816
       Amortization of deferred software and development costs
           and other intangible assets                                                       1,568         12,143          8,277
       Provision for deferred  income taxes                                                 (7,295)        (1,982)        (3,557)
       Income from affiliates                                                               (2,524)          (258)          (105)
       Minority interest in net income of consolidated subsidiaries                            217            112            167
       (Increase) decrease in assets (net of discontinued operations):
         Receivables from clients                                                          (25,488)       (11,115)        (2,794)
         Income taxes receivable                                                             2,216          4,558          3,327
         Other current assets                                                               (3,889)           342           (351)
         Other assets                                                                          480             76         (1,930)
       Increase (decrease) in liabilities (net of discontinued operations):
         Accounts payable and accrued liabilities                                           54,567         11,318          1,300
         Income taxes payable                                                               12,052         (3,563)        (7,799)
         Accrued retirement benefits                                                        (5,388)        (4,169)         5,556
         Deferred rent and accrued lease losses                                             (3,406)        (2,262)         5,034
         Other noncurrent liabilities                                                        1,132            840            687
       Other, net                                                                              514          1,603            656
       Discontinued operations, net                                                         (5,537)       (18,554)         7,530
                                                                                       -----------     ----------     ----------
       Net cash provided by operating activities                                            54,537         21,245         49,048
                                                                                       -----------     ----------     ----------

Cash flows (used in) from investing activities:
   Purchases of fixed assets                                                               (19,684)       (16,034)       (15,548)
   Proceeds from sales of fixed assets and investments                                         237            623            446
   Acquisitions                                                                             (6,207)             -         (1,169)
   Investment in software and development costs                                                  -         (3,000)        (4,554)
   Investment in affiliates                                                                  4,220          3,076         (1,385)
   Discontinued operations                                                                       -        (14,750)       (20,062)
                                                                                       -----------     ----------     ----------
       Net cash used in investing activities                                               (21,434)       (30,085)      (42,272)
                                                                                       -----------     ----------     ----------

Cash flows (used by) from financing activities:
   Borrowings and bank overdrafts                                                          (11,418)        11,258              -
   Issuances of Redeemable Common Stock                                                     15,451          1,005         15,414
   Repurchases of Redeemable Common Stock                                                  (15,124)       (13,141)       (16,604)
                                                                                       -----------     ----------     ----------
       Net cash used by financing activities                                               (11,091)          (878)        (1,190)
                                                                                       -----------     ----------     ----------
Effect of exchange rates on cash                                                               568         (3,134)        (1,023)
                                                                                       -----------     ----------     ----------
Increase (decrease) in cash and cash equivalents                                            22,580        (12,852)         4,563
Cash and cash equivalents at beginning of period                                            13,405         26,257         21,694
                                                                                       -----------     ----------     ----------
Cash and cash equivalents at end of period                                             $    35,985     $   13,405     $   26,257
                                                                                       ===========     ==========     ==========

</TABLE>


                                                         SEE ACCOMPANYING NOTES
                                                                   F-4
<PAGE>
<TABLE>
<CAPTION>
                                                  WATSON WYATT & COMPANY
                            CONSOLIDATED STATEMENTS OF CHANGES IN PERMANENT SHAREHOLDERS' EQUITY
                                               (THOUSANDS OF U.S. DOLLARS)

                                                                                                  Adjustment for
                                                                                                    Redemption
                                                                                                       Value
                                                                                                  (Greater) Less
                                                           Retained            Cumulative           Than Amounts
                                                           Earnings            Translation           Paid in by
                                                           (Deficit)           Gain (Loss)         Shareholders
                                                         -------------        -------------        -------------
<S>                                                      <C>                  <C>                  <C>
Balance at June 30, 1996                                 $      30,677        $      1,040         $     (37,549)

Comprehensive income:
     Net income                                                    898                   -                     -
     Foreign currency translation adjustment                         -                (204)                    -
                                                         -------------        ------------         -------------
Total comprehensive income                                         898                (204)                    -
Effect of repurchases of 3,258,203 shares of
     common stock (various prices per share)                    (6,942)                  -                 6,942
Adjustment of redemption value for change
     in formula book value per share                                 -                   -                (7,067)
                                                         -------------        ------------         -------------
Balance at June 30, 1997                                 $      24,633        $        836         $     (37,674)

Comprehensive loss:
     Net loss                                                 (126,118)                  -                     -
     Foreign currency translation adjustment                         -              (3,752)                    -
                                                         -------------        ------------         -------------
Total comprehensive loss                                      (126,118)             (3,752)                    -
Effect of repurchases of 2,410,425 shares of
     common stock (various prices per share)                    (5,349)                  -                 5,349
Adjustment of redemption value for change
     in formula book value per share                                 -                   -               (12,341)
Adjustment of redemption value for non-recurring
     compensation charge (see Note 12)                               -                   -                69,906
                                                         -------------        ------------         -------------
Balance at June 30, 1998                                 $    (106,834)       $     (2,916)        $      25,240


Comprehensive income:
     Net income                                                 20,813                   -                     -
     Foreign currency translation adjustment                         -                 354                     -
                                                         -------------        ------------         -------------
Total comprehensive income                                      20,813                 354                     -
Effect of repurchases of 2,361,542 shares of
     common stock (various prices per share)                     2,812                   -                (2,812)
Adjustment of redemption value for change
     in formula book value per share                                 -                   -               (11,008)
                                                         -------------        ------------         -------------
Balance at June 30, 1999                                 $     (83,209)       $     (2,562)         $     11,420
                                                         =============        ============         =============


</TABLE>






                                                      SEE ACCOMPANYING NOTES
                                                               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 an  international  company
engaged in the business of providing  professional  consultative services on a
fee basis,  primarily  in the human  resource  areas of employee  benefits and
compensation,  but also in other areas of specialization such as human capital
consulting and human resource related technology consulting. 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.

In 1998,  the Company  discontinued  its Benefits  Administration  Outsourcing
Business  as further  described  in Note 16. The  Consolidated  Statements  of
Operations   in  1999  and  1998   reflect  the  charges   recorded  for  that
discontinuation  as well  as for the  operating  results  of the  discontinued
operations in 1998 and 1997.

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,  allowances  for
uncollectible  receivables,   investments  in  affiliates,   depreciation  and
amortization,  profits on long-term  contracts,  asset  write-downs,  employee
benefit plans, taxes, discontinued operations and Year 2000 costs.

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  inter-company  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.  Such investments were $21,700,000 at June 30, 1999.

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.

REVENUE RECOGNITION - For consulting services,  fees from clients are recorded
as  services  are  performed   and  are   presented  net  of  write-offs   and
uncollectible amounts. Revenues from long-term contracts are recognized on the
percentage of completion basis.  Anticipated contract losses are recognized as
they become known. Fees for  administrative  and recordkeeping  operations are
recognized as earned by the Company.

                                      F-6
<PAGE>

INTANGIBLE  ASSETS - 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 seven 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.  Losses so identified
are then  measured as the  difference  between the net book value of the asset
and the  discounted  present  value  of the cash  flows  and are  recorded  as
identified.

EMPLOYEE  RECEIVABLES  - The  Company  had  outstanding  employee  receivables
included in other current and  noncurrent  assets of $2,440,000 and $3,165,000
at  June 30,  1999 and  June 30,  1998,  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.   Foreign   currency   translation   gains  or   losses   on
inter-company  receivables  and payables are generally not recognized  because
such amounts are usually  considered  to be permanent  and are not expected to
be liquidated.

FAIR VALUE OF FINANCIAL  INSTRUMENTS  - The carrying  amount of the  Company's
cash and cash equivalents,  short-term  investments,  receivables from clients
and notes and  accounts  payable and  accrued  liabilities  approximates  fair
value   because  of  the  short   maturity   and  ready   liquidity  of  those
instruments.  At June 30,  1999, the  outstanding  balance under its revolving
credit  agreement was zero,  while at June 30, 1998 the Company had $9,000,000
outstanding.  The Company  knows of no event of default that would  require it
to satisfy the guarantees  described in Notes 9 and 15 other than as reflected
in the Consolidated Financial Statements.

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 15,215 in
fiscal year 1999,  17,170 in fiscal year 1998,  and 17,438 in fiscal year 1997
(see Note 10).

COMPREHENSIVE  INCOME - In fiscal year 1999, the Company adopted  Statement of
Financial  Accounting  Standards  ( SFAS  ) No.  130  Reporting  Comprehensive
Income. Comprehensive income includes net income and changes in the cumulative
foreign currency  translation gain or loss. For the years ended June 30, 1999,
1998   and   1997,    comprehensive   income   (loss)   totaled   $21,167,000,
$(129,870,000), and $694,000, respectively.

                                      F-7

<PAGE>

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

Interest expense                       $  1,889    $  2,639    $  1,506
Income taxes paid                      $  5,462    $ 18,679    $ 11,947


NOTE 3 - INVESTMENTS IN AFFILIATES

Entities accounted for under the equity method are:

                                                                   June 30
                                                          --------------------
                                                 Ownership
                                                 Interest      1999       1998
                                                 --------      ----       ----

Watson Wyatt Partners                              10.0%  $   9,265   $ 11,040
Watson Wyatt Holdings (Europe) Limited             25.0%      6,041      6,626
Professional Consultants Insurance Company, Inc.   27.4%          -          -
                                                          ---------   --------
Total Investment in Affiliates                            $  15,306   $ 17,666
                                                          =========   ========


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.
Effective July 1, 1998, the Company sold one half of its investment in WWHE to
Watsons; no gain or loss was recognized on the transaction.

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  using the  equity  method of  accounting
because  it has  the  ability  to  exercise  significant  influence  over  the
operations of the entity.

At June 30,  1999, the Company's  investment in WWHE and Watsons  exceeded the
Company's  share of the  underlying  net assets by $2,257,000 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.

                                      F-8

<PAGE>

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

                                                Year Ended June 30
                                         -------------------------------
                                           1999       1998         1997
                                         -------     ------      -------

Equity investment income                 $ 2,760     $  724      $ 1,019
Amortization of basis differential          (236)      (466)        (914)
                                         -------     ------      -------
Income from affiliates                   $ 2,524     $  258      $   105
                                         =======     ======      =======

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

                                                      1999       1998
                                                   ---------   ---------

Current assets                                     $ 117,717   $ 118,116
Noncurrent assets                                     17,286      10,886
                                                   ---------   ---------
     Total assets                                  $ 135,003   $ 129,002
                                                   =========   =========

Current liabilities                                $  65,171   $  54,278
Noncurrent liabilities                                30,810      39,344
Shareholders' equity                                  39,022      35,380
                                                   ---------   ---------
     Total liabilities & shareholders'equity       $ 135,003   $ 129,002
                                                   =========   =========

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:


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

Revenue                                  $ 206,463  $ 173,012  $ 166,851
Operating expenses                         155,330    135,577    126,338
                                         ---------  ---------  ---------
Income before tax                        $  51,133  $  37,435  $  40,513
                                         =========  =========  =========
Net income                               $  51,116  $  38,176  $  39,996
                                         =========  =========  =========

                                      F-9
<PAGE>

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.

The components of fixed assets are:

                                                     June 30
                                                     -------
                                               1999           1998
                                             --------       --------

Furniture, fixtures and equipment            $ 96,096       $ 90,727
Leasehold improvements                         27,069         22,294
                                             --------       --------
                                              123,165        113,021
Less: accumulated depreciation
     and amortization                         (80,368)       (75,653)
                                             --------       --------
     Net fixed assets                        $ 42,797       $ 37,368
                                             ========       ========

NOTE 5 - PENSION AND SAVINGS PLANS

In fiscal year 1999, the Company adopted the revised  disclosure  requirements
of  SFAS  No.  132,   "Employers"   Disclosures   about   Pensions  and  Other
Postretirement  Benefits. SFAS 132 standardized the disclosure of pensions and
other  postretirement  benefits  but did not change the  accounting  for these
benefits. Prior years information has been reclassified to conform to the 1999
disclosure format.

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


                                                      June 30
                                               ---------------------
                                                  1999       1998
                                               ---------   ---------

Defined benefit retirement plans               $  28,149   $  35,263
Canadian Separation Allowance Plan                 5,953       6,264
Postretirement benefits other than pensions       43,038      41,001
                                               ---------   ---------
     Accrued retirement benefits               $  77,140   $  82,528
                                               =========   =========


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  associate's  compensation  during the
three highest paid consecutive years of service.

                                      F-10

<PAGE>

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.  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.

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

<TABLE>
<CAPTION>
                                                   June 30, 1999                          June 30, 1998
                                           --------------------------------   ---------------------------------

                                           Assets Exceed      Accumulated     Assets Exceed        Accumulated
                                            Accumulated        Benefits        Accumulated          Benefits
                                              Benefits       Exceed Assets      Benefits          Exceed Assets
                                            (Qualified)     (Non-qualified)    (Qualified)       (Non-qualified)
                                           -------------     --------------   -------------      --------------
<S>                                        <C>               <C>              <C>                <C>
Accumulated benefit obligation             $     245,890     $       42,740   $     230,886      $       38,474
                                           =============     ==============   =============      ==============
Projected benefit obligation               $     290,704     $       86,703   $     275,139      $       78,519

Fair value of plan assets                        411,102                  -         381,398                   -
                                           -------------     --------------   -------------      --------------
Over(under)funded                          $     120,398     $      (86,703)  $     106,259      $      (78,519)
                                           =============     ==============   =============      ==============
Net prepaid (accrued) benefit cost         $      26,691     $      (58,527)  $      13,778      $      (47,974)
                                           =============     ==============   =============      ==============

</TABLE>

The following  table sets forth the net periodic  pension cost,  contributions
and benefits paid for the principal plans:

                                              Year Ended June 30
                                        ------------------------------
                                          1999       1998       1997
                                        --------   --------   --------

Net periodic pension cost               $  5,511   $  4,411   $  6,596
Company contributions                      7,878      9,311      7,171
Participant contributions                     54          -          -
Benefits paid                             14,593     16,040     12,697


During fiscal year 1999,  the Company  acquired a portion of KPMG's  actuarial
consulting  services.  In  connection  with  this  transaction,   the  Company
recognized additional pension expense of $665,000.

                                      F-11

<PAGE>

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

                                                          June 30
                                                          -------
                                                 1999       1998       1997
                                                 ----       ----       ----

Discount rate, projected benefit obligation       7.0%       6.8%       7.5%
Discount rate, net periodic pension cost          6.8%       7.5%       7.5%
Expected long-term rate of return on assets      10.0%      10.0%      10.0%
Rate of increase in compensation levels           5.3%       5.8%       5.8%



DEFINED CONTRIBUTION PLANS

The Company  sponsors a savings plan which provides  benefits to substantially
all  U.S.   associates   and  under   which  the  Company   matches   employee
contributions  at 50% of the  first  6% of  total  pay  (which  includes  base
salary,  overtime  and  annual  performance-based  bonuses).  Vesting  of  the
Company  match occurs after three years for new  employees and is 100% for all
employees  hired  before  January 1, 1997.  The expense in fiscal  years 1999,
1998 and 1997 for the match was $4.5  million,  $5.1 million and $2.0 million,
respectively.  Under  the  plan,  the  Company  also has the  ability  to make
discretionary  profit-sharing  contributions.   The  Company  made  no  profit
sharing  contributions  during  fiscal years 1999,  1998 or 1997.  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 1999,  1998 and 1997  amounted to $377,000,  $293,000
and $414,000, respectively.


NOTE 6 - BENEFITS OTHER THAN PENSIONS

HEALTH CARE BENEFITS

The  Company   sponsors  a   contributory   health  care  plan  that  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  $2,495,000  at June 30,  1999 and
1998,  and is  included in accounts  payable  and accrued  liabilities  in the
consolidated balance sheets.

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-12
<PAGE>

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


                                                               June 30
                                                       ----------------------
                                                          1999         1998
                                                       ---------    ---------

Accumulated postretirement benefit obligation          $  34,981    $  32,326
                                                       =========    =========
Accrued benefit cost                                   $  44,419    $  41,743
                                                       =========    =========


The following  table sets forth the net periodic  postretirement  benefit cost
for the principal plans:

                                                    Year Ended June 30
                                         ------------------------------------
                                           1999          1998          1997
                                         --------      --------      --------

Net periodic postretirement cost         $  3,507      $  3,316      $  3,243
Company contributions                       1,092           660           883
Participant contributions                     175           189           112
Benefits paid                               1,267           849           995



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

<TABLE>
<CAPTION>
                                                                         June 30
                                                            --------------------------------
                                                            1999          1998          1997
                                                            ----          ----          ----
<S>                                                         <C>           <C>           <C>
Health care cost trend, accumulated benefit obligation:
Pre-65 benefits
       (decreasing to 5.0% for 2004 and thereafter)         7.7%          8.4%          9.1%
Post-65 benefits
       (decreasing to 5.0% for 2007 and thereafter)         7.1%          7.7%          8.3%
Discount rate, accumulated benefit obligation
        postretirement benefit                              7.0%          6.8%          7.5%
Discount rate, net periodic cost                            7.0%          6.8%          7.5%
</TABLE>

                                     F-13
<PAGE>

NOTE 7 - ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

Accounts payable and accrued liabilities consist of:
                                                              June 30
                                                      -----------------------
                                                         1999          1998
                                                      ---------     ---------

Accounts payable and accrued liabilities              $  53,586     $  55,865
Accrued salaries and bonuses                             68,405        37,567
Current portion of defined benefit retirement plans
    and postretirement benefits other than pensions       9,948         4,191
Accrued vacation                                         13,578        13,300
Advance billings                                          6,854         5,625
                                                      ---------     ---------
Total accounts payable and accrued liabilities        $ 152,371     $ 116,548
                                                      =========     =========


NOTE 8 - LEASES

The Company leases office space and various computer equipment under operating
lease  agreements  with terms  generally  ranging  from one to ten years.  The
Company has entered into sublease agreements for some of its leased space. The
rental expense was  $43,631,000,  $43,133,000 and $42,079,000 for fiscal years
1999, 1998 and 1997, respectively.  Sublease income was $4,208,000, $3,905,000
and $1,702,000 for fiscal years 1999, 1998 and 1997, respectively.

Future cash  outlays for  operating  lease  commitments  and cash  inflows for
sublease income are:

                                Lease          Sublease
                              Commitments       Income
                              -----------     ---------
             2000             $    43,771     $   3,388
             2001                  38,709         3,315
             2002                  30,614         2,963
             2003                  18,074           115
             2004                  14,043             -
          thereafter               25,770             -
                              -----------     ---------
                              $   170,981     $   9,781
                              ===========     =========

As a result of  relocations  and the  subleasing of excess  office space,  the
Company  recognized  lease  termination  losses  of  $341,000,   $790,000  and
$12,107,000 in fiscal years 1999, 1998 and 1997, respectively.


NOTE 9 - NOTE PAYABLE

The Company has a  $120,000,000  credit  facility  with a group of banks at an
interest  rate that  varies with LIBOR  and/or the Prime Rate,  plus an annual
commitment fee that varies with the Company's  financial  leverage and is paid
on the unused  portion of the credit  facility.  No amounts  were  outstanding
under the  revolving  portion  of the  credit  facility  as of June 30,  1999;
$9,000,000  was  outstanding at June 30, 1998.  The credit  facility  requires
the  Company  to  observe  certain  covenants  (including  requirements  as to

                                     F-14
<PAGE>

minimum  net worth and  other  financial  and  restrictive  covenants)  and is
secured by a blanket  lien on all assets.  At June 30, 1999 the Company was in
compliance  with all  covenants  under  the  credit  facility.  The  revolving
portion of the credit facility is scheduled to mature on June 29, 2003.

Of  the  total  credit  line,  $95,000,000  is  available  to the  Company  as
revolving credit for operating  needs. The remaining  $25,000,000 is available
to secure  loans to  associates  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  $20,316,000  and  $15,617,000  at June 30, 1999 and
1998,  respectively.  Shares totaling 4,735,000 and 4,897,000 of the Company's
Redeemable  Common Stock were pledged by shareholders to secure these loans at
June 30, 1999 and 1998, 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 sales by the Company 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.  Amounts paid by the Company to repurchase  Redeemable  Common
Stock  reflect 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  Company's
Redeemable  Common  Stock as of June 30,  1996,  increased or decreased by net
income or  losses,  and all other  Generally  Accepted  Accounting  Principals
("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, (ii) eliminate annual
changes in the Currency Translation  Adjustment occurring after June 30, 1996,
and (iii)  eliminate  the after tax  increases  or decreases in Net Book Value
recorded in  accordance  with GAAP as a result of the  discontinuation  of the
Benefits Administration Outsourcing Business. The Formula Book Value was $6.68
at June 30, 1999 and $6.05 at June 30, 1998.

                                      F-15

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

                                                               1999            1998
                                                            ---------        ---------
<S>                                                         <C>              <C>
Consolidated net worth (1)                                  $  36,882        $  15,742
Adjustment for the compensation survey items:
     50% of consolidated income received
     from compensation survey business                          5,915            5,915

Add:  Adjustment for after-tax effect of discontinuation
      of Benefits Administration Outsourcing Business          61,228           69,906

Add:  Adjustment for after-tax effect of lease losses           3,606            4,733
                                                            ---------        ---------
Formula Book Value of Redeemable Common Stock               $ 107,631        $  96,296
                                                            =========        =========
Number of shares of Redeemable Common Stock outstanding        16,112           15,917
                                                            =========        =========
Formula Book Value per share of Redeemable Common Stock     $    6.68        $    6.05
                                                            =========        =========
<FN>
     (1)After adjusting for currency translation as specified in the Company's
     bylaws of $3,602 in 1999 and $3,956 in 1998.
</FN>
</TABLE>

                                      F-16

<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, 1999 were as follows:

                                               Number of         Redeemable
                                                Shares          Common Stock
                                              ----------        ------------

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

Redemption of shares                          (2,410,425)            (13,141)

Issuance of shares                               196,752               1,005

Adjustment of redemption value for
  change in Formula Book Value per share               -              12,341
                                              ----------        ------------
Balance at June 30, 1998                      15,916,757        $     96,296

Redemption of shares                          (2,361,542)            (15,124)

Issuance of shares                             2,557,201              15,451

Adjustment of redemption value for
  change in Formula Book Value per share               -              11,008
                                              ----------        ------------
Balance at June 30, 1999                      16,112,416        $    107,631
                                              ==========        ============


The Company  sponsors a Stock Purchase Plan ("SPP") which allows virtually all
associates  to  become   shareholders.   During  1999,  the  Company  received
$15,451,000  from the sale of 2,557,201  shares of stock under the SPP.  There
was no formal  stock sale in fiscal  year 1998,  although  for the fiscal year
ended June 30,  1998, the Company received $1,005,000 from the sale of 196,752
shares of stock  outside of the SPP.  During  fiscal  year 1997,  the  Company
received  $15,414,000  from the sale of  3,126,670  shares of stock  under the
SPP.  During 1997,  the Company  paid each  associate  purchasing  stock $0.50
per share, resulting in expense of $1,300,000.

                                      F-17

<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  continuing  operations  income tax  provision  before
minority interest and discontinued operations include:

                                                    Year Ended June 30
                                              ------------------------------
                                                1999       1998       1997
                                              --------   --------   --------

Current tax expense:
        U.S.                                  $ 10,817   $  9,972   $  8,370
        State and local                          4,050      3,324      2,773
        Foreign                                  3,877      1,820      1,484
                                              --------   --------   --------
                                                18,744     15,116     12,627
                                              --------   --------   --------
Deferred tax (benefit) expense:
        U.S.                                    (5,776)      (337)    (4,188)
        State and local                         (1,407)    (1,706)    (1,507)
        Foreign                                   (113)        61      2,138
                                              --------   --------   --------
                                                (7,296)    (1,982)    (3,557)
                                              --------   --------   --------
Total provision for income taxes              $ 11,448   $ 13,134   $  9,070
                                              ========   ========   ========


                                      F-18

<PAGE>
Deferred income tax assets (liabilities)  included in the consolidated balance
sheets at June 30, 1999 and June 30, 1998 are comprised of the following:

                                                             June 30
                                                             -------
                                                      1999          1998
                                                    --------     ---------
Cash method of accounting for U.S. income
     tax purposes                                   $      -     $ (15,561)
Difference between book and tax depreciation               -        (1,987)
Foreign temporary difference                          (2,595)         (914)
                                                    --------     ---------
     Gross deferred tax liabilities                   (2,595)      (18,462)


Cash method of accounting for U.S. income
     tax purposes                                      3,744             -
Difference between book and tax depreciation           3,202             -
Accrued retirement benefits                           37,137        39,255
Amortization of deferred rent                          5,697         6,794
Foreign temporary difference                           6,367         3,092
Foreign net operating loss carryforwards               1,989         4,942
Discontinued operations exit costs                     7,230        19,559
Other                                                    317             2
                                                    --------      --------
     Gross deferred tax assets                        65,683        73,644
                                                    --------      --------
     Deferred tax assets valuation allowance          (6,882)       (6,271)
                                                    --------      --------
     Net deferred tax asset                         $ 56,206      $ 48,911
                                                    ========      ========

The  Company has foreign tax credit  carryforwards  for U.S.  tax  purposes of
$305,000.  At June 30,  1999,  the Company has unused loss  carryforwards  for
tax  purposes  in  various   jurisdictions   outside  the  U.S.  amounting  to
$6,352,000,  of which  $4,350,000 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
($1,944,000),   the  tax  effect  of  certain   foreign   temporary   expenses
($4,563,000) and foreign tax credit  carryforwards  and other items ($375,000)
for which realizability is considered uncertain.

The net change in the valuation  allowance of $611,000 in fiscal year 1999 and
$2,569,000  in fiscal  year  1998 is due  primarily  to the tax  effect of the
change in  realizable  foreign net operating  losses,  foreign tax credits and
non-deductible foreign expenses.

                                      F-19

<PAGE>

Domestic and foreign components of income before taxes,  minority interest and
discontinued  operations  for each of the  three  years  ended  June 30 are as
follows:

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

          Domestic                      $ 15,203    $ (47,435)  $ 14,861
          Foreign                          8,597        4,469      6,757
                                        --------    ---------   --------
                                        $ 23,800    $ (42,966)  $ 21,618
                                        ========    =========   ========

The reported income tax provision for continuing  operations  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:
<TABLE>
<CAPTION>
                                                                  Year Ended June 30
                                                          --------------------------------
                                                             1999        1998       1997
                                                          ---------   ---------   --------
<S>                                                       <C>         <C>         <C>
Calculated income tax provision at U.S.
     federal statutory tax rate of 35%                    $   8,330   $ (15,038)  $  7,507

Increase (reduction) resulting from:
     Non-deductible compensation expense                          -      24,467          -
     Results of non-U.S. affiliates taxed at other
          than statutory rates                                 (377)       (324)      (463)
     Losses of non-U.S. affiliates for which no
          current benefit is available                          881         852        599
     State income taxes, net of federal tax
          benefit                                             1,207       1,618      1,266
     Non-deductible amortization and other
          expenses                                              849         758        700
     Tax credits                                                  -        (353)      (888)
     Other                                                      558       1,154        349
                                                          ---------   ---------   --------
Income tax provision                                      $  11,448   $  13,134   $  9,070
                                                          =========   =========   ========

</TABLE>

NOTE 12 - NON-RECURRING COMPENSATION CHARGE

In accordance with generally accepted accounting  principles,  the Company has
recorded  a  charge  against  operating  results  of  $69,906,000  in  1998 as
compensation  expense.  This charge  arises  because  the Company  changed the
method of  calculation  of its  Formula  Book  Value  during  1998,  through a
shareholder  vote, to eliminate  from the Formula Book Value  calculation  the
effect of the charge  taken for  discontinued  operations  resulting  from the
discontinuation of the Company's Benefits Administration Outsourcing Business.

                                      F-20
<PAGE>

The  non-recurring  compensation  charge  does not  represent  a call  against
Company  resources and will not recur unless the Company  modifies its Formula
Book Value  calculation  again.  The Company has  separately  disclosed in the
Statement  of  Operations  the  amount of the  charge so that  readers  of the
financial  statements  may  consider  its effect on  earnings  and  infrequent
nature.  Excluding  this charge,  income from  continuing  operations  for the
Company in 1998 would have been $13,700,000  compared to the reported net loss
from continuing operations.


NOTE 13 - SEGMENT INFORMATION

In fiscal  year 1999,  the  Company  adopted  SFAS No. 131  Disclosures  about
Segments of an Enterprise  and Related  Information.  The Company is primarily
organized geographically and has seven reportable segments:

          (1)      U.S. East
          (2)      U.S. Central
          (3)      U.S. West
          (4)      Asia/Pacific
          (5)      Canada
          (6)      Latin America
          (7)      Data Services

The Company evaluates the performance of its segments and allocates  resources
to them based on net operating income. Prior year data has been restated to be
consistent with current year classifications for comparative purposes.

                                      F-21


<PAGE>
The table below presents  specified  information about reported segments as of
and for the year ended June 30, 1999 (in thousands):
<TABLE>
<CAPTION>

                     U.S.        U.S.        U.S.        Asia/                  Latin        Data
                     East      Central       West       Pacific      Canada    America     Services      Total
                     ----      -------       ----       -------      ------    -------     --------      -----

<S>               <C>         <C>         <C>         <C>         <C>         <C>         <C>         <C>
External fees     $ 150,959   $ 130,568   $  54,496   $  44,404   $  36,515   $   5,691   $  12,796   $ 435,429
Intersegment fees    37,738      24,369      18,957       4,284       5,010       1,424         329      92,111
Net operating
   income            45,287      27,087       1,236       7,085       3,488         223       3,736      88,142
Interest expense      1,158         856         471          17         300          98           5       2,905
Depreciation &
   amortization       5,950       4,414       3,351       1,281       1,186         143         185      16,510
Receivables          47,198      39,905      18,730      12,729      12,491       2,527           -     133,580
Income from
   affiliates                                                                                             2,524

</TABLE>

The table below presents  specified  information about reported segments as of
and for the year ended June 30, 1998 (in thousands):
<TABLE>
<CAPTION>

                     U.S.        U.S.        U.S.        Asia/                  Latin        Data
                     East      Central       West       Pacific      Canada    America     Services      Total
                     ----      -------       ----       -------      ------    -------     --------      -----
<S>               <C>         <C>         <C>         <C>         <C>         <C>         <C>         <C>
External fees     $ 129,337   $ 125,639   $  68,076   $  38,429   $  36,221   $   6,062   $  13,004   $ 416,768
Intersegment fees    28,187      15,296      14,210       3,945       4,443       1,153         249      67,483
Net operating
   income            28,286      25,127      10,476          65       4,315         574       3,742      72,585
Interest expense        963         710         494          33         314          68          14       2,596
Depreciation &
   amortization       5,801       3,758       2,822       1,458       1,077         149         166      15,231
Receivables          36,044      33,113      21,375      11,719      11,992       2,097           -     116,340
Income from
   affiliates                                                                                               258

</TABLE>

The table below presents  specified  information about reported segments as of
and for the year ended June 30, 1997 (in thousands):
<TABLE>
<CAPTION>

                     U.S.        U.S.        U.S.        Asia/                  Latin        Data
                     East      Central       West       Pacific      Canada    America     Services      Total
                     ----      -------       ----       -------      ------    -------     --------      -----
<S>               <C>         <C>         <C>         <C>         <C>         <C>         <C>         <C>
External fees     $ 126,077   $ 121,613   $  63,989   $  45,468   $  34,743   $   5,024   $  12,062   $ 408,976
Intersegment fees    17,518      12,739       8,002       2,851       2,789         784         573      45,256
Net operating
   income            18,169      26,797      11,595       5,162       2,595         225       3,146      67,689
Interest expense      1,165         799         322          10         262          35          17       2,610
Depreciation &
   amortization       5,838       3,555       2,353       1,599       1,006         132         193      14,676
Receivables          34,042      32,416      15,134      17,821      10,812       2,345           -     112,570
Income from
   affiliates                                                                                               105

</TABLE>
Information  about  interest  income and tax expense is not presented as it is
not produced internally.

                                      F-22
<PAGE>

A reconciliation of the information reported by segment to the consolidated
amounts follows for the years ended June 30:

<TABLE>
<CAPTION>
                                                                           1999        1998        1997
                                                                         ---------   ---------   ---------
<S>                                                                      <C>         <C>         <C>
FEES:
Total segment external and intersegment fees                             $ 527,540   $ 484,251   $ 454,232
Reimbursable expenses not included in segment fees                          30,426      28,686      30,091
Other, net                                                                  (1,106)       (277)      2,179
Consolidated fees                                                        ---------   ---------   ---------
                                                                         $ 556,860   $ 512,660   $ 486,502
                                                                         =========   =========   =========
NET OPERATING INCOME:
Total segment income                                                     $  88,142   $  72,585   $  67,689
Non-recurring compensation charge                                                -     (69,906)          -
Sublease loss                                                                 (341)       (790)    (12,107)
Income from affiliates                                                       2,524         258         105
Differences in allocation methods for depreciation,
  G&A and pension costs                                                      1,277      (6,208)      3,913
Gain on sale of business units                                               2,723       3,093           -
Discretionary payments                                                     (67,194)    (37,400)    (34,703)
Other, net                                                                  (3,331)     (4,598)     (3,279)
                                                                         ---------   ---------   ---------
Consolidated pretax income(loss)from continuing operations               $  23,800   $ (42,966)  $  21,618
                                                                         =========   =========   =========
INTEREST EXPENSE:
Total segment expense                                                    $   2,905   $   2,596   $   2,610
Differences in allocation method                                              (259)        172      (1,104)
                                                                         ---------   ---------   ---------
Consolidated interest expense                                            $   2,646   $   2,768   $   1,506
                                                                         =========   =========   =========
DEPRECIATION & AMORTIZATION:
Total segment expense                                                    $  16,510   $  15,231   $  14,676
Capitalized software amortization, not allocated to segments                     -      12,267       9,451
Goodwill amortization, not allocated to segments                             1,568         549         695
Differences in allocation method and other                                  (2,830)     (3,053)     (2,728)
                                                                         ---------   ---------   ---------
Consolidated depreciation and amortization expense                       $  15,248   $  24,994   $  22,094
                                                                         =========   =========   =========
RECEIVABLES:
Total segment receivables                                                $ 133,580   $ 116,340   $ 112,570
Net valuation differences and receivables of discontinued operations         2,286      13,056      11,191
                                                                         ---------   ---------   ---------
Total billed and unbilled receivables                                      135,866     129,396     123,761
Assets not reported by segment                                             178,094     138,914     208,017
Consolidated assets                                                      ---------   ---------   ---------
                                                                         $ 313,960   $ 268,310   $ 331,778
                                                                         =========   =========   =========
</TABLE>

                                      F-23

<PAGE>

The  following  represents  total fees and long lived  assets  information  by
geographic area as of and for the years ended June 30:

<TABLE>
<CAPTION>
                              Fees                               Long Lived Assets
               ---------------------------------          ---------------------------------
                  1999        1998        1997              1999         1998        1997
               ---------   ---------   ---------          ---------   ---------   ---------
<S>            <C>         <C>         <C>                <C>         <C>         <C>
United States  $ 464,521   $ 424,246   $ 395,351          $ 105,481   $  95,617   $ 156,692
Foreign           92,339      88,414      91,151             25,794      20,731      17,781
               ---------   ---------   ---------          ---------   ---------   ---------
               $ 556,860   $ 512,660   $ 486,502          $ 131,275   $ 116,348   $ 174,473
               =========   =========   =========          =========   =========   =========
</TABLE>

Fee  revenue is based on the country of domicile  for the legal  entity  which
originated  the fees.  Exclusive  of the  United  States,  fees from no single
country  constituted  more  than 10% of  consolidated  revenues.  Fees from no
single customer constituted more than 10% of consolidated revenues.


NOTE 14 - RELATED PARTY TRANSACTIONS

In  connection  with the  contractual  servicing of the  Retained  Clients (as
defined  in Note  16)  which  continued  through  September  1998,  Wellspring
provided  the  services to those  clients on behalf of the  Company.  Expenses
charged to the Company by Wellspring  for such services for fiscal 1999,  1998
and 1997 were  $11,600,000,  $41,811,000 and  $40,313,000,  respectively.  The
Company's  obligation  to service the Retained  Clients  ceased in fiscal year
1999 and there were no amounts due to  Wellspring  at June 30, 1999,  compared
with $1,186,000 at June 30, 1998.


NOTE 15 - 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 to the Company resulting from such litigation,
and management  believes that the Company carries  adequate  insurance,  above
reasonable  deductibles,  or has appropriately accrued against any foreseeable
outcome of such litigation.

As of June 30,  1999, the Company and its affiliates had  outstanding  letters
of credit of $2,225,000.

The Company  continues to  guarantee  certain  leases for office  premises and
equipment for Wellspring.  Minimum remaining  payments  guaranteed under these
leases at June 30,  1999 total  $59,800,000,  which  expire at  various  dates
through 2007.  These leases are also jointly and  severally  guaranteed by the
Company's former partner in Wellspring,  State Street. The estimated loss from
the potential  exercise of these  guarantees  has been included in the loss on
disposal of the Benefits Administration Outsourcing Business.

Anticipated  commitments  of funds  for  fiscal  year  2000 are  estimated  at
$30,100,000,  which  includes  expected  purchases  of  fixed  assets  and  an
installment  payment  during the fiscal  year  related to the  purchase of one
consulting operation.  The Company expects operating cash flows to provide for
the Company's cash needs.

                                      F-24
<PAGE>

NOTE 16 - DISCONTINUED OPERATIONS

During the third  quarter of fiscal year 1998,  the Company  discontinued  its
Benefits Administration Outsourcing Business,  including its investment in its
affiliate  Wellspring  Resources LLC ("Wellspring"), pursuant to a Redemption,
Restructuring,  and  Indemnity  Agreement ("the  Restructuring  Agreement") by
which Wellspring  redeemed the Company's 50% interest in Wellspring  effective
April 1, 1998.  The  restructuring  effected,  pursuant  to the  Restructuring
Agreement,  the  implementation  of a  discontinuation  plan  approved  by the
Company's  Board of Directors on February  18, 1998.  Under the  Restructuring
Agreement,   certain  outsourcing  contracts  retained  by  the  Company  when
Wellspring was initially formed in 1996 ("Retained Clients") would continue to
be performed until their respective contract expirations.

In  connection  with  the  restructuring,  the  Company  agreed  to  indemnify
Wellspring  for certain  costs and losses as a result of services  provided by
Wellspring on the  Company's  behalf.  Further,  the Company was released from
certain liabilities relating to the Wellspring business in connection with the
redemption.

In  1998,  the  Company  recorded  a  pre-tax  loss  on   discontinuation   of
$109,800,000,  which included the  $45,200,000  write-off of its investment in
Wellspring,  a $14,000,000  write-off of net capitalized  software development
costs for the Retained  Clients and a $50,600,000  provision for completion of
any obligations to clients, vendors or its former venture partner.

In  October  1998,  the  Company  consummated  agreements  with the  remaining
Retained  Clients,  Wellspring,  and its former  venture  partner to  transfer
operating  responsibility  for these  clients to  Wellspring,  clarifying  the
remaining  future  obligations  and  costs  related  to  the  discontinuation.
Management  believes  that  savings  of  $25,000,000   compared  with  initial
estimates  made in the third quarter of fiscal 1998 and  $15,000,000  from the
amount  provided  at June 30,  1998 will be realized  from these  events.  The
Company  reduced the amount of its  provision  for losses from disposal of the
Benefits  Administration  Outsourcing Business in the second quarter of fiscal
year 1999. A credit to income of $15,000,000,  less the associated tax expense
of $6,322,000,  is reflected in the  Consolidated  Statement of Operations for
fiscal year 1999 in the line "Adjustment  (loss) on  disposal of  discontinued
Outsourcing Business".

                                      F-25
<PAGE>
<TABLE>
<CAPTION>
                                        WATSON WYATT & COMPANY
                                             SCHEDULE II
                            VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
                                        (THOUSANDS OF DOLLARS)




                                             Additions          Additions                     Balance at
                          Balance at          Charged          Charged to                       End of
      Description     Beginning of Year     Against Fees     Other Accounts    Deductions        Year
      -----------     -----------------     ------------     --------------    ----------        ----


                                       Year Ended June 30, 1999
                                       ------------------------
<S>                        <C>               <C>                <C>             <C>             <C>
     Allowance for
   doubtful accounts       $ 2,142           $ 9,503            $        -      $ (7,944)       $ 3,701

  Valuation allowance
for deferred tax assets      6,271                 -                   611(1)          -          6,882



                                       Year Ended June 30, 1998
                                       ------------------------

     Allowance for
   doubtful accounts       $ 2,525           $ 5,613            $        -      $ (5,996)       $ 2,142

  Valuation allowance
 for deferred tax assets     3,702                 -                 2,569(1)          -          6,271



                                       Year Ended June 30, 1997
                                       ------------------------

     Allowance for
   doubtful accounts       $ 5,161           $ 6,853            $        -      $ (9,489)       $ 2,525

  Valuation allowance
 for deferred tax assets     3,331                 -                   371(1)          -          3,702

<FN>
(1) Represents current year net operating loss carryforwards and the
    nondeductible foreign expenses for which realizability is considered
    uncertain.
</FN>
</TABLE>
                                                F-26