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, 1998
                                      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 24, 1998
   (TITLE OF CLASS)                                           15,055,015 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 $81,217,602.  The aggregate  market value
was  computed  by using the  Formula  Book Value of the stock  (calculated  in
accordance with the bylaws) as of September 24, 1998.

                     Documents Incorporated by Reference

The registrant's definitive proxy statement for its 1998 annual meeting of
shareholders (which is to be filed pursuant to General Instruction G of Form
10-K not later than October 28, 1998), 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.  The Company and its alliance  partner  Watson Wyatt  Partners,  a
United Kingdom  partnership,  operate as Watson Wyatt  Worldwide.  The Company
works with  organizations  of all sizes,  from the largest  multinationals  to
public employers and nonprofit institutions.

Founded  in  1946,  Watson  Wyatt  is  owned  almost  entirely  by its  active
employees.  The  Company  is  incorporated  in  Delaware,  and  its  principal
executive  offices  are  located  at  6707  Democracy  Boulevard,  Suite  800,
Bethesda,  MD 20817.  Together with its  affiliates,  it operates  globally as
Watson Wyatt Worldwide.

GLOBAL OPERATIONS

Watson Wyatt Worldwide  provides services in the United States,  Canada,  Asia
and the South  Pacific,  Europe,  Africa,  Latin  America  and the  Caribbean.
Watson Wyatt Worldwide employs approximately 5,100 associates.

The Company employs  approximately 3,600 full-time associates in the following
geographic areas:

North America                     2,960
Asia Pacific                        560
Latin America                        80
                                  -----
                                  3,600
                                  =====

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


PRINCIPAL SERVICES

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

BENEFITS  CONSULTING:  Analysis,  design and  implementation of client defined
benefit  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  comprised  55%,  57% and 57% of fees in fiscal  years 1998,
1997, and 1996, respectively.

HUMAN CAPITAL CONSULTING:  Compensation plan design,  benefits  communication,
and  organization  effectiveness  comprised 13%, 13% and 12% of fees in fiscal
years 1998, 1997 and 1996, respectively.
                                      
<PAGE>


HR  TECHNOLOGY   CONSULTING:   Systems  for  human  resources   administration
comprised 9% of fees in fiscal years 1996 through 1998.

OTHER  STRATEGIC  CONSULTING  SERVICES:  Watson Wyatt  provides other types of
strategic consulting services,  which individually  represent less than 10% of
total fees, and which  accounted in the aggregate for 23%, 21% and 22% of fees
in fiscal years 1998,  1997 and 1996,  respectively.  These  services  include
consulting  in the  areas of risk  management,  international  operations  and
sales of surveys.

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

COMPETITION

The  human  resource  consulting  business,  including  all of  the  Company's
principal  services,  is highly competitive and has relatively low barriers to
entry.  There is no substantial  difference  between the competitive  position
of the  Company's  overall  business as compared  to its  individual  lines of
business.  The Company's  competitors  include other human resource consulting
firms, insurance brokers,  general management  consultants,  public accounting
firms and, to some  extent,  mutual  funds and other  financial  institutions.
The  human  resource  consulting  field  includes  as  many  as ten  principal
competitors  who offer  services in the United  States and, in several  cases,
internationally.  Business  Insurance  (December,  1997) ranks Watson Wyatt as
the fourth largest benefits consulting firm in the world.

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

AFFILIATES

On April 1, 1995, the Company (then The Wyatt Company or "Wyatt")  transferred
its United Kingdom  operations to R. Watson & Sons  ("Watsons"),  an actuarial
consulting  partnership based in the United Kingdom, and received a beneficial
interest  in Watsons and a 10%  interest in a defined  profit pool of Watsons.
Wyatt also transferred its Continental  European  operations to a newly formed
holding  company owned by Wyatt and Watsons  ("WWHE") in exchange for 50.1% of
its shares.  On July 1, 1996,  Wyatt and Watsons changed their names to Watson
Wyatt & Company and Watson  Wyatt  Partners,  respectively.  While both remain
separate legal entities,  the companies are operating together as Watson Wyatt
Worldwide.  Effective  July 1, 1998,  the Company  sold 50% of its interest in
WWHE to Watsons.

On March  31,  1996,  the  Company  transferred  the  Benefits  Administration
Outsourcing  Business  operations of Wyatt  PREFERRED  CHOICE  ("WPC"),  to a
newly  formed   limited   liability   company,   Wellspring   Resources,   LLC
("Wellspring"),  owned 50% by Watson  Wyatt and 50% by State  Street  Bank and
Trust Company ("State Street").  The Company retained three  pre-existing long
term   administrative   and   recordkeeping   contracts  and  contracted  with
Wellspring to service those clients ("Retained  Clients").  Effective April 1,
1998,  the Company,  State Street and  Wellspring  entered into a  Redemption,
Restructuring  and  Indemnity  Agreement  whereby  the  Company's  interest in
Wellspring  was  redeemed,  effecting  the  plan of  discontinuation  from the
Benefits   Administration   Outsourcing  Business  adopted  by  the  Board  of
Directors  in  February  1998.  The  Company  has  recorded  a charge of $69.9
million net of taxes for the  discontinuation  of its Benefits  Administration
Outsourcing  Business.  The Company  continues to contract with  Wellspring to
provide services for the Retained Clients until those contracts  expire.  (See
Note 14 of Notes to the Consolidated Financial Statements).

                                   -2-
<PAGE>

ITEM 2.     PROPERTIES.

Watson  Wyatt  Worldwide  operates  in  approximately  90  offices  in  cities
throughout  the world.  With few  exceptions,  operations  are  carried out in
leased  offices under  operating  leases which normally do not exceed 10 years
in length.  The Company does not  anticipate  difficulty  in meeting its space
needs at lease  expiration or if  additional  space is required  earlier.  The
Company also evaluates office  relocation on an ongoing basis to meet changing
needs in its markets while minimizing its occupancy expense.

The fixed assets owned by Watson Wyatt represented  approximately 14% of total
assets at June 30, 1998 and consisted primarily of computer equipment,  office
furniture and leasehold improvements.


ITEM 3.     LEGAL PROCEEDINGS.

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


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

On April 2, 1998 at a special meeting of the shareholders of the Company,  the
shareholders  voted to approve an  amendment  to the  Company's  Bylaws.  This
amendment  authorized  modifying the formula for  determining the price of the
Company's  Redeemable  Common Stock to eliminate the effect on the share value
of the discontinuation of the Benefits  Administration  Outsourcing  Business.
The modified  formula,  which is called "Modified Formula Book Value," will be
used to determine share price for stock  transactions in periods  beginning on
July 1, 1998.

The amendment was approved by the  affirmative  vote of  shareholders  of more
than 80% of the Company's  outstanding stock (as required per Section 9 of the
Bylaws) as follows:

For:                15,552,357
Against:               168,768
Abstain:               154,962


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  

                                      -3-
<PAGE>
Company's Common Stock is generally limited to directors,  full-time and certain
part-time  associates  of the Company,  its  subsidiaries  and  affiliates,  and
corporations, partnerships, associations or other entities

designated  by the Board of  Directors  with  which the  Company  has a business
affiliation  and the employees  thereof.  In addition,  all  shareholders of the
Company,  prior to selling any shares of the  Company's  Common Stock to a third
party,  must first offer such shares to the Company.  As of September  24, 1998,
there were 1,715 registered holders of the Company's Common Stock.  Transfers of
the Company's  Common Stock are made at Modified Formula Book Value, as defined,
and the current Modified Formula Book Value per share is calculated  pursuant to
the  Company's  bylaws  to be  $6.05  per  share at June 30,  1998,  as  further
described in the Notes to the Consolidated  Financial Statements.  This Modified
Formula Book Value  reflects an increase of  approximately  14% from the Formula
Book Value of $5.30 per share at June 30, 1997.

On April 2, 1998, the Company's  shareholders  approved a modification  to the
calculation  of  its  Formula  Book  Value  to  eliminate  the  impact  of the
discontinuation  of the Benefits  Administration  Outsourcing  Business.  (See
Notes 10 and 12 of Notes to the Consolidated Financial Statements).

In January  1998,  the Company  deferred the annual sale of Common Stock until
the  resolution  of  important  issues  of  business  strategy  and  financial
investments.  The  Company  did not  conduct a stock sale in fiscal year 1998,
but anticipates conducting a stock sale in the third quarter of fiscal 1999.

DIVIDENDS

Under the Company's  credit facility (See Note 9 of Notes to the  Consolidated
Financial  Statements)  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  $9.3 million was available for
the  declaration  or payment of  dividends as of June 30,  1998.  No dividends
have been  declared by the Company  since  fiscal year 1991.  The  declaration
and payment of dividends by the Company is at the  discretion of the Company's
Board of  Directors  and  depends  on  numerous  factors,  including,  without
limitation, the Company's net earnings,  financial condition,  availability of
capital,  debt covenant  limitations,  and other business needs of the Company
and its subsidiaries and affiliates.

ITEM 6.     SELECTED CONSOLIDATED FINANCIAL DATA.

The following  table sets forth  selected  consolidated  financial data of the
Company  as of and  for  each of the  years  in the  five  year  period  ended
June 30,  1998. The selected  consolidated  financial data as of June 30, 1998
and 1997 and for each of the years in the three  year  period  ended  June 30,
1998 are derived from the audited consolidated  financial statements of Watson
Wyatt  included  in this Form  10-K and have  been  restated  to  reflect  the
Company's  discontinued  operations.  The selected consolidated financial data
as of June 30,  1996,  1995,  1994,  and for each of the years ended  June 30,
1995  and  1994 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.

                                      -4-
<PAGE>
The selected  consolidated  financial data should be read in conjunction  with
Watson  Wyatt's  consolidated  financial  statements  and  notes  thereto  and
"Management's  Discussion  and Analysis of Financial  Condition and Results of
Operations"  included in Item 7 in this Form 10-K.  Amounts are in  thousands,
except per share data.
<TABLE>


                                                                        Year ended June 30,
                                                                        -------------------
Statement of Operations Data:                        1998         1997          1996         1995          1994
                                                     ----         ----          ----         ----          ----
<S>                                                <C>          <C>           <C>           <C>          <C>

Continuing operations
   Fees                                            $  512,660    $  486,502   $  475,298    $  465,788   $  436,197
   (Loss) income before income taxes and
      minority interest (See Note 12 of Notes
      to the Consolidated Financial Statements)       (42,966)       21,618       34,036        12,204       20,064
Discontinued operations - loss                        (69,906)      (11,483)     (10,480)       (4,059)      (4,640)
Net (loss) income (See Note 12 of Notes
      to the Consolidated Financial Statements)      (126,118)          898        9,355           849        5,636
(Loss) earnings per share                          $    (7.34)   $     0.05   $     0.51    $     0.05   $     0.29
Weighted average shares
    outstanding                                        17,170        17,438       18,516        19,248       19,160

                                                                        Year ended June 30,
                                                                        -------------------
Balance Sheet Data:                                  1998         1997          1996         1995          1994
                                                     ----         ----          ----         ----          ----

Investment in affiliates                           $   17,666    $   52,516   $   41,195    $   18,783   $      383
Deferred software and development costs                     -        32,869       35,746        28,979       12,479
Total assets                                          268,310       331,778      320,819       286,622      266,786
Redeemable Common Stock                                96,296        96,091       90,214        86,275       87,612
Formula Book Value
    per share [1]                                  $     6.05    $     5.30   $     4.94    $     4.51   $     4.44
Shares outstanding                                     15,917        18,130       18,262        19,130       19,732

[1]As described more fully in Note 10 of Notes to the Consolidated Financial Statements, effective with the
   fiscal year ended June 30, 1998, the Company modified its bylaws for calculating Formula Book Value
   per share.

</TABLE>

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

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
second  event,  a  $69.9  million  non-recurring  compensation  charge,  was 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.  Both of these events
are  discussed  in more  detail  below and in the  "Notes to the  Consolidated
Financial Statements".

During 1998 the Company discontinued its Benefits  Administration  Outsourcing
Business  including its investment in Wellspring.  The Company recorded a loss
on discontinuation  net of taxes of $69.9 million

                                      -5-
<PAGE>

which  includes the write-off of its  investment in  Wellspring  Resources,  net
capitalized  software development costs for the Retained Clients and a provision
for the completion of any  obligations  to clients,  vendors or its former joint
venture  partner.  As of the filing date, the Company believes it has adequately
provided for future costs during the winddown of the discontinued operations.

Further,  for fiscal  year 1998,  the  Company  has  recorded a  non-recurring
compensation  charge of $69.9 million.  This charge arises because the Company
modified the  calculation of the Formula Book Value of its shares to eliminate
the effect of the discontinued  operations on the  calculation.  The charge is
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 does not reduce  company  resources  but does reduce  operating  income
from continuing  operations.  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 "Cost 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>

                                                                        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)
                                                                  --------------             ------------
Continuing operations net income (loss)                                   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) earnings per share, discontinued operations                $        (4.07)            $      (4.07)
                                                                  ==============             ============
(Loss) earnings per share, net (loss) income                      $        (3.27)            $      (7.34)
                                                                  ==============             ============
</TABLE>
                                      -6-
<PAGE>

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  North American and
Latin  American  consulting  offices  offsetting a decline in the Asia Pacific
region  and  is  due  to  the  realization  of  billing  rate  increases.  The
Retirement,  Human Capital,  and HR Technology  practices  experienced  strong
revenue growth.

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 corporate 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 from continuing  operations  before income taxes,  minority  interest and
the  cumulative  effect of a change in accounting  was $43.0 million in fiscal
year 1998.  This loss  reflects the $69.9 million  non-recurring  charge which
is not a taxable  transaction.  Pre-tax  income  without this amount was $26.9
million with taxes of $13.1  million or an  effective  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.
                                      -7-
<PAGE>


YEAR ENDED JUNE 30,  1997 COMPARED TO YEAR ENDED JUNE 30,  1996 (1997 AND 1996
AMOUNTS HAVE BEEN RECLASSIFIED TO REFLECT  DISCONTINUED  OPERATIONS.  SEE NOTE
16 OF NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS).

The Company  generated net income in fiscal year 1997 of $0.9 million compared
to net income in fiscal  year 1996 of $9.4  million.  Revenue  growth of $11.2
million outpaced inflation,  but the improvement was offset by greater expense
growth during the period.  The primary factor,  as further explained below, is
the sublease loss of $12.1 million  resulting  from the relocation of offices,
which will be more than offset by future  rent  savings.  As a result,  income
from continuing  operations before minority interest and taxes decreased $12.4
million.  Income from continuing  operations of $12.4 million was $7.4 million
less than 1996 due to the lease loss offset by reduced income taxes.

Fee revenue  reached  $486.5 million in fiscal year 1997, an increase of $11.2
million,  or 2%,  from  $475.3  million in fiscal  year 1996.  Revenue  growth
occurred across all major business areas and all geographic regions.

For the year,  salaries and employee  benefit  expenses  were $252.3  million,
which is $2.2 million  greater than 1996 and is due  primarily to increases in
base salaries and associate bonuses.

Occupancy and  communications  expense  increased  $11.6 million in 1997.  The
Company relocated its corporate  offices to lower cost suburban  facilities in
1997 recognizing sublease losses of $12.1 million.

Professional  and  subcontracted  services  were $48.8 million for fiscal year
1997, an increase of $6.4 million, or 15%, from fiscal year 1996.

Other costs of providing services were unchanged from year to year.

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

Depreciation  and  amortization  decreased $3.4 million in fiscal year 1997 to
$22.1  million.  This  decrease is primarily  due to the disposal of assets in
the prior year and lower levels of capital  expenditures in the current fiscal
year.

Income before  income taxes and minority  interest was $21.6 million in fiscal
year 1997.  The  provision  for income  taxes of $9.1  million  reflects a 42%
effective  tax rate  compared to an  effective  tax rate of 41% in fiscal year
1996.  The increase in the  effective  tax rate is due to increased  income in
jurisdictions with higher tax rates.

In fiscal 1997,  the Company  recorded an after tax net loss of $11.5  million
for the Benefits  Administration  Outsourcing  Business which was subsequently
discontinued  in fiscal  1998.  This loss  compares  with  $10.5  million  for
fiscal year 1996 for the same operations.

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,  1998 totaled $13.4 million,
compared  to $26.3  million at  June 30,  1997.

                                      -8-
<PAGE>
Borrowings at June 30, 1998 totaled $9.0  million.  The Company did not have any
outstanding  borrowings  at June  30,  1997.  The  increase  in  borrowings  and
decreased cash balances result  primarily from the fact that the Company did not
conduct its annual stock sale in fiscal year 1998, and from payments  associated
with the discontinuation of the Benefits Administration Outsourcing Business.

The Company  negotiated a new $120.0 million credit line with a group of banks
in  1998.   The  line  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 for
the purchase of  Redeemable  Common Stock made  available  under the Company's
Stock Purchase  Program.  At June 30,  1998,  $86.0 million of the credit line
was available to the Company as revolving credit for operations.

CASH FROM  OPERATIONS.  The Company's annual pattern of cash flow is generally
stable and  typically  does not fluctuate  widely  between  operating  cycles.
However,  net cash  provided by  operating  activities  decreased in 1998 from
1997 by $27.8  million.  This decrease was partially  offset by decreased uses
of cash in investing activities of $12.2 million.

The decrease in net cash  provided by operating  activities  was primarily due
to  the  $26.1  million  increase  in  the  use of  cash  by the  discontinued
operations.   Amounts  due   Wellspring   were  paid  in  1998  prior  to  the
discontinuation.  Accrued  retirement  benefits used $9.7 million more cash in
1998 as  payments  in 1998  were  greater  than in 1997  compared  to  amounts
provided.  Deferred and current income taxes payable/receivable  provided $7.0
million more cash in 1998 mainly due to the higher  continuing  operations tax
provision.  Deferred  rent and accrued  lease losses were reduced in 1998 over
the previous year by $7.7 million as previously accrued losses were paid.

CASH  FROM  INVESTING  ACTIVITIES.  Uses  of  cash  for  investing  activities
decreased $12.2 million principally due to reduced investment in Wellspring.

CASH FROM  FINANCING  ACTIVITIES.  Cash provided by financing  activities  was
comparable year to year although  borrowings replaced the annual stock sale as
the source of cash from financing activities.

The Company's  foreign  operations do not  materially  impact its liquidity or
capital  resources.  At June 30,  1998, $8.2 million of the total cash balance
of $13.4 million was held outside of North  America,  all of which the Company
has the ability to readily  access,  if  necessary.  There are no  significant
repatriation  restrictions  other than  local or U.S.  taxes  associated  with
repatriation.    The   foreign   operations   in   total   are   substantially
self-sufficient.

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

Due to the nature of the  Company's  operations  (billing and  collecting  for
services  within each country in that country's local  currency),  the Company
has 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.

                                      -9-
<PAGE>

The Company's ratio of current assets to current  liabilities  held consistent
between fiscal years 1998 and 1997 at 1.2.

Anticipated  commitments  of funds for fiscal year 1999 are estimated at $31.3
million,  which  includes  expected  purchases  of  fixed  assets,  25% of the
capital  requirements of WWHE and purchases of certain  consulting  operations
during  the  fiscal  year.  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 Year 2000  problem  arises  because many  computer  programs are unable to
distinguish  dates in  different  centuries as a result of the use of only two
digits to  represent  a year.  The Year 2000  problem  affects  virtually  all
computer  systems,  processes,  and  products in all  segments of the economy.
Since a principal area of the Company's  business involves  actuarial analysis
and  financial  forecasting,  many  of the  Company's  internal  systems  have
addressed Year 2000 issues for several  years.  The Company began to develop a
formal Year 2000  compliance  strategy in 1997 while  providing  for Year 2000
compliance  in many of its systems well before that.  Based on the review that
has been  completed to date,  management  

believes  that the  principal  risks facing the Company as a result of Year 2000
issues (most of which are not unique to the Company) include:

 *   problems related to software written by the Company for its clients
 *   costs of  replacement or remediation of internal and vended systems
 *   risk of a general economic downturn as a result of the Year 2000 problem
 *   risks arising from public  infrastructure such as electricity or telephone
         service
 *   problems related to computer systems used by clients or vendors
 *   risks from operations outside the United States and Canada

      The Company has  established a Year 2000 Steering  Committee to lead and
coordinate  its  Year  2000  compliance  efforts.   The  Company's  Year  2000
compliance  strategy relies on geographic and practice  leaders to assess and,
where appropriate,  to oversee repair or replacement of software used in their
"domain".  The  goal of the  Company's  Year  2000  compliance  program  is to
assess the risk and  impact of  potential  systems  failures  and to  mitigate
those risks  through  appropriate  measures.  Since the Year 2000  problem may
have far-reaching and unpredictable  effects,  management does not expect that
the Company's Year 2000 compliance  program will be able to eliminate all risk
to the Company associated with the century change.

       The  Company  has  retained  outside   consultants  to  assist  in  the
assessment  of Year 2000  risks.  However,  management  does not  expect  that
outside  consultants  will play a significant  role in testing or verification
of remediation efforts.

      The Company has  established  the following  schedule for key activities
relating to year 2000 compliance:

 *   The target date for the  completion  of all local office and practice area
        inventory and assessment activities is November 30, 1998;
 *   The target  date to  complete  testing  for all major  systems is December
        31, 1998;
 *   The target  date for all systems to be  compliant,  retired or replaced is
        July 1, 1999.

The  Company  is likely  to  revise  this  schedule  as a result  of  on-going
assessment of its compliance  efforts.  The schedule for assessment and repair
encompasses  both  the  Company's  own  computer  systems  as well as  

                                      -10-
<PAGE>
"non-IT  systems"  (such as  microprocessors  embedded in equipment) and systems
relied  upon by the  Company's  clients  and  vendors.  The  Company has not yet
completed its assessment of the Year 2000 risks faced by its vendors. Because of
the nature of the  Company's  business and its broad,  diversified  client base,
management  believes that the Company does not face significant  risks from Year
2000  failures  arising  from  embedded  systems or systems  relied  upon by its
clients and vendors.

The  following  table  summarizes  the  approximate  percentage of work in the
stages specified which has been completed as of August 31, 1998:

                                 Assessment  Remediation  Testing
                                 ----------  -----------  -------
             Major Systems       90%         75%          25%
             Other Systems       25%         25%          25%

The Company  has not  separately  tracked the costs of its Year 2000  compliance
program for years before  fiscal  1999.  The Company  projects  that the cost to
address Year 2000 compliance  issues in fiscal year 1999 will exceed $2 million.
This  projection is based on costs estimated at the end of fiscal year 1998, and
it is likely  that the  Company's  actual  costs will be  different.  Management
estimates  that the amounts spent and budgeted to date  represent  approximately
one-half  of the  total  cost to the  Company  of  currently  planned  Year 2000
compliance efforts,  but because the Company has not yet determined the specific
cost of repairing systems other than mission-critical  systems,  those estimates
are subject to change.  Funds for costs  associated with the Company's Year 2000
compliance  efforts  will  come out of  general  revenues  from all areas of the
Company's  operations.  These costs will be expensed as  incurred.  Although the
Company's Year 2000  compliance  efforts may cause some  information  technology
projects to be deferred,  management does not expect that that any such deferral
will materially impact the Company's financial condition.

The Company's Year 2000 compliance  program includes  appropriate  contingency
plans. The Company has already prepared written  contingency  plans to address
failures  in most of its major  information  technology  systems.  These plans
include  identification of major systems,  dependencies on third parties,  and
resources  and  strategies  necessary  to restore  operations  or work  around
failures.

Management  believes that the Company's Year 2000 compliance  program includes
appropriate  measures  to address  the risks  identified  to date and that the
shift  to the Year  2000  will not have a  material  impact  on the  Company's
business,  results of operations,  or financial condition.  This assessment is
subject to revision  based on the results of the Company's  on-going Year 2000
compliance program.

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.

                                      -11-
<PAGE>



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.

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
 
                                      -12-
<PAGE>

      Financial Statements:

         Consolidated Statements of Operations for the three years ended
         June 30, 1998                                                      F-2

         Consolidated Balance Sheets at June 30, 1998 and 1997
                                                                            F-3

         Consolidated Statements of Cash Flows for the three years ended
         June 30, 1998                                                      F-4

         Consolidated Statements of Changes in Permanent Shareholders' Equity
         for the three years ended June 30, 1998                            F-5

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

(2) Consolidated Financial Statement Schedule for the three years ended
    June 30, 1998
 
      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.

      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

         Current report on Form 8-K, filed April 21, 1998.

c)       Exhibits

3.1  Restated Certificate of Incorporation of Watson Wyatt & Company[2]
3.2  Restated Bylaws (as amended through June 30, 1998)[3]
4    Form of Certificate Representing Common Stock[1]
10   Credit Agreement Among NationsBank, N.A. and Others dated June 30, 1998[3]
21   Subsidiaries of Watson Wyatt & Company[3]
23   Consent of the Company's Independent Accountants[3]
24   Consent of Wellspring's Independent Accountants[3]
99   Wellspring Resources, LLC Financial Statements[3]






_______________________
[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]   Filed herewithin
                                      -13-
<PAGE>

SIGNATURES


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


                                          WATSON WYATT & COMPANY
                                          (Registrant)


Date: September 24,  1998
                                       By:/S/ A.W. Smith, Jr.
                                          -----------------------------     
                                          A.W. Smith, Jr.
                                          President and Chief Executive Officer

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

SIGNATURE                           TITLE                         DATE
---------                           -----                         ----

/S/ A.W. Smith, Jr.                President, Chief Executive     9/24/98
----------------------             Officer and Director
A.W. Smith, Jr.                    


/S/ Barbara L. Landes               Vice President and Chief      9/24/98
----------------------              Financial Officer
Barbara L. Landes                   


/S/ Carl D. Mautz                   Controller                    9/24/98
----------------------
Carl D. Mautz


/S/ Charles A. Clemens              Director                      9/24/98
----------------------
Charles A. Clemens


/S/ Paula DeLisle                   Director                      9/24/98
----------------------
Paula DeLisle


/S/ David Friend                    Director                      9/24/98
----------------------
David Friend


/S/ John J. Haley                   Director                      9/24/98
----------------------
John J. Haley

                                      -14-
<PAGE>


SIGNATURE                           TITLE                         DATE
---------                           -----                         ----

/S/ Gary T. Hallenbeck              Director                      9/24/98
----------------------
Gary T. Hallenbeck


/S/ Ira T. Kay                      Director                      9/24/98
----------------------
Ira T. Kay


/S/ Brian E. Kennedy                Director                      9/24/98
----------------------
Brian E. Kennedy


/S/ Robert D. Masding               Director                      9/24/98
----------------------
Robert D. Masding


/S/ Gail McKee                      Director                      9/24/98
----------------------
Gail McKee


/S/ Paul Mee                        Director                      9/24/98
----------------------
Paul Mee


                                    Director                      9/24/98
---------------------
R. Michael McCullough


                                    Director                      9/24/98
--------------------
John A. Steinbrunner


/S/ A. Grahame Stott                Director                      9/24/98
--------------------
A. Grahame Stott






                                      -15-
<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) and (2) of this Form 10-K present  fairly,  in
all material  respects,  the financial  position of Watson Wyatt & Company and
its  subsidiaries  at  June 30,  1998  and  1997,  and the  results  of  their
operations  and their  cash  flows for each of the three  years in the  period
ended  June 30,   1998,  in  conformity  with  generally  accepted  accounting
principles.   These  financial   statements  are  the  responsibility  of  the
Company's  management;  our  responsibility  is to express an opinion on these
financial  statements  based on our audits.  We conducted  our audits of these
statements in accordance  with generally  accepted  auditing  standards  which
require  that we plan and  perform  the audit to obtain  reasonable  assurance
about whether the financial statements are free of material  misstatement.  An
audit includes  examining,  on a test basis,  evidence  supporting the amounts
and  disclosures  in  the  financial  statements,   assessing  the  accounting
principles used and significant  estimates made by management,  and evaluating
the  overall  financial  statement  presentation.  We believe  that our audits
provide a reasonable basis for the opinion expressed above.




/S/ PRICEWATERHOUSECOOPERS LLP
------------------------------
PRICEWATERHOUSECOOPERS LLP

Washington, D.C.

July 23, 1998



                                     F-1
<PAGE>
<TABLE>

   
                                                 WATSON WYATT & COMPANY
                                          CONSOLIDATED STATEMENTS OF OPERATIONS
                                  (THOUSANDS OF U.S. DOLLARS, EXCEPT PER SHARE AMOUNTS)

                                                                                             YEAR ENDED JUNE 30,
                                                                                    ---------------------------------------
                                                                                       1998          1997          1996
                                                                                    -----------   ------------  -----------
<S>                                                                                <C>            <C>           <C>


Fees                                                                                $    512,660  $    486,502  $  475,298

Costs of providing services:
    Salaries and employee benefits                                                       268,611       252,302     250,103
    Non-recurring compensation charge (see Note 12)                                       69,906             -           -
    Occupancy and communications                                                          62,061        72,155      60,566
    Professional and subcontracted services                                               49,907        48,827      42,450
    Other                                                                                 26,779        23,871      23,637
                                                                                    ------------  ------------  ----------
                                                                                         477,264       397,155     376,756

General and administrative expenses                                                       51,759        45,696      38,656
Depreciation and amortization                                                             24,994        22,094      25,541
                                                                                    ------------  ------------  ----------
                                                                                         554,017       464,945     440,953

(Loss) income from operations (see Note 12)                                              (41,357)       21,557      34,345

Other:
    Interest income                                                                          901         1,462       1,441
    Interest expense                                                                      (2,768)       (1,506)       (930)

Income (loss) from affiliates                                                                258           105        (820)
                                                                                    ------------  ------------  ----------


(Loss) income before income taxes and minority interest (see Note 12)                    (42,966)       21,618      34,036

Provision for (benefit from) income taxes:
    Current                                                                               15,116        12,627      21,911
    Deferred                                                                              (1,982)       (3,557)     (7,840)
                                                                                    ------------  ------------  ----------
                                                                                          13,134         9,070      14,071
                                                                                    ------------  ------------  ----------


(Loss) income before minority interest (see Note 12)                                     (56,100)       12,548      19,965


Minority interest in net income of consolidated subsidiaries                               (112)          (167)       (130)
                                                                                    ------------  ------------  ----------

Continuing operations net (loss) income (see Note 12)                                    (56,212)       12,381      19,835

Discontinued operations:

Loss from operations of discontinued Outsourcing Business (less
    applicable income tax benefit of $5,053, $8,181 and $4,868 respectively)              (6,821)      (11,483)    (10,480)

Loss on disposal of Outsourcing Business, including provision
    of $12,207 for operating losses during phaseout period
    (less applicable income tax benefit of $46,715)                                      (63,085)            -           -

                                                                                    ============  ============  ==========
Net (loss) income (see Note 12)                                                     $   (126,118) $        898  $    9,355
                                                                                    ============  ============  ==========



(Loss) earnings per share, continuing operations                                    $     (3.27)  $       0.71  $     1.07
                                                                                    ===========   ============  ==========

(Loss) earnings per share, discontinued operations                                  $     (4.07)  $      (0.66) $    (0.56)
                                                                                    ===========   ============  ==========

(Loss) earnings per share, net (loss) income                                        $     (7.34)  $       0.05  $     0.51
                                                                                    ===========   ============  ==========
</TABLE>


                                                  SEE ACCOMPANYING NOTES
                                                           F-2
<PAGE>
<TABLE>


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

                                                                                JUNE 30,                JUNE 30,
                                                                                  1998                    1997
                                                                             ---------------          --------------

                                                      ASSETS
<S>                                                                         <C>                       <C>   

Cash and cash equivalents                                                    $        13,405          $       26,257
Receivables from clients:

    Billed, net of allowances of $2,142 and $2,525                                    69,671                  67,393
    Unbilled                                                                          59,725                  56,368
                                                                             ---------------          --------------
                                                                                     129,396                 123,761

Income taxes receivable                                                                2,216                       -
Other current assets                                                                   6,945                   7,287
                                                                             ---------------          --------------
    Total current assets                                                             151,962                 157,305

Investment in affiliates                                                              17,666                  52,516
Fixed assets                                                                          37,368                  37,045
Deferred income taxes                                                                 48,911                  39,025
Deferred software and development costs                                                    -                  32,869
Other intangible assets                                                                2,412                   2,661
Other assets                                                                           9,991                  10,357
                                                                             ---------------          --------------

                                                                             $       268,310          $      331,778
                                                                             ===============          ==============

                     LIABILITIES, REDEEMABLE COMMON STOCK, AND PERMANENT SHAREHOLDERS' EQUITY


Accounts payable and accrued liabilities                                     $       116,548          $      103,415
Note payable and book overdrafts                                                      11,666                     408
Income taxes payable                                                                       -                   3,563
Deferred income taxes                                                                      -                  28,612
                                                                             ---------------          --------------
    Total current liabilities                                                        128,214                 135,998

Accrued retirement benefits                                                           82,528                  86,697
Deferred rent and accrued lease losses                                                12,676                  14,938
Other noncurrent liabilities                                                          32,784                   9,908

Minority interest in subsidiaries                                                        322                     351

Redeemable Common Stock - $1 par value:
    25,000,000 shares authorized;
    15,916,757 and 18,130,429 issued
    and outstanding; at redemption value                                              96,296                  96,091

Permanent shareholders' equity:
Adjustment for redemption value less (greater)
    than amounts paid in by shareholders                                              25,240                 (37,674)
Retained (deficit) earnings                                                         (106,834)                 24,633
Cumulative translation (loss) gain                                                    (2,916)                    836

Commitments and contingencies
                                                                             ---------------          --------------

                                                                              $      268,310          $      331,778
                                                                             ===============          ==============
</TABLE>


                                                  SEE ACCOMPANYING NOTES
                                                           F-3
<PAGE>
<TABLE>


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


                                                                                                   YEAR ENDED JUNE 30,
                                                                                      ----------------------------------------------
                                                                                         1998              1997             1996
                                                                                      -----------       -----------      -----------
<S>                                                                                   <C>               <C>              <C>

Cash flows from operating activities:
    Net (loss) income                                                                  $ (126,118)       $      898     $     9,355
    Adjustments to reconcile net (loss) income to net cash
      provided by operating activities:
        Non-cash non-recurring compensation charge                                         69,906                 -               -
        Net loss from Discontinued Operations                                              69,906            11,483          10,480
        Provision for doubtful receivables from clients                                     5,613             6,853          11,667
        Depreciation                                                                       12,849            13,816          14,805
        Amortization of deferred software and development costs
            and other intangible assets                                                    12,143             8,277          10,736
        Provision for deferred income taxes                                                (1,982)           (3,557)         (7,840)
        (Income) loss from affiliates                                                        (257)             (105)            819
        Minority interest in net income of consolidated subsidiaries                          112               167             130
        (Increase) decrease in assets (net of discontinued operations):
            Receivables from clients                                                      (11,115)           (2,794)          2,901
            Income taxes receivable                                                         4,558             3,327           7,206
            Other current assets                                                              342              (351)             30
            Other assets                                                                       76            (1,930)         (1,904)
        (Decrease) increase in liabilities (net of discontinued operations):
            Accounts payable and accrued liabilities                                       11,318             1,300          18,797
            Income taxes payable                                                           (3,563)           (7,799)         10,926
            Accrued retirement benefits                                                    (4,169)            5,556           7,104
            Deferred rent and accrued lease losses                                         (2,262)            5,034          (3,004)
            Other noncurrent liabilities                                                      840               687          (6,193)
        Other, net                                                                          1,602               656              99
        Discontinued operations, net                                                      (18,554)            7,530         (13,078)
                                                                                      -----------       -----------      ----------
        Net cash provided by operating activities                                          21,245            49,048          73,036
                                                                                      -----------       -----------      ----------

Cash flows from investing activities:
    Purchases of fixed assets                                                             (16,034)          (15,548)        (21,672)
    Proceeds from sales of fixed assets and investments                                       623               446           8,160
    Acquisitions                                                                                -            (1,169)         (2,445)
    Investment in software and development costs                                           (3,000)           (4,554)         (8,358)
    Investment in affiliates                                                                3,076            (1,385)           (398)
    Discontinued operations                                                               (14,750)          (20,062)        (33,499)
                                                                                      -----------       -----------       ---------
        Net cash used in investing activities                                             (30,085)          (42,272)        (58,212)
                                                                                      -----------       -----------       ---------

Cash flows from financing activities:
    Borrowings and bank overdrafts                                                         11,258                 -               -
    Issuances of Redeemable Common Stock                                                    1,005            15,414          10,274
    Repurchases of Redeemable Common Stock                                                (13,141)          (16,604)        (14,270)
                                                                                      -----------       -----------       ---------
        Net cash used by financing activities                                                (878)           (1,190)         (3,996)
                                                                                      -----------       -----------       ---------

Effect of exchange rates on cash                                                           (3,134)           (1,023)           (994)
                                                                                      -----------       -----------       ---------

(Decrease) increase in cash and cash equivalents                                          (12,852)            4,563           9,834

Cash and cash equivalents at beginning of period                                           26,257            21,694          11,860
                                                                                      -----------       -----------       ---------

Cash and cash equivalents at end of period                                            $    13,405       $    26,257       $  21,694
                                                                                      ===========       ===========       =========


</TABLE>





                                                       SEE ACCOMPANYING NOTES
                                                                F-4

<PAGE>
<TABLE>

                                      WATSON WYATT & COMPANY

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

                                                                                                    ADJUSTMENT FOR
                                                                                                   REDEMPTION VALUE
                                                                                                    LESS (GREATER)
                                                           RETAINED            CUMULATIVE            THAN AMOUNTS
                                                           EARNINGS            TRANSLATION           PAID IN BY
                                                           (DEFICIT)           GAIN (LOSS)           SHAREHOLDERS
                                                         -------------        -------------        ----------------
<S>                                                      <C>                  <C>                   <C>   

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

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

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

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

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

Net loss                                                      (126,118)                   -                   -
Effect of repurchases of 2,410,425 shares of
     common stock (various prices per share)                    (5,349)                   -               5,349
Foreign currency translation adjustment                              -               (3,752)                  -
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
                                                         =============        =============        ============
</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 a diversified  international
company  engaged in the business of providing  professional  services on a fee
basis,  primarily in the employee benefits and compensation field, 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.

The Company has discontinued its Benefits Administration  Outsourcing Business
as  further  described  in  Note  15.  The  Statement  of  Operations  in 1998
reflects  the  charges  recorded  for  that  discontinuation  as  well  as the
operating  results  in 1998,  1997,  and 1996  related  to these  discontinued
operations.   Results  of  operations   and  cash  flows  for  1997  and  1996
previously   reported  have  been   restated  to  reflect  this   discontinued
operation.

USE OF ESTIMATES - Preparation  of financial  statements  in  conformity  with
generally  accepted   accounting   principles   requires  management  to  make
estimates  and  assumptions  that  affect the  reported  amounts of assets and
liabilities,  disclosures of contingent  assets and liabilities at the date of
the  financial  statements  and the reported  amounts of revenues and expenses
during  the  reporting   period.   Actual  results  could  differ  from  those
estimates.  Estimates  are used when  accounting  for revenue,  allowance  for
uncollectible   receivables,   deferred   software  and   development   costs,
investments in affiliates,  depreciation and amortization,  asset write-downs,
employee benefit plans, 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  intercompany  accounts  and
transactions.  Investments in affiliated  companies over which the Company has
the ability to exercise  significant  influence  are  accounted  for using the
equity method.

RECLASSIFICATIONS   -  Certain   amounts   previously   presented   have  been
reclassified   to  conform  to  the  current   presentation,   including   the
presentation of discontinued operations.

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 $17,200,000 at June 30, 1997.

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.  Under certain long-term  contracts for administrative
and recordkeeping  services,  implementation  fees are deferred until services
become  operational and are then recognized ratably over the remaining life of
the  initial  contract.   There  were  no  

                                      F-6
<PAGE>

current  or  non-current  deferred  implementation  fees at June  30,  1998  and
$9,043,000  was  outstanding  at June  30,  1997.  Fees for  administrative  and
recordkeeping operations are recognized as earned by the Company.

DEFERRED  SOFTWARE  AND  DEVELOPMENT  COSTS - The  Company  has  followed  the
practice of capitalizing  labor and direct costs of software and systems where
future cash flows that exceed costs  related to the software can be separately
identified.  Such software  costs are  amortized  over the useful lives of the
products   ranging   usually  from  three  to  five  years.  In  fiscal  1998,
management   reevaluated  the  useful  lives  of  its  software  products  and
accelerated   amortization  of  certain   products   resulting  in  additional
amortization expense of $6.8 million.

The Company  assesses  impairment  quarterly  on software  costs by  comparing
probable  undiscounted  future  cash  flows  with  the net  book  value of the
deferred  costs.  Losses so  identified  are then  measured as the  difference
between net book value of the deferred costs and the discounted  present value
of the cash flows and are recorded when  identified.  Permanent  impairment of
$3.7  million  on  Retained  Client  deferred  system  development  costs  was
recognized  during  fiscal  year  1997 and the  remaining  net  book  value of
Retained Client deferred system development costs, $14.0 million,  was written
off in the third  quarter of fiscal  year 1998 as part of the  discontinuation
of  the  Benefits  Administration   Outsourcing  Business.  Both  charges  are
included in discontinued operations.

OTHER  INTANGIBLE  ASSETS  - Other  intangible  assets  consist  primarily  of
goodwill  related to the excess cost over net assets of  purchased  companies.
Goodwill  is  generally  amortized  on a  straight-line  basis  over  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.

EMPLOYEE  RECEIVABLES  - The  Company  had  outstanding  employee  receivables
included in other current and  noncurrent  assets of $3,165,000 and $3,506,000
at  June 30,  1998 and  June 30,  1997,  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,  1998 the Company had $9.0 million outstanding under
its note payable,  while at June 30, 1997, the  outstanding  balance was zero.
The Company  knows of no event of default  which  would  require it to satisfy
the  guarantees  described  in Notes 9 and 15 other than as  reflected  in the
consolidated financial statements.

                                      F-7
<PAGE>

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

EARNINGS PER SHARE - The  computation  of earnings per share is based upon the
weighted  average  number of shares of  Redeemable  Common Stock  outstanding.
The  number of shares  (in  thousands)  used in the  computation  is 17,170 in
fiscal year 1998, 17,438 in fiscal year 1997, and 18,516 in fiscal year 1996.


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,
                            1998            1997             1996
                            ----            ----             ----
Interest expense       $     2,639      $      1,506     $       930
Income taxes paid      $    18,679      $     11,947     $     2,800


NOTE 3 - INVESTMENTS IN AFFILIATES

Entities accounted for under the equity method are:

                                                                  June 30,
                                                 Ownership        --------
                                                  Interest    1998        1997
                                                 ---------    ----        ----
UNCONSOLIDATED SUBSIDIARY:
  Watson Wyatt Holdings (Europe) Limited             50.1%  $  6,626   $  7,614
50% OR LESS OWNED ENTITIES:
  Watson Wyatt Partners                              10.0%    11,040     12,582
  Professional Consultants Insurance Company, Inc.   22.5%         -        426
                                                            --------   --------
     Total investment in affiliates                         $ 17,666   $ 20,622*
                                                            ========   ========
*Prior year information under "Investments in Affiliates" has been restated to
 eliminate data for Wellspring Resources, as part of the Company's discontinued
 operations.

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

                                      F-8
<PAGE>

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  exercises  significant  influence,  but  does  not  control,  the
operations of the entity.

At June 30,  1998, the Company's  investment in WWHE and Watsons  exceeded the
Company's  share of the  underlying  net assets by $3,666,000 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.

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

                                                  Year ended June 30,
                                                  -------------------
                                           1998          1997         1996
                                           ----          ----         ----
Equity investment gains (losses)           $  724      $ 1,019      $  (183)
Amortization of basis differential           (467)        (914)        (636)
                                           ------      -------      -------
Income (loss) from affiliates              $  257      $   105      $  (819)
                                           ======      =======      =======


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

                                                  1998                               1997
                                                  ----                               ----   
                                    Unconsolidated     50% or less     Unconsolidated     50% or less
                                      Subsidiary      Owned Entities     Subsidiary      Owned Entities
                                    --------------    --------------   --------------    --------------
<S>                                 <C>               <C>              <C>               <C>

Current assets                      $  11,091         $  107,025       $  12,487         $  110,433
Noncurrent assets                       1,449              9,437           1,972              3,021 
                                    ---------         ----------       ---------         ----------
          Total assets              $  12,540         $  116,462       $  14,459         $  113,454 
                                    =========         ==========       =========         ==========

Current liabilities                 $   5,868         $   48,410       $   7,820         $   35,063
Noncurrent liabilities                 14,281             25,063          13,561             14,723
Shareholders' (deficit) equity         (7,609)            42,989          (6,922)            63,668 
                                    ---------         ----------       ---------         ----------
          Total liabilities &
            shareholders' equity    $  12,540         $  116,462       $  14,459         $  113,454 
                                    =========         ==========       =========         ==========
</TABLE>
                                      F-9
<PAGE>

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

<TABLE>

                                         1998                             1997                            1996
                                         ----                             ----                            ----
                            Unconsolidated 50% or less       Unconsolidated   50% or less    Unconsolidated  50% or less
                              Subsidiary   Owned Entities    Subsidiary       Owned Entities Subsidiary      Owned Entities
                            -------------- --------------    --------------   -------------- --------------  ---------------
<S>                           <C>          <C>               <C>              <C>            <C>             <C>

Revenue                       $  22,951    $  150,061        $  29,410        $  137,441     $  20,082       $   116,702
Operating expenses               24,530       111,047           31,443            94,895        23,493            86,428 
                              ---------    ----------        ---------        ----------     ---------       -----------
(Loss) income before tax      $  (1,579)   $   39,014        $  (2,033)       $   42,546     $  (3,411)      $    30,274 
                              =========    ==========        =========        ==========     =========       ===========
Net (loss) income             $  (1,643)   $   39,819        $  (2,220)       $   42,216     $  (3,249)      $    30,577 
                              =========    ==========        =========        ==========     =========       ===========
</TABLE>


NOTE 4 - FIXED ASSETS

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

The components of fixed assets are:
                                                 June 30,
                                                 --------
                                        1998               1997
                                        ----               ----

Furniture, fixtures and equipment      $  90,727           $  105,704
Leasehold improvements                    22,294               23,688 
                                       ---------           ----------
                                         113,021              129,392
Less: accumulated depreciation
     and amortization                    (75,653)             (92,347)
                                       ---------           ----------
     Net fixed assets                  $  37,368           $   37,045 
                                       =========           ==========

                                      F-10
<PAGE>

NOTE 5 - PENSION AND PROFIT SHARING PLANS

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

                                                                 June 30,
                                                                 --------
                                                           1998        1997
                                                           ----        ----
Reserves for defined benefit retirement plans             $  35,263  $  42,212

Reserves for Canadian Separation Allowance Plan               6,264      6,229
Reserves for postretirement benefits other than pensions     41,001     38,256
                                                          ---------  ---------
     Accrued retirement benefits                          $  82,528  $  86,697
                                                          =========  =========


DEFINED BENEFIT PLANS

The  Company  sponsors  both  qualified  and  non-qualified   non-contributory
defined  benefit pension plans covering  substantially  all of its associates.
Under the Company's  principal plans (U.S.,  Canada, and Hong Kong),  benefits
are based on the number of years of service and the  associates'  compensation
during the three  highest  paid  consecutive  years of  service.  Consolidated
pension plan expense for the  Company's  principal  defined  benefit plans for
fiscal  years 1998,  1997 and 1996  amounted  to  $4,359,000,  $6,595,000  and
$10,952,000 respectively.

Contributions  are limited to amounts that are  currently  deductible  for tax
purposes,  and the  excess of  expense  over  such  contributions  and  direct
payments under  non-qualified  plan  provisions is accrued.  At June 30,  1998
and 1997,  the  Company's  non-qualified  plans had  accumulated  benefits  in
excess of related plan assets.

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

                                      F-11
<PAGE>

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

                                                   June 30, 1998                        June 30, 1997
                                                   -------------                        -------------
                                           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>  

Actuarial present value of benefit
  obligations:
Vested benefit obligation                  $      205,334    $       31,444     $      162,769    $       32,689 
                                           ==============    ==============     ==============    ==============   
Accumulated benefit obligation             $      230,886    $       38,474     $      184,582    $       36,239 
                                           ==============    ==============     ==============    ==============   
Projected benefit obligation for
  service rendered to date                        275,139            78,519            225,987            69,258
Plan assets at fair value, primarily
  marketable equity securities                    381,398                 -            322,485                 - 
                                           --------------    --------------     --------------    --------------
Projected benefit obligation (less than)
  in excess of plan assets                       (106,259)           78,519            (96,498)           69,258
Remaining unrecognized transition
  obligation                                         (481)             (512)              (576)             (598)
Unrecognized prior service cost (benefit)          13,969           (25,069)            15,385           (27,676)
Unrecognized net gain subsequent
  to transition                                    78,993            (4,964)            78,635               885 
                                           --------------    --------------     --------------    --------------
Accrued pension obligation (benefit)       $      (13,778)   $       47,974     $       (3,054)   $       41,869 
                                           ==============    ==============     ==============    ==============   
</TABLE>

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

                                                        Year ended June 30,
                                                        -------------------
                                                  1998        1997       1996
                                                  ----        ----       ----
Service cost - benefits earned during
    the period                                $  18,340   $  16,962   $  16,601
Interest cost on projected benefit
    obligation                                   22,302      19,651      18,425
Amortization of unrecognized net obligation
    and other deferred amounts                   20,842      26,860      24,798
Actual return on plan assets                    (57,073)    (56,877)    (48,872)
                                              ---------   ---------   ---------
Net periodic pension cost                     $   4,411   $   6,596   $  10,952 
                                              =========   =========   =========


During fiscal year 1996, the Company sold its Minneapolis  benefit outsourcing
center  and  transferred  the  employee  benefits  administrative  outsourcing
operations of WPC to a newly formed limited liability  company.  In connection
with  this  transaction,   the  Company   recognized  a  curtailment  gain  of

                                      F-12
<PAGE>

approximately  $2,919,000,  which is included in the accompanying statement of
operations  for fiscal year 1996,  but is  excluded  from the  previous  table
detailing net periodic pension cost.

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

                                                         June 30,
                                                         --------
                                                1998        1997      1996
                                                ----        ----      ----
Discount rate, projected benefit obligation       6.8%      7.5%      7.5%
Discount rate, net periodic pension cost          7.5%      7.5%      7.5%
Rate of increase in compensation levels           5.8%      5.8%      5.8%
Expected long-term rate of return on assets      10.0%     10.0%      9.5%


Based upon an analysis of recent  experience,  anticipated  future experience,
and market  and  economic  factors,  the  Company  changed  certain  actuarial
assumptions  used in its pension  valuations for fiscal years 1998,  1997, and
1996.  Changes in actuarial  assumptions  from fiscal year 1997 to fiscal year
1998  increased   pension   expense  by   $1,522,000.   Changes  in  actuarial
assumptions  from  fiscal  year 1996 to fiscal  year  1997  decreased  pension
expense by  approximately  $1,182,000.  Changes in actuarial  assumptions from
fiscal  year  1995  to  fiscal  year  1996   increased   pension   expense  by
approximately $1,039,000.

DEFINED CONTRIBUTION PLANS

The  Company  sponsors  a profit  sharing  plan  which  provides  benefits  to
substantially  all  U.S.   associates  and  to  which  the  Company  can  make
discretionary   irrevocable   annual   contributions   and  matches   employee
contributions.  The Profit  Sharing  Plan was  changed in 1997 to The  Savings
Plan with a company match of 50% of the first 6% of total pay (which  includes
base  salary,  overtime  and annual  performance  based  bonuses) on associate
401(k)  contributions.  Vesting of the Company  match occurs after 3 years for
new  employees  and is 100% for all  employees  hired before  January 1, 1997.
The expense in fiscal  years 1998 and 1997 for the match was $5.1  million and
$2.0 million,  respectively.  The Company made no profit sharing contributions
during fiscal years 1998,  1997 or 1996.  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
1998,   1997  and  1996   amounted  to  $293,000,   $414,000,   and  $509,000,
respectively.


NOTE 6 - BENEFITS OTHER THAN PENSIONS

HEALTH CARE BENEFITS

The  Company   sponsors  a  contributory   health  care  plan  which  provides
hospitalization,  medical  and  dental  benefits  to  substantially  all  U.S.
associates.  The  Company  accrues a  liability  for  estimated  incurred  but
unreported  claims based on  projected  use of the plan as well as paid claims
of prior periods.  The liability totaled $2,495,000 and $2,195,000 at June 30,
1998 and 1997,  respectively,  and is included in accounts payable and accrued
liabilities in the consolidated balance sheets.

                                      F-13
<PAGE>

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.

The  following  table sets forth the  principal  plans'  status as  reflected 
in the consolidated balance sheets:
                                                               June 30,
                                                               --------
                                                         1998            1997
                                                         ----            ----
Accumulated postretirement benefit obligation:
     Retirees                                         $    15,169  $    12,453
     Fully eligible active plan participants                2,135        1,918
     Other active plan participants                        15,022       15,661 
                                                      -----------  -----------
     Accumulated postretirement benefit obligation         32,326       30,032
Unrecognized prior service cost                             1,451        1,563
Unrecognized net gain subsequent to transition              8,664        8,367
Unrecognized transition obligation                           (698)        (792)
                                                      -----------  -----------
     Accrued postretirement benefit obligation        $    41,743  $    39,170 
                                                      ===========  ===========


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

                                                          Year ended June 30,
                                                          -------------------
                                                       1998     1997      1996
                                                       ----     ----      ----
Service cost - benefits earned during the period    $  1,848  $  1,891  $  3,881
Interest cost on accumulated postretirement
     benefit obligation                                2,133     1,987     2,685
Net amortization of prior service cost and net gain
     subsequent to transition                           (711)     (685)      138
Amortization of transition obligation over 20 years       46        50       347
                                                    --------  --------  --------
      Net periodic postretirement benefit cost      $  3,316  $  3,243  $  7,051
                                                    ========  ========  ========

                                      F-14
<PAGE>

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

                                                                                  June 30,
                                                                                  --------
                                                                        1998        1997        1996
                                                                        ----        ----        ----
<S>                                                                     <C>         <C>         <C>
Health care cost trend rate, accumulated benefit obligation:
        Pre-65 benefits
           (decreasing to 5.0% for 2004 and thereafter)                  8.4%        9.1%        9.8%
        Post-65 benefits
           (decreasing to 5.0% for 2007 and thereafter)                  7.7%        8.3%        8.8%
Health care cost trend rate, net periodic postretirement benefit cost:
        Pre-65 benefits
           (decreasing to 5.0% for 2004 and thereafter)                  9.1%        9.8%       10.6%
        Post-65 benefits
           (decreasing to 5.0% for 2007 and thereafter)                  8.3%        8.8%        9.4%
Discount rate, accumulated benefit obligation                            6.8%        7.5%        7.5%
Discount rate, net periodic postretirement benefit cost                  6.8%        7.5%        7.5%
</TABLE>

Based on an  analysis  of market and  economic  trends,  the  Company  changed
certain actuarial assumptions used in determining net periodic  postretirement
benefit  cost in fiscal  years  1998,  1997 and  1996.  Changes  in  actuarial
assumptions  from fiscal year 1997 to fiscal  year 1998  decreased  expense by
approximately  $219,000 in fiscal year 1998. Changes in actuarial  assumptions
from fiscal year 1996 to fiscal year 1997 decreased  expense by  approximately
$3,182,000 in fiscal year 1997.  Changes in actuarial  assumptions from fiscal
year 1995 to fiscal year 1996 decreased  expense by approximately  $259,000 in
fiscal year 1996.

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

                                                                          Year ended June 30,
                                                                          -------------------
                                                                        1998      1997       1996
                                                                        ----      ----       ----
<S>                                                                    <C>        <C>        <C>   
Increase in accumulated postretirement benefit obligation              $ 1,950   $  1,441   $ 5,242
Increase in service and interest cost components of net
    periodic postretirement benefit cost                               $   156   $    260   $ 1,301
</TABLE>

                                      F-15
<PAGE>


NOTE 7 - ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

Accounts payable and accrued liabilities consist of:
                                                             June 30,
                                                             --------
                                                       1998            1997
                                                       ----            ----
Accounts payable and accrued liabilities           $     55,865   $      48,328
Accrued salaries and bonuses                             37,567          33,221
Current portion of reserves for principal defined
    benefit retirement plans                              3,500           1,351
Current portion of reserves for postretirement
    benefits other than pensions                            691             891
Accrued vacation                                         13,300          11,426
Deferred fee income - current portion                     5,625           8,198
                                                   ------------   -------------
Total accounts payable and accrued liabilities     $    116,548   $     103,415
                                                   ============   =============

NOTE 8 - LEASES

The  Company  leases  office  space  and  various  computer   equipment  under
operating  lease  agreements  with  terms  generally  ranging  from  one to 10
years.  The Company  has  entered  into  sublease  agreements  for some of its
leased  space.   The  rental  expense  was   $43,133,000,   $42,079,000,   and
$45,749,000  for fiscal  years  1998,  1997 and 1996,  respectively.  Sublease
income was $3,905,000,  $1,702,000, and $1,810,000 for fiscal years 1998, 1997
and 1996,  respectively.  Future cash outlays for operating lease  commitments
and cash inflows for sublease income are:

                                              Lease              Sublease
                                        Commitments               Income
                                        -----------               ------
              1999                    $      42,146          $        3,325
              2000                           40,468                   3,318
              2001                           34,563                   3,477
              2002                           28,487                   2,984
              2003                           16,381                       -
        thereafter                           36,058                       - 
                                      -------------          --------------
                                      $     198,103          $       13,104
                                      =============          ==============   


As a result of  relocations  and the  subleasing of excess  office space,  the
Company  recognized  lease  termination  losses  of  approximately   $790,000,
$12,100,000, and $500,000 in fiscal years 1998, 1997, and 1996, respectively.


NOTE 9 - NOTE PAYABLE

On June 30, 1998 the Company  entered into a new $120 million credit line with
a group of banks at an interest  rate that varies with LIBOR  and/or the Prime
Rate, plus an annual  commitment fee based on the unused portion of the credit
line. The new agreement,  among other things,  increased the total size of the
credit  facility  under  terms and  conditions  very  similar to the  previous
agreement.  The  balance  due by the

                                      F-16
<PAGE>

Company was $9.0 million at June 30, 1998. No amounts were  outstanding  at June
30,  1997.  The  interest  rate at June 30, 1998 was 8.5%.  The credit  facility
requires the Company to observe certain covenants (including  requirements as to
minimum net worth, and other financial and restrictive covenants) and is secured
by a blanket  lien on all  assets.  Of the total  credit  line,  $95  million is
available to the Company as revolving  credit for operating needs. The revolving
credit facility is scheduled to mature on June 29, 2003.

The remaining  $25 million 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   $15,617,000  and
$20,920,000  at  June  30,  1998  and  1997   respectively.   Shares  totaling
4,897,000 and 5,718,000 of the Company's  Redeemable Common Stock were pledged
by shareholders to secure these loans at June 30, 1998 and 1997, 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.

During fiscal 1998 and 1997, the Company's  shareholders  approved  changes to
the Bylaws to effect  changes in the  calculation  of Formula Book Value.  The
1998 change was the  elimination of the effect of the  discontinuation  of the
Benefits  Administration  Outsourcing  Business;  the  1997  changes  were the
currency translation adjustment and sublease loss adjustments.

Formula   Book  Value  as  used  herein  means  the  Net  Book  Value  of  the
Corporation's Common Stock as of June 30,  1996, increased or decreased by net
income or losses,  and all other GAAP basis increases or decreases to Net Book
Value  occurring  after  June 30,  1996,  adjusted to (i) spread the  economic
impact of certain real estate  sublease  losses over the remaining life of the
sublease;   (ii)  eliminate   annual  changes  in  the  Currency   Translation
Adjustment  ("CTA")  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 $6.05 at June 30, 1998.

                                      F-17
<PAGE>

During  Fiscal  Year 1997,  Formula  Book Value was  defined as Net Book Value
adjusted  for real  estate  sublease  losses and CTA only.  The  Formula  Book
Value per share was $5.30 at June 30,  1997.  In years prior to 1997,  the Net
Book Value was defined in the bylaws as the sum of  Redeemable  Common  Stock,
adjustments   for   redemption   value   greater   than  amounts  paid  in  by
shareholders,   retained  earnings,  and  cumulative  translation  adjustment,
adjusted by  compensation  survey items.  The Formula Book Value per share, as
defined above, was $4.94 at June 30,  1996.  Redeemable  Common Stock is equal
to the number of shares  outstanding  multiplied by the Formula Book Value per
share.

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

                                                           1998           1997          1996
                                                           ----           ----          ----
<S>                                                       <C>             <C>          <C> 

Consolidated net worth [1]                                 $ 15,742       $ 84,091      $ 84,382
Adjustment for the compensation survey items:
      50% of consolidated income received
      from compensation survey business                       5,915          5,915         5,915

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

Add:  Adjustment for after tax affect of lease losses         4,729          6,003           N/A 
                                                           --------       --------      --------
Formula Book Value of Redeemable Common Stock              $ 96,292       $ 96,009      $ 90,297 
                                                           ========       ========      ========
Number of shares of Redeemable Common Stock outstanding      15,917         18,130        18,262 
                                                           ========       ========      ========
Formula Book Value per share of Redeemable Common Stock    $   6.05       $   5.30      $   4.94 
                                                           ========       ========      ========
      [1]  After adjusting for Currency Translation as specified in the Company's Bylaws of $3,956
           in 1998 and $204 in 1997.
</TABLE>
                                      F-18
<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, 1998 were as follows:

                                                 Number of        Redeemable
                                                  Shares         Common Stock
                                                 ----------     ---------------
Balance at June 30, 1995                         19,129,706     $        86,275

Redemption of shares                             (3,146,899)            (14,270)

Issuance of shares                                2,279,156              10,274

Adjustment of redemption value for
  change in formula book value per share                  -               7,935 
                                                 ----------     ---------------
Balance at June 30, 1996                         18,261,963     $        90,214 
                                                 ==========     ===============
Redemption of shares                             (3,258,203)            (16,604)

Issuance of shares                                3,126,670              15,414

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



The Company  sponsors a Stock  Purchase Plan (SPP) which allows  virtually all
associates  to become  shareholders.  There was no formal stock sale in Fiscal
Year 1998 and  therefore  no related  expense  for 1998.  For the fiscal  year
ended June 30,  1997, the Company paid each  associate  purchasing  stock $.50
per share  purchased  under the SPP.  For the  fiscal  year  ended  1996,  the
Company paid each associate  purchasing  stock $1.00 per share purchased under
the  SPP.  This  resulted  in  expense  for  fiscal  years  1997  and  1996 of
$1,300,000 and $1,700,000, respectively.

                                      F-19
<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 the
cumulative effect of any accounting change include:

                                          Year ended June 30,
                                          -------------------
                                   1998            1997           1996
                                   ----            ----           ----
Current tax expense:
        U.S.                     $    9,972    $     8,370   $     16,255
        State and local               3,324          2,773          4,025
        Foreign                       1,820          1,484          1,631 
                                 ----------    -----------   ------------
                                     15,116         12,627         21,911 
                                 ----------    -----------   ------------
Deferred tax (benefit) expense:
        U.S.                           (337)        (4,188)        (5,841)
        State and local              (1,706)        (1,507)        (1,298)
        Foreign                          61          2,138           (701)
                                 ----------    -----------   ------------
                                     (1,982)        (3,557)        (7,840)
                                 ----------    -----------   ------------
Total provision for income taxes $   13,134    $     9,070   $     14,071 
                                 ==========    ===========   ============

                                      F-20
<PAGE>

Deferred income tax assets (liabilities) included in the consolidated balance
sheets at June 30, 1998 and June 30, 1997 are comprised of the following:

                                                           June 30,
                                                  1998             1997
Cash method of accounting for U.S. income
     tax purposes                             $       (15,561)  $      (23,468)
Difference between book and tax depreciation           (1,987)          (2,576)
Amortization of deferred software and
     development costs                                      -           (3,470)
Foreign temporary difference                             (914)          (1,036)
Partnership income                                          -           (4,289)
Other                                                       -               (9)
                                              ---------------   --------------
     Gross deferred tax liabilities                   (18,462)         (34,848)
                                              ---------------   --------------

Accrued retirement benefits                            39,255           36,619
Non-deductible foreign expenses                         1,329            1,172
Amortization of deferred rent                           6,794            3,419
Foreign temporary difference                            1,763            1,281
Foreign net operating loss carryforwards                4,942            2,530
Discontinued operations exit costs                     19,559                -
Other                                                       2            3,942 
                                              ---------------   --------------
     Gross deferred tax assets                         73,644           48,963 
                                              ---------------   --------------
     Deferred tax assets valuation allowance           (6,271)          (3,702)
                                              ---------------   --------------
     Net deferred tax asset                   $        48,911   $       10,413 
                                              ===============   ==============


The  Company has foreign tax credit  carryforwards  for U.S.  tax  purposes of
$633,000.  At June 30,  1998,  the Company has unused loss  carryforwards  for
tax  purposes  in  various   jurisdictions   outside  the  U.S.  amounting  to
$4,942,000,  of which  $2,234,000 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
($4,942,000),   and  the  tax  effect  of   nondeductible   foreign   expenses
($1,329,000) for which realizability is considered uncertain.

The net change in the  valuation  allowance of  $2,380,000 in fiscal year 1998
and  $371,000  in fiscal year 1997 is due  primarily  to the tax effect of the
change in foreign net operating losses and non-deductible foreign expenses.

                                      F-21
<PAGE>

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


                                 1998              1997              1996
                                 ----              ----              ----
    Domestic                  $ (47,435)       $   14,861        $   26,825
    Foreign                       4,469             6,757             7,211 
                              ---------        ----------        ----------
                              $ (42,966)       $   21,618        $   34,036 
                              =========        ==========        ==========


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>

                                                              Year ended June 30,
                                                              -------------------
                                                        1998          1997        1996
                                                        ----          ----        ----
<S>                                                   <C>           <C>         <C>   
Calculated income tax provision at U.S.
     federal statutory tax rate of 35%                $  (15,038)   $   7,507   $   11,867
(Reduction) increase resulting from:
        Non-deductible compensation expense               24,467            -            -
        Results of non-U.S. affiliates taxed at other
             than statutory rates                           (324)        (463)         120
        Losses of non-U.S. affiliates for which no
             current benefit is available                    852          599          792
        State income taxes, net of federal tax
              benefit                                      1,618        1,266        2,727
        Non-deductible amortization and other
              expenses                                       758          700        1,668
        Tax credits                                         (353)        (888)        (311)
        Other                                              1,154          349       (2,792)
                                                      ----------    ---------   ----------
Income tax provision                                  $   13,134    $   9,070   $   14,071 
                                                      ==========    =========   ==========
</TABLE>

NOTE 12 - NON-RECURRING COMPENSATION CHARGE

In accordance with Generally Accepted Accounting  Principles,  the Company has
recorded  a charge  against  operating  results  of $69.9  million  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.

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, continuing operations net income for the Company in 1998 would have been
$13.7 million compared to the reported net loss from continuing operations.
                                      F-22
<PAGE>

NOTE 13 - GEOGRAPHIC SEGMENT INFORMATION

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

                                                                                Year ended June 30,
                                                                                -------------------
                                                                       1998            1997            1996
                                                                       ----            ----            ----
<S>                                                                  <C>                <C>          <C>  

U.S. Operations
          Fees                                                       $    424,246     $  395,351     $   393,754
          Cost of providing services, excluding non-recurring
             compensation charge (See Note 12)                            324,237        313,870         301,891
          Non-recurring compensation charge (See Note 12)                  69,906              -               -
          Depreciation and amortization                                    22,515         19,139          22,768 
          Income from operations before                              ------------     ----------     -----------
             General and Administrative expenses                            7,588         62,342          69,095 
                                                                     ------------     ----------     -----------
Foreign Operations
          Fees                                                             88,414         91,151          81,544
          Cost of providing services                                       83,121         83,285          74,865
          Depreciation and amortization                                     2,479          2,955           2,773 
          Income from operations before                              ------------     ----------     -----------
             General and Administrative expenses                            2,814          4,911           3,906 
                                                                     ------------     ----------     -----------

All Operations
          Fees                                                            512,660        486,502         475,298
          Cost of providing services, excluding non-recurring
             compensation charge (See Note 12)                            407,358        397,155         376,756
          Non-recurring compensation charge (See Note 12)                  69,906              -               -
          Depreciation and amortization                                    24,994         22,094          25,541 
          Income from operations before                              ------------     ----------     -----------
             General and Administrative expenses                           10,402         67,253          73,001 
                                                                     ------------     ----------     -----------
          General and Administrative expenses                              51,759         45,696          38,656 
                                                                     ------------     ----------     -----------
          (Loss) income from operations                              $    (41,357)    $   21,557     $    34,345 
                                                                     ============     ==========     =========== 
                                                                                  As of June 30,
                                                                                  --------------
                                                                       1998            1997            1996
                                                                       ----            ----            ----
Total Assets:
          U.S. Operations                                            $    249,802     $  306,779     $   300,472
          Foreign Operations                                               18,508         24,999          20,347 
                                                                     ------------     ----------     -----------
          All Operations                                             $    268,310     $  331,778     $   320,819 
                                                                     ============     ==========     =========== 

General and Administrative  expenses include corporate  functions primarily in
the U.S.
</TABLE>

                                      F-23
<PAGE>

NOTE 14 - RELATED PARTY TRANSACTIONS

In  connection  with  the  contractual  servicing  of  the  Retained  Clients,
Wellspring  provides the  services to those  clients on behalf of the Company.
For direct expenses,  the fee is equal to the cost of servicing those clients;
certain shared  services  contain a 20% profit  element.  Expenses  charged to
the Company by Wellspring  for such services for fiscal 1998,  1997,  and 1996
were  $41,811,000  $40,313,000,  and  $10,829,000,  respectively.  At June 30,
1998 the Company owed  Wellspring  $1,186,000 for such  services.  At June 30,
1997, the Company owed Wellspring $11,009,000 for such services.


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  resulting from such litigation,  and
management  believes  that  the  Company  carries  adequate  insurance,  above
reasonable deductibles, against any foreseeable outcome of such litigation.

As of June 30,  1998, 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,  1998 total  $69,654,000,  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 1999 are estimated at $31.3
million,  which  includes  expected  purchases  of  fixed  assets,  25% of the
capital   requirements  of  WWHE  and  the  purchase  of  certain   consulting
operations  during the fiscal year. The company  expects  operating cash flows
to provide for the Company's cash needs.


NOTE 16 - DISCONTINUED OPERATIONS

On March 31, 1996, the Company  transferred its employee  outsourced  benefits
administration  operations  including  certain  deferred  systems  development
costs, to a newly formed limited liability company,  Wellspring Resources, LLC
("Wellspring").  Wellspring,  which was then owned 50% by the  Company and 50%
by State Street Bank and Trust Company  ("State  Street"),  provides  benefits
and human resources administration outsourcing services.

In  the  fourth  quarter  of  fiscal  year  1998,  the  Company  entered  into a
Redemption,   Restructuring,   and  Indemnity   Agreement  ("the   Restructuring
Agreement")  with State Street and Wellspring by which  Wellspring  redeemed the
Company's 50% interest in Wellspring  effective April 1, 1998. The restructuring
effected pursuant to the Agreement  implemented a discontinuation  plan approved
by the Company's  Board of Directors on February 18, 1998 which provided for the
Company's exit from the Benefits Administration Outsourcing Business.  Following
the redemption of the Company's interest in Wellspring, Wellspring has continued
to operate as a  wholly-owned  subsidiary of State Street.  Certain  outsourcing
contracts retained by the Company

                                      F-24
<PAGE>

when Wellspring was initially formed in 1996 ("Retained Clients"), will continue
to be performed until their respective contract  expirations.  One such contract
has  been  completed  and the  Company  has no  further  obligation  under  that
contract.  The Company is exploring mutually advantageous  arrangements with the
remaining  clients and will continue to provide  services under these agreements
using  facilities and personnel  provided by Wellspring  until such  alternative
arrangements have been finalized or the contracts expire.

In connection with the  restructuring  transaction,  the Company has 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 has
been released from certain liabilities  relating to the Wellspring business in
connection with the redemption.

The  discontinuation  of the  Company's  Benefits  Administration  Outsourcing
Business  resulted in the $109.8 million pre-tax charge.  This charge included
the write-off of the  Company's  investment  in  Wellspring,  which had a book
value at the disposal date of $45.2  million.  In addition,  the Company wrote
off $14.0 million in unamortized  deferred  software and development costs net
of related  deferred  revenues  related to the Retained  Clients.  Further,  a
provision of $50.6  million was recorded  for contract  termination  expenses,
lease  guarantees,  potential  severance  and other  expenses  related  to the
Company's exit from the Benefits Administration Outsourcing Business.


NOTE 17 - SUBSEQUENT EVENTS

The Company's Chief  Executive  Officer,  Mr. A. W. Smith,  Jr., has announced
his  plans  to  retire  from  the  Company  effective  June  30,  1999  at the
expiration of his current term of office.

Effective  July 15,  1998 the  Company  sold its  defined  contribution  daily
record-keeping  software and all intellectual property rights thereto for $3.7
million to a third-party.

Effective  July 1, 1998 the  Company  sold 50% of its  interest in WWHE to its
Alliance  partner,  Watson Wyatt  Partners.  No gain or loss was recognized as
result of the transaction.

The Company's Chief Financial  Officer,  Barbara L. Landes,  has announced her
intention to leave the Company effective September 30, 1998.

                                      F-25
<PAGE>


                             WATSON WYATT & COMPANY

                                   SCHEDULE II
                 VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
                             (THOUSANDS OF DOLLARS)




                                   ADDITIONS      ADDITIONS              BALANCE
                   BALANCE AT       CHARGED      CHARGED TO              AT END
   DESCRIPTION    BEGINNING OF    AGAINST FEES     OTHER     DEDUCTIONS  OF YEAR
                      YEAR                        ACCOUNTS
   -----------    ------------    ------------   ----------  ---------- --------

                             Year Ended June 30, 1998
                             ------------------------
  Allowance for
doubtful accounts   $2,525          $5,613            -       $(5,996)    $2,142

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

                              Year ended June 30, 1997
                              ------------------------
   Allowance for
doubtful accounts    5,161           6,853            -        (9,489)     2,525

     Valuation
   allowance for     3,331               -          371(1)          -      3,702
   deferred tax
      assets
                             Year ended June 30, 1996
                             ------------------------
   Allowance for
doubtful accounts    1,508          11,667            -        (8,014)     5,161

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


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

                                      F-26