DEAR FELLOW SHAREHOLDERS,

No one could have predicted all that has happened over the past year. The shocking events of September 11. An economy that just couldn’t find its legs. Extremely volatile financial markets. And growing cynicism toward business in the face of one scandal after another.

In terms of what we do—consulting on human capital issues—these events gave rise to new challenges for our clients. How to deal with growing employee distrust. How to close pension funding gaps. How to respond to the fallout over stock options and executive pay.

And, if all this were not enough, health care inflation came roaring back, driving up labor costs.

What we brought to our clients was a unique combination of skills. Most important was our ability to see both sides of the equation—the business side and the people side.
It was this ability—to understand people and business, connect them and make them stronger—that helped us add significant value to our client relationships in fiscal 2002. And despite the overall sluggish economy, we performed remarkably well.

Our Fiscal 2002 Results

•	We generated solid profits and cash flow. Our net income reached an all-time high of $47 million on revenue of $710 million. Our positive cash flow, $96 million in cash and cash equivalents on hand as of June 30, and no outstanding debt provide an excellent financial base on which to build future growth.
•	We gained market share in key segments. In our largest business—U.S. retirement consulting—we gained share in our target market for the fifth year in a row. And even while technology spending was sharply down in the economy overall, we managed to grow our eHR consulting business, our second largest segment, by 9 percent.
•	We remained focused on cutting discretionary spending, but not at the expense of our talent base. While many of our competitors were retrenching, we used the downturn as an opportunity to acquire some great people. We sharpened the point on performance management, but never resorted to across-the-board layoffs. Entering fiscal 2003, I firmly believe we won last year’s war for consulting talent.
•	We added to our blue-chip roster of clients. Over the past year, we consulted with nearly 70 percent of the Fortune 100. And we acquired many significant new consulting engagements, both by adding to our premier client base and by expanding existing relationships to include multiple service lines.

Our success in fiscal 2002 came down to one word: focus. We remained incredibly focused from both a target market and a service offering point of view. Our marketing and sales efforts were—and continue to be—aligned around targeting the Fortune 1000 and equivalent companies around the world. And we’ve never been more convinced that our service mix—benefits, eHR and human capital strategies—is the right one.

Benefits
Our benefits practice achieved solid results in fiscal 2002, with revenue growing 6 percent.

In the wake of highly publicized company failures and amidst a shaky economy, concerns over retirement security were at an all-time high, driving demand for our services on a number of fronts. We helped our clients assess the cash flow and accounting impacts of declining investment returns, evaluate the funded status of pension plans, assess retirement plan governance and develop more effective governance systems. We also have been outspoken in advocating changes to federal policies surrounding retiree medical funding and pension funding—to allow tax-favored funding of retiree benefits and to smooth out the extreme volatility in annual pension funding requirements. Our proposed changes would help secure employer-sponsored benefits for workers and future retirees.

Our health care consulting practice accomplished a great deal during fiscal 2002. Our progressive research on consumer-driven health plans, retiree health care benefits and health care costs, combined with new leadership and a series of key hires, have positioned us well for growth in the coming years.

eHR
We grew our eHR consulting business by 9 percent—an impressive rate given the general downturn in technology-related spending.

Last year, our clients’ need to control costs largely drove the demand for HR technology consulting. We helped clients optimize their existing systems and invest prudently in new solutions to manage costs and boost employee productivity.

We remained focused on our three core competencies in eHR: pension administration, health and welfare administration, and strategic eHR consulting services.

Human Capital Strategies
Demand for human capital consulting—broad-based compensation and organization effectiveness services—is the most discretionary in our business. And these projects are typically the first to go when consulting budgets shrink in parallel with the markets. Though revenue declined by 13 percent in fiscal 2002, we kept our public profile high with industry-leading media attention on executive pay and governance issues, human capital metrics and employee perspectives.

And we delivered the results of some highly anticipated research efforts. First was the 2002 North American Human Capital Index Study, an update of our original groundbreaking survey that first linked superior human capital practices and shareholder value creation. Also, McGraw-Hill published “The Human Capital Edge,” authored by two of our national practice directors. The book expands on our finding that human capital is a lead—rather than lag—indicator of business performance, and also includes results from our WorkUSA® and Strategic Rewards® studies, among others.

Looking Ahead
In both the short and long term, employers are facing unprecedented challenges involving the management of their people. Our latest WorkUSA survey of 13,000 working Americans reveals that only 39 percent trust the leadership of their companies. And less than half of employees understand the steps their companies are taking to reach new business goals—a 20 percent drop since 2000. Those are big gaps.

It won’t be easy to replace employees—trusting or not—given the acute labor shortage we will experience in the years ahead. Workers in every major economy are aging and several mature markets will actually face negative workforce growth in the near future. The economic slowdown may have softened labor markets somewhat, but the demographic numbers all point in one direction: even if we experience a modest economic recovery, tight labor markets are likely to be back. In fact, our research suggests that we may soon regard the 1990s—when we all struggled to find the right employees—as the good old days.

On top of all this, the employer/employee deal has changed as well. Promises have come due and workers will be looking for organizations to make good. High performers will demand to be paid as such, or they’ll take their skills elsewhere. It turns out that retirement security is as critical to the Next Generation as it is to the Boomers, and workers will be looking for companies to provide some of it. Technology will continue to distribute knowledge to put more power in the hands of employees and more accountability on the shoulders of executives. We expect the tension between employers and their workforces to grow.

All of this points to reinvigorated demand for our services. And Watson Wyatt is ready.

In fiscal 2003 we will continue to invest in our core service offerings, particularly health care consulting, and remain committed to helping our clients respond to ongoing pension and governance issues. We will leverage our excellent client base—especially in the retirement business—to expand the mix of services provided. And we will capitalize on opportunities to further strengthen our brand through innovative and forward-looking research efforts.

We will continue to pursue strategic alliances that provide strong growth opportunities and will remain focused on global expansion in targeted areas. Under new leadership in Asia, we are strengthening our practice structure and rolling out our Human Capital Index this fall. We also will open an office in Shenzhen—our third in China and the 20th in our Asia-Pacific region, a traditional stronghold for us. In Latin America we will continue to look for acquisition candidates to round out our capabilities, following two recent acquisitions in Mexico and Brazil.

I continue to be proud of Watson Wyatt’s rich history, our truly global reach, our research-based approach, our long-standing client relationships and our track record of solid financial performance.

I believe we weathered the downturn exceptionally well compared to other businesses, and I am also exceedingly proud of our people. They were focused in fiscal 2002—on executing business fundamentals and on relentlessly serving client needs. They are connected with our business, and they drove our results.

This is an exciting time to be advising companies as they navigate through ever-changing human capital issues. I have no doubt that we can lead the way.

John J. Haley, President and Chief Executive Officer