MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATION

Special Note Regarding
Forward-Looking Statements
This Annual Report contains certain statements that are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, including, but not limited to the following: the third paragraph under “Critical Accounting Estimates” on page 16; the second paragraph under Liquidity and Capital Resources on page 21; under the subheadings “Restatement” and “Stock-Based Compensation” in Note 1 “Summary of Significant Accounting Policies” on pages 28 and 29; in the second paragraph of Note 10 “Employee Stock Plans and Equity” on page 35; and in the first and third paragraphs of Note 14 “Commitments and Contingent Liabilities” on page 42. In some cases, you can identify these statements and other forward-looking statements in this filing by words such as “may,” “will,” “expect,” “anticipate,” “believe,” “estimate,” “plan,” “intend,” “continue,” or similar words. You should read these statements carefully because they contain projections of our future results of operations or financial condition, or state other “forward-looking” information. A number of risks and uncertainties exist which could cause actual results to differ materially from the results reflected in these forward-looking statements. Such factors include, but are not limited to our continued ability to recruit and retain highly qualified associates, outcomes of litigation, a significant decrease in the demand for the consulting services we offer as a result of changing economic conditions or other factors, actions by competitors offering human resources consulting services, including public accounting and consulting firms, technology consulting firms and Internet/intranet development firms, regulatory, legislative and technological developments that may affect the demand for or costs of our services and other factors discussed under “risk factors” in our prospectus dated June 21, 2001, which is filed with the SEC and may be accessed via EDGAR on the SEC’s web site at www.sec.gov. These statements are based on assumptions that may not come true. All forward-looking disclosure is speculative by its nature. The Company undertakes no obligation to update any of the forward-looking information included in this report, whether as a result of new information, future events, changed expectations or otherwise.

Overview
Watson Wyatt is a global provider of human capital consulting services. We provide services in three principal practice areas: Benefits, eHR and Human Capital consulting. We operate from 61 offices in 18 countries throughout North America, Asia-Pacific and Latin America. We also operate through our affiliates in Europe. Our principal affiliates are Watson Wyatt LLP which conducts operations in the United Kingdom and Ireland, and in which we hold a 10% interest in a defined distribution pool, and are a member of their partnership board, and Watson Wyatt & Company Holdings (Europe) Limited, a holding company through which we conduct Continental European operations. We own 25% of Watson Wyatt & Company Holdings (Europe) Limited and Watson Wyatt LLP owns the remaining 75%.

We operate globally as an alliance with our affiliates. However, the revenues and operating expenses in the Consolidated Statements of Operations reflect solely the results of operations of Watson Wyatt. Our share of the results of our affiliates, recorded using the equity method of accounting, is reflected in the ‘’Income from affiliates’’ line.

We derive substantially all of our revenue from fees for consulting services, which generally are billed at standard hourly rates or on a fixed-fee basis; management believes the approximate percentages are 60% and 40%, respectively. Clients are typically invoiced on a monthly basis with revenue recognized as services are performed. For the most recent three fiscal years, revenue from U.S. consulting operations have comprised approximately 80% of consolidated revenue. No single client accounted for more than 4% of our consolidated revenue for any of the most recent three fiscal years.

In delivering consulting services, our principal direct expenses relate to compensation of personnel. Salaries and employee benefits are comprised of wages paid to associates, related taxes, benefit expenses such as pension, medical and insurance costs and fiscal year-end incentive bonuses. In addition, professional and subcontracted services include client reimbursed travel and other costs specifically billable to clients, as well as fees paid to external service providers for independent contractors, promotion expenses and other services. Approximately 50% of professional and subcontracted services are reimbursed by our clients and included in revenue.

Occupancy, communications and other expenses represent expenses for rent, utilities, supplies and telephone to operate office locations, as well as non-client-reimbursed travel by associates, publications and professional development. General and administrative expenses include the operational costs and professional fees paid by corporate management, general counsel, marketing, human resources, finance, research and technology support.

Historically, we have paid incentive bonuses to associates under a fiscal year-end bonus program. In fiscal years 1999 and 2000, in addition to annual fiscal year-end bonuses, we provided supplemental bonus compensation to our associate stockholders pursuant to our stock incentive bonus plan in an amount representing all income in excess of targeted performance. The supplemental bonus compensation pursuant to our stock incentive bonus plan accrued in fiscal year 1999 and fiscal year 2000 was paid in January 2000 and 2001, respectively. We terminated the stock incentive bonus plan in conjunction with our initial public offering in October 2000 and replaced it with equity-based incentives.

In conjunction with the Company’s review of its overhead cost structure in the second quarter of fiscal year 2002, the Company examined the classification of its operating expenses. This review included the identification and evaluation of the costs that comprise general and administrative expenses. Prior to the second quarter of fiscal year 2002, expenses associated with and incurred by various associates from our practice groups (the “Practice Support Team”), for the centralized development of practice-specific tools and services, were included in general and administrative expenses. The costs associated with the Practice Support Team are mainly comprised of the salaries and employee benefits and professional services expenses incurred by the associates on this team.

As a result of our review, in the second quarter of fiscal year 2002, we reclassified the Practice Support Team’s expenses from the beginning of fiscal year 1998 through the first quarter of fiscal year 2002 as components of salaries and employee benefits, professional and subcontracted services and occupancy, communications and other expenses. These expenses were previously included as a component of general and administrative expenses and represent less than 2.5% of total operating expenses and revenue for each of the five years in the period ended June 30, 2002. Revenue, income from operations, income before income taxes and net income were unaffected by this reclassification.

For more information on the Company’s reclassification of our Practice Support Team’s expenses, refer to the Company’s Form 8-K filed on January 24, 2002.

Critical Accounting Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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 revenue and expenses during the reporting period. Our estimates, judgements and assumptions are continually evaluated based on available information and experience. Because of the use of estimates inherent in the financial reporting process, actual results could differ from those estimates. We have reviewed the accounting estimates recognized in our financial statements and have determined that the accounting for our pension plans utilizes assumptions that are highly uncertain and can have a material impact on the presentation of the Company’s financial condition.

Pension Assumptions. We sponsor both qualified and non-qualified, non-contributory defined benefit pension plans covering substantially all of our associates. Under our principal plans (U.S., Canada and Hong Kong), benefits are based on the number of years of service and the associate’s compensation during the three highest paid consecutive years of service.

Determination of our obligations and annual expense under each of the plans is based on a number of assumptions that, given the longevity of the plans, are long-term in their focus. A change in one or a combination of these assumptions could have a material impact on our pension benefit obligation and related expense. For this reason, management employs a long-term view so that assumptions do not change frequently in response to volatility of the economy in the short-term. The Company recognizes that actual returns on investments in fiscal year 2002 are lower than our long-term expected rate of return. However, given our historical investment returns, which have approximated 14% over the past 20 years, and the long-term view of the plan, we anticipate the plans will realize the expected rate of return.

We consider several factors when determining the appropriate level of each assumption, including economic forecasts, historical trends, portfolio composition and peer comparisons. Assumptions used in the valuation for our U.S. plan, which comprises the majority of the principal defined benefit pension plans obligations and investments, included the following over the past three fiscal years: